The Audit
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February 25, 2011 06:51 PM
Audit Notes: Grand Oil Party, The Limits of Anecdote, Mod Investors
The Economist's Matt Steinglass reports on an egregious government giveaway to the oil companies—one that started accidentally and has now been intentionally enshrined by Republicans in Congress.
The Minerals Management Service was supposed to give free leases to oil drillers in the Gulf in areas in which paying royalties would make drilling uneconomic.
So apparently, in 1998-99, the folks at the MMS were too busy flirting with each other, or accepting private-jet rides to college football games, or whatever, to notice that the price of oil had gotten pretty high and they shouldn't be handing out free leases anymore. As a result, 24 companies got free leases they shouldn't have gotten. And ever since, they've been making extra money that they really ought to be returning in the form of leases on public property to the American taxpayer.
How much extra money? About $1.5 billion this year and an estimated $53 billion over the next twenty-five years. That money goes straight out of taxpayers' pockets and into oil companies—at a time when gas is creeping up on $4 a gallon.
Democrat Ed Markey offered an amendment to change this last week, but it was rejected by House GOP, which is trying to gut everything from Head Start to Pell Grants but won't reclaim wrongfully gotten money from Big Oil. The vote wasn't even close.
Steinglass:
There is no rationale for continuing to oblige regular taxpayers to pick up the tab for these distortionary favours to major oil companies except that the oil companies want the money. For this Congress, that's plenty reason enough
If you're like me, you didn't hear a peep out of this from the American press. Don't you think we should have heard more about this story?
— Anecdotes are good, but they're not enough.
The Huffington Post has an all-anecdote story today that clearly shows their limits and why they need to be backed up by data and other reporting.
It's headline asks "Are These People Overpaid?" and it goes on the ground in Madison, Wisconsin, to talk to a retired firefighter, a paramedic, and a teacher about how much money they make as the right is in full attack mode on government pay. It's a great idea for a story and there are some good anecdotes here, but there's little substance.
Even if you don't get into a full discussion of the debate over how much government employees make relative to private-sector workers, you should at least acknowledge it. The data's readily available. For instance, the liberal Economic Policy Institute says Wisconsin's government workers make far less in total compensation than their private-sector counterparts who have similar degrees.
A paragraph or two about that would have made this story so much better.
— Yves Smith of Naked Capitalism has covered the foreclosure fraud scandal better than anybody, and she dissects today the news of a possible settlement. You should read the whole post for her take on that.
But what particularly interests me is this:
RMBS investors thus have a nuclear weapon in their hands. If they want deep principal mods, and we are told in no uncertain terms that they do, a credible threat of litigation on this front ought to bring recalcitrant banks and trustees to heel, quickly. The last thing the mortgage industrial complex wants is litigation on an issue that would both call into question the validity of RMBS and if successful, would leave the banks with massive damages. And you don’t need to do this publicly and rattle the markets; some investors with the right legal top guns could spell out the consequences if the banks failed to get off their duffs and enter into serious negotiations.
Smith is saying that the owners of the mortgage bonds at the heart of the financial crisis want the mortgages they own to be changed dramatically with "deep principal" modifications for the borrowers in the homes. But it's not happening. It's the opposite of what mortgage servicers have been saying about why they won't modify mortgages so they're payable.
Smith herself has written why:
But servicers have lots of reasons not to go there. First, they get lots of fees upon foreclosure and have organized streamlined processes to make it a profitable activity for them. Second, they are obligated to keep advancing principal and interest when borrowers default. Technically, they can stop when the borrower looks irredeemable, but in practice, they keep advancing P&I; until they reach the mortgage balance. So they also are driven to foreclose to recover P&I; advances. Third, they are just not set up to do mods. Not only do their contracts not allow for them to collect fees to do mods, but for a mod to have any hopes of success, you need to do some borrower assessment. Servicers are factories, highly routinized, so doing anything on a one-to-one basis is difficult given their operating parameters.
Doesn't it seem like the fact that MBS investors want servicers to modify mortgages but the servicers won't do it is a much bigger story than what we've gotten from the mainstream press?
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February 25, 2011 02:30 PM
HuffPo Shows OCC Still Poster Child of Regulatory Capture
The Huffington Post's Shahien Nasiripour has some interesting reporting in a story on the Obama administration's move to settle the fraudclosure scandal with banks for up to $30 billion in fines and writedowns. He reports state attorneys general want the settlement to be even bigger.
But most interesting to me is the reporting on what the Office of the Comptroller of the Currency is up to. The OCC, along with its now former chief John Dugan, is the bank overseer that pretty much defines regulatory capture.
Wikipedia defines regulatory capture as "when a state regulatory agency created to act in the public interest instead advances the commercial or special interests that dominate the industry or sector it is charged with regulating."
Keep that in mind as you read Nasiripour here, remembering that he's reporting on how the OCC wants to sharply limit how much screwed-over homeowners will get from the banks it regulates (emphasis mine):
The Office of the Comptroller of the Currency, which oversees the nation's largest banks, intends to pursue its own settlement with lenders, a track distinct from the talks conducted by its federal counterparts, the sources said. The OCC, eager to protect major banks from expensive fines, is seeking to limit the terms to $5 billion, while also ensuring that lenders retain wide latitude in how to administer relief for homeowners, the sources said.
Looks like nothing much has changed now that Dugan is gone.
