Ski Trip Extravaganzas And Housing Advocate Shills

The Wall Street Journal is reporting Countrywide Treats Bankers to Ski-Resort Trip.

Countrywide Financial Corp., the nation's largest mortgage lender by loan volume, will host about 30 representatives of smaller mortgage banks for three nights next week at the Ritz-Carlton Bachelor Gulch ski resort in Avon, Colo. At one of the country's most-glamorous skiing spots, a regular room on a weekday starts at $750.

The first items on the agenda for guests arriving Monday evening: Cocktails and ski fittings. Next is dinner at the Spago restaurant, whose menu includes Kobe steak with wasabi potato puree for $105. (For the budget-minded, pan-roasted buffalo filet with Kabocha pumpkin flan is $54.)

The annual event is for bankers at correspondent lenders, which originate loans and then sell them to Countrywide. The Calabasas, Calif., lender is paying for hotel rooms, meals, skiing and tips, according to a program distributed to attendees.

The schedule calls for four-hour business meetings Tuesday and Wednesday mornings, followed by skiing and dinner. Those dinners are at Zach's Cabin, where diners arrive by sled, and at Larkspur in Vail, Colo., where the menu includes California farmed Alverta President caviar, listed at $140.50.

...

Sen. Charles Schumer, a New York Democrat who has been pushing Countrywide and others to do more for people facing foreclosure, called on Countrywide to cancel the trip and devote the money to refinancing distressed homeowners.

A Countrywide spokesman declined to comment. The company has argued in recent news releases that it is making efforts to keep distressed borrowers in their homes. Among those are agreements with nonprofit consumer-advocacy groups to negotiate loan workouts for borrowers. A Bank of America spokesman declined to discuss Countrywide's hospitality.

Countrywide's news releases that is it making efforts to help distressed borrowers via agreements with nonprofit consumer-advocacy groups is laughable. Yes, Countrywide is interested in keeping people in houses, but only because they do not want to own more property.

Nonprofit consumer-advocacy groups are in nearly every instance a scheme to benefit businesses not consumers.

Industry Shills

Companies accepting money from Countrywide (CFC), Chase (JPM), Ocwen Financial (OCN), Wells Fargo (WFC) and others are little more than industry shills.

HomeFree Funding, Inc.

HomeFree Funding, Inc was launched in 1997 as a wholly owned mortgage brokerage subsidiary of HomeFree-USA. From its inception HomeFree Funding was designed to close the loop between fully prepared, default resistant homebuyers and their access to mortgage products that reflected their needs and recognized their preparation for homeownership.

Since its inception, HomeFree Funding has originated in excess of 1,500 loans in Maryland and the District of Columbia in conjunction with the HomeFree-USA counseling program. These originations have been brokered to primary partners such as Bank of America, Chevy Chase Bank, CitiMortgage and Wells Fargo.

Hope Now Alliance

Hope Now USA is a full private mortgage counseling service that acts on behalf of homeowners to achieve mortgage relief and avoid foreclosure. The Federal Government does not act or negotiate on behalf of homeowners.

Translation: Hope Now USA's mission is to get you to keep paying your mortgage whether it is in your best interest or not.

Acorn Housing

National non-profit ACORN Housing has been providing free housing counseling to low and moderate income homebuyers since 1987. We have opened HUD-certified, Fannie Mae-approved housing counseling offices across the US, helping over 50,000 families to achieve homeownership.

Dominion Homes "Free Down Payments"

Here is another charitable advocacy program to consider: Dominion Homes Sponsors Broken Dreams with "Free Down Payments.

A federal database called Neighborhood Watch that tracks default rates among lenders who make Federal Housing Administration loans proved to be a smoking gun. The Neighborhood Watch Database showed Dominion led the state in the number of homeowners who defaulted on FHA mortgages within two years of closing on the loans.

It also allowed us to discover that Dominion had the worst default rate in the nation among its peers - builders with their own financing divisions. U.S. Department of Housing and Urban Development audits, which took six months to obtain through a Freedom of Information Act request, documented Dominion's questionable lending practices. The company gave loans to buyers with shaky credit, income and savings. Dominion shielded from customers its ownership in a title agency that closed their loans.

The Dispatch also found that Dominion's "free" down payments also contributed to foreclosures among its customers. Dominion rolled the cost of the freebie into the price of the house. The company funneled the down payments through a national charity that did nothing but collect a processing fee and issue the down payment "gift."

In a sidebar, we profiled the California-based charity, Nehemiah Corp. of America, and its partnership with Dominion. Because these were FHA loans, an insurance fund bailed out lenders when the mortgages went bad. Dominion faced no financial consequences when foreclosures hit. The story "Suburban Blight" focused on one neighborhood, where one of every six houses was either in foreclosure, bankruptcy or both.

