More From Kyle Bass

[20:01]

Kyle Bass of Hayman Capital:

"When you see things like Argentina, Greece, Cyprus, Ireland, Italy, you see how fast things go from perfectly stable to completely unstable.  In this case [Japan] I think it will happen more quickly because of the twenty-year build-up."

Needless to say, Bass is short the yen.  See the full clip for his thoughts on gold as an investment, on residential mortgage-based securities, on Fannie Mae and Freddie Mac, on near- and intermediate-term interest rates in the U.S., and more.

Tuesday Tune-up

Santana, "Samba Pa Ti"

"Riskiest Time"

[10:08]

Kyle Bass of Hayman Capital:

Now is "the riskiest time to be complacent in our generation...Investing with the traditional endowment model...is not going to work much longer...

"The insidious nature of a runaway inflation is it bankrupts the middle class.  So the poor stay poor.  The middle class--people that have had some fiscal rectitude, the doctors, the lawyers, the civil servants that have saved their money and put it in the bank--these are the people that get wiped out, or let's say severely impaired in this situation.  The wealthy that are levered with productive assets actually do the best...

"That's an awful scenario for the world to engage in."

Quote for the Week, April 7-13, 2013

I have wondered at times if some of the managed-care bureaucrats I have encountered over the years had been subjected to a bilateral hemispherectomy.  It would certainly explain some of their rulings.
--Dr. Ben Carson

Volatility is Cheap--Beware

Investors scaling back their tail-risk insurance, must mean a black swan is right around the corner-- reut.rs/10hJUlf via @reuters
— Bill Hine (@billhine) April 5, 2013

Recommended Reading

For all you history buffs:

Bob Schieffer chats with authors of new books about Coolidge, Churchill, FDR, Lindberg, Eisenhower, and Nixon.

Tuesday Tune-up

Hrysoula Stefanaki, "I Varka Gyrise Moni"

Opening Day

Getch'ur tickets heah!

America in "End-Stage Metastasis"

Former OMB Director David Stockman pulls no punches.

"The way out would be so radical it can't happen.  It would necessitate a sweeping divorce of the state and the market economy.  It would require a renunciation of crony capitalism...It would require, finally, benching the Fed's central planners, and restoring the central bank's original mission:  to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy.  Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism."

Complete N.Y. Times commentary here.

Quote for the Week, March 31-April 6, 2013

Did EU banking officials really believe that haircutting depositors would be sufficient to restore confidence in Cypriot banks?  The infantile quality of the actions of EU officialdom is mind boggling.
--Christopher Whalen

Big Brother in Asia

Trailer:  "State of Control"

American filmakers are trying to document social unrest in occupied Tibet.  Their chief obstacle:  Chinese computer hackers trained to delete.

Criminals to the Left of Me, Criminals to the Right

€100,000 invested with Madoff 5 years ago would still be worth €79,000. If you deposited it in Laiki Bank, you now have €20,000 <cough>
— Grant Williams (@ttmygh) March 27, 2013

Tuesday Tune-up

Jefferson Airplane, "White Rabbit"

Bair Refuses to Hibernate

Sheila Bair with Bill Moyers

[22 min.]

The former FDIC Chair talks about the U.S. Senate's investigation into the risk-taking and disinformation campaign carried out by JPMorgan Chase.  She points out that federal regulators are subject to "cognitive capture" by the very industry which they are charged to oversee.  "We need a culture change with the regulators," she tells Moyers.  "They confuse bank profitability with bank safety and soundness."

Quote for the Week, March 24-30, 2012

Hell hath no fury like a saver robbed.
--Ambrose Evans-Pritchard

We Have Met the Enemy

"Have they no grandchildren?"

--Jeremy Grantham, interviewed by Charlie Rose

03-11-13

[53:39--click here]

Investment adviser Jeremy Grantham (GMO) worries that the human population has surpassed the carrying capacity of planet Earth.  We are seven billion going on ten by 2050; we need to be on our way back down to four.  We survive at the moment solely because of fossil fuels, representing "millions of years of stored energy" and affording us "an amazing, but short, time-out."  How short?  Let's say 250 years, and we are well into the second half.

