Wednesday, October 31, 2007

How To Spot A Scam, Part 4

As a follow-up to my post on How To Spot A Scam, here is a link to a website dedicated to helping potential victims spot fake checks: FakeChecks.org.

Here is a PSA advertising the site:



There are more videos here.

Tuesday, October 30, 2007

Inflating the Beast

One of the things I have been thinking about is the reason for the inflating of the money supply. Conservatives have been arguing that cutting taxes increases tax revenues using the Laffer Curve argument. How could this sleight-of-hand be accomplished? Inflate the money supply. With the combination of nominally more money in the economy and the effect of the AMT tax hitting the middle class, there would be an increase (nominally) in the amount of tax revenues. Combine this with social security payments kept virtually the same (and doing the most harm to low income retirees) and you end up effectively starving the beast.

It's dishonest, of course. But I expect conservatives to tout this come next year.

Predatory Lending PSA

Debt Bomb

From CNN Money's The $915B bomb in consumers' wallets:

(Fortune Magazine) -- This past summer's subprime meltdown involved about $900 billion in now-suspect securitized debt, reckless lending, and consumers who buckled under the weight of loans they couldn't afford. Now another link in the consumer debt chain - credit cards - is starting to show signs of strain. And the fear that the $915 billion in U.S. credit card debt (an uncannily similar figure) may blow up has major financial institutions like Citigroup, American Express, and Bank of America strapping on their Kevlar vests.

...

The doomsday scenario would play out something like this: Just like CDOs and other asset-backed securities, credit card debt is sliced, diced, and sold off again as packages of securities. Rising delinquencies would hurt not only the banks involved but the securities backed by the credit card receivables. Those securities would decline in value as consumers defaulted, leading to bank losses as well as portfolio losses in the hedge funds, institutions, and pensions that own the securities. If the damage is widespread enough, it could wreak havoc on the economy much as the subprime crisis has done.

To be sure, there are key differences between the subprime market and the problems brewing with credit cards. The first is that while rising mortgage delinquencies were apparent for months before the subprime market blew up, credit card delinquencies are actually coming off unusually low levels.

...

But credit card debt is different from subprime debt in another way: Unlike mortgages, credit card debt is unsecured, so a default means a total loss. And while missed payments are at a historical low, they show signs of an uptick: The quarterly delinquency rate for Capital One, Washington Mutual, Citigroup, J.P. Morgan Chase, and Bank of America rose an average of 13% in the third quarter, compared with a 2% drop in the previous quarter.

...

If there is an international precedent the U.S. should be watching, it's actually that of the U.K. British consumers are just as overstretched as Americans, but since the real estate market there rose faster and fell earlier, they're about 18 months ahead in the credit cycle. Since the last quarter of 2005, credit card delinquencies and charge-off rates in Britain have risen as much as 50%, forcing banks to take huge write-offs.

It's a sign of the times that, according to one survey last month, 6% of British homeowners have been using their credit cards to pay their mortgages. That's suicidal, of course, given that credit card interest rates are more than double even the heftiest mortgage. Keep your fingers crossed that it's not a trend that crosses the Atlantic.

That doesn't sound good. At. All.

The T.V. pundits tell us that the housing meltdown is not the entire market. But let's see: so far we have seen a problem in:

1. An almost nationwide mortgage and housing meltdown; and

2. Credit card delinquency rates rising and interest rates and fees rising; and

3. Fuel, food, health care and education costs rising far faster than "core" inflation; and

4. A rapidly falling dollar; and

5. Drought in much of the country and flooding in others; and

6. Wages and social security payments not keeping up with inflation; and

7. A crumbling infrastructure (bridges failing and bridges to nowhere).

The credit problems are not the economy. It's just the tip of it.

Monday, October 29, 2007

Speechless

I apologize for not posting. If it's not one thing, it's another. My computer was having problems with random access memory this time. I think it's fixed now. I think.

I've also been doing a lot of reading and thinking; and spending my weekends traveling and cleaning.

I am back to posting about one of the issues that got me to start this blog: health care. Michael Moore has started a new web site SickoCure.org wherein he is trying to start an organized movement to pressure candidates for national office into taking a stand for universal health care.

A question for Hillary Clinton:


A question for Barack Obama:


A question for John Edwards:


And the Daily Kos has a new post today regarding Americans and Britons going overseas to India and other parts of Asia for cheaper health care. From the post:


You don't have to go far to find someone - George Bush, for instance - who will spout the typical propaganda: America has "the best health care system in the world." True enough if you're a Congressperson or hoi oligoi who can afford to pay for treatment at one of the nation's top medical centers. But, compared with other nations in the developed world, the U.S. does a rotten job of delivering good care to hoi polloi. As plenty of us know firsthand, even Americans with fairly decent health coverage often find it hard to get the treatment the "best health care system in the world" should be providing. When it comes to delivery, the American health care system is ... an outrage.

Tuesday, October 23, 2007

Bob Herbert: The Long, Dark Night

Read The Long, Dark Night for a sad story of financial disaster due to medical debt.

He reeled off a long list of charges that are coming at him like machine-gun fire, bills that he cannot afford to pay.

“So we’re selling the house,” he said. He sat quiet for a moment, then added in a soft voice, “You shouldn’t have to go live in a tent somewhere just because you don’t have insurance.”

Sunday, October 21, 2007

Garry Kasparov on Real Time With Bill Maher



This one has real substance discussed. Maher's comment about needing the KGB at the beginning referred to a group of protester's at his show disrupting the program. They were conspiracy theorists who allege that the World Trade Center's tower #7 had to have been brought down by demolition explosives and Maher had called these people crazy on a previous program. Maher had to have security people called in to remove them.

Friday, October 19, 2007

Garry Kasparov on the Colbert Report



Not much of substance was discussed.

Best line:

Kasprov: "In chess there are rules. In Russian politics there are no rules."

Both Stephen Colbert and Garry Kasparov have new books on the market.



Tuesday, October 16, 2007

You Could Lie To Me

Here is a Mark Heard song that seems to have some relevance to our times. From Stop the Dominoes:

You Could Lie To Me

You could lie to me with a ring of truth
And I would not understand
You could lead me on to the pits of Hell
I'm a less-than-perfect man

Oh - Who's gonna warn me
Oh - How can I tell
Oh - It's so easy
Believing the lies you tell

You could take my heart, turn it into stone
And I might not even know
You could season me until my feelings are gone
And the pain is felt no more

Oh - Who's gonna warn me
Oh - How can I tell
Oh - It's so easy
Believing the lies you tell

I do not see the casualties
I don't know what might have been
You're making friends out of my enemies
And enemies of my friends

Oh - Who's gonna warn me
Oh - How can I tell
Oh - It's so easy
Believing the lies you tell

Written by Mark Heard
© 1981 Bug and Bear Music (ASCAP)

Sunday, October 14, 2007

eMusic Spotlights Mark Heard

Taken from Mark Heard: Orphan of God:

Mark Heard: Orphan of God

by Michael James McGonigal

When one of my editors asked me to write a column on the talented singer, producer and songwriter Mark Heard, I was elated to learn that so much of his discography had recently been added to eMusic’s catalogue. Frequently compared to the likes of Townes Van Zandt, Tom Petty, Leonard Cohen and Bob Dylan, Heard’s stature has increased steadily since he passed away from heart complications fifteen years ago.