Residents of the Galloway Ridge subdivision who were able to pay their bills found themselves surrounded by vacant houses with weed-infested yards. They were stuck in a neighborhood where their brand-new houses were worth less than they paid for them, while Dominion was still building houses in the 804-lot development.

Those "free" down payments sure worked out well didn't they? Nonetheless, advocacy groups are still in the business of offering "free help". Meanwhile Bank of America is asking Congress for a $739 billion bank bailout.

The most likely business purpose of Countrywide's ski trip extravaganza is for banks to figure out a way to save their own buts regardless of what it costs the homeowner. Why not have a big party while doing so? After all, it's only shareholder money.... right now. The trick is to come up with a scheme that will make it taxpayer money instead.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Bank of America Asks Congress for a $739 Billion Bank Bailout

The New York Times is writing A ‘Moral Hazard’ for a Housing Bailout: Sorting the Victims From Those Who Volunteered.

Over the last two decades, few industries have lobbied more ferociously or effectively than banks to get the government out of its business and to obtain freer rein for “financial innovation.”

But as losses from bad mortgages and mortgage-backed securities climb past $200 billion, talk among banking executives for an epic government rescue plan is suddenly coming into fashion.

A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government — now that it is in trouble.

My Comment: The attempt to blame the free market for this mess is galling. The blame lies with Congress, the Fed, and the SEC. If the Fed had not reduced interest rates to 1% and held them there, the bubble would never has gotten as big.

Tax breaks by Congress and things like "the ownership society" helped drive up prices. GSEs were created to promote affordable housing and now the limit on "affordable" has been pushed to $730,000.

It was an act of the SEC that created the nightmare at the rating agencies. See Time To Break Up The Credit Rating Cartel for more on the rating agencies.

The proposal warns that up to $739 billion in mortgages are at “moderate to high risk” of defaulting over the next five years and that millions of families could lose their homes.

To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.

My Comment: The reason they are at "high risk" is twofold. Prices are too high and Congress and this administration is spending too much money weakening the dollar. Home prices need to come down, the war in Iraq needs to be stopped cold turkey, and Congress needs to stop bailing out banks and homeowners when they do something stupid. While we are at it, we need to abolish the Fed.

“We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,” the financial institution noted.

In practice, taxpayers would almost certainly view such a move as a bailout. If lawmakers and the Bush administration agreed to this step, it could be on a scale similar to the government’s $200 billion bailout of the savings and loan industry in the 1990s.

My Comment: Everyone would view it as a bailout of banks and Wall Street for one simple reason: It would be a bailout of banks and Wall Street.

The arguments against a bailout are powerful. It would mostly benefit banks and Wall Street firms that earned huge fees by packaging trillions of dollars in risky mortgages, often without documenting the incomes of borrowers and often turning a blind eye to clear fraud by borrowers or mortgage brokers.

A rescue would also create a “moral hazard,” many experts contend, by encouraging banks and home buyers to take outsize risks in the future, in the expectation of another government bailout if things go wrong again.

My Comment: Precisely

If the government pays too much for the mortgages or the market declines even more than it has already, Washington — read, taxpayers — could be stuck with hundreds of billions of dollars in defaulted loans.

My Comment: Taxpayers could be stuck or would be stuck? I think the latter. No one entity or agency can value these things, certainly not Moody's Fitch, and the S&P. For recent evidence, please see Evidence of "Walking Away" In WaMu Mortgage Pool.

The only proper way of establishing the worth of these securities is by the free market, not guesstimates by bureaucrats who cannot find their asses with both hands at one time, nor by banks willing to sell the government a bill of goods at taxpayer expense.

But a growing number of policy makers and community advocacy activists argue that a government rescue may nonetheless be the most sensible way to avoid a broader disruption of the entire economy.

The House Financial Services Committee is working on various options, including a government buyout. The Bush administration may be softening its hostility to a rescue as well. Top officials at the Treasury Department are hoping to meet with industry executives next week to discuss options, according to two executives.

“There are a lot of ideas out there,” said Scott Stanzel, a spokesman for President Bush, when asked at a White House press briefing on Friday about a possible buyout program. “There are many different ways in which we can address this problem and we continue to look at ways in which we can do that.”

My Comment: There are indeed a lot of ideas out there and every one of them but one is a horrid idea. The only good idea is to let this play out naturally over time without the government making matters worse.

Supporters contend that a government rescue could be the fastest and cleanest way to force banks and investors to book their losses from bad mortgages — a painful but essential first step toward stabilizing the housing market.

My comment: Those supporters are socialist fools.

The government would buy the mortgages at their true current value, perhaps through an auction, at what would probably be a big discount from the original loan amount. The mortgage lenders, or the investors who bought mortgage-backed securities, would be free of the bad loans but would still have to book their losses.

My Comment: This just gets sillier and sillier. If the Government buys them at "True Value" then why don't the banks just hold them at "True Value", or sell them to someone else at "True Value"? Clearly the idea is to dump them on the government at a price far above "True Value".