Buried down in the story are these interesting details:
The OCC has already begun a process toward resolving the allegations lodged against the banks that it regulates, recently sending draft orders detailing improper and illegal practices that the firms would have to end, according to people familiar with the matter. The draft orders, which are not public, have been shared with some federal agencies, the sources said.
One source said the OCC was effectively aiding the banks in delivering the orders by handing them valuable information about its findings, thus allowing mortgage companies more time to marshal a defense.
The OCC has also shown reluctance to share its detailed findings and documents with other federal regulators, said people familiar with its actions. As the primary regulator for the nation's largest lenders, the OCC is privy to more inside information than its counterparts, giving it substantial power in shaping the contours of any negotiation.
I would have liked the sourcing to be stronger here, but we'll take what we can get. It sure looks like the OCC, two-plus years into the Obama administration, is up to its same old tricks.
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February 24, 2011 09:45 PM
WSJ Slips Up on a Union Story
And its misses tilt toward the anti-labor side
The Wall Street Journal's page-one story yesteday on the union battle in Wisconsin erred on a few points, all of which skew coverage against the union side.
First the paper misleads readers by implying that Wisconsin Governor Scott Walker campaigned on taking away collective bargaining rights from government workers:
Several of the new governors ran campaigns promising to go after public-union benefits and to weaken their bargaining powers...
"We have finally elected people who are doing what they said they would do," said U.S. Sen. Ron Johnson, the newly elected Republican from Wisconsin, who supports efforts to trim labor's powers. "I certainly hope that voters will stand by Gov. Walker when he makes these tough decisions."
Problem is, Walker said no such thing in his campaign. Governor Walker has recently claimed he did, but the Journal Sentinel and PolitiFact Wisconsin have showed that this is flat false.
This isn't a small detail. It matters if you're claiming a voter mandate for radical change and you never got it.
Next, the Journal says this about right-to-work states:
Government figures show that over the past 10 years, inflation-adjusted per capita income in six right-to-work states increased at a 6.9% annual rate, while contracting at a 0.5% rate in six unionized upper-Midwest states. Many high-paying automotive and other manufacturing jobs disappeared from those union states, and foreign auto makers concentrated nearly all of their new investment in right-to-work states.
Red flag number one: No state has even come close to a 6.9 percent average annual real per capita income increase over the last ten years. Right-to-work Washington, D.C. led the pack with a 3 percent average real income increase from 2000 to 2009, according to numbers I ran from the Bureau of Economic Analysis. The Journal says the six "unionized upper-Midwest states," which it doesn't name, saw real per capita income drop by 0.5 percent a year over the last decade. But of upper-Midwest states, only Michigan has seen such a precipitous drop. Wisconsin's real per capita income grew at 0.3 percent a year. Minnesota was up 0.3 percent a year, too. Ohio was barely negative. Indiana was down 0.1 percent.
Also, what stand out here is how incomplete and ripe for cherry-picking this six-versus-six stat is. Why does the Journal limit its comparison to six right-to-work states? As it itself notes earlier in the story, there are twenty-two right-to-work states. Which states did it pick? We're not told.
And there sure seems to be some cherry-picking here. Of the top ten states in terms of real per capita income over the last decade, half are not right-to-work states. Moreover, of the bottom ten performing states, half are right-to-work.
The Journal, at least, does acknowledge in its next graf that:
Still, the December unemployment rate was lower in Wisconsin, at 7.5%, than in some right-to-work states such as Texas, at 8.3%, or Alabama, at 9.1%, according to the Labor Department.
But then a few paragraphs later the WSJ falls into false equivalence with pollsters Rasmussen and Gallup.
A Rasmussen poll released Monday found that 48% of likely voters supported Gov. Walker in the face-off in Wisconsin, while 38% sided with the unions. But a Gallup/USA Today poll conducted Monday found that 61% of Americans could oppose taking away collective-bargaining rights in their states.
Rasmussen polls are notoriously skewed toward Republicans—obvious even to the casual political observer. Nate Silver ran the numbers on their 2010 election polls and it was damning:
Moreover, Rasmussen’s polls were quite biased, overestimating the standing of the Republican candidate by almost 4 points on average. In just 12 cases, Rasmussen’s polls overestimated the margin for the Democrat by 3 or more points. But it did so for the Republican candidate in 55 cases — that is, in more than half of the polls that it issued.
The Journal, if it's going to bother quoting Rasmussen's polls, should note its hardly the trusted nonpartisan source that Gallup is. Silver himself is on the potential problems with this latest one.
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February 24, 2011 05:00 PM
Bloomberg Reveals Citi’s Deceptive Reporting
On February 14, 2008, John Lyons, the examiner in charge of large bank supervision at the OCC, sent Citigroup and its auditors a scorcher of a valentine. In a nutshell, it said that Citigroup had no idea what it owned and had no idea how to value it. "Risk management had insufficient authority," it said. The board "had no effective oversight role," and "matters requiring attention" ranged from corporate governance and risk management, in general, and CDO valuation, in particular.
Eight days later, on February 22, Citi unveiled its annual report to shareholders. In that report, Vikram Pandit personally attested that Citi had full control over its finances and that its valuations were reliable; the auditor, KPMG, said exactly the same thing.
