Larry Doyle's  Instablog

 What the hell is truly going on within the entire mortgage foreclosure fiasco? There are seemingly more angles to this mess than there ever were choices of mortgage products themselves. Where can we turn to make some ‘sense’ of this madness? Let’s check in with the crowd on the cutting edge of this sinkhole, that is our friends at 12th Street Capital. Today they write,

Not surprisingly the ones that look to be best positioned during this mortgage foreclosure/put back fiasco are the lawyers. As reported by HousingWire.com late yesterday, “A spokesperson for the New York law firm Quinn, Emanuel Urquhart & Sullivan confirmed to HousingWire it has been hired by the Federal Housing Finance Agency, a move some say means the government-sponsored enterprises are going after bad mortgages it bought from originators.” Guess what, the GSEs have ALWAYS pursued repurchases.

This is getting blown WAY out of proportion. Yes I would agree it is never good to have the NY Fed across the aisle in a court room. And sure Pimco and Blackrock have some very deep pockets and can probably stay in the fight a-lot longer than most plaintiffs however it seems to me that the monday morning quarterbacks here are counting on public opinion, CNBC, and the politicians to further their case much more than they are actual legal culpability.

It is clearly a very complex problem and let me start with (1) yes there were loans that were made that should have never been made….
and probably a fair amount of them. (2) the servicers can find themselves conflicted given their relationships with originators or issuers of certain securities, however remember it is the trustee that is the steward of the trust and should be pursuing repurchases not some guy in Simi Valley that probably has no idea where the loan resides (in a deal or nor, and if so in which deal) when he is looking at his servicing screen and trying to follow the maze of rules set forth not only by his company but also by the government over the past 12 months. Also remember, servicing can often be a judgement call. Is it better to execute a short sale, or not? Is it better to modify or not? Is it better to pursue a refi or not? I can see a slap on the wrist or an admonishment to do a “better” job, but I don’t see a full scale culpability due to servicing practices. Finally, (3) this whole idea that there chain of title was broken, or the loans were not legally ‘sold’ is a joke. The UCC (http://en.wikipedia.org/wiki/Uniform_Commercial_Code) has language adopted by all 50 states governing the transfer of these notes into the trusts and the idea that 30+ years of securitization can be undone by an oversight of this is a comical.

Also I was thinking about the case being made for “these loans should have never been made” argument. Sure I would agree there were a lot of loans that should not have been made, but raise your hand if you actually looked at a loan level file when you bought these bonds. Sure there were some residual buyers in subprime sector that did, but other than them I can count on 1 hand the number of guys that were doing true loan level due diligence. For crying out load the street was only doing sample due diligence on whole loan trades…..the housing market crashed, and by the way every update I get from my So Cal realtor is about a lowering of prices on homes so I’m not sure the upper end of housing has found solid ground yet. But does that mean a no doc loan was illegal? Bad idea yes but illegal definitely not. I tell my kids to not rely on the “everyone else was doing it” defense, but the truth of the matter was that market standards change and most people adapt and change over time. Other than the government that was allowing for no money down loans, tax benefits, and home buyer subsidies it seems to me that the market has adapted.

Last but not least, if you have 5 minutes, read this article,http://www.housingwire.com/2010/10/18/a-little-bit-of-sanity-please It is a little bit of balance versus the mind numbing blogs and CNBC chatter. A couple of highlights, “As for REMIC and related loan assignment issues, more than a few talking heads have gone postal in recent weeks about how every REMIC in the U.S. is a fraud, and that the U.S. banking system is similarly fraudulent. In the latest variation on the “show me the note” strategy, these would-be experts point to the fact that when a note is transferred to a trust, it is typically endorsed “in blank” — so the trust never owned the note, right? Nobody owns the note! Chaos! Anarchy! Free homes for all! (Or at least an issue for the courts to decide.)

