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HomeA Fraud By Any Other Name
Posted by Larry Doyle on April 6th, 2009 4:30 PM |
A few loyal readers have graciously shared video clips of interviews with former banking regulator, William K. Black. These interviews address the fact that a tremendous amount of mortgage originations at the core of our current economic turmoil were fraudulently underwritten. The borrowers were never qualified only then to fall upon hard times. The loans were often NINJA (No income check, No job check or asset check) and the fraud was more often committed by the lender than the borrower.
Why and how did this happen? Let’s briefly revisit my writing from November 12th:
At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans … no income, no asset check). WOW!!! What were we thinking?? Well Wall St. felt, “let’s worry about it tomorrow or maybe not at all because we are making too much money today.”
That money SUPPOSEDLY being made left tremendous risks on the books of the banks. The pursuit of ever greater SUPPOSED profits incorporated the use of CDS (credit default swaps) as synthetic collateral for structured deals. These CDS allowed for an enormous increase in volume and SUPPOSED profits. Don’t forget, though, at the core of the process a large percentage of the underlying loans were fraudulently underwritten. (more…)
Refinancing Risk Runs Rampant…Get To Higher Ground!
Posted by Larry Doyle on April 6th, 2009 10:27 AM |
The key for the global markets and economy is the ability to refinance outstanding debt. In the absence of a viable asset securitization market, will banks provide financing for current loans to be refinanced as they come due? Please remember the asset securitization market represented approximately 40% of total lending, so we are talking about a MAJOR segment of the market.
As banks assess applications for loan refinancings, they will impose ever more stringent underwriting standards as they will most likely put these loans on their books. Consumers, small businesses, and major corporations that do not have solid balance sheets and income statements will NOT get new financing. What happens to the existing loans that can’t get refinanced? The process is as such:
1. loan becomes delinquent
2. loan defaults
3. lender forecloses and takes possession of asset
4. lender attempts to liquidate asset via sale, pressuring valuation of assets in that sector.
5. original lender books loss on non-performing asset
What does it all mean? Losses on asset classes across the board. Can government programs plug the holes in the refinancing markets? Well, the Federal Reserve is known as the lender of last resort but their loans extend primarily to the banks themselves to plug holes in their balance sheets. The other governmental programs (TALF, PPIP) will hopefully restart the asset securitization markets and bring liquidity back in for refinancing. Will these programs hold the waves behind the dike? To a certain extent, but my recommendation is . . . get to higher ground. (more…)
Insurance Companies’ Ignorance Is Definitely Not Bliss!!
Posted by Larry Doyle on April 6th, 2009 5:20 AM |
I remain very concerned about potential liquidity and capital shortfalls within the insurance industry. The investment portfolios of insurance companies are chock full of the following:
1. commercial real estate loans: defaults expected to triple.
2. corporate loans and securities: defaults expected to triple
3. sub-prime and Alt-A (between prime and sub-prime) residential mortgages: defaults expected to quadruple.
4. prime mortgages: defaults expected to triple
I wrote What is Lincoln Thinkin’ to address the pressures that Lincoln Financial was facing. Those pressures are certainly not abating; in fact, the WSJ writes how Lincoln Faces Rising Stress As Its Debt Comes Due.
Over and above the pressures specific to Lincoln, the industry as a whole is facing strains due to the massive amount of annuities written by insurance companies. These annuities were written to provide policyholders a guaranteed fixed payout. With the significant selloff in the equity and bond markets, the insurance industry is facing an enormous capital shortfall on these annuities. (more…)
In 30 Minutes, Join NoQuarter Radio’s “Sense on Cents with Larry Doyle”
Posted by Larry Doyle on April 5th, 2009 7:30 PM |
Join me from 8:00 to 9:00 p.m. ET on NoQuarter Radio for Sense on Cents with Larry Doyle. These are truly historic times in the global economy. Let’s “navigate the economic landscape” without the pandering or nonsense found elsewhere! With the stock market near 12 year lows, what is driving the flows? What is truly going on in the economy? Where are markets headed? What came out of the G-20? What is happening in Washington and how is that impacting Wall Street? So much to cover.
Tonight I will be speaking with Phil Trupp, a journalist/author with more than 30 years of professional experience writing for several prestigious newspapers and magazines in the world. Over the years, his investigative reporting and columns have led to congressional hearings on coal mine safety, corruption in the trucking industry, poverty in America, environmental hazards, and global warming, among other controversial issues. Trupp’s financial journalism background includes a seven-year stint as Washington correspondent and assistant bureau chief for Fairchild Publications, and as a reporter at the Washington Evening Star.
Phil Trupp is currently writing MONEY ON ICE: How Ordinary Investors Beat the Biggest Fraud in Wall Street History. It is an exposure of the Auction Rate Securities scandal in which 146,000 investors have been bilked out of $336 billion.