The FCIC should have asked questions about this—after all, the OCC letter comes from its own archives. But it doesn't seem to have done so, which means that it has fallen to Jonathan Weil to do the digging and to construct a timeline and to ask awkward questions. The problem is that Weil, as excellent as he is, doesn't have nearly the power that the FCIC had. So he can get stonewalled easily:
Pandit, Crittenden and O’Mara didn’t return phone calls. A KPMG spokesman, George Ledwith, declined to comment, as did an OCC spokesman, Kevin Mukri. A Citigroup spokeswoman, Shannon Bell, declined to discuss the OCC’s findings.
It's now certain that Citi and its auditors were well aware of the problems the bank had in valuing its assets—those problems were clearly spelled out to the bank in a formal letter from its regulator. And yet, as Weil writes:
Somehow KPMG and Citigroup’s management decided they didn’t need to mention any of those weaknesses or deficiencies. Maybe in their minds it was all just a difference of opinion. Whatever their rationale, nine months later Citigroup had taken a $45 billion taxpayer bailout, still sporting a balance sheet that made it seem healthy.
Both Pandit and KPMG are still in place; their la-la-la-la-we-can't-hear-you approach to disclosure seems to have worked perfectly. But the SEC should look into this. It's the formal disclosures in the 10K which now look deceptive at best and downright fraudulent at worst. I know it's fun to chase hedge funds for insider trading. But we're still waiting for the crisis-related prosecutions to begin, and this would seem to be a fruitful place to start—especially given Pandit's newfound hero status.
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February 24, 2011 02:44 PM
NYT’s Scoop on an Alleged Roger Ailes Coverup
Lawyers say the Fox chief urged Judith Regan to lie to the feds about Giuliani pal Bernie Kerik
The New York Times has an excellent scoop out today that could mean trouble for Fox News's Roger Ailes. It's sure worth following.
The paper reports that former News Corporation book publisher Judith Regan (and now her former lawyers) said that Ailes asked her to lie to the feds about her relationship with Bernie Kerik in order to help Rudy Giuliani's presidential campaign. He said, she said, you say. But the potential bombshell here is that Regan recorded the conversation.
The Times notes that News Corporation gave Regan a big settlement shortly after she filed her suit:
It is unclear whether the existence of the tape played a role in News Corporation’s decision to move quickly to settle Ms. Regan’s lawsuit, paying her $10.75 million in a confidential settlement reached two months after she filed it in 2007.
Needless to say, it's a no-no to obstruct justice by telling people to lie to federal investigators. If there's a recording here and it says what Regan's lawyers say it does, Ailes could be a goner, although the Times quotes a Columbia prof raining on that idea:
Depending on the specifics, the conversation could possibly rise to the level of conspiring to lie to federal officials, a federal crime, but prosecutors rarely pursue such cases, said Daniel C. Richman, a Columbia University law professor and former federal prosecutor.
“In the scheme of things there are other priorities, and these are not necessarily easy cases to make,” Mr. Richman said.
It's unclear to me why it would be a difficult case to make if there's a recording of a powerful public figure like Ailes urging Regan to lie to federal officials, although it would hardly be surprising if the tape doesn't exist anymore as part of the $11 million settlement.
Until and if we see a transcript, this will be stuck in a he said, she said, because—in what I'd guess was part of said $11 million settlement—News Corporation has a letter from Regan in which she says Ailes didn't urge her to lie. Or at least that's what News Corporation says the letter says. Regan's lawyer seems to disagree, at least to some extent:
In a statement released on Wednesday, a News Corporation spokeswoman did not deny that Mr. Ailes was the executive on the recording.
But the spokeswoman, Teri Everett, said that News Corporation has a letter from Ms. Regan “stating that Mr. Ailes did not intend to influence her with respect to a government investigation.”
“The matter is closed,” Ms. Everett said.
Ms. Everett declined to release the letter, and Ms. Regan’s lawyer, Robert E. Brown, said the News Corporation’s description of the letter did not represent Ms. Regan’s complete statement.
How the Times learned of Regan's tape adds to the intrigue (emphasis mine):
The new documents emerged as part of a lawsuit filed in 2008 in which Ms. Regan’s former lawyers in the News Corporation case accused her of firing them on the eve of the settlement to avoid paying them a 25 percent contingency fee. The parties in that case signed an agreement to keep the records confidential, but it does not appear a court order sealing them was ever sent to the clerk at State Supreme Court in Manhattan, and the records were placed in the public case file.
One of Regan's former lawyers says in a sworn statement that "a senior executive in the News Corporation organization told Regan that he believed she had information about Kerik that, if disclosed, would harm Giuliani’s presidential campaign. This executive advised Regan to lie to, and to withhold information from, investigators concerning Kerik.” The Times reports the lawyer says that senior executive was Ailes himself.
It's really too bad that the Times doesn't publish these documents for everybody to see. It quotes from them, but putting these things online should be a core function of journalists these days. The Times apparently has them but notes that we can't get them. Since it examined them, they "have subsequently been taken out of the public case file."
Still, this is an excellent piece of reporting by the Times.
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February 24, 2011 11:02 AM
JunketSleuth’s FOIA War With the FDIC
Perhaps it's time for an "openness czar"
Russell Carollo, of Mark Cuban's JunketSleuth, has a great post up today about the way in which the FDIC aggressively rebuffs FOIA requests that other government agencies are happy to comply with. The FDIC has long been a hugely powerful and unaccountable arm of the government, and its letters to Carollo stink of arrogance and entitlement.