Someone needs to inform the public about how this is really done. Namely, that notes are endorsed to the trustee or servicer only when needed to pursue a foreclosure, and not before then. Endorsing in blank is recognized in every single U.S. state, since evidence of ownership and transfer rests with the executed loan purchase agreement, and not with the assignment itself — something that has been true for well over 30 years in this country, and is just now supposed to be controversial?” and “the third real issue facing mortgage markets today, quite frankly, is that political reality is allowed to subsume actual reality. This is the outcome that sees the mortgage industry eat its own, if it comes to pass. It’s supremely ironic, for one thing, to see the White House now advocating that foreclosures proceed as quickly as possible — after spending the better part of the past two years attempting to halt foreclosures at all costs. But that doesn’t make the White House wrong now; it means our political leaders were wrong then, wrong with the HAMP program and wrong to interfere with a housing market in dire need of a functioning clearing mechanism.”

Thank you to the team at 12th Street Capital for making some ‘sense on cents’ out of what is otherwise an enormous s*&$tshow.

Larry Doyle

Disclosure: no positions

 I truly believe this could be the single most important and enlightening commentary ever put forth at Sense on Cents. Although it is a little lengthy and has some legalese, if you care about truth, transparency, and integrity in our nation, take the time to read and review. You will be better for it. I encourage you to share it with friends and colleagues.

Washington still does not get it.

I strongly believe the deeply embedded Wall Street-Washington incestuous relationship was central to the erosion of our economic foundation. While that incest must be extirpated if we are to regain our economic standing, we continue to suffer through “show trials” dealing with the critically important topic of pursuing transparency across our political and financial landscape. Regrettably, the media in general provides limited coverage to this ongoing pursuit. To that end, I welcome banging this drum and engaging those in our nation who will ask the hard questions and put forth aggressive propositions so real transparency can be achieved. Even if the pursuit comes up short, the effort and goals are beyond worthy. Let’s navigate.

Yesterday, the House Financial Services Committee chaired by Barney Frank held a hearing to address the SEC’s exemptions from Freedom of Information requests embedded in the Financial Regulatory Reform legislation. Congressman Frank rolled out the red carpet to SEC Chair Mary Schapiro. From the testimony, Frank offers:

Chairman Schapiro, let me say I appreciate your coming and I just want
to say at the outset no one, I think, does or should consider
this in any way any kind of criticism or indictment. And I
understand you — my own view is that you have significantly
improved the enforcement mechanism. I know Mr. Grisami (ph)
(Khuzami) couldn’t be in today because of impossible conflicts. But I
welcome him and what he’s been doing. So I — I want to make
very clear, I think everybody’s made it clear, we’re here in
a spirit of cooperation. We have a common enterprise (ph). We
have conflicting goals to some extent, which is tough
enforcement, but also complete openness.

Way to take the gloves off there, Barney. Have you ever heard anybody presenting an effective “cross examination” so warmly embrace an individual providing testimony? Is this the best America gets? Let’s get real.

Who should really be questioning Ms. Schapiro? Who should make the case for the need for real transparency at the SEC? Who can ‘talk the talk’ because he has ‘walked the walk’? None other than the great American, Gary Aguirre. For those not familiar with Mr. Aguirre, he has no equal when it comes to credibility and integrity in pursuing FOIA requests from the SEC. He is a true giant. He won a wrongful termination suit against the SEC. Aguirre utilized the FOIA to obtain documentation from the SEC which led to a $28 million settlement and shut down Pequot Capital headed by the legendary Art Samberg. Aguirre recently published his thoughts on the SEC’s FOIA exemptions in the September 2010 Wall Street Lawyer. I am happy to share it with the audience here at Sense on Cents.

Aguirre opines that the legislation as written may very well be unconstitutional. While Aguirre’s commentary is written largely for those with a legal background, there are lots of lessons for all Americans. Allow me to share a few ‘appetizers’ in the hope that people will take the time to review the full 8-page document. Aguirre writes:

No other provision in the U.S. Code purports to grant any agency such unbridled discretion by declaring itself to be an Exemption 3(B) statute. In this way, § 929I appears to be a unique grant of power by Congress to a federal agency.

Don’t go anywhere as Gary Aguirre has a lot more to say, including:

However, as discussed below, Congress’s unfettered grant of power to the SEC to decide what government secrets should be disclosed to the public may raise constitutional issues.

