Sense on Cents

Fair and Fraudulent Mortgage Lending

Posted by Larry Doyle on August 5th, 2009 2:07 PM |

To think that fraudulent mortgage lending practices will simply go away because regulators want them to would be the height of naivete. In fact, given the challenging economic times, I think one could make a case that fraudulent mortgage practices may actually increase on a relative basis. How so? Desperate people will always do desperate things, including fraudulent and criminal acts.

Where can one go to receive a fair deal in the process of getting mortgage financing? What parts of the mortgage market may represent the next wave of fraud? Which firms may currently be involved in these frauds?

Major “high five” to KD and our friends at 12th Street Capital for providing tremendous perspectives on these topics this morning. KD writes:

From the Fair Mortgage Collaborative website . . .

The Fair Mortgage Collaborative is a nonprofit membership organization whose members are individually and collectively committed to providing low and moderate income and minority homeowners and homebuyers access to mortgages with the consumers’ best interests at its core, at a fair rate of compensation. Our approaches and standards work for all homeowners and homebuyers.

KD’s comment: While I certainly applaud their effort, I would make the friendly suggestion they should be looking at FHA lenders and Reverse Mortgage lenders in particular..for those are the bastions of future (and current) abuses.”

Sense on Cents will also not unilaterally bless this organization, but it may be a decent place to start in hopes of finding fair lending practices. Speaking of which, an organization you may care to avoid is Taylor, Bean, and Whitaker Mortgage as the following story from Bloomberg highlights. Obviously TBW, as with any individual or organization, is entitled to due process but until this case is adjudicated, consumers may fare better going elsewhere. KD highlights the Bloomberg story as follows:

Aug. 4 (Bloomberg) — Taylor, Bean and Whitaker Mortgage Corp., the Florida home lender that offered $300 million to save Colonial BancGroup Inc., was barred from making new loans guaranteed by the Federal Housing Administration.

The FHA, citing concern about possible fraud, plans to sanction two top officials at Ocala-based Taylor Bean for providing “false” information to the agency, according to an FHA statement today.

Agents bearing federal warrants searched Colonial’s Orlando offices yesterday, and the Ocala, Florida Star-Banner reported a similar search at closely held Taylor Bean. The firm ranked 12th among U.S. mortgage originators (KD’s comment: I think they were 3rd in FHA lending behind B of A and Wells) in the first half of this year with $17 billion of loans, according to industry newsletter Inside Mortgage Finance.

Taylor failed to submit a required annual financial report and “misrepresented that there were no unresolved issues with its independent auditor,” the FHA said. The auditor discovered “irregular transactions that raised concerns of fraud,” according to the FHA statement.”

KD’s comment: Here is the official HUD News Release on this topic. It is probably even more painful that TBW will be losing their $25bln FHA servicing portfolio and the word on the street is that it will be moved to Bank of America.

Thank you KD and 12th St. Capital for providing these awesome insights and helping us collectively navigate the economic landscape.

Sense on Cents update @ 2:30pm: The Wall Street Journal reports Taylor, Bean to Cease Operations.

Comments (4)

‘Flash Orders’ Ready to Burn Out, but High Frequency Trading Still Red Hot

Posted by Larry Doyle on August 5th, 2009 11:48 AM |

The controversy surrounding the ‘flash order’ component of high frequency trading seems poised to burn out very soon. Senator Schumer, the SEC led by Mary Schapiro, and other market regulators may represent a discontinuation of flash orders as a victory. Make no mistake, though, this development would merely be a victorious battle in what should be a perpetual war to keep our markets free, fair, and totally transparent.

Sense on Cents has the following questions regarding flash orders and high frequency trading:

1. How were flash orders ever allowed to be utilized in the first place? Shouldn’t new trading methodologies, just like new financial products, be approved initially by the SEC and other market regulators prior to being utilized?

2. Isn’t the fact that flash orders have been utilized and will now seemingly be discontinued a further indictment of the lax regulatory procedures of the SEC? Who at the SEC is supposed to monitor these types of activities?

3. Given that flash orders will seemingly be discontinued, which individuals and firms/exchanges developed this practice? Why aren’t these names publicized? What other ‘tricks of the trade’ are these individuals and firms/exchanges concocting or practicing?

4. As Joe Saluzzi highlighted on my Sunday radio program (Review of Sense on Cents Interview with Joe Saluzzi on High Frequency Trading), there are many aspects of high frequency trading that need to be addressed. The war to make sure our markets are fair and free for all participants goes on. Let’s openly debate with total transparency the topic of rebates, co-location, predatory algorithms, and EVERY other aspect of high frequency trading.

