Bits Bucket for July 21, 2012
Post off-topic ideas, links, and Craigslist finds here.
The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Cali Goes Bankrupt: One California city after another becomes insolvent as the state’s economic crisis worsens.
“The Riverside Press-Enterprise reported: “The city of San Bernardino’s financial woes are a directly correlation to a torrent of foreclosures in the Inland area of Southern California, the national foreclosure tracking firm RealtyTrac said Thursday. ‘Property taxes plunged in San Bernardino because of an avalanche of foreclosure activity during the recent housing bust,”
“There’s no doubt San Bernardino and Stockton—Ground Zero for the housing crisis—suffered from the problem described above. But what did those cities do with the rapid increase in property tax revenues during the price run-up? We know—they squandered it on increased compensation for government employees, on redevelopment projects and other questionable spending deals.”
http://reason.com/archives/2012/07/20/california-goes-bankrupt
Here comes the tidal wave, can you see it?
“But what did those cities do with the rapid increase in property tax revenues during the price run-up?”
They used it to pay down their debt.
Oh wait, they SHOULD HAVE used it to pay down their debt but instead they decided to spend it all (and then some).
But spending it all (and then some) wouldn’t have been anything to fuss over as long as property tax revenue would steadily increase forever as was projected and forecased and promised by some very highly-educated suits.
But something somewhere went a bit wrong. And, so, here we are.
These highly-educated suits are guys that spent some very big bucks to go to places such as Harvard to learn finance and economics, then they left these institutions of higher learning and went out into the Real World and ended up doing something totally different from what they were taught.
But that did not seem to matter much because as long as they had the degree from Harvard, or wherever, their words and deeds carried clout. Who but another degreed-annoited Harvard graduate could dare question any of their decisions?
Of course, combo, if the city governments had actually used the windfall to pay down debt, they would have been pilloried in the local papers and voted out at the next election. If people pay taxes, they want something more concrete for their tax money than changing some digits on the city’s credit card bill.
Ditto for the country as a whole. When Clinton (with help) managed a surplus in 2000, the R’s — for all their dire debt talk — didn’t pay down debt either. They lowered taxes, twice.
I seem to recall the Comptroller, either leaving office, or already gone, writing an op ed to the state that said essentially the same thing - save the money, pay off debt, don’t expect the current windfall to continue. This was right before the peak of the bubble, and the comments on the article were nasty - “how dare you assault the new paradigm?”, “Children will DIE if we don’t spend it!”, yada yada yada. Same happened all over the country. Oxide, i disagree that it was the voters who demanded the money be spent, it was more about local government who can’t be trusted with money (recall all the financial scandals in CA over the last couple of years?), budgets wildly out of control and unreported in the media, and unions bellying up to the state and local bar for their share. Plus, was Goldman Sachs involved with their investment plans?
“‘Property taxes plunged in San Bernardino because of an avalanche of foreclosure activity during the recent housing bust,’ said RealtyTrac vice president Daren Blomquist.”
Why don’t the counties take possession of these tax deficient properties and sell them on the courthouse steps like the old days?
Sell to who?
Most likely, even at auction prices, they weren’t buying because of the taxes and tax assessment.
“Why don’t the counties take possession of these tax deficient properties and sell them on the courthouse steps like the old days?”
Government and corporate (in this case, bankster) entities working fist in glove.
If you are not a member of the upper strata of either entity, you lose. This applies at all the levels of government.
And interestingly, our two presidential “candidates” represent each entity, Romney = corprit, Obama = goobermin.
Nice see-saw.
Actually Romney is both corprit and goobermin.
This is why he is favored by elites so much these days. Obama no longer serves any purpose to the elites, there’s a fear that he might even go rogue in his second term. Why doesn’t Bernanke QE3 and why do you hear so much about “fiscal cliff” these days? They are both related and are the “tools” of the elites to get Romney elected. Romney wins, “fiscal cliff” will be averted because tea-partiers will make deal with any R president. More wars and more government spending will ensue. Good times once again.
I just had those thoughts in my bathtub this morning. Looks like Buffet isn’t the only one who gets inspired in his bathtub….
You left out the part where Romney also hates children, the old, the sick, minorities, puppies, kittens and of course women.
You forgot about dogs.
Hello EddieTard…..
You agree with me that Smithers is just good ole boy Eddie with a newfangled handle?
Yeah. I wagered on it yesterday. It’s the same adolescent, shortsighted rhetoric and perspective.
If obama does not serve the elites then why did he not use his overreaching executive authority to abolish the FHA the first day of his presidency?
I said no longer. FHA is small potato compared to getting off prosecution of any kind last 4 years. Obama’s main purpose was to get the elites off from the crimes that were committed. He served his purpose and he is done as far as elites are concerned.
Welcome back EddieTard. We hardly missed thee!
It wasn’t a matter of non payment (someone is going to pay, whether the homeowner or the bank), but of lowered assessed values, which dropped the tax itself.
“…San Bernardino and Stockton—Ground Zero for the housing crisis…”
Exactly how many Ground Zeros were there?
For those unfamiliar with California geography, San Bernardino and Stockton aren’t even in the same part of the state.
“Exactly how many Ground Zeros were there?”
I don’t know why they wrote it like that, but you could say that most of inland California was/is one big ground zero. Sac, Stockton, Modesto, Fresno, Bakersfield and I guess you can include San Bernardino. Didn’t think they were as hard hit as the others though.