Additionally:

And § 929I grants the SEC an even more extraordinary power: the ability to expand the scope of its new FOIA exemptions at will. Should the SEC believe the current form of its new exemptions is too narrow, it may expand their scope under its rule-making authority.

Hence, if the SEC decides it needs an even broader exemption under FOIA, it simply modifies its rules to broaden the exemptions’ reach.

Aguirre’s “cross examination” again presents this SEC exemption as likely unconstitutional in writing,

Hence, § 929I’s broad grant of power to the SEC appears void of any standards which would permit it to pass constitutional muster.

With such “unbridled discretion” to withhold information from FOIA requesters comes the question whether § 929I constitutes an unlawful delegation of legislative authority.

Aside from the case being made in this commentary by our great American, Mr. Aguirre, he also references that the SEC’s own Inspector General David Kotz questioned the SEC’s compliance with FOIA. On this note, Aguirre offers:

Last September, SEC Inspector General H. David Kotz issued a 60-page report (OIG FOIA Report) damning the SEC’s conscious failure to comply with FOIA. Mr. Kotz noted the SEC releases records in response to only 13% of requests, while other federal agencies do so in response to 60% of the requests.

While Aguirre presents a compelling case in his commentary as to why the SEC should be compelled to comply with FOIA, he saves his best for last. How so? Aguirre aggressively puts forth why the SEC may truly want to be further exempt from FOIA. He references his own case against the SEC and emphasizes,

Section 929I Closes FOIA’s Path to Records of SEC Misconduct Opened by Aguirre v. SEC

In Aguirre, the author, a former SEC staff attorney, led an SEC insider trading and market manipulation investigation of Pequot Capital Management during 2004 and 2005. The SEC discharged the author in September 2005 after he complained internally that his supervisors were giving preferential treatment to a prominent Wall Street banker (LD’s edit: the banker was John Mack). In November 2006, the SEC closed the Pequot investigation without filing charges. In August 2007, the Senate Committee on the Judiciary and the Senate Committee on Finance issued a 108-page joint report in which they found the SEC (1) had been unduly deferential to the Wall Street banker and (2) had fired the author for questioning that deferential treatment.

Consequently, Aguirre provides a pathway for the media, financial writers, and the public to obtain information about the SEC’s failures, such as those which led to the financial crisis, where a plaintiff has proof of misconduct by SEC staff.

Aguirre cogently connects the dots. I will allow others to judge the merits of Mr. Aguirre’s cross-examination. I know how I feel. I love it. America needs a LOT more of what Mr. Aguirre is serving. Gary Aguirre once again distinguishes himself as a great American in this commentary. He provides the ‘cross examination’ which Frank and others are obligated to pursue.

With this commentary, Gary Aguirre gains immediate elevation into the highest echelon of the Sense on Cents Hall of Fame. I strongly encourage readers to take the 20 minutes to fully and totally review Aguirre’s paper. You will be more fully informed as to the real issues lying at the base of the Wall Street-Washington incest. (Click on the attached below to access Aguirre’s full commentary.)

 

 

 

 

Larry Doyle

Disclosure: no positions

Do you increasingly feel that you are not receiving the full story in terms of our overall economy? Do you feel as if the ‘political class’ in Washington is speaking a different language than the ‘working class’ in the rest of the country? Do you scratch your head as to why economic releases are often immediately panned and quickly thereafter revised? (Case in point, the initial release of 2nd quarter GDP on July 30th was quickly thereafter  projected to be halved.) For all of the above reasons, more and more Americans are relying on independent economic research and analysis. Two of my favorites in this camp (aside from Sense on Cents, of course!!) are John Williams of Shadow Government Statistics and Rick Davis of Consumer Metrics Institute. 

I referenced Williams’ work in recently writing What Is the Real Rate of Unemployment in the United States?. In that commentary, I referenced Williams as he had stated,   

That began a lengthy process of exploring the history and nature of economic reporting and in interviewing key people involved in the process from the early days of government reporting through the present.

