A New Rant

A new rant just posted at Pacemaker:

Real estate crashes are built into the plan and are not a bug but a feature.  And with every crash, assets are further concentrated at the top of the wealth scale.  Let's look at the last crash.  The end of the boom was signaled Thanksgiving 2006 when Chase and Wells simultaneously (But certainly without collusion.  It's a miracle!)  converted the lines of credit that were an essential part of their mortgage programs into 60-month amortized loans, closing off access to credit for thousands of small businesses.  Why?  Well after spending the boom dead to the world, SEC and DOJ had been politically forced into semi-comatose states and had given Chase and Wells taps on the shoulders.  They hurriedly solidified their LOC positions into conventional loans before throwing a few of their lackeys under the bus the following Spring to placate the regulators.  By then the cat was out of the bag.  But the crash didn't happen.  Because the players still had too much Quatsch on their books, and their shovels were only so big.  They had to find marks to unload it to.  Failing that, they had to find marks to hedge it.  And they had to position for post-crash opportunities.  It took a year.  There was turbulence along the way.  New Century and American Home Mortgage went Chapter 11, a bunch of funds either closed or froze withdrawals, and B of A snapped up Countrywide, ostensibly as a bailout of Countrywide, but really to shore up B of A's balance sheet.  Then the players pulled the plug, and the spring unwound.  IndyMac, Bear, and Lehman folded up; Chase pushed WaMu off a cliff so it could grab its assets and shore up its balance sheet; a bunch of players, but especially Chase and Goldman, broke AIG and the Greatest Balance Sheet on Earth by loading it with rigged CDSs and other hedge positions; the houses that had put enough lipstick on their positions to keep from folding got absorbed, so B of A got Merrill Lynch, and MUFG got Morgan Stanley; and Wells got a seat at the big-boy table by winning the Wachovia sweepstakes.  Then it spread to other industries, and to the rest of the world, and everyone got a nice Mike Tyson square in the face.

And since then?  Let's just say China is not the only bubble out there.  For example, right here in Salt Lake City we've been frantically tearing down commercial property and slapping up 5-8 story apartment and condo blocks.  And the financing makes no sense, even with tax weirdness thrown in.  Rates of return that should only acceptable on government securities, but here they are on real estate.  But with interest rates effectively at zero, I guess anything is preferable.  And with that we can see the game is once again afoot.  Build it, then flip it out in the current inflated market to marks who are desperate for any return above 0%, then sit on your cash and wait for the next crash so you can buy it all back on the cheap.  And are the regulators looking into any of this?  Don't be silly.  They'd rather be looking at every mortgage and rent payment in the country than at which financial institutions have all their money tied up in cash, waiting to throw the switch on the next collapse.  And the grift goes on.

All the News...

Well, let's take a look at a few things that have been happening out there in the freak show called reality.

First, the Florida Supreme Court dealt mortgage borrowers an expected blow in  Bartram et al. v. U.S. Bank NA.  Florida is a judicial foreclosure state, so it does not have a lot of effect in Utah and Washington, but it is a good view of how things are going.  The court held that a prior case dismissed for a reason other than the merits of the issues has no issue preclusion effect on a later case.  Put another way, if the lender's first foreclosure claim was dismissed for procedural defect and not because the lender failed to state a claim, the lender can re-accelerate the note for later nonpayments and sue again.  Yet another blow to the "I can get you a free house" hucksters.

Second, the Supremes are reviewing the latest example of US courts trying to get jurisdiction over other countries (See here, here, and here.).  A US oil drilling company owned a subsidiary that was a Venezuelan corporation that it used for drilling there.  Venezuela got behind on payments, the company stopped drilling, and Venezuela seized the rigs to keep them operating.  The drilling company sued Venezuela in US court.  Ordinarily you can't sue a foreign sovereign in a US court, but both the DC District Court and the DC Circuit Court decided the "violation of international law" exception applies, and that's the issue before the Supremes.  The problem I see, and that Venezuela has raised all along, is that this isn't a matter of international law.  The rigs were seized from a Venezuelan corporation, not the US parent.  As far as I'm concerned, that ought to be the end of it.  But the courts are playing around with the political ramifications.  And that's the real problem.  Because every time our courts decide to reach out and touch someone overseas, it increases the justification for anyone who wants to do the same to us.  And that ought to scare you.

