Thursday, February 9, 2012

February, Thursday 09, 2012

DOW + 6 = 12,890
SPX + 1 = 1351
NAS + 11 = 2927
10 YR YLD +.07 = 2.07%
OIL +1.09 = 99.80
GOLD -2.90 = 1730.10
SILV -.04 = 34.00
PLAT – 5.00 = 1661.00

Greece is a done deal. The Big Bank settlement for abusive mortgage practice is a done deal. We'll start with the Greek deal and then we'll look at the mortgage settlement and if you'll ever see a penny of the $25 billion dollar deal.

Finance ministers from across Europe flew to Brussels to put their seal of approval on an orderly default of Greek debt. Private sector investors will swap their old Greek bonds for new Greek bonds, and they will give up 70 percent of the value, and Athens will reduce its overall debt of 350 billion euros, down to 250 billion euros. To deal with the remaining pile of debt, the technocrats are requiring deep austerity measures. Greece's two major labor unions have already called for a 48 hour strike on Friday and Saturday. It is widely expected there will be social unrest.

There were quite a few special interests represented at the negotiating table; that's probably why it took so long. In the era of debt securitization, creditors have become far more numerous, and include hedge funds and other investors over whom regulators and governments have little sway.

“Innovation” in financial markets has made it possible for securities owners to be insured, meaning that they have a seat at the table, but no “skin in the game.” They do have interests: they want to collect on their insurance. The ECB’s insistence on “voluntary” restructuring – that is, avoidance of a credit event that would trigger a claims payment – placed the two sides at loggerheads. The irony is that the regulators have allowed the creation of this dysfunctional system.
Of course, the banks might have managed the default risk on the bonds in their portfolios by buying insurance. And, if they bought insurance, a regulator concerned with systemic stability would want to be sure that the insurer pays in the event of a loss. But the ECB wants the banks to suffer a 70% loss on their bond holdings, without insurance “benefits” having to be paid.
There are three explanations for the ECB’s position, none of which speaks well for the institution and its regulatory and supervisory conduct. The first explanation is that the banks have not, in fact, bought insurance, and some have taken speculative positions. The second is that the ECB knows that the financial system lacks transparency – and knows that investors know that they cannot gauge the impact of an involuntary default, which could cause credit markets to freeze, and possible result in a global financial meltdown. Finally, the ECB may be trying to protect the few banks that have written the insurance and might have been responsible for paying claims.
None of these explanations is an adequate excuse for the ECB’s opposition to deep involuntary restructuring of Greece’s debt. The ECB should have insisted on more transparency; that should have been one of the main lessons of 2008. Regulators should not have allowed the banks to speculate as they did; if anything, they should have required them to buy insurance – and then insisted on restructuring in a way that ensured that the insurance paid off. Instead, the Credit Default Swap market has continued to operate in the shadows.
There is little evidence that a deep involuntary restructuring would be any more traumatic than a deep voluntary restructuring. By insisting the default is voluntary, the ECB is putting the banks’ interests before that of Greece, which desperately needs to get out from under its debt. In fact, the ECB may be putting the interests of the few banks that have written credit-default swaps before those of Greece, Europe’s taxpayers, and creditors who acted prudently and bought insurance.
The final oddity of the ECB’s stance concerns democratic governance. Deciding whether a credit event has occurred is left to a secret committee of the International Swaps and Derivatives Association, an industry group that has a vested interest in the outcome. Some members of the committee used their position to promote their own negotiating positions – no shock there. But it seems unconscionable that the ECB would delegate to a secret committee of self-interested market participants the right to determine what is an acceptable debt restructuring.
The one argument that seems to put the public interest first is that an involuntary restructuring might lead to financial contagion, with large eurozone economies like Italy, Spain, and even France facing a sharp, and perhaps prohibitive, rise in borrowing costs. But that begs the question: why should an involuntary restructuring lead to worse contagion than a voluntary restructuring of comparable depth? If the banking system were well regulated, with banks holding sovereign debt having purchased insurance, an involuntary restructuring should hardly cause a ripple in the financial markets. What this tells us is the banking system is NOT well regulated, and when the Federal Reserve and the ECB and the IMF tells us they learned the lessons from 2008 and now they can avoid a Lehman style meltdown, we should realize they haven't learned much at all.
And that leads us to the real reason for demanding a voluntary restructuring, because if Greece gets away with an involuntary restructuring, others would be tempted to try it as well. And the bankers just can't concede that much freedom to a sovereign country.
The ECB’s behavior should not be surprising: institutions that are not democratically accountable tend to be controlled by special interests.
And that brings us around to the mortgage abuse settlement; a sweetheart deal for the special interests if ever there was one; a $25-billion settlement of investigations of foreclosure abuses. The nation’s five largest mortgage servicers jumped at the deal with 49 states' attorneys general (Oklahoma didn't join in). The banksters will now have to provide help to up to 2 million homeowners affected by the collapse of the housing market. The settlement sets new national standards for mortgage servicing, to be overseen by an independent monitor, that officials said would end the frustrating runarounds by consumers who try to get their mortgages modified or make other changes. Yea, this time they'll do better.