If the government took control of the bad mortgages, supporters of a rescue contend, it could restructure the loans on terms that borrowers could meet, keep most of them from losing their homes and avoid an even more catastrophic plunge in housing prices.

My Comment: A plunge in home prices should not be catastrophic. It should be welcome. Property taxes would drop and housing prices would be more affordable. Where are all the affordable housing clowns hiding out now anyway?

“Every citizen has a dog in this hunt,” said John Taylor, president of the National Community Reinvestment Coalition, a community advocacy group that has developed its own mortgage buyout plan. “The cost of spending our way out of a recession is something that everybody would have to bear for a very long time.”

Mr. Taylor estimated the government might end up buying $80 billion to $100 billion in mortgages. But he said the government could recoup its money if it was able to buy the mortgages at a proper discount, repackage them and sell them on the open market.

My Comment: Mr.Taylor is clearly a complete buffoon. How the hell is the government supposed to be able to package this garbage and sell it on the free market if the banks can't?

Surprisingly, the normally free-market Bush administration has expressed interest. Treasury officials confirmed that several senior officials invited Mr. Taylor to present his ideas to them on Feb. 15. Mr. Taylor said he had also received calls from officials at the Office of Thrift Supervision and the Office of the Comptroller of the Currency, which is part of the Treasury Department.

My Comment: Bush knows Republicans are going to get slaughtered in the upcoming election so he is vote pandering like everyone else.

But even supporters acknowledge that a government rescue poses risks to taxpayers, who could be left holding a very expensive bag.

Ellen Seidman, a former director of the Office of Thrift Supervision and now a senior fellow at the moderate-to-liberal New America Foundation, said the government’s first challenge is to buy mortgages at their true current value. If the government overpaid or became caught by an even further decline in the market value of its mortgages, taxpayers would indeed be bailing out both the industry and imprudent home buyers.

My Comment: The first and only challenge is to do nothing.

“It’s not easy, but it’s not impossible,” Ms. Seidman said. “There are various auction mechanisms, both inside and outside government.”

My Comment: With that Ms. Seidman proved she is a complete buffoon too.

A second challenge would be to start a program quickly enough to prevent the housing and credit markets from spiraling further downward. Industry executives and policy analysts said it would take too long to create an entirely new agency, as Bank of America suggested. But they expressed hope that the government could begin a program from inside an existing agency.

My Comment: We are in deep trouble if we start addressing the second challenge. The first and only challenge should have been to do nothing.

But even if the government did buy up millions of mortgages and force mortgage holders to take losses, the biggest problem could still lie ahead: deciding which struggling homeowners should receive breaks on their mortgages.

My Comment: See how this has already morphed into a third challenge. And they did not even say so. There will be 88 challenges, all of them butchered, if we go beyond the first challenge of doing nothing.

Administration officials have long insisted that they do not want to rescue speculators who took out no-money-down loans to buy and flip condominiums in Miami or Phoenix. And even Democrats like Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, have said the government should not help those who borrowed more than they could ever hope to repay.

My Comment: Instead they want to rescue the banks who were equally stupid, if not more so.

But identifying innocent victims has already proved complicated. The Bush administration’s Hope Now program offers to freeze interest rates for certain borrowers whose subprime mortgages were about to jump to much higher rates. But the eligibility rules are so narrow that some analysts estimate only 3 percent of subprime borrowers will benefit.

My Comment: Innocent victims are easy to spot. Those who stayed out of the mess but saw property taxes soar to the moon anyway. The second set of innocent victims were those on fixed incomes who got paid a lousy 1% in their money market accounts while the Fed blew the biggest credit bubble the world has ever seen.

Bank executives, meanwhile, warn that the mortgage mess is much broader than people with subprime loans. Problems are mounting almost as rapidly in so-called Alt-A mortgages, made to people with good credit scores who did not document their incomes and borrowed far more than normal underwriting standards would allow.

My Comment: Finally a true statement. The mortgage mess is indeed very broad. But notice how the blame was shifted to those who did not document their incomes, from banks who knowingly looked the other way while it happened.

Borrowers who overstated their incomes are not likely to get much sympathy. But industry executives and consumer advocates warn that foreclosed homes push down prices in surrounding neighborhoods, and a wave of foreclosures could lead to another, deeper plunge in home prices.

My Comment: Most of those who overstated their incomes are not looking for sympathy. They are simply walking away. It is banks who are looking both for sympathy and handouts.

Right or wrong, the arguments for rescuing homeowners are likely to be blurred with arguments for rescuing home prices. At that point, industry executives are likely to argue that what is good for Bank of America is good for the rest of America.

My Comment: There is no blur here. The arguments for rescuing homeowners and rescuing home prices are both equally stupid.

