Message for MainePERS

Dial 1-800-GET-ME-OUT

Late yesterday came word that Bank of America was close to a settlement whereby a whopping $8.5 billion will be paid out to institutional investors holding toxic mortgage-backed securities peddled by Countrywide Financial, which BofA took over in 2008. This is the biggest settlement to date over claims arising from the subprime mortgage boom that helped precipitate the near-meltdown of financial markets three years ago.

[update 07-05-11: The price tag may go higher. Today a court filing on behalf of an investor group called Walnut Place challenged the proposed settlement for "the secret, non-adversarial and conflicted way in which [it] was negotiated." The Walnut Place investors want to opt out and pursue recourse separately, feeling that the $8.5 billion for a class-action suit is not enough.]

The deal follows the bank's settlements earlier this year with Fannie Mae and Freddie Mac (for $2.8 billion) and Assured Guaranty Ltd. ($1.1 billion). As of March 31, Bank of America was seriously under-reserved for an outcome of this magnitude, with a provision for representations and warranties of just $1 billion (scroll to page 22 here). The latest settlement wipes that away, plus all year-do-date earnings as well. In addition to the $8.5 billion payout, the company will set aside $5.5 billion to rebuild the aforementioned reps-and-warranties reserve (because yes, Mathilda, there are more claims coming). And it doesn't stop there. According to a statement:

The company also expects to record $6.4 billion in other mortgage-related charges in the second quarter of 2011, including a non-cash, non-tax deductible impairment charge of $2.6 billion to write off the balance of goodwill in the Consumer Real Estate Services business, as well as charges related to additional litigation costs, a write-down in the value of mortgage servicing rights, and additional assessment and waiver costs for compensatory fees associated with foreclosure delays.

Add all those items together, and the total damage to the company's balance sheet is over $20 billion. Not even Jamie Dimon makes that much.

Karl Denninger points out that $20 billion is a hefty 12% of BofA's market capitalization (share price multiplied by share count). And the litigation is not over. BofA and other lenders are currently negotiating with the 50 state attorneys general and the feds regarding shoddy lending practices and abusive foreclosures. The bill for those transgressions may add up to as much as $20 billion industry-wide. The MainePERS investment portfolio continues to hold 2.5 million shares of Bank of America common stock and almost a million shares of another highly exposed bank, Dimon's own JP Morgan Chase (see below). The share prices of those two are in serious downward trajectories as the hedgies are fleeing in droves.

While MainePERS portfolio managers sit on their hands.

[update 07-06-11:]

Maine Treasurer Bruce Poliquin referred my letter of June 18th to MainePERS, from whom I have received the following reply:

Thank you for your email inquiring about the MainePERS investments. Treasurer Poliquin requested that we respond. I apologize for the delay in my response. It was very busy closing up the fiscal year.

Hopefully we can ease your concern about LD 1524. MainePERS is committed to transparency because we are a public fund. Our investments are fully disclosed in a number of venues, our website and investment reports being two. Also, our investment process has multiple layers of checks and balances to ensure ethical investing including regular reviews by both internal and external auditor who have access to all confidential data.

LD 1524 is not intended to limit any information that assures the public about the propriety of our investments. Its’ primary purpose is to limit other investors (e.g. competitors of MainePERS, hedge funds, money managers) from using the public disclosure process to obtain competitive information, sensitive financial information, and trade secrets which may disadvantage MainePERS and the funds with which we are investing.

The exemptions in LD 1524 were drafted to be as limited as possible to provide the public with a clear view of our investments and to allow MainePERS to make the solid investments on behalf of its beneficiaries. These exemptions are similar to exemptions provided to the Finance Authority of Maine (FAME) and Small Enterprise Growth Fund of Maine (SEGF) for their private party transactions. Similar exemptions are also found at numerous other state pension funds and university systems.

Your second concern is one that is most appropriately directed to the Legislature, the sponsor of state pension plans. The Legislature has created a work group to develop a new plan based on Social Security participation for all new hires after 2015.