Bruce Cockburn called Heard “America’s best songwriter,” while the alternative adult contemporary music magazine Paste argued in a lengthy 2003 feature that “no artist has crafted three consecutive albums with both the lyrical radiance and the musical vibrancy to rival Dry Bones Dance, Second Hand and Satellite Sky.” I wouldn't go quite that far myself, but those three records really are exceptional — poetic, slice-of-life stuff by any standard. Heard is an original, an iconoclastic figure who presaged the work of artists like Chris Rice and Jeremy Enigk. In a two-sentence biography on All Music Guide he is casually called “brilliant.” Heard’s 1982 long-player Victims of the Age album was ranked in the top third of CCM magazine’s list of the all-time greatest Christian albums. And yet Mark Heard remains something of a cult figure.

Heard came of age in contemporary Christian music’s infancy — the late ‘70s and early ‘80s. CCM had yet to become a multi-million dollar industry, and in many ways was still a holdover from the so-called Jesus Rock movement of the ‘60s. Rear-guard CCM artists often questioned the nature of faith, but newer singers like Amy Grant had begun to proffer a simpler, more saccharine approach to mixing faith and music. Heard must have known that, in this context, his work had power and deserved to be heard by as wide an audience as possible — certainly by as many people who purchased Bob Dylan’s 1980 album Saved. “I'm not looking for votes, and my music isn't only for Christians,” Heard told New Christian Music in 1984.

The fact that Heard had songs with titles like “Everybody Loves a Holy War” might clue you in to his approach. In a series of amazing advertisements for his 1979 album Appalachian Melody, Heard wrote that “most Christians would say that the music should in some way glorify God… [however] one assortment of notes on the scale can't glorify God more than another. Neither can certain assortments of words... If you are an up and coming Christian singer and you have to sing for a Christian audience, you'd better throw as many words like "saved" or "hallelujah" or "sweet Jesus" as you can, otherwise your spirituality will be discussed behind your back. But anybody can [simply] say the words. Like Groucho says, 'Say the secret woid, the duck comes down, you win a hunnid dollas.'”

Heard’s early work is in the folky vein; he was often compared to James Taylor, and not always favorably. In his later recordings, he veers towards flat-out rock in a country-tinged Tom Petty-ish style that also encompassed Appalachian folk, Tex Mex and zydeco on that great Dry-Hand-Sky trilogy. Even his best albums feature the gated drum sound, reverb-saturated vocals, U2-ish guitar leads and other elements of mainstream ‘80s rock production. His voice is strong, though, especially on his sadder ballads. But what really propels his work is his way with words. Take “Fire” from Dry Bones Dance: “Oh, to find love's hiding place/ We are beggars and bootleggers/ Fading embers caught out in the rain/ Wondering what's it take to burst into flames/ And meanwhile hammers fall on anvils of grief/ Molten souls in madmen's cauldrons.”

Heard was struck down during his creative peak, and his spirit and wit are as much missing from contemporary Christian music as his exceptional songcraft. In that series of ads for Appalachian Melody, Heard said he liked “to write songs about things which cause me to glimpse the worth of God. Sometimes that might be the ocean, sometimes it is love for my wife, sometimes it can be absurdly simple things… We shouldn't search for a spiritually symbolic rationalization for [every] activity we enter into. It is not evil to enjoy a good laugh or a hike in the Sierras for what they are.” Having suffered the banalities of one too many well meaning but excruciatingly boring CCM acts (not to mention anemic praise and worship performances), these words still ring loud and true for me, nearly thirty years after the fact.


I am going to add a few words to the bolded quotes above. I have had (and even still have) the same complaint about Christian music played on the radio. Almost all of it comes down to variations of: "Jesus loves me this I know; for the Bible tells me so." Before getting an e-mail notifying me of this review of Mark Heard's work, I had been thinking about this very issue this week and had been thinking about writing about it anyway.

I realize there is a time and place for simplistic Christian songs; and America is increasingly moving toward a business model of exploiting niche markets (of which Christian music is one). There was a time when a Christian artist couldn't make a decent living producing strictly Christian music. But, on the other hand, the drive for a Christian artist to become monetarily successful requires that they conform to certain social norms within that Christian audience they are trying to convince to buy their music. That means -- all too often -- that they must water down any lyrics that might challenge the Christian audience of long-held orthodoxies. True artists move society forward by challenging their prejudices. Religions, by nature, are conservative -- or even reactionary -- forces on society. Contrarily, art almost always is a progressive force that changes and shapes perceptions toward societal evolution by showing injustices because of conservative ideas.

Back when I was in high school, there were Christian musicians like Randy Stonehill who challenged us about being susceptible to the American culture with its fixation on Fast Food and cosmetic appearances. Where are all the Christian artists today that challenge us to move toward changing our culture? Almost all of them are giving us the message to conform to the culture around us (at least the dominant Christian culture with all of its trappings combined with economic orthodoxies). Sometimes I wonder how Jesus himself would react to a McDonald's inside of a church? (Thoughts of Jesus whipping the moneychangers come to mind.)

(By the way, I would like to point out that the one time I got to see Mark Heard perform live, it was as an opening act for Randy Stonehill. I got to meet Mark after the show and talk to him for a few minutes.)

Anyway, I guess one of the reasons I liked Mark Heard's music so much was that I am the kind of person who likes to be challenged mentally. Even St. Paul wrote: "When I was a child, I used to speak like a child, think like a child, reason like a child; when I became a man, I did away with childish things." 1 Corinthians 13:11. But I feel like too many Christians today in their emphasis on conformity also create an insulated culture that resembles child-like reasoning in areas of science, politics, economics and law. . .even when that means serving mammon rather than God.

Thursday, October 11, 2007

We're All Subprime Now

Today, blogger Tanta, who writes for Calculated Risk, today wrote about predatory practices in the mortgage industry in HMDA Data on High Priced Loans. A clip:

This whole dynamic may be hard for the WSJ and its fellows in the Big Paid Media, so let me explain this very clearly. In 1975, some folks accused lenders of redlining, which means not granting credit at all to some people. The lenders said they weren't doing that. Congress passed HMDA, and then there was actual data about geographic lending patterns to analyze instead of anecdotes. Once we got some HMDA data under our belts, the Community Reinvestment Act came into being (in 1977) precisely because it was clear that redlining had been going on. CRA in essence forces lenders to show that they are willing to make loans in neighborhoods in which they are willing to take deposits (i.e., those deposits need to be "reinvested" in the neighborhood they came from in the form of loans, not just mortgage loans, to that neighborhood. You can't extract deposits from poor people and use them exclusively to fund loans to rich people.) CRA does not mandate price levels, or even address the question of price levels.