What's good for Bank of America is to learn a very painful lesson. What's good for America is Ron Paul.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Evidence of "Walking Away" In WaMu Mortgage Pool

A friend of mine who goes by name "CS" sent me this screen shot of a particular Washington Mutual (WM) Alt-A mortgage pool known as WMALT 2007-0C1. Let's take a look to see what we can see.



Click on chart for sharper image.
You might want to open it up in a new window to follow along with the discussion below.

The chart shows performance by month since July, 2007. Rows 2-6 are delinquencies through REO (Real Estate Owned). In theory, this should work like an assembly line: Mortgages enter 30 days delinquent, the next month that subset goes into 60 days, then 90 days, then foreclosure, then REO. It's a process that takes time.

Look at this most recent jump from December, 2007 to January, 2008. Foreclosures increased a whopping 4.92%, yet in December, 2007 the 90 days delinquent bucket was only 3.79% (If every 90 day delinquent loan went to foreclosure, the jump would only have been 3.79%) How could this happen? The evidence suggests that people are walking away 30 days or 60 days delinquent without even waiting for foreclosure.

Other Interesting Aspects Of This Cesspool

Note the credit score line. The FICO score for this mortgage pool is 705. Those interested in what makes up a FICO score can find out at myFICO. Bankrate.Com notes offers diverse opinions on what a good FICO score is.

While 705 is not sterling, it's not exactly swiss cheese either. Yet in a mere six months (since July), in spite of reasonable FICO scores, foreclosures have gone from 0% to a whopping 13.17% of the entire pool. Has the FICO model gone haywire or is something else happening (such as walking away). Most likely it is a combination of both.

This is a relatively new pool. The issue date was a May, 2007. Common wisdom suggests that it is mortgage vintages from 2004-2006 from those buying near the real estate peak that are most in trouble. This pool is blowing sky high in 8 months flat.

Inquiring minds may be asking about lines 7 and 8 as well as the GEO lines at the bottom of the screen shot.

• Line 7 is the sum of lines 3 through 6 (anything 60 days late or greater plus all previous foreclosures and REOs)
• Line 8 is the sum of lines 4 through 6 (anything 90 days late or greater plus all previous foreclosures and REOs).
• The GEO lines (geographic distribution) show this pool is 48% California and 14% Florida.

WMALT 2007-OC1 A1 is a securitized mortgage-backed security issued in May, 2007. Following are the breakdowns and ratings from the prospectus.

Initial Principle Balances By Class



click on chart for sharper image

Class Ratings



click on chart for sharper image

Let' do the math.

• The total pool size is $513,969,100.
• $476,069,000 was rated AAA.
• 92.6% of this cesspool was rated AAA.
• Yet 15% of the whole pool is in foreclosure or REO after a mere 8 months!

In addition, the data suggests that people are not even bothering to wait for delinquencies to hit 90 days. Instead they are handing over the keys right now.

Washington Mutual was the underwriter. If you bought a slice of this cesspool from WaMu, are you going to buy their next offering? One final question: Does anyone have any reason to trust any rating from Moody's, Fitch, and the S&P?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Credit Card Reform Is Coming

Like it or not (banks won't but consumers will) credit card reform is coming.

Rep. Carolyn Maloney (D-NY) with backing from Rep. Barney Frank (D-MA), chair of the House Financial Services committee, introduced the Credit Cardholders' Bill of Rights while the Stop Unfair Practices In Credit Cards Act was introduced last May by Senators Carl Levin (D-MI) and Claire McCaskill (D-MO).

There you have it. Both the senate and house are sponsoring credit card reform. One version or other is sure to pass in 2009.

Keeping Card Companies Honest

MSNBC is reporting Bill would keep credit card companies honest.

Could it be? Is Congress really ready to put an end to the credit card industry’s most abusive practices? A bill introduced a few weeks ago by Rep. Carolyn Maloney (D-NY), would change the way most credit card companies do business and provide significant consumer protection for every cardholder.

“In recent years the playing field between credit card companies and credit cardholders has become very one-sided,” Maloney said. “A credit card agreement is supposed to be a contract, but what good is a contract when only one party has the power to make decisions?”

The Credit Cardholders’ Bill of Rights Act of 2008, known as H.R. 5244, would protect cardholders from arbitrary interest rate increases and unfair fees. Maloney, who chairs the House Financial Institutions and Consumer Credit Subcommittee, is quick to point out that her bill does not have any price controls. It does not cap rates or fees.

“I firmly believe the free market works best when consumers are empowered to make their own choices,” she says. “This bill helps foster fair competition and free market values.”

My Comment: Some aspects of this legislation have little to do with the free market, but then again many of the abuses it is attempting to correct have nothing to do with the free market either. For example, the Bankruptcy Reform Act of 2005 attempted to make people debt slaves forever, even after bankruptcy. That legislation fueled a massive increase in predatory credit card lending that would not have occurred in a free market where lenders would have been more concerned about the credit risks they were lending to. Legislation on top of legislation is where we are today, each attempting to undo previous wrongs. The best thing to do would be to scrap everything and start over, but realistically that is not going to happen.