In the competition for resources, "the rich half of the world is pricing out the other half."  Crude oil has quadrupled in price since 2000.  Indeed, "resource prices are squeezing the rest of the system," likely constraining economic growth to little more than 1% annually for the foreseeable future.  The world's phosphorus, essential in sustaining animal and plant life, will be exhausted in 50 years, assuming an annual increase of 2% in consumption.  Most portfolio managers don't care.  They live in a "paper world," not the real one, and are too busy chasing short-term returns to worry about long-term consequences.

Grantham advises that we not confuse human ingenuity with a resource bonanza.  To those confident that we will somehow figure things out, Grantham observes that throughout human history robust civilizations, prior to the mining of coal, routinely collapsed.  After the time-out, they may again.

Ripple (Or Tsunami?) From Cyprus

Now, whenever you hear the word "bailout" assume your bank account goes missing. Unless it's for Wall St. in which case they get trillions.
— Michael Krieger (@LibertyBlitz) March 21, 2013

Tuesday Tune-up

Priscilla Ahn, "Dream"

Quote for the Week, March 17-23, 2013

When interest rates rise into decelerating nominal GDP, 'accidents' can happen.
--Vince Foster

Too Big To Nail?

In the crosshairs:  JPM CEO Jamie Dimon

"JPMorgan Chase, the nation's biggest bank, ignored internal controls and manipulated documents as it racked up trading losses last year, while its influential chief executive, Jamie Dimon, briefly withheld some information from regulators, a new Senate report says."
--N.Y. Times DealBook [full article here]

Full Senate report here.

Senate hearing begins in one hour.

Tuesday Tune-up

Lindsey Stirling, "Song of the Caged Bird"

Quote for the Week, March 10-16, 2013

The experience of over 250 debt crises over the past few hundred years tells us that there is no specific point when the markets lose confidence in a government's debt.  When it happens, though, it is ferocious in its intensity.
--John Mauldin

Tuesday Tune-up

Steve Miller Band, "Swingtown"

ZIRP Is a Zero-Sum Game

The man with a plan.

"Further deficits are not a viable option, and threaten undesirable long-term consequences. The ideal solution is to pair deficit reduction efforts with policies to stimulate gross domestic investment. 'Investment' in this context does not mean financial investment, but real investment in factories, equipment, capital goods, research, and development. Policies to stimulate investment include investment tax credits, accelerated expensing of investment, R&D incentives, and similar programs....[emphasis author's]

"The only sustainable course to a higher standard of living is to encourage productive investment. Policies like those currently pursued by the Federal Reserve attempt to encourage consumption, but do so by distorting savings and investment decisions toward speculative activity rather than productive investment. Unfortunately, the reluctance of consumers to spend is tightly linked to existing mortgage and consumer debt burdens, many of which remain unserviceable and have not been restructured. Attempts to squeeze greater consumption demand from these individuals, without a strategy to increase productive activity and income, is likely to produce continued failure.

"While policies to stimulate gross domestic investment may be viewed as unwanted 'tax expenditures' in deficit reduction efforts, these policies are critical to prevent the unintended consequence of economic contraction."

John Hussman's commentary appears in full here.

Quote for the Week, March 3-9, 2013

[Those who] are waiting for the arrival of intelligent government are utopians.  The real choice today is between bigger or smaller unintelligent government.
--George Will

Hurdles for Would-be Home Owners

Want a home loan?  Submit your fingerprints and grab a Snickers.  It's going to be awhile.

"It's very painful to be a borrower in a refi or a purchase position...it's the relatively small number of approvals.  And I hate to say this, but it's probably going to get a little bit worse along those lines before it gets better."
--Rick Sharga, Carrington Mortgage Holdings, in a recent radio interview

Tuesday Tune-up

Mount Moriah, "The Letting Go"

Quote for the Week, February 24-March 2, 2013

The [economic] reality is terribly hard, no green shoots or passing clouds or early spring.
--Mariano Rajoy, Spanish Prime Minister, in his State of the Nation address on Feb. 20

Tuesday Tune-up

Jerry Douglas & Aly Bain, "Sophie's Lullaby"

Too Big For Trial

We need more like Elizabeth:

[One must feel a little sorry for the regulators in the hot seats, who are but appointees of recent standing charged with cleaning up a mess many years in the making.]