You may be surprised to hear this, but over time accusations of discriminatory lending practices did not go away. In a number of cases, "mystery shopper" tests were performed, in which a white applicant and a black applicant each applied for credit at the same instutition with identical credentials (employment, income, credit history, loan terms), and the results showed that black applicants were more likely to be turned down. This cast some doubt on the lenders' claims that loan rates in minority neighborhoods were a function of the lower credit quality of those borrowers. That became a hypothesis in need of some testing, you see, not an accepted explanation.

So the 1989 revision to HMDA forced collection of demographic data, for the precise purpose of testing the assumption that poor and minority people are just always bad credit risks. This resulted, as you might expect, in conjunction with CRA and other fair lending laws, in much higher rates of home mortgage lending in those areas that were once redlined.

But were these poor and minority people happy, at last? Why no, they weren't. Turns out, anecdotal evidence began to emerge that while these good people were finally getting loans, they were getting them at much higher interest rates than higher-income folks and whites generally got, and that this could not be accounted for by the difference in creditworthiness of the borrowers or the quality of the collateral (the latter proxied by census tract).

...

The bottom line is, as [Calculated Risk] notes, that "high-risk" lending was everywhere in the boom years. Of course there is a desire to collapse it all into the easy category of "subprime." And there has for a long time been a lot of political pressure to keep the association of "subprime" and "urban minorities" in place, because it has functioned as a good excuse for the subprime lenders (they "help" the poor and minorities, remember?). My view is that a whole lot of parties are very interested in maintaining rather than seriously analyzing a lot of faulty assumptions about risk, rates, and borrower credit characteristics. If this ain't "just a subprime problem," then an entire debt-based economy in which even the middle and upper middle class cannot afford homes given [real estate] inflation and wage stagnation is suddenly in question. The last thing certain vested interests want to hear is that, basically, "we are all subprime now."


My favorite comments:

At least then, when they say the problem is contained to subprime, they'd be correct.
daveNYC | 10.11.07 - 10:47 am |


What about the revelations coming forward that a lot of these sub-prime loans were to people who would/could /should have qualified for prime loans. My gut feeling is that the lending industry realized that there was more money to be had in the sub-prime market and rationalized the use of the product by telling borrowers your can always refinance. So while I can see the possibility that we are all becoming sub-prime candidates because of high LTV due to lack of down payments or low rates to buy the MacMansion, I cant help but feel it was the lenders looking to sack the borrower for higher fees and on top of that being bale to book unrealized profits from the fully adjusted loans. Now there is a racket!!
formerly known as... | 10.11.07 - 11:41 am | #


Down where the rubber met the road, '04-06 subprime was a broker-dominated and refinance-oriented business. Those brokers tend to chase after big fish. Which would you rather do? ONE loan for a cardiologist with a bunch of lates thanks to the ex-wife or TEN deals involving city bus drivers with gambling problems, immigrant cleaning ladies with thin credit files, single moms with three jobs, dancers with cash wages and voracious drug habits? - oh, wait, that's alt-a - anyhow, you get the gist. It's not that subprime was ever AIMED at low-income - quite the contrary - it's just that median income of those with impaired credit happens to lower.
Shnaps Parlor



The last paragraph raises an interesting point. We have been told that FICO scores are not related to race, sex or economic status. However, it is also true that women, minorities and lower-income individuals not only have less economic power as a group, but also are at a greater risk that the above examples and medical problems/debt are more likely to adversely affect their ability to pay their bills. Hence, lower credit scores.

The end result is that it contributes to the disparity between the wealthiest (who have the highest credit scores, due to the ability to weather unexpected expenses, and therefore who borrow at lower interest rates), and the poor (whose credit scores crash after one adverse event and have to borrow at higher interest rates). (BTW: I have been meaning to write about how banks charge fees on small balances that can quickly sap wealth from poor patrons.)

The answer is to provide social insurance on some costs (medical debt and education) and living wages that allow for even the poorest to save for the future. There are some costs which cannot be defrayed: rent, electricity and natural gas, food, transportation and personal hygiene. Even the lowest wage should be enough to cover these costs and provide enough to save for the future.

Tuesday, October 09, 2007

Introspection

From a link over at Sudden Debt, I found this quote today at TheStreet.com:

While many pros have been spending their time telling us why this market can't possibly continue to be so strong, the foolish bulls who harbor no doubts have been racking up some great profits. With the credit problems, slowing economy, real estate meltdown, high oil and weak dollar, it has been very easy to make a strong case that this market will likely crack and start downtrending. The logic is compelling but for one very important fact: prices keep going up. For whatever reason, buyers continue to buy.

I always worry about the fact that we have a tendency to be so stuck on our biases and preconceptions of how things are and how things work that we fail to see other truths beyond our scope of vision. In this Information Age, we are prone to congregate with like-minded people. As a result, we reinforce each others beliefs. However, because we think so much alike, we fail to take into consideration entire chunks of information outside of our predispositions.

I have generally been in the bearish camp in economic matters. I have thought that the amount of debt that is outstanding is unsustainable at either a personal or national level. However, I come to the table with my own bias of having been a bankruptcy attorney and having a series of tragic incidents color my judgment. But now that my luck is starting to change, I am starting to wonder if such beliefs will prevent me from maximizing my opportunities.

Let me make it clear: I still think I am right, but I am open to other information that would change my bias.

Monday, October 08, 2007

10,000

Sometime today I received my 10,000th hit. Thank you to all my readers who have supported my blog over the last year.

Sunday, October 07, 2007

Alarming Parallels

An anonymous commenter over at Sudden Debt has alerted me to an article in The American Prospect entitled The Alarming Parallels between 1929 and 2007.


Testimony of Robert Kuttner
Before the Committee on Financial Services
Rep. Barney Frank, Chairman
U.S. House of Representatives
Washington, D.C.
October 2, 2007

Mr. Chairman and members of the Committee:

Thank you for this opportunity. My name is Robert Kuttner. I am an economics and financial journalist, author of several books about the economy, co-editor of The American Prospect, and former investigator for the Senate Banking Committee. I have a book appearing in a few weeks (The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity) that addresses the systemic risks of financial innovation coupled with deregulation and the moral hazard of periodic bailouts.

...