I commend Joe Saluzzi for elevating the dialogue on high frequency trading. I repeat, the flash order battle is merely one beachhead in the perpetual war for free, fair, and open markets for all.

Let’s hear 4 minutes of wisdom from Joe Saluzzi himself on Bloomberg News:

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Basis Risks Will Lead to Future Financial Frauds

Posted by Larry Doyle on August 5th, 2009 8:24 AM |

How often have we heard from those involved in financial frauds that they never initially intended on perpetrating a fraud? Well then, what did they intend? Having personally witnessed more than a handful of ‘under the radar’ frauds in the form of intentional misrepresentations of investment values, the activity often centers on a financial term known as ‘basis risk.’ What is basis risk? Why do I think our current financial system has numerous financial frauds germinating?

Utilizing our friendly Investing primer (found in the right sidebar here at Sense on Cents), we learn that basis risk is defined as:

The risk that offsetting investments in a hedging strategy will not experience price changes in entirely opposite directions from each other. This imperfect correlation between the two investments creates the potential for excess gains or losses in a hedging strategy, thus adding risk to the position.

Or similarly,

Offsetting vehicles are generally similar in structure to the investments being hedged, but they are still different enough to cause concern. For example, in the attempt to hedge against a two-year bond with the purchase of Treasury bill futures, there is a risk that the Treasury bill and the bond will not fluctuate identically.

I have no doubt that a number of financial firms entered into hedging strategies over the last 9 months that present massive basis risk. While these financial firms own an array of individual investment positions (corporate, municipal, mortgage-backed, commercial mortgages, asset-backed, equities), the hedging vehicle utilized is often an index of some sort which is representative of an entire market segment or, in the case of a specific corporate entity, the CDS (credit derivative swap) for that company.

As financial firms move forward, they manage their investment positions and their hedges accordingly. Do not forget, however, that last Spring the FASB (Federal Accounting Standards Board) relaxed the mark-to-market accounting standard so banks could delineate between true credit impairments in their investments and liquidity risks.

While not every firm may have entered into hedging strategies, it is naive to think many did not given the perilous price action in the markets over the last 9 months. Fast forward to the current period and we see the SEC is seriously concerned with these issues, as well they should be. CFO Magazine reports, The SEC’s Most Wanted:

Last fall the Securities and Exchange Commission promised to scrutinize the regulatory filings of the largest financial institutions. So it’s little wonder that many of the recent comment letters sent by the SEC to corporations focused on the more controversial accounting issues that cropped up during the current financial crisis, including valuations of financial instruments and other-than-temporary impairments of securities.

The regulator has also niggled nonfinancial firms, by asking finance executives to better explain how they worked through goodwill impairment testing. Brad Davidson, a partner at accounting firm Crowe Horwath who recently compiled a list of frequent topics cited by SEC staffers in comment letters, says finance executives should keep the points raised by SEC staffers in mind as they put the finishing touches on their next round of financial reporting.

While firms may be able to disguise the hidden losses and embedded risks for a period of time (which can be extended, depending on the size and scope of the operation), basis risks have brought more so-called outstanding traders, portfolio managers, CIOs, and CFOs to their knees than they would ever care to admit.

Any readers who have direct or indirect experience with basis risks please share.

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‘Cash for Clunkers’ or ‘Ask Us No Questions, We’ll Tell You No Lies’

Posted by Larry Doyle on August 4th, 2009 3:31 PM |

Instinctively, I am very suspicious of how $1 billion was spent on the ‘Cash for Clunkers’ program within such a short time frame. As such, is it unreasonable to ask for an audit of this program prior to allocating more funds? Who is to say that some degree of misappropriation, if not outright fraud, has occurred?

Whose money is being allocated? Yours and mine. I want an accounting. Who is supposed to protect our interests? Our elected representatives. They must be held accountable.

Perhaps there has been no fraud or misappropriation in the allocation of these funds. Perhaps administratively this program is overmatched by demand. If so, those administering the funds should swallow their pride and say as much.

I find it totally unacceptable, though, that upon request those in Washington overseeing this program can not give a timely and accurate accounting. As the Associated Press reports, Obama Administration Withhold Data on Clunkers:

The Obama administration is refusing to quickly release government records on its “cash-for-clunkers” rebate program that would substantiate — or undercut — White House claims of the program’s success, even as the president presses the Senate for a quick vote for $2 billion to boost car sales.