Managing a $10.5 billion dollar portfolio takes a significant amount of work to develop an asset allocation strategy. We always welcome thoughts and perspectives such as yours when we are going through the allocation process.

I know I can’t directly answer some of your concerns, but I hope this information is helpful.

Sandy Matheson, Executive Director

Maine Public Employees Retirement System

Mainer Saves Garden Patch

The weeds were...

...outta control, I tell ya, OUTTA CONTROL!

Gould Farm

Monterey, MA

June 2011

Quote for the Week, June 26-July 2, 2011

Let us live so that when we come to die even the undertaker will be sorry.
--Mark Twain

E-Street Sax Man Passes

Clarence Clemons

1942-2011

Quote for the Week, June 19-25, 2011

A countryman between two lawyers is like a fish between two cats.

--Benjamin Franklin

Dear Bruce

Open Letter to Maine's State Treasurer:

Treasurer Poliquin--

I am dismayed to read in this morning's Lewiston Sun Journal about the progress of LD 1524, a bill that, if implemented, would pull a veil over some of the state's investments on behalf of MainePERS beneficiaries. If I were a state employee coerced into mandatory pension contributions, I would sure as hell want to know where my money was.

I have already communicated to you that I believe the state should be out of the retirement-planning business altogether. The projected returns of 7+% per annum are totally unrealistic given the current trends of an aging population, growing structural unemployment, and collapsing credit. Liquidate MainePERS. Let beneficiaries get their money back (with a reasonable return and, if necessary, a cash-out bonus) while they can, before the looting runs its course.

And if we're going to continue playing the markets, let's dispense with the "passive" management approach. There will be more losers than winners in the next 5-7 years, so buying the indices practically guarantees poor performance. A good place to start would be culling the zombie banks from the MainePERS portfolio. Every hedge-fund manager on the planet worth his salt is doing exactly that. The financial sector can only shrink from here.

Sincerely--

Bill Hine, Peru, ME

[update 07-06-11:]

Treasurer Poliquin referred my letter to MainePERS, from whom I have received the following reply:

Thank you for your email inquiring about the MainePERS investments. Treasurer Poliquin requested that we respond. I apologize for the delay in my response. It was very busy closing up the fiscal year.

Hopefully we can ease your concern about LD 1524. MainePERS is committed to transparency because we are a public fund. Our investments are fully disclosed in a number of venues, our website and investment reports being two. Also, our investment process has multiple layers of checks and balances to ensure ethical investing including regular reviews by both internal and external auditor who have access to all confidential data.

LD 1524 is not intended to limit any information that assures the public about the propriety of our investments. Its’ primary purpose is to limit other investors (e.g. competitors of MainePERS, hedge funds, money managers) from using the public disclosure process to obtain competitive information, sensitive financial information, and trade secrets which may disadvantage MainePERS and the funds with which we are investing.

The exemptions in LD 1524 were drafted to be as limited as possible to provide the public with a clear view of our investments and to allow MainePERS to make the solid investments on behalf of its beneficiaries. These exemptions are similar to exemptions provided to the Finance Authority of Maine (FAME) and Small Enterprise Growth Fund of Maine (SEGF) for their private party transactions. Similar exemptions are also found at numerous other state pension funds and university systems.

Your second concern is one that is most appropriately directed to the Legislature, the sponsor of state pension plans. The Legislature has created a work group to develop a new plan based on Social Security participation for all new hires after 2015.

Managing a $10.5 billion dollar portfolio takes a significant amount of work to develop an asset allocation strategy. We always welcome thoughts and perspectives such as yours when we are going through the allocation process.

I know I can’t directly answer some of your concerns, but I hope this information is helpful.

Sandy Matheson, Executive Director

Maine Public Employees Retirement System

Greeks Refuse To Go Along

Tension outside the Greek Parliament,

Athens

June 15, 2011

Remember what this means for the U.S. financial sector.

$21M for One Guy for One Year?

The Financial Times has an interactive graphic detailing what the CEOs of the big Wall Street banks are getting paid. You might want to review the bidding because before year's end the banks will be back to the taxpayers for another bailout.

Go here.