Although the particulars are different, my reading of financial history suggests that the abuses and risks are all too similar and enduring. When you strip them down to their essence, they are variations on a few hardy perennials -- excessive leveraging, misrepresentation, insider conflicts of interest, non-transparency, and the triumph of engineered euphoria over evidence.

The most basic and alarming parallel is the creation of asset bubbles, in which the purveyors of securities use very high leverage; the securities are sold to the public or to specialized funds with underlying collateral of uncertain value; and financial middlemen extract exorbitant returns at the expense of the real economy. This was the essence of the abuse of public utilities stock pyramids in the 1920s, where multi-layered holding companies allowed securities to be watered down, to the point where the real collateral was worth just a few cents on the dollar, and returns were diverted from operating companies and ratepayers. This only became exposed when the bubble burst. As Warren Buffett famously put it, you never know who is swimming naked until the tide goes out.

...

A second parallel is what today we would call securitization of credit. Some people think this is a recent innovation, but in fact it was the core technique that made possible the dangerous practices of the 1920. Banks would originate and repackage highly speculative loans, market them as securities through their retail networks, using the prestigious brand name of the bank -- e.g. Morgan or Chase -- as a proxy for the soundness of the security. It was this practice, and the ensuing collapse when so much of the paper went bad, that led Congress to enact the Glass-Steagall Act, requiring bankers to decide either to be commercial banks -- part of the monetary system, closely supervised and subject to reserve requirements, given deposit insurance, and access to the Fed's discount window; or investment banks that were not government guaranteed, but that were soon subjected to an extensive disclosure regime under the SEC.

Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s -- lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn't paper at all, and the whole process is supercharged by computers and automated formulas. An independent source of instability is that while these credit derivatives are said to increase liquidity and serve as shock absorbers, in fact their bets are often in the same direction -- assuming perpetually rising asset prices -- so in a credit crisis they can act as net de-stabilizers.

A third parallel is the excessive use of leverage. In the 1920s, not only were there pervasive stock-watering schemes, but there was no limit on margin. If you thought the market was just going up forever, you could borrow most of the cost of your investment, via loans conveniently provided by your stockbroker. It worked well on the upside. When it didn't work so well on the downside, Congress subsequently imposed margin limits. But anybody who knows anything about derivatives or hedge funds knows that margin limits are for little people. High rollers, with credit derivatives, can use leverage at ratios of ten to one, or a hundred to one, limited only by their self confidence and taste for risk. Private equity, which might be better named private debt, gets its astronomically high rate of return on equity capital, through the use of borrowed money. The equity is fairly small. As in the 1920s, the game continues only as long as asset prices continue to inflate; and all the leverage contributes to the asset inflation, conveniently creating higher priced collateral against which to borrow even more money.

The fourth parallel is the corruption of the gatekeepers. In the 1920s, the corrupted insiders were brokers running stock pools and bankers as purveyors of watered stock. 1990s, it was accountants, auditors and stock analysts, who were supposedly agents of investors, but who turned out to be confederates of corporate executives. You can give this an antiseptic academic term and call it a failure of agency, but a better phrase is conflicts of interest. In this decade, it remains to be seen whether the bond rating agencies were corrupted by conflicts of interest, or merely incompetent. The core structural conflict is that the rating agencies are paid by the firms that issue the bonds. Who gets the business -- the rating agencies with tough standards or generous ones? Are ratings for sale? And what, really, is the technical basis for their ratings? All of this is opaque, and unregulated, and only now being investigated by Congress and the SEC.

Yet another parallel is the failure of regulation to keep up with financial innovation that is either far too risky to justify the benefit to the real economy, or just plain corrupt, or both. In the 1920s, many of these securities were utterly opaque. Ferdinand Pecora, in his 1939 memoirs describing the pyramid schemes of public utility holding companies, the most notorious of which was controlled by the Insull family, opined that the pyramid structure was not even fully understood by Mr. Insull. The same could be said of many of today's derivatives on which technical traders make their fortunes.

...

A last parallel is ideological -- the nearly universal conviction, 80 years ago and today, that markets are so perfectly self-regulating that government's main job is to protect property rights, and otherwise just get out of the way.

...

One last parallel: I am chilled, as I'm sure you are, every time I hear a high public official or a Wall Street eminence utter the reassuring words, "The economic fundamentals are sound." Those same words were used by President Hoover and the captains of finance, in the deepening chill of the winter of 1929-1930. They didn't restore confidence, or revive the asset bubbles.

The fact is that the economic fundamentals are sound -- if you look at the real economy of factories and farms, and internet entrepreneurs, and retailing innovation and scientific research laboratories. It is the financial economy that is dangerously unsound. And as every student of economic history knows, depressions, ever since the South Sea bubble, originate in excesses in the financial economy, and go on to ruin the real economy.


That is a lot of parallels to think about; and they are alarming parallels at that.

Congress Seeks To Limit White Collar Prosecutions

From the story U.S. Prosecutors Say New Limits May Help Future Enrons Go Free:

Oct. 1 (Bloomberg) -- U.S. businesses, with the help of civil libertarians, are on the verge of outmaneuvering federal prosecutors and persuading Congress to limit the government's power to pursue corporate fraud.

Lawmakers are considering a measure that would, among other things, bar the government from demanding that companies reveal confidential talks with their lawyers in order to win leniency in plea deals. It would also prohibit federal agencies, including the Securities and Exchange Commission, from demanding that companies fire or cut off legal support for employees under investigation.

Such tools were crucial in helping prosecutors pry loose valuable information in hard-to-prove cases against WorldCom Inc. and Enron Corp. Curtailing them may mean fewer such investigations in the future, putting investors more at risk.

``Pre-Enron, U.S. attorneys never brought these cases, and after this bill is passed, they will quit bringing them again,'' says Lynn Turner, a former SEC accounting chief. ``This is a very clear message from Congress: Don't touch white-collar criminals.''

The Justice Department's guidelines for corporate cases were crafted as it and the SEC sought to cope with the explosion of financial scandals early this decade by offering companies leniency in exchange for cooperation.

That typically means a company reports potential illegality, conducts its own internal probe and waives the attorney-client privilege. Prosecutors say they need such confidential information to ensure against cover-ups and, if necessary, help them freeze assets that might otherwise be hidden or squandered.

No Secret

``It's no secret that cooperation from defendants of all types is a very effective tool we need to use in getting the bad guys,'' says Karin Immergut, U.S. attorney in Oregon and head of a Justice Department white-collar crime committee.

Immergut says the waiving of attorney-client privilege played a vital role in the prosecution of former Chief Executive Officer Bernard Ebbers for the $11 billion WorldCom fraud --he's now serving a 25-year prison term -- and helped the government locate and seize $80 million in cash from financier Martin Armstrong, who pleaded guilty in an investor fraud.