The FDIC repeatedly refused to provide any information on travel by its employees, claiming, among other things, that it has no central database, that Junketsleuth’s requests were too broad and that even if they had the information, the public wouldn’t have a right to see it...
Although the FDIC has rejected all of JunketSleuth’s Freedom of Information Act requests, more than 20 other agencies that got identically worded letters turned over their travel databases, which contain hundreds of thousands of records...
In addition, more than 30 agencies have provided JunketSleuth with other types of records. Those include hotel bills, airline receipts and other documents related to travel by top agency officials and other government employees, or to travel to specific destinations that we asked about.
But the FDIC provided nothing.
In response to JunketSleuth’s initial request for data, the FDIC claimed that our request—again, worded identically to those that yielded voluminous records from many other agencies—did not “reasonably describe” the information being sought.
The FDIC also said that we did not specify a time frame for the records we sought, suggesting that our request for data could be interpreted to mean all travel-related information compiled since the agency was created in 1933.
The FDIC seems perfectly happy to send responses to FOIA requests saying that it will provide no information at all on the grounds that the FOIA "could be construed to include" some impractically massive amount of information. It's a textbook example of bad faith: what's clearly happening here is that the FDIC has first decided that it's not going to provide anything at all, and then instructed its lawyers to find some colorable reason why the request is being denied.Why is it that the FDIC is being so willfully obstructive even as other agencies, including the Department of Defense and the FDA, are much more cooperative? The answer is surely the culture of secrecy and of we-know-best that pervades the financial sector generally, including the areas where it seeps into government. The Fed, of course, is just as bad, if not worse—it has a habit of dismissing FOIA requests out of hand, on the grounds that it's not a government agency. (Technically, it's a privately-owned corporation.)
Whenever information has emerged which Treasury or the Fed initially wanted to keep secret, the deleterious effects have been invisible—once again, the risk of something bad happening as a result of disclosure is an excuse used to justify a blanket decision not to disclose anything, rather than the reason for that decision. It's worth remembering here that immediately before he was Treasury secretary, Tim Geithner ran the hugely secretive New York Fed, and did nothing to improve its transparency.
Government is, by its nature, a massive bureaucracy, and it's very hard if not impossible to change an ingrained culture in such places. But a bit of top-down pressure could only help. Perhaps the White House could appoint an "openness czar" or similar to whom anybody getting serially rebuffed could appeal. Because this secrecy is ultimately self-defeating, not to mention politically damaging.
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February 24, 2011 07:30 AM
Vulture Funds Exposed in Playboy
Playboy has long mixed its girlie pics with serious journalism, but it's not always obvious why. Take the December 2010 issue, for instance. It includes a fantastic investigative piece on vulture funds by Aram Roston, which isn't advertised on the cover and which wasn't placed online either until I found out about it a few days ago and started nudging them.
In any case, all's well that ends well: the story's up now. It suffers from the same problem that bedevils all investigative features on vulture funds: for all that such people will talk to trade journalists and vulture-fund apologists like myself (although even I have difficulty talking to them), they'll very rarely talk to anyone doing this kind of piece. Roston talked to one vulture on the record -- Hans Humes -- and includes a number of anonymous quotes as well, although some of the anonymous quotes are certainly from Humes as well. The result is necessarily one-sided, although not remotely as bad as other articles I might mention, and the real fault here lies with the vultures, rather than with the reporter.
What Roston has done is look into the early history of vulture funds -- Ken Dart vs Brazil, Jay Newman vs Panama -- in a way I haven't seen elsewhere. This history is hard to dig up: he clearly knows what he's talking about. I have quibbles -- I always thought that Elliott Associates successfully lobbied in Albany to change the law about calculating compound interest, rather than unsuccessfully lobbying to change the law about champerty. But these things are minor. What's impressive is some of the color that Roston has dug up around the way that Elliott works:
Newman tried to freeze, attach or seize anything belonging to the government of the Congo. The government tried to keep a step ahead of him, allegedly resorting to fraud or straw owners to keep its oil revenue out of the vultures’ talons.
The vultures set up an intelligence operation to gather information and pursue allegations of corruption against the Congo. Newman supposedly set up an operation in London to conduct private investigations.
One vulture fund investor described the cloak-and-dagger operations. “Think Casablanca,” he said. He told me an “information bazaar” tried to dig up dirt on the leaders of Congo-Brazzaville, and former CIA station chiefs cooperated. “They’re all former spooks,” he told me. “Senior guys, station chiefs.”
Their operator was proud of what he’d accomplished in gathering information about Congolese corruption, but he marveled at the cost of digging up the dirt. “This piece of information, $50,000.” He held out one hand as he said it. “This piece of information, $100,000.” He held out the other hand...
The country settled with most of the aggressive vulture funds at 55 cents on the dollar, but Newman and his financier at Elliott scored better than the others. Apparently by agreeing to stop providing reporters with negative information about the ruling family, Newman is said to have collected about $90 million from the Congo. He had paid less than $20 million for the old debt. His biggest cost may have been for lawyers, private eyes and lobbyists.You can see how Elliott's investors love this: it's the very definition of uncorrelated returns.
Roston quotes one anonymous vulture as defending his work on the grounds that vultures expose corruption. That's pretty weak, as even Humes admits. The reasons to admire vultures are a bit more subtle than that: their existence reassures big institutional bond investors that their will always be a bid for their paper, and thereby reduces sovereigns' borrowing costs. Or to put it more generally, someone has to be willing able to enforce a legally-binding contract in a court of law. Otherwise, no one will buy any bonds at all, given that they're nothing but legal contracts. (For a much longer defense of vulture funds, check out my 2007 post here.)