Quote for the Week, February 17-23, 2013

The damnable truth is we are in really different worlds, on totally different planes, and I don't know you anymore, I only know the you that was.  I wish I could explain the desperate sense of isolation, of not belonging to my own past, of being adrift in some kind of alien space.  It is one of the toughest things we have to bear--that and the primal, gut-rotting worm of fear.
--Farley Mowat, writing home from the Italian front, December 1943

The Murder That Sparked a Revolution

His finger was on the trigger.

She was the lure.

Princess Irina Alexandrovna, the beautiful niece of the Russian Tsar, was not yet nineteen when she married one of the richest men in Russia, Felix Yusupov.  The two were honeymooning when World War I broke out.  Detained by Kaiser Wilhelm II, they had to pull strings in Berlin to get back into Russia, now at war with Germany.

The war could not have gone worse for Russia, which suffered from shortages of food and equipment--and from the indecisive leadership of the monarch, Nicholas II.  The Tsar listened less to his ministers than to his German-born wife, Alexandra, who in turn had come under the influence of a faith-healer, Grigori Rasputin.  By December 1916 Rasputin had become a lightning rod for widespread criticism of an isolated and insensitive autocracy.  Even members of the Imperial family felt that it was time for him to go.

Yusupov was among a core of conspirators who hatched a plan to assassinate Rasputin.  The problem was drawing Rasputin away from the protection of his home and his followers.  The solution:  offering him a late-night introduction to Irina, whom he had never met.

For the peasant courtier from Siberia, it was Goodnight, Irene.

Rasputin:  poison and bullets were not enough.

Tuesday Tune-up

Bruce Springsteen & Melissa Etheridge, "Thunder Road"

Quote for the Week, February 10-16, 2013

Why does everybody think we will never again be subject to 'market forces?'  Confident markets do not lend money to insolvent governments at these rates of interest.  Period.
--Grant Williams

Memo to Banks: Let's Un-settle

For spawning the global financial crisis, the big Wall Street banks have gotten off easy.  So far.  No criminal cases have been brought against high-level executives, who continue to collect their annual seven-figure bonuses.  And civil complaints against their firms have seldom resulted in admissions of wrongdoing.  Federal prosecutors have been content to cut deals with the banks, extracting vigorish of pennies on the dollar.  For the banks, it is like buying immunity.  They settle, then resume business.

That may be about to change.  Let's review the news flow:

The New York State Supreme Court is currently overseeing a settlement reached in 2011 in which Bank of America agreed to shell out $8.5 billion to settle claims regarding the securitizing and servicing of sketchy home loans.  Now three Federal Home Loan Banks have filed new documents alleging further abuses in loan-modification practices.  In particular, BofA is believed to have imposed losses on investors in first mortgages while improperly protecting second liens held by the bank on the very same properties.  The Court is free to evaluate these new claims and may decide that $8.5 billion in restitution is not enough.  (story)

A U.S. District Court in New York has ordered Flagstar Bancorp Inc. to pay $90.1 million to Assured Guaranty Ltd., a bond insurer, in a contract dispute over loans underlying $900 million in mortgage-backed securities (MBS).  In the grand scheme of things, $90.1 million sounds like a small number.  But it represents 40% of Flagstar's net income for 2012.  More importantly, it is almost 78% of the amount sought by Assured.  The biggest banks face similar litigation over representations and warranties and are not reserving anything close to 78% for received and potential putback claims.  If 78% becomes the new rule of thumb, watch out.  (story)

Congress will investigate a settlement reached last month by the Office of the Comptroller of the Currency (OCC) and the Federal Reserve that ended the Independent Foreclosure Review process for eleven of fourteen mortgage servicers.  To get out from under IFR, the eleven banks (including all the biggies) agreed to pay $9.3 billion to indemnify and forgive eligible borrowers.  Congress may decide that $9.3 billion is insufficent.  (story)

The U.S. Department of Justice has filed civil fraud charges against Standard & Poor's, the nation's largest credit-ratings agency.   The DOJ's lawsuit alleges that investors, among them federally insured financial institutions, lost at least $5 billion on collateralized debt obligations (CDO) "for which S&P issued inflated ratings that misrepresented the securities' true credit risks."  The DOJ had offered to settle for $1 billion plus an admission of guilt.  Fearing that such an admission would open the floodgates for other complaints, S&P declined to settle.  State prosecutors and the Securities and Exchange Commission (SEC) are also circling.  The banks that sold the CDOs are hoping to avoid joint and several liability for the rigged ratings.  (story)