The Transportation Department said it will provide the data as soon as possible but did not specify a time frame or promise release of the data before the Senate votes whether to spend $2 billion more on the program.

We deserve so much better!!

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Wall Street vs Main Street: The Great Divide Widens

Posted by Larry Doyle on August 4th, 2009 8:01 AM |

Please rank the following professions in terms of commanding respect:

1. used car salesmen
2. lawyers
3. Wall Street
4. dog catchers
5. burglars
6. politicians

Plenty could argue that dog catchers would command the most respect, with burglars a distant second. How so? At least you know exactly what their intentions are, admirable or not, and manage accordingly.

With all due respect to quality individuals in the other professions, those industries as a whole have always suffered from a very poor public perception.

Moving to the fully serious part of my writing this morning, I would venture to say that the chasm which has always existed between Wall Street and Main Street has never been wider and is widening by the day. How so?

I am being inundated regularly with comments and questions as to whether the market is truly representative of the fundamentals in the underlying economy. Others have asked me how an industry that is supposedly once again making sizable profits can shamelessly impose credit card rates of upwards of 30%!!

It is my sense that the American consumer and investor feels woefully neglected at this point in our country’s history. As such, I have little doubt that many people have exited the markets with the intention of NEVER returning.

I would not pretend that I can appreciate the level of anxiety and disgust of everybody in our country today, but I share your contempt for a crowd both in Washington and on Wall Street that has done little to nothing to protect your interests.

This contempt welled up this morning as I read The Wall Street Journal’s, Geithner Vents at Regulators as Overhaul Stumbles:

Treasury Secretary Timothy Geithner blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration’s faltering plan to overhaul U.S. financial regulation, according to people familiar with the meeting.

The proposed regulatory revamp is one of President Barack Obama’s top domestic priorities. But since it was unveiled in June, the plan has been criticized by the financial-services industry, as well as by financial regulators wary of encroachment on their turf.

While I could wax poetic on the topic of regulatory reform, I will abbreviate my remarks with a very succinct and direct statement: “THESE PEOPLE DON’T GET IT!”

The fact remains, “Future Financial Regulation: Not a Question of Sufficiency, but of Transparency and Integrity.”

Does the American public understand how thay have been abused by both their political and banking representatives? I strongly believe they are gaining a greater awareness of this phenomena every day.

In coming full circle, my respect rankings from top to bottom would be:

1. dog catcher
2. burglars (at least you know their intentions)
3. used car salesmen
4. lawyers
tie for 6th between politicians and Wall Street

How about you? Please share your thoughts and rankings!!

Comments (5)

Navigating the Bond Market

Posted by Larry Doyle on August 3rd, 2009 12:16 PM |

Where should people invest these days?

Are we to believe the price action in the equity markets?

With short term rates on CDs and money market funds ridiculously low, where does one turn to make a safe investment with limited risk?

Prior to putting any money to work, always make sure you look at an investment in the context of an overall portfolio. Diversity and prudent risk management never go out of style and should be the cornerstones of any portfolio.

Sense on Cents recommends short to intermediate bond funds. I am concerned about longer maturity interest rates moving higher (in fact they have moved considerably higher this morning). As such, I would stay away from bond funds with longer maturities in the underlying investments.

What are some of the road signs investors should look for in navigating the bond market? The Wall Street Journal provides a very handy overview this morning, The New Bond Equation:

As the financial crisis heads into its third year, investors in bond funds are facing some difficult choices.

Investors usually turn to these funds for safety. But bond funds are facing a host of pressures that are driving down returns, raising long-term risk—and making it tougher to settle on the right investment strategy.

Let’s navigate!

1. Default Risk
Do not be presumptuous and think the portfolio manager is carefully managing individual exposures in a bond fund. Investors need to look into the actual portfolio of bonds and ask brokers or financial planners on questionable credits.

2. Interest Rate Risk
In the presence of a massive fiscal deficit and the likelihood that the deficit will grow, interest rates are likely to head higher. A rising rate environment means declining bond values, which is why I recommend short to intermediate maturity bonds which will be less impacted.

3. Passive Investing via Index Funds
Maximize diversity and minimize expenses.

4. What About the Perils of Inflation?
Gain some exposure to TIPS (Treasury Inflation Protected Securities) and commodity funds.

5. Should Investors Try to Time the Market?
Sense on Cents ALWAYS recommends a dollar cost averaging or value averaging approach, in which an investor puts in a set amount of money every month. NO investor or portfolio manager is so good as to pick the top or bottom in a market, despite what you may hear.