Roston also fails to note that while the profits in vulture investing can be enormous when it works, the losses can be even bigger when it doesn't work. What he describes as "the vultures’ biggest play of all"—Argentina—has been an unmitigated disaster for the vultures, who are happily racking up legal fees and court judgments in New York, none of which make them any money at all, even as the bondholders who accepted Argentina's exchange offer have seen their new bonds soar in value. At this point, it's pretty much unthinkable that the holdout vultures will ever end up making more money off Argentina than they would have done if they'd just accepted Argentina's initial offer. And to date, of course, they've received nothing. More generally, the total profits of all vulture funds ever remain a rounding error in the history of sovereign debt flows—it's important to keep these things in perspective, and to remember that profits in some countries have to be offset by losses in other countries which never paid out.
Roston's conclusion—that vultures will be with us always—is less hopeful than my view that a consensus is forming between people who used to be very far apart, and that the vulture-fund debate is slowly fading into irrelevance and anachronism. Certainly the Argentine elephant is going to remain in the room for the foreseeable future—and now, of course, there's a very real risk that we'll see the whole thing kicked up a few orders of magnitude if eurozone sovereigns get into the sovereign-default game. But for the time being the European Central Bank is doing a great job of keeping distressed sovereign debt out of the hands of potential litigants.
One vulture investor recently moaned to me that there was nothing to invest in, these days, what with all asset prices going through the roof. Maybe the thing which really kills vultures isn't legislation from the likes of Maxine Waters, but rather ultra-loose monetary policy and quantitative easing. Vultures profit from distress; they tend to drown, rather, in liquidity.
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February 23, 2011 08:07 PM
Audit Notes: A Mirror For Scott Walker, SPJ Outraged at Blogger, Foreclosures
Steven Pearlstein goes into his columnists' bag of tricks to show how crazy Governor Scott Walker's agenda would be if a Democrat tried to pull it:
One old trick is to suggest a thought experiment that asks readers to consider the mirror image of what is going on. In this case, you'd be asked what the reaction would be from Republicans and business interests if a newly elected Democratic governor and legislature proposed to deal with a budget deficit by first raising unemployment benefits and then pushing through a big corporate tax increase for all but the Democratic-leaning tech sector. For good measure, the package would also contain a ban on corporations making political donations without getting the permission of each shareholder, lest they use their power to repeal the tax increase and push the budget out of balance.
This is analogous, of course, to what Gov. Scott Walker has proposed for dealing with Wisconsin's budget gap: the tax breaks for businesses, the benefit cuts for all state employees except Republican-leaning police and firefighters, the automatic decertification of all public-sector unions and the stripping of their right to bargain anything but wages. Looking at Walker's reflection in the political fun-house mirror makes it abundantly clear that the governor has a more ambitious agenda than merely closing a modest budget gap.
It takes some incredible chutzpah to take a crisis caused by Wall Street capitalists and right-wing ideologies and use it as an excuse to squash what remains of the American labor movement.
— Speaking of Wisconsin's governor, the Society of Professional Journalists is out with a statement blasting a journalist who snookered Walker into thinking he was a right-wing billionaire.
The Society of Professional Journalists, through its Ethics Committee, strongly condemns the actions of an alternative online outlet this week when an editor lied and posed as a financial backer in a recorded phone call with Wisconsin Governor Scott Walker.
Thing is, I'm pretty sure said alternative online outlet, aka the Buffalo Beast, doesn't care what SPJ thinks about how to do journalism. Here's a screen shot of its home page:
Yes, the headline next to the main "Koch Whore" story says "Help this exploited child help The Beast buy decent drugs." The Buffalo News it ain't.
Its blogger, noting that Democratic leaders in the state hadn't been able to get hold of Walker via phone, told the governor's receptionist that he was conservative billionaire David Koch and was promptly put through to the governor himself.
That bit of gonzo is as revealing as a hundred straight-news stories, no?
— And to round out our all Upper Midwest edition of Audit Notes, Brian J. O'Connor of The Detroit News does a good job keeping an eye on how banks are going after borrowers even after foreclosures and short sales. I don't think many people understand this can and is happening and this kind of story is what the press needs to be doing:
Now, because of dropping property values, mortgage lenders are engineering foreclosures so they can pursue a borrower for the unpaid balance of a home loan for years to come. With added fees and interest, this phantom debt — called a "mortgage deficiency" — could swell to become more than the homeowner paid for the property.
Here's how it works:
But now that many homes in the region are worth far less than their mortgages, lenders aren't bidding what's owed. They enter bids for the current value of the home or, sometimes, even less. Under state law, the lenders can then pursue the homeowner for the shortfall between what was owed and what the lender got when the home was sold, plus legal fees and interest.
Lenders have up to six years to sue for the bad debt and, once they obtain a judgment, can pursue the borrower for 10 years. If they still haven't collected, they can renew the judgment for another decade, repeating the process indefinitely.
During that time, interest can build on the debt at the default rate stated in the original mortgage. That's usually four or five percentage points above the original mortgage rate, so a deficiency on even a low 6-percent loan would be charged 10 percent or 11 percent interest, doubling the cost of the debt in as little as six and a half years.