Company documents aided accounting probes at Enron and Adelphia Communications Corp., and helped convict 11 former executives in connection with a $67 million fraud at online real-estate seller Homestore Inc., the Justice Department says.

...

Mobilizing

In the absence of an all-out defense by the department, prosecutors on the front lines are mobilizing to fight the legislation. ``This bill would certainly make it harder for prosecutors to protect victims and the investing public,'' says Immergut. Pointing out that drug defendants are routinely asked to waive their rights if they want leniency, she asks why executives deserve special treatment.

``I frankly find it kind of baffling that people are proposing legislation that protects corporations and corporate officers like CEOs more than other individuals,'' she says.

I think this just shows you who our elected officials really work for. Do you ever get the feeling that it is their own self-interest they are voting on?

Saturday, October 06, 2007

Sunday Music: Kevin Max

Kevin Max is another one of the members of DC Talk besides Toby Mac and Michael Tait. (He is also a Mark Heard fan, by the way.) His major solo hit, Existence, got regular airplay on the Christian stations. Here is the video:

Kevin Max -- Existence


A fan of his created a video featuring his song Fade To Red to Lord of the Rings clips.

Kevin Max -- Fade To Red


I Just Wanna Get Warm

This song is another one by Mark Heard that has a kind of Cajun style to it. It appears on his Second Hand CD and again on the High Noon compilation CD released after his death. You can listen to the song at Rhapsody.com. It is song number 8 on the Second Hand CD.

I Just Wanna Get Warm

The mouths of the best poets
Speak but a few words
And then lay down
Stone cold in forgotten fields
Life goes on in this ant farm town
Cold to the lifeblood underfoot
All talk and no touch
And I just wanna be real
I just wanna be real

The colors here are monochrome
Studies in one shade of grey
The good times and the hard times
Cut from the same grey cloth
And all the fires that crackle here
Consume but do not burn
All light and no heat
And I just wanna get warm
I just wanna get warm

The days they rattle past me
Like a tunnel round a train
Landscapes and heartaches
I don't know what I feel
All I know is my condition
Is worse than I can tell
The small talk and the slow burn
And I just wanna be healed
I just wanna get well

There are things I should remember
But I have forgotten how
I'm all tied up with no time
Trying do too much
And the thoughts that I've avoided
Are the ones I need right now
Like a warm wind and love's hand
And I just wanna be touched
And I just wanna be real
And I just wanna be well
And I just wanna be healed
And I just wanna be warm

Written by Mark Heard
© 1991 Ideola Music/ASCAP

Gulf Coast Travels: Adventure Swamp Tours

A few weeks ago, I had the pleasure to be taken on a guided tour of the swamps along the Texas-Louisiana border. The tours cost is reasonable (about $25) and lasts about two hours. This pictorial post will take you through the tour in the order that I remember it.

Here is a flower that our guide showed us just before the tour began:

Here is an example of the kind of trees that grow in the brackish water (water that is part salt water and part fresh water). Their roots grow upward out of the water.

Our tour guide (I believe it was Eli Tate) explained that the Spanish moss that grows on the trees here is not really a moss at all, but is really part of the pineapple family.

On the tour you visit an old, abandoned shipyard used to build ships during World War II.

If you are lucky enough, you just might spot this eagle on your tour. Right before you get here, you will be taken through a maze of sunken ships that stick up out of the water.

This is a strip of land that had some unique cattle that are not easily tamed.

My photo does not show it well, but this area here was filled with lots of spiders with large webs in between the trees. (If you look just above the palm plant at the bottom of the photo, you can barely make out the spider.) I think the locals refer to the colorful spiders as "banana spiders" -- although I don't think that is what they really are.

And now the moment you take the tour for: our tour guide kept hitting the side of the boat and whistiling like a bird. Then he threw a white ball on a string out into the water to attract the alligators. (Cue the Jaws music....):

Nice alligator, nice alligator....

Finally, after showing an ancient native burial ground and attracting yet another alligator to the boat, he took us to an area with lots of lilies and lily pads.

Finally, I was surprised that mosquitos were not prevalent here. Apparently, they are in Louisiana, but not here along the Texas border. That's not to say that they are not prevalent elsewhere in southern Texas.

So if you are in the Orange, Texas area and want to learn more about the swamps, give Mr. Tate a call. He gives a very pleasant and informational tour of the swamps.

Congratulations Two-Headed Blog

Congratulations to Two Headed Blog for winning the Best Commentary Award at the Okie Blog Awards. The runner-up was Bounded Rationality.

Congratulations to all the other winners and nominees.

Prisoner's Debt

You all have heard of Debtor's Prison, but how many of you were aware of the fact that many convicts come out of prison with more financial debt than they can repay (and rarely is it dischargeable in bankruptcy).

The New York Times today brings light to this rarely discussed topic in an editorial today.

The scope of the ex-offender debt problem is outlined in a new study commissioned by the Justice Department’s Bureau of Justice Assistance and produced by the Council of State Governments’ Justice Center. The study, “Repaying Debts,” describes cases of newly released inmates who have been greeted with as much as $25,000 in debt the moment they step outside the prison gate. That’s a lot to owe for most people, but it can be insurmountable for ex-offenders who often have no assets and whose poor educations and criminal records prevent them from landing well-paying jobs.

...

A former inmate living at or even below the poverty level can be dunned by four or five departments at once — and can be required to surrender 100 percent of his or her earnings. People caught in this impossible predicament are less likely to seek regular employment, making them even more susceptible to criminal relapse.


Here are the proposed solutions as reported by the Times:

The Justice Center report recommends several important reforms. First, the states should make one agency responsible for collecting all debts from ex-offenders. That agency can then set payment priorities. The report also recommends that payments to the state for fines and fees be capped at 20 percent of income, except when the former inmate has sufficient assets to pay more. And in cases where the custodial parent agrees, the report urges states to consider modifying child support orders while the noncustodial parent is in prison. Once that parent is released, child support should be paid first.

The states should also develop incentives, including certificates of good conduct and waivers of fines, for ex-offenders who make good-faith efforts to make their payments. Where appropriate, they should be permitted to work off some of the debt through community service. Beyond that, elected officials who worry about recidivism need to understand that bleeding ex-offenders financially is a sure recipe for landing them back in jail.

Here is what bothers me about this aspect of the penal system: the people who need to pay hefty fines -- those that commit white collar crimes, for instance (for example: insider stock trading), rarely have to pay fines and restitution equal to the amount they stole, swindled or conned from their victims and many times they are quite capable of paying it (even though it may mean that trusts that they created to be exempt from creditors have to be "pierced").

This is another reform that needs to be addressed, in my opinion.

Friday, October 05, 2007

Relief Bill for Homeowners Passes House

Relief Bill for Homeowners Advance

WASHINGTON (AP) -- Financial relief for homeowners facing foreclosure or in bankruptcy advanced in the House Thursday when the House approved legislation to help financially strapped homeowners.