The rules keep changing

Chances are the contract you have with your credit card company gives it the right to change the terms of the deal at any time and for any reason with just 15 days written notice. That includes increasing your interest rate.

"No other business in America could raise the price on something after you purchased it,” says Travis Plunkett, legislative director at the Consumer Federation of America. “But that’s exactly what credit card companies do when they increase your interest rate on an outstanding balance.”

My Comment: I am not a legal scholar but self modifying one sided contracts written in fine print no one could possibly read seems questionable at a minimum.

And then there’s “double-cycle billing.” It lets the bank charge interest on balances you’ve already paid. Here’s how it works. Let’s assume you had a credit card bill of $1,200 and you paid off all but $100. With double-cycle billing you’ll be charged interest on the entire $1,200 the following month, not just on the $100 you carried over.

“That seems unfair to us and it seems unfair to a lot of consumers,” says Consumers Union’s Jeannine Kenney.

My Comment: I agree this is a complete ripoff, and Discover Card is one of the biggest offenders. I have talked about 2-cycle billing on several occasions, most recently in Read the Fine Print On Credit Cards. However, is the problem here a matter of consumer education or a matter of legislation?

Credit Cardholders’ Bill of Rights

Here is Rep. Carolyn Maloney's Credit Cardholders' Bill of Rights

The Credit Cardholders' Bill of Rights takes a moderate and balanced approach to reforming major credit card industry abuses and improving consumer protections without resorting to price controls, rate caps, or fee setting.

1. Cardholders Deserve Protections against Arbitrary Interest Rate Increases.

• Requires card companies give cardholders 45 days notice of any interest rate increases.
• Gives cardholders the right to cancel their card and pay off their existing balance at the existing interest rate and repayment schedule if they get hit with an interest rate hike; gives cardholders 3 billing cycles after the rate increase to say no to these new terms.
• Prevents card companies from retroactively increasing interest rates on the existing balance of a cardholder in good standing for reasons unrelated to the cardholder's behavior with that card (the so-called "universal default" rate increase).
• Prohibits card companies from arbitrarily changing the terms of their contract with a cardholder, banning the so called practice of "any-time, any-reason repricing."

2. Cardholders Who Pay on Time Should Not Be Penalized.

• Prohibits card companies from charging interest on debt that is paid on time during a grace period. This prevents the so-called "double-cycle billing" practice.
• Prohibits card companies from slapping fees on the remaining interest-only balance of a cardholder who has paid hisher bill on time.

3. Cardholders Should Be Protected from Due Date Gimmicks.

• Gives cardholders time to pay their bills by requiring card companies to mail billing statements 25 calendar days before the due date (14 days is the current minimum).
• Requires that payments made before 5 p.m. EST on the due date are considered timely.
• Directs card companies to provide on every statement, a phone and internet address that a cardholder can access for payoff balances.
• Prohibits card companies from charging late fees when a cardholder presents proof of mailing his or her bill within 7 days of the due date.

4. Cardholders Should Be Protected from Misleading Terms.

• Prevents card companies from using terms such as "fixed rate" and "prime rate" in a misleading or deceptivemanner by establishing single, set definitions of those terms.
• Gives cardholders who get pre-approved for a card the right to reject that card up until the moment they activate it without having their credit adversely impacted.

5. Cardholders Deserve the Right to Set Limits on Their Credit.

• Requires card companies to offer consumers the option of having a fixed credit limit that cannot be exceeded.
• Prevents card companies from charging over-the-limit fees on a cardholder with a fixed credit limit.

6. Card Companies Should Fairly Credit and Allocate Payments.

• Directs card companies to fairly allocate payments on balances at different interest rates. Many card companies currently require cardholders to pay off a lower interest rate balance first.

7. Card Companies Should Not Impose Excessive Fees on Cardholders

• Limits the amount of "over-the-limit" fees card companies are allowed to charge to 3. Some card companies currently charge limitless fees for going over credit limits.

8. Card Companies Should Not Give Subprime Credit Cards to People Who Can't Afford Them.

• Requires that all fees for subprime cards, whose total fixed fees over a year exceed 25 percent of the credit limit, be paid up front before the card is issued.

9. Congress Should Provide Better Oversight of the Credit Card Industry.

• Improves existing data collection on industry profits, as well as card fees and rates; requires this information to be presented to Congress every year.

Payback For A decade Of Greed

The pendulum has reversed. This is just the initial stages of reversal. The proposals are what they are and they do not have to make sense. Many won't. However, consumers are fed up and a Congress far more sympathetic to consumers' desires is going to be elected.

And as disgusting as two-cycle billing is, I would not legislate against it. There is a choice. Consumers do not have to choose Discover Card or any other 2-cycle lender.

