WALL STREET'S GET OUT OF JAIL FREE CARD ... "INTENT"

If you ever wanted to know why no one from the financial sector and Wall Street is behind bars look no further than this 60 Minutes piece on mortgage fraud and Countrywide. Simply put, committing fraud isn't enough to get you prosecuted. You have to show that fraud was also intended (can you imagine a criminal defendant saying, "I didn't mean to kill him, he just happened to be in the way of my bullets"?).

Also, in the FYI category, none of this was confined simply to Countrywide either. It was prevalent and encouraged throughout the industry (and by Wall Street), and is indicative of corporate entitlements and protections that you and I don't get.

I've said it before, and I'll say it again, we can fix a lot of this if we understood Bill Black's "control fraud" better, and used RICO statutes to go after our financial institutions as criminal enterprises ...

- Mark

CORPORATE AMERICA'S BLAME GAME

Want to know one of the reasons why banks - but especially Countrywide and Bank of America - have been foreclosing on homes instead of negotiating with distressed borrowers? They're foreclosing, in part, because it pays. Or it's supposed to pay. Check out this interesting turn of events between the banks and the insurance companies.

Before the market collapsed in 2008 banks that held mortgages purchased insurance contracts in the event that they had to foreclose on a house (or had trouble with a mortgage backed CDO). How do we know this? Because on the last day of 2009, Republic Mortgage Insurance Company (RMIC) sued Countrywide, Bank of America, and several other banks because, RMIC claims, either the borrowers or the banks lied during the mortgage origination process. Their pattern of lies is what produced toxic mortgage, so the argument goes. 

In simpler terms, RMIC is claiming that Countrywide, BofA, and other banks were defrauding them as they sought insurance for mortgages that they knew were toxic. RMIC filed suit in New York saying that they were not going to pay out on the banks' insurance claims because there was:

... either a material misrepresentation by the borrower or a material misrepresentation or negligence by the insured, correspondent lender, mortgage broker, intermediary underwriting or processing the loan on behalf of the insured, escrow agent, closing agent, or any other agent or broker for the insured or other person which originated or processed the loan or acted with respect to the loan, or appraiser or other person providing a valuation of the property that is used in the underwriting, processing, or origination of the loan.

Got that?

RMIC says that fraudulent activities were so wide spread that pretty much everyone in the mortgage financial train could have had a hand lying about the mortgage contract that was created. Worse, the banks knew or encouraged it. Ergo, RMIC claims they don't have to pay foreclosure insurance claims.

For their part, Countrywide turned around and sued RMIC, arguing that not only did RMIC compete with other insurers for Countrywide's mortgage insurance needs but that RMIC knew about Countrywide's shady business practices and that they might be insuring toxic crap. To be sure, Countrywide's suit doesn't claim anything about their "shady" business practices, but if you read between the lines it's easy to see the reference. Specifically, Countrywide's suit claims:

In addition to having a sound understanding of how Countrywide operated it's mortgage lending business ... RMIC understood first hand the risks associated with the mortgage lending business.

Reading between the lines, Countrywide is saying ,"RMIC knew we were insuring crap, but they still took our money."

But wait, it gets better.

Triad Guaranty Insurance - one of the companies who also sold forecosure insurance (called "flow insurance") - is so miffed at Countrywide and BofA for misrepresenting their toxic mortgage contracts that they are now denying foreclosure insurance claims too. And just like with the RMIC case, when Triad filed suit in New York, Countrywide and BofA turned around and filed suit in Los Angeles, claiming Triad owes them $111 million for breach of contract and bad faith.

And on it goes ...

All of this makes one thing clear: Not only did market greed and stupidity get out of control before 2008's market collapse, but it appears that many market players in corporate America no longer want to assume responsibility for anything. What this is doing to the integrity of the market and the moral justification of capitalism can't be calculated (yet). But rest assured, none of this is good for America.

Even if it did "save the system" (a dubious argument to begin with), bailing out the banking system, and then paying them 100 cents on the dollar for their toxic contracts, is increasingly looking like the wrong decision.

- Mark

A STEP IN THE RIGHT DIRECTION ...

From the NY Times ...

Angelo R. Mozilo, the man who built Countrywide Financial, has finally been charged with securities fraud and insider trading by the Securities and Exchange Commission. In addition to generating $140 million in profits from 2005-007 by selling stock in the company - as the company's share price was tanking - the suit alleges that Mozilo misled investors about growing risks in the company’s lending practices. Mozilo was doing all of this at the same time that he was going to the federal government for bailout money, which they were then calling "loans."