The bill, passed by a 386-to-27 vote, would give a tax break to homeowners who have mortgage debt forgiven as part of a foreclosure or renegotiation of a loan. No taxes would be owed on the value of any debt forgiven or written off. Currently such debt forgiveness is taxable income.

While the measure is anticipated to reduce taxes of some strapped homeowners by $650 million, the cost to the government would be offset in part by limiting a tax break available on the sale of second homes.

...

The House vote was the latest congressional reaction to a mortgage crisis touched off this spring by a blowup in high-priced home loans for risky borrowers, throwing a pall over the economy. Foreclosures are at record highs and late payments are spiking. Lenders have been forced out of business and investors have taken huge financial hits.

An estimated 2 million to 2.5 million adjustable-rate mortgages - worth some $600 billion - will jump from low initial "teaser" rates to higher rates this year and next. Steep prepayment penalties have made it difficult for some to get out of their mortgages, and some overstretched homeowners can't afford to refinance or sell their homes.

To help offset the $650 million in tax revenue, the legislation makes it harder to get breaks on capital gains taxes for the sale of second homes. The White House supports the measure but wants mortgage relief to be in effect three years, not permanent as approved in the House. Bush also is opposed to limiting tax breaks on the sale of second homes.

The Mortgage Bankers Association expressed strong support for the bipartisan tax-relief bill but fiercely criticized another measure, opposed by Republicans on a House Judiciary subcommittee that narrowly approved passing it to the full committee.

That measure, which faces a contentious future in Congress, would revise the bankruptcy code to aid homeowners facing default and foreclosure. If enacted, it would further trim profits at hard-hit mortgage lenders.

The bill would allow judges to order mortgage lenders to ease terms for homeowners in bankruptcy proceedings. Currently, mortgage lenders can foreclose against a homeowner in default 90 days after a bankruptcy filing.

Mortgage lenders would be "terrified" of getting wrapped up in bankruptcy proceedings, said Brian Gardner, a research analyst with investment firm Keefe, Bruyette & Woods.

The MBA said in a statement: "Lenders will have no choice but to move to foreclosure right away to ensure that they are not covered by the onerous provisions of this bill. In the longer term, investors and speculators who overpaid for homes at the height of the housing bubble will have an incentive to file for bankruptcy, walk away from the loan and property, and reap an undeserved windfall."


The tax-relief bill is H.R. 3648.

The bankruptcy-related bill is H.R. 3609.


In response to the MBA, so the MBA should reap a windfall for engaging in what they knew -- or, at least, should have known -- was an overheated market (that they helped create)? Secondly, if you are in bankruptcy, where is the "windfall?" After all, isn't that a risk that lenders take when they make loans?

Thursday, October 04, 2007

Rising Inequality

I found a statement made by Alan Greenspan recently quite disturbing. Greenspan Book Criticizes Bush And Republicans:

Greenspan worries that rising income inequality could undo “the cultural ties that bind our society” and even lead to “large-scale violence.”

His solution to remedy this situation is “not higher taxes on the rich but improved education”, which, he claims, “can be helped by paying math teachers more.”


It might help, though, if rich people paid at least comparable rates as working class people do.

Securitization

Today, over at Sudden Debt, an anonymous commenter named Bernard left a comment on the post A Tale of Two Recessions:

Under the Basel Accord for every $100 of AAA securitized assets, a bank need only hold $0.60 of equity, to back up that debt. The theory is AAA assets are among the highest rated and thus the risk of default is virtually nil. However, for every BBB securitized asset, a bank would have to hold almost $5.00 of equity for every $100.

Gold: The Collapse of the Vanities

In other words, if a AAA-rated security is downgraded to BBB, the bank will have post up almost 10 TIMES MORE CAPITAL.

Where are they going to get that capital from at that point?

Are they going to sell the security?

I don't think so--there will be NO BID.

Bernard


The blog's author, Hellasious, responded thus:

Bernard,

You have hit upon a very important element in the whole MBS/ABS situation. While AAA paper won't be downgraded to BBB in one step, the combination of a series of consecutive downgrades and SIV assets going back onto balance sheets (and thus having to be covered by equity) means that the process of painful adjustment will take a long time. In other words, the credit crunch will last.

THIS IS NOT a replay of LTCM, for the simple reason that in its case the banks saved LTCM, so as not to get hurt themselves from the fallout. Today it is the banks/brokers that are in trouble: who's going to save THEM?

Or, to look at it another way: Who will save us from them?

A Response to Alex Taylor III

Today, Alex Taylor III wrote an article posted at CNN Money wherein he criticized Thomas Friedman of the New York Times in his article Debunking auto industry myths. That all fine and good; but in the process he made (I feel) an unfair statement:

It has been argued here before that if the government wants to be serious about improving fuel economy, all it has to do is boost the tax on gasoline. The revenue generated could be rebated to lower-income drivers who are truly disadvantaged or invested in mass transit. The auto companies aren't going to argue for such a tax because it would give them a black eye with consumers. And the government won't do it either, because of its anti-tax bias.

But Friedman, using his column as a bully pulpit, could argue for such a tax with impunity. And it would be a whole lot more effective than perpetuating the old myth about the ignorant luddites in Detroit who are withholding the small, fuel-sipping cars that Americans really want to buy.

But he has argued for a tax on gasoline. Here is a quote from his column back in February:


But at the same time, we have to impose a tax that creates a floor price of $3.50 a gallon for gasoline — forever. This is also about leverage. It says to all the parties: we are going to conserve enough gasoline and spur enough clean alternatives to fossil fuels that no matter what you all do in the Middle East, we will not depend on you for energy.


Another thing I take issue with is his statement that U.S. automakers and Americans don't need to change their habits:

That's wrong...and wrong. Forcing people to buy more efficient cars by ordering car companies to make them is like forcing people to lose weight by banning food companies from selling Big Macs and pizzas. The reason Americans consume so much gasoline is that they like their big pickup trucks, SUVs, and V-8 engines. The reason the automakers make them is because people want to buy them.



He also tries to defend them by saying:

American manufacturers DO build fuel-efficient cars but Americans don't buy them.
Ford (Charts, Fortune 500) is currently offering cut-rate financing on the 2008 Escape Hybrid, while GM (Charts, Fortune 500) is subsidizing the smallest car in its lineup, the Chevy Aveo. And GM can brag all it wants about having more models - 30 of them - than any other manufacturer that get more than 30 miles per gallon on the highway, but it gets precious little credit for it in the marketplace.

The reason people (like me) don't buy them is because the quality is not as good as a Honda or Toyota -- even if it is cheaper. Furthermore, the Aveo's fuel economy is not as good as the Honda Civic or Fit or Toyota Echo or Yaris. (I know, I checked.)