In the ’90s and 2000s, people were totally priced out of the bay area, so there was a good reason for the inland growth, as it was worth the cost of the long commute. From Stockton, etc. So even before the “boom”, central valley building had already heated up big time. Adding the later housing mania to that was a killer.
La zona cero.
All that building on FARMLAND, too. So very foresighted.
Yup rents are going up.
Just extended my lease for another 6 months. Same Rate.
2.5% discount was available if I sign for a year or longer. Mind you, this is the complex that has seen an influx of young families lately and occupancy is all time high.
My rent went up this year. Only 5%, but up nonetheless. Moving was not an option.
I locked in a 3% increase for this year (doesn’t go up until January) when I signed up for a two year lease. It was pretty risk free for me since my rent is substantially less than their current rates. It paid off nicely to be willing to take what was available a week before Christmas and move the day before New Year’s eve.
In 2003 my studio in L.A. (west Torrance) cost $1000 per month. No air conditioning and some days I needed it due to southern exposure. 9 years later I am now paying $1100 per month. That is less than a 1 percent annual inflation rate. I have A/C this time, but no permission to park in the garage.
Hey BiLA
I’m alive and well in “Leningrad”, CO
BTW, thanks for the cheap shot yesterday, I expect nothing more coming from you, or neocons and “libertarians” in general. Fail the purity test and you’re a commie. Noted.
Many people would like to bury the paleos, Colorado.
Where’s old Teddy Roosevelt when you need him?
He’d be considered a commie today.
Forget Teddy, Eisenhower (the last Republican to not run a budget deficit) would fail the purity test today. He would especially be in hot water for his warnings about the industrial-military complex and his high income tax rates on the well to do.
I LIKE IKE!
Another good one. Kept the non-productive wealthy from getting out of line.
You aren’t a communist/socialist because you fail a purity test. You are a communist/socialist because you espouse communist/socialist ideas. I always find it interesting how socialists always get defensive when they’re called socialists. Embrace your philosophy man! You can come out of the closet.
This is why I like Bernie Sanders, the self described socialist Senator from VT. I disagree with 99% of what he stands for. But I can respect him because he’s honest about who he is. I’d rather have an honest person who’s out in the open with their socialism than a Barry type who is a socialist but pretends not to be.
I agree with the sentiment although I don’t like labeling. There are quite a few people here who make excuses for Obama for the things they would have mercilessly criticized Bush.
“You aren’t a communist/socialist because you fail a purity test. You are a communist/socialist because you espouse communist/socialist ideas.”
Yes Adolf, noted.
I’d rather have an honest person who’s out in the open with their socialism than a Barry type who is a socialist but pretends not to be.
Never mind that the socialist party disavows Obama as one of their own. To quote Iñigo Montoya, that word doesn’t mean what you think it means.
Slow bits bucket today, if it was a weekday the “you’re a socialist” thread would have dozens of posts by now.
And as a Colorado resident and authority on all matters and doings within Colorado, yes the Aurora shooter was a card-carrying Tea Party member.
And as a Colorado resident and authority on all matters and doings within Colorado, yes the Aurora shooter was a card-carrying Tea Party member.
Really? I see he’s also being shown as an OWS-SD member.
I was camping in the mountains Thursday night and missed all of this until I turned on AM 850 expecting Rush Limbaugh and got Mike Rosen (also columnist for the Denver Post) doing an extended show taking listener calls, many of whom were eager to link the shooter to OWS. But facts are facts, the gunman was a Tea Party Patriot, just as Jared Loughner was directly influenced by the crosshairs on Sarah Palin’s website to shoot Gabby Giffords.
But facts are facts, the gunman was a Tea Party Patriot, just as Jared Loughner was directly influenced by the crosshairs on Sarah Palin’s website to shoot Gabby Giffords.
Now I can’t tell if you’re being serious or not.
And BTW, Coney Island outside of Bailey on US 285 has very delicious (albeit expensive) hot dogs, my lunch order was late so I got a 24 ounce milkshake even though I ordered a 16 ounce at no extra charge.
Any and all acts of violence and extremism committed by white males in the U.S. since 2009 are the direct responsibility of the Tea Party. Now back to your regularly scheduled program…
I’d rather have an honest person who’s out in the open with their socialism than a Barry type who is a socialist but pretends not to be.
I’ve been watching Youtube clips from the BBC regarding the UK’s economic troubles, and I’m amazed with their government official’s candour. You just don’t see, or hear, that sort of honesty here in the land of freedom.
“But facts are facts, the gunman was a Tea Party Patriot,”
Except that it turned out that it was another person with the same name. One would think after so many stories where someone sharing the name with the accused in a prominent criminal case (George Zimmermans across the country got harassed; women and men named Casey Anderson got death threats) that in a country that has hundreds of millions of people, there’s more than one person with that name.
(This is generalized frustration; between those criminal cases and people getting tarred when we try to turn a politician’s LAST name into a slur, we, as a country, are messing with a bunch of people who have nothing to do with the issue at hand.)
My theory is this:
If you are a painless renter (or have been a good, solid payer without causing damage/trouble), you get hit with lower increases…landlords don’t want to lose you.
Once you move out, the mark to market can be extreme.
I lived in the same house for 7 years, and was a painless renter. The landlord apologetically raised my rent by a total of about 10% over that timeframe (this is a short walk to a nice SF Peninsula downtown…very attractive). When I left, he raised the rent for the next guy by 30%. It rented in a day.