If the feds get this right, they should be able to make Mozilo the first of many poster boys for what went wrong in the mortgage lending markets. I say that as long as they're going after him for fraud they should also consider using RICO statutes to catch him for criminal intent too.

Sure, RICO laws are used mostly for the mob. But what else do you call the shake down that the finance and mortgage industry are putting on the American taxpayer?

- Mark

THE MORTGAGE PROGRAM, FOR DUMMIES

For those of you close to someone whose home is under water (or is that upside down?) here’s an excellent Q & A article from the San Jose Mercury (thanks Mike). It answers some basic questions about the new federal legislation designed to stem the tide of looming home foreclosures. For some real life examples of how the program works out here’s a good NY Times article.

In a few words, any chance of getting a home loan renegotiated begins with the stipulation that you must be living in the home that's tied to the mortgage you're renegotiating. There are two type of programs, the Home Affordable Refinance (HAR) program and the Home Affordable Modification (HAM) program. Both involve either reducing interest rates and, in some cases, the principal.

Your chances of getting your home loan refinanced under the HAR are GOOD/EXCELLENT if:

• Fannie Mae or Freddie Mac hold your loan.
• You have no equity and/or owe up to 105% of your home's value.
• You are considered a “strong borrower” or a good risk (you have a good job).

If the above doesn’t work, you MIGHT be able to negotiate a refinance under HAM if:

• You are a “strong borrower” who owes less than $729,750.
• You’re payments (taxes, insurance, etc.) currently eats up more than 31% of your income.
• You've had, or anticipate, a change in your financial situation (divorce, job change, etc.) .
• You have a lender that’s willing to renegotiate, which may mean credit counseling. This will be a hard sell if you are seriously under water (or are working with Countrywide).

You WON’T be able to get your home refinanced if:

• Your current home loan is for more than $729,750.
• You’ve had a significant jolt to your income and/or finances.

While this post is designed to provide information, I feel obligated to say the following (it is my blog) . . .

The crime in all of this is that Countrywide – which was one of the earliest chump companies to stick out its hand for a bailout, after dumping their toxic debt products on the U.S. taxpayer – is increasingly saying “No” to homeowners in trouble. They’re doing this at the same time that it’s former president,Stanford Kurland, is making a killing purchasing delinquent home mortgages for his new company (as I noted here almost a year ago), some times for pennies on the dollar.

Kurland was forced out of Countrywide for helping run the company into the ground, but not before he cashed out hundreds of millions in stock right before Countrywide took a hit in the stock market. Now he’s going to get rich(er) picking up the pieces. I don’t know if Kurland has a conscience, but I have to think there’s a special place in Hell for him (if you believe in that kind of thing).

On the (potentially) bright side for those left out of HAR and HAM, the House is going to discuss a bill that could give bankruptcy judges the power to change mortgage terms on primary residences, while protecting loan-servicing companies from lawsuits by investors ... many of whom recklessly “invested” anticipating big and forced payouts on adjustable rate mortgages, CDO buyouts, and CDS guarantees.

Stay tuned.

- Mark

P.S. Here's an excellent interactive from the NY Times which also explains the mortgage programs (click on the piece to expand).

PREDATORY LENDING SETTLEMENT

Good News: In what will rank as the largest predatory-lending settlement in history, an estimated 125,000 Californians may get their Countrywide loans modified and payments reduced under a program to be announced today. The program is expected to save billions for homeowners.

Bad News: The program, however, rests on the assumption that investors in mortgage securities cooperate with the loan workouts. There is no indication, yet, that this will happen.

This is one of the problems of the $700 billion bailout. While the securities market gets the American tax-payer to subsidize the value of their products, there is no provision to compel the mortgage security industry to cooperate with programs like these.

I'll discuss this in more detail on Saturday.

- Mark

FINALLY ...

Not that anything will come from this, but former Countrywide CEO Angelo Mozilo is now under investigation by the Securities and Exchange Commission. Unfortunately they're only looking at insider trading and, apparently, not into how Mozilo helped drive the company into the ground.

- Mark

THE MOTHER OF ALL FINANCIAL STUPIDITY?

It seems to me that Comrade Bush won't be happy until he and his cronies can raise the flag over the United States of Socialist Republicans (USSR). Check this out ...

At the end of March I wrote about how greed and deregulation created "Ponzi-like" market conditions that made Countrywide a success, a failure, and then (ultimately) an attractive investment opportunity for Bank of America. Homeowners were worse off but things couldn't be better for the executives and the "vulture" investors because of the subsidies.

