As I sat down to watch Bethany McLean talk about the attitudes on Wall Street… remember, she’s the financial reporter that broke the ENRON story, and was appearing on PBS’ NOW with David Brancaccio.  She was there to talk about the $18 billion in bonuses that Wall Street’s New York executives paid themselves in 2008 while we watched the U.S. and global financial markets literally melt down, I wasn’t expecting to enjoy myself. I was hoping, I suppose, to be educated in some way as to how these financial geniuses think.

Obama called the $18 billion in bonuses… “shameful”.

Brancaccio opened the interview by saying something about how Wall Street must now realize that they’ve “lost the great war and it’s time to do things completely differently”. Bethany laughed, and it was not a staged, pre-planned laugh… she laughed without meaning to, involuntarily. Then she said something that I’m not going to laugh about.

“I don’t think so. I don’t think there’s been a real come to Jesus moment on the Street yet.” She was just shy of chuckling as she spoke.

Brancaccio replied: “Even with all we’ve been through? Even with the great collapse of 2008 and 209?” And Bethany replied, but quite seriously now:

“I think there is still the attitude that it is the fault of American borrowers for borrowing beyond their means, for homeowners for moving into homes they couldn’t afford, and all Wall Street did was package this stuff up and sell it to investors around the world… that they are the least of the villains, rather than the greatest of the villains.”

Further, she said that the feeling on Wall Street is: “that we’re smarter than you so we’re entitled to make a lot more money than the rest of you.” She said that the people at Merrill Lynch, who were paid untold zillions in at the end of 2008, as they were being taken over by Bank of America, believe that it was just a few people at Merrill that created the problems and that you still have to pay people what they were promised.

By this point I was feeling lightheaded.

Bethany then pointed out that there’s a “real gap” between how Wall Street sees it and the rest of the country sees it. That the American people wonder how they can be taking taxpayer dollars and paying out exorbitant bonuses, while Wall Street says that they promised people this compensation and that they must be paid as a result… or they’ll leave.

Is that right? They’ll leave if we don’t pay them? Well, Holy Mother of God… DON’T PAY THEM!

Now… dizzy… when will this end. Maybe watching this wasn’t a good idea…

Bethany said that the argument that people will leave might not hold the same weight it once did, because the number of jobs on Wall Street has been cut by more than half. She said that maybe the upper echelon would leave and if they couldn’t find another job, they’ve been paid enough to just go to the beach for a couple of years…

My mid was now reeling… the light in the room seemed to be fading in and out… which beach? Which beach? WHICH GOD DAMN BEACH?

Brancaccio asked about whether these Wall Street types recognized that bonuses are usually paid on profits, but that profits are “radically down,” and Bethany replied that they don’t. She said that there’s a widespread belief that “it wasn’t my fault, so I’m still owed mine.”

Then she pointed out that the justification Wall Street firms have provided in past years when defending the large bonuses being paid out each year is to look at the profits being made. But, she explained, when you look at the write-downs on assets these firms have taken over the past year or two having completely decimated the profits of the last so many years, the reality is that the profits were illusory… they were never there to begin with… just over valued assets sitting on the books. So, as she put it, “people have already collected millions of dollars that in a strictly economic sense, they weren’t entitled to.”

Damn, is it hot in here? Mind if I open a window?

Brancaccio had a stupid half grin on his face as he segued into his next question about how one news story was reported in two different ways… blah, blah, blah… Apparently, Reuters reported that Wall Street bonuses had dropped the most they’d dropped in 30 years. While the New York Times, looking at the same data, reported “The 6th Largest Bonuses in History in 2008 for Wall Street,” or something very close to that.

Brancaccio then astutely pointed out that 2008 did not produce the sixth largest profits in history, which cleared up a lot of confusion for me, how about you?

Bethany commented that she thought the two different ways of reporting the same data on the bonuses was a good analogy to how Wall Street feels versus how we on Main Street America feel… and then she said, “And to answer your initial question, no… I don’t think Wall Street understands how much Main Street holds them to blame.”

Alright look… the next person that refers to me as “Main Street,” I’m knocking out. You’re the one that’s Main Street, betch. I’m Upper Westside. Or maybe Soho… the Villaige… Central Park East. Take that Main Street rap down the road, you backpacker ho.

Oh dear, I’m sorry about that. I can’t believe I said that out loud?

Citing the stock back-dating scandals that went on just after ENRON, Bethany continued, saying that the same mindset that existed before ENRON still existed today: “That we’re executives and are therefore entitled to money that really belongs to the shareholders.”

Brancaccio, his countenance now looking its most concerned, then asked the all-important question as far as he was concerned: “Will we be able to stop it from happening again?” He went on to say something about how wonderfully transparent Treasury Secretary Tim Geithner has promised to be and how that would help.

I held my laptop out of the way as I threw up on my shoes.

Bethany said she doesn’t have a lot of faith in regulations as far as having the ability to stop future problems, and she points out that Sarbanes-Oxley was supposed to stop the problems in 2003, but that today’s problems had nothing to do with Sarbanes, calling Sarbanes, “completely irrelevant”. She said that regulations are akin to the Maginot Line, which in case you don’t remember your WWII history, did a fine job keeping Germany from invading France.

Then Bethany said that she thought the central problem was “incentives”. I started to pass out… she said that as long as incentives are provided for short-term performance, people will do whatever it takes to achieve that short-term performance and that there’s no “claw-back,” even when that performance is shown just a year or two later to be illusory.

She thinks that’s the biggest problem. Those damn short-term incentives.

Bethany then said that Americans wouldn’t have stood for the government coming out during the boom and saying okay it’s overheated, we’re going to cool things down a bit. So, she thinks “there’s a little hypocrisy there on the part of Main Street, as well.”

I slapped myself across the face as hard as I could.

When I came back, she was explaining that if banks wanted to find out the price of their toxic assets, since nobody knows, they could sell them right now to private investors, but then the losses would be real. And she said the real question is: “Who should bear the brunt of this risk, should it be taxpayers, should it be equity holders, should it be bond holders?

My stomach started to ache… I don’t think I can go on much longer…

Then the two of them went into a discussion about the advantages of nationalizing banks. Brancaccio was saying that the critics of nationalization, which coincidently are the CEOs of the banks themselves, argue that the if the government owned the banks they’d be under political pressure not to do things like put people out of their homes when they didn’t pay their mortgage. Brancaccio asked: “So, is that such a bad thing?”

And she replied that it was a tricky question.

I inadvertently pulled out a good size clump of my own hair.

When Bethany was asked about the banks and the idea of selling the toxic assets to “the bad bank,” she said:

“It doesn’t change the need to determine the actual price of the toxic assets, because the banks will have to sell them to the bad bank. If the government buys the toxic assets at a price where the taxpayers would actually make money on them in the long run, then you’re going to cause a severe hole in the balance sheets of financial institutions… that’s going to mean that the banks will need more capital to fill that gaping hole. If the government buys the toxic assets at a price that keeps the financial institutions whole, keeps the balance sheets intact… then taxpayers are going to have to bear the losses on the toxic assets.”

Be careful… if you read that last paragraph again, your eyes could start to bleed, and you’d land yourself in the hospital for a week. Just say no… no good cam come of it.

Bethany went on to talk about how so many people are guilty in creating this crisis that no one is going to go to jail, as in Jeff Skilling and Andy Fastow of ENRON fame. She thinks the Wall Street executives were wrong, the borrowers were wrong… the sub-prime lenders were wrong. And that it’s hard to pull one person out of that crowd and punish them, because it was tricky question as to whether they did something unethical, as opposed to illegal.

Many experts say that the banks will likely need $2-$4 trillion more from the taxpayers, before this is over. And to top it all off, Bethany said she thought the idea of loan modifications was yet another… tricky question.

At that, I dropped my laptop on the tile floor and went for a walk.

Just don’t, okay?  I don’t want to talk about it.

Mandelman out.

This article was originally posted on September 3, 2009… seems like forever ago, doesn’t it?  I’m re-posting it now because for one thing I know relatively few read it… I didn’t have all that many readers back then.  And for another, because it’s every bit as relevant today as it was back then… I was way early on this one… and I’m about to publish another article on how Geithner’s accounting rules are driving servicer behavior.  So, read this and then stay tuned.

I’ve been working on understanding this fast moving, gelatinous 3D jigsaw puzzle we call our housing crisis for over a year now, and it’s been nothing if not frustrating.  Here are a few of the questions that, even after a year, have been sticking around in my brain…

A. Forgetting the last administration’s mysterious behavior related to the housing crisis, why didn’t the Obama Administration’s housing rescue plan offer more to stop the flood of foreclosures that’s preventing any sort of economic recovery from taking hold?

In other words, they flubbed it?  Team Obama flubbed it?

All those extra smart guys in the administration and no one thought to do the grocery store math that was involved in figuring out what would and wouldn’t work.  Come on… why did they flub it?  They didn’t have to flub it… it was almost too easy to do right.  It had been flubbed recently.  They couldn’t have learned from past mistakes?  They certainly looked smart enough to handle something as simple as housing.  Health care?  Maybe not.  But housing?  Come on… I could fix housing and I’m not 22 Harvard grads, or how ever many of those people they have running around the White House these days.

So, alright they flubbed it.  Okay then.

B. Why aren’t the banks and servicers modifying more mortgages?  I’ve read so many opinions on this haziness that I can’t see straight at times.  Is it the investors’ unwillingness to maximize profits?  Servicing agreements that call for a banking executive human sacrifice in order to modify a mortgage?  How about their exceptionally short-sighted but greedy nature?

Oh, wait… maybe it’s their obvious inability to hire people, implement systems, answer a large number of phone calls, or stop their personnel from repeatedly losing file folders.

That last one has become my personal favorite, by the way.  Apparently, I’m being asked to believe that Bank of America, Chase, and Wells are continuing to have a dickens of a time doing things like hiring financial types, creating efficient processing systems, stopping paperwork from getting lost over and over again, and anything over a couple of thousand calls each day… basically their organizations shut down.

It’s like I went to bed, and when I woke up I was in a world where insurance companies couldn’t seem to stop overpaying claims, the DMV had a drive up window, and Bank of America can’t answer the phone, or hold onto a folder for over an hour.

“Where did I put that folder?  Oh no… Darn it.  I lost another one.  That’s 22 so far this week. I’m so silly.   Where do I keep putting them?  I swear, I’d lose my head if it wasn’t screwed on tight.”

C. Why are the banks more profitable all of a sudden?  Maybe I don’t understand how banks make money, or perhaps it’s that I don’t have a solid understanding of what the phrase “more profitable” means.  But see… the thing is… I aced the Money & Banking economics final exam back in grad school, and I just can’t help thinking… something very wrong here.

I just read that banks are more profitable, and they’re so profitable that they’re literally racing to shovel money back into the Treasury and we the taxpayers are making billions in unexpected profits.  Unexpected profits… everyone’s favorite kind of profits.  I still remember once when I found $20 in a pair of jeans I hardly ever wore, and it was a kick.

So, even Geithner himself didn’t expect these profits.  Like when he saw them come in he went: “Whoa now, what have we here?  Where the heck did this $10 billion come from?  Get Bernanke on the phone, he’s not going to believe this.  Woohoo!”

Unexpected profits, huh?  Down right super spooky.

Ten months ago, Obama looked like he was going to throw up in his mouth a little as he pronounced the economy near dead and then tried to convince us that we were basically months away from a soup line, and should be grateful for that.

Okay, so it’s The Great Depression Part 2… but it’s the kind of Great Depression that gets tons better in ten months?

As far as I’m concerned, if it was going to improve in ten months, I wish they hadn’t of even mentioned it to begin with… could have kept it to themselves.  I would have gladly focused on a little gay marriage over a bed of immigration and stem cell research nestled in Afghanistan with a side of nuclear Iran.  Yep, that would have filled me up for sure.

But still… you can’t help thinking about stuff like the banks not lending, employers not hiring, people not spending and foreclosures never ending… asset prices dropping, with no sign of stopping… but things are getting better… for the bank but not the debtor… and I can’t stop myself from rhyming, it seems I’m stuck in 4/4 timing… help… me… whew.  That was close.  Once I got stuck in a rhyming frenzy and had to be sedated.

You get my point though, right?  Why are the banks more profitable?  Are they holding car washes and bake sales on weekends?  Renting out conference rooms to MonaVie and Pre-Paid Legal meetings in the evenings?  I thought banks made money by lending it out.  I was sure it had something to do with lending it out.  But they’re not lending it out.  And they’re getting more profitable.  So, well… okay then.

And people aren’t spending, as they watch their home’s value sink past 1986 levels.  Some neighborhoods look like a Hollywood set in a movie about the end of time.  Empty streets… looks like whoever lived there left in a hurry.  It’s the kind of scene you might expect Rod Serling to walk into:

“Witness, Mr. Henry Beemis.  A small man with small ideas.  A man who’s job it was to remove people from their homes.  But as we’ll soon see, some homes don’t like it when their people are removed.  The kind of homes you’ll get to know as you move ever closer to… The Twilight Zone.”  (I wish I could insert the music.)

Employers aren’t hiring either.  The unemployment rate… the real one… is over 16% nationally, and even the administration is admitting that 10% plus is around the corner.  Half the homes in the country will soon be underwater.  There’s not even anything ahead that looks like it might make the banks more profitable.  They’ve got to downsize, assuming they survive at all.  For example, I’m pretty sure that Chase isn’t going to be fully utilizing WAMU’s 2,200 retail branches going forward.  Just a guess.

So, what’s the deal?  I’m about to tell you.  And you will not like it.  Not one bit.  It’s positively scandalous, besides being just plain awful.  Here’s what’s going on… the banks aren’t being irrational in their behavior, they’re acting that way on purpose.  Because it’s in their best interests.  Ready?  Okay… here we go:

JPMorgan Chase bought Washington Mutual in a fire sale.  They paid $1.9 billion for the whole kit and caboodle.  Such a deal.   $90 BILLION in mortgages on the balance sheet for $1.9 billion.  How about the $60 billion in servicing assets, the real estate, the $300 billion plus in retail deposits and a loss sharing agreement with the FDIC.  Everything a girl could hope for… wrapped up with a bow.

They paid $1.9 billion and got, in addition to everything else, $90 billion in mortgages.  Worth saying again.  Basically, they bought them for cents on the dollar.  But approve a principal reduction?  Unthinkable.  The guy owns a house and owes $300,000 but can’t make his payments and you only paid $3,000 for it… you cut the price and start collecting payments on the now performing loan.  But, not our banks.  They seem to prefer foreclosing, paying the extra costs, and trying to sell REOs, which makes no sense.

Why would a bank chose to foreclose and evict when there’s already someone living in the house who would love to buy it?  By modifying the loan, the bank won’t have to pay all the associated costs of foreclosure, and then put the property on the market where it might not sell for some time.  Selling an REO?  Lucky to get 50% in some areas.  Why not just write down the loan for the homeowner and save all the trouble?  Again, it makes no sense.

Until I went back and thought about the partial suspension of the accounting regulations imposed under FAS 157 & 159, which applies only to banks and only as of last April or May, I believe.  That’s when I started feeling queasy.

Under the partial suspension of the FSAB accounting rules, the banks don’t have to write down Level 3 assets to market value, if they state that the bank has no plans to sell the assets for an extended period.  In other words, if the bank says that it’s not going to sell a given house anytime soon, they can keep it on its books at its full fictional value.

So… a couple have a home on which they owe $300,000.  It now appraises at $150,000, but will sell as an REO for $130,000 tops.  The bank backs off the appraisal and says it’s worth $110,000.  Then they pay everything from property taxes to property preservation.  They take the home back as a foreclosure instead of modifying, which is a bummer for some family, but they get to leave it on their books for $300,000… until later… and by later I mean after the mid-term elections.

They don’t have to write it down because they say they’re not planning on selling it anytime soon.  The nice couple lost their house.  But the bank just totally cleaned up.  And with the FDIC loan freebies, they can sit there for years before they even consider trying to sell that house.  When they do sell it… who knows, maybe the market will be better?  Or maybe that particular banker will be retired by then.

So… Sec. Geithner is allowing the banks to recapitalize on the backs of homeowners losing their homes to foreclosure.

What’s next Tim?  Child labor tax credits?  That should boost productivity… let’s put 3^rd graders back on the assembly line where they belong?

I’ll say one thing for Secretary Geithner: He’s great at distraction.  He goes, “Lookie over here.”  Then he points his finger towards China… and a pigeon flies out of his ass.  You really have to watch this guy.  David Copperfield has nothing on this guy.

He’s full of beans, though.  He’s lying through his teeth every time he opens his mouth.  At the end of the day, he doesn’t really care if another million or two get put out of their homes, as long as he can get the banks recapitalized without having to go back to Congress before the mid-term elections.

New investors in IndyMac paid $13 billion and got $500 million per year in servicing assets, and 33 branches, $6 billion in retail deposits, an origination platform, a loss sharing agreement with the FDIC, and $40 billion in loans on the balance sheet, which is close to 200,000 loans.

But reduce principal?  Don’t be silly.  It just wouldn’t be prudent.  Not at this juncture.

Now, just so I’m clear about this… this means Obama knows this is happening.  I personally think that’s why Obama never talks about his team flubbing the housing thing.  I don’t think he can keep his food down when he thinks about it.  I mean, a mother’s son killed himself last week over being unable to obtain a loan modification from GMAC.  But I guess on the bright side, the new Ally Bank is giving away tee-shirts at its grand opening.

Oh what a tangled web we weave when first we practice to deceive.

Tim… you are a dickish man.  You really don’t see anything wrong with how this whole mortgage meltdown is being mangled, do you?  You’re really okay with it.  I bet there are people in this country that used to want to beat you up all the time.  Was 5^th grade hard for you, Tim?

Well, I’m here to tell you Mr. Secretary… you’re making a big and bad mistake.  You are underestimating the American people in a big way.  You think you’ll get things cooking again, at least on paper, and slide right through the midterms, and by then no one will care what you did.  But it’s not going to work like that, Timothy.

People are going to start figuring out that it wasn’t the borrowers who broke the world, Tim-O.  Poor people who bought houses they couldn’t pay for did not take out Wall St. inside of a week.  I know…it’s a fabulous story, but you had to know it wouldn’t hold indefinitely.  And when people figure it out… boy oh boy are they going to be… let’s see… how would your Ivy League buddies say it… oh yeah… they’re going to be miffed.

We’ve already seen how well you’ve handled the banks.  You said they were too big to fail, and since then you’ve allowed them to only get bigger.  Bam… did you see that pigeon?  Shot out of his ass like Apollo 13.

I’m going to have to start watching this guy a lot more closely.

Mandelman out.

NOTE: Okay, accounting gurus… I’m right, right?  That is what it says in the revised FASB regs, right?  Geithner’s just using another tool to extend and pretend and bring in insolvent banks for controlled crash landings, right?

First posted April 9, 2009… Re-posted now at reader’s request…

And a good idea because its worth reading.  Nothing’s changed.

Just for the record, I did study accounting, both at the undergraduate and graduate levels. I’m no accountant, by any means, but if you explain it to me slowly, I can usually “get it”.

I understand quite a bit about the public company structure and tax treatment associated with the informal funding of previously unfunded, long-term liabilities associated with nonqualified executive benefit programs, the importance to the P&L of asset to liability “matching” on corporate balance sheets and even how to balance my business checking account… well, sort of… no one can actually balance today’s business checking accounts.

Anyway, I’m not bragging, I’m just saying. That’s it. I just wanted to say that. Now, I’ll start writing the article whose headline drove you to read. Okay, sorry… so here goes…

Yesterday, Oppenheimer issued a report saying that Bank of America would need to raise an additional $36.6 billion dollars to bring its capital ratios in line with its competitors, Fox Business Network reported. Bank of America denies it.

Whew! Well, I for one am so totally relieved. Or, at least I would be… if I could make myself believe even one word of what comes out of CEO Ken Lewis’ mouth. Why does this guy still have a job? I’m serious, why?

President Obama told GM’s CEO to hit the bricks, but I liked the guy. Why? I don’t know… because I have a GM Suburban, it’s my second one… they run great… comfortable… four wheel drive… safe… I know… lousy gas mileage, but you never hear me complaining about it. GM’s CEO had been there forever, and was working for a dollar a year. Why call for his head and then put his #2 at the helm? Please don’t tell me that you’re expecting me to believe that the #2 guy at GM is radically different than his boss of the last umpteen years. I mean it… don’t tell me you want me to believe that, because that’s just stupid.

Remember when Lewis was talking about the downfall of those other banks and saying that it represented an opportunity for Bank of America to assume its rightful position as the clear and dominant leader of the banking industry. Lewis was like a cat perched above looking down coyly at the silly humans and their problems. When was that… hmmm… oh yeah, like six months ago, which is about a decade in deepening-recession-hours.

Bank of America bought Countrywide for $4 billion and change. That sounds funny to me now. You’ve got to admit it. The idea that someone would PAY money for Countywide has to make you giggle at least a little bit. Like someone buying themselves rheumatic fever. Shouldn’t Countrywide have been free? Never mind… I’m just saying.

Then, adding insult to injury, the man paid money for Merrill Lynch, too. And I think that makes him a special kind of moron. He’s a moron with hubris… you know… brass balls, you’ll pardon the phrase.

Without getting overwhelmed in details, let’s take a look at a few highlights from Mr. Lewis’ recent past, shall we?

Back in the latter part of January 2008, the Federal Reserve announced an emergency rate cut. Mr. Lewis called it a “pleasant surprise,” according to Reuters, saying that the move should help stave off a recession. Here’s what Lewis said at the time:

“It was a bold and decisive move and was exactly what the market needed. Growth had become very sluggish. Absent any moves, we were very close to a recession. This gives us a chance not to have one.”

Now, it’s important to keep in mind that he was saying this in late January 2008, and Bank of America had just reported fourth quarter 2007 results. The bank’s filings, which were signed by Mr. Lewis, showed net income tumbled 95% to 5¢/share from $1.16/share just one year ago. They also showed the bank writing off $5.28 billion in collateralized debt obligations (CDOs). Merrill alone had $16 billion in write-downs that last quarter of 2007, and posted a $9.8 billion loss.

I wonder what set of factors would have to occur for Mr. Lewis to see the potential for a recession ahead.

“Sir, it is Armageddon out there… has been Armageddon for months now. What shall I tell the press?” “Tell them I still think the resilience of the American workforce combined with the entrepreneurial spirit of our young people, will once again prove and let the world see, how our economy is strong… blah, blah, blah.” I can hardly listen to these guys anymore.

Fast-forward to early October 2008, again according to Reuters, and you’ll find a very different picture.

“These are the most difficult times for financial institutions that I have experienced in my 39 years in banking,” said Kenneth Lewis, its chairman and chief executive officer, in a statement.

Bank of America warned that credit quality continued to weaken during the quarter, and Lewis said he expected higher credit losses and depressed earnings ahead. Third-quarter net income dropped to $1.18 billion, or 15 cents a share, from $3.70 billion, or 82 cents a share, a year ago.

Lewis blamed the weaker earnings on higher credit costs resulting largely from Countrywide Financial Corp and Chicago-based LaSalle Bank, its two most recent acquisitions. The bank cited “recessionary conditions,” and halved its dividend on October 6, 2008.

October 6, 2008? Wasn’t the whole Wall Street meltdown thing around September 15^th? Ask Sen. John McCain, I’m pretty sure he’ll remember the exact date. Maybe even the time.

Fast-forward again to January 16, 2009 and you find a joint press release from the Federal Reserve Board of Governors, the FDIC, and the Treasury Department. It reads:

The U.S. government entered into an agreement today with Bank of America to provide a package of guarantees, liquidity access, and capital as part of its commitment to support financial market stability. Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $118 billion of loans, securities backed by residential and commercial real estate loans, and other such assets, all of which have been marked to current market value. In addition, Treasury will invest $20 billion in Bank of America from the Troubled Asset Relief Program.

Then a week or so ago, Bloomberg reported that:

Bank of America Corp is carrying loans on its balance sheet marked at more than $44 billion above their fair value, the company said in its annual report filed with U.S. regulators on Friday.

The bank said it ended 2008 with $886.2 billion in loans, but estimated the fair value – or market price – for these loans as $841.6 billion.

So far, so good? Are you keeping some lose track of all these numbers? You don’t have to run tape or anything, which is what us older folk used to call using a calculator when it was still an adding machine, just so you have some sense of the dollars involved is fine.

The other thing I don’t like about Ken Lewis, is that he bought Countrywide… which means he had to get along with Angelo Mozilo, who is shaping up fast to be the Ken Lay of the mortgage meltdown. As I understand it, the competition for the Ken Lay moniker is stiff this year, but smart money is still backing Mozilo.

Countrywide was the nation’s largest predatory lender… er… I mean sub-prime mortgage lender. It’s been investigated by the FBI, SEC, and God only knows who else, but I’m not even talking about any of that. I’m talking about Mozilo. He’s the guy who gave us IndyMac Bank, now IndyMac Federal. It was like someone pulling the pin on a grenade and handing it to you. You turn around and… KA-BLAMO!

Of course, with the meltdown in full swing in late 2006 and throughout 2007, Mozilo sold $145 million in Countrywide stock. Simply put, he is a man who made hundreds of millions of dollars while the mortgage market fell apart and people lost their homes, dreams, and life savings. My kind of guy he is not.

Look, I don’t care about being politically correct here, the guy’s a crook. He needs to give the money back and go to jail. His is the kind of case that really shouldn’t take more than an hour or two to get through at trial. What’s to discuss? The prosecution could just stand up and say, “Ladies and Gentlemen of the jury, we are here to punish Angelo Mozilo,” and then sit back down. Then the foreman could stand up and say, “We have reached a verdict, Your Honor.” And… cut… print… that’s a wrap people, the Final Four are on… ”

(Ow, ow… take it easy, John… ow, ow, ow.)

So, Lewis made a deal with Mozilo and the guy from Merrill Lynch, who bought the antique toilet for like $36,000 or some crazy number. Now, what kind of person do you have to be to ever come in contact with, much less consider or purchase an antique toilet for $36,000… or $360 for that matter? (For $36, I might buy it.) That’s not the thinking of a normal mind, right?

I’d be walking along with the antique dealer and he’d say to me: “Well, and right over here we have an antique toilet for $36,000.” And I’d go: “Ooooo, yuck… that’s disgusting. Throw it away. $36,000? What… are you on crack?”

The Royal Tushie.

Mr. Kenneth Lewis, CEO of Bank of America, however, must have gotten along with both these guys… a very sleazy group, if you ask me. And we, the tax payers have now given Bank of America roughly $164 billion in order to keep it not lending to businesses or consumers.

So, now even though old Kenny-boy says it’s not true about Bank of America needing another $36 billion, the chances of him telling the truth are small enough, but since it’s Lewis we’re talking about here, I should add that the chances of him knowing or actually being right are so slim that it’s not even worth talking about.

So… I suppose we’re going to give Bank of America the $36 billion… and who knows what we’ll cough up after that. There’s no reason to think that Bank of America is going to get better… ever. You can’t expect a company to digest that many toxic assets and live. Look for the announcement on page 16B of the Business Section on a Saturday.

Once we’ve said yes to the additional $36 billion, we will have come up with $200 billion for BofA including guarantees and cash.

I stared at the number for a few minutes and finally couldn’t contain myself… I had to know. I went online to find out how much Bank of America is worth… as a company… if we bought the damn thing. It wasn’t at all difficult to find out. Couple of clicks and there it was. As of a couple of weeks ago, Bank of America had a valuation of… wait for it… a little less than $30 billion.

That $30 billion includes the bank’s stakes in Central, South American banks, and asset manager Blackrock, which came with the Merrill Lynch acquisition. Add to those holdings the bank’s stake in China Construction Bank, currently valued at $20 billion, and you get a total price tag of $30 billion for Bank of America. And we’re paying $200 billion… but we don’t own the bank?

How the hell do accountants do it? The Citibank deal was a lot like this one. We pumped so much money into Citibank relative to its value that when Secretary Geithner announced on a certain Monday morning that the US government would nationalize Citigroup, it would invest with a partner, and the US taxpayers would only own 36%… after pumping hundreds of billions into it.

All about transparency, yeah… that’s the ticket.

I know, I know… it’s not all going into common shares, which are technically the shares that own and control the company through the election of its Board of Directors. But so what? I’m tired of struggling with the accounting related to this mess. It would seem that it’s long past time for a little common sense.

If you pump $200 billion into something with $30 billion and don’t own it… then all bets are off. Up could be down… in might be out. Don’t ask me nothing… I obviously don’t know a thing under such conditions. Whatever accounting classes I took were clearly a waste of time because I’m out of the field. Don’t want to know… not going to ask…

Oh, and one last point… one small, little, minor point I just read about… it’s the one that ultimately caused me to have to lie down.

On a national basis, the Wall Street Journal reported earlier this month that banks hold $41 BILLION in LOANS MADE TO TOP EXECUTIVES, DIRECTORS, AND OTHER INSIDERS!

At Charlotte-based Bank of America, those loans more than doubled last year, to $624.2 million – the biggest dollar jump in the country. The largest of them likely went to three directors or their companies. The surge came during the third quarter as credit markets froze, the government prepared to infuse banks with billions in tax dollars and the board approved the purchase of troubled Merrill Lynch. Bank of America ranked fourth on the list of biggest insider lenders.

Industry experts were quoted as saying that insider lending is “particularly troublesome because it could cloud the judgment of people charged with protecting shareholders and overseeing bank management.” Particularly troublesome? I’ll bet they’re particularly troublesome.

And wouldn’t you know it… at Charlotte-based Bank of America, those insider loans more than doubled last year, to $624.2 million – the biggest dollar jump in the country and Bank of America ranked fourth on the list of biggest insider lenders… that’s my Kenny! I bet he makes his mother proud.

It’s a small loan, I swear.

By the way, banks, as it turns out, don’t have to explain increases in insider lending. They don’t have to disclose individual amounts loaned or the terms of those loans to any insiders, including executives. Of course, insider favoritism is against the law, so we dodged a bullet there, don’t you think?

Most publicly traded companies were banned from making insider loans in 2002, as part of the regulatory changes that followed the Enron debaucle. But banks were excluded from the ban, because they’re banks, silly… and also because it was said that loans have been subject to extensive regulation for more than 25 years. That’s rich… really rich.

Here’s the rub…

Seventy percent of the banks with the largest insider loan balances got a more than $50 billion in the TARP funds late last year, according to an analysis of banks’ federal filings by the Charlotte Observer. What’s that you say? You don’t subscribe to the Charlotte Observer? Well, then you just won’t ever know these kinds of things I suppose. (To subscribe to the Charlotte Observer, call 1-800-EAT-SH#T.)

There’s a handbook called “Insider Activities” that’s published by the nation’s lead regulator for big national banks, the Comptroller of the Currency. Here’s what it says about insider loans at banks:

“Studies of bank failures have found that insider abuse, including excessive or poor quality loans made … is often a contributing factor to the failure.”

Did you feel that? We just got bitch-slapped across the face.

Good thing I don’t live near any bridges, ’cause I swear there are certain articles I write after which I just want to…

Mandelman out.

This article originally ran in December 0f 2009, but I’m reposting it because maybe it will be read by someone who will find it even the least bit interesting.

Training personnel to properly interact with those losing homes to foreclosure is not only the right thing to do… it’s also likely to improve a mortgage servicer’s bottom-line.

Losing a home to foreclosure is something most people never forget. It’s an event likely to stay with you for the rest of your life. It’s certainly not something most people think will happen to them… until it does. And it can happen to anyone at any stage of life, young, old, rich, poor… all can find themselves at risk. As the off-color colloquialism says about life… stuff happens. Although many people might not readily agree, foreclosures are statistically a “there-but-for-the-grace-of-God-go-I” type of situation.

Of course, there are times when more stuff happens to more people, and today is obviously an example of such times. The economic conditions that we’re experiencing today are causing more foreclosures than at any time since the 1930s. When housing prices began to collapse a couple of years back, no one could have seen just how far things would go, and how difficult it would be to bring our economy back to life, as we’ve known it.

One of the causalities of our accelerating economic downturn has been a shared understanding of its cause. Some blame our politicians, some blame Wall Street’s bankers, some blame the Federal Reserve, and we’ve all heard that it was the sub-prime borrowers themselves that are the root cause of our recession.

Belief in a Just World

As human beings, we need to understand the causes behind events that negatively impact our world in order to feel safe. When we don’t understand how or why something happened, when something appears

to have been a truly random occurrence, it frightens us terribly because we can’t plan to protect ourselves from such an event.

Melvin Lerner is a prominent social psychologist. In his 1980 book, “The Belief in a Just World: A Fundamental Delusion,” he argued that people want to believe in the inherent justice of the economic system in which they live, and want to believe that people who are suffering are responsible for their own situations. He conducted a series of experiments and provided empirical evidence showing that after an initial feeling of sympathy, people tend to develop negative views toward others who are suffering. And that’s the type of negative tendency that seems to be in play today.

So, perhaps it shouldn’t be surprising that instead of having sympathy for homeowners that are losing their homes to foreclosure, many people are blaming the homeowners themselves for their predicaments. It’s just an example of the general tendency that was documented by Melvin Lerner and other social psychologists many years ago.

The Sanctity of Contracts

The other factor that comes into play involves the phrase: “sanctity of contracts.” We live in a nation with a capitalist economy that depends on the sanctity of contracts. Our founding fathers put the contract clause into the U.S. Constitution to make clear that people need to live up to the documents they sign. Article I, Section 10 of the U.S. Constitution states: “No state shall pass any law impairing the obligation of contracts.”

So, people have the tendency to view those losing homes to foreclosure as not living up to the contracts they’ve signed. They bit off more than they could chew, is a phrase often heard by those who lack sympathy for borrowers in foreclosure.

How do these factors manifest themselves in human terms? To understand, picture a line of moving trucks extending for hundreds of miles, taking the furniture of countless families to storage lockers. Picture the schoolchildren saying goodbye to their classmates, leaving the comfort and security of their own bedrooms. Picture the parents sitting up late at night looking through bills trying to figure out how they can save their home, or resigning themselves to the fact that they can’t make it. Picture the arguments, the crying, feelings of loss, of failure… picture the moment when all hope is lost.

Picture the day they must leave their home, getting in the car, pulling away from their home, the ones that turn to look back, the ones that force themselves not to look. The radios that aren’t turned on because no one wants to hear music at a time like that. These people you’re picturing aren’t going on vacation, they are being abruptly moved to the other side of town. They won’t have their own yard to play in. They won’t have their patio to relax on as they watch their children run and play. They’re losing their most prized possession… their home.

Yet, it’s also easy to take a stern view of this spectacle. The arguments go something like this: Foreclosure is not the end of the world. There are valuable lessons to be learned from such a life experience. They got themselves into this mess, now they have to pay the price for their own irresponsible actions.

The Price Paid by Children

Some of the hardest-hit victims of foreclosures are children. According to the Center for Responsible Lending, over the last two years: “Over 1.95 million youth have been affected by foreclosure.”

Brenda Jones Harden, Ph.D., wrote that “children exposed to violent, dangerous, and/or highly unstable environments are more likely to experience developmental difficulties.” Children hear more than most parents think they do, so parents’ stress is transferred to their children more than anyone might think.

Oftentimes, the kids come to feel that they are both a financial and emotional burden. They can begin making sacrifices for their families, wanting less, eating less. Some children are forced to quit teams they’re on, or stop taking music lessons simply because their parents cannot afford them. Even young children start taking on weekend jobs to help pay the family’s bills. Vacations are cancelled, and other normal childhood comforts are left by the wayside.

There are other enduring side effects as well. Being uprooted creates instability in a child’s life. They lose friends, teachers, teammates, social circles, perhaps most importantly, confidence. Being forced to change one’s lifestyle is both difficult and stressful for adults. For children, it can be a nightmare.

Children that are displaced by foreclosures often start bringing home lower grades. They exhibit behavior caused by lowered self-esteem. Behavioral issues often become common problems among kids because they feel that they don’t belong in their new setting. Frequently, families that lose their homes can’t afford to move into a neighborhood of equal socio-economic standing. The children can find themselves in new surroundings that may have more crime, inferior school systems, and fewer activities available for youth.

The Great Depression of the 1930s changed a generation. Those that lived through those difficult times altered the way they lived the rest of their lives. What will our nation experience a decade from now as a result of the millions of foreclosures our country continues to experience in these difficult times? No one can know the answer to that question, but it seems clear that there will be some discernable impact on segments of our population, and today’s children are certain to pay a price.

Exhibiting Anger

The crisis we’re experiencing is morphing as it continues, and we can expect continued changes that lead to further problems in our society as the recession lengthens and broadens in scope. One of the factors that’s changing is that the level of anger among foreclosed homeowners certainly appears to be rising, and lenders and mortgage servicers, faced with managing and marketing the volume of foreclosed properties, are increasingly seeing that anger in very tangible terms.

According to the National Association of Realtors, foreclosed properties already make up 45% of home sales, and the number is climbing. Home prices have continued to decline at record pace in 2009, and there are no signs of them stabilizing. Further price declines will undoubtedly result in even more foreclosures. Homeowners remain unable to refinance out of unaffordable adjustable rate mortgages (“ARMs”), and as the market continues its decline, more homeowners, realizing that they have little hope of building equity, will choose to walk away from their properties.

Homeowners losing homes to foreclosure have started advertising their home’s fixtures on Websites like craigslist.com. Some are stripping their home down to its wiring, destroying its plumbing, tearing out entire kitchens, and even removing roofing tiles. Garage doors are disappearing. Built-in cabinets are gone. Even furnaces and air conditioning units are up for sale by homeowners losing their homes to foreclosure.

Recently, the media reported that one homeowner in Monsey, NY, actually leveled his home with a bulldozer just a few days before the property was scheduled to be sold at auction.

Of course, not all homeowners experience that level of anger, or if they do, choose not to exhibit their anger in such extreme ways. But the trends are disturbing. More and more often homeowners are damaging their homes before being forced out as a result of foreclosure.

Communities Suffering

The large number of foreclosed homes on the market today means hundreds of thousands of homes sitting vacant. And vacant homes are magnets for partying teenagers, drug users, vandalism and crime. Broken windows, smashed plaster, huge holes punched in walls, graffiti on walls throughout the homes, debris, and much worse are becoming more commonplace, as more neighborhoods are seeing more foreclosed homes remain on the market for longer periods of time.

Abandoned homes from the foreclosure crisis have a direct impact on the rise in crime in numerous communities. Even when not the result of homeowners or local teenagers, thieves start breaking into these vacant houses, stripping them of valuables, and the destruction of property and vandalism is making the homes even more difficult to sell. Often, as a result, it requires more money to repair these homes than the homes would sell for in today’s market.

According to a recent study by Dan Immergluck of the Georgia Institute of Technology in Atlanta, and Geoff Smith of the Woodstock Institute in Chicago, “when the foreclosure rate increases one percentage point, neighborhood violent crime rises nearly 2.5 percent.” A study conducted in Austin, Texas last year, found that “blocks with unsecured buildings had 3.2 times as many drug calls to police, 1.8 times as many calls reporting theft, and twice the number of calls reporting violence as blocks without vacant buildings.”

According to a paper on the impact of foreclosures, published by NeighborWorks America:

“When homes are abandoned because of foreclosure, entire communities begin to deteriorate. Garbage, un-mowed lawns, pests and dilapidated roofs and porches are eyesores. The lack of care can change the entire atmosphere in a community. The people who remain may have feelings of loneliness, fear and frustration. To make matters worse, potential buyers find conditions like these unattractive, turning them away and cause the empty homes to remain on the market for months and even years.”

Neighbors Pay Too

According to the Center for Responsible Lending, “Foreclosures cost neighbors $223 billion.” The Center also cites that “Over 44 million homes in the United States will experience property devaluation as a result of foreclosures in their neighborhoods. Forty-two counties in the United States can expect to see their property tax base erode by more than $1 billion. And households located in proximity to lost properties could see the value of their property decrease by $5,000, on average.”

According to a story in USA Today, Vallejo, California, once a vibrant and flourishing place to live, recently had to declare bankruptcy when the collapsing housing market caused their local economy to go over the edge. “Vallejo cut 87 jobs and slashed funding for parks, a library, a senior citizens’ center and other public services, but it wasn’t enough to hold off the bankruptcy filing.”

Unfortunately, social programs and public services are often the first things to be cut from municipal budgets, and seeing the irony in this vicious cycle is unavoidable. The programs that are cut first are often the programs that exist to help those suffering from the crisis that caused the cuts in the first place.

Gimme’ Shelter

Of course, the question we should all be asking, with so many people losing homes, is where is everyone moving to? According to the National Coalition for the Homeless:

• 76% of displaced homeowners and renters are moving in with relatives and friends.
• 54% move to emergency shelters at some point.
• 40% are already ending up on the streets.
• 61% of state and local homeless coalitions say they’ve seen a rise in homelessness since the foreclosure crisis began in 2007.

Of course, many homeowners that lose their homes to foreclosure ultimately become renters, and the increasing demand for rentals has, quite predictably, led to rising prices. So, not only do foreclosure victims have a tough time qualifying for rental housing due to their damaged credit scores, but many are being priced out of the market as well.

And that’s not the end of the rental story. Foreclosures are affecting renters too. Many of the foreclosed properties nationwide are apartment unit buildings. According to the Furman Center: “60% of the 15,000 foreclosure filings in New York City last year were on multi-unit buildings.” And the result is families forced out of their apartments often with very little notice. According to the National Low Income Housing Coalition, “In the State of Nevada alone, 5,000 families have been evicted from their rental homes in the last 18 months.”

The coalition also reports that in suburban Los Angeles, a tent city of more than 200 displaced residents has emerged. Notoriously high rent payments in the LA basin are leaving many with no other option than to pitch a tent or live out of their car in settlements like this. At this settlement there is no electricity, no plumbing and no drainage. There is nowhere to properly store food. Clearly, the lack of plumbing and refrigeration poses serious health risks to the residents of this makeshift community.

Homeowners Attitudes About Banks Worsening

Lenders, mortgage servicers, hedge funds, and various real estate investors are all more than aware of the crisis and its ramifications. Yet, distressed homeowners continue to report their frustration and anger over the way they are treated by their bank. And for banks and mortgage servicers wondering about the outcome of this increasing homeowner dissatisfaction… well, the writing is on the wall.

In a November 2008 story, published by the Oakland Tribune (Oakland, California), customers of Countrywide, Wachovia, and Wells Fargo, among others, describe the banks as uncooperative, ineffective and rude.

“Countrywide says it wants to help people restructure? That’s baloney,” said Dawn Aguiar, who bought her Fremont home for $587,000 in 2005. “They have not been helpful at all.” She financed the purchase with a $586,000 mortgage from Countrywide, but homes in her neighborhood now sell for $450,000 to $500,000, so her house is “under water” – worth less than the loan. Her adjustable rate loan balance increases monthly, and she’s behind in her payments.

“One lady I spoke to was so rude, she had a real attitude,” Aguiar said. “She talked down to me like I was a deadbeat.”

The complaints from homeowners at risk of foreclosure about rude treatment by bank personnel are mounting in number and visibility. A quick check online yielded the following:

Mark Gagliardi about Countrywide: “They’re not proactive. No calls, no follow-ups. And when I call them, I get put on ignore.”

Sue Chai Spaulding about Bank of America: “They don’t want to help you. But they shouldn’t take this so lightly. These are people’s lives. They have been rude to me.”

Rachelle Gonzales about American Home Mortgage: “It’s so frustrating. They say they’ll help. Then they say no. They have called me names. They have called me a slime. This has been awful. Just awful.”

On one Website discussion about homeowners losing homes to foreclosure, the following discussion thread was easily found:

The first comment said: “The best way to ruin a house beyond repair is this… Get yourself a couple of bags of cement and mix a lot of water to make it a bit light… Drop it down every open pipe in your house (sink, toilet, bathtub, sewer pipes, main water pipe) then let it set. The repair will cost the bank more than the house… replacing every pipe in the house means they have to redo the house. They might be able to charge you tho… ha, ha.”

To which another replied: “Awww… the poor banks. Whatever will they do? Ain’t karma a bitch?”

And then another added: Yes they could, but, what can they get out of you when you have nothing to lose? Remember kids, fire cleanses everything.

And then another: “Great point. I hate banksters.”

And another: “Payback’s a bitch.”

And then another: “I think this is funny as hell. Everyone getting evicted should take all they want, then burn the place down.”

And another: “The bank may own the house but not the appliances! Of course they should take them – they are theirs. I can find NO sympathy in my heart for bankers or real estate agents – they’re right up there with tax collectors.”

And then another: “If the lender makes things hard, they get to live with the consequences. That house will be torn to shreds.”

And lastly: “If you ask for peace, prepare for war.”

The Cost of Foreclosing

The costs involved in foreclosing on a home are high and getting higher. Lost principal and interest payments, tax and insurance payments, maintaining the property, lost servicing fee income, costs of collection efforts/servicing, legal costs for handling the foreclosure, administrative fees, costs of restoring the property to saleable condition, real estate commissions… all play a role in negatively impacting a lender’s bottom-line.

According to estimates from Standard & Poor’s, published in 2008, the average cost to a lender, expressed as a percentage of the loan balance is 26%. The costs breakdown as follows:

Amount lost in interest payments: 13.6%

Property taxes paid by lender: 3%

Legal fees paid by lender: 1%

Real estate agent commissions: 6%

Home maintenance: 3%

With the housing crisis still in full swing, home prices still not at bottom, and many forecasting millions of foreclosures still to come, it’s clear that lenders will endure more pain over the next few years. What banks and servicers need to consider is how homeowner attitudes are likely to change for the worse as the crisis continues.

Our politicians have recently started to see how populist anger can make governing much more difficult. The outrage over the AIG bonuses provided an example of how close many of our nation’s citizens are to marching in the streets. One can only imagine how homeowners will feel a year or two from now, when many of those who thought they could make it through our economic downturn, find that they have not. No one can know for sure, but one thing seems certain: If they’re getting angry today, they’ll be that much angrier a year from now.

Loan Modifications

As the economy has deteriorated, the number of foreclosures has continued to increase, which places further downward pressure on home values, which in turn causes more foreclosures and does further harm to our economy. Today, we all realize that foreclosures benefit no one, although to-date, we have not united behind a solution to this very serious ongoing problem.

As a result of this dangerous, downward spiral, the cost of foreclosure in some parts of the country is reaching the level at which no one, including the investors that own the property, wants to foreclose.

One alternative is loan modification. If, by modifying the terms of an existing mortgage, the borrower can afford the mortgage payments and therefore remain in the home and avoid foreclosure, it’s often true that everyone, even the investors that hold the mortgage on the property, comes out ahead. For investors, it’s really a question of which alternative, foreclosure or modification, offers the greater financial return. There are several methods for determining the cost differential between the two alternatives, for example one could compare a present value calculation with the expected cost of foreclosure, factoring in variables like repairs and reconditioning, expected time on the market, and assumptions about trends in home prices.

It’s worth considering, however, that lenders and servicers continue to struggle with loan modifications, which are transactions that are particularly time and labor intensive and often produce unsustainable results. As an example, studies published last year indicate that when banks attempt to handle loan modification negotiations directly with a borrower, the end result is that 60% are back in default in six months.

The reasons for this are many, but the overriding fact is that negotiations between a bank and an individual homeowner at risk of foreclosure, are obviously not negotiations between equals, and that manifests itself

in high re-default rates in the first year.

By contracting with qualified and quality loan modification firms, banks may be able to increase the diameter of the pipeline and therefore modify more loans, keeping people in their homes where they’re supposed to be.

Cash for Keys

A number of lenders have adopted the practice of offering to pay a homeowner about to lose a home to foreclosure a cash payment for leaving the home undamaged. Lenders report offering payments of $1500-$3,000. But with the incidence of borrowers damaging their homes before they leave rising, offering three grand may only be keeping the already honest… honest.

For those angry enough to strip wiring out of a home, remove a garage door, or even sell the air conditioning unit, three thousand dollars is not likely to accomplish much.

The Best Way to Catch Flies

Lenders seeking to reduce their costs of foreclosures should consider the old axiom: You catch more flies with honey than you do with vinegar.

As it relates to a lender’s loss mitigation and collection personnel, it means that training them to better understand the psychology of foreclosures, to feel more empathy for those losing homes, to identify with a parent with children in financial distress… and more… banks can expect to be repaid hundreds of times over.

People in foreclosure, and those at risk of going into foreclosure, are often scared, lonely, tired, insecure, and sometimes confused. They’re not thinking clearly and they’re on the edge. A little kindness at a time like that can go a long, long way. A little rudeness, on the other hand, can push someone into a rage. It’s not easy to work with distressed homeowners day after day. And even though some might feel like they’re not letting their true feelings come through, at times like these, that can be difficult, if not impossible to do.

Here are some ideas that I think bank management could consider to change the way their personnel behave toward distressed borrowers.

1. Explain what distressed borrowers are thinking and how they are feeling. Give them the details. Ask them to imagine what they would do and how they would feel. By bringing them into this kind of discussion, you’ll force people to realize that others worry about the same things they do, and once they share their thoughts and feelings with co-workers, they’ll stop seeing those in trouble as getting what they deserve.
2. Share the facts about the costs that neighborhoods, communities and society as a whole pay as a result of foreclosures. You can use some of the statistics presented earlier. People sometimes fail to see how something that hasn’t happened to them personally, affects everyone personally.
3. Play the Foreclosure Game – Ask people to calculate what would have to happen to place them at risk of losing their homes to foreclosure. You can even create cards that describe various catastrophes that happen to people in life. For example: You are injured in a car accident that leaves you unable to work for three months; the driver that hit you is uninsured. A month later your spouse is laid off from work, and you have a tuition payment of $18,000 due in 90 days. You can’t take out an equity line on your home, nor can you borrow from the bank. And your retirement plan account has been reduced by 40% as a result of the latest market correction.
4. Consider asking a borrower who already lost his or her home to foreclosure to come in as a guest speaker. Often times, it’s harder to harbor ill feelings about someone you’ve met face-to-face, and the personnel stories from people who have come through it, can have a lot of impact.
5. Conduct role-playing exercises in which one person is the borrower and the other the bank manager. The borrower starts by explaining to the bank manager how they got in so much trouble. The rest of the group votes on the level of empathy and compassion the bank manager has communicated during the call.
6. Review your personnel training manuals to ensure that they are not placing counterproductive restrictions or using guidelines that make it more difficult for your people to spend the time needed. For example, do your people try to spend less than a certain amount of time per call? If the answer is yes, you may want to consider either lifting that requirement, or lengthening it.
7. Changing culture has to start at the top. Have all of your organization’s top managers speak at your training sessions. When your loss mitigation personnel hear the CEO talk about foreclosure victims with sympathy and caring… they’ll stop and listen.
8. Clip and distribute articles that highlight the heartbreaking stories of people losing homes due to no fault of their own. Many people today, still have the impression that those that got in trouble did it to themselves. Show data on the number of prime loans that are now defaulting. Examples that destroy that perception help to open minds.
9. Encourage your people to share stories with each other at regular meetings. This is not something you want to do just once and leave it alone after that. This is an ongoing program intended to make sure that the people you have on the phone aren’t causing someone to punch holes in their walls when they hang up from the call.
10. Consider increasing the number of breaks your people take during the day. And consider providing some items “just for fun” in areas where breaks are taken. An Etch-a-Sketch, Slinky, or even Play-Doh, can all bring back happy memories and help to relieve stress, or on the more serious side, provide an exercise ball, weights, or even a treadmill or two… exercise kills stress.

Conclusion

Human beings have a need to see bad things that happen to someone as not being their problem. And because of how this crisis has unfolded, many people have come to believe that everyone losing a home is an “irresponsible sub-prime borrower”. This belief can color how someone interacts with a distressed homeowner.

Those losing homes today are going through very stressful times. Many have lost jobs, and are struggling to make ends meet. Many have young children. And many have lost all hope. It’s easy for someone under that kind of stress to become angry, and an angry homeowner losing a home to foreclosure is likely to damage the home before leaving.

Banks and servicers need to take a look at how loss mitigation personnel are trained to deal with homeowners at risk of foreclosure, because as the months and even years go by, the situation will only get worse. By helping personnel to better understand what’s happening and how these customers are feeling, they can spend a little extra time, or offer a kind word that can make the difference between a home left in decent condition, and one in need of thousands of dollars in repairs.

Most importantly, communicate with the people that interact with troubled borrowers on the phone every day. It’s a hard job and constant exposure to tragic situations and frustrated or angry customers can wear one down, even if the person doesn’t realize it.

Today, just like my mother used to say… It pays to be nice.

Mandelman out.

I can’t think of any subject that has been so widely and frequently discussed and studied, over such a long period of time, by such a large number of experts and observers, who continually espouse such a diverse range of opinions and cite such a large number of conflicting facts, that is still so misunderstood… or understood differently by different people… or in short, is such a mess… that affects so many people… and is so important to our government and our economy… yet remains pretty much unsolvable… AS LOAN MODIFICATIONS.

See… loan modifications today represent such a complex subject that even writing a sentence describing the situation surrounding them, such as the one above, was a pain in the neck.

Let’s start with the questions on everyone’s mind… Why aren’t more loans getting modified?  Why is it so difficult to get the bank to modify a mortgage?  Why are trial modifications ending in foreclosure?  Why is it that people are consistently treated so poorly by the banks?  Is it the investors that are making it hard to get a loan modification?  Is the government doing enough to get banks to modify loans?  And should people hire an attorney to help them obtain a loan modification, or go it alone?  That’s at least a pretty good start, right?

I think the fundamental thing that almost no one understands involves how a bank views a borrower’s request for a loan modification.  Lot’s of people, including me in past articles, have said that banks simply don’t want to modify mortgages.  Lot’s of people, including me, have also pointed out that servicers make more money by foreclosing than modifying loans.

All of those points apply in certain circumstances, but they’re also beside the point to some degree.

A Banker’s View…

Your bank views you calling to request that your mortgage be modified as the beginning of a process.  Maybe you truly need and deserve a loan modification, but maybe not.  The only way the bank will be able to tell one way or the other is by putting you through that process, and it’s not a pleasant process in the least.

Let’s say that you’re someone that has good credit, you’ve never missed a payment, and now are saying that you need your loan modified or you may lose your home to foreclosure.  When you call your bank to ask about a loan modification, they’re going to tell you that they can’t talk to you until your payment is delinquent by at least 30 days.

You hang up the phone.  You’re disappointed.  And you now have your first decision to make: Do you let your credit score get trashed by going 30 days late on your mortgage?  It’s not an easy decision.  Once you head down that path it’ll be years before your credit score is back up where it’s always been, and if you need your credit to be good for other reasons, chances are you’ll decide that you no longer want a loan modification because the cost of trying to get one… sacrificing your credit score… is too high.

The bank’s process has just saved the bank quite a bit of money.  Had the bank agreed to modify your loan, it would have been like throwing money away unnecessarily because you kept making your payments without them having to modify your loan.

Now, let’s say that you decide to go 30 days delinquent on your mortgage.  You call back, now 30 days late, but now your bank tells you that you have to be 90 days late before you can be transferred to a negotiator.  You hang up the phone.  Again, you’re disappointed.  Do you go 90 days late, or do you bring your loan current and forget the whole thing?  Some bring their loans current, others don’t.

If you don’t bring your loan back to current status, you’re about to start receiving a series of letters and phone calls designed to make you feel ashamed, guilty and scared.  And those letters will come more and more frequently, and they’ll be written using stronger and stronger terms.  And chances are you’ll feel worse and worse as time goes by.

Then in 90 days, assuming you’ve gone the distance, you call the bank again.  This time they’ll tell you that your credit score is now too low to qualify for a loan modification.  Now you’re enraged.  You stomp your feet.  And then, if there’s anyway you can do it, chances are you bring your loan current and try to forget the whole idea of a loan modification.  Maybe you get rid of a car payment to do it, maybe you rent out a room or take on a part-time job to generate the extra income you need, or maybe you borrow the money from a relative.

You never even bring up the whole experience to your friends or family members because you’re ashamed that it even happened.  You’re ashamed that you were having trouble making the mortgage payment that you signed up for, and you’re ashamed about having gone 90 days late on your mortgage payment and almost losing your home.  The whole thing becomes one of those skeletons that you hope will soon fade away in your closet of memories.

Besides, what would your friends or family members even say if you did tell them?  Do you think they’d be on your side and angry at the way your bank treated you?  Or would they take the view that the bank had every right to handle your situation the way they did, because after all, you signed the mortgage and agreed to make the payments… the bank has no obligation to lower your payment just because you having trouble making it.  You’re lucky the bank didn’t foreclose, in the eyes of your friends or family members.

Oh, and one or two more things, while we’re at it… maybe you should have opted for a little less house and not gone quite so far out on a limb… maybe you should have spent a little less on your car too, and not used your credit cards for all those nice clothes you wear… maybe you’re just living way beyond your means.  You’re probably not saving for retirement either.  You’re one of THOSE irresponsible people and maybe losing your home to foreclosure would teach you a lesson.

Whew… it’s exhausting, isn’t it?

But, let’s say for a moment that you could not find a way to bring your mortgage payment current when told, when you were 90 days delinquent, that your score was now too low to qualify for a modification.  Now you’re 120 days behind, and soon it’s been six months since you’ve made a payment to your bank on your loan.

By now the bank is sending you the most threatening letters imaginable.  They could foreclose at any moment according to the letters, and their tone tells you that you are basically an irresponsible failure who cannot be trusted because your word means nothing.  You promised to make the payment and now you’re not living up to that promise.  You’re a promise breaker… a liar.  How do you sleep at night?  You shouldn’t even have friends, because if your friends knew what you were up to, they likely wouldn’t want to be your friend anymore.

Nonetheless, you’re now seven months late, then eight, and then nine.  Now the bank is calling you almost daily, the pressure is becoming unbearable, you’re trying everything to make more money so that you can make the payment.  If you do find a way to come up with the cash, you bring your mortgage payment current immediately.  If you get a new job that pays more, you call your bank and start begging and explaining that everything is going to be okay… you’re working again… if they’d just please understand… you’re a good person… you’ll pay your payment every month and on time from now on… you’re sooooo sorry to have gotten behind… How about $1200 this week, and then $1200 the following week, and then $2000 by the end of the… blah, blah, blah.

You’re a babbling fool that will agree to just about anything the bank says at that moment.  If the person you’re talking to at the bank acts the slightest bit nice to you, or comes off as even a little bit understanding of your situation… you gush with appreciation and feel like you want to be their BFF.   Thank you, thank you, thank you, thank you, thank you, thank you… really… thank you so much.  My husband thanks you, my children thank you… my dog thanks you.  Yuck.  It’s disgusting, really.

Or, maybe that’s not what happens.  And now you’re almost eleven months late.  You’re working.  You could make a reasonable payment if you weren’t so far behind.  You’ll never be able to pay off the arrears though, so what’s the point.  You’re desperate… you’re about to give up and resign yourself to the fact that you’re going to lose your home to foreclosure.  You’re trying to get used to the idea that you’ll soon be packing and calling the moving truck… its heart wrenching for anyone to watch.

Well, guess what?  Depending on the specifics of your situation… whether there’s any equity in your home… how far underwater you are… how long are homes like yours and in your area remaining on the market before being sold? Things like that.

Do you see what’s going on?

Since foreclosure is now imminent, the bank can’t threaten to ruin your credit score anymore, as it’s already ‘F’ and would be ‘G’ if scores went that low.  The bank is now trying to figure out two things:

1. What is the likelihood of you being able to make the payment if the bank modifies your loan?  What if they take the amount in arrears, tack it on to the back end of the loan, and reduce your monthly payment by a couple hundred a month?  Would that do it?  Or would you agree to the deal and then not be able to make the modified payment… and again in six months end up right back in foreclosure where you are now.

If the bank thinks that might happen, they won’t modify your loan.  They’d rather foreclose now than go through this same thing next year and end up foreclosing then.  Real estate values will likely be lower next year, so by waiting the bank just assures itself of a bigger loss on the property.

The cost of foreclosure to your bank is going to be 30% to 50%, or even more in the worst of instances.  But that’s not the most important factor to your bank… this is all about your bank’s degree of certainty that if they modify your loan, you won’t be back in foreclosure anytime soon, and likely never.  Your bank views a loan modification as pretty close to unthinkable in the first place, so it’s unquestionable that it’s a once in a lifetime thing in their eyes.  You should be too embarrassed to even ask a bank to modify a loan a second time, according to your bank.  It’s almost like… if that happens, you’ll probably want to change your name and move to another state. What a load of crap the banks have peddled our way all these years.

So, you see… it’s a range.  In order to get your loan modified, you need to fall somewhere between “Definitely won’t default again if loan reasonably modified,” and “Will self-cure the mortgage before home is actually taken back by the bank”.  Get it?

I talk to people all the time that have recently applied for a loan modification, and they always talk to me about how it will cost the bank more to foreclose on their particular house, so they expect the bank to modify the loan.  But then the bank refuses, and I hear people say that they can’t understand it because the bank should do what’s in the best interests of investors.  Then we start talking about how servicers make more money foreclosing, all of which is true.

The problem with this line of thinking, however, is that it fails to incorporate all the data… it’s not just a numbers game to the bank.  First they need to know, if they offer you nothing, will you really end up losing the home to foreclosure, or will you let the Devil himself rent out a room to avoid that shameful outcome?  Then they need to know that if they do accommodate you and provide you with a modification, chances are good that you’ll never miss a payment for the rest of your life.

Shame, shame, shame…

So, how should a bank go about getting the answer to either or both of those key questions?  Self-cure and/or re-default?  It’s not like you can find the answer to either of those questions from looking at an application or a credit report.  You certainly can’t tell by talking to someone on the phone.

The only way a bank can know for sure whether you’re going to self-cure and eject yourself from the foreclosure process, is to let you get to that point and see what you do.

It’s like a game of poker… will you fold under extreme stress and pressure and show up with the money to save your home, or will the bank actually be forced to foreclose, and therefore better off to modify your loan… and if they do approve your “mod,” as they say in the biz, will you make it just fine for a long, long time, or will you end up right back where you are today, next year at this time, if not sooner?

Once a bank knows the answer to those two questions about you, then the bank’s cost comparison between modification and foreclosure becomes pivotal, but until then, chances are the bank will play out its inherently superior hand and count on you folding your cards before foreclosure by coming up with the money you said you could not possibly come up with when you were talking with your bank’s representative about a loan modification.

I talked to a woman a few days ago, she said she was in her early sixties, said she owned two homes, desperately needed at least one loan modified and probably both, otherwise she’s going to be on the street.  She wanted me to recommend a few attorneys for her to talk to, and I gave her the contact information for the lawyers I knew in reasonably close proximity to her home.  Then she asked me a few questions, and the last one I’ll always remember.  Referring to the lawyer, she said:

“Do you think I have to tell him about my trust account?”  (Adorable, right?)

I answered as honestly as I could.  I said: “I wouldn’t.”  (It’s probably not the right answer, I realize, but I’m just saying…)

If this were a tennis match, the score would always read: Advantage – Banks & Servicers

The reason that, other things being equal, I advise people to hire an attorney to help them negotiate a loan modification is that their lender or servicer will ALWAYS have a huge built in advantage in any negotiation over the settlement of a debt you contracted to repay, because the moral norms for borrowers work against them, and the market norms that apply to banks, support the bank doing pretty much whatever it thinks it needs to do to get the borrower into compliance with the terms of his or her loan… or reclaim the property.

Even when people hear that a bank did something really egregious or even illegal, many of them just say: “Yeah, well, I guess that can happen.”  It’s as if to say that perhaps the bank went too far, but the borrowers were juggling flaming chainsaws in terms of risk, and the bank still has the right to take back its home and punish the irresponsible homeowner who fell outside of our society’s norms by failing to fulfill his or her promise to repay a debt.

See, there are some things in our society that work the way they do only because we believe they will work the way they do.  The FDIC, or Federal Deposit Insurance Corporation, is a commonly offered example of this principle at work.  The FDIC “guarantees” cash deposits up to $250,000 per account, as of last year, I believe.  So, no one has to worry about rushing down to the bank to get their money out if there’s a problem at the bank, the FDIC will cover any loss up to $250,000 per account.

Except, even in the best of times, the FDIC could not possibly come up with the money to cover even a small fraction of bank deposits in this country.  If there ever were a disaster that caused all the banks to fail, the FDIC would be meaningless.  The FDIC is an independent agency of the federal government and you might call it a “faith based” organization because it only exists to give us faith in our banking system, and only works as intended because of that faith.

Well, loan modification negotiations are a little bit like that.  The bank gets to use shame, guilt and fear to get you into compliance with your loan.  Once you’re deeply ashamed, you won’t tell anyone what’s going on… and you’ll feel worse every day.  Then you become afraid to answer the phone.  Then you’re turning off the machine… you won’t even want to hear the phone ring.

Your bank will also greatly exaggerate what it will cost you to lose your property to foreclosure.  You’ll be told that you won’t be able to buy anything for a decade, and all kinds of other nonsense.  By the time you’re done reading a few of the letters you get from your lender each week, you can easily become convinced that losing your home is almost the end of all opportunity in your life.  Might as well be a bum after that.  It’s absurd of course… you can buy another home in 2-3 years, if that’s even what you want to do.  There’ll be so many foreclosures on the market… you’re going to be hearing about foreclosures selling ten years from now.

The Point Is…

The point is, that when homeowners start the process of negotiating with their lender, they’re not only subject to being made to feel guilty and ashamed, but they are also likely to over-estimate the personal cost of foreclosure, all as a result of the bank’s and our society’s intentional efforts to make borrowers feel that way.  It’s no accident, is what I’m trying to say.

You see, we keep the banks open and safe by believing in the FDIC, and we keep people from walking away from their homes when the value of those homes drops significantly by imposing our society’s moral norms, which include shame, guilt and fear, related to repaying debts.  If the government and the banks can make homeowners deeply ashamed and afraid to lose their homes, then fewer people will even ever ask for a modification in the first place.  With me?

Why the Bank Doesn’t Want You to Hire a Lawyer or other Expert…

When a homeowner hires an attorney to help negotiate a loan modification, that attorney is not going to being made to feel ashamed, guilty, or afraid… the borrower can be made to feel all of those things and more, but the lawyer, not so much.  He or she is a hired gun, if you will.  That’s why the banks don’t want homeowners to be represented, and why they want homeowners to call them directly.

Treasury looks the other way on this “put-the-borrower-through-hell” process because it understands that banks have to make sure that they are not throwing away money by modifying loans for borrowers who would have self-cured.  Nor does the government want the banks to modify loans for people who won’t be able to make the modified payment.  And since the only way for the bank to really know either of those things is to put the borrowers through their paces, as it were.  Many will self-cure, some should be foreclosed upon… blend, shake, stir and pour,,, see what comes out.  And of those that fall somewhere in the middle, some will have more or less equity, and some will be in markets where houses are selling relatively faster than others.

Out of that psycho-social-financial-market analysis, the bank will modify some loans… but the process used to conduct the so-called analysis is guaranteed to frustrate the hell out of everyone who enters it that’s determined to obtain a loan modification.

Being represented by an attorney or other expert throughout the process is unquestionably better than not being represented, mostly because that attorney won’t be subject to the bank’s tactics of trying to shame, guilt or scare, and as a result of that, is likely to think more clearly than you would be able to.  And also because of the attorney’s or other expert’s knowledge of the law related to the foreclosure process and the HAMP guidelines, that attorney is more likely to get a result that’s acceptable to you, the homeowner… and by acceptable, I mean a modification that’s sustainable over time.

Is This How Things Should Be Done Today?

Absolutely not.  The situation we’re in today is NOT a normal market correction, and I thought I’d better make it clear how I feel about how the banks are handling loan modifications: I hate everything about it, and I think it could not be more wrong.  The Obama Administration has continued our government’s tradition of implementing pointless programs designed to help stop the foreclosure crisis.  Nothing our government has done has helped in the least… they’ve failed us at every turn.

It’s not today’s homeowners that are responsible for the position in which they find themselves… no matter what anyone tells you… it is NOT your fault.  If someone would like to debate that point with me, bring it.  I’m easy to find and can be emailed at mandelman@mac.com.  But come to the discussion prepared, because I am.

This meltdown was caused by this country’s financial institutions, and not by people with mediocre credit scores who wanted to buy houses.  It’s the banks that did this, but no one is making them do anything to fix what they’ve clearly broken.

We’ve given the banks in this country something like $11 TRILLION so far, and we’re going to have to give them a lot more.  The so-called toxic assets are still right where they were last fall, and the banks that were too big to fail last year, are now bigger.  They have an obligation to act in the best interests of the homeowners they screwed, and in the best interests of our nation’s economy because without American taxpayers, they wouldn’t even be open for business.

So, don’t read what I’ve written and come away thinking that I approve of the way banks view borrowers asking for loan modifications… I don’t.  I’ve only written what you’ve just read because I think it’s important that people understand the dynamics of what’s going on… that the reason they feel guilty and ashamed is because the banks and our government want them to feel that way, so that people don’t just start walking away from their mortgages because they’re so far underwater.

They’re manipulating you into feeling ashamed for being in trouble on your mortgage… but don’t let them make you feel that way.  It’s not your fault… it’s the banks that wear the black hats in this horror movie, make no mistake about that.

And, in the event that you’ve already lost a home to foreclosure, don’t believe the crap about how your life will be ruined for another ten years.  It’s simply not true.  You may not be able to buy another house for the next few years, but so what?  We haven’t come close to hitting bottom, so you wouldn’t want to buy another home in the near future anyway.

All forecasts say that we’ll have 12 million more foreclosures in the next two years, and that number is probably low, so don’t feel alone and ashamed about your situation.  The people you’re talking to down the street have problems too, they’re just too ashamed to tell anyone about their situation, just like you’ve been afraid to talk about yours.

Let it go… and let’s turn up the heat on exposing what the banks have done and continue to do.  Next year the mid-term elections will mean that every single representative in the House is up for re-election.  Let’s just see if we can’t send a message they’ll hear and listen to… I’m sure we can, if we want to.

It’s not over until it’s over.  Don’t give up the fight.  Knowledge is power.  As Winston Churchill once said:

“Never give up.  Never give up.  Never.  Never.  Never.”

Lately, one report after another is discussing the issue of “strategic defaults,” or as the mortgage banking industry would call them “ruthless defaults”.  These are the foreclosures that happen on purpose.  People find themselves owing significantly more than their property is worth and they decide to walk away from their indebtedness instead of spending the next 20 years paying hundreds of thousands more than the property is worth.  Crazy, huh?  Go figure.

Apparently, there are some people that think such a decision involves some sort of moral dilemma.  Isn’t that just adorable?  A moral dilemma… there’s something immoral about walking away from your mortgage?  Okay, so I have questions.  Is it less or more immoral than say… gay marriage?  Or what about flag burning?  How does walking away from your mortgage compare with flag burning on the morality scale?  If you’re even thinking about trying to answer that question… give it a rest.

I understand why people want to keep their home.  I understand why they don’t want to lose it to foreclosure.  I even understand why some people choose to stay in a home that’s seriously underwater… for a while, anyway.  But, if I were underwater in a property by hundreds of thousands of dollars with no hope of ever having any equity of which to speak, I’d walk away in a New York minute without feeling the least bit immoral for having done so.  It’s a mortgage, for heaven’s sake.  What’s moral or immoral about a mortgage?

When I take out a mortgage I take on a certain amount of risk.  And the investor funding my mortgage takes on a certain amount of risk.  And we both hope the risks we’re taking pan out.  If they don’t, for either party, well… that’s the way the cookie crumbles.  The investor may decide he wants out of the deal for whatever reason and decide to sell the mortgage to another investor.  And I may decide that it’s not working out for me, and if I do… and I can’t sell the property… well, I may walk away.  The investor gets the property and I get the foreclosure on my credit report.  I don’t even see where morality enters into the equation.

Let us say that you owed $600,000 and the house appraised for $400,000.  Here’s how today’s strategic default might work out:

A. You stop paying your mortgage payment, which is $3500 a month, and your property taxes, which are $8,000 a year.  Savings in 12 months: $50,000.

B. One year is how long you can easily stay in the house before they actually kick you out, and you may be able to get 18 or even 24 months, you never know.

C. Keep all other payments current… car loans, credit cards.  You only want to let your mortgage payment lapse, nothing else.  That way all of your other credit lines will remain intact.

D. Go rent a house down the street or wherever you want.  Rents are way down essentially everywhere.

E. Two years later start shopping for another house.  Pay $300,000 for the same house you owed $600,000 on before walking away, and start building equity immediately, because you’ve saved $100,000 to put down over the last three years.  Aren’t you happy now…

These days, it occurs to me, there would be even less morality involved in the decision to walk away from a mortgage.  I can’t believe anyone actually feels morally obligated to a bank today.  Why would anyone possibly feel that way?  About a bank?  You’ve got to be kidding me.

I mean, what type of business would be considered less moral than a bank?  I think I’d feel more morally obligated to a drug king pin than a bank… maybe about the same… hard to say.  It would depend on the dealer, I suppose.

I bank at Citibank and if I ever come out even a nickel ahead in our dealings, I’m having a damn party.  Heck, every time I go into Citi with a friend, we try to carry out the furniture or whatever “art” is hanging on the wall.  The manager hates me.  He chased after me once when I was trying to carry one of the bank’s potted plants to my car.  What’s the big deal?  We, the taxpayers, have given Citi something like $400 million in fabulous cash and prizes for bankrupting themselves.  Why shouldn’t I be able to take home one lousy plant?

Morgan Stanley obviously doesn’t feel morally obligated to the bank that was financing their mortgages, and we’re not talking about a $189,900 three bedroom/2 bath in Palmdale here.  Bloomberg ran the story just two weeks ago under the headline: Morgan Stanley to Give Up 5 San Francisco Towers Bought at Peak.  Here’s how the story starts off… you’re going to love this…

Dec. 17 (Bloomberg) — Morgan Stanley, the securities firm that spent more than $8 billion on commercial property in 2007, plans to relinquish five San Francisco office buildings to its lender two years after purchasing them from Blackstone Group LP near the top of the market.

The bank has been negotiating an “orderly transfer” of the towers since earlier this year, Alyson Barnes, a Morgan Stanley spokeswoman, said yesterday in a telephone interview. AREA Property Partners will take over the buildings. Barnes declined to say when the transfer will occur.

“This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”

Now you see… that’s exactly what I was going to say.  Alyson and I see things exactly the same way.  It’s not a default or foreclosure situation… they’re just giving the bank the properties back in order to get out of the loan.  What’s wrong with that?  There’s nothing immoral about that, right?  Morgan Stanley certainly doesn’t think so, so why would anyone else?  Where this whole moral dilemma thing coming from anyway?

What a crock of crap that is.  What Morgan Stanley is doing is called a “strategic default,” simple as that.  You can dress it up and make it sound like it came directly from the Board of Directors, but at the end of the proverbial day, Morgan wants out because the property is worth half what they paid for it, and they know it will be many years, and probably decades before the price comes back to the previous level.

And guess what… it’s not even the first time Morgan Stanley has walked away this year.  According to the Bloomberg story, this is the second time the mega-bank has defaulted on its obligations… no, that’s the wrong way to say it… it’s the second time the mega-bank has negotiated to surrender property it had previously purchased and was now underwater.  Here’s how Bloomberg described it:

The San Francisco transfer would mark the second real estate deal to unravel this year for Morgan Stanley, which bet big on the property markets as prices were rising. The firm last month agreed to surrender 17 million square feet of office buildings to Barclays Capital after acquiring them for $6.5 billion in 2007 from Crescent Real Estate Equities. U.S. commercial real estate prices have dropped 43 percent from October 2007’s peak, Moody’s Investors Service said last month.

“It’s not surprising this deal ran into trouble,” Michael Knott, senior analyst at Green Street Advisors in Newport Beach, California, said in an interview. “It was eye-opening among a group of eye-opening deals. There was almost no price too high in 2007 for office space in top gateway markets.”

The Morgan Stanley buildings may have lost as much as 50 percent since the purchase, he estimated.

Morgan Stanley bought 10 San Francisco buildings in the city’s financial district as part of a $2.5 billion purchase from Blackstone Group in May 2007. The buildings were formerly owned by billionaire investor Sam Zell’s Equity Office Properties and acquired by Blackstone in its $39 billion buyout of the real estate firm earlier that year.

Well, obviously Mrogan Stanley was under the impression that real estate prices would go up forever.  And it looks like they bit off more than they could chew.  I bet they bought jet skis and Hummers too.  Probably used their office buildings like ATMs… well, maybe not.  They didn’t need to, I suppose.  After all, they turned into a commercial bank over night in order to get TARP funds and countless other taxpayer funded freebies that have allowed the bank to have a record year this year, along with everyone else on Wall Street for that matter.  So, technically they used us as their ATM, but it’s the same idea.

The Bloomberg story doesn’t bother to mention who the bank is that’s eating Morgan’s default… I mean orderly transfer of the property back to the bank that funded their mortgage.  Kind of weird… I mean, they must be very unhappy at having to take a billion dollar loss.

Oh, but wait… they don’t have to take any loss at all, do they?  Thanks to Uncle Timmy, and the myriad of others in the Banker’s Party, the bank doesn’t have to recognize the losses caused by a decline in the underlying value of commercial property at the momeny, so whew… dodged a bullet there, I’d say.  That was close.  Thank God for these new pretending rules, or we might be in serious trouble.  Tim is always thinking, I’ll say that for him.

I like this pretending stuff… it’s cool.  I don’t know why no one has ever thought of it before.  Why did we have that whole dot-com meltdown anyway?  Couldn’t we have just put some pretending rules in place?  If we had, maybe Pets.com would still be delivering 100-pound bags of kibble across the country overnight for free.  It was a great service; you’ve got to admit.  What would you like to bet George W. is watching this and thinking: “Pretending.  Of course, pretending.  Why the heck didn’t we think of that?  Laura, come in here, you’re gonna’ just love this.”

The Agonist, a blog I’ve been reading lately and like a lot, says it so well, it’s just not worth trying to write any better:

The investment banks are winning at this game. Very few mortgages are being renegotiated to allow the homeowners to keep their home, and this despite all the programs of the federal and state governments trying to force renegotiations on to the financial firms. One of the reasons the investment banks are winning is that there is a conscious, deliberate effort by the financial industry, the press, and the government to prevent homeowners from entering into strategic defaults.

Americans still view a deliberate default as immoral and a sign of personal failure.

Morgan Stanley doesn’t look at it that way, not when it comes to its own behavior. It only expects you, the consumer and homeowner, to have moral attitudes about financial decisions. With the corporations, morality doesn’t enter into it; it’s just business. That is why it is very, very important for strategic defaults by firms like Morgan Stanley to be dressed up as something different – as a negotiation done voluntarily for mutual agreement. And after all, Morgan Stanley itself isn’t going bankrupt, just the subsidiary that bought these properties is acting like it’s bankrupt.

The last thing the financial industry and our worthy government leaders want is for American consumers to act as irresponsibly and amorally as our corporations do.  If most Americans acted like that, not one major US financial firm would be left standing.

Did everyone catch that last line? If we acted like our corporations, not one major US financial firm would be left standing.  Yeah, well make a mental note of that.  It’s the kind of thing that could come in handy down the road a piece.

Morgan Stanley doesn’t have to walk away from the buildings they purchased during the bubble.  They’re doing great as a result of being loaded with taxpayer funded cash, and not having to recognize losses, but they want out because they’re underwater to such a degree they know it makes no financial sense to continue paying what they’re obligated to pay.  If you or I did that, we be getting foreclosed on, our bank would be calling seven times a day and sending us the nastiest letters on the planet trying to scare us into paying way more than we have to for the property.  But when Morgan Stanley does it, they’re working to negotiate something amicable in order to ensure a smooth transition, or some such nonsense.

Our government seems just hunky dory with the whole deal too.  It’s fine for Morgan to stop paying a mortgage when it’s too far underwater, but not for a homeowner to do the same thing for the same reason?  Well, alrighty then… fair enough.  Whatever they say.

Listen… I can’t tell anyone what to do, nor would I want to, but let’s just make sure we’re all thinking a little more corporately as this battle continues, shall we?  Food for thought… food for thought… I report, you decide… ( walks away whistling…)

According to just about everyone on television and in print these days, should a homeowner get the crazy idea that they might be able to avoid losing their home to foreclosure through a loan modification, the thing they should do is call their bank and, I would assume, ask for one. I say “I would assume” because no one on television or in print has offered anything more detailed in the way of instruction than to say: “Call your bank.” So, alrighty then… fair enough.

~~~

Being that I had some extra time this morning, I thought… what the heck… the guy on 20/20 said it would work so he must know, right? So, I decided to call my own mortgage holder… First Nationalized Bank.

Ring… ring… ring… Thank you for calling First Nationalized Bank. If you know the extension of the person you are calling you may enter it now. For the company directory, press 9. (Silence…)

If you are calling about a checking or savings account, press 1. For credit cards, press 2. Auto loans… 3. Other options… press 4. (I pressed 4.)

(Ring… ring… ring….) You have reached First Nationalized Bank. For questions about home mortgages press 5… for questions about… (I pressed 5.)

You have reached First Nationalized Bank. If you know the extension of the person you’re trying to reach, you may enter it now. (Silence…) To return to the main menu, press 7. To hear a duck quack, press 8. (Silence…) To speak with an operator, press 0. (I pressed 0.)

Ring… ring… ring… No one is available to take your call… But we value your business… If you’d like to leave a message press… (Click)

I figured maybe it wasn’t a good time, and decided to try back a little later. Mornings are probably busy times for banks. No reason to make any snap judgments based on just that one attempt.
Plus, I’m of a mind to give the banks a break. They’ve had a very tough year. Giving out all those bonuses is time consuming. It’s not like they’re direct deposits you know? And that’s to say nothing of the envelopes. Who’s going to lick all those envelopes, huh? And the TARP money? Hey, you think all those billions just store themselves? No sir, someone has to store all that money away somewhere.
Then, when you add in all the time it takes to get the sub-prime borrowers evicted and onto the streets where they belong… all that crying and sobbing… please Mr. Banker… please… we’ll pay soon… please… it gives me a headache just thinking about it. I mean, if I just picked up a bonus check for a couple of million… I’m sure I want to go deal with some dead beat who couldn’t even handle it when his mortgage payment doubled over a couple of months… like, deal with it people… I’m booked on the 7:05 to Maui and I don’t have time for your whining… like I said… I’m quite sure it’s been hectic.
The only saving grace has been that at least the banks didn’t have to worry about making loans to actual customers… and do all that other stuff.

I remember that Citibank laid off like… I don’t know… what was it… two million people? And I heard that David Rosenberg, who used to be the Chief Economist at Merrill Lynch, is now working as a teller at B of A. So, there’ve been some very significant changes at most banks for sure.

Heck, Citi even had to cancel the purchase of one of its Lear Jets that had been on order. See how dangerous all that populism crap is? You let that stuff get out of control and next thing you know bankers are going to start forcing executives to drive the Mercedes instead of the Bentley. It’s dangerous. It’s socialism. It’s a slippery slope.

So… let’s give First Nationalized Bank a break on that first call and talk about something else. We’ll try them back in 15 minutes, how’s that?

You may remember this past year there was a study released that showed that loan modifications were re-defaulting at the rate of like 60% within the first year after being modified. It sort of came across like proof that sub-prime borrowers shouldn’t have been allowed to buy their homes in the first place, because apparently even if you modified their loans, they still couldn’t make their payments. Ah ha! I knew it! Dead beats, one and all.
I saw the study. It was actually two studies. One done by Credit Suisse and the other by the Swiss banking giant, UBS. (U… BS. I love that name.)
The total number of mortgages in both studies, as I remember it, was right around 1400. And roughly 40% – 60% of the loans defaulted in six months depending on the exact circumstances, but the point was the same either way. A lot of modified loans defaulted, or rather re-defaulted… that was the point.
I immediately wanted to figure out why that would be the case. Why, you ask? I’m not sure… it just seemed like an awfully high percentage in an awfully short period of time. I mean, even hard core dead beats make it more than six months, right? A year, maybe?
So, I dove in to the data, trying to see if there were any reoccurring themes that would lead me to that “Ah ha!” moment for which I was hoping. I tried to see if there were any patterns as far as the borrowers were concerned… but nothing popped out. I tried to see if the numbers presented a path to follow… again nothing looked indicative of anything special. I even tried to find out the average credit scores or whether there was a geographical consistency, like maybe a whole bunch of the borrowers lived in Michigan. Nope, nothing.

So, feeling a little bit lost, I called a friend of mine who used to be a big time corporate treasurer at a Fortune 100 company. He’s smart as a whip, and I wanted to see if he had any ideas. He didn’t. But he did offer to refer me to a senior executive at PIMCO, which to me sounded like the transmission place ‘Aamco,’ but without the horn honking at the end. The CEO’s name is Bill Gross, and he’s a zillionaire.

PIMCO is like the world’s largest bond holder, or something like that. I never even bothered to look them up. I just called the woman my friend recommended and said hello.

My friend was right… she was double sharp and knew everything about the whole mortgage mess. When I mentioned the bond ratings agencies she immediately got hot under the collar. She almost raised her voice saying “They should be in jail.”
“Really,” I said. “How so?” And she went on to explain the intricacies of the bond market as it related to securitization and derivatives. She laughed towards the end of her rant, which woke me up and luckily she wasn’t asking a question so I was free to get back at my original topic of interest: loan modifications.
She had no idea why borrowers would default in such high numbers and so quickly. She did however express surprise that the investors had let Credit Suisse or UBS modify their loans, and she told me that PIMCO wouldn’t let one of their servicers do that.
I asked why, a little hesitantly now, and she explained…
“The banks don’t own the loans,” she explained. “Investors like PIMCO do, and why would an investor allow a servicer to cut into their profitability, just because someone wasn’t making the payments on their mortgage?” Foreclose, was her answer. I mentioned that the costs of foreclosure in this market were rather high, but she wasn’t having any of it. Foreclose, and that’s that. Well alrighty then… interesting.
Then I suggested that a cost comparison could be done using a net present value calculation as compared with the costs of foreclosure and her attitude changed.

“Oh, well… that would be different, I suppose,” she was clearly softening at the mere mention of a “net present value calculation,” bond people are so easy. “If someone showed us a net present value calculation as compared with a foreclosure costs and the data was solid, I suppose we’d have to take a look at it.” Bingo.
Maybe this would be a good time to try First Nationalized Bank again. What do you think? No? Okay, let’s give them a few more minutes, then we’ll call back. I’m sure we’ll get someone. Anderson Cooper said so.
I thanked my new net present value oriented friend and hung up. Next I would need to find a homeowner whose loan had been modified directly by the bank as a result of their request. This wasn’t easy. Lots of refinancing, but no modifications. Finally, I found an older gentleman who said that he asked his bank about modifying his mortgage and they did.
“Perfect,” I said to him on the phone. “How’s tomorrow?”
The next day I found myself driving out to Palm Springs. It was crisp and sunny… a beautiful day and I was anxious to see how he had done it and why he had chosen to do so. I spent the entire afternoon with the old guy; we drank a couple of martinis and drove around a golf course in his private cart. It was fun and I genuinely liked him. He told me how it went, and answered all of my questions. I started to think that maybe the banks weren’t so bad after all.

As I was leaving, I stopped by a glass case by the hallway leading to the home’s main door. There was a plaque that read “Employee of the Year… Bank of America… 1965.” Uh oh. “Were you with Bank of America before you retired” I called out to him. “Yes,” he replied, “44 years,” he said with great pride. So, I guess when you called B of A for your loan modification, you knew exactly who to call, right? And they took your call because they saw it was you, right?”
“Oh absolutely,” he said. I was the Senior Vice President of Consumer Loans and Mortgages for 21 years… when I retired, there were more than 1,000 people at my party. They held it at our loan-processing center in Pasadena. Want to see some pictures?”
“Maybe next time,” I said. It was getting late… so, I said my goodbyes and got back on the road toward home, kicking myself that I hadn’t thought to ask about that before driving for two hours to interview Mr. Bank of America Ret. Oh well… people are losing their homes to foreclosure, who am I to complain about a little extra driving.

Alright, so let’s give old First Nationalized Bank a call… it has to work, the guy on Sixty Minutes was sure of it. And even President Obama said we wouldn’t need to pay anyone for help… okay, one more try…. here goes… dialing now…

Ring… ring… ring… Thank you for calling First Nationalized Bank. If you know the extension of the person you are calling you may enter it now. For the company directory, press 9. (Silence…)

If you are calling about a checking or savings account, press 1. For credit cards, press 2. Other callers, press 3.

I pressed 3. (Ring… ring… ring….) You have reached First Nationalized Bank. For questions about loans press 5… for questions (I pressed 5)

You have reached First Nationalized Bank. If you know the extension of the person you’re trying to reach, you may enter it now. (Silence…) To return to the main menu, press 1. (Silence…) To speak with an operator, press 0. (I pressed 0)

Ring… ring… ring… No one is available to take your call… If you’d like to leave a message press… (Click)

~~~

Okay, this is embarrassing… maybe I should have tried this earlier… don’t get impatient; we’ve got a lot more to cover anyway. Besides it’s getting close to lunchtime, maybe that’s the problem… they probably don’t answer as many calls around lunchtime.
So, getting back to my analysis of the disappointing loan modification data… through several interviews with borrowers and a few with bankers, I was able to ascertain what I referred to as my “7 Points of Blight” behind the high re-default percentages. It wasn’t the borrowers that caused the high numbers of re-defaults, it was the nature of the transactions. Banks simply were not handling loan modifications effectively, and none of the reasons for this should be the least bit difficult to understand.

Banks Negotiating Directly With Borrowers: 7 Points of Blight

1. Banks have a hard time getting in touch with distressed borrowers. As in: “Honey, it’s the bank.” “Tell them I’m not here.” Or mail that goes unopened. It’s just not that easy for a bank to get in touch with someone who is four months or more behind on their mortgage payments. And in many instances, by the time the bank did reach the borrower, it was often too late to stop the foreclosure process.

~~~

2. Banks and loan servicers today are anything but overstaffed, as one might imagine. They certainly haven’t upsized this past year, right? So, as an industry, they simply don’t have the additional staff sitting around trained to handle loan modifications.

~~~

3. Banks and servicers are set up to process tens or hundreds of thousands of mortgage statements and handle routine foreclosures and collections… all processes made possible by systems, more so than people. Loan modifications, however, are like a hand made car. One at a time… working with the borrower… putting the package together for submission to the lender… as a process it bears little resemblance to routine mortgage processing.

~~~

4. Perhaps most importantly, I was able to determine that the negotiation between a bank and a borrower at risk of losing their home is not a negotiation at all. It’s more like having a gun to your head. Being at risk of losing a home is nothing if not frightening. Distressed homeowners who received an offer from their bank that allowed them to stay in their homes, too often, jumped at it… and understandably so. After all, I realized, if I was going to lose my home to foreclosure, I suppose six months from now beats the heck out of next week, right?

~~~

5. Systems were lacking, as well. Banks and servicers had robust systems to handle the processing of payments, normal collections and even foreclosures, but loan modifications were another animal altogether. And few in the industry were prepared to invest in a system enhancement that would likely only be used for a couple of years. If you were a mortgage lender or loan servicer, would you invest in systems and people to handle loan modifications, when you saw that such modifications will only be a factor for a limited number of years? Exactly.

~~~

6.Investors are reticent to give banks and loan servicers the authority to write down their assets. No standardized guidelines exist, and investors need criteria upon which such decisions are to be made. Otherwise, it seems safer to foreclose.”

~~~

7. Compensation was another issue. Banks servicing mortgages are being paid to do so, but they weren’t being paid to handle loan modifications, and investors that we spoke with all indicated that in their opinion, mortgage servicers were over paid when times were good in order to cover times that were not. In other words, the investors weren’t all that hot on the idea of paying the banks anything extra to modify loans in order to avoid foreclosure.

~~~

When I finished my analysis of why so many borrowers were re-defaulting six months after their loans were modified by their lender or mortgage servicer, I went around testing my theories with everyone who would listen. And guess what?

Everyone agreed, most said something equivalent to “Duh… like, of course.”

Meanwhile, the stories about modified loans re-defaulting were showing up everywhere. In fact, it was becoming an urban legend, for a while anyway. I’d show up at a meeting, the sub-prime crisis would come up and within a minute, someone would bring up the Credit Suisse or UBS data. Most of the time the person bringing it up didn’t even know from where the stats came. All they knew was that modified loans were re-defaulting 60% of the time after just six months. And that made homeowners at fault. How could they not be… if 60% of them couldn’t even make it six months after modification, although not much of a modification, if you ask me.
I went ahead and called First Nationalized Bank again, just in case the phone lines had cleared up, but obviously they must be having some kind of problem over there. It can’t be the norm, can it? Assuming it was just a bad phone day, I stopped in at a bank to see if they could answer a few questions about President Obama’s plan to rescue the housing market.
They said they didn’t know anything. Just that the paperwork hadn’t been sent out to banks as yet. One of the guys who worked for the bank asked me a few questions and I fielded them all. I gave them the government phone number from the Treasury Website, and I told them this:

“Whatever you do, don’t hang up… no matter how many times it rings, stay on hold… or they put you all the way back at the end of the line… so even if it takes an hour… just wait there… they’ll answer, it just takes time. And once they do, it’ll be really helpful… you’ll love it, they answer everything…”

Then I got into my car and laughed the buttons off my shirt… You’ve got to have a hobby… I think I’m going to take up making fun of banks.

For want of a refi the payment was lost.
For want of a payment the mortgage was lost.
For want of a mortgage the house was lost.
From too many lost houses the market was lost.
For want of a housing market the financial sector was lost.
For want of a financial sector the credit markets were lost.
For want of the credit markets the economy was lost.
For want of the economy prosperity was lost.
For want of prosperity the country was lost.

And all for the want of a sustainable loan modification?

~~~

Mandelman out.

The Bankers Who Broke the World, Part 1

A Geek Tragedy

Told in Two Parts

The Players

Chances are that the names Matthew Tannin and Ralph Cioffi don’t mean a thing to you.  They’re not the stars of an upcoming holiday movie.  They didn’t lose in the Men’s Doubles Finals at the U.S. Open.  And they weren’t the first team to pilot the Space Shuttle.  Nothing like that.  You’ll hear about them soon though, we all will.

You see, Mr. Tannin and Mr. Cioffi are two of the ultra-smart professionals whose work at Bear Stearns ended up starting the worst global financial meltdown the world has ever seen.  Not bad for two kids from New Rochelle.  Actually I have no idea where they’re from, but it’s got to be somewhere like New Rochelle, so what difference does it make?

Matthew Tannin and Ralph Cioffi worked at Bear Stearns Asset Management, a Wall Street firm that made its money advising others on their investments, and as of June 30, 2007, had $45.6 billion in assets under management.  The two managed the Bear Stearns High Grade Structured Credit Strategies Enhanced Master Fund Ltd. (the “Enhanced Fund”), and the Bear Stearns High Grade Structured Credit Strategies Master Fund Ltd. (the “High Grade Fund”), which were hedge funds, registered as a Cayman Islands corporation with its principal place of business in New York, New York.

Bear Stearns Securities Corporation, located in Brooklyn, New York, served as the Fund’s prime broker, and acted as custodian for the Fund’s assets.

Ralph Cioffi was the founder and senior portfolio manager of the High Grade Fund and the Enhanced Fund from the inception of the fund in October of 2003 through July of 2007.  At his side from day one and right up to the end, was Matthew Tannin, the portfolio manager for both funds.  Sounds like they must have been good friends.

A Few Definitions…

Before we begin our story, it’s important that you know a few key terms.

NAV - A hedge fund’s Net Asset Value (“NAV”) is the value of the fund’s assets minus its liabilities.  Sometimes you see it expressed as the total net value for the whole fund and sometimes as the net value for each share.

REPOs - A “Repo,” as those in the biz liked to call it, would more accurately be described as a “Repurchase Agreement.”  A Repo is a type of loan agreement.  Repos were used by hedge funds to increase the fund’s buying power.  It was called a “Repo” because of how it worked.  A lender would purchase securities from a borrower for less than the securities were worth.  At some agreed to date, that lender would sell them back to the borrower at an agreed to price.  Of course, since the securities were the collateral for the loan, if their value dropped, there could be margin calls against the borrower, meaning that the borrower would have to come up with the cash to cover the drop in value.

CDO - A Collateralized Debt Obligation (“CDO”) is a security backed by a pool of mortgages. The mortgages generate interest, which is paid out to the investors in the CDO.  Typically a CDO is divided into parts called tranches, and an investor in a CDO could own part of a tranche, or all of the tranche.  The top tranche was considered to be the most secure because it was the last to be deprived of interest payments and return of principal if the underlying mortgages defaulted, and because it was the safest its owners got the smallest percentage of the interest payments.

The bottom tranche, the equity tranche, was considered the riskiest because it was the first tranche to be denied interest payments and return of principal if the underlying mortgages defaulted.  And because it was the riskiest, investors in the equity tranche got the highest percentage of the interest payments flowing to the CDO.

Basically, higher risk… higher return… lower risk… lower return.  And a CDO-squared, as the name implies, is a CDO backed by other CDOs.

The different tranches of CDOs and CDO-squareds, if that’s a word, are rated by the ratings agencies, Standard & Poor’s, Moody’s, and Fitch.  The rating tells investors about the relative risk of default of the underlying mortgages.  The highest possible rating, on Standard & Poor’s scale, is AAA, and AAA rated securities are supposed to be extremely safe, like almost T-Bill type safe.

The top tranche of a CDO was generally rated AAA, while the bottom tranches received lower ratings, such as AA, A or BBB. Debt securities, or bonds, that have a high risk of default, such as the bottom tranche of a CDO, were sometimes so risky as to be “unrated”.

Three more definitions, and then we’re ready to begin the telling of our tragic tale.

LEVERAGE – Leverage, as it relates to finance and investing, is borrowing secured by the assets you have and reinvesting the amounts borrowed in order to increase your overall returns.  The idea is that the cost of borrowing is less than the return you make on your investments.  The problem is that although leverage can create returns that otherwise would have been unavailable, the potential for losses is also greater because if the investment becomes worthless, the amount borrowed and all the interest on the loan still has to be repaid.  Some Wall St. firms employed leverage of 40:1 and higher.

A SUB-PRIME MORTGAGE, just in case you’ve been incarcerated in a foreign land and deprived of television news for the last three years, is a mortgage offered to a borrower who has a relatively poor credit history or lesser financial “cred” than someone who would qualify for a prime mortgage.  And when we speak of a hedge fund’s “LIQUIDITY,” we’re talking about how much cash, or things that can be easily turned into cash, the hedge fund has.

Okay, are you with me?  Then let our story begin…

Act One, Scene One: A Fund is Born

The Bear Stearns High Grade Fund was first opened to investors in October of 2003.  Ralph Cioffi supervised a growing group of BSAM employees.  Matt, Ralph and their minions told investors that the High Grade Fund invested in low-risk, “high grade” debt securities, primarily AAA and AA rated tranches of CDOs.

The High Grade Fund enhanced its ability to generate returns through leverage, which means that it borrowed money through things like Repo agreements in order to purchase additional income-producing assets, such as more CDOs.  The idea was that the use of this leverage would enhance the fund’s returns because it would borrow at lower interest rates than it earned from the assets it purchased with the proceeds of the Repo loans.

Matt and Ralph, when talking to investors, described the High Grade Fund’s objective as providing a modest, safe and steady source of returns.  They told investors that they could expect annual returns of 10 to 12%, and that the fund was not designed to “hit home runs.”  In fact, according to Matt and Ralph, the High Grade Fund was only slightly riskier than a money market account.

And for about three years, it worked as advertised.

By 2006, however, the fund’s performance had started to decline, and some of the investors started threatening to withdraw their investments.  Matt and Ralph needed something new to sell, and so shortly thereafter, in August of 2006, the Enhanced Fund was born.

The Enhanced Fund was to invest primarily in CDOs, but it would employ substantially more leverage than the High Grade Fund.  Matt and Ralph told investors that the Enhanced Fund would generate even higher profits than the High Grade Fund, but that those profits would come with only a limited amount of additional risk.  It would invest in an even higher proportion of the least risky securities, and the increased profits would come from the increased use of leverage.

Matt and Ralph told investors that they had invested their own money in the Funds, and the fact that hedge fund managers had their own money in a fund was critically important to investors because it showed that the managers had faith in the fund, and it aligned the interests of those managers with the interests of investors.

As of July 31, 2006, investors had a total of approximately $1.527 billion in the High Grade Fund.  When the Enhanced Fund opened, many High Grade Fund investors switched to the Enhanced Fund largely because Matt and Ralph said that they were moving their own personal funds from the High Grade Fund to the Enhanced Fund.

As of January 31, 2007, both Funds had reported positive returns every month since their respective beginnings, and life was good.

ACT ONE, SCENE TWO: Beware the Ides of March

By March of 2007, however, with the housing bubble having popped months before, Matt and Ralph knew their Funds were in grave condition and at risk of collapse, but this is where our intrepid duo started down a path that would end badly.

When the bubble popped, real estate prices started to pull back, and the worst of the loans started to default.  But because these sub-prime cash flows had been put inside tranches rated AAA, the bond market locked up as investors dumped the debt securities that they now saw had been improperly rated.

This is when Treasury Secretary Henry Paulson saw the problem as being limited to the lax lending standards that had allowed some borrowers to buy homes they couldn’t afford, and because the number of these loans represented a very small percentage of all mortgages, he saw no reason to intervene.  But while that situation was the fuse, it was not the bomb.  The real problem was that the country’s bond market was about to lock up, as investors no longer trusted the ratings on debt securities, and therefore had no appetite for investing in them.

Without a market for asset-backed debt securities, banks couldn’t replace the cash they had loaned out on mortgages and almost overnight, it became impossible for anyone to refinance a mortgage.  More defaults would unquestionably soon follow as the banks stopped lending and started hoarding their cash, and this had a major impact on debt securities as the ratings agencies started to lower their ratings.

The foreclosure crisis had begun.

Rather than disclosing the truth about their Funds, which had invested heavily in asset-backed securities and leveraged those securities, to their investors and lenders, which might have allowed an orderly wind-down of the Funds, Matt and Ralph decided to embellish… um, embroider… well, they decided to lie.

It would seem that they told themselves that the Funds’ bleak prospects would change, come around, and that their incomes and reputations would remain intact.  Just a couple of months later, on June 9, 2007, when the Funds’ collapse was imminent, Ralph stated: “If I can’t turn the Funds around I’ve effectively washed a 30 year career down the drain.”

And that he had.

As Bill Shakespeare said, “Oh what a tangled web we weave when first we practice to deceive,” and no truer words were ever spoken as far as Matt and Ralph were concerned.  Over the small handful of months before the Funds would finally collapse, the two, according to the complaint filed with the courts, would “misrepresent or omit material facts in their communications with investors and lenders about a variety of topics, including the financial prospects of the Funds, their opinions regarding the financial prospects of the

Funds, their personal investments in the Funds, the Funds’ investor redemption requests, the Funds’ liquidity picture, and the Funds’ exposure to the sub-prime mortgage market.”

In other words, they lied to everyone about absolutely everything.

Ralph hosted an informal meeting on March 2, 2007, with Matt and two others members of the portfolio management team in attendance.  He told his team that the Funds had experienced an extremely difficult month in February, but that they had averted disaster.  This soon led to a vodka toast in celebration of surviving the month.  He ended the meeting directing his staff not to talk about the Fund’s problems with anyone else… even the other members of the team.

Throughout the month of March, Ralph became increasingly concerned about the Funds’ exposure to the sub-prime mortgage market, and he shared his concerns with Matt.  On March 3^rd, talking to Matt he said: “At least we have our health and our families; we’re not 19 year-old Marines in Iraq.”  And later that same day he said: “The worry for me is that the sub-prime losses will be far worse than anything people have modeled.”

A week later he acknowledged: “We’ll be hard pressed to be up in either fund in March.”  And four days later Ralph wrote an email to a colleague that said: “I’m fearful of these markets.  Matt said it’s either a meltdown or the greatest buying opportunity ever.  And I’m leaning more towards the former.  It may not be a meltdown for the general economy but in our world it will be.”

By the end of the month, the performance of the Funds had deteriorated to the point where Ralph told a team member: “I’m sick to my stomach over our performance in March.”

By now, Ralph was also more than a little concerned about the Funds’ liquidity.  They were running out of cash, but especially in the High Grade Fund.  In fact, according to Bear Stearns Asset Management internal reports, throughout the month of March the High Grade Fund was in an “extremely precarious liquidity position”.  And Ralph was particularly worried that he would need to sell Fund assets at unfavorable prices to meet margin calls from Repo lenders.

It was March 14^th when Ralph told a member of his team that, “We do need to take positions down in the High Grade Fund.  We’re getting loads of margin calls.”

The High Grade Fund, however, didn’t have the money to satisfy those calls for cash, and Matt and Ralph discussed the possibility of merging it with the Enhanced Fund.  All that leverage was starting to exert pressure in the wrong direction, and even though Ralph knew it, he continued to tell lenders and investors that everything was hunky dory, including telling a Repo lender in March that the Funds had “more than enough liquidity to meet any likely eventuality.”

ACT ONE, SCENE THREE: Need Cash?  Just Get More Investors to Invest in the Funds

Matt and Ralph needed cash badly to cover the numerous margin calls that were the result of the leverage employed by the funds, so they decided that the easiest thing to do was to go get some from investors, which would stop other investors from pulling out and exacerbating the problems.

Incredibly, Ralph and Matt told their team members to tell investors that the market presented a buying opportunity.  In fact, on March 7^th, Ralph told a Bear Stearns broker who had put more than 40 of his clients into the Funds that he believed that “We have an awesome opportunity.”  And later that same day he told that same broker: “Matt and I are in agreement that we are looking at some great possibilities for the coming months. I don’t know where you are putting your money now but I would suggest we speak about adding more to the fund. That’s what I’m thinking.”

Matt was on the phone as well.  He told investors that he believed that the market presented tremendous “buying opportunities,” and that he was so confident in the Funds future prospects that he was going to add money to his own personal investments.  Just as one example, on March 15^th, Matt told an investor, that “We are seeing opportunities now and are excited about what is possible.  I am adding capital to the Fund. If you guys are in a position to do the same I think this is a good opportunity.”

Matt, it should come as no surprise, never added any of his own capital to the plummeting fund, and who could blame him?

And in an email message to another member of the portfolio management team at the end of March 2007, Matt expressed his satisfaction at the success he had in convincing investors to add more capital to the Funds, saying: “Believe it or not, I’ve been able to convince people to add more money. . . . ”

Rome was burning, but fiddlers Matt and Ralph were spinning it as a tremendous opportunity to buy undervalued assets.

On March 15^th, Ralph told Matt that the Funds “have to be very light on the investment side and continue to raise cash in the High Grade Fund and maintain cash in the Enhanced Fund primarily to meet margin calls.”

Cash, it seems, was about to reveal itself as King.

To Be Continued…

Tune in to Mandelman Matters tomorrow for the final act in our

Geek Tragedy, The Bankers Who Broke the World, Part 1:

ACT TWO, SCENE ONE: Ralphie Heads for the Hills

It was the worst of times… it was the worst of times.

Okay, so go ahead… tell me your story…

Homeowners #1 – The Smiths

We bought our home in 2002 for $700,000.  By 2005 it appraised for $1.1 million.  We knew it wouldn’t go up that way forever.  We’re not stupid.  We knew real estate was cyclical and would have some ups and downs.  But not like stocks.  The stock market could be really volatile.  You could lose everything in the stock market.  We had learned that back in 2000 when the dot com bubble popped and we lost a ton.

We weren’t trying to be greedy or anything, it’s just that everyone was putting money into technology and our advisor said we should, and it seemed like the right thing to do.  And it was going up and up, and you read all these stories about people making so much, and you don’t want to be the only ones that didn’t make the money… you know.  So, then it all went down and everybody lost a lot and we swore we weren’t going to do that again.

Anyway, that’s one of the reasons we bought the house.  You know, interest rates were down, and the bank said we could get the loan, no problem.  We were making good money, and it just seemed like the right thing to do… for our future, you know… invest our money in our home instead of anywhere else.  Like it seemed like the safe, responsible thing to do.  We’d be buying a little more house, investing our money in something safer, and 20 years down the road it would be worth quite a bit more for sure.  And along the way we’d be enjoying our home… a lot more than we’d ever enjoy owning a stock, I can tell you that.

So, when it appraised in 2005, for $1.1 million we thought we’d take some equity out and invest that money right back into the house.  That seemed like the responsible thing to do.  Invest in your home because it would go up in twenty years or so for sure.  I don’t know how much.  Like I said, we knew real estate wouldn’t just keep going up forever in a straight line like it had the last few years.  But over the next twenty years it seemed like houses would cost something more than they did in 2005… for sure.  And no matter what, in twenty years you’d have paid down the mortgage, so no matter what, you’d have this asset that you could sell, or borrow against, or whatever, and it would be a pretty good part of your retirement.

It was the responsible thing to do for your future, I don’t know… a lot of people just thought that way, that’s all.  It seems so stupid now… ‘cause you know, now we’ve lost nearly everything.  And if we don’t get the mortgage modification thing approved by the bank, we could lose the house.  And then I just don’t know what we’d do.

I don’t even want to think about that, at the moment.  Anyway…

So, we refinanced late in 2005 and took $200,000 out of the equity.  And we put all of it, well… maybe almost all of it anyway… no, I’m serious… we put almost all of it back into the house.  We remodeled the kitchen, we put in the deck and the pool, and, we changed the front quite a bit, with all new landscaping.  Our Realtor had told us that’s one of the most important things when you go to sell your home… she called it curbside appeal… how it looks in the front, so anyway…

We took out the $200,000, it was no problem getting the loan, we used a mortgage broker, he made it so easy, and then we put the money straight into an account, like a savings account.  We were really careful.  It’s not like we were going to take the money and go to Vegas or anything like that.  Well, actually, it’s funny… we did go to Vegas, actually… but that wasn’t because of the money we took out of the house, we had been planning that… anyway…

So, then we owed like $900,000… but our payment wasn’t really any higher than before we took the money out, not really.  Maybe $50 or $100… that’s it.  It was one of the 5-Year ARMS… it started low for the first five years and then it could adjust up, higher… you know, but we figured five years later, if it started to go higher, we could always just refinance to a fixed rate.

Okay, so since then everything has come down, you know?  A lot.  Our house went from $1.1 million to like $600,000… or maybe not that low… maybe $650,000, $675,000… anyway…

So, when everything started going crazy, and our payment was going to go up, and started going up quite a bit… we called our mortgage guy, he was really good, and he tried everything, but we couldn’t do it.  We could not refinance to a fixed rate.  They said we would have to come up with $100,000, or even it was… $130,000, $240,000…  I can’t remember, but something like that.  Like if we had $130,000, we wouldn’t need to refinance, you know… anyway…

So, now… our payment has gone up from $3800 to almost eight thousand dollars a month.  Yes it has, $8,000 a month.  And for a while we were paying it, I don’t know how, but we were getting by, we used what was in our retirement accounts, we cashed in a life insurance policy… but then business started getting worse and our income dropped by like 20%, and then went even lower.  And there was just no way.

And I really thought Obama would do something for the homeowners.  Tell you the truth, that’s a big part of the reason we voted for him… he would fix what was happening to the housing market.  But he didn’t… not yet anyway.

Now we hired a law firm to help us get a modification.  We tried doing it ourselves for a couple months, but I knew that wasn’t ever going to work.  Plus, it would be a fulltime job, I waited on hold for like two hours everytime I’d call, anyway… they said we had to be late on our mortgage to qualify, so we did that.  Actually, we would have started missing payments about that time anyway, so when they said we had to be behind, we thought… well, that’s good because we were just about to be anyway.

Actually, first we hired this company called Rescue My House Modification and they did nothing.  We were so pissed.  We probably won’t ever see that money from them… you know… there are so many scams out there… you read about it every day in the paper.  I saw this one guy on one of the news programs that’s on at night.  He scammed like 200 people, they said… I don’t remember exactly…

So, now we’ve hired a law firm to work on it… it’s been like six months… If we don’t get it, we could lose this house… I don’t know what we’d do… I can’t sleep… I think the law firm will do it though… they said they’re successful like 90% of the time… so anyway… we should get it.

Please don’t tell anyone any of this.  It’s embarrassing, you know.  We didn’t think we were doing anything wrong.  But you hear people all the time… at work… on television… they think it’s all the homeowner’s fault… which I can see in some cases… people that bought homes they could not afford… we didn’t do that.

We thought we were doing the right thing… for our future, you know.  Now we’re screwed.  Totally.  We’ve lost everything.  We just don’t want to lose this house because it’s all we have and we’ve put so much into it… and Real Estate will come back someday… it always has in the past.  We love our home.  And we owe like $950,000 and it appraised three months ago for like $600,000, and they said they take another 10-15% off because prices are still going down, I guess.

I don’t know why… I mean I know some of it, but I don’t fully understand why our government isn’t fixing this.  People are really hurting… it’s getting bad.  Why doesn’t Obama fix it?  The banks get all the money and we get nothing.

Homeowner #2 – The Jones

They say timing is everything and boy, isn’t that the truth.  We bought our house in 2006.  I don’t think we could have bought at a worse time.  We paid $450,000… and now… now it’s worth $225,000… maybe.  We didn’t take out a second mortgage or anything like that… we put 10% down.

We just paid way too much for the house, and now, because we can’t switch to a fixed rate loan, our payments keep rising.  They started at $1800 a month, and as of last month, they’re $3650… doubled.

So, we’re stuck.  We’ve been making the payments so far.  But it’s killing us.  We have no spending money, no money for vacations… nothing.  And I don’t know how long we can keep this up.

The only reason we took out the adjustable rate loan was because we thought we could use the extra cash to fix it up, buy furniture, appliances… it was our first house, you know.  We figured that in a few years, we’d just be able to switch to a fixed rate loan.  We knew real estate had its ups and downs, we just didn’t think the downs would be this far down… this fast.  I mean, our home dropped more than a hundred grand in a year.

Plus, as our payment was going up, we were late on a couple of car payments, you know.  So, our credit score went down, and then our bank sent us a letter and it said they lowered our credit card limit from $5,000 to $2,500.  So, that didn’t help.

So, now we don’t really know what we’re going to do.  We called our bank to see if we could get a loan modification, but they said we were current so there was nothing they could do.  It’s like we’re trapped.  If the payment adjusts again, it’ll be like impossible.  The stress is bad… I’m worried all the time.  I mean, we’ve got two kids.  And we love this house.  If we lose it, where would we go?  We couldn’t buy another one.  I just can’t believe this happened.  We saved and we bought a house… that’s what we were supposed to do, right?

And we can’t even tell anyone… we haven’t even told our best friends because we know what they’ll say.  They’ll say we shouldn’t have taken out the adjustable rate loan.  And I know they’re probably right, but we just didn’t think we wouldn’t be able to change to a fixed rate loan in a few years.  I know we only put 10% down, but we just didn’t think our house would be worth half of what we paid for it just a few years ago.  If we had thought that, we wouldn’t have bought it in the first place.

We hear lots of ads for companies saying they can help get you a loan modification, but then you hear that they’re all scams, you know.  Some are probably okay, but how do you know which ones are good and which ones aren’t?

I guess soon we’ll just have to take a chance and hire someone to help us.  I just don’t know who to ask… but we have to try something.  We can’t just lose our home… we just can’t.

Homeowner #3 – The Browns

We should not be in the situation we’re in.  I just can’t believe it.  We’ve been in our home for 36 years and the thought of losing it after all that time… and at our age… well, it just kills me to think about it.  And the government programs are a joke.  I tried getting help from the government program and from our mortgage company for 10 months and got nowhere.

I guess it’s our fault, even though I really don’t feel that way.  We did refinance a few years ago in order to pay off some bills and we also took some money to buy a rental.  We had this real estate agent advising us, and she suggested that we look at buying a triplex that we could rent out and we thought it sounded like a good idea at the time.  We’re in our sixties and we knew we’d be slowing down in some number of years, so we thought it would be a good idea to invest in a rental property and it would pay off over the next 15 years and then we could either sell it or rent it, or whatever.

Well, since then everything has gone wrong.  The apartments had always been rented, but then a lot of people started getting laid off, and we had people late on their rent, and then vacant apartments that we couldn’t rent for a few months.  Then my hours got cut and our income dropped and we got behind.  It’s amazing how fast everything can change.

We’ve never been late on anything in our lives.  We’re not irresponsible people.  But now look at us.  We might lose our home because of all this.  And I don’t understand why the government isn’t doing something about this.  I mean, Barack Obama was supposed to help regular people, but all he’s done is give money to the banks.  What about the taxpayers?  What about the people who have paid their taxes and lived by the rules?  We raised three children, sent them to college.  Now we’re the bad guys?  Our savings has been almost wiped out.  And we’re almost in our seventies.  What are we supposed to do now?

We heard all the stories of scammers offering to modify mortgages for people, and we didn’t want to get caught up in all of that, but we finally got desperate and hired a law firm and they at least were able to get us  a short sale on the apartments, so that’s taken care of.  But our credit score… you don’t even want to know.  And now we’re waiting to see what they say about our mortgage.  There’s no way we can make the payments where they are now.

I don’t know what we’re going to do.  I don’t want to ask our kids… we haven’t even told them about what’s happening.  I’m just feeling like our whole lives have been lost and all because of those stupid apartments.

What are we supposed to do now?

Homeowner #4 – The Greens

Look, it’s sad to see people losing their homes, but hey… they got themselves into their mess.  No one forced them to do what they did.  No one made them sign the papers.  They were using their home like a cash machine.  So, why should we bail them out now?  Where’s our bail out?  We didn’t over-extend ourselves.  Why should they get bailed out for being irresponsible and we get nothing for being careful and conservative.

If they bit off more than they could chew, then that’s just tough.  I was raised to avoid debt.  We don’t even use our credit cards.  If we don’t have enough money in the bank to buy something, then we do without.  I’ve been driving the same car for 14 years.  And it’s fine.  I could have gone out and bought some fancy BMW or whatever, but I didn’t.  I’ve learned to live within my means.  Maybe if more people knew how to do that, we wouldn’t be in the economic situation we’re in.

In 2004 and 2005, we used to drive around and see all the new houses going up… big, fancy… had to cost a million bucks, most of them.  And you’d see a Mercedes in the driveway, and an SUV, and a motorhome parked on the side, and jet skis… people’s garages looked like they had bought every toy at the store.  And I used to think, how the heck do people make so much money these days?  We’d drive by in our 12 year-old Chrysler and wonder how they could possibly pay for all that stuff.

Now we know… they just bought it all on credit.  And now they’re crying, help us, help us.  Might be the best thing that could ever happen to them, losing a home.  Maybe they’ll learn that you gotta’ pay the piper at some point.  You can’t just borrow, borrow, borrow and then when things change and the money runs out cry, oh help me, I need help from the government.  I feel sorry for people who lose their homes, but it is what it is.

And you know what… the faster it happens, the faster we’re going to get over it, and the faster the economy can get back to normal.  Stop delaying the inevitable.  Most of these people aren’t ever going to be able to afford the payments on the houses they bought… no matter what.  They modify the loans and six months later over half of them are right back in default.

I say let it drop further if it needs to.  I don’t care if my house goes down another 20%… heck 50%.  I’m not moving.  What do I care… it’ll come back… it always does.

So, there you have it…

It was the worst of times… it was the worst of times.

Four couples… three out of the four are in trouble, about to lose their homes.  Only one out of four isn’t.

It’s an incredible tragedy that’s going on here in California and all over the country.  People’s lives are being torn apart.  It’s heartbreaking… and then you realize that it could so easily be you.

It’s truly amazing how small a difference there is between success and failure… between being a respectable homeowner to being an irresponsible spendthrift… between feeling as though you understand your world to feeling lost at sea.  In the blink of an eye, everything can change.

And you don’t know how to look those you love in the eye.  You feel like it’s your fault that you’re where you are.  You should have known better.  You got greedy.  No one made you do what you did.

It’s all crap, however, do you know that?  C – R – A – P… it wasn’t your fault.  The United States Treasury didn’t see any of this coming, so why should you have known better?  This isn’t some ordinary recession.  I’ve been through the last three or four serious recessions and I can’t remember a single one where the only mortgage lender in the country was the Federal Government.  I don’t remember all of Wall Street going under during any other recession.

You didn’t do anything wrong… the banks did the wrong here.  The banks and investment banks are who should be standing front and center.  They fraudulently packaged shoddy loans with others, put a ribbon around it, and called it a AAA mortgage backed security when they knew it wasn’t AAA.  How did they know, because they made it.  They knew.

And then they all lowered the amount they hold in reserves for losses, so they could pay themselves billions of dollars in bonuses.  Billions and billions, as the late Carl Sagan used to say about the stars in the sky.

They broke the financial markets… they broke the bond market.  They created leverage and securitization schemes that, when they went bad, almost took out the world.  They robbed their own banks and threw the entire world into the Great Depression Part 2.

You, on the other hand, wanted a house.  And you thought you were doing an okay thing… who knew we’d be where we are today?

We’ve given the banks so many TRILLIONS of dollars it’s just stunning.  And we’re going to fix health care now?  I don’t think you even deserve a chance to fix health care if you can’t fix housing?

And about the scammers… Bank of America and Wells Fargo have each accepted billions of dollars in government aid… and they’re going to need more in the future if they’re to stay afloat.  Both banks took that money from the gvernment and signed agreements with the government to modify loans under certain circumstances…

and they haven’t done what they contracted to do.  In fact, they’ve done terrible things to homeowners.  They’ve foreclosed on people before they should have.  They’ve denied people loan modifications when they qualified perfectly.  They’ve charged upfront fees for a loan modification even though they’re prohibited from doing so and funded by the government.

They’ve lied about their numbers… and they’ve ruined plenty of lives.

Who are the scammers here?  I see the Attorney General puffing out his chest as he rides about the countryside, sleighing scammers for the good of society.  Perfect… then go arrest someone at one of the mortgage servicers that have abused the HAMP program and their share of homeowners.

Why isn’t the AG saying anything about that little factello?  The banks and servicers have scammed us in such worse ways, isn’t it time that we get honest and educated about what’s really going on here?

We can fix this together, but not divided, trying to sneak a peek in someone’s garage to count the jet skis.

The Loan Mod Blues… Sing it with me… You know how the blues sounds, right?

I’ve got the loan mod blues…

Verse 1

I can’t pay my mortgage

I can’t pay my bills

I can’t pay attention

To sleep I pop pills

Verse 2

My payment it doubled

I’m feeling the weight

I hope my bank gives me

A real low fixed rate

Chorus

I’ve got the loan modification blues

Yes they’re the loan modification blues.

I called my bank, I called my Mama,

I once believed in Barack Obama…

The loan modification blues… the loan modification blues.

Verse 3

I call everyday

To see where we are

Will I keep my house

Or soon live in my car

Verse 4

I finally hired

A firm that would help

And if they don’t do it

To the Bar or AG I will yelp!

Chorus

I’ve got the loan modification blues

Yes they’re the loan modification blues.

I called my bank, I called my Mama,

I once believed in Barack Obama…

Now I’ve got the loan modification blues… yes they’re the loan modification blues.

With all the positive news about the financial sector coming out left and right, Bloomberg News asked the Federal Reserve which banks participated in an “emergency lending program” and how much money they received.  The Federal Reserve gave Bloomberg News the same response I used to sometimes get when I was in 5^th grade: None of your business… it’s a secret.

Bloomberg News, being sticklers for The Freedom of Information Act, went to the U.S. District Court in Manhattan to ask Chief Justice Loretta Preska what the court’s opinion might be, and last week she said the court thought it actually was very much “our business”.  She ordered the Fed to release the information to Bloomberg News so they could share with us which banks were having financial emergencies and how big those emergencies were.

So, the Federal Reserve said: “Okay, we’re sorry,” and released the information.  Oh, come on… you know that’s not how things work in this country today.  Not a chance.

In response to the court’s order, U.S. Federal Reserve officials asked the judge not to enforce the order because they said that if they released the information, the banks that participated and the entire economy might, in a phrase, come apart at the seams.

Here’s the statement the Fed issued to the press:

“Immediate release of these documents will cause irreparable harm to these institutions and to the board’s ability to effectively manage the current, and any future, financial crisis.”

Now, if you’re thinking: “That’s weird… I would have thought that point would have come up in court during the lawsuit.”  Well, Justice Preska thought that too.  She stated that the Federal Reserve had failed to show how revealing the names of the banks and the amounts of money they each received would result in “imminent competitive harm”.

So, the Federal Reserve said: “Okay, we’re sorry,” and released the information.  What?  It could happen.  It didn’t, of course, but it could… maybe… someday.  In real life, the Fed is preparing an appeal.

Then, in a surprise move, an organization called The Clearing House LLC, an agency that represents banks, including Bank of America, Citigroup, HSBC, Wells Fargo and JPMorgan Chase, filed a motion in support of the Federal Reserve’s position.  Frankly, I was shocked to see the banks supporting the position taken by the banks.

The Clearing House LLC said that if the information was released, there might be runs on deposits and trading partners might demand additional collateral on outstanding loans, which is another way of saying that if people knew the truth, they might want to put their money in a bank that’s not at risk of going under.

Now, I’m no expert, but I think The Clearing House LLC is probably right about that.  Besides, it’s more fun for people not to know.  Kind of like something Las Vegas casinos might come up with… put your money in any one of the 1,000 banks… then we spin the wheel and which ever one comes up, the people that chose that one lose everything!  Yay!  Heck, it sounds fun… I’d have to go pay-per-view on something like that.

Or how about this one… there’s a bomb set to go off in 100 of these 1,000 office buildings… but we’re not going to tell you which 100.  Tune in tomorrow when we’ll see which ten will explode!  I’ve even got a name for the show… we could call it: All Men Are Cremated Equal.  What do you think?  I think it’s got legs…

So, that’s it for now.  I guess the only question that remains would have to be: Which monkey do you want to be?  The one covering his eyes, ears, or mouth?

By the way, I do have an answer to all of this and I’ll give it to you in four words: Royal Bank of Canada.  I’m not kidding, here’s the link… and you’re welcome, don’t you know.

The Royal Bank of Canada