Does anyone know what other units in their complex are renting for (to new people) vs. their own rent?
Your theory makes sense in principle, though I’m sure landlords differ with respect to their attempts to pass on the high costs of ownership to their tenants.
In our case, the theory seems to apply — our rent has gone up on average by 2.3% a year while we lived here.
Meanwhile, the value of our landlord’s investment (based on current list prices on comparables) has gone down by enough to cover all of our rental payments since we lived here. And of course, the landlords incurred all the other costs of ownership besides capital loss, including principle on the original inflated purchase price, interest, taxes, insurance, home maintenance contract, yardwork, HOA etc.
Works for us!
Agree. Different landlords take a different approach. My landlord was a guy, who did all the work himself. So by me being painless, I was very valuable to him.
For people who own large portfolios (and are truly looking to maximize cashflow, not minimize hassle), they may be far more ruthless in terms of raising rents.
Not true for commercial complexes. They don’t care if you’re Jesus. They will raise the rent and if you complain, they will straight-up tell you to find somewhere cheaper and good luck doing it, and they will find another tenant, or combination of tenants.
I gave my example the other day, but its worth repeating here. I’m a renter in NYC and my rent for my current apartment has gone up 10% every year for the last 4 years. previous increases did not reach the point were I wanted to deal with the hassle of moving. This year however I decided to look around and found a nearly identicle place around the corner for what I was paying 4 years ago. We moved and low and behold our old apartment that the corporate LL was not willing to accept anything but a 10% increase is now listed on CL for 30% less than we were paying. The reality is that while average rents may go up every year, new rents do not rise as fast (in some cases not at all). I’m not saying that paying less is always worth the hassle of moving, just that (in NYC at least) if you’ve been paying increases every year, chances are you are paying more than the comps.
It depends on who you rent from, and what you are renting - apartments are much different beasts than houses, especially in the Bay Area. If you rent from one of the handful of real estate management companies that have bought up a lot of the apartment complexes, they often will only offer you a one year lease max, will raise your rent by 25-35% guaranteed and there’s no negotiating, not offer any incentive to re-sign (they want churn), and will only offer you current rates (Which WILL be lower than what you’re paying) if you move to another unit within the property, but only for 6 months. Oh, but you’re ‘pre-approved” at all of their locations, so you can play the same game across town. I asked for a two year lease, and the manager looked at me like i had a skunk on my head, and I’d asked her to examine it rectally. (Don’t get me started on the managers in these places…they must breed them somewhere)
If I ever move back there, it’s private owners only, if I rent.
Yep…
Our long time friends recently lowered their the rent on a 3 bedroom apt from $1200 to $900/month……… within commuting distance to NYC.
I paid $1700 per month for a furnished one bedroom apartment in a quiet area of Northern New Jersey off of exit 30 on I-80 - back in 2002. It would have been perfect if it had in-unit full sized washer and dryer. Had great views to the east and west as it was on a hilltop and on the top floor of a 3-story building.
I drove in the mornings 5 miles west to catch a van pool into Clifton. The client paid no overtime, however the client did not expect consultants to work more than 8 hours a day. Perfect for me. 4:00 pm I would head to the parking lot and get back on the van. 5pm or 5:30pm I would work out at the local World’s gym. It was a pattern I kept the next ten years - work, workout, sleep, save money, repeat.
That $1700 was the most I ever paid for housing. I somehow was able to save in a 401k, invest $1000 per month in a municipal bond fund, buy stock mutual funds outside my 401k too. My tax break made my taxable rate about 9%.
That makes the $1100 per month rent I pay seem decent now.
Any economist who believes the best way to escape from the economic tailwinds of the Great Recession is for the Fed to play the inflation card should carefully consider the implications for seniors on fixed incomes.
Facing Foreclosure After 50
T. Lynne Pixley for The New York Times
Roy Johnson, 79, recently lost the home he built 48 years earlier in Georgia to foreclosure. Older Americans are increasingly facing this problem.
By ROBBIE BROWN
Published: July 19, 2012
MABLETON, Ga. — Roy Johnson fell so far behind on his $1,000-per-month mortgage payments that last year he allowed the redbrick, three-bedroom ranch he had owned since 1963 to lapse into foreclosure.
“I couldn’t pay it any longer,” he said. “One day, I woke up and said, ‘Hell, I’m through with it. I’m walking away from the house.’ ”
That decision swept Mr. Johnson, 79, into a rapidly expanding demographic: older Americans who have lost their homes in the Great Recession. As he hauled his belongings by pickup truck from this Atlanta suburb and moved into his daughter’s basement, Mr. Johnson became one of the one and a half million Americans over the age of 50 who lost their houses to foreclosure between 2007 and 2011. Of those, the highest foreclosure rate was for homeowners over 75.
Once viewed as the most fiscally stable age group, older people are flailing. On Wednesday, AARP released what it described as the most comprehensive analysis yet of why the foreclosure crisis struck so many Americans in their retirement years. The report found that while people under 50 are the group most likely to face foreclosure, the risk of “serious delinquency” on mortgages has grown fastest for people over 50.
While the study classified even baby boomers as “older Americans,” its most dire findings were for the oldest group. Among people over 75, the foreclosure rate grew more than eightfold from 2007 to 2011, to 3 percent of that group of homeowners, the report found.
