Sense on Cents

A 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. Read the rest »

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I Have Some TIPS For You

Posted by Larry Doyle on April 6th, 2009 1:00 PM |

In the midst of the massive government intervention in the economy and markets, the Federal Reserve is providing measures of liquidity that are truly “off the charts.” This liquidity, in the form of U.S. dollars, is flooding the economy. If and when the economy gains a little traction and the money multiplier kicks in, the growth in our money supply will skyrocket. What happens in the face of any market with increasing supply? Prices decline. In this case, the price decline in the value of the U.S. dollar spells INFLATION.

Many investors are questioning how to best position themselves for a potential increase in inflation. Various analysts are recommending commodities, real estate, and precious metals. However, while each of those assets can be a great store of wealth in the face of rising inflation, an investor is faced with a mix of fundamental and technical variables in determining the value of the asset. As a result, the correlation between rate of inflation and the performance of assets within those classes is not perfect. Is there an asset perfectly correlated with inflation? Come closer, I will give you a tip as to the asset class correlated to inflation.

Treasury Inflation Protected Securities, yes TIPS, are U.S. government securities indexed to the rate of inflation. Read the rest »

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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. Read the rest »

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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. Read the rest »

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Audio Recording: NoQuarter Radio’s “Sense on Cents with Larry Doyle”

Posted by Larry Doyle on April 5th, 2009 9:08 PM |

In case you missed LD’s Sunday night radio show, just click on the Play button below for the audio recording. Once the playback has started, you can fast forward or rewind to any portion of the show by clicking at any point along the play bar.

It was a fabulous show featuring Phil Trupp, a journalist/author with more than 30 years of professional experience writing for several prestigious newspapers and magazines in the world. Trupp is currently writing MONEY ON ICE: How Ordinary Investors Beat the Biggest Fraud in Wall Street History, an exposure of the Auction Rate Securities scandal in which 146,000 investors have been bilked out of $336 billion.

Sunday night, April 5th, 2009
NoQuarter Radio’s “Sense on Cents with Larry Doyle”

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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?
Read the rest »

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It’s a Mad, Mad, Mad, Mad World!!

Posted by Larry Doyle on April 5th, 2009 3:30 PM |

It’s a mad, mad, mad, mad world.

While Bloomberg offers, Obama Urges New Efforts to Cut World’s Nuclear Arms,

Kim Jong-Il responds: The leader of North Korea Launches Rocket, Prompting Condemnation.

Meanwhile the Financial Times reports, U.S. May Cede to Iran’s Nuclear Ambitions. Accessing the Financial Times online is a subscription service, so just in case you can’t get to it I have included the article here in its entirety:

US officials are considering whether to accept Iran’s pursuit of uranium enrichment, which has been outlawed by the United Nations and remains at the heart of fears that Iran is seeking nuclear weapons capability.

As part of a policy review commissioned by President Barack Obama, diplomats are discussing whether the US will eventually have to accept Iran’s insistence on carrying out the process, which can produce both nuclear fuel and weapons- grade material.

“There’s a fundamental impasse between the western demand for no enrichment and the Iranian dem and to continue enrichment,” says Mark Fitzpat rick, a former state depart – ment expert now at the International Institute for Strategic Studies. “There’s no obvious compromise between those two positions.” Read the rest »

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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? Read the rest »

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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.

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!!

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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. Read the rest »

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