But when banks purposely mail out statements at the very last minute (which they do), change terms for little reason (which they do), require receipt by noon even when their normal mail delivery is 2:00PM (which they do), and charge absurd overlimit fees instead of disallowing transactions (which they do), this is what happens. I have no sympathy for the banks when legislation over-reaches in the other direction.

Treat people fairly instead of what you can get away with and this kind of reaction does not happen. For cash strapped banks, such legislation could not come at a worse time. But this is just a start. A reform of bankruptcy reform is bound to happen as well.

Credit card and other reforms are coming. Banks better get used to the idea.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Ambac Bailout Hopes Excite Bulls

Bloomberg is reporting Ambac Soars on Reports Bailout May Happen Next Week.

Ambac Financial Group Inc., the bond insurer in rescue talks with banks, soared in New York Stock Exchange trading on optimism the company may soon reach an agreement that would save its AAA credit rating and avoid losses on $556 billion of securities it guarantees.

The New York-based company rose 16 percent after CNBC Television said a deal between Ambac and its banks may be announced Feb. 25 or Feb. 26. A group of banks is preparing to inject $2 billion to $3 billion into Ambac, the Financial Times said. The money would be part of plan to split Ambac, the newspaper said.

A rescue that enabled Ambac to retain its AAA rating for the municipal and asset-backed securities guaranty units would help banks, the insurance company and municipal debt investors avoid losses. Banks stood to lose as much as $70 billion if the top rated bond insurers, which include MBIA Inc. and FGIC Corp., lose their credit ratings, Oppenheimer & Co. analysts estimated.

Eight banks including Citigroup Inc. and UBS AG formed a group to consider providing financing, a person familiar with the matter said earlier this month. Royal Bank of Scotland Group Plc, Wachovia Corp., Barclays Plc, Societe Generale SA, BNP Paribas SA and Dresdner Bank AG, were also involved, said the person, who declined to be named because details hadn't been set.

FGIC, which lost its top rating at Moody's Investors Service last week, asked to be split in two to protect the ratings on municipal bonds it guarantees. MBIA yesterday said all bond insurers must eventually divide their businesses.

S&P Futures Soar On The News

Volume surged way ahead of the news stories hitting mass media, spurring silly talk on message boards of the PPT. Here are a couple of charts I was watching real time.

S&P 500 3 Minute Chart



S&P 500 15 minute chart



click on chart for sharper image

More Details Emerge After Hours

After hours, additional details are emerging, mainly in the form of what the bailout might look like. MarketWatch is reporting Banks may recapitalize Ambac to save AAA rating.

A group of eight banks that are major counterparties to Ambac Financial Group may recapitalize the struggling bond insurer in a bid to save its crucial AAA rating, two people familiar with the situation said Friday.

"We have a lot of alternatives. A capital raise has always been an option to stabilize the rating," said Vandana Sharma, a spokeswoman for Ambac. "We're trying to do the best by all constituents, including policy-holders, shareholders and counterparties."

Splitting up bond insurers would be difficult, pitting policyholders against shareholders of the bond insurer holding companies. "The lawyers have already begun gearing up on that one," said Josh Rosner, a managing director at research firm Graham Fisher & Co.

One proposal involves banks injecting roughly $5 billion of capital into specific bond insurers and also providing a $10 billion line of credit.

Another idea involves commuting, or effectively tearing up, CDS contracts between banks and bond insurers. In return for dropping their claims, the banks would get a preferred equity stake in the bond insurer.

"Putting capital into an insurer is more of a contract issue between the companies involved, rather than a regulatory issue," said James Gkonos, vice chairman of the Insurance Practice Group at law firm Saul Ewing. "That would be the simplest and most efficient way to do this."

A forced splitting up of a bond insurer by a regulator such as the New York State Insurance Department would be an "extreme scenario" that would involve public hearings and litigation and take a long time to complete, he explained.

Still, any re-capitalization of Ambac by bank counterparties would present its own problems too, because it could dilute existing investors in the company. Such a plan would also use up capital that banks may need to help them through other problems thrown up by the global credit crunch.

"Sometimes there are problems that just can't be solved," Rosner said. "At some point, the market is going to realize that there is not always a best solution. There is often just a least worse solution."

Who's Holding The Bag?

If you want to know who's holding the bag if the monolines fail, simply look at the who's who list of sponsors.

Who's Who Bagholder List

• Citigroup (C)
  
• UBS AG (UBS)
• Royal Bank of Scotland (RBS)
• Wachovia Corp (WB)
  
• Barclays (BCS)
  
• Societe Generale SA
  
• BNP Paribas SA
• Dresdner Bank AG

The two key sponsors (Citigroup and UBS) were on the list of recommended shorts by Meredith Whitney. See Analyst Meredith Whitney Asks Banks "Where's Waldo?" for more on expected bank writedowns and dividend cuts.