“Despite the perception that older Americans are more housing secure than younger people, millions of older Americans are carrying more mortgage debt than ever before, and more than three million are at risk of losing their homes,” the report found. “As the mortgage crisis continues, millions of older Americans are struggling to maintain their financial security.”
The report was based on nationwide loan data that covered a five-year span. The profile of those facing foreclosure has changed since 2007. As the average age and wealth of those people rise, their foreclosures are less likely to involve high-interest loans. In fact, most foreclosures are now the result of prime loans rather than subprime ones, according to the Federal Reserve Bank of New York.
Instead, older Americans are losing their homes because of pension cuts, rising medical costs, shrinking stock portfolios and falling property values, according to Debra Whitman, AARP’s executive vice president for policy. They are also not saving enough money. Half of households whose head is between 65 and 74 have no money in retirement accounts, according to the Federal Reserve.
At CredAbility, an Atlanta-based credit counseling agency, the average age of callers needing help has risen to 49 from 43 in recent years. Scott Scredon, a spokesman for the agency, said most older Americans facing foreclosure are frugal but are unable to live on fixed incomes with the rising cost of living.
“When we think of foreclosures, we think of someone who was a little reckless and spent beyond their means,” he said. “The older the person, the less likely that is to be the case.”
…
Lots of economists seem fine with the “screw the seniors and bond owners” easy way out of the Great Recession.
To his credit, Ben Bernanke is not among them.
Those who advocate higher inflation seem happy enough to overlook the moral hazard problem associated with painlessly letting debtors off the hook, which is that another generation of profligates will feel encouraged to assume unrepayable financial obligations, recognizing that they, too, will soon enjoy a credit bailout in one form or another.
Not only seniors and bond owners will get shafted, but also American workers. This isn’t the 1970s, when union contracts covered many American workers with COLAs. Raise wages now, and the production effort will simply shift elsewhere in the global economy.
July 21, 2012, 5:00 AM
Number of the Week: Could Inflation Revive the Recovery?
…
In a speech last fall, Chicago Fed President Charles Evans laid out the argument this way: The Fed’s implicit inflation target is 2%. The Fed doesn’t have a widely cited numerical target for unemployment, but a conservative estimate of the “natural,” or underlying, rate of unemployment is 6%.
“So, if 5% inflation would have our hair on fire,” Mr. Evans said in September, “so should 9% unemployment.”
Unemployment has come down some since last fall, but it’s still at 8.2%, nowhere close to the Fed’s “maximum employment” mandate. By Mr. Evans’s logic (which he explains more fully in his speech), the current rate of joblessness is equivalent to inflation running at 4.2% — more than double the Fed’s target rate.
Mr. Evans has argued the Fed should consider allowing inflation to run above its target until unemployment falls to some pre-determined — and pre-announced — level. He got more support for that position this week from economists Menzie Chinn, of the University of Wisconsin (and also the blog Econbrowser), and Jeffry Frieden, of Harvard. In a new article in the Milken Institute Review, the two economists argue that if fiscal stimulus, quantitative easing and an alphabet-soup of mortgage relief programs haven’t been enough to kick-start the recovery, it’s time to try inflation.
The big factor holding back economic growth in both the U.S. and Europe, the two economists say, is debt: Consumers, companies and governments are all struggling under the burden of huge debts run up during the boom years, making it harder for them to spend, borrow and invest.
That diagnosis of the problem — they cite “This Time Is Different,” Carmen Reinhart and Kenneth Rogoff’s now-famous study of financial crises — is fairly mainstream at this point. But their prescription isn’t: Ease the burden on debtors by allowing inflation to rise.
“Raising the expected rate of inflation would reduce the real burden of debt on households, corporations and governments, spurring both investment and consumption,” Profs. Chinn and Frieden write, arguing the Fed should allow inflation to run “in the 4 to 6 percent range for several years.”
The authors recognize their proposal will likely be “met with howls of indignation” from creditors, who would see a policy of intentional inflation — which would reduce the value of their bonds — as an expropriation of their assets. “To an extent, they are right,” the economists say.
But one way or another, they continue, those debts aren’t going to be repaid in full, whether it’s through inflation, default, bankruptcy or negotiated settlements. Better to do it in a way that’s quick and, because it treats all debts equally, at least relatively fair. The logic is the same as in bankruptcy proceedings, they write: “For creditors, something is better than nothing; for debtors, relief is better than default; for both, certainty is better than uncertainty.”
Messrs. Chinn and Frieden join other prominent economists, including Mr. Rogoff and left-leaning economists such as Paul Krugman, in arguing for more inflation. But one important economist they don’t look likely to win over: Mr. Bernanke. In this week’s testimony, Mr. Bernanke left little doubt that he opposes raising the inflation target, even temporarily. (Mr. Bernanke has plenty of prominent backers for his position, too, including former chairman Paul Volcker.)
…
48 years in the same house and he still has a mortgage? What did you do with the cash you got when you refinanced, Roy?
48 years in the same house and he still has a mortgage? What did you do with the cash you got when you refinanced, Roy?
I read that article and had the exact same thought. And how could the reporter fail to ask that very basic question??
“And how could the reporter fail to ask that very basic question??”
Probably for the same reason he used the word “flailing”:
“Once viewed as the most fiscally stable age group, older people are flailing.”
I use the word myself, but didn’t expect to see it in the Times.
I read that article and had the exact same thought. And how could the reporter fail to ask that very basic question??
Notice the article’s comments were disabled too.