Discipline is critical every step of the way. Do your homework prior to investing. Make sure the execution at point of investment is handled properly. Monitor your investments as you move forward.

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Review of Sense on Cents Interview with Joe Saluzzi on High Frequency Trading

Posted by Larry Doyle on August 3rd, 2009 8:38 AM |

Joe Saluzzi

For those unable to listen to my interview regarding high frequency trading with Joe Saluzzi of Themis Trading, I hope this timeline review of the questions asked and topics covered proves helpful.

I strongly encourage anybody interested in the nature of our markets today to listen to this interview in its totality. Joe provides a wealth of riveting information. In the spirit of balanced journalism, I believe I took a fair approach in my discussion with Joe; I have already reached out to people within the HFT community to invite them on the show. I hope they take me up on my offer.

As we move forward on our economic landscape, I hope this interview will serve as a significant informational resource.

To access Joe’s insights on specific topics, simply point and click on the audio player bar (provided at the end of this post) to the particular minute and second referenced. I apologize for the technical difficulties during the first 8 minutes, 56 seconds of the show. The timeline below picks up the broadcast at the start of the show which begins at the 8 minute, 57 second mark:

8 minutes, 57 seconds – Welcome and introduction.

11 min, 45 sec – What is Regulation NMS and what impact has it had on the marketplace?

13 min, 30 sec – How has the pricing of stocks in decimals impacted trading?

14 min – What is ‘displayed liquidity?’

14:30 – Historical transition from obligatory market making of specialists to high frequency trading.

16:30 – Definition of HFT terms, including: algorithmic trading, predatory algorithms, dark pools, ECNs, flash orders.

21:30 – How do equity exchanges work? Nature of two-tiered markets and the inherent conflict of interests exchanges have as for profit entities. Overall level of confidence in exchanges.

24:45 – Call for an independent commission to investigate exchange operations.

25:55 – What is co-location and how does it impact equity trading?

27:15 – What is naked access and how does it impact equity trading?

29:30 – LD plays devil’s advocate and challenges Mr. Saluzzi about benefit of narrower spreads versus the costs to investors. Joe delineates volume and churning versus true liquidity.

32:30 – Further color on exchange volume which is heavily dominated by high frequency trading. Market analysts estimate that upwards of 70% of equity trading is driven by high frequency traders who represent 2% of market participants!!

34:00 – What risks are taken by high frequency traders? How are these risks mitigated?

36:20 – Could HFT manipulate the market? Does HFT present systemic risk? Were oil markets manipulated?

39:50 – Is HFT a violation of the Sherman Anti-Trust Act?

41:00 – Mr. Saluzzi highlights that as of September 1st, the London Stock Exchange will no longer issue rebates for liquidity providers. Joe recommends the same for our exchanges.

41:50 – Discussion of regulatory oversight of exchange activities.

44:15 – How should retail investors adapt to trading and investing in the presence of HFT? Should they utilize limit orders? Market orders?

47:20 – Do vendors sell HFT software or do individuals develop their own software code?

48:20 – How do we compel regulators to embrace technological advancements while maintaining a fair and balanced playing field?

50:20 – Comparing electronic trading in the bond market to the equity market.

51:25 – Impact of putting a speed limit on the equity highway. That is, what would happen if all orders were good for a 1- second time requirement while exchanges eliminated flash orders and rebates.

53:25 – What is the risk or potential that HFT could crash the market? What is pushing the market higher currently?

55:00 – Overview on market, and desire for integrity in the marketplace.

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Instructions: Once you’ve clicked on the “Play” button to begin the playback, point and click on the audio player bar to the particular minute and second referenced for each topic (or listen to the entire show…it’s worth it!!). Remember, the show does not begin until the 8 minute, 57 second mark.

Once again, I thank Mr. Saluzzi for elevating the debate and dialogue on this topic and our markets in general.

I hope anybody reading this commentary and listening to my interview with Mr. Saluzzi finds it truly beneficial. If so, please share it with friends and colleagues.

Additionally, please follow all of my work via Twitter, Facebook, an RSS feed, or preferably by e-mail delivery. All links are provided at the top of the page or in the right sidebar.

Comments, questions, constructive criticism always appreciated.