UBS reported a Q4 loss of $2 billion thanks to legal costs. (story)

Barclays has set aside another $1.6 billion for legal costs.  (story)

RBS has just been fined $612 million for rigging interest rates, less than UBS but more than Barclays for the same offense.  The DOJ extracted a guilty plea on this one.  (story)

Who's next?  Among the European banks, Deutsche Bank.  In the U.S., Citigroup and JP Morgan Chase are under investigation.  (story)

The hits will keep on coming.

My Kingdom for a Hearse!

Royal remains.

[story here]

Don't miss the sequel:

Tuesday Tune-up

Creedence Clearwater Revival, "Bad Moon Rising"

Tu Casa Es Mi Casa

The bill that introduced a New Normal.

One hundred years ago yesterday (as ZeroHedge reminds us), the 16th Amendment to the U.S. Constitution was formally ratified, legalizing a tax on personal income.  Ever since, this taxing authority has served as collateral (and stimulant) for the federal government's borrowing.  Also in 1913, Congress created the Federal Reserve System as a lender of last resort.  Coincidence?

Put one and one together and decide for yourself.

Quote for the Week, February 3-9, 2013

Investors either have not figured out that they are long seriously overpriced promises [i.e. government and corporate debt] or think that they will all have the luck and perspicacity to reject such instruments before they plunge in price.
--Paul Singer, Elliott Management

The Graying of the American Workforce

Wall Street Journal:

"Americans Rip Up Retirement Plans"

And from ZeroHedge:

"But perhaps an even more disturbing trend is the conversion of America into a gerontocratic worker society, where the bulk of jobs are handed out to those 55 and over, which puts all young workers, not to mention college graduates, at a major disadvantage relative to far more experienced older workers, who are willing to work for less as they scramble to compensate for retirement shortfalls, and which prevents the natural rotation of the US labor force from older to younger."

Black Saturday

Earlier this month:  a crowd waits outside an Apple store in Shanghai.

Definition of scary:  being wedged tightly in a crowd of impatient shoppers as Wal-Mart opens the door on Black Friday (or is it Black Thursday now?), especially if there is a single pallet of heavily discounted smart phones waiting inside.  You have no choice but to go with the flow, whether you want a phone or not.  Best to suit up in body armor in case some of the amazing racers start brandishing  firearms.  Best not to stumble to the floor and get trampled underfoot.  No, best to stay home.

Then there is beyond scary.  On the morning of May 30, 1896, a half-million people were gathered on the Khodynka Field on the outskirts of Moscow not to buy anything, but to accept a royal handout.  Khodynka, a military training ground, had been prepared for a festival celebrating the coronation of Nicholas II as the new Russian czar.  The common folk would be showered with gifts:  a commemorative mug (below), scarves, edibles (pryaniki, saiki, sausage), and beer.

The very first iThing.

Peasants had been arriving from the hinterlands for days to join in.  The night before they had been sleeping on the ground, drinking and singing around bonfires, or crowding about pavilions and tents, amused by bands, circus performers, gypsy entertainers, trained bears, the whole nine yards.  [cf. Harrison Salisbury, Black Night, White Snow]  By midnight, tens of thousands had begun to line up for the free stuff.  The mad rush began soon after dawn, apparently triggered by a rumor that there would not be enough free stuff to go around.

When demand exceeds supply, watch out.

1,389 dead.

Tuesday Tune-up

The Corrs, "Everybody Hurts"

Quote for the Week, January 27-February 2, 2013

Things was better when everybody live on the land.  Sure, there was tough times.  But everybody pulled along of everybody else to get through, and the feelin' you got from doing that was worth a few tough times.
--Joe Thrasher, Inuit, to Farley Mowat, author of High Latitudes

Banksters Skate, Exhibit A

From CBS News:

The smoking gun at Lehman Brothers.