The reporter didn’t fail to ask the question, the reporter didn’t care - he wanted a martyr, and he found one, a willing one.
Built the house 50 years ago, and he was paying $1000 a month 50 years later. I bet all of his grandkids have the best electronic toys on the block, thanks to dear old Grampa Heloc.
I’d call depending on our government and its central bank not to completely debase our currency and screw over the saver or the fixed income retiree is rather reckless.
You should also worry about a Fed chairman announcing the exact opposite policy he intends to follow to strengthen the shock and awe effect of what he does.
bernake studied the depression deeply.
He’s done a fair job so far of replicating it, too.
Maybe a letter from the former Georgia Governor to bought and paid for realtor and US Senator from Georgia Johny Isaakson as to why the good Senator is accepting cash contributions from NAR, NAHB and MBA.
That would be a good start for the former Governor.
“For Mr. Johnson, it was painful to watch the house he built 48 years earlier sell for only $33,000 at auction last year.”
I see Roy Johnson remembered to wear his veteran’s hat while he plays the victim. A likely story here is several HELOCs over the years to bridge the gap between flat wage growth and asset inflation. No mention of stubborn union Luddism. “A fool and his money are soon parted.” –Thomas Tusser
The cat is out of the bag on subprime college lending, but it seems entirely unclear how the ugly aftermath will resolve itself.
Government study: Private student loans parallel boom-bust of subprime mortgages
By Associated Press, Published: July 19 | Updated: Friday, July 20, 11:23 AM
WASHINGTON — Risky lending caused private student loan debt to balloon in the past decade, leaving many Americans struggling to pay off loans that they can’t afford, a government study says.
Private lenders gave out money without considering whether borrowers would repay, then bundled and resold the loans to investors to avoid losing money when students defaulted, according to the study released Friday.
Those practices are closely associated with subprime mortgage lending, which inflated the housing bubble and helped bring about the 2008 financial crisis.
“Subprime-style lending went to college, and now students are paying the price,” said Education Secretary Arne Duncan, whose department produced the report with the Consumer Financial Protection Bureau.
Duncan said the government must do more to ensure that people who received private loans enjoy the same protections as those who borrow from the federal government.
Student loans fall into two main categories: Loans directly from the government and those offered by banks and other private financial companies. The report focused on private student loans, which spiked from $5 billion in loans originated in 2001 to more than $20 billion in 2008. After the financial crisis, as lending standards tightened, the market shrank to $6 billion in 2011.
American consumers still owe more than $150 billion in private student loan debt, the study said. Including federal loans, Americans now owe more than $1 trillion in student loan debt, according to the CFPB. It has surpassed credit card debt as the biggest source of unsecured debt for U.S. consumers.
Private student loans are riskier than federal loans, the study said. They often carry variable interest rates, which can cause monthly payments to rise unexpectedly. Federal loans offer fixed interest rates.
In many cases, if a borrower is unable to repay, federal loans can be postponed or reduced. Those options are rare for private loans, the study said.
Students often did not understand the difference between federal and private loans, the study said. That caused many to take out costly student loans when they were eligible for cheaper, safer government loans.
…
July 19, 2012, 5:00 am
The Federal Reserve and the Libor Scandal
By SIMON JOHNSON
Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”
On June 1, 2008, Timothy F. Geithner – then president of the Federal Reserve Bank of New York – sent an e-mail to Mervyn A. King and Paul Tucker, then respectively governor and executive director of markets at the Bank of England. In his note, Mr. Geithner transmitted recommendations (dated May 27, 2008) from the New York Fed’s “Markets and Research and Statistics Groups” regarding “Recommendations for Enhancing the Credibility of Libor,” the London interbank offered rate.
The recommendations accurately summarized the problems with procedures surrounding the construction of Libor – the most important reference interest rate in the world – and proposed some sensible alternative approaches.
This New York Fed memo stands out as a model of clear thinking about the deep governance problems that allowed Libor to become rigged.
At the same time, the timing and content of the memo raises troubling questions regarding the Fed’s own involvement in the Libor scandal – both then and now.
According to the recent order against and settlement with Barclays by the Commodity Futures Trading Commission, the Libor “market” had by 2005 become a hotbed of collusion and price-fixing, in which reported interest rates were being manipulated both up and down to the advantage of individual traders and, sometimes, to benefit the banks that employed them.
These activities were widespread, representing – depending on your reading of the details – some combination of a complete breakdown of compliance and control at Barclays and presumably other banks (mentioned but not yet named by C.F.T.C.) and a pattern of apparent criminal fraud.
The New York Fed was apparently aware of Libor-rigging at some level in 2007 and serious concerns – although presumably not the full details of what the C.F.T.C. later established – had reached the most senior levels of the Federal Reserve System by early 2008.
In response to a question from Senator Pat Toomey, Republican of Pennsylvania, at a hearing on Tuesday of this week, the Fed chairman, Ben S. Bernanke, confirmed that he became aware of Libor-related issues in April 2008 (see Page 23 of the preliminary hearing transcript from Congressional Quarterly’s Transcripts Wire; the other quotations below are from the same source, which is available by subscription only).
There are three questions that Mr. Geithner and his colleagues are likely to face in Congressional testimony on Libor. (The House Financial Services Committee has already announced it will hold hearings.)
First, why didn’t Mr. Geithner tell Mr. King the full depth and motivation for his concerns?