The developments in the markets, economy, global finance, Wall Street, and Washington are occurring at breakneck speed. I will try to slow things down a bit and provide a sense of perspective. What did we learn in the markets over the last week and month and what do they mean for the weeks and months ahead? What is happening overseas and how does that impact us here at home? What is happening in the municipal sector and how will that impact the markets and our personal finances?
(more…)
Putting the Genie Back Inside the Bottle
Posted by Larry Doyle on April 5th, 2009 11:43 AM |
The genie, in the form of the Federal Reserve, has granted the markets a lot more than three wishes over the course of these challenging economic times. What are some of the wishes granted so far? Let’s review:
1. cutting the Federal Funds rate to a range of 0-.25%.
2. backstopping a wide array of short term funding operations, including the Commercial Paper market, Money Market funds, and Swaps market.
3. opening the Federal Reserve discount window for investment banks prior to their conversion to commercial banks.
4. utilizing a massive Quantitative Easing program to purchase government, mortgage-backed, and government agency securities in an attempt to bring interest rates down and jumpstart borrowing by consumers and corporations.
5. working in concert with the Treasury and FDIC to implement the TARP (Troubled Asset Recovery Program), TALF (Term Asset-Backed Lending Facility) and PPIP (Public-Private Investment Program).
In the process of implementing all of these activities, this genie, the Federal Reserve, in the person of chairman Ben Bernanke, has gone places no genie has ever gone before.
The question before the court is whether the free market can ever get the genie back in the bottle. Additionally, aside from getting the genie back in the bottle, these wishes granted by the genie aren’t exactly free. How so? (more…)
Tune in Sunday Evening to NoQuarter Radio’s Sense on Cents with Larry Doyle
Posted by Larry Doyle on April 5th, 2009 7:10 AM |
Please join us Sunday evening (tonight!) from 8-9 p.m. ET for NoQuarter Radio’s Sense on Cents with Larry Doyle. With the stock market near 12 year lows, what is driving 
the flows? What is truly going on in the economy? Where are markets headed? What came out of the G-20 Summit? How about the FASB’s easing of mark-to-market? So much to cover.
These are truly historic times in the global economy. Let’s “navigate the economic landscape” without the pandering or nonsense found elsewhere! What is on your mind? What would you like to address? Please share your questions and thoughts by calling in to (347) 677-0792, and also join our live chat room, which I’ll start up about 10 minutes before the show begins.
Tonight I will be speaking with Phil Trupp, a journalist/author with more than 30 years of professional experience writing for several prestigious newspapers and magazines in the world. Over the years, his investigative reporting and columns have led to congressional hearings on coal mine safety, corruption in the trucking industry, poverty in America, environmental hazards, and global warming, among other controversial issues. Trupp’s financial journalism background includes a seven-year stint as Washington correspondent and assistant bureau chief for Fairchild Publications, and as a reporter at the Washington Evening Star.
Phil Trupp is currently writing MONEY ON ICE: How Ordinary Investors Beat the Biggest Fraud in Wall Street History. It is an exposure of the Auction Rate Securities scandal in which 146,000 investors have been bilked out of $336 billion.
As a reminder, all NoQuarter Radio programming is archived and can be played back at any time. Just go to the NoQuarter Radio site and look for previous episodes. In addition, each program is available as a podcast on iTunes.
Many thanks to Larry Johnson and the rest of the team at NoQuarterUSA blog for providing such a vibrant vehicle as NoQuarter Radio. I look forward to having you join me Sunday evening as we collectively navigate the economic landscape!!
Big Brother
Posted by Larry Doyle on April 4th, 2009 8:45 PM |
Long term financial health and well being is predicated on fiscal discipline, core values, and strong management. These principles are necessary for major corporations and also individual family units. The market has a means of rewarding corporate units that practice these principles and punishing those that don’t. Enter into the world of finance 2009 when a number of financial units (Citi, AIG, Freddie, Fannie) are kept alive despite not practicing those principles.
Both shareholders and employees of these companies bear the risk of being connected to such institutions. It remains a challenge as to how to operate these institutions in the context of truly free and open markets. In light of these challenges, it is no surprise why other organizations would not want to have Uncle Sam as a partner. (more…)
Tea Is Served
Posted by Larry Doyle on April 4th, 2009 4:45 PM |
I strongly believe Congress and the Obama administration know that the American public has no appetite for further government bailouts. This public demeanor presents a challenge for a government that has gotten used to writing big checks for Wall Street, the Stimulus, and automotive companies.
What is the federal government to do for municipalities, insurance companies, commercial real estate companies, or others who may go bankrupt?
Secretary Geithner has laid the groundwork for government takeover of institutions deemed to present systemic risk. How that power is effected or implemented will be very interesting. (more…)