Banksters Skate, Ch. 4

From PBS Frontline:

"The Untouchables"

Chapter Four:  The DOJ Dodge
[14:45]

Chapter One

Chapter Two

Chapter Three

Banksters Skate, Ch. 3

From PBS Frontline:

"The Untouchables"

Chapter Three:  Disgust on Capitol Hill
[20:56]

Chapter One

Chapter Two

Chapter Four

Banksters Skate (Ch. 2)

From PBS Frontline:

"The Untouchables"

Chapter Two:  Due(-doo) Diligence
[9:16]

Chapter One

Chapter Three

Chapter Four

Banksters Skate (Ch. 1)

From PBS Frontline:

"The Untouchables"

Chapter One:  Find 'Em, Fund 'Em

[8:44]

Chapter Two

Chapter Three

Chapter Four

Tuesday Tune-up

The Joy Formidable, "Wolf's Law"

Quote for the Week, January 20-26, 2013

Permanent war makes for permanent temporary measures.
--George Friedman

Dumpster Diving

Rooting for bank profits...

Garbage.  That's what MarketWatch called yesterday's earnings reports from Bank of America and Citigroup, serial underachievers in the financial sector.  I especially like this line:  "to suggest that these types of quarters are year-end, 'kitchen sink' quarters is an insult to sinks, kitchens, quarters, and, mostly, investors."  The complaint here is that these so-called disclosures are designed to obfuscate.  Accounting gimmickry and P.R. spin make it hard to understand how well (slash poorly) these businesses are doing.

Take Bank of America (please!), which reported a profit of $732 million for the fourth quarter of 2012. Got that?  The headline number was in the black.  Now let's start digging.  That "profit" was thanks entirely to a release from loan-loss reserves of $900 million (go here, click on Q4 Supplemental Information, then scroll down to page 44).  But why raid reserves when you are holding over $19 billion in non-performing home loans (page 42)?  Because if you don't, you're gonna show a quarterly loss, so hey, whaddya gonna do?

So back out the $900 million, but don't stop there.  We have a tax benefit of $2.636 billion in there (page 4).  Take that out, and now you have some serious red ink.   Note (also on page 4) that it would have been worse had income not included $792 million in trading account profits.  This proprietary trading is exactly what the Volker Rule is designed to limit.  Focusing just on traditional banking activity, we find that Bank of America does a poor job of it.  ZeroHedge paints this picture:

[click to enlarge]

BofA's bottom line was crushed this quarter by a provision for credit losses of $2.2 billion stemming from the company's recent settlement with Fannie Mae.  Even though the settlement disposes of over $12 billion in GSE claims, private-label and monoline claims increased by $1.56 billion in Q4 to almost $15 billion.  So what the company describes as "one-time" charges are more like over-and-over charges, as the New York Times explains here.

Busted

JPM CEO takes 50% pay cut.

2012 compensation:  only $11.5 million.

Poor baby.

This morning JP Morgan Chase & Co.'s Board of Directors announced that its Chairman and CEO, Jamie Dimon, would get a bonus of only $10 million for his performance in 2012.  Dimon is being held accountable for over $6 billion in losses incurred by the firm's chief investment office when it bet heavily on risky derivatives (internal report here).  The announcement comes two days after sanctions imposed on the bank by the Office of the Comptroller of the Currency and the Federal Reserve for deficiencies in its risk-management practices.  As other U.S. and British regulators are investigating the infamous "London Whale" trade, further enforcement actions may be coming.  The OCC also issued a cease-and-desist order for failure to comply with the Bank Secrecy Act.  Indeed, some suggest that Dimon deserves jail time for money-laundering.

Meanwhile, JP Morgan Chase just reported a record profit for the fourth quarter.  Adding to net income was the release of almost $900 million in loan-loss reserves.  Curiously, as page 22 of the earnings presentation (PDF) shows, the company has drawn off $5.673 billion from loan-loss reserves in the past year (boosting profits) even as the total value of non-performing loans has increased by $727 million over the same period.  So Jamie's latest bet is this:  a mending economy will cure some of these bad loans.

Page 15 shows the same shrinking interest margins observed last week with Wells Fargo (see chart below).  The company bemoans lower yields on loans, lower yields on investment securities, and "limited reinvestment opportunities," which may explain why the CIO was reaching for reward last year.  The Fed's zero interest-rate policy (ZIRP) makes it hard for an honest banker to earn a living.  Really, who can live on a measly eleven-point-five mill these days?