Some Problems Can't Be Solved

A $2-$3 billion infusion simply cannot fix a gaping long term $70-$150 billion problem (depending on who you believe) in the monolines. Should an attempt to do so be made, I confidently predict the banks will have to go back to the well again and again to provide additional capital.

If instead the banks agree to an upfront writeoff of the entire amount of worthless CDOs in return for an equity stake, exactly where are the banks going to come up with the necessary cash? Even if they do manage to pull that off, they will have accomplished nothing but buying a business model that is slowly dying and facing competition from Buffett as well.

"Sometimes there are problems that just can't be solved", and this is likely one of them. Oh sure, the market may rally a bit, especially if Moody's, Fitch, and the S&P keep their collective heads buried in the sand and reaffirm the AAA ratings on a mere $2 billion infusion, but long term the problem cannot go away until the entire package of CDOs guaranteed by the monolines is properly marked to market at a value close to zero.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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"Free Lunch" Era Is Over

Florida and California continue to make the news. Just yesterday in More Budget Cuts in California, New Jersey, and Florida I noted the following.

• California's budget deficit grew from $14.5 billion to $16 billion in the last two months.
• New Jersey is facing a budget freeze
• Florida is threatening to layoff circuit court employees for 11 of the next 19 weeks without pay
• Akron, Ohio wants to sell its sewer system to give "free" tuition to city residents

Inquiring minds may also wish to consider Vallejo California On Brink Of Bankruptcy.

Clearly the Matter Of Choice keeps growing larger and larger. California already has to make 10% budget cuts and I can't help wondering when that will become 20%.

Here Are The Choices

• Raise Taxes
• Fire workers
• Reduce Pay

The Era of the Free Lunch is Over.

Muni Auctions Continue To Fail

Today California and Florida are back in the news in relation to municipal bonds. Bloomberg is reporting Florida Schools, California Convert Auction-Rate Debt.

California, Florida schools and the owner of John F. Kennedy International Airport joined a growing list of municipal borrowers exiting the U.S. auction-rate bond market as record failures push taxpayer costs higher.

Rates in the more than $300 billion auction market, where local governments, hospitals, museums, student-loan agencies and closed-end mutual funds borrow, are determined through a bidding process every seven, 28 or 35 days. Auctions fail when there aren't enough buyers. That's left bondholders who wanted to sell stuck with the securities and taxpayers or other backers of the debt such as fund holders with higher interest costs.

Yesterday's 641 auctions of publicly offered bonds resulted in 395 failures, or 62 percent, according to data compiled by Bloomberg from four auction agents.

Failed Auctions Mean Higher Rates

Failed auctions mean higher costs for already cash strapped municipalities. Budget deficits will rise because of this. In addition, some muni holders, especially in closed end funds are finding themselves trapped in a market with no bidders.

Professor Sedacca summed up the Auction Rate Security (ARS) situation nicely with his piece Pain In The ARS. I took the liberty of expounding on his idea and added a bit of history in Too Late To Protect Your ARS.

The Great California Exodus

How many times did we here that boomers wanted to retire to California? Probably too many to count. It's now demographics in reverse as the California exodus turns to stampede.

California, which once lured Americans from near and far, is now driving out millions of the most productive residents – including high percentages of the most affluent.

"When California faced a Mount Everest-sized $14 billion deficit in 2003, one of the major causes for the red ink was the stampede of millionaire households from the state," says a report called "Rich States, Poor States" by economists Arthur Laffer and Stephen Moore."

[Click on that link to see how your state stands]

The bad news for California is that it faces a $14 [$16 billion and growing] deficit this year, despite boasting one of the highest tax burdens in the nation.

Let's Review The Choices Again

• Raise Taxes
• Fire workers
• Reduce Pay

Is raising taxes going to help? I think not, it will cause more of the affluent to leave, further shrinking the tax base! California has no realistic choice other than to fire workers or reduce pay and benefits of government employees.

Email From Carol

A friend of mine named Carol wrote to me this morning:

We have considered moving down to CA for several years (my husband and I both grew up there), but one of the big sticking points is the higher tax load. Where we live now, in Washington State, there is no personal income tax. So a move down to CA for us would be a double-edged sword financially: higher living costs and lower income (from higher taxes).

All that for a little more sun and several tens of millions more people. We haven’t made the move to CA yet, and we may never make it.

Free Lunch Era Is Over

Failing muni auctions in conjunction with the likely bankruptcies or defaults by Ambac (ABK) and MBIA (MBI) mean the days of perpetually floating more bonds to meet current expenses has dried up.

It had to end sometime and so it did. The end of the free lunch is over for California (and many other states too). Real choices now have to be made. Furthermore, the sinking dollar at some point will put an end to the Free Lunch Era at the national level too.

Those addicted to the "free lunch" are headed for a forced withdrawal. While misguided talk of a second half recovery is emanating from Bernanke, Bush, and Paulson, budget cutbacks and a commercial real estate implosion are going to ensure this recession is both long and deep. Sadly, hardly anyone is prepared for it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Analyst Meredith Whitney Asks Banks "Where's Waldo?"