A week later I then explained how the primary culprits behind Countrywide's problems were walking away rich. In the post I highlighted how former Countrywide president Sanford Kurland had secured a new job where his knowledge of "where Countrywide's financial toxic waste is buried" would make him even more money.

One week later I outlined how the federal government was ultimately going to bailout the entire banking industry by taking on the high risk loans of the housing industry.

Today, I present to you The Mother of All Financial Stupidity (at least for the moment) ... It appears that the American taxpayer is now going to fund the Bank of America takeover of Countrywide.

And just how are we going to do this, you ask? Simple. By allowing Bank of America to write-off the losses of newly purchased (but still floundering) Countrywide. It's kind of complicated, but you can read all about it here at Bloomberg.com.


So, this is what we got.

After weathering Countrywide's greed-laced, and government driven, boom & bust cycle ... after being slapped in the face as those responsible for Countrywide's mess walked away rich and into new jobs ... after virtually guaranteeing that the housing and financial industry's troubled loans would be subsidized by the American taxpayer ... it now looks like the American taxpayer is also going to foot the bill for Bank of America's takeover of Countrywide too (which, by the way, gives them a technically illegal 10.9% of industry market share).

Perhaps I'm wrong, but didn't we fight a Cold War to discredit and overthrow market socialism?

- Mark

"TOO BIG TO FAIL" & BAILOUTS

Here we go again …

According to an April 14th Standard & Poor’s Report, two enterprises with nominally public missions, Freddie Mac (the Federal Home Loan and Mortgage Corporation) and Fannie Mae (Federal National Mortgage Association) may have to be bailed out to the tune of roughly $5 trillion if the economy slides into a deep recession. The rationale is that these for-profit enterprises are seen as too big to fail because of their potential impact on the national economy.

Let’s make this real simple. “Too Big to Fail” is slowly becoming a nice prelude, and euphemism, for industry bailouts. In a darker corner some might call it what it looks like – another form of corporate welfare.

So, the question remains, How did two for-profit enterprises like Freddie Mac and Fannie Mae get into the position where the feds (i.e. you and me) may have to bail them out in the future?

Real simple (actually, I'm oversimplifying here). Both enterprises purchase a bundle of home loans and use the proceeds, plus fees, to guarantee that home loans will be processed and made in a timely manner. They then sell these products to others, who like to be called "investors" (I say this because the "investors" will be at the forefront demanding a bailout should everything fall apart). Freddie Mac and Fannie Mae then use the proceeds to buy more mortgages from the mortgage industry. In doing so Freddie and Fannie (1) create a new class of “mortgage backed securities” that (2) returns money to mortgage lenders, who then (3) make more loans to consumers.

This arrangement facilitates a transfer of funds from Wall Street to Main Street. But it also allows Wall Street and unscrupulous lenders to get off the hook when they push products they know are shady. You know, the "no doc" loans, the Ninja (no income, no job, no assets) loans, and the "liar" loans we saw over the past 5 years. Why worry about them when everyone's bought into the cycle of deception?

Problems also arise when you have companies like Countrywide Financial who go to Freddie Mac for more than $50 billion in loans, and then put up virtually worthless (or soon to be worthless) subprime loan contracts as collateral. This helps to explain why Freddie Mac and Fannie find themselves in trouble today. They’ve gotten wrapped up in a lot of “toxic” loan contracts.

There’s more to this story, but I’ll make this simple: This is what happens when government enterprises, with legitimate public missions (homeownership), underwrite an industry that then gets caught up in a euphoric web of deregulation, easy money, and greed. The taxpayer picks up the tab, while the "investors" lose little to nothing.

These dynamics not only gives legitimate government activities a bad name, but undermines the integrity of the market.

- Mark

COUNTRYWIDE & "SLEAZE CAPITALISM"

After driving Countrywide Financial to the brink of financial ruin (in part by issuing $40.6 billion in subprime contracts), former president Stanford Kurland was recently named chairman and chief executive of Private National Mortgage Acceptance Co. (PennyMac). In his new position Kurland will help PennyMac buy loans "from financial institutions seeking to reduce their mortgage exposures.”

Cutting through the jargon, this means Kurland will take his knowledge of "which mortgaged-backed securities are toxic" and will help his new company pick out the ones with real value (we can all guess who's going to pick up the tab for the worthless stuff, right?). Putting Kurland's charmed financial life in perspective, MoneyNews.com reports ...