[click to enlarge]

Nightrider

Wells Fargo delivers for now, but visibility is poor.

When times are good, banks make out like bandits.  Every time money changes hands, the banks get a cut.  Call it wealth by a thousand cuts.  But that was then, and this is now.  Even as the Fed seeks to expand the the supply of money in the U.S. by trillions of dollars, the velocity of money has slowed.  The spending power of consumers is diminished by declining incomes; some of it is trapped in upside-down home mortgages.  The investing power of cash-flush corporations is being held in reserve, thanks to regulatory uncertainty and crumbling consumer demand.  Fewer transactions all around.  Fewer cuts.

What can an honest, self-respecting bank do to grow profits in this environment?  Wells Fargo has a short-term answer:  take share from competitors.  On Friday Wells kicked off the quarterly earnings parade for the biggest banks by announcing record net income on revenues that grew 7% year-over-year.  Not bad.  The company sported a hefty $125 billion in new mortgage originations.  75 percent of that activity involved refinancings.  Industry-wide, that's a robbing-Peter-to-pay-Paul scenario.  When most of the other mega-banks report later this week, we'll find out who Peter is.  (Bank of America, anyone?)

If you look at Wells Fargo's earnings summary (PDF), you will find worrisome signs that the company may not be able to sustain the momentum.  Net Interest Margin (NIM--see page 11) has declined from 3.91% in the first half of 2012 to 3.56% in Q4.  Lower margins mean smaller cuts.  Page 14 reveals billions in "environmentally-elevated costs," a cute euphemism for liabilities stemming from bad loans.  Page 15 shows that the $125 billion in new mortgages was actually down 10% from the prior quarter.  Finally, repurchase demands from Fannie Mae and Freddie Mac (page 20) for risky loans made between 2006 and 2008 remain stuck at roughly $2 billion, even as repurchase demands pile up for newer-vintage originations.  Wells was forced to add $841 million to its repurchase reserves in the second half of 2012.  Mop-up duty continues, with no end in sight.

ZeroHedge has a useful graphic (below) capturing the company's dilemma:  deposits (a cost center) are rising faster than loans (a profit center), a sure recipe for shrinking margins.  And if the loans go bad (can't happen, no way!), then profits will shrink as well.

[click to enlarge]

Tuesday Tune-up

Itzhak Perlman, Vivaldi's "Spring"

Click here.

Quote for the Week, January 13-19, 2013

If I'll miss anything about my career, it will be to listen to what people say you can't do, then to go and do it.
--Ray Lewis, linebacker, Baltimore Ravens

Peak Food

[11:29]

David McWilliams scribbles a Malthusian manifesto.

"If all the world's seven billion people consumed as much as the average American, it would take the resources of over five Planet Earths to sustainably support all of us."

McWilliams also takes to task the world's central banks for flooding the globe with fiat money, thereby making food "a commodity to be gambled on."

Screamliner

Grounded--not once, but twice.

The new Boeing 787 has identity issues.  On Monday, it thought it was a Chevy Volt and caught fire while parked at the gate at Boston's Logan International Airport.  The next day, while taxiing for take-off at the same airport, it decided to be the Exxon Valdez instead, spilling jet fuel on the tarmac.  The flight was immediately aborted, as Massport officials were concerned that the plane might morph into a duckboat next if it tried to clear the runway.  Boeing insists that the so-called Dreamliner is flightworthy, which it might be.  In your dreams.  Or on a tight leash, with a pre-plotted string of diversion airports along the flight path.

Not only was the aircraft grounded, but so was Boeing's stock:

Boeing's share price (5-day chart).

So far it has been a tough week for Boeing's CEO, James McNerney (below), and it's only Wednesday.  If this keeps up, Nerns will do in Chicago what his Yale classmate, Howard Dean (then a candidate for U.S. President), did in Iowa nine years ago:

Scream.

Who knows?  Maybe the Dreamliner will inspire a new idiom:  Yeah right, I'll believe that when 787s fly.

[update, 01-16-13--]

Scream on.  The FAA has just grounded all U.S.-registered Boeing 787 Dreamliners, issuing "an emergency airworthiness directive (AD) to address a potential battery fire risk."  The directive follows an aborted flight in Japan earlier today.  Deployment of emergency chutes (below) is never a good sign.