Reuters is reporting Analyst Whitney Says Citi Has to Cut Dividend More.

Meredith Whitney, Oppenheimer & Co's banking analyst who was the first to say Citigroup Inc. (C) needed to cut its dividend last year, said on Thursday the bank would need to cut payouts again and raise more capital.

Citi has already raised $12.5 billion from foreign funds this year after posting heavy losses last year. It also cut its dividend 41 percent. Citi's shares have lost a third of their value since Whitney's call last year.

Interview With Maria



Click Here To Play Video

I listened to the video a half dozen times and offer this transcript by hand. The following may not be perfect but what's presented below should be extremely close. A few sections were not transcribed. Inquiring minds will want to play it.

Intro:
More Write-Downs Ahead?

The Citigroup research of Meredith Whitney, executive director of CIBC World Markets, triggered a staggering global selloff, and now she's warning that banks could face additional write-downs of up to $70B if bond insurers are downgraded.

Maria:
So you predicted the dividend cut, you've been negative on the banks tell us where we stand in this cycle right now. How much more pain is ahead?

Meredith:
Well a lot of people ask where are we in terms of innings or are we half way over. I think we are probably 40% of the way over. And the biggest problem has been this game of finding Waldo.

No one has been forthright about where their losses are actually hidden, where there exposure is. There's still so much risk remaining on bank balance sheets that has yet to be sold and this constrains lending and that’s why you have a problem with any type of hiring.

Banks aren’t lending so businesses can’t grow, manufactures can’t invest, and this is a systemic issue because banks are still in denial.

If these assets were truly marked to market banks would be indifferent to whether they hold them or sold them. Obviously they are not indifferent. The fact they are holding it means they have some hope that these assets will recover.

If they had sold these assets 6 months ago they probably would have gotten 50-75% more than they can sell these assets for today. When they do finally come up for sale there is going to be a supply jam that will drive these prices even lower.

That is just one part of banks problem. The other part of the problem is loss curves. Loans they have on balance sheets are accelerating in terms of losses and these banks are under reserved for those loans. So capital issues surround these banks all over the place and a couple of banks are at particular risk.

Image Of Whitney's Financial Calls:
Long – American Express (AXP)
Short – Citigroup (C), Merrill Lynch (MER) , UBS

Maria:
Who is most vulnerable for more losses of dividend cuts?

Meredith:
Believe it or not it’s Citigroup. Citi now has earnings problems, they have balance sheet constraints, they have further CDO writedowns, they have exposure to the monolines and they have the single largest concentration of exposure to high LTV [Loan To Value] mortgages.

Citi has over $50 billion in exposure to 90+% LTV mortgages are likely underwater now that housing prices have declined. So they will have the highest severity of losses with respect to those mortgages. I estimate that Citi is anywhere from $6 to $12 billion under reserve because of those exposures. There’s no place to hide for Citi.

Maria:
So you think Citigroup will have to cut the dividend again then?

Meredith:
Yes, Citi is capital constrained and they will be further capital constrained when they have to take more writedowns. ...

Historically payout ratios on dividends is under 50%. As Citigroup becomes earnings challenged, its payout ratio of dividends to earnings is 70% and that is imprudent for a board to authorize such payouts particularly when they are going to sovereign nations and borrowing at expensive rates.

Maria:
Will Citi have to raise more capital?

There is not a doubt in my mind that Citigroup will have to raise more capital. Collectively they raised about $20 Billion from sovereign wealth funds and smaller investors. I believe they raised what they could at the time. ...

Citigroup, Merrill, and UBS raised capital that diluted existing shareholders by 20%. That’s unheard of. And the fact they are going to have to go back and dilute shareholders even further makes my argument of a payout ratio even stronger.

Maria:
The monolines, Ambac (ABK) and MBIA (MBI) what is your prediction there?

Meredith:
There is no way the rating agencies can possibly know how much capital Ambac and MBIA need because no one understands what the end of the housing market decline is actually going to look like. There’s no way they can do it.

Maria:
And as far as things getting worse, how much of this scenario is priced in?

Meredith:
I think that the best case scenario is 15% downside in the financials.
I think that the worst case scenario is 50% downside in the financials.

Maria:
50% downside in the financials, worst case scenario. Meredith, good to have you. Thanks so much.

That was a good interview. But let's discuss bank lending a bit more. Yes, capital impairment is preventing lending. However, lending is not going to revert back to what it was even if the capital issues are solved. Psychology has changed and it's extremely unlikely to change back for a long time. A secular peak in lending craziness has been reached and the pendulum has far, far to go in the other direction.

The process has just started. More writeoffs are coming from commercial real estate and credit cards. Furthermore there is no reason for businesses to hire or expand given rampant over capacity everywhere. This recession is going to be far deeper and last far longer than anyone thinks.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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