... If Kurland thrives at his new venture, he certainly won’t be the first person in the investment world to cause huge losses and then rebound ... Victor Niederhoffer, who first made his reputation as a partner of the legendary hedge fund mogul George Soros, has apparently made and lost at least two fortunes through his investments ... There is a difference between Niederhoffer and the Countrywide crew, however ... Niederhoffer’s mistakes hurt himself and his clients. Countrywide’s mistakes helped push the economy into what probably is a recession and the financial system into a serious crisis ...

As MoneyNews.com pointed out, while many people are to blame for the subprime mess, "the leaders of Countrywide ... played a role."

No doubt considering the recent billion dollar Countrywide bailout engineered by the government, consumer lawyer Irv Ackelberg told The Wall Street Journal, "The whole subprime mortgage fiasco was built on sort of Wall Street’s snake-oil salesmen convincing America this is a can’t-miss scheme.” Nouriel Roubini was even more blunt: "The lesson of this sad and sleazy episode is that when profits are privatized and losses are socialized we get sleaze capitalism ..."

- Mark

THIS ISN'T WHAT ADAM SMITH HAD IN MIND ...

In the previous post we learned the following about Countrywide:

1. The company’s stock price went into free fall in 2007 while its 3rd and 4th quarter performance saw losses in excess of $1.6 billion.

2. To soften the blow of increasingly unstable subprime loans on their books, Countrywide turned to the federal government for over $50 billion in loans.

3. As collateral for these loans, the federal government accepted Countrywide’s toxic subprime waste as collateral, in the process sticking the American taxpayer with Countrywide’s garbage.

4. At the same time, Countrywide’s board members and executives cashed out enough millions of dollars in options to be investigated by the Securities & Exchange Commission.

Well, brace yourselves. It looks like more Countrywide ugliness is around the corner.

Countrywide has billions in loans that allow(ed) borrowers to pay a lower amount on their monthly mortgage than they actually owed (with the unpaid balance added to the principal). The result? Countrywide is now warning of defaults in these once highly-touted “pay-option” loan programs. Not surprisingly, they’re laying all the blame on the homeowners, claiming:

“Our borrowers’ ability to defer portions of the interest accruing on their loans may expose us to increased credit risk …”

This makes so much sense.

I mean, who can blame the creditors and brokers who made stupid decisions by selling home loans to deadbeats and the unemployed, and then saying “I don’t need documentation”? Why should Countrywide be blamed for their part in the industry stampede to underwrite irresponsible loans to people with “no income, no job, and no assets” (so called “ninja” loans), right? That would be like blaming drug dealers for selling … Oh, wait, never mind …

Seriously, if we accept Countrywide’s claim that home owners alone are at fault for the financial mess around the corner – while the federal government continues to bail out only the investors – all notions of accountability in America's capitalist markets fly out the window.

Adam Smith, the intellectual godfather of capitalism, is no doubt turning in his grave.

- Mark

THE AMERICAN ECONOMY, COUNTRYWIDE & CARLO PONZI

Wow. It looks like the leaders at Countrywide who helped build and feed the sub-prime mess are going to walk away with additional millions of dollars after Bank of America finishes purchasing the company. This comes after Countrywide directors cashed out so many millions of dollars in options that the Securities & Exchange Commission started looking into insider trading (company directors selling company stock is exactly the opposite of what happened after the last major market meltdown occurred in 1987; but that’s another story).

So, what helped make Countrywide such a bargain for BofA? Primarily three developments:

1. EASY MONEY & ASSET INFLATION: The price of Countrywide (and its industry) had to be driven up. Thank you Alan Greenspan.

2. DEREGULATION allowed investors to enter the home mortgage market. Thank you Republican Party (who apparently couldn’t imagine that good investors would yield to speculators who, with enough easy money, would become Ponzi-like sharks, depending on asset inflation and creative credit instruments to keep the mania going).

3. MARKET SUBSIDY: After getting wrapped into the sub-prime mess Countrywide secured billions of dollars in government backed loans to help cover losses.

While easy money and deregulation helped Countrywide’s stock price soar in the 2000s, federal loans helped the company bury their financial “toxic waste” because the feds, incredibly enough, accepted Countrywide’s sub-prime debt as collateral.

That’s right. In spite of company directors selling company stock like rats jumping off a sinking ship, and a boat-load of bad debt, the federal government gave Countrywide billions of dollars in loans, and then took Countrywide’s financial garbage as collateral. BofA then swoops in and purchases the troubled company at a bargain price, knowing that the federal government now has a stake in Countrywide.

You know it seems that the more details we see in these rescues-bailouts, the more it appears the only real problem in the Pyramid Schemes of Charles Ponzi was that he never had Greenspan-like easy money, nor was he able to hook the federal government into underwriting his shady deals.

- Mark