Tuesday Tune-up

The Proclaimers, "I'm Gonna Be (500 Miles)"

Breaking: BofA Settles with Fannie Mae

Small investor speed-dials his broker: "Dump my BAC!"

Within the past hour has come the announcement that Bank of America has reached a settlement of $11.6 billion with Fannie Mae for a bouquet of abusive practices in the home-mortgage industry.  More than half of that sum will go toward buying back residential mortgages sold to the government-sponsored enterprise (GSE) between 2000 and 2008.  BofA will refund the original purchase prices (which exceed current fair value) plus accrued interest.  There will be additional cash payments to Fannie totaling nearly $5 billion in compensatory fees.  The bank expects a hit of $2.7 billion to pre-tax earnings for Q4.

This would actually be good news for the company if this were the end of it.  But there is more exposure for Bank of America, one of 14 lenders now negotiating with the Office of the Comptroller of the Currency for a settlement of claims arising from foreclosure abuses and botched loan modifications (an announcement on the so-called "robo-signing" scandal is expected any day, with an expected price tag of $10 billion split among all parties).  Even with Fannie out of the way, BofA must confront a long line of ticked-off mortgage insurers.  As of September 30, 2012, the company had $16.3 billion reserved for future pay-outs.  ZeroHedge suggests that that will not be enough, as outstanding claims are in the tens of billions of dollars:

"[W]hile the additional [representations and warranties] provision may be $2.5 billion for just one Fannie, look for the final number to be far greater when all other exposures are settled, which include private labels, Freddie, second-lien monolines as well as whole loans."

[update, 11 a.m.--]

Just in.  Federal regulators have settled with ten banks for $8.5 billion over the above-mentioned foreclosure abuses.  The jury is still out on four other banks.  Bank of America is one of the ten to settle.  (Federal Reserve announcement here.)  Yves Smith at NakedCapitalism.com calls the settlement another "ritualized sellout."

Go here for a report on Bank of America's shrinking business model.

Bait and Switch 101

Matt Taibbi's latest:

"Secret and Lies of the Bailout"

Rolling Stone

[excerpt:]

"[T]he government has turned the entire financial system into a kind of vast confidence game – a Ponzi-like scam in which the value of just about everything in the system is inflated because of the widespread belief that the government will step in to prevent losses. Clearly, a government that's already in debt over its eyes for the next million years does not have enough capital on hand to rescue every Citigroup or Regions Bank in the land should they all go bust tomorrow. But the market is behaving as if Daddy will step in to once again pay the rent the next time any or all of these kids sets the couch on fire and skips out on his security deposit. Just like an actual Ponzi scheme, it works only as long as they don't have to make good on all the promises they've made. They're building an economy based not on real accounting and real numbers, but on belief."

Complete article here.

Mr. King Goes to Washington

Thumbnail of Maine's new Senator
with NBC's Tom Brokaw

Quote for the Week, January 6-12, 2013

Religion is no longer able to guarantee the governments that the people will remain peaceful; the Rothschild system of loans can perform the task much better.
--Heinrich Heine

What's My Line?

Used car salesman or a mega-bank CEO?
(And, um, which finger is that?)

The Atlantic is out with a cover story about the lack of transparency at Wall Street biggest banks.  When the system finally crashes, don't say that you were not warned.

[excerpt:]

"[A]s trust diminishes, the likelihood of another crisis grows larger.  The next big storm might blow the weakened house down.  Elite investors—those who move markets and control the flow of money—will flee, out of worry that the roof will collapse.  The less they trust the banks, the faster and more decisively they will beat that path—disinvesting, freezing bank credit, and weakening the structure even more.  In this way, fear becomes reality, and troubles that might once have been weathered become existential."

"What's Inside America's Banks?"

Want more?  This Bloomberg piece reports that JP Morgan Chase (the bank headed by the dude pictured above) may be sanctioned for blowing off regulators by withholding information regarding one of its illustrious clients, Bernie Madoff.  Yes, that Bernie Madoff (dude pictured below).

Or how about this one detailing how the banks defeat and defuse regulatory reviews of their own shady lending practices?

Tuesday Tune-up

Rachel Platten, "1,000 Ships"