Friday, October 29, 2010

Pay rises across the board

Board of Directors, that is.

FTSE 100 pay packets 'scandalous' when ordinary workers face wage cuts
New figures out today revealed FTSE 100 director pay shot up by 55pc in the 12 months to June. In the FTSE 350, total boardroom pay climbed by 45pc on average, the figures by IDS found.

The statistics came less than 24 hours after a survey by the same consultancy found 16pc of employers were still pushing through pay freezes, effectively passing on pay cuts to staff when inflation was taken into account.


Tuesday, October 26, 2010

MERS eat notes

Mairzy doats and dozy doats and liddle lamzy divey
A kiddley divey too, wooden chew?

If the words sound queer and funny to your ear, a little bit jumbled and jivey
Sing "Mares eat oats and does eat oats and little lambs eat ivy"

Mairzy Doats

There's a guest/ghost author on Barry Ritholtz' blog today, who knows his oats from his ivy league.

What Is MERS and What Role Does It Have in the Foreclosure Mess? (Hint: It Holds 60% of All Mortgages, But Has ZERO Employees)
You’ve heard the name Mortgage Electronic Registration Systems or “MERS” mentioned in relation to the foreclosure problems in the residential real estate market.

But what is MERS?

It is the company created and owned by all of the big banks to process title to property in the U.S. Approximately 60% of the nation’s residential mortgages are recorded in the name of MERS.

MERS, the banks and the mainstream financial press all say that it was simply to save fees by digitizing mortgage electronic.

But as Ellen Brown notes, there is in reality a very different reason that the big banks created MERS:
The rating agencies required that the conduit be “bankruptcy remote,” which meant it could hold title to nothing ….

Indeed, the secretary and treasurer of MERS admitted this in a deposition

MERS is a shell corporation with no employees, but thousands of officers.

Astonishingly, MERS “vice presidents” are simply paralegals, customer service representatives, and foreclosure attorneys employed by other companies. MERS even sells its corporate seal to non-employees on its internet web page for $25.00 each. Ironically, MERS, Inc.—a company that pretends to own 60% of the nation’s residential mortgages—does not have any of its own employees but still purports to have “thousands” of assistant secretaries and vice presidents.

As the treasurer and secretary of MERS admitted in a deposition:

Q Does MERS have any salaried employees?
A No.
Q Does MERS have any employees?
A Did they ever have any? I couldn’t hear you.
Q Does MERS have any employees currently?
A No.
Q In the last five years has MERS had any
A No.
Q To whom do the officers of MERS report?
A The Board of Directors.
How many assistant secretaries have you
appointed pursuant to the April 9, 1998 resolution; how
many assistant secretaries of MERS have you appointed?
A I don’t know that number.
Q Approximately?
A I wouldn’t even begin to be able to tell you
right now.
Q Is it in the thousands?
A Yes.
Q Have you been doing this all around the
country in every state in the country?
A Yes.
Q And all these officers I understand are unpaid
officers of MERS?
A Yes.

In another deposition, a legal assistant at a law firm initiating 4000 to 7000 foreclosures per month in Florida held herself out as “vice president” and “assistant secretary” of MERS. She testified:
Q: The question was you have no job duties as an assistant secretary of MERS, correct?
A: I do not have any job duties other than signing the assignments and mortgage. Does that help?
Q: Yes. Here, I’ll try to rephrase this. Do you attend any board meetings at MERS?
A: No, sir.
Q: Do you attend any meetings at all at MERS?
A: No, sir.
Q: Do you report to the secretary of MERS?
A: No, sir.
Q: Who is the secretary of MERS?
A: I have no idea.


Q: Where are the MERS offices located?
A: I can’t remember.
Q: How many offices do they have?
A: I have no idea.
Q: Do you know where their headquarters are?
A: Nope.
Q: Have you ever been there?
A: No.
Q: How many employees do they have?
A: I have no idea.