The five lenders, Bank of America, JP Morgan Chase, Citigroup, Wells Fargo, and Ally Financial  have committed to pump billions of dollars into programs to partially compensate people who lost their homes and to help current homeowners avoid that fate. The deal includes $17 billion for relief to about 1 million current homeowners, the majority of which would come through reductions in the principal they owe on their mortgages. Another $5 billion in cash would go directly to the states as restitution for foreclosure paperwork problems and other improprieties by the servicers in the foreclosure process.

About $1.5 billion of that state money will be distributed directly to people whose homes were foreclosed from 2008 through 2011 and there was some operational problem, such as lost paperwork. Officials estimated hundreds of thousands of homeowners would get money as part of that settlement, though the average check would be $1,500 and $2,000. The settlement could expand to include other large mortgage servicers, and if certain terms are met, the size of the settlement could grow to more than $40 billion.

So, are you eligible for some sort of mortgage settlement. Well, the government has created a website to answer all your questions. The site is: And if you go to the site you will learn that:   “Because of the complexity of the mortgage market and this agreement, which will be performed over a three-year period, borrowers will not immediately know if they are eligible for relief.”

For people who lost their homes to foreclosure, the may be entitled to some small compensation. They'll eventually receive a form in the mail instructing them what to do. If you think you have a claim; we don't have anything specific to tell you today.

For borrowers who are delinquent on their payments, or who are at risk of defaulting on the loan, help may include a reduction in their existing loan principal or other modifications. Borrowers who are up to date on payments may be able to refinance into a new loan at current interest rates, which are at historic lows. The settlement also makes help available specifically for borrowers who are unemployed, or who are members of the military. At least that is the theory. The reality is that there has been a backlog of foreclosures because of the concerns about liability for robo-signing, and this might just result in a fresh wave of people losing their homes.

A settlement for $25 billion may sound like a big deal but of that, roughly $17 billion is credits for principal modifications, which will come largely from mortgages owned by investors; $3 billion is for refis; and only $5 billion will be in the form of hard cash payments. Another way to look at it; $5 billion is money from the banks and the rest is your money. The mortgage principal writedowns are guaranteed to come almost entirely from securitized loans, which means from investors, which in turn means taxpayers via Fannie and Freddie, pension funds, insurers, and 401 (k)s. Refis of performing loans also reduce income to those very same investors.

There are plenty of reasons to hate this settlement. Some think it rewards people who lost their homes to foreclosure, but let's not forget what lead to this deal – it was the massive violations that came to be known as robo-signing. I tell you why I hate this deal; because now it puts a price that the banks can pay for breaking the law. We now have  a set price for forgery and perjury. It's $2000 per loan. This is a pittance compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It’s a great deal for the banks because they're NOT going to jail for forgery. The banks have set the price for riding roughshod over 300 years of real estate law. And now that they know they can set a price on perverting contract law, you can bet they'll do it again and again and again.

By the way, Arizona suit against Countrywide for violating its past consent decree on mortgage servicing has been “folded into” the settlement. This was a big gift for Bank of America. This move proves that failing to comply with a consent degree has no consequences but will merely be rolled into a new consent degree which will also fail to be enforced. These cases also alleged HAMP violations as consumer fraud violations and could have gotten costly and emboldened other states to file similar suits not just against Countrywide but other servicers, so it was useful to the other banks as well.

The Murdoch Street Journal is reporting that the SEC is about to launch some securities litigation against the major banks. Of course, the statute of limitations has already run out on securities filings more than 5 years old. Yesterday, we noted the 5 year anniversary of the HSBC subprime breakdown; so, we're pushing up against the statutes, and even if the SEC and DOJ get cracking, they'll only get the tail end of the slimy deals from the subprime debacle. But today, nobody goes to jail. Even though we know there was forgery; we know the servicers have walked into courtrooms across the country and lied to the judges about the documents they presented. We know the law was broken. And now we know how much it costs to buy off our government; it works out to about 3 to 6 weeks profits for the Big Five banks.

Like I said earlier: institutions that are not democratically accountable tend to be controlled by special interests. And now you know who wields the power in the USSA, and it's not the politicians, and it's not you and me.

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