Take THAT, LeBron!

Ohio guv rubs it in.

Of course, the Mavs should remember the old saw about the Grand Prize being an expenses-paid week in Cleveland. Second-place prize? Two weeks in Cleveland....

Maybe next year.

Derrick Jackson Does the Smokies

Most thru-hikers will tell you: Maine is their favorite stretch of the Appalachian Trail. But the Great Smoky Mountains run a close second. The Boston Globe's Derrick Jackson, who often trains his photo eye on Maine, headed south to see what all the talk is about. His latest photo gallery appears here.

Quote for the Week, June 12-18, 2011

Leading is easy, the hard part is getting people to follow.
--Yogi Berra

Hot Potatoes Coming Our Way

Nice place to visit, wouldn't want to lend there.

Greece is like really REALLY far away. So who in America cares if the Greek government fails to pay off its sovereign debt! What happens in Greece stays in Greece, right?

OK, so maybe there will be a little leakage to the rest of the European Union. Or a lot. The European Central Bank, truth be told, has an Airbus A380 full of paper not only from Greece, but from the other PIIGS as well. If they all default, the ECB becomes insolvent, as will a gazillion European banks holding the same crapola. U.S. banks have less direct exposure to European peripheral debt, so we're all good on this side of the Pond.

Or not. To the surprise of absolutely no one, the biggest U.S. banks have concocted yet another way of trying to get money for nothing. They have sold insurance to the European banks in the form of credit default swaps (CDS), which, upon a default "event," obligate the seller (read: "greedy U.S. bank") essentially to buy the bad bonds at face value from the swapholder ("clever Euro bank"). In other words, the risk of default is transferred from the bondholder to the seller of the swap. The U.S. banks are betting that they are the clever ones, that the PIIGS will be bailed out before they are ever allowed to default. The CDS, they hope, will expire worthless.

But look:

...the Greek people, never to be confused with their government, are not interested in having services curtailed, benefits trimmed, and paychecks confiscated just so that all the banks, European and American, can get paid 100 cents on the dollar. Nor are their German brethren willing to guarantee loan payments ad infinitum. A nasty "event" is increasingly likely--and may be only days way.

Financial commentator John Mauldin's weekly newsletter, posted today, is entitled "Time to Get Outraged." He reckons that the CDS exposure of U.S. banks totals $120 billion, enough to bankrupt them should dominoes start to fall. In the "event," expect TARP Two, where the banks extort more bailout money from U.S. taxpayers. As for the banks' shareholders (that's you, MainePERS), they get wiped out. It's a win-win for the banks. The Europeans come out whole, and American CEOs continue to get paid. It's a lose-lose for the rest of us.

How exposed is MainePERS stepchild Bank of America? Let me count the ways:

[from BofA's first-quarter 10Q filed with the SEC]

[update, 06-12-11:]

ZeroHedge has a provocative post up today with evidence that the beneficiaries of the Federal Reserve's latest round of quantitative easing (a.k.a. QE2) are not U.S. banks nor their domestic customers, but foreign banks:

"In summary, instead of doing everything in its power to stimulate reserve, and thus cash, accumulation at domestic (US) banks which would in turn encourage lending to US borrowers, the Fed has been conducting yet another stealthy foreign bank rescue operation, which rerouted $600 billion in capital from potential borrowers to insolvent foreign financial institutions in the past 7 months. QE2 was nothing more (or less) than another European bank rescue operation!

[click to enlarge]

...if there is one definitive proof of the Fed abdicating any and all of its mandates, and merely playing the role of globofunder explicitly at the expense of US consumers and borrowers, not to mention lackey for the banking syndicate, this is it."

Quote for the Week, June 5-11, 2011

Progress is precisely that which the rules and regulations did not foresee.
--Ludwig von Mises

This Little Piggy Went to Market...

...these BIG piggies foreclosed:

PiggyBankBlog.com

Meanwhile, VOICE of Northern Virginia tells Jamie Dimon and Brian Moynihan (CEOs of JP Morgan Chase and Bank of America, respectively) to...

"get your hard hats on!"