Both Mr. King and Mr. Tucker say they did not learn of accusations of dishonesty until recent weeks. What exactly did Mr. Geithner communicate as the specific context and rationale for his reform memo? Did he really only talk in general and vague terms, rather than about the detailed and apparently credible accusations regarding Barclays?
Officials at this level speak with each other on a regular basis. There was ample opportunity for full sharing of relevant information.
Second, why didn’t the Fed do anything itself about the rigging of Libor, including deliberate misrepresentation of information by people at big banks for material gain – keeping in mind that any action that makes a bank look better should be presumed to enhance the bonus of the people involved? This issue also came up in Tuesday’s hearing.
Mr. Bernanke emphasized that Libor-rigging is a major problem but was adamant that the Fed bore no responsibility for what happened, adding:
Mr. Bernanke’s answer raises – but does not address – the central issue. The Federal Reserve is responsible for the “safety and soundness” of the financial system in the United States. Does allowing suspicions of fraud to continue unchecked at the heart of this system help to sustain the credibility and legitimacy of markets? Surely not.
Trust is essential to all financial transactions. When trust evaporates – or is smashed to oblivion through reckless and self-serving behavior at megabanks – the consequences can be dire.
…
How can the U.S. stock market be so dumb that it repeatedly “forgets” about the unresolved Eurozone debt crisis? I personally find this supposed myopia among market participants highly questionable.
Business
Stock market falls as Europe’s financial crisis flares
Posted: 07/21/2012 01:00:00 AM MDT
Updated: 07/21/2012 02:05:29 AM MDT
By Christina Rexrode
The Associated Press
For the past few days, the U.S. stock market was able to forget about problems in Europe.
Friday put Europe squarely back in the spotlight.
U.S. stocks fell sharply as escalating problems in Spain jolted investors. Spain’s stock market plunged 6 percent and its borrowing costs spiked after a regional government asked for a financial lifeline.
The drop on Wall Street, which sent the Dow Jones industrial average down as much as 133 points, marked a U-turn for the market. Stocks had risen over the past three days as investors focused on healthy earnings from U.S. companies such as Mattel, Honeywell and Coca-Cola.
On Friday, talk of sluggishness in Europe was prevalent as more companies turned in their quarterly results.
Staffing agency Manpower fell 6 percent, to $33.46, and chip maker Advanced Micro Devices fell 13 percent, to $4.22, after reporting that weak demand in Europe had dragged down second-quarter revenue.
Xerox trimmed its earnings forecasts as Europeans bought less equipment. Ingersoll-Rand, whose products include Trane air conditioners, cut its revenue prediction for the same reason. Xerox fell 49 cents, to $6.70, and Ingersoll-Rand lost $1.22, to $40.25.
Late Thursday, guitar maker Fender abruptly canceled its plans to go public, blaming “current market conditions” and “concerns about economic conditions in Europe.” And General Electric, though its stock edged up 7 cents to $19.87, noted Friday that its orders also fell in Europe.
“We prepared ourselves for a pretty tough year this year, or certainly a volatile year,” chief executive Jeff Immelt said in a call with analysts.
All the major U.S. stock indexes fell. The Dow Jones industrial average dropped 120.79 points, to 12,822.57. The Standard & Poor’s 500 fell 13.85, to 1,362.66. The Nasdaq composite index lost 40.60, to 2,925.30.
All three indicators were down about 1 percent. They eked out tiny gains for the week and are about flat for the month to date.
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How can an international financial system built on a foundation of systemic lies and fraudulent deception possibly endure in its present state of existence?
Wonkbook: The financial system was systemically corrupt
Posted by Ezra Klein on July 20, 2012 at 7:27 am
Very few banks came out of the financial crisis looking good. But JPMorgan and Barclays were in that elite club. Their apparent rectitude raised the possibility — as JPMorgan CEO Jamie Dimon said over and over again — that what we’d had were a few bad banks, not a hopelessly corrupted financial system. Fast forward a couple of years, and JPMorgan and Barclays are not looking so good anymore. And the particular way in which they’re not looking so good points to the fact that we did, indeed, have a hopelessly corrupted financial system.
If you haven’t been following the Libor scandal, read Dylan Matthews’ great primer. But if you refuse to do even that, here it is in a few sentences: Libor is the rate at which banks lend to each other. It’s considered a measure of how safe the financial system is. As such, many banks use it as a benchmark to set the rate on the consumer debt you and I buy — they start with the Libor rate and then they add on whatever they think our risk is. But there’s something odd about Libor: It’s a rate the banks report themselves. And, in recent weeks, we’ve found out Barclays was lying about it.
In recent days, however, we’ve found out that it wasn’t just Barclays lying about it. Everybody was lying about it. Citigroup was lying about it. German banks were lying about it. We know a number of banks — though we don’t know exactly who — are talking to the feds about a settlement. We know HSBC, Deutsche Bank and JPMorgan Chase are being investigated.
On Wednesday, Lloyd Blankfein, CEO of Goldman Sachs, was asked about Libor. “The biggest impact is once more undermining the integrity of a system that has already been undermined substantially. There was this huge hole to dig out of in terms of getting trust back and now it’s that much deeper.”
Remember when Ronald Reagan said “trust, but verify”? Well, we’ve spent the last few years verifying. And when it comes to the financial system, the lesson is not to have too much trust.
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Where, exactly, does the buck stop at JPMorgan?