The “vice president” and “assistant secretary” MERS signing sworn statements under penalty perjury was simply making it up and doing what she was told.

And as a a forthcoming article in the Real Property, Trust and Estate Law Journal notes, saving fees was another motivation for the giant banks in running mortgages through MERS, but in a way which is shadier than routine cost-cutting efforts.
In the mid-1990s mortgage bankers decided they did not want to pay recording fees for assigning mortgages anymore. This decision was driven by securitization—a process of pooling many mortgages into a trust and selling income from the trust to investors on Wall Street. Securitization, also sometimes called structured finance, usually required several successive mortgage assignments to different companies. To avoid paying county recording fees, mortgage bankers formed a plan to create one shell company that would pretend to own all the mortgages in the country—that way, the mortgage bankers would never have to record assignments since the same company would always “own” all the mortgages.

Even though not a single state legislature or appellate court had authorized this change in the real property recording, investors interested in subprime and exotic mortgage backed securities were still willing to buy mortgages recorded through this new proxy system.

Worse, MERS may have literally “split the baby” and rendered millions of mortgages unsecured:
Typically, the same person holds both the note and the deed of trust. In the event that the note and the deed of trust are split, the note, as a practical matter becomes unsecured. Restatement (Third) of Property (Mortgages) § 5.4. Comment. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Id. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. Id. The mortgage loan became ineffectual when the note holder did not also hold the deed of trust.

The mortgage industry has premised its proxy recording strategy on this separation despite the U.S. Supreme Court’s holding that “the note and the mortgage are inseparable.” If today’s courts take the Carpenter decision at its word, then what do we make of a document purporting to create a mortgage entirely independent of an obligation to pay? If the Supreme court is right that a “mortgage can have no separate existence” from a promissory note, then a security agreement that purports to grant a mortgage independent of the promissory note attempts to convey something that cannot exist.

While this argument will surely strike a discordant note with the mortgage bankers that invested billions of dollars in loans originated with this simple flaw, the position is consistent with a long and hitherto uncontroversial line of cases. Many courts have held that a document attempting to convey an interest in realty fails to convey that interest when an eligible grantee is not named. Courts all around the country have long held: “there must be, in every grant, a grantor, a grantee and a thing granted, and a deed wanting in either essential is absolutely void.”

The article itself is full of citations and quotes from various sources, and Guambat has made a hash of identifying what is from where. Much like MERS itself.

You will have to read the article directly to be better educated that this hack cut and paste job has done. You won't regret it.

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Time for a daily dose of fraud

DOJ's McInerney: Govt Trying To Speed Securities Fraud Indictments
A top U.S. prosecutor said the federal government is now applying to securities cases the same aggressive strategy it has used to speed up indictments for health-care fraud.

"We are no longer taking a long time to issue grand jury subpoenas to banks," Department of Justice Criminal Division Fraud Unit Chief Denis McInerney said at a conference in Washington Monday.

A health-care fraud strikeforce the Justice Department started in March 2007 has netted more than 800 indictments, about half of which have resulted in guilty pleas, McInerney said. Before the strikeforce, such indictments were in the single digits.

Drugmakers top list of DOJ fraud settlements
Pharmaceutical companies made up eight of the government's top 10 settlements related to fraud in the last year, according to the advocacy group Taxpayers Against Fraud Education Fund. An insurer and a hospital chain filled out the list.

Topping the list was specialty drugmaker Allergan Inc. which paid out $600 million to settle allegations that it marketed the anti-wrinkle injection Botox for unapproved uses. Trailing just behind was AstraZeneca, which paid $520 million over allegations it inappropriately marketed its psychiatric drug Seroquel.

As more baby boomers become eligible for Medicare, the government is spending more on prescription drugs, attracting scrutiny from government investigators.

Overall, the group estimates that in the fiscal year that ended Sept. 1, government prosecutors collected $3.1 billion under the False Claims Act, which allows the government to collect damages reported by private citizens.