Don't believe me? Here is the fuel economy for the Chevy Aveo:

City 26
Highway 35

And the Honda Civic:

City 30
Highway 38

You need only look at Consumer Reports or a similar opinion poll by consumers on what kind of car they want to buy to know that GM's economy cars have a ways to go in terms of quality. And as for the Escape Hybrid? It's hybrid engine is designed not to increase its gas mileage but instead to increase its power. That misses the point of hybrid technology.

Wednesday, October 03, 2007

Myanmar's Atrocities Exposed

Back in February, I wrote about human rights abuses against the Christian minority in Myanmar in my post Myanmar: The Other Killing Field. Now, according to reports on CNN, it appears that abuses are happening even to Buddhist monks.

Thankfully, Anderson Cooper with his 360° program has been bringing these activities to light (and CNN in general). He also has been reporting about abuses in this country by auto insurance companies against their insureds. This isn't the first time that Anderson Cooper has reported about hardball practices by auto insurance practices.

Thank you, Mr. Cooper, for bringing these issues to light.

Tuesday, October 02, 2007

John Dean: The Impact of Authoritarian Conservatism

John Dean has written the third part in his three part series on Authoritarian Conservatism. Here is a snippet:

Nixon created the "imperial presidency." After the public rejected that concentration of power, in the aftermath of Watergate, Reagan restored the imperial presidency in another guise. Now, Bush and Cheney have created the post-imperial presidency. Using the threat of terrorism as their justification, Bush and Cheney have embraced the so-called "unitary executive theory" - which, in truth, is merely another term for an authoritarian presidency.

I have been saying the same thing for a quite a while.

Monday, October 01, 2007

Whose Entitlement Mentality?

David Brooks in his column last Friday in the New York Times, wrote a column entitled The Entitlements People. I am going to respond to some of his statements (and the general underlying presumptions of his argument). Let's start with an alarmist statement:

The U.S. government has $43 trillion in unfunded liabilities, or $350,000 for every taxpayer. Standard & Poor’s projects that in 2012, the U.S. will lose its AAA bond rating.

The current Gross Domestic Product of the U.S. is about $13 trillion. How these unfunded liabilities are supposed to equal over three times the entire annual U.S. economy is beyond me. Total tax revenues in 2006 equaled $2.4 trillion. The unfunded liabilities are supposed to equal almost 20 times annual tax revenues? Somehow that doesn't compute, either.

In a web post by a group called The Social Security Network entitled The "Unfunded Liabilities" Ruse who was responding to a USA Today article claiming that the U.S. Government would have a $53 trillion unfunded liability in the next four years in October 2004:

All of the grotesquely huge unfunded liability numbers spouted by scare mongers depend on forecasts that go out many decades, often hundreds of years. Such forecasts routinely go beyond the point where we could have any firm knowledge of what to expect. Of course, it is technically very easy to trace the implications of assumptions about future productivity, birth and immigration rates, labor force participation levels, and various costs over the next 20, 50, or even 1,000 years. These assumptions have implications for the age structure of the population, the rate of economic growth, and the cost of various government programs. Plugging those assumptions into a spreadsheet can tell us precisely how much Social Security or Medicare will cost us, extrapolated to eternity, if we like.

The problem is that over such long time horizons, small differences in those assumptions compound to huge variations in forecasts. If something (say health care costs) is growing faster than something else (say incomes) and we assume that this continues indefinitely, then eventually, what is growing fast will swamp what is growing slowly. That's arithmetic, not policy analysis.


Here it is in 2007 and now that number has shrunk to $43 trillion in Brook's column. Another assumption is that taxes will not be raised and/or inflation will not cause revenues to increase to meet those obligations. Again, from The "Unfunded Liabilities" Ruse post linked above:

The notion of "unfunded liabilities" in certain programs is based on the arbitrary assumption that certain designated revenue sources should pay for certain classes of government expenditures. The story that Social Security and Medicare should be paid for out of payroll taxes and their trust funds is not a recent creation of critics of those systems. It has been around for decades. But why? Revenues and expenditures are "fungible," meaning that a dollar is a dollar is a dollar. In fact, today's Social Security surplus flows right into the pot with other revenues, while a significant portion of Medicare costs already are paid for out of general revenue. The real question is not "will the designated revenues be enough to pay for the designated programs" but "will we have enough income to afford to keep the promises we have made?"

There is no question that the nation's gross domestic product will be sufficient to meet all of our Social Security promises forever, leaving lots of income for increasing the prosperity of the young. In general, the outlook for economic growth is good. Our average income per person in 100 years is likely to be much, much higher than it is today (more than four times as high). Social Security benefits are predicted to rise from about 4.5 percent of our GDP to about 6.6 percent over the next century. Even though such long predictions are very uncertain, this one should leave us sanguine: if incomes in 100 years are only twice their present level, and incomes of the old rise from 4.5 to 6.6 percent of income, that still leaves us with $1.96 for every dollar we have today, after Social Security obligations are taken care of. We can continue to keep our modest Social Security promises, and young families still will be much better off than families are today.


I agree with the conclusion The "Unfunded Liabilities" Ruse makes when they say:

Imagine if in 1950, someone had calculated the costs of educating the baby boomers in public institutions through their college years. What an immense, unmanageable burden! And nothing-not a penny-had been set aside by 1950 to cover the costs of public universities in the 1960s and 1970s! Using the logic of unfunded liabilities that has fueled alarmist media stories, public universities should have been closed; education should have been left to the private sector.

Yet nobody ever claimed in the 1950s and 1960s that the education of the Baby Boomers was an excessive burden our society, or that our public institutions could not afford to accept the challenge. When we needed more schools, we built them. Why should the Boomers' retirement be unmanageable? We need to strengthen social insurance for old people, and we will be able to afford it.

I hate to beat a dead horse, but I still think that many Americans would take advantage of Social Security as a full pension if they understood how unsecure their current pensions are.

I also want to focus on something else Brooks wrote:

Democrats vow to pay for their grand spending plans by raising taxes on the rich, even though each one percent increase in the top tax rate only produces $6 billion in revenue.
It's nice how he limits the question only to the top tax rate of income taxes. As I have pointed out before, the rich often don't pay income taxes. As Warren Buffett has tried to point out, people in his class almost always pay far lower capital gains taxes (which makes up most of their incomes). I'm curious how much an increase in the capital gains rate to, say, 30% (i.e. doubling the rate) would have on revenues. Tax revenues from capital gains were roughly $80 billion in 2005. Even if we assume that raising the rate would have some adverse effect on tax revenues, I think that $120 billion in revenue per year would not be out of the question. That would be an increase of $40 billion per year.