Investment Banking July 13, 2012, 4:44 pm
Trading Loss at JPMorgan Will Result in Millions in Pay Givebacks
By FLOYD NORRIS
Ina R. Drew, formerly of JPMorgan.
JPMorgan Chase, via Bloomberg News
8:48 p.m.
Ina R. Drew, the former chief investment officer of JPMorgan Chase, has become the $30 million woman.
Not, however, in a good way.
She is one of four former officials of the bank who are to lose the equivalent of two years of compensation because of their involvement in the “hedging” fiasco that has cost the bank $5.8 billion, and that could cost it as much as $1.7 billion more, the bank disclosed on Friday.
Ms. Drew, who resigned in May, was the only one named, and the exact amount that will be clawed back was not disclosed. But Jamie Dimon, the bank’s chairman and chief executive, said that it would amount to about two years’ worth of compensation. The company previously disclosed that her total compensation was $15.9 million in 2010 and roughly $14 million in 2011.
The other executives were supervisors in the London office, Mr. Dimon said. He did not name them, but bank officials said they were Bruno Iksil, the trader who has gained fame as “the London whale” for his large trades, and two men who worked under him, Achilles Macris and Javier Martin-Artajo. Each has left the bank, and will be penalized approximately two years’ compensation.
The bank said that other officials, including Mr. Dimon, might face penalties at the end of the year when the board considers 2012 bonuses and the possible return of previous compensation.
It said the board would base its decisions in part on the person’s “involvement and responsibility” for the trading.
The four executives appear to be the first at any major bank that have been publicly identified as having their compensation taken back.
JPMorgan had harsh words for traders in its chief investment office on Friday as it restated its first-quarter financial statements. It said that after an investigation that included reviewing numerous e-mails and taped telephone calls, it had concluded that it had overvalued positions held by the office by $660 million at the end of the first quarter. Many of the securities were valued based on estimates by the same traders who had bought them, a practice known as “trader marks.”
In a filing with the Securities and Exchange Commission, the bank said “the recently discovered information raises questions about the integrity of the trader marks, and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred in the portfolio during the first quarter.”
Mr. Dimon, who in April had characterized concerns over the trading positions as a “complete tempest in a teapot,” said he was confident that he had acted properly in his corporate reporting, despite the need to restate earnings. “We talked to our best advisers, accounting and legal, and tried to do what we thought was right and the most conservative thing to do,” he said in a conference call with analysts after the bank released its financial results. “Hopefully, this is what the S.E.C. chairwoman herself would have done if she had seen all the same facts at the same time.” He was referring to Mary L. Schapiro, who oversees the commission.
Mr. Dimon went out of his way to praise Ms. Drew, a 30-year veteran of the bank, even as he announced her decision to surrender the money.
“I have enormous respect for Ina as a professional and as a person,” he told analysts. “She has made some incredible contributions to this company. When she decided to retire I got several letters from former chairmen who talked about her contribution. One even said she saved the company, in his judgment.”
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My FIL admitted to me last week that he bought JPMorgan stock this spring, just before the London whale trading scandal story broke. I subsequently reminded myself never to buy individual stocks.
Investment Banking | Wall Street Earnings
July 13, 2012, 11:49 am
New Fraud Inquiry as JPMorgan’s Loss Mounts
By JESSICA SILVER-GREENBERG
Jamie Dimon, JPMorgan’s chief executive, at the company’s headquarters in Manhattan.Jin Lee/Associated PressJamie Dimon, JPMorgan’s chief executive, at the company’s headquarters in Manhattan.
9:07 p.m.
JPMorgan Chase disclosed on Friday that losses on its botched credit bet could climb to more than $7 billion and that the bank’s traders may have intentionally tried to obscure the full extent of the red ink on the disastrous trades.
Mounting concerns about valuing the trades led the company to announce that its earnings for the first quarter were no longer reliable and would be restated. Federal regulators, who were already examining the trades, are now looking at whether employees of the nation’s biggest bank by assets intended to defraud investors, according to people with knowledge of the matter.
The revelations left Jamie Dimon, the bank’s chief executive, scrambling for the second time within two months to contain the fallout from the trading debacle. It has already claimed one of his most trusted lieutenants, compelled Mr. Dimon to appear before Congress to account for the blunder and prompted the bank to claw back millions in compensation from three traders in London at the heart of the losses. A top bank official said that the board could also seize pay from Mr. Dimon, but did not indicate that it would do so.
Since announcing initial losses of $2 billion in May, Mr. Dimon, once vaunted for his risk prowess after navigating the bank deftly through the financial crisis, has worked to prove that any flaws in risk management are limited to the chief investment office, a once-obscure unit with offices in London and New York. But the latest news is prompting fresh questions about whether risk controls throughout the bank are weak.
“This points to fundamental and potentially widespread risk management failure,” said Mark Williams, a professor of finance at Boston University, who also served as a Federal Reserve Bank examiner.
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What is the true JPMorgan loss figure — $5.8 bn, $9 bn or something else?
It somewhat chafes me that my FIL gambled away his hard-earned wealth on this looser of a stock; doesn’t he know that his grandkids may need his money some day? But then again, it’s his money to gamble away; after all, the stock market is the only avenue for Mormons to gamble, as Las Vegas (aka “Sin City”) is off limits to them.
By Richard Davies
Jun 28, 2012 8:03am
JP Morgan’s Trading Loss Now $9 Billion?