In a rare instance of bad news for banks, Bank of America, while not actually having to face the music for all the messes it has created, might at least have to hum a few bars.  The 1st Circuit in Boston has ruled that a fraud case against BOA can proceed.  In 2007 BOA was pushing auction-rate securities hard, marketing them as extremely liquid, practically cash substitutes.  The problem with that liquidity was that it depended on the dealers continuing to trade those securities.  In February 2008 they stopped, and all that lovely liquidity turned into solid lead.  BOA said, "Hey, we warned them in the prospectus what could happen if the market froze up."  The court, in a wonderful moment of lucidity rare in banking litigation, responded, "Yeah, but you just kept selling after it looks like you saw the market was headed south, and you changed your sales pitch not one bit."  Expect BOA to settle this dog soon and put a big gag clause on the settlement.

Finally, in the latest maneuver in the farce that is the prosecution of our last two AGs, John Swallow is trying to get a big chunk of the case thrown out.  He's making certain legal arguments, but in reality I think he figures that since Shurtleff skated, and since he was just doing what Shurtleff did, he should skate too.  Poor John.  He never learned the first rule of poker: When you sit down at the table, look around for the mark; if you don't see him, he's you.  You're the only one left they can turn into a sacrificial lamb, John.

Slaps on the Wrist

US, UK, and Swiss regulators have slapped fines against Chase, Citi, Bank of America, UBS, RBS, and HSBC for turning forex trading into a fraud factory for their own benefit.  The fines total US$ 4.3 billion, trumpeted as the heaviest penalties in history.  The traders involved have been shown the door, along with one of the forex chairs at the Bank of England.  And the fact that this crap is being touted as some sort of regulatory triumph shows just how messed up the system is.

First, this scam went on for years, the players were brazenly communicating their activities with each other, and no one did a thing.  Second, the forex market trades over US$ 5 trillion per day.  Even if these banks took only 0.1% commissions (HA!) and held just 10% of the market (They're well north of that.), the fines would amount to less than two weeks of commissions.  Third, once again only the little people have been punished while the players who make the policies that created these crimes remain in place.  It would be as if Donald Segretti took all the blame for Watergate and everyone else got to stay in the White House.

The game is rigged.  Makes you want to run right out and put your retirement in the market, doesn't it.

It's the Middle Class, Stupid

Or rather the lack of same.  The financial pundits on both sides of the Atlantic are beginning to admit that most people aren't recovering a thing in this recovery.  Given that there no longer is a recognizable economy that can support a middle class, this comes as a surprise only to those who don't actually have to work for a living.  The rest of us see jobs disappearing, businesses going dark, and concerted attacks on the few remaining things that make survival possible (The DC Circuit's recent ruling on the Affordable Care Act is nothing short of criminal, the only way to save affordable healthcare is single-payer, and we need to start removing judges, starting with the Fascist Five on the SCOTUS.), and every time we turn around, those of us in business are expected to work for free (I'm not talking about paying taxes.  I'm talking about doing free work for "marketing" or for "social responsibility."  When our wonderful Bar Association expects me to do pro bono work to help the "image of lawyers," I have to laugh.  I do pro bono constantly, along with a lot of reduced rate work, as well as holding up my end re professional image.  I'd tell them to go talk to the Big Firm people, but since those are the folks who own and operate the Bar....).  No, there's no recovery going on; quite the contrary.