I think one of the problems is that even as inflation has caused incomes to rise, the payroll tax has not extended beyond $120,000 and taxes on the investor (wealthy) class is too low (even Warren Buffett agrees with this). Instead, it appears that Congress is content to sock it to the middle class through inflation's effect on the Alternative Minimum Tax (AMT).

Another major problem is that we are not paying for the government we know we need. The fact that tax revenues don't pay for the government that our elected representatives allocated ought to be a clue that tax revenues are lacking somewhere. Deficit spending is only supposed to take place during war or economic distress according to Keynesian theory. The debt is then supposed to be paid back when the economy rebounds or when the war is over. But we seem to be in a perpetual cycle of government deficit and ever-increasing government debt obligations.

The fact is that all government is nothing more than a very large service-based industry. Whatever services we deem necessary need to be paid for. With a $9 trillion national debt, we are obviously not paying for the services that we are utilizing.

I guess we all just feel entitled.

Cram Down

Sorry about the lack of posts, but the internet here is rather persnickety. It doesn't work half the time; and when it does work, it seems that I can't post for one reason or another. I also have the problem that sometimes I can only read one e-mail, and then it just locks up.

Anyway, back to reality...

In the news today, Bankruptcy Change Could Save 600,000 Homes:


NEW YORK (CNNMoney.com) -- One consumer group estimates that 600,000 foreclosures could be avoided over the next two years by making a simple change to the bankruptcy code.

The Center for Responsible Lending (CRL) calls it a tweak, but it could be a significant change for homeowners and the market for mortgage-backed securities.

CRL's proposal - reflected in a House bill recently introduced - would make changes to the regulations for Chapter 13 bankruptcies, which don't wipe out debts, but rather establish a repayment plan.

Under current law, when a person files for Ch. 13 bankruptcy, judges cannot reduce mortgage debt owed on a person's primary residence, although they may modify mortgages on investment property or second homes.

Under the House bill, the bankruptcy judge would have the option of reducing what the homeowner owes the lender. Say a homeowner's property is worth less than what he owes. The judge could reduce the principal to match the home's current market value as well as reduce the loan's interest rate.

The rest of the original principal would then be treated as unsecured. That means it becomes a lower priority for repayment than the borrower's secured debt, such as the newly reduced principal on his home. Unsecured debts may be discharged.

OK, indulge me while I give you some "inside" information. Allowing a debtor to pay what the collateral is worth on a secured debt is called a "cram down" in bankruptcy lawyer-speak. A recent Supreme Court case already allowed debtors to cram down the interest rate to the discount rate plus a point or two (or three) on personal items such as cars, furniture and jewelry. Before the 2005 changes, you used to be able to cram down cars, furniture and the like to their value as well. After the BAPCPA law was passed, the feeling among the debtor's counsel was that we should make car dealers "eat steel" unless they agreed to negotiate with the debtor on the price.

The proposed changes in the bankruptcy law would allow debtors to "cram down" the debt to the value of the house in the current market and it seems that they propose that the interest rate rule in Till v. SCS Credit Corp. be extended to houses as well.

I agree with the article that this is more than a tweak, but it is probably a necessary tweak. The representative for the mortgage industry is quoted in the article as saying:

If investors in mortgage debt knew that mortgages could be adjusted by the courts without the consent of the lender, that could increase their perceived risk and change their valuation.

Yes, and some would argue that that is precisely the problem. That is to say: mortgage backed securities (MBS) are not currently getting marked-to-market, but instead are getting marked-to-model.

I admit I am just a lawyer -- not an economist or Wall Street whiz kid. But if I am understanding it right, this article at Sudden Debt: Rocks, Hard Places and Pricing Models probably explains it pretty well. From Hellasious's post:

Which finally brings us to the subject of the pricing models used to issue and mark-to-model all those structured finance securities. It is quite obvious that the primary variable in all pricing models is their sensitivity to credit risk, i.e. the risk of default. During the "virtuous" cycle, when credit risk goes down, such models indicated higher prices, which were used to issue structured finance securities at higher prices and with higher proportions of readily salable AAA-A merchandise. But as the cycle turned "vicious" those models started throwing out lower prices - and when the credit risks signaled by the CDSs jumped suddenly and substantially, as happened in August, those model-calculated prices moved radically down, causing havoc in the balance sheets of existing CDO holders such as banks, SIVs and hedge funds. The trouble was further enhanced by the fact that many holders were highly leveraged, i.e. they had borrowed heavily through ABCPs and prime-bank margin to buy those securities. Judging by market action quite a lot of margin came from the yen carry tactic. Live by the sword, die by the sword...

But why did participants choose to mark-to-model instead of mark-to-market? Two reasons:

(a) Because of the fragmentation in the structured finance business there were thousands of "made to order" issues that had next to zero secondary market liquidity. Usually the issuers pledged they would maintain a secondary market, but for practical purposes this was an empty promise. Even in good times the spreads between quoted bid-offer prices routinely exceeded 5 points ($50 per $1000 face) and in tiny amounts (eg $500k). We call this "trading by appointment only". Therefore, they couldn't truly mark-to-market because there simply was no active market.

(b) During the "virtuous" cycle marking-to-model served to hide the enormous embedded fees paid by real money buyers in the new issue market. For example, pension funds bought large amounts ($50 million and more) of such securities at par, a price that routinely included 5-8% underwriting fees - an atrocious percentage for AAA-A bonds when bought in size. I know of several instances where fees even exceeded 10%. By comparison, highly rated agencies and straight corporates are issued with fees of 0.5-1%.

Which brings us to what could be the "next shoe to drop". As defaults in the mortgage and junk loan sectors rise, as they are already, the models will calculate significantly lower prices, particularly for those issues that were put together with overly optimistic default assumptions. I won't be surprised to see some issues eventually model-priced at 10-20 cents on the dollar, even if their prospects for partial recoveries mean that their true values are double that. In other words, just as the models produced "garbage" prices on the upside, they have the potential to come up with "garbage" prices on the way down.


Also, some mortgage companies don't want to negotiate precisely because they win even if all of their properties go into foreclosure, apparently. From today column by Paul Krugman in the New York Times Enron's Second Coming?:

But Countrywide made more questionable loans than anyone else — and its postbubble behavior does stand out. As Ms. Morgenson reported in yesterday’s Times, Countrywide seems peculiarly unwilling to work out deals that might let borrowers hold on to their homes — even when such a deal, by avoiding the costs of foreclosure, would actually work to the benefit of both sides.

Why block mutually beneficial deals? As the article points out, Countrywide can make money from the fees it charges on foreclosures, while the losses from mortgages that could have been saved, but weren’t, are borne by others.

I think this is an example of moral hazard at work.

Actually, changing the bankruptcy laws to allow debtors to "cram down" their mortgage debts just might be the thing we need to bring back some sanity to this insane housing market in much of the country.