O'Connor reports that one of the biggest problems is bottom-feeding collections agencies buying bad debts for pennies on the dollar.
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February 23, 2011 02:01 PM
The SEC, Tangled Up in Madoff
How about that Irving Picard?
The lawyer trying to recover cash for Bernie Madoff's victims had the nerve to sue Jamie Dimon's JPMorgan Chase for $6.4 billion, saying the bank was at the "very center" of Madoff's fraud and knew—or should have known—what was going on (it's worth revisiting a New York Times/Il Sole 24 Ore report from early 2009 on JPM yanking its money from Madoff just months before the Ponzi unraveled).
Now Picard is going after the SEC's top lawyer, David M. Becker, to recover $1.5 million in "ill-gotten" gains his late mother made with Madoff. That's according to a nice New York Daily News scoop this morning.
Becker denies knowing anything about his mother's Madoff money, but it's another black eye for the SEC, which did its best to look the other way despite repeated warnings that Madoff was operating Ponzi scheme. Those warnings came from the whistleblower Harry Markopolos, and it's well worth revisiting this New York Times Q&A; with him from last year:
(Deborah Solomon) You met last year with Mary Schapiro, the current head of the S.E.C. How did that go?
(Markopolos:) I would say she was coldly polite. Her general counsel, David Becker, did most of the talking. He and I did not get along at all. He was getting ready to come across the coffee table and strangle me.
Now let's emphasize that Becker wasn't at the SEC from 2002 until 2009. But he was there—as the top lawyer—2000 to 2002, when Markopolos first warned the agency that Madoff was running a Ponzi. That's also when reporter Michael Ocrant wrote a piece headlined "Madoff Tops Charts, Skeptics Ask How" and Erin E. Arvedlund of Barron's wrote a story that raised serious questions about Madoff's operation and how it got its returns. There's no indication that Becker squelched an investigation or even knew about the Madoff warnings. But it's worth a look.
The Daily News gets a bit aggressive with this quote, but it gets the point across:
Bradley Simon, a former federal prosecutor who has watched the Madoff case unfold, said situations such as Becker's look bad for the SEC.
"If families of high-ranking SEC officials were heavily invested in Madoff it may help explain why the SEC was less than vigilant in scrutinizing his activities," Simon said. "We know they were asleep at the switch. This may help explain why."
A further note on the tangled-web angle: Another general counsel, JPMorgan's Stephen Cutler, was quoted last week in The Wall Street Journal defending his company against Picard's allegations. As Audit Trustee Dean Starkman pointed out last week, Cutler from 2001 to 2005 was the enforcement chief of the SEC.
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February 23, 2011 11:25 AM
The History of Austerity
It's grim—all the way back to Napoleon
One of the best aspects of being a journalist is that you get to talk at length to the most knowledgeable and interesting experts on just about any subject you can think of. For me, yesterday was a prime case in point: a long and fascinating lunch with James Macdonald, the author of my favorite book on the history of sovereign debt. Turns out he also has a microscopic vineyard in Tuscany, so the conversation ebbed wonderfully from economics to wine and back.
Macdonald has an economic historian's view of the current austerity debate, and he was very clear: if you look at the history of countries trying to cut and deflate their way to prosperity while keeping their currencies pegged, it's pretty grim -- all the way back to Napoleonic times. Sometimes, the peg is gold. For a good example of the destructive abilities of that particular peg, look at the UK in the 1920s, which Macdonald says was arguably worse than the US in the 1930s: shallower, to be sure, but substantially longer. The devaluation of the pound, when it finally came, was very long overdue.
At other times, the peg is simply political: Macdonald gives the example of southern Italy being locked into what was essentially the Piedmontese monetary system at the time of the Risorgimento. That might have been well over a century ago, but there's a case to be made that it has hobbled just about everywhere south of Rome to this day -- and that's in a country with about as much internal labor mobility as between EU countries.
So from a historical perspective, the prospects for countries like Portugal, Ireland and Greece are pretty grim. They can cut their budgets drastically and stay pegged to the euro, but most of them would be better off in the position of Iceland, which can and did devalue in a crisis (and allowed its banks to default, too). So far, the Baltic states have stuck to their deflationary guns with the most determination and discipline, but such things work until they don't: at some point it's entirely possible that Latvia or Estonia could pull an Argentina and kickstart growth by devaluing.
All of this is relevant for the US states, of course, which are also locked into a currency union and facing very tough fiscal cuts, as Steven Pearlstein says today:
Will the pain come in the form of prolonged high unemployment? Or wage and salary cuts? Or reduction in the value of homes and financial assets? Or loss of ownership of American companies? Or price inflation? Or higher taxes? Or reductions in government services and benefits?
The right answer, of course, is "all of the above."Meanwhile, David Leonhardt takes an important look at Germany, which you might think was benefiting, in some kind of zero-sum mathematics, from the pain of the European periphery. It isn't: German GDP is still significantly lower than it was in the first quarter of 2008, while US GDP is now back above its pre-crisis levels. (Britain is doing significantly worse than either.)
"The historical lesson of postcrisis austerity movements," writes Leonhardt, "is a rich one," and also clear: they don't work, even if they're "morally satisfying."
The answer, it seems, would be for crisis-hit countries to do the equivalent of what Macdonald and I did at lunch yesterday. I was coming off a slightly feverish and bed-ridden Monday, but we still went ahead and ordered the macvin, a spectacular fortified late-harvest white (yellow, really) pinot noir from the Jura. It goes very well indeed with mangalitsa ham. And I feel much better today, thanks.