But what are the pundits worried about?  That Democrats and Labour are making noise other than Austro-Chicago orthodoxy (Horrors!).  Janan Ganesh recently took issue with Ed Milliband in the Financial Times because the Labour leader is behaving, well, like a Labour leader instead of Tory Lite.  Ganesh thinks Millibrand should be proposing new ideas, which would be nice, but Ganesh defines "new ideas" as the same old free market fraud his club has been pounding since Maggie installed her throne at No. 10.  Earth to Janan: Your neoliberal dreack has gotten us into this mess, with a growing pool of hopelessness and no security for anyone other than the 1%.

Speaking of Tory Lite, Tony Blair keeps trying to absolve himself of the current mess in the Middle East.  He continues to claim that removing Saddam Hussein did not create the current crisis.  Facially that statement is true, but not in the way Blair tries to claim.  What caused the crisis was putting Saddam (and all the other tin pot, self-medaled dictators around the world) in power in the first place.  We made modernization look like a tool of Western control.  It's no wonder the fundamentalists attracted an entire generation that was fed up to the gills with our meddling.

What else is worrying the pundits?  How about the end of the USD as the world's reserve currency as a result of a conspiracy led by Russia and China and including France?  Please.  While it would be bad if the Yankee dollah were no longer the world's currency, news of its demise is way premature.  There simply isn't anyone in a position to step up and take over.  Not China, not Russia, not the Eurozone.  This is just another pseudo-crisis intended to distract us from the reality of our inequitable, unproductive global economy.

Any other "crises" to distract the masses while they're being led to slaughter?  Is a pig's backside pork?  According to Martin Wolf, Europe will be without gas and oil unless we all march straight in the Ukraine and push Putin back to Moscow.  Martin has apparently never heard the bit of wisdom about never fighting a land war in Asia, especially against the Russians on Russian soil.  He might want to look into how much success others have had with that.

What other lunacy is flying about?  One need look no farther than the ever-reliable Robin Harding, who has never met a Randian delusion he didn't try to have a long-term, intimate relationship with.  His latest shovel-full is that house prices are artificially high because of, wait for it, zoning laws.  I realize that conservatives believe that, in the words of their Blessed St. Ronnie, "Facts are stupid things, " but let us nevertheless put facts before a candid world.  First, housing prices are not artificially high; they're pretty depressed here in the US, albeit over-encumbered by toxic mortgages that the likes of Harding once touted as the next great bit of free market brilliance, and while prices have risen recently in the UK, that was a product of loose money that will soon be going away, so expect a correction on that front soon.  Second, housing zoning these days is focused on affordability: multi-family, townhouses, in-fill.  This shift became necessary if for no other reason than that the old model created an infrastructure that was unsupportable.  Suburban sprawl created too much street, too many miles of utility lines, too much area for fire and police to cover, etc.  That Harding believes zoning still promotes acres of lawns and miles of picket fence has more to do with where he and his friends live than with reality.  Finally, Harding, true to his creed, ignores the 409-kilo gorilla in the room: People can't buy houses regardless of the price because 1%ers he is so stridently defending have created a system in which very few of the 99% have sufficient economic security to enter into a mortgage.

It's the middle class, stupid.  People who work for a living can no longer even hope for stable enough incomes for a house, a new car, and college educations for the kids.  They may be making it this month, but it could all be gone next.  This is what the 1% has pushed us into.  This isn't a recipe for independent, economic actors; it's a recipe for serfdom.

Crash Goes the Trolley

File this under "I am shocked.  Not."  Trolley Square Associates has defaulted on a stack of loans for about $57 million, and a lender group headed by Bank of America has filed for a receivership.  I would first note that I buy none of B of A's high-toned rhetoric about just wanting to preserve the assets.  If that were true, the creditors would have filed an involuntary bankruptcy and had a judge and trustee who knew something about preserving a going concern.  Over in state court, you'll probably get a judge who doesn't know how to administer a receivership and just lets the creditors run roughshod.


Anyway.  It's not like Trolley has ever been much of a going concern, and it's not like Trolley Square Associates has ever demonstrated it was up to this job.  I've given TSA kudos here for getting special events to the Square and chided the tenants for not taking advantage, but in a real mall, the leases have "special event clauses that allow the landlord to force tenants to be open for such events.  And don't even get me started about places like the candy shop, which locks up a corner location all year for two months of operations.  A normal mall owner wouldn't put up with that, but requires being a chooser not a beggar, and Trolley and its owner are definitely the latter.  Let's face it, anyone who has to borrow from B of A, the gang that couldn't lend straight, is already in trouble.  We'll see how this plays out, but right now my Magic 8-ball says "Blight."

As If We Needed Any More Evidence

OK, so I haven't blogged for awhile, and the following is a bit stale. Hey, I work for a living, and this isn't getting the attention it deserves.

To preface, for those of you who may think I was late to the bubble prediction bandwagon, I suggest you look here and see that I was predicting the train wreck in December 2005. Beat that, Nouriel Roubini.

We know that the overwhelming majority of opinion makers in the US are just sock puppets for the Financial Overlords. Ditto for our supposed intellectuals. They don't need to rub our noses in it. But along comes Roger Lowenstein in Bloomberg Businessweek to "explain" why there have been effectively no prosecutions resulting from the collapse. It's because, simpletons, there were no crimes committed. Demands to the contrary are just the result of our overheated, plebeian blood.

Well, Roger, here's the deal, and I'm speaking as a former prosecutor who's handled white-collar crimes, which is one more claim that you can make (Yes, I know Daddy was a Wall Street lawyer and Columbia law prof, but I have a shingle on the wall too, and my kids know that doesn't make them legal experts.): If this mess wasn't created by a tsunami of crime, we have glossed "criminal fraud" out of our legal system.

I'm no accountant, and if you want that kind of analysis, I recommend you go read Francine McKenna's column in Forbes, which is heavily linked. I'll stick with what we know of facts and law.

In 2002, the Dot Com Bomb and 9/11 had deflated the preceding bubble (Anybody remember how outraged we were over LTCM? Those were innocent times.), and investment houses and banks were sitting on cash with investors clamoring for it to go somewhere that produced a return. Fortunately, "help" was at hand: real estate.

First, create a demand pool for the money. This required bringing a pile of borrowers to the table who had no business being there. No problem. No-doc loans and "creative financing" (Read: Fake it 'til you break it.) bring everyone to the table.

Second, you need properties that "support" the loans. Again, no problem. You have everything from investment groups flipping properties internally to jack the prices to armies of in-house appraisers for whom "MAI" means "Made As Instructed."

Third, take that freshly inked paper, cut it up like paper dolls, and securitize it all over the place. Get the ratings agencies to help by declaring that poo no longer stinks.

Fourth, the piece de resistance. Cherry-pick the securitized pools and hedge. Then buy credit default swaps on both the bets and the hedges. And THEN sell the swaps upstream and downstream. AIG and the monolines will be more than happy to help.

Oh, don't forget to make sure the regulators remain lapdogs by reminding them that if they do their jobs, the house of cards will collapse, and then there will be no place for them when they leave government and want to earn some serious scratch.

And at every one of those steps, the commissions and fees run hot and heavy. And so do the fibs, the half-truths, the misrepresentations, the blind eyes, and the outright lies. Countrywide lied systemically to produce the greatest pile of toxic, residential mortgages in history. JP Morgan Chase wasn't any different on the commercial side. Chase propped itself up with a forced take-over of Washington Mutual (No, kiddies, it wasn't really WaMu that needed the propping.). Bank of America swallowed Countrywide with all the due diligence of a five-year-old dragging home a stray dog. And Goldman Sachs got caught buried shoulder-deep in the cookie jar, selling products it had created so it could bet against them. And on, and on, ad nauseam, ad absurdum.

And nothing. Few meaningful investigations, fewer prosecutions, and business goes on as usual. Except that it's right out in the open now; no one even bothers with back rooms. And it all gets ignored. So I guess you're right, Roger, in a sick way, because legally there is no crime without a conviction, and there can't be a conviction without a charge. But who are you going to blame, Roger, when Joe Main Street starts treating the rule of law with the same contempt his lords and masters demonstrate?

Train Wreck Reform

Once again couldn't get this to post at Credit Slips, so here it is:

BAPCPA was a deliberate shot, below the waterline, at consumers and small businesses, and it was a highly successful shot, exacerbated by the wildly moving targets that are the courts' and trustees' expectations. Pre-filing analysis for either a 7 or a 13 has become rocket science, except that with rocket science you're at least dealing with, you know, science, as opposed to the whimsy of the gods. No matter what you're dealing with (qualifying a consumer for 7, reformatting and producing the accounting for a business 7, or dealing with a 13 trustee who has no concept of business operations or irregular paychecks), it's a labor-intensive mess.

Then there is personal Chapter 11, a saddle on a sow necessitated by the horse-and-buggy jurisdictional limits in 13 and exacerbated by the brain-dead semi-incorporation of 13 standards into 11 (but what can you expect from The Mind of Grassley). In all honesty, everyone is just making this up as they go, and I shall be long dead before any semblance of order is imposed. Pile onto this that the disparity of treatment between big and little keeps getting worse. Big 11s get away with pre-petition roll-ups and "reorganized liquidations" (*cough* Blockbuster *cough*) that would get an individual or small business bounced for fraud.

Finally, creditors are increasingly using the "reform" to take a dog-in-the-manger approach. This list is long, but these are a few notable locals: Bank of America/Chase (Why is it that every other mortgage has these two worthies in an owner-servicer pas de deux in which they torpedo short sales, proceed with foreclosure at a lower price, and then proceed with a claim for the full deficiency?), RC Willey (I shall never darken its door again. Dear Mr. Buffett, if you made your pile buying into companies with these tactics, you aren't the Sage of Omaha, you're the Don Corleone of Omaha.), America First Credit Union (With its reaffirmation policies, it needs to rename itself "America Last".), Celtic Bank (Sorry, it isn't my clients' fault your troubled assets ratio is back up to 90, six times the national median. It's a you problem.).

We're creating a bankruptcy system people either can't get into or can't stay in, and the system outside bankruptcy is reverting to debtors' prisons. Is it just me, or is there something wrong with this picture?

What Passes for Business Reporting in Utah

If you want business news in Utah, don't look for anything that matters from any of the local, mainstream media. The bulk of the "business reporting" here is nothing more than company press releases with no editing or additions. An article on the City Creek Center in this morning's Trib is a prime example. Taubman Centers, Inc., is developing and managing City Creek, and it has issued a press release about bringing Linda Wardell to town as general manager. The article is nothing but PR gush, waxing rhapsodic about the big plans for City Creek and touting Wardell's experience as general manager of The Pier Shops at Caesar's in Atlantic City. And the Trib swallowed it and published it whole.

The Trib could not have done any research for this article. A basic Google search would have shown that, when Taubman launched The Pier in 2006 (a major overhaul of an existing mall on the site of the old Million Dollar Pier), it planned to install up-scale shops and restaurants anchored to a big, tourist draw (Caesar's at Atlantic City). In other words, the same plan it intends to use here (Granted, Caesar's and Temple Square are different draws, but they are still big, single-anchor draws.). A little research also would have shown that last year Taubman and Wardell failed at The Pier; Taubman strategically defaulted on a $135 million note and turned the keys over to Bank of America (See here and here.).

That's a real nice record of success coming to town. And the Trib missed every bit of it. Way to keep your readers informed, guys.

Dear WSJ: Missing a Step?

The Wall Street Journal came out with this article this morning on Bank of America's successes from its real estate investments.  Note that the article nowhere mentions the SEC's expanding investigation of BofA (The article also refers to Deutsche Bank's revenues without mentioning its exposure to Dubai's unfolding defaults,  but that would be asking for just too much, wouldn't it.).  You think that cooking books and pumping offerings might have some effect on posted earnings?  Apparently the Journal doesn't; BofA's revenues are just from great management.  So, do you think the Journal is an information source, or just a cheerleader?