For a number of years I conducted surveys among business economists as to the quality of government statistics (the vast majority thought it was pretty bad), and my results led to front page stories in the New York Times and Investors Business Daily, considerable coverage in the broadcast media and a joint meeting with representatives of all the government’s statistical agencies. Despite minor changes to the system, government reporting has deteriorated sharply in the last decade or so. (LD’s emphasis)

In that very same vein, Rick Davis at CMI is doing similarly spectacular work in capturing and measuring real time discretionary consumer activity. Rick has been way ahead of the curve over the last six-plus months in projecting a double dip in our economy. Those who would like to pan Rick or his work fail to see that Rick’s trendline for the American consumer has been amazingly accurate. What does Rick see now? Are you sitting down? Because it would appear that the American consumer has recently further retrenched. Let’s navigate as Rick writes,

At the Consumer Metrics Institute we have a unique perspective on the economy. We measure consumer demand on a daily basis, providing nearly two orders of magnitude more resolution than the BEA’s GDP releases. This is like moving from naked eye observations to using a lab-grade microscope. As a result we can see timing relationships that simply can’t be seen in quarterly data.

Our Daily Growth Index has reached a year-over-year contraction rate of 5%, and it is rapidly closing the gap on the worst contraction rate observed during the 2008 Great Recession:

The current 2010 contraction is now over 215 days old. At the same point during the duration of the 2008 Great Recession, consumer demand was contracting at less than a 1% year-over-year rate. Additionally, during the 2008 Great Recession our Daily Growth Index had returned to net growth after 223 days. From the above chart we can see that the profile of the 2008 contraction and the 2010 contraction are substantially different. The 2008 event was a classic “V” shaped recession. So far this one is not. We have previously suggested that this contraction might be mild but prolonged. We are no longer confident about “mild”. (LD’s emphasis)

We have previously gained some notoriety for having our Daily Growth Index lead the GDP by a relatively consistent 18-20 weeks during the Great Recession. Does this mean that we expect the GDP a couple of quarters from now to be contracting at rates similar to our current -5% rate?

► Our methodologies capture only on-line consumer demand for discretionary durable goods, the most volatile portion of the consumer’s 70% contribution to the GDP. As a consequence we are not seeing the impact of most ongoing governmental stimuli. If governmental stimulus packages can successfully offset the 2010 drop in consumer demand, the GDP might never feel the full weight of the 2010 contraction event.

► However, as we have said before, we suspect that consumers are the “800 pound gorilla” in this recession, and their actions (or inactions) will ultimately be felt to a major extent in the GDP.

By analogy to (American) football statistics, we are only measuring the performance of the starting quarterback for the U.S. economic team. It is possible for a football team to win even though the quarterback is below average — an overwhelming defense and a punishing running game can compensate for a journey-man quarterback — but the performance of the starting quarterback is by far the best predictor of a football team’s final results. The U.S. economy might grow without the U.S. consumer’s support, but only with net exports and/or unsustainable governmental consumption. At the current time the likelihood of the U.S. becoming a net exporter is very low, and unsustainable governmental consumption is simply that: unsustainable.

It is also helpful to distinguish between “leading” and “predicting”; we have deliberately decided to measure discretionary consumer demand data because it is highly leading, while fully realizing that the volatile data provides amplified signals. Fortunately during the 2008 recession the BEA’s numbers for the full economy eventually matched the discretionary consumer demand portion (that we measure) with embarrassing accuracy. While we know that we are measuring only one portion of the economy — the quarterback in the above analogy — we still feel that those measurements reliably lead the economy as a whole. And they should not be expected to predict exactly what the BEA’s 1937 based methodologies eventually measure — for those portions of the economy that really mattered in 1937.

As the saying goes: our numbers are what they are. They are pure daily measures of on-line consumer demand for discretionary durable goods. If consumer demand decisions initiate 70% of all U.S. commerce, we would like to measure that demand as far “upstream” as possible.

If the consumer is in fact the quarterback of our American economy, why does it appear that he is now preparing for a ‘quick kick?’ As Rick states, the numbers are what they are, but as anybody in Wall Street knows, numbers don’t lie. Liars lie.  

In keeping with the football analogy, is that Tim Geithner over there in his letter sweater holding some pom-poms and a megaphone? While over here it looks like Ben Bernanke has once again tried to spike the Gatorade.

Larry Doyle

I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved. 

Disclosure: no positions