Toxic Mortgages – Will The Banks Have To Buy Them Back?

On By southwerkIn business ethics, Capitalism, ethics, Government Failure, White Collar Crime2 Comments

If you read my last post, you may recall my emphasis on the word, putback. Strangely enough, it took about five minutes after I put that post up that the phrase once again became important.

Read this (from a CBS Moneywatch posting called, “The Foreclosure Mess: The Start of Another Bank Bailout?” –

The foreclosure mess suddenly turned messier yesterday when a group of heavyweight investors, including the Federal Reserve Bank of New York, demanded that Bank of America buy back toxic mortgages that a subsidiary had sold them during the housing bubble. BlackRock, the world’s largest investment company, and Pimco, the world’s largest bond manager, joined the New York Fed in arguing that shoddy record keeping and other missteps by Bank of America subsidiary Countrywide Financial amount to a breach of their contract. Such a breach would allow the investors to sell the mortgages back to the bank at full price. The investors’ claims, which became public yesterday, probably marks the opening shot in a long legal battle that could cost B of A billions and possibly push it into insolvency.

Wow, the unfortunate entities (like pension funds) who bought these toxic assets have come back for a fight. They are saying that the numerous, continuous and often illegal acts (false affidavits presented to the court system – not a matter of opinion or just sloppy paperwork – crimes), have breached their contract. So, in the vernacular, the want their money back and they want it now! (That’s a putback by the way.)

Okay, let’s read a little more from the article –

That adds a new dimension to the foreclosure mess, which the banks had been hoping to put behind them. Banks and others had argued that maybe some i’s weren’t dotted and a few T’s might have misplaced crosses on mortgage documents, but those were just technicalities. The bottom line is that people didn’t pay their mortgages and foreclosures should be allowed to proceed. The Wall Street Journal editorial page recently declared: “We’re not aware of a single case so far of a substantive error.” But now some of the world’s savviest investors are joining defaulting homeowners in claiming that too many T’s are missing crosses. Unlike defaulting homeowners, most of whom will eventually lose their homes to foreclosure, the investors may succeed in winning concessions from the banks. And if the courts agree that Bank of America must make the investors whole, it could be more than the bank’s fragile finances could bear.

So, if the banks through their very own wretched incompetence lose ten of billions of dollars, they may turn to the taxpayers for a little more money!

Have you noticed a common thread that runs through every single story about these banking adventures? No one ever seems to go to jail. No one every seems to really get in any trouble at all, except of one group, a little bitty one.

The taxpayers always seem to be riding to the rescue of their fellow citizens, whoops, I mean the banks, whether they want to or not.

Tell me, does that get old after a while?

James Pilant

White House Refuses To Act! Administration Will Not Call For Foreclosure Freeze!

On By southwerkIn business ethics, Capitalism, Corporate Social Responsibility, ethics, Government Failure, Philosophy of Business, White Collar Crime2 Comments

What a shock! The White House siding with the banks! Who would have thought it? Well, me. I was shocked the President pocket vetoed the legislation that would have retroactively made the banks false affidavits a non problem, but I needn’t have worried this meant a change of policy.

The banks will be protected. Homeowners are not that big a deal, but banks, no matter what they’re doing (unethical, illegal, cruel, vicious, incompetent- those things), will be protected.

Well, the President figured he’d stand firm, conduct a cursory investigation, which would be kept well in hand, and it would all go away.

Wrong, the crisis keeps rolling and keeps getting bigger.

Now, listen up, this is not the fault of Rahm Emanuel, Larry Summers, the President’s Council of Economic Advisers, or the Fed. The President of the United States is making these decisions. There is only one guy in charge at the White House and unless they’re holding his family hostage, he is the architect of his own decisions.

The President once said, “My administration is the only thing between you and the pitchforks.” How about, “and the law, and justice and accountability?”

I think those ought to be in there too.

Well, the crisis continues. This is Jill Schlesinger from CBS’ Moneywatch –

Banks are against the moratorium because it could call into question larger documentation issues, which could in turn put the nation’s biggest financial institutions on the hook for breaches of representations and warranties made to buyers of mortgage-backed securities. If there were a breach, the buyers of the loans in question could “put back” the loans to the banks, forcing the banks to repurchase them for face value or to make the owner of the mortgage whole for the losses incurred. Some analysts have estimated the potential cost of putbacks to banks to be over $100 billion.

Let’s talk about this “putback” thing a little bit. Soon, you may hear about little else in the news!

You see the banks unloaded all these nasty securities packages on pensions funds, etc., selling them as if they were good values without disclosing their inherent flaws because the purchasers were “knowledgeable investors,” a legal status that is essentially a license for investment banks to lie to them. If the banks misrepresented these loans, the pension funds, etc. can demand their money back. What terrible thing could the bank have lied about that would get them in trouble? Well, they might have told the buyer that they owned the mortgages when they didn’t have the actual documents of ownership. Whoops! One hundred billion dollars! That a lot of money.

Remember that phrase, “putback.”

James Pilant

Sign Mortgage Documents, 500 In The Morning and 500 In The Afternoon, For Week After Week – Get A Brand New BMW Sport Utility Vehicle!

On By southwerkIn business ethics, Capitalism, ethics, Government Failure, Philosophy of Business

So, there are rewards for signing documents without any concept, any inkling of what is in them! Now the poor stupid schmucks who bought the mortgage, they’re going to lose their homes and pay the losses based on almost random documentation. Is this a great country or what?

From the Huffington Post –

Florida authorities are investigating the law offices of David J. Stern over how it handled foreclosure paperwork. As the AP notes, Cheryl Salmons, an office manager at the law offices of David Stern, “would sign 500 files in the morning and another 500 files in the afternoon without reviewing them and with no witnesses,” according to Kelly Scott, a former assistant at the firm.

The perks for good performance were considerable, according to Scott’s statement. Tampa Online notes office employees were lavished with gifts:

“As a perk of Samons’ [sic.] job, Stern’s office would routinely pay her personal mortgage, a car payment, her electric bills and her cell phone bill, according to Scott, who told investigators Stern also bought Samons [sic.] a new BMW sport utility vehicle every year and gave her and other employees jewelry. Additionally, Stern purchased employee David Vargas a house, a car and a cell phone, Scott claims in her statement.”

I try to tell my students about reality. Sometimes, I wonder whether or not that is a good idea. I try to teach them to do what’s right. BMW Sport Utility Vehicles may well be a stronger argument than my moral exhortations.

Are any of these financial pirates going to pay anything bigger than a small fine? I doubt it.

Reality is dirty and messy. It tears your guts out. It means you live in a country where money is bigger than common decency, bigger than relationships, bigger than family, bigger than patriotism, – bigger than God. It is for a great many Americans, the only measure of success.

I challenge you to talk the language of morality, justice and Christianity and apply it to business and see how many uncomprehending looks you get or worse yet, the rolled eyes from the denizens of that strange ethereal plane, “the real world.”

But the “real world” bears the same resemblance to reality as the land of Oz. You see in reality, the vast majority of Americans live trying to do the right thing. In the “real world,” these people of honor are fools, marks to be taken, unrealistic clowns to be victimized by bank fees, credit card scams and every kind of bizarre internet rip off.

Millions of Americans work in jobs where they make less money than they could have in another field, they are teachers, firemen, policemen and soldiers. They live lives of service and sacrifice. This is just a joke in the “real world.”

I could go on.

But I suspect that anyone who claims to live in the “real world,” might not be someone you want to do business with.

I prefer those living lives of honor, those working in fields of service, those people trying to fulfill their duty to God and country, than the denizens, the predatory locusts of the “real world.”

James Pilant

Financial Roulette – America Loses

On By southwerkIn business ethics

Twenty percent of the American economy is the financial sector, the largest proportion in all of history.

For most of American history, banking was a vital part of economic growth. Bank loans provided the capital for small businesses and government to build factories, stores, highways and other public works. This is no longer the bank’s major function. While bank lending is still a critical part of the function of banks as far as the welfare of the nation is concerned, the profits are elsewhere.

It is hardcore speculation, casino capitalism, where the real money is made. This is not wealth creation, it is more similar to the board game, monopoly, you try to make money speculating on property although in the modern sense this is more likely stocks, mutual funds, derivatives, etc. This is not a benefit to the economy. It is a drag and a danger to the larger economy. When the financial sector loses, the taxpayer picks up the losses, while taxpayers share nothing in the winnings. This is because the nation insures deposits and because changes in the law in 1999 allows banks to speculate with these federally insured funds – Corporate welfare on a scale of trillions of dollars.

This gambling has far reaching societal effects. Those who benefit from this no way to lose game make more and more money while those who insure them against loss make less and less.

From the New York Times Article – Scrutinizing the Elite, Whether They Like It or Not –

Olivier Godechot, a French academic on the sociology panel, presented research that quantified just how skewed the increase in wealth at the very top has become. Mr. Godechot, a researcher at the National Center for Scientific Research in France, said that two professions — finance and business services — accounted for almost all of the increase in income inequality.

Professor Godechot has put his finger on it. Our society has focused, fixated on finance as the only mode of economic growth. Everything else from services to manufacturing are poor relations whose share in the wealth and even the concern of the government continues to dwindle.

Because of these changes we have an enormous inequality of income in the United States. From wikipedia –

Americans have the highest income inequality in the rich world and over the past 20–30 years Americans have also experienced the greatest increase in income inequality among rich nations. The more detailed the data we can use to observe this change, the more skewed the change appears to be… the majority of large gains are indeed at the top of the distribution.

The big incomes in America are strongly aligned with the world of finance. So, many of the great incomes in the United States are associated with a socially negative activity that not only produces no value to the large economy but actively endangers the economy through its taxpayer guaranteed bets.

It this wasn’t bad enough, hundreds of thousands of graduates from the most expensive and prestigious universities in the United States pursue careers in this field often starting at a quarter of a million dollars in annual salary, a massive diversion of talent from every other field of endeavor. So, our focus on finance weakens the nation and diverts its future leadership into the same unproductive path resulting in further devastating losses to society as a whole.

What can be done? Well, we could consider making things. We could make actual products in this country, televisions, stereos, building materials, etc. We could base our economy on things of value. We could rise in morality and ethics to a point where the idea of making money by financial speculation becomes an abomination to any upright citizen with even a smattering of civic conscience.

We will do it. Either by choice or by necessity.

You see, the financial way of making money, this casino capitalism, when applied to a society as large is a disaster that unfolds over the years. It hollows out a society diverting the money that would have built manufacturing and countless other useful investment, diverting the young from useful and productive enterprise and diverting the attention of society away from the important endeavors of life and nation building and into a life of profit based on speculation. Why work, when you can gamble with other people’s money?

When this cardboard edifice falls, once again we will find virtue in the making of value.

James Pilant

Facebook Comments On My Post, “The Dumbest Quote For The Day.”

On By southwerkIn Capitalism, ethics

My post, The Dumbest Quote for the Day, attracted some comments on Facebook. Here’s my lead paragraph.

I teach in Northwest Arkansas. Students here tend to feel that because they are from Arkansas and go to a small college that they are going to have trouble competing with students from name schools. I always tell them that they are just as smart as students from anywhere in the country. As evidence of this, I point to the litany of stupidity, overreaching and greed by these graduates of name universities in the banking industy.

These gentlemen have commented on my posts before. They have a lot to say.

Here are their comments.

Andrew Gates I started my education at Georgia Southern University and am ending it at Georgia Tech. Its my opinion that students from smaller schools have more interaction with the real world. This makes them more prepared to handle, and manage, the real world. I would engineer for a company managed by one of your students before I would engineer under a harvard business grad, hands down!

Kevin Stebbings The problem is rather that they are too smart; they have not experienced limitations and therefore think they can model and manipulate a system which is truly outside their control. You may be setting your students up for failure to say they can compete with Harvard or MIT mathematicians. Believe me, I went to school with a handful that went on to those places and they SCARE me. Their intelligence is not to be downplayed or trifled with. In purporting an arm of the American dream here as you are, you are supporting the great lie that led some of these people to do the foolish things that they did. Knowing one’s place is better advice.

Andrew Gates Kevin: what if George Washington had given that advice to the Continental Congress? Where would we be? There is more to a man than just his intelligence. The human will is the catalyst for all great human accomplishments. I go to school with some guys that are more intelligent than me, and some that are less intelligent than me. The reason we have all made it this far is because what we lack in intelligence, we make up for, respectively, in sheer will power and hard work. There is no lie or falsehood in that idea of the American dream.

Kevin Stebbings I am quite and fully aware of that and was from the start. I would not argue that people should not try and I would not argue that sheer tested intelligence is all there is to it. Never, would I argue that. But my friend the American dream is both evil and a lie. Every highschool student who had read the Great Gatsby ought to know that. The American dream is a lie of the people in charge that keeps those beneath mentally enslaved; fighting for a dream that does not serve them….born ceaselessly back into the past or whatever the last line of that halfway tolerable book was.

Andrew Gates Ah. I see what you are saying. I think you confuse the idea of the American dream with the way in which it is used and manipulated.

I think one of the fundamental flaws shared by all of the most popular political and economic systems is that they all diverge from reality as the population size of the society grows. For instance, I think any small village of people (a few hundred people at most) can effectively operate as a market economy with relatively little problem. Likewise, I think another village of the same size can effectively operate as a communist society with relatively little problem.

The reason is because in that type of society, everyone knows everyone else. Interaction with your fellow villager is both imminent and necessary. You are much LESS likely to try and rip off a man when you know you have to see him on sunday at church or when you need something that he produces. A village is also much less tolerant of what it perceives to be immoral or unjust behavior when the village is small.

As a society grows in size and number, citizens become more and more anonymous in respect to each other. There is no way that any one American citizen personally knows even 0.001% of our population. This anonymity breeds apathy. This apathy, mixed with size of our society seems to dilute the impact that crime and immoral behavior has on the society as a whole. In a small village, a murder is a HUGE deal, because it could be the towns only doctor, or the towns only blacksmith, but in our society, that sense of urgency seems a little diluted because each citizen, more or less, is replaceable.

I said all of that to say that the idea of the American dream is not what the evil here. The idea that you can lead a happy life if you work hard and provide for yourself is, in of itself, a good idea in my opinion. The lack of moral behavior, especially from the rich and powerful, has led to them using this idea and twisting it into something it was never meant to be.

James Pilant I think very little of the “American Dream.” However, if you think I mean their education is the same, I’m not teaching that. I’m teaching that their inherent intelligence and what they can draw from their minds, their souls, is just as good as those people’s. jp

James Pilant I want to blog the whole thing!
jp

Andrew Gates Be my guest!

Gael O’Brien Reviews The Documentary – “Inside Job”

On By southwerkIn business ethics, Capitalism, Economic measurement, ethics, Government Failure, Philosophy of Business, White Collar Crime5 Comments

From the article –

While of course we know the outcome of the unfolding events Ferguson describes, his interviews with many of the players in the crisis provide additional insight into the larger question of how could so many very bright people be involved in a failure so huge? The film shows the consequences when thought capital is wrapped around the dogged pursuit of an ideology, in this case deregulation, so that conflicting data or opposing viewpoints are not allowed to interfere.

The band of men from Ivy League economics departments wielded a lot of power in the 30-year push for deregulation. They served as consultants to the industry and were selected for significant regulatory or White House advisor positions. Ferguson raises questions about their objectivity as scholars, as well as whether their integrity was compromised by conflicts of interest and accepting fees from Wall Street, or to testify before Congress, or as expert witnesses.

I’ve already written a recommendation style review of the documentary and this one is very positive as well.

You need to read it to get the full flavor of O’Brien’s prose.

James Pilant

Is A 398,264.69 Square Foot House Big Enough For You Or A Bit Much?

On By southwerkIn business ethics, Capitalism, ethics, Philosophy of Business

It’s bigger the the French Palace at Versailles. (Versailles is pictured at the left.)

Its price tag – One billion dollars (American).

Location – Mumbai

Owner – The Richest Man in India – Mukesh Ambani.

Named Anitlla, the entire structure is 27 stories high, although to be fair the first 6 floors are a 160-car garage.

From CBS Moneywatch –

The amenities are as extravagant as they are endless, but what would you expect from the fourth richest human on the planet? The most expensive house in the world has:

* Private gym
* Ballroom
* 50-seat movie theater
* Health spa
* Several swimming pools
* 3 helicopter pads

The house, well, building, also features small trees in the residence in an elevated garden with high ceilings.

Why?

I just don’t get it. (There’s room for 600 servants.) I don’t think I am ever going to get it.

Don’t be mistaken I don’t believe that he should give it all to charity, but isn’t there a point at which diminishing returns kicks in? I mean after the first 100,000 square feet, wasn’t there a pause? And then didn’t someone think at least in the back of their mind, “This is crazy?!”

Well, probably not. But I still don’t understand.

James Pilant

Mortgage Freeze Has Some Winners Too

On By southwerkIn Capitalism, ethics

If you are paying on your mortgage and you want to sell your house, a mortgage freeze buoys your prospects.

Here – Read – From CBS Moneywatch

The housing market just keeps getting uglier. Now we’re learning that not only did banks do a bad job of making loans, they’re also doing a bad job of foreclosing on them. So bad that we have a nation-wide freeze on foreclosures. But if you’ve been paying your mortgage and your house is for sale, the foreclosure freeze just made your house a lot more attractive to potential buyers.

Charlie Farrel’s explanation of the advantages is quite clear. If you own your own home and are thinking about selling, I’d give it a full read.

James Pilant

The Dumbest Quote for the Day

On By southwerkIn business ethics, Capitalism, ethics, Government Failure, Philosophy of Business, Teaching3 Comments

I teach in Northwest Arkansas. Students here tend to feel that because they are from Arkansas and go to a small college that they are going to have trouble competing with students from name schools. I always tell them that they are just as smart as students from anywhere in the country. As evidence of this, I point to the litany of stupidity, overreaching and greed by these graduates of name universities in the banking industy.

Well today, I got a new quote to use:

It’s not a surprise that we know we have crises every five or ten years. My daughter came home from school one day and said, ‘daddy, what’s a financial crisis?’ And without trying to be funny, I said, ‘it’s the type of thing that happens every five, ten, seven, years.’ And she said: ‘why is everybody so surprised?’ So we shouldn’t be surprised…

This is from JPMorgan CEO Jamie Dimion. That’s right. You heard it clearly. This financial crisis is just “the type of thing that happens every five, ten, etc.” Do you mean the financial crisis that destroyed a large proportion of the value of American homes, came within an inch of destroying the international banking system and has put millions of people out of work? That one? It seems to me the others were a lot smaller – much, much, much smaller. I hope he is better in other aspects of teaching his children. The story of Santa Claus has more validity.

Mr. Dimion has an MBA from Harvard Business School. You see, my students are just as smart as their students. The evidence is clear. I don’t think I could get any of my students to claim that the current financial crisis is a kind of “seasonal” phenomenon and that we shouldn’t be surprised when the elite educated bankers screw up on in a manner barely conceivable in fiction.

James Pilant

(First published in January of this year.)

RECORD FINES = WHAT PATHETIC NONSENSE!!

On By southwerkIn business ethics, Capitalism, ethics, Government Failure, White Collar Crime

From the BBC –

Angelo Mozilo will pay the Securities and Exchange Commission $22.5m (£14.1m) and repay $45m of profits.

He is the highest profile executive to face charges relating to the US sub-prime mortgage crisis in 2007.

The SEC alleged he, with two colleagues, had failed to disclose risks that Countrywide was taking.

The civil charges related to claims he had misled the market by falsely assuring investors that Countrywide was a prime quality mortgage lender that had avoided the excesses of its competitors.

From 2001-2006, his compensation was 470 million dollars.

This is what passes for justice.

This is supposed to send a message.

This is supposed to be a nation under laws.

This is rubbish.

James Pilant