Thursday, August 30, 2012 - While We Wait for Fed, Banks Behave Badly

While We Wait for Fed, Banks Behave Badly

-by Sinclair Noe

DOW – 106 = 13,000
SPX – 11 = 1399
NAS – 32 = 3048
10 YR YLD -.03 = 1.62%
OIL - .67= 95.88
GOLD - .80 = 1656.30
SILV -.29 = 30.54
PLAT – 11.00 = 1512.00

Federal Reserve Chairman Ben Bernanke has returned to Jackson Hole Wyoming for the annual economic symposium.  Following the minutes of the most recent FOMC meeting, in which we learned the Fed felt compelled to take action unless the economy shows dramatic improvement, there has been general acknowledgment the Fed must certainly act sooner rather than later. Sooner being tomorrow or later being at the next FOMC meeting September 13^th.  And although it is unlikely Bernanke will announce a major new program tomorrow, he must at least telegraph.

Any new Fed actions are likely to have only a small effect on job creation. Among possible options, Bernanke might announce he’ll extend the Zero Interest Rate Policy to late 2014 or into 2015. He could move toward QE3, another round of bond purchases, most likely involving Treasury bonds and mortgage bonds. This would flood money into the economy and housing market, pushing record-low interest rates even lower. Both republicans and democrats have weighed in. Democrats say he should not be deterred from doing what’s needed to reduce unemployment; Republicans say new action should be avoided because of the risk of inflation. So we have a question of whether inflation or no job is the main culprit to eroding incomes.  Bernanke says that the big economic decisions are Congress’s to make. And that should frighten everyone.

If Bernanke doesn’t move with authority, you can expect an adverse reaction.

Meanwhile, the head of the European Central bank, Mario Draghi has vowed to do whatever it takes; and the former prime Minister of Greece has a suggestion but I doubt Drgahi will take it.  Former Greece prime minister George Papandreou has said his country might have avoided a bailout if the economy had not been robbed by funds being funneled to tax havens. Papandreou says $21 trillion was hidden in tax havens around the world.

"Whether it is in developed or developing nations, it is our citizens that are being robbed," he said, saying this "plain robbery" denied governments the capacity to invest in areas like welfare and education. I know this, Greece is suffering from this. Had this alone been tackled, Greece would have most likely never have needed a bailout.  Yet Europe, the G8, G20, the banking system despite my pleas as prime minister, despite token reference in our council of G20 decisions, have done nothing to change this."

Meanwhile, another day brings another example of banks behaving badly.  Citigroup has agreed to pay $590 million to shareholders who sued the bank over toxic assets the bank was hiding on its own books.  The story goes back to before the 2008 meltdown and bailout. Citi lied to its own shareholders regarding billions of dollars in toxic mortgage-backed securities on its books. The bank did not write-down the positions even though executives knew the assets were worth less than what was shown on the books.   In a separate suit last year, Citi agreed to pay the SEC $285 million to settle charges of lying to investors about CDOs. In that case, Citi sold the CDO to investors then bet against the $1 billion CDO, with losses to investors topping $160 million.

A judge must still approve the new settlement on toxic assets but it would essentially clear Citi of ongoing litigation associate with the financial meltdown.  Of course, Citi did not admit wrongdoing in the case. And for this reason, I truly hope the judge rejects the settlement. I understand the expediency of a universal settlement with no admission of wrongdoing, but at some point, somebody has to take responsibility.

The Office of Mortgage Settlement Oversight has released their initial assessment of the foreclosure fraud settlement. And what they’re finding is that banks are “paying off” their portion of the settlement by engaging in short sales with their borrowers; which is something they were already doing in greater numbers prior to the settlement. The Mortgage Settlement was the $25 billion, multi-state deal. So far the banks are claiming credit for more than $10.5 billion, but $8.6 billion is short sales which were already happening. Short sales increased by 25% year-over-year in the first quarter of 2012, according to RealtyTrac. That mostly predates the foreclosure fraud settlement. Fannie and Freddie just inaugurated a program facilitating short sales that has nothing to do with the settlement. And there’s the issue that economically a short sale amounts to waiving a deficiency judgment, which are barred in non-recourse states anyway, including… California and Arizona, where we’ve seen high pickup on short sales for a year now.

On principal reduction, which was supposed to be the purpose of the settlement, banks have not even done $750 million; and in the case of Bank of America, the number is a big fat zero.  BofA has not completed any first-mortgage modifications that reduce loan balances for borrowers – and that was supposed to be the big point of the settlement. BofA did complete $4.8 billion in short sales, which they were already doing. So, you break the law, you get caught, you don’t’ have to admit wrongdoing, the court forces you to go home, go to your job, and continue doing exactly what you were doing before.  

Global food prices rose 10% in the month of July, raising fears of soaring prices for the planet's poorest, the World Bank has warned.  The bank said that a US heatwave and drought in parts of Eastern Europe were partly to blame for the rising costs.  The price of key grains such as corn, wheat and soybean saw the most dramatic increases, described by the World Bank president as "historic".  The bank warned countries importing grains will be particularly vulnerable.

From June to July this year, corn and wheat prices each rose by 25% while soybean prices increased by 17%, the World Bank said. Only rice prices decreased - by 4%. In the United States, the most severe, widespread drought in half a century has wreaked havoc on the corn and soybean crops while in Russia, Ukraine and Kazakhstan, wheat crops have been badly damaged.

The World Bank said that the use of corn to produce ethanol biofuel - which represents 40% of US corn production - was also a key factor in the sharp rise in the US maize price.  Overall, the World Bank's Food Price Index - which tracks the price of internationally traded food commodities - was six percent higher than in July of last year, and one percent over its previous peak, in February 2011.