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February 23, 2011 08:53 AM
A New Twist on the Wisconsin Story With Gin and Tacos
Ed at Gin and Tacos picked up on a particularly audacious section of the Wisconsin budget-repair bill yesterday: the governor can sell off any state-owned heating, cooling, and power plants he likes, at any price, to anybody he wants, without any kind of auction or bid-solicitation process, and such a sale would be defined as being in the best interest of the state and to comply with criteria for certifying such a transaction.
Ed calls this "a highlight reel of all of the high-flying slam dunks of neo-Gilded Age corporatism: privatization, no-bid contracts, deregulation, and naked cronyism" -- but as Yves Smith notes, the sad fact is that all this language is gratuitous: if you're a state, there are essentially no legal restrictions on how to privatize state-owned industries and franchises if you're so inclined.
It probably comes as little surprise to note that the most lucrative privatizations have generally been done by parties of the left: I'm thinking in particular of the UK's auction of 3G licenses, which netted the Exchequer $35.4 billion at the height of the dot-com bubble.
Right-wing parties, by contrast, are more prone to thinking of privatization as something inherently good, and of monies flowing to the government as a kind of taxation which is inherently bad.
And then of course there's the other spectrum, from clean to corrupt, which is orthogonal to the left-right spectrum -- the more beholden the government is to special interests, the more likely those interests are to wind up with sweetheart deals. Sometimes, the special interests in question are public-sector unions, which find themselves able to negotiate the kind of final-salary defined-benefit pensions which are now threatening state solvency and municipal bond markets around the country. At other times, the special interests are large corporations looking to buy up lucrative monopolies on the cheap. In both cases, elected politicians are not the best people to ensure a good deal; non-partisan career civil servants tend to generate much better results.
The advantage of privatization in cases like the Chicago parking meters is that it removes the utility from political meddling -- in that case, from local aldermen who would always agitate for parking rates well below the optimal level. (Relatedly, if you haven't read it yet, go read Ed Glaeser's Atlantic essay on the massive economic cost of urban zoning regulations.)
But in the case of Wisconsin-owned energy plants, such considerations don't come into play. There's no reason to believe that the private sector will run those plants in a way that is better for the public, and every reason to believe that they will run the plants in a way that is worse (ie, more expensive) for the public. If the state wants to cut such a deal in return for a one-time check, that check had better be enormous. And there's absolutely no reason to believe that it will be.
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February 22, 2011 07:46 PM
Audit Notes: Watchdog Blogging, Union Power, Stadium Economics
The blog Gin and Tacos makes a fantastic catch on Wisconsin Republican Governor Scott Walker's effort to take away the right to organize from most of the state's public unions and cut their pay.
Buried in the bill is language that would allow Walker's administration to privatize state-owned power plants on terms only a Russian oligarch could love:
with or without solicitation of bids, for any amount that the department determines to be in the best interest of the state... no approval or certification of the public service commission is necessary for a public utility to purchase, or contract for the operation of, such a plant, and any such purchase is considered to be in the public interest and to comply with the criteria for certification of a project...
Gin and Tacos:
If this isn't the best summary of the goals of modern conservatism, I don't know what is. It's like a highlight reel of all of the high-flying slam dunks of neo-Gilded Age corporatism: privatization, no-bid contracts, deregulation, and naked cronyism. Extra bonus points for the explicit effort to legally redefine the term "public interest" as "whatever the energy industry lobbyists we appoint to these unelected bureaucratic positions say it is."
Excellent watchdog blogging.
— Matt Stoller makes an interesting observation today about the Wisconsin union protest.
He notes on Twitter that it's "probably the first real strike/labor action most Americans under 35 have seen" and links to Bureau of Labor Statistics numbers on major strikes since 1947.
From 1970 to 1979 there were an average of 288 work stoppages a year involving more than a thousand workers. From 2000 to 2009 the average plunged to twenty a year.
Stoller also links to the numbers in chart form, saying it's "one of the most consequential yet little noted parts of modern life in America."
— Once upon a time, universities were for students—or so I hear.
Here in Seattle, the University of Washington's $250 million renovation of its decrepit 90-year-old stadium shows how that's changed.
Once the stadium reopens in 2013, there will be all the usual accoutrements: skyboxes, suites, etc. The important and/or rich people staying dry in the suites will have wet bars while the proles getting rained on in the cheap seats remain dry in that sense.
Students, meantime, who had been sitting on the 50-yard line, will be sloughed off to the end zone, where they will pay three times ($375) what they paid for 50-yard line seats (They can still buy 50-yard line seats if they can somehow afford to fork out $150 per game for tickets to see a bad football team play). That's so the athletic department can jack up prices on those seats to pay for the renovation.
The best you can say about this is at least taxpayers aren't on the hook for this one, though the athletic department tried its best, of course, to get public money.
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February 22, 2011 05:38 PM
One For the Whistleblowers
The government has thrown up its hands and says it can't prosecute Angelo Mozilo, despite the fact that his company Countrywide was a giant predatory-lending machine, that he misled investors about the health of the company, or that he acclerated his stock sales in October 2006, after it became clear that subprime was going down. This despite that over the last two years, he and his company had to cough up $68 million to the SEC to settle civil fraud charges and $8.7 billion to settle with California over predatory lending.