Related Sense on Cents Commentary:

Is Uncle Sam Manipulating the Equity Markets?
– Mr. Saluzzi addresses questionable nature of high frequency trading on Bloomberg. (July 1, 2009)

Is Uncle Sam Manipulating the Equity Markets? Part II
– Sergey Aleynikov is arrested for stealing high frequency software from Goldman Sachs. (July 6, 2009)

Is Uncle Sam Manipulating the Equity Markets? Part III
– Joe Saluzzi addresses possibility of market manipulation via high frequency trading. (July 8, 2009)

Wall Street Has a Problem as High Frequency Trading Moves to Main Street
– The New York Times writes a lead article on high frequency trading. (July 24, 2009)

High Frequency Trading Debate: Mano a Mano
– Joe Saluzzi and Irene Aldrich of Able Alpha Trading engage in a debate on CNBC. (July 24, 2009)

Wall Street Has a Problem as High Frequency Trading Moves to Washington
– Senator Chuck Schumer (D-NY) announces he will move to limit flash orders if the SEC does not take action. (July 27, 2009)

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New York Times ‘Kisses’ Raymond James on Auction-Rate Securities

Posted by Larry Doyle on August 2nd, 2009 3:34 PM |

ars My heartbeat accelerated this morning upon reviewing page 2 of The New York Times. As I perused the headlines of the lead articles, I saw Investors Without a Lifeline in the Sunday Business section. Could this be the article that would fully expose the fraud involved in the sales and marketing of Auction-Rate Securities? Would investors finally get some satisfaction in publicly exposing all those involved in Wall Street’s greatest fraud?

While I am heartened by any public attention regarding the ARS fiasco, this report by The New York Times falls woefully short. Let’s reveal color and analysis that The New York Times and every other credible business outlet should feel obligated to provide. In doing so, I can only hope that investors still holding ARS, whether sold by Raymond James or any other entity, can move one step closer to a return of their capital along with interest and penalties.

The New York Times hardly lands a blow on Raymond James in the ARS fiasco. In fact, I would define the reporting as the equivalent of a ‘kiss’ in what should be a brawl. The reporter, Gretchen Morgenson, does not even venture to ask who is supposed to protect investors before making an investment or a lifeline after the fact. The answer to those questions are the SEC and FINRA (Financial Industry Regulatory Authority).

While Raymond James has $800 million in ARS exposure, that figure only represents approximately .5% of the total outstanding exposure. Why does Ms. Morgenson focus strictly on Raymond James and not the entire industry? Read the rest »

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Reminder: Sense on Cents Interviews Joe Saluzzi Regarding High Frequency Program Trading
Sunday Night at 8PM

Posted by Larry Doyle on August 1st, 2009 7:40 PM |

UPDATE: The show has concluded. Please utilize the following link for a full Review of Sense on Cents Interview with Joe Saluzzi on High Frequency Trading .

Or you can listen to a replay using the audio player below. We had some technical difficulties at the start of the show, so advance the audio player to the 8 minute, 57 second mark, at which point the show begins.

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High frequency program trading is the single hottest topic on Wall Street today. No individual has generated greater focus on this topic than Joe Saluzzi of Themis Trading.

I look forward to interviewing Mr. Saluzzi this Sunday evening, August 2nd from 8-9pm on NoQuarter Radio’s Sense on Cents with Larry Doyle.

This show will comprehensively cover the gamut of issues and topics involved in this highly controversial trading activity. Does high frequency program trading engage in front-running? Are retail and institutional investors disadvantaged? Are the exchanges and regulators looking the other way? What were the developments in the marketplace which brought us to this point?

NQR’s Sense on Cents with Larry Doyle will address these questions and more with the man ‘in the arena’ and at the center of the debate, Joe Saluzzi.

The show is available as a podcast on iTunes, and also archived in an audio player right here at Sense on Cents so it should serve as a tremendous informational resource as we continue to navigate the economic landscape.

Please share with friends and colleagues.

Related Sense on Cents Commentary:
“High Frequency Trading Debate: Mano a Mano” July 24
“Is Uncle Sam Manipulating the Equity Markets?” July 1

Comments (2)

Arianna Huffington Agrees with Sense on Cents

Posted by Larry Doyle on August 1st, 2009 4:04 PM |

Regardless of what you may think about Arianna Huffington or her politics, I strongly encourage you to review this recent Bloomberg interview. She addresses the incestuous nature of the relationship between Wall Street and Washington. This perspective gets little to no air time from major media outlets. In my opinion, this big money relationship rests at the core of many serious problems in our country today.

The two video clips run less than ten minutes. Please view them from a macro- perspective and assess what they mean for our country going forward.

All comments encouraged.

Related Sense on Cents Commentary:
   “Crony Capitalism”
   “How Wall Street Bought Washington”
   “Legalized Bribery”

Part I