Morning Business Memo:
Trading losses at JP Morgan Chase may be much bigger than previously reported and may have ballooned to as much as $9 billion, reports The New York Times. “The red ink has been mounting in recent weeks, as the bank has been unwinding its positions, according to interviews with current and former traders and executives at the bank,” says the Times. JP Morgan’s massive loss has added to the debate over bank regulations, and whether some “too big to fail firms” are making very risky trades.
And then there’s Barclays… The global bank has been hit with $453 million in fines by US and British regulators for manipulating the price of key interest rates linked to global loans and financial contracts. The international investigation into trading activities at other big banks continues. Regulators have been looking into how the Libor and Euro Interbank Offered Rates are set. HSBC, RBS, Lloyds, Citigroup and JP Morgan Chase are also reported to be under investigation.
A downgrade this morning for several big banking firms by Moody’s. Citigroup, Goldman Sachs and Bank of America all received downgrades by the ratings firm, which sites growing risk from weak economic conditions as well as the cost of tougher regulations.
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ft dot com
Last updated: July 20, 2012 8:01 pm
Bank bailout fails to ease Spain concern
By Joshua Chaffin in Brussels
Even as eurozone finance ministers unanimously approved a loan package of up to €100bn to repair its banks, a surge in the country’s bond yields suggested that doubts about its financial position were rapidly mounting.
The approval by the eurozone’s 17 finance ministers was granted on a conference call on Friday and was considered a formality after they reached a political agreement with Spain earlier this month.
But any positive sentiment from the announcement was undermined as Madrid on Friday revised its growth forecast for 2013 downward. The government said it now expected the economy to contract 0.5 per cent next year instead of growing 0.2 per cent, with unemployment remaining at about 24 per cent.
In another sign of the growing strain on the country’s finances, authorities in Valencia said they would seek support from an €18bn emergency fund created by the central government to help struggling regions.
Several large regions, including Catalonia with its economy the size of Portugal’s, have called on Madrid to support them in refinancing their debts after finding themselves closed out from the capital markets.
Valencia was one of the engines of Spain’s real estate bubble, with all three of its local savings banks at one point falling under state control after lending aggressively to developers.
Spain had hoped the bank overhaul would reassure financial markets that it can contain the crisis and avoid a larger bailout. Under the terms of the deal, a first payment of up to €30bn is expected to arrive in Spanish coffers before the end of the month so that the country can begin recapitalising a financial system that has been devastated by a property bubble collapse and a grinding recession.
Olli Rehn, Europe’s economics commissioner, said: “The aim of this programme is very clear: to provide Spain with healthy, effectively regulated and rigorously supervised banks, capable of nurturing sustainable economic growth.”
Mr Rehn noted that Spain would also be expected to cure the government’s excessive budget deficit by 2014 and push through structural reforms.
But the tense debate over the bailout this week in some national parliaments – particularly Finland and Germany – reflects growing reluctance among the eurozone’s credit-worthy northern members to continue supporting struggling governments on the periphery.
“It was a necessary decision to take, even though it’s very hard,” said Jyrki Katainen, Finnish prime minister, after parliament approved its share of the bailout on Friday. “It’s unpopular, but we have to take responsible moves and steps because the economic situation is so challenging.”
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Curiouser and curiouser…
ft dot com
Last updated: July 20, 2012 8:09 pm
Speculation mounts over Romney’s tax records
By Stephanie Kirchgaessner in Washington
Mitt Romney’s refusal to release more than one year of his tax records – and the political price he is paying for that decision – has opened the door to all sorts of theories about what might lie inside.
For now the speculation amounts to little more than informed hypothesis from tax experts who have examined the Republican presidential contender’s 2010 tax release. But one thing is abundantly clear: Mr Romney’s reluctance to follow the tradition of most presidential candidates and open up his tax records to public scrutiny has emerged as a possibly game-changing problem for the candidate.
For starters, it is not just Democrats who are pressing Mr Romney to be more transparent. This week, the editorial board of the conservative National Review argued that “perceptions matter”, that Mr Romney ought to release the additional records and that his posture was “unsustainable”.
The tax release that is available shows that Mr Romney’s fortune, amassed through his tenure at private equity group Bain Capital, is worth about $250m and that he holds accounts in the tax havens of Bermuda and the Cayman Islands. He also held a now-closed Swiss bank account.
The most perplexing aspect of the tax return is Mr Romney’s retirement account, which is valued at between $21m and $102m. What makes the IRA so unusual is that at the time in question, there was a $2,000 annual limit on how much an individual could contribute to such an account, which are meant to allow retirement investments to appreciate tax-free. A different kind of IRA used by Bain during Mr Romney’s tenure had a higher limit of $30,000, but even that does not explain the IRA’s size.
Tax experts have devised a different theory of how Mr Romney’s IRA grew exponentially, and it involves a complex valuation of the securities that it held.
Edward Kleinbard, a professor at USC Gould school of law, says he believes the logical explanation is that Mr Romney consistently valued the securities – which he compared to options – on the basis of their “immediate liquidation value”, as opposed to their fair market value. This would have allowed Mr Romney to move much more value into the IRA than the $30,000 cap would suggest.
A private equity expert who has been critical of the industry’s accounting methods, Victor Fleischer of Colorado Law, put it this way: “The only way you get a $100m IRA is by putting in property that is difficult to value and taking advantage of the fact that if there is something that is difficult to value, the IRS doesn’t know how to value it either.”
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