Or that we know now what Mozilo tried to do when an executive refused to go along with his company's "anything-goes" culture: Show him the door.
Gretchen Morgenson reports on a Countrywide whistleblower who just won a jury case and $3.8 million against his former company and its current owner Bank of America for firing him because he wouldn't play along. It's a glimpse at how CEOs influence their corporate cultures by who they promote and who they ostracize.
After talking to a Countrywide employee who had "Fund 'Em" on his license plate and told Winston he'd lend to everybody even if they had no job or assets (remember NINJA loans?), Winston wrote a letter to a superior challenging that culture. That challenge led to clear signals from the top that he was being ostracized. A few weeks after Winston refused to make up a report to Moody's out of thin air, as instructed by Countrywide's president, Mozilo himself asked HR to fire him.
“As I expressed to you, I am concerned about the motivations and overall attitude and demeanor of Michael Winston,” Mr. Mozilo wrote. “I want him terminated effective immediately.”
I would note here that we haven't heard anything about Mozilo questioning the "motivations and overall attitude and demeanor" of the executives who helped push Countrywide deeper into predatory lending. Freeze-outs, firings, and promotions are one of the main tools a CEO has in shaping his corporate culture.
And speaking of corporate culture, what does it say about Bank of America that it put folks it had previously fired back on its payroll after Winston's attorneys put them on their witness list?
A fascinating detail in his case: after providing to the opposition his list of witnesses, which included former colleagues who had also been let go by Bank of America, the bank hired several of them back. Then they testified against him.
That reminds me of something from Michael Hudson's book The Monster, a deeply reported investigation of predatory lender Ameriquest that you should really read. A top Ameriquest executive named Wayne Lee sued company owner Roland Arnall, saying that Arnall had blocked reforms he'd tried to institute to prevent shoddy lending. But when attorneys for other plaintiffs deposed him, they found that Lee was far from forthcoming about Arnall and Ameriquest.
Conveniently enough, in the three months between Lee's lawsuit and his clamming up, Arnall and Ameriquest had settled with him, giving him $15 million and removing Lee's non-compete clause. Hudson:
All he had to do was drop his lawsuit and agree to a "mutual non-disparagement" clause.
Sorry, I'm no lawyer, so forgive the stupid question. But why is it legal for a company to—overtly—pay a whistleblower or others who might have dirt on it to shut up? How often does this kind of thing go on?
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February 21, 2011 04:08 PM
LAT’s Hiltzik Dissects An Outsourcing Fiasco
Michael Hiltzik has a fantastic column on Boeing's outsourcing disasters in the LA Times; it's well worth reading the whole thing, complete with a link to a prescient 2001 paper by Boeing technical fellow LJ Hart-Smith.
Hiltzik's point, which is undeniable, is that Boeing's outsourcing mania has cost it billions. It's not a new idea (Reuters ran this special report in January, and the Seattle Times covered the outsourcing news earlier this month), but it's rarely been this well expressed:
Boeing's goal, it seems, was to convert its storied aircraft factory near Seattle to a mere assembly plant, bolting together modules designed and produced elsewhere as though from kits.
The drawbacks of this approach emerged early. Some of the pieces manufactured by far-flung suppliers didn't fit together. Some subcontractors couldn't meet their output quotas...
Rather than follow its old model of providing parts subcontractors with detailed blueprints created at home, Boeing gave suppliers less detailed specifications and required them to create their own blueprints.
Some then farmed out their engineering to their own subcontractors. At least one major supplier didn't even have an engineering department when it won its contract.Not only was all this forseeable, it was foreseen -- not only by the unions, but also by executives. And, of course, the aforementioned Hart-Smith:
Among the least profitable jobs in aircraft manufacturing, he pointed out, is final assembly — the job Boeing proposed to retain. But its subcontractors would benefit from free technical assistance from Boeing if they ran into problems, and would hang on to the highly profitable business of producing spare parts over the decades-long life of the aircraft. Their work would be almost risk-free, Hart-Smith observed, because if they ran into really insuperable problems they would simply be bought out by Boeing.
What do you know? In 2009, Boeing spent about $1 billion in cash and credit to take over the underperforming fuselage manufacturing plant of Vought Aircraft Industries, which had contributed to the years of delays.
The lesson here is that Boeing executives, just like most of the rest of corporate and political America, were incredibly bad at pricing moral hazard and tail risk. Outsourcing is a bit like taking collateral from your repo operation and investing it in subprime credit. Most of the time, you make a small amount of money -- and then, occasionally and unpredictably, you lose an absolute fortune. Boeing was picking up pennies in front of a steamroller, and ended up getting crushed.I do wonder what proportion of corporate "efficiencies" are false ones along these lines. Did Mark Hurd improve HP's margins by cutting back on R&D expenditure? Or did he sign the company's long-term death warrant? And of course when Win Neuger's reach for yield in the AIG securities-lending operation was truly disastrous.
Hiltzik concludes:
The company now recognizes that "we need to know how to do every major system on the airplane better than our suppliers do."
One would have thought that the management of the world's leading aircraft manufacturer would know that going in, before handing over millions of dollars of work to companies that couldn't turn out a Tab A that fit reliably into Slot A. On-the-job training for senior executives, it seems, can be very expensive.The sad thing is that this lesson has to be learned the hard way so many times. Can't anybody else learn from Boeing's mistakes?
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