County Launches Anti-Fraud Campaign
A new public awareness campaign aimed at curbing insurance fraud is being featured on more than 340 movie screens in theaters across San Diego County, authorities said Monday.

District Attorney Bonnie Dumanis said insurance fraud costs California consumers an estimated $15 billion each year.

SEC's Khuzami: Agency Is Focused On Municipal Securities Fraud
The Securities and Exchange Commission's director of enforcement said the regulatory agency is focused on rooting out securities fraud in the $2.8 trillion municipal bond market.

The SEC currently lacks the authority to require issuers to disclose financial information before selling debt in the $2.8 trillion municipal market. Rather, the agency largely oversees the market by cracking down on fraud committed by broker-dealers that sell municipal securities.

Morgan Stanley sued over alleged CDO fraud
In a complaint filed in Manhattan federal court, 18 investors in Singapore said they invested in notes issued by Pinnacle Performance Ltd, a Cayman Islands-registered entity, that Morgan Stanley had marketed as "conservative," with an eye to protecting the investors' principal.

Ex-stripper who brought down appellate judge is sentenced for bank fraud
A former New York City stripper was sentenced Monday to one year of supervised release for bank fraud, ending a lurid tale of deceit that brought down a Florida appellate court judge.

Christy Yamanaka, 50, pleaded guilty to one count of scheming with then-Judge Thomas E. Stringer Sr. to hide the fact that she gave him cash to buy a house in Hawaii.

In 2004, when Stringer and Yamanaka bought the house, she had filed for bankruptcy and was concealing money from creditors to whom she owed nearly $315,000. On the mortgage application, he wrote that none of the money for the down payment was borrowed, when, in fact, he got it from her.

After the house was sold, the two fell into a dispute over its profits, leading to a tabloid scandal that cost Stringer his reputation, his seat on the 2nd District Court of Appeal and, for at least five years, his license to practice law.

"I will not stray again," she said. "I am full of regret and sorrow for my conduct."
At least she didn't say, as almost all large corporations say after they "settle" a suit, "I did nothing wrong."

NJ man admits $1.7M fraud involving horseshoes
A New Jersey man has admitted he defrauded investors by persuading them to buy unregistered shares in a company that was supposed to make therapeutic shoes for horses competing in the Olympics.

The state Division of Criminal Justice says the Garfield resident received about $1.7 million from 300 investors. Prosecutors say he never bought equipment to manufacture the horseshoes and used investor funds for personal expenses.

Mobile Attic founder admits bank fraud in Ala.
The former Elba businessman admitted kiting $8.1 million in checks among the businesses' bank accounts.

His last name is "Cash". Really. Check the story link. Guambat will not purposefully lie to you.

Payroll Company President Gets Jail for Fraud
Andre served as president of Arizona Payroll Systems, Inc., which provided payroll services for small businesses in Camp Verde, Cottonwood and Sedona.

From 2005-2007, Andre collected worker’s compensation premiums from his small business clients but falsely reported the hours, wages and type of work to the State Compensation Fund of Arizona.

Because worker's compensation premiums are based upon type of work, hours worked and wages earned, Andre's misrepresentations caused the State Compensation Fund of Arizona to be underpaid by $72,453 in premiums.

Clinton Sisters Arrested On Insurance Fraud Charges
Two Clinton women have been arrested on multiple counts of insurance fraud, Attorney General Jim Hood announced on Monday.

Among the charges, Dinah Haralson is accused of filing false records on behalf of her daughter for injuries reportedly received in a bicycle accident in January 2008 and in September 2008, for a skating accident in March 2008 and for an automobile accident in April 2009, Hood's office said.

Additionally, Dinah Haralson claimed to have received severe burns while cooking in March 2007, to have had a bicycle wreck in February 2008, to have fallen down a set of stairs in April 2008 and to have had automobile accidents in August 2008 and April 2009, according to the news release.

Bandera woman named in securities fraud probe
A Bandera woman is under investigation over allegations that she helped dupe people into investing millions of dollars in a company whose principals made outlandish claims that, if true, would have made it the second-largest firm in the country, agents say.

A federal court affidavit filed Friday said Teresa Brown is one of the main sellers of unregistered shares for a Kansas City company called Petro America Corp., whose CEO, a man named I. Owen Hawkins, is the primary focus of the probe led by the U.S. Attorney for Western Missouri and the Internal Revenue Service's Criminal Investigation division.

The company has claimed to have hundreds of acres in oil and gas leases in Missouri, plus partial ownership of eight gold mines, a granite quarry, and several subsidiaries — including an alternative energy company, a financial services provider, a packaging company, a tech company, an insurance company and an electric-car company.

Investors have pumped more than $5 million into the firm, but federal agents have discovered that only a small fraction was actually invested in Petro America, the affidavit said.

Instead, the affidavit said, Hawkins, Brown and their associates withdrew the money in cash and spent it lavishly on themselves. Brown, for instance, bought a $37,000 boat, a $5,200 piece of Louis Vuitton luggage, expensive jewelry, and traveled to places like Switzerland, the document states.

Embezzler who got tax credit faces more charges
Short was arrested in mid-March a day after sharing the stage with Gov. Jennifer Granholm as she announced his company would get $9.1 million in tax credits for setting up its headquarters in Flint. RASCO and Short, the chief executive officer, got the grant after saying they planned to improve the lives of poor people overseas by using renewable energy to provide electricity, clean drinking water, sanitation and telephone and Internet service.

Short's ability to get a business tax credit for a company he apparently cooked up on his home computer in a trailer park deeply embarrassed the state's economic development officials. His prison record and the fact that he was on parole was easily accessible in the state's searchable offender tracking database posted on the Internet.

Officials at the Michigan Economic Development Corp. said they never conducted a background check on Short.

They also failed to check his other paperwork, including an apparently fake letter Genesee County Prosecutor David Leyton said Short wrote showing he had $10 million in a trust fund to finance RASCO's operations.

Guambat wonders if there's any pattern to who does the time for these crimes, and who doesn't.


Saturday, October 23, 2010

Ya feelin' lucky, punk?

John Hussman, PhD, is a good read, from time to time. His writing style is often dry and since he constrains his view of the economy to the big picture, he's not so frenetically following the many distractions of the day that a market trader might, so new themes and ideas develop slowing in his weekly diary. But, from time to time, he is well worth the read.

And this time, it is not only helpful, but he's actually got some life in his prose. Here are a few extracts.

The Recklessness of Quantitative Easing
In the movie Dirty Harry, Clint Eastwood growls his famous line "I know what you're thinking. 'Did he fire six shots, or only five?' Well, to tell you the truth, in all this excitement I kind of lost track myself... You've gotta ask yourself one question. Do I feel lucky? Well, do ya punk?"

Over the past two years, the Fed has emptied what has largely turned out to be a chamber of blanks. Its remaining credibility lies in the belief by the public that Bernanke still has a live round left to fire. Once the Fed engages in QE, a failure of appreciable improvement in U.S. employment and economic activity would result in a substantial loss of public confidence. The Fed would be wise to save whatever ammunition it has left for a crisis point when the U.S. public is in dire need of confidence.

An additional fruit of careless, non-economic thinking on behalf of the Fed is the idea of announcing an increase in the Fed's informal inflation target, in order to reduce expectations regarding real interest rates. The theory here - undoubtedly fished out of a Cracker Jack box - is that lower real interest rates will result in greater eagerness to spend cash balances.

Unfortunately, this belief is simply not supported by historical evidence. If the Fed should know anything, it should know that reductions in nominal interest rates result in a lowering of monetary velocity, while reductions in real interest rates result in a lowering of the velocity of commodities (commonly known as "hoarding").

A second round of QE presumably has two operating targets. One is to directly lower long-term interest rates, possibly driving real interest rates to negative levels in hopes of stimulating loan demand and discouraging saving. The other is to directly increase the supply of lendable reserves in the banking system. The hope is that these changes will advance the ultimate objective of increasing U.S. output and employment.

To assess whether QE is likely to achieve its intended objectives, it would be helpful for the Fed's governors to remember the first rule of constrained optimization - relaxing a constraint only improves an outcome if the constraint is binding. This policy will be ineffective because it will relax constraints that are not binding in the first place.

On the demand side, it is apparent that the U.S. is presently in something of a liquidity trap. Interest rates are already low enough that variations in their level are not the primary drivers of loan demand.

Businesses and consumers now see their debt burdens as too high in relation to their prospective income. The result is a continuing effort to deleverage, in order to improve their long-term financial stability. This is rational behavior. Does the Fed actually believe that the act of reducing interest rates from already low levels, or driving real interest rates to negative levels, will provoke consumers and businesses from acting in their best interests to improve their balance sheets?

On the supply side, the objective of quantitative easing is to increase the amount of lendable reserves in the banking system. Again, however, this is not a constraint that is binding. The liquidity to make new loans is already present.

Despite the probable lack of measureable benefits, further QE poses significant risks. It has already triggered a steep decline in the exchange value of the U.S. dollar, and threatens a destabilization of international economic activity, a loss of confidence, and the creation of a "boom-bust" cycle threatening to choke off any economic recovery that does emerge.

The Fed might like to believe that a cheaper dollar will improve trade by increasing U.S. exports and reducing imports. However, over the past two decades, and particularly in recent years, U.S. imports have been much more elastic in response to fluctuations in the U.S. dollar than exports have been. This suggests that provoking further dollar depreciation is likely to have negative effects on the global economy, owing to a shift away from imports, but with few positive effects for U.S. economic activity. Indeed, a further depreciation would unnecessarily create a negative wealth effect for U.S. consumers facing higher prices for imported goods and services. Any improvement in the trade deficit would be largely offset by downward pressure on U.S. consumption.

As a side note, some observers have suggested that QE represents nothing more than "printing money." While this might be accurate if the Fed never reverses the transactions, the most useful way to think about QE, in my view, is as an attempt to directly lower interest rates by purchasing Treasury securities. This interest rate effect - not any major inflationary outcome - is the cause of the dollar depreciation we are observing here. There is little doubt that the effect of large continuing fiscal deficits is long-run inflationary, but as I've noted repeatedly over the years, there is little correlation between inflation and temporary - even large - variations in the monetary base. Inflation is ultimately a fiscal phenomenon born of unproductive spending, regardless of how that spending is financed.

once the Fed has quadrupled or quintupled the U.S. monetary base from its level of three years ago, how will it reverse its position? Japan was able to successfully reverse its program of QE several years ago without much impact on yields, but unlike the U.S., it had the luxury of an extremely high savings rate. With nearly 95% of its debt held domestically, Japan had no need to resort to foreign capital. In contrast, over half of the U.S. national debt is held by other countries. Without a deep pool of domestic savings, and with no repurchase agreements in place, the Federal Reserve will eventually have to entice domestic and foreign investors to buy the Treasury securities back, pressuring interest rates higher, and virtually ensuring a capital loss.

Better policy options are available on the fiscal menu. Historically, international credit crises have invariably been followed by multi-year periods of deleveraging, but measures can be taken to smooth the adjustment. The key is to focus on the economic constraints that are binding. Presently, these relate to high private debt burdens, uncertainty about income, weak aggregate demand, and the reluctance by U.S. businesses to launch new projects.

Appropriate fiscal responses include extending unemployment benefits, ensuring multi-year predictability of tax policy, expanding productive forms of spending such as public infrastructure, supporting public research activity through mechanisms such as the National Institute of Health, increasing administrative efforts to restructure debt through writedowns and debt-equity swaps, abandoning policies that protect reckless lenders from taking losses, and expanding incentives and tax credits for private capital investment, research and development.

Throwing a trillion U.S. dollars against the wall to see what sticks is not sound monetary policy. By pursuing a policy that relaxes constraints that are not even binding, depresses the U.S. dollar, threatens to destabilize international economic activity, encourages a "boom-bust" cycle, provokes commodity hoarding, and pops off the Fed's last round of ammunition absent an immediate crisis, the Fed threatens to damage not only the U.S. economy, but its own credibility.

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Friday, October 22, 2010

Search Google for "Double Irish" and "Dutch Sandwich"

Photo © Karin Engelbrecht

They are not menu items in a trendy little bistro.

It's more like a zen question: How can you do no evil and pay no tax while making billions of dollars a year?

So, go ahead -- google "double irish" and "dutch sandwich".

Oh, for chrissakes, just click here.

Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes
Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.

Google, the third-largest U.S. technology company by market capitalization, hasn’t been accused of breaking tax laws. “Google’s practices are very similar to those at countless other global companies operating across a wide range of industries,” said Jane Penner, a spokeswoman for the Mountain View, California-based company.

The tactics of Google and Facebook depend on “transfer pricing,” paper transactions among corporate subsidiaries that allow for allocating income to tax havens while attributing expenses to higher-tax countries. Such income shifting costs the U.S. government as much as $60 billion in annual revenue, according to Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon.

Facebook, the world’s biggest social network, is preparing a structure similar to Google’s that will send earnings from Ireland to the Cayman Islands, according to the company’s filings in Ireland and the Caymans.

Google’s income shifting -- involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” -- helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.

“It’s remarkable that Google’s effective rate is that low,” said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. “We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent.”

The U.S. corporate income-tax rate is 35 percent. In the U.K., Google’s second-biggest market by revenue, it’s 28 percent.

Google, the owner of the world’s most popular search engine, uses a strategy that has gained favor among such companies as Facebook Inc. and Microsoft Corp. The method takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax.

The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad.

Meanwhile, the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros.

As a strategy for limiting taxes, the Double Irish method is “very common at the moment, particularly with companies with intellectual property,” said Richard Murphy, director of U.K.- based Tax Research LLP. Murphy, who has worked on similar transactions, estimates that hundreds of multinationals use some version of the method.

“The sandwich leaves no tax behind to taste,” said Murphy of Tax Research LLP.

“You accumulate profits within Ireland, but then you get them out of the country relatively easily,” said Jim Stewart, a senior lecturer in finance at Trinity College’s school of business in Dublin. “And you do it by using Bermuda.”

Once Google’s non-U.S. profits hit Bermuda, they become difficult to track. The subsidiary managed there changed its legal form of organization in 2006 to become a so-called unlimited liability company. Under Irish rules, that means it’s not required to disclose such financial information as income statements or balance sheets.

“Sticking an unlimited company in the group structure has become more common in Ireland, largely to prevent disclosure,” Stewart said.

The high corporate tax rate in the U.S. motivates companies to move activities and related income to lower-tax countries, said Irving H. Plotkin, a senior managing director at PricewaterhouseCoopers LLP’s national tax practice in Boston. He delivered a presentation in Washington, D.C. this year titled “Transfer Pricing is Not a Four Letter Word.”

“A company’s obligation to its shareholders is to try to minimize its taxes and all costs, but to do so legally,” Plotkin said in an interview.

Technically, multinationals that shift profits overseas are deferring U.S. income taxes, not avoiding them permanently. The deferral lasts until companies decide to bring the earnings back to the U.S. In practice, they rarely repatriate significant portions, thus avoiding the taxes indefinitely, said Michelle Hanlon, an accounting professor at the Massachusetts Institute of Technology.

U.S. policy makers, meanwhile, have taken halting steps to address concerns about transfer pricing. In 2009, the Treasury Department proposed levying taxes on certain payments between U.S. companies’ foreign subsidiaries.

Treasury officials, who estimated the policy change would raise $86.5 billion in new revenue over the next decade, dropped it after Congress and Treasury were lobbied by companies, including manufacturing and media conglomerate General Electric Co., health-product maker Johnson & Johnson and coffee giant Starbucks Corp., according to federal disclosures compiled by the non-profit Center for Responsive Politics.

The rules for transfer pricing should be replaced with a system that allocates profits among countries the way most U.S. states with a corporate income tax do -- based on such aspects as sales or number of employees in each jurisdiction, said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan Law School.

“The system is broken and I think it needs to be scrapped,” said Avi-Yonah, also a special counsel at law firm Steptoe & Johnson LLP in Washington D.C. “Companies are getting away with murder.”

In February, the Obama administration proposed measures to curb shifting profits offshore, part of a package intended to raise $12 billion a year over the coming decade.

The key proposals largely haven’t advanced in Congress.

US Congressman Dave Camp from Michigan is the Ranking Republican on the House Ways and Means Committee.

He opened a hearing on "Transfer Pricing Issues" in May this year with a complete whitewash of transfer pricing, saying the policies protect American "leaders in innovation" and "these employers provide larger than average paychecks for Americans".
Transfer pricing rules have been a matter of interest for some time and today’s examination will help us all understand a little better how American companies struggle to stay competitive.

Now, it appears by the witnesses invited by the Majority that we will hear the argument that the transfer pricing rules provide an incentive for these companies to ship jobs overseas. If that is the Majority’s real concern – the tax code pushing jobs overseas – then I would suggest we focus on the real problem, which is the corporate tax rate.

shifting to an arbitrary “formula apportionment” system ignores not only the international competition U.S. employers already face, but also ignores the fact that such a move could expose worldwide American companies to double taxation. Unless foreign countries adopted a similar formula – and virtually all use our current “arms-length” standard to determine fair market value – the result could be double taxation.

[This ignores the fact that the techniques used pass through countries with very low to no tax incidents. There can be no double taxation without the second imposition of a tax. It also ignores the foreign tax credits that the US offers to US companies doing business in many or most of its significant trading partners. But ignor-ance seems to be the name of the came here. That and dissemblance, as he continues down a side track; indeed, he jumps the track and careens down a dirt road:]

Before I close, I want to make a particular point with regard to the pamphlet produced by the Joint Committee on Taxation. While I certainly appreciate their efforts, it is critical to note that the Joint Tax Committee, by its own admission, did not look at the transfer pricing practices of a representative sample of American companies. Instead, they focused on only six companies with similar tax liabilities.

Even more significantly, JCT’s pamphlet fails to meaningfully describe other countries’ international tax systems or their transfer pricing regimes, and it does not adequately discuss the global tax treatment or transfer pricing practices of foreign companies that compete directly against the six American companies that were studied.

For those reasons, JCT’s pamphlet, while very informative about the law, comes without the critical broader context that policymakers need to evaluate the effects on international competitiveness of proposed changes to our current law.

Guambat doubts that it was not only the large IT companies (and others) who take advantage of these tax havens. He's quite certain that the tax mavens who contrive, lobby and sell these convenient dodges also manage to discreetly secrete their nice fat fees in these rabbit holes, also.

Guambat can almost here the right-wing chorus warming up with renditions of "Obama Boys" as they try to pin this outrageous con on Obama, with the claim, "well, you know, Google backed Obama".


Thursday, October 21, 2010

Sarbox at your cervix, sir.

Sarbanes-Oxley meets servicer execs
Sarbox, enacted in 2002 in response to corporate fraud at firms like Enron, mandates increased personal liability for senior managers. And we should be clear here — it doesn’t seem to be Sarbanes-Oxley per se that could come back to haunt mortgage servicer execs accused of shoddy practices, but rather Sarbox-type agreements they may have signed as part of the US Treasury’s various housing programmes.

Servicing executives were required by the Treasury Department to sign Sarbanes-Oxley-type agreements by Sept. 30 certifying they were in compliance with the Making Home Affordable Program. Some servicing executives initially balked

it does state that the “servicer is in material compliance with, and certifies that all services have been materially performed in compliance with all applicable federal, state and local laws, regulations, regulatory guidance, statutes, ordinances codes and requirements.”

The issue then is that some mortgage servicer execs could face personal lawsuits brought under the False Claims Act — if they guaranteed that their own internal servicing processing satisfied that applicable law compliance requirement.

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Wednesday, October 20, 2010

The Countrywide Legacy: The BofA Put

Pimco, NY Fed Said to Seek BofA Repurchase of Mortgages
A group of bondholders wrote a letter to Bank of America and Bank of New York Mellon Corp., the debt’s trustee, citing alleged failures by Countrywide to service loans properly, their lawyer said yesterday in a statement that didn’t name the firms. The New York Fed acquired mortgage debt through its 2008 rescues of Bear Stearns Cos. and American International Group Inc.

Investors are stepping up efforts to recoup losses on mortgage bonds, which plummeted in value amid the worst slump in home prices since the 1930s. Last month, BNY Mellon declined to investigate mortgage files in response to a demand from the bondholder group, which has since expanded. Countrywide’s servicing failures, including insufficient record keeping, may open the door for investors to seek repurchases by bypassing the trustee, said Kathy Patrick, their lawyer at Gibbs & Bruns LLP.

“We now are in a position where we have to start a clock ticking,” Patrick, who is based in Houston, said today in a telephone interview.

If the issues aren’t fixed within 60 days, BNY Mellon should declare Countrywide in default on its servicing contracts, Patrick said.

The initiative covered by the letter sent to Bank of America and BNY Mellon yesterday is separate from the effort coordinated through Dallas lawyer Talcott Franklin, Patrick said. That firm is coordinating action for a larger group of mortgage-bond investors holding more than $500 billion of the debt.

PIMCO, BlackRock, and NY Fed Ask BofA to Repurchase Mortgage Bonds
With investors of this stature looking to force a bank as significant as Bank of America to buy back bonds, you can expect a tidal wave to begin. Other mortgage bond investors will almost certainly begin to follow suit. Other banks will also likely be the target of similar demands. If banks refuse, then lawsuits will likely follow.

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The sun sets

The sun has finally set on the British Empire. When it comes to being a serious world power, you have to pay to play. You can't talk that talk, even with a plum in your mouth, if you can't walk that walk.

Britain's armed forces will have to seek French help to fight a war
Britain's armed forces will have to seek French help to fight a war The review all but ruled out the possibility of Britain ever mounting a major independent operation again, saying that future wars will be fought alongside allies. It said Britain must "intensify" its cooperation with France.

At the heart of the review is a new policy on military operations that limits the size of the force Britain will be able to send to the front line -- 30,000 on short-term deployment, well below the 45,000 sent into Iraq in 2003.

For "enduring operations" over several years, Britain will be able to sustain a force of only 6,500 troops. There are 10,000 British personnel in Afghanistan.

Read more:

U.K. slashes military budget but seeks to protect place on world stage
Instead, Britain will invest in its much admired special forces and develop expertise on cyber threats to secure the country's status as a major global power, Cameron said.

Cameron said the overhaul wasn't just aimed at cutting the military budget — saying he was breaking decisively with the strategy of predecessors Tony Blair and Gordon Brown.

He criticized the previous government's decision to sign contracts for two new aircraft carriers — explaining that cancelling the program would have cost more than building the vessels. "That is the legacy we inherited, an appalling legacy the British people have every right to be angry about," he said.

Late Monday, the British leader shared details with President Barack Obama in a phone call, hoping to assure the White House that Britain will still be equipped to fight alongside the U.S. on missions overseas.

"Britain has punched above its weight in the world, and we should have no less ambition for our country in the decades to come," Cameron told the House of Commