Operation LeakS accuses Bank of America of Mortgage Fraud

I hate to publicize info before it has really been vetted, but you'll be hearing about it elsewhere. So, best to refer our readers to a reasonable analysis of the recent Operation LeakS release of Bank of America e-mails related to the mortgage meltdown.

The exchange centers on requests by Balboa employees to have document tracking numbers purged from Balboa systems so that they no longer correlate to specific loans.

At one point in the emails, a Balboa employee states that the request to purge information is an 'unusual' one and will require 'upper management approval' before they can move forward...

One of the leaked emails claims that Balboa was knowing hiding foreclosure information from federal auditors.

If the accusation is true - that a Bank of America manager requested loan information be destroyed and hidden from auditors, then this is explosive. But it's just as likely we're only hearing one side of the story.

Banks accounting for unpaid mortgages as "income"?

There is a fundamental difficulty with regulating banks in the modern age. Unlike days past, banks often no longer derive value from tangible assets like gold and silver, but instead are number-engines creating value out of mathematics. That is not to say what they do is illusory - not at all! - but it means it is easy to game the system by tweaking the way the engine runs.

For example, Forbes is reporting that even after accounting-rules changes, many banks are still allowed to count mortgages as "income" even if no one is paying them... until the house is actually foreclosed upon. This means that banking giants like Bank of America and Chase can continue creating value from these properties (in the eyes of shareholders) even though they no longer have any real benefit to the company.

I can't help wondering if this explains a number of anecdotes I have heard of late from people trying to buy short sales (i.e. homes not actually foreclosed upon) where the bank showed very little interest in selling. After all, a sale is a real loss (assuming they sell for less than the mortgage is worth) whereas a continued unsold property is producing phantom income for the balance sheet.

Truly a Big BAD Wolf

Whack-A-Banker?

Since I work in the financial services field (in Information Technology), it is no surprise to me that there is hostility to banker out there. Even before the Great Recession, bankers were often hated for obscure fees, labyrinthine rules, and a general lack of empathy. (Honestly, most of the banker I have known have been good people who went out of the way for their customers, but this is the perception.) When the crash came, things got even worse since the direct cause blamed was the Mortgage Derivatives market - clearly the fault of financial services management.

Now, one arcade owner is making a mint by taking advantage of anti-banker animosity with a retooled Whack-A-Mole called "Whack-A-Banker". The owner claims it is so popular, he keeps having to replace worn-out mallets.

Is I.T. Responsible for the Economic Crisis?

I work in Information Technology, so I am sharply aware of the dangers inherent in a badly-built set of systems. It is not just the risk of the Blue-Screen of Death that Windows users are familiar with, or the spinning beachball that haunts Apple users. Even a system that never crashes can be a danger to your business if it doesn't get you the info you need, when you need it. A logical question then, is whether better I.T. systems could have prevented the Economic Crash.

This fragmented IT landscape made it exceedingly difficult to track a bank’s overall risk exposure before and during the crisis. Mainly as a result of the Basel 2 capital accords, many banks had put in new systems to calculate their aggregate exposure. Royal Bank of Scotland (RBS) spent more than $100m to comply with Basel 2. But in most cases the aggregate risk was only calculated once a day and some figures were not worth the pixels they were made of.

During the turmoil many banks had to carry out big fact-finding missions to see where they stood. “Answering such questions as ‘What is my exposure to this counterparty?’ should take minutes. But it often took hours, if not days,” says Peyman Mestchian, managing partner at Chartis Research, an advisory firm.

Of course, it never helps to blame technology for the failings of human nature and human decisions. But poor human decisions about technology can lead to even more poor human decisions. Quality counts.

Is defaulting on your mortgage ever acceptable?

A law professor at Arizona University has caused quite a stir by releasing a new paper that argues more people should be defaulting on their mortgages, and that defaulting on a mortgage in excess of the current value of your home makes economic sense. He claims that in as little as two years after a default, an individual can have returned to having "good credit." He argues instead that what holds individuals back is (1) the cultural shame of foreclosure and (2) the moral sense that one should hold to a contract once signed.

Frankly, I find it encouraging that the professor finds so many people "acting against their economic interests" by honoring their commitments. It speaks well to American morality, which has been belittled of late. What do Mod-Bloggers think? Is he right? Or is it right to keep plugging away, even when you know you may be permanently underwater?

Some days, you can't win

These days, a bank can't afford to have a bad day. The Mortgage Meltdown was the fault of bad banking policies and poor oversight, and it has lead to an economic downturn that is now being called "The Great Recession" by many. Many of the largest U.S. banks of 2008 don't even exist anymore in 2009.

So, one can't help being amazed by stories like this one, where a bank sold a house out from under a woman whose mortgage was in excellent standing. It took a Miami judge to set things right, after police officers forcibly evicted her family and locked them out of their own house for 3 days.

The eviction came after Ramirez’s home was mistakenly auctioned off to the highest bidder by her bank, Washington Mutual (yes, we know WaMu is now Chase, but we're in denial). Usually, you get a warning before you get the boot. A foreclosure letter. Maybe a sign saying your house is up for sale. Not Ramirez, who found her belongings bashed and battered in the street...The man who bought the house told Ramirez he paid $87,000 for it, which shocked Ramirez, who bought the house for $260,000.

This is a good reminder to keep a close eye on your creditors in these dark economic days. Just because you are playing by the rules, that does not mean some lazy bureaucrat can't harm you.

An Open Account of a Personal Credit Problem

Edmund L. Andrews, an economics reporter for The NY Times writes a very open and honest account of how, though he should have known better, he is now deep in debt and behind on his mortgage. He also talks about just how easy it was to get there. Andrews realizes that the blame lies solely with himself and his wife, which makes this article a great read. The article discusses many of the lending options available to him, allowing him to "fix" the current insufficient funds issue without fixing the underlying overspending problem. It's a long article, but well worth the read.

"Bank Stress Tests" may be too Stressful for the Market

When they were first proposed, the "Bank Stress Tests" that were part of Treasury Secretary Tim Geithner's economic plan seemed prudent. If the government has a clearer picture of the actual state of troubled banks, then it could react more intelligently. What could be more logical? But now, it appears such revelations could do more harm than good as a jittery market rushes to judgement over the slightest whiff of weakness in a bank's balance sheet.

While weaker banks deemed to need additional capital will be given six months to raise it, financial markets may have little more than six minutes of patience before punishing them if the information is publicly released, one official said...

The economy has worsened since the Treasury announced the tests in February, raising questions about whether the scenarios regulators are applying to bank portfolios are rigorous enough. Officials are considering taking a tougher stance in judging the tests’ results given the job market’s deterioration, the Financial Times reported today without citing anyone.

Under the assessments’ “more adverse” scenario, the unemployment rate is seen rising to 10.3 percent in 2010. When officials designed that scenario, the most-recent jobless rate was 7.6 percent. It has already soared to 8.5 percent since then.

Of course, since the economy - or at least Wall Street - is essentially mass psychology, we have a lose-lose situation here. If the report is released and it contains bad news, then there will be a panic. But if the report is NOT released, it will create additional uncertainty which will drive the market down steadily. Knowledge is power, but knowledge untempered by wisdom is a bull in a china shop.

AIG proves why they crashed - No common sense or judgement

There is a saying that was popular a few years ago: "Common sense isn't common." And you can certainly see it at AIG, where even now, millions of dollars are being paid to executives of the division which caused AIG's collapse despite unrelenting public outcry.

The bonuses will be paid to executives at A.I.G.’s financial products division, the unit that wrote trillions of dollars’ worth of credit-default swaps that protected investors from defaults on bonds backed in many cases by subprime mortgages.

The bonus plan covers 400 employees, and the bonuses range from as little as $1,000 to as much as $6.5 million. Seven executives at the financial products unit were entitled to receive more than $3 million in bonuses.

Clearly, it is time for the Federal government to stop simply playing the "carrot" of bailout money. It is time to also bring out the "stick" and begin prosecuting executives who caused these monumental collapses. If they want million dollar bonuses and AIG can't stop them, fine. But they had better be ready to pay out the bonuses as fines and in civil lawsuits.

Release the hounds, Mr. President.

Horror Show: 1929 vs 2009

If you're wondering how the start of the Great Depression stacks up to the current Recession, wonder no longer. Fair warning, this is a SCARY story. If you are already stressed or anxious today, leave it for another day.

At the same time, we must remind ourselves that while history repeats themes, it rarely does so with absolute fidelity. History loves variation. This means there is hope to produce a better result out of the current economic climate.

AIG hungry! Want more bailout!

Sigh. What more can be said? Sigh.

The government agreed late Sunday to provide $30 billion more to American International Group as the company prepares to report a $62 billion loss today, people involved in the discussions said.

The insurer’s quarterly loss would be the biggest in history.

The intervention marks the fourth time that the federal government has been forced to step in to help AIG avert bankruptcy.

I hate to ask as a Conservative, but would it be cheaper to just let AIG go bankrupt and promise to fund all the displaced people for 5 years via the unemployment system, when the Recession will likely have passed?

Microsoft knows how to make a bad situation worse

Microsoft recently laid off 1,400 employees after years of faithful service. Such is life in the current economy, some might say. But the software giant showed its usual tin ear for public relations afterward by asking laid off employees to pay back some of their severance check. If an Executive does not put the kibosh on this Monday, it is proof that MS no longer has any interest in having a positive public image.

"An inadvertent administrative error occurred that resulted in an overpayment in severance pay by Microsoft," the letter states. "We ask that you repay the overpayment and sincerely apologize for any inconvenience to you."
A Microsoft spokesperson confirmed that the authenticity of a letter posted on TechCrunch, but declined further comment, saying it was "a private matter between the company and the affected people."
The company declined to specify how many of these letters were sent out, and it's unknown how much the overpayments total, but it did indicate that some laid off employees were also undercompensated.

Visualizing the Mortgage Meltdown

This is really a brilliant explanation of how we got to where we are in the economic crisis. It shows how things go badly quickly, when everything thinks they can't lose.

A Defense of the Stimulus

These days it is easy to find critics of the various economic stimulus bills wending their way thru Congress. They look like pork-laden pieces of political claptrap designed to do nothing so much as pay off the friends of politicians. And most of the defenses are simply lame, "We have to do SOMETHING!" i.e. The supporters of a stimulus bill feel it needs no reasoned defense in light of the crisis. As though a fire were an excuse for any action, even throwing gasoline in its general direction.

Finally, someone has bothered to put together a clear defense of a stimulus which explains why its supporters feel that the details of the stimulus are less important than the bill itself. It is a short article and worth a read. I do not think it addresses many of the concerns of critics, but it is a good, clear defense.

Citigroup & Bank of America fall further, get bailed out further

Working in the banking field has been tough this week as bank stocks across the market have been hammered. Why? Primarily because of announcements out of Citigroup and Bank of America which underline how much risk they have gobbled up, and how poorly they have managed as they have acquired small bank after small bank. Citigroup has actually been split this week into two different companies - albeit still under the Citigroup umbrella of management - one of which is likely to be allowed to fail in the next six months. Both banks have also accepted large new sums of capital from the government, making the U.S. government primary shareholders in these companies.

Have we crossed the Rubicon here, on the weekend between presidencies, at a time when Bush is no longer president but Obama has not yet taken on the mantle? This looks and smells just like complete nationalization of the banking system, something our Founding Fathers (and Mothers) were absolutely against and which has lead Europe into a malaise which has kept unemployment high and growth low for decades. The timing of this move is suspicious as it gives all politicians the excuse of not having been in charge when it happened, thus there being no accountability for such a fundamental change to our economic system.

As a bank employee, I am happy to see it as a potential bringer of stability to an unstable market. As an American, I am sad to see it, as it may be the beginning of an era of extreme governmental intrusion and limitation of personal liberties.

It makes you think...

Banks Refuse to Detail Bailout Money Useage

There is an old saying, "A fish stinks from the head," which means that corruption (in both the moral and physical sense) begins with those in leadership. A few weeks back, the Treasury Department began refusing to disclose how the TARP bailout money was being used. Other than theatrical cries of outrage, no one did anything about it. No lawsuits, no independent investigations, no press outlet pledging to track the money to the ends of the earth. (Please correct me in the comments, if I am wrong and just missed it.) Is it any surprise therefore that apparently banks are following the leader and refusing to account for how bailout money is being used? Why potentially compromise competitive disadvantage when it appears that no one is going to make you play by the rules of the game?

This "secrecy" needs to be broken ASAP. I understand the attitude of banks - they are not used to publicly accounting for where the money raised from stock sales are used and such an accounting could well inadvertently disclose information that could be used by a competitor. (For example, if a big bank were about to roll out an innovative new lending product that they expect to capture a good deal of the market.) But the fact is that he who pays the piper, gets to choose the tune. The cost of taking this money was to be held accountable for its use. And every day that the money's use is "kept secret" is undermining trust in banks and the economy, and simply making things worse.

Mr. President, Give the order. Force banks to disclose the use of bailout funds before the inauguration of Barack Obama. Otherwise, there is little hope for a restoration of trust in the drivers of the American economic system. "Trust me," only works BEFORE the Fall.

Bush bails out the Automakers

You know the Auto Bailout. You know, the one that Congress - the only body entrusted with the power to make law and spend money - turned down a week or so go? Well, the Executive Branch - you know the body entrusted to enforce law and protect the citizenry from foreign threats but NOT make law - has put it into practice by tapping the Wall Street Bailout fund. Anyone want to speculate now as to why the Treasury Department refuses to say who got loans from this fun? My guess: it was used to bail out only a few banks, but make loans to all other parts of the economy that taxpayers would be furious about.

Here's hoping SOMEONE in the next 4 to 8 years can restore a Constitutional government in the USA. Because the way things are being run right now, the cart is definitely before the horse.

Explanation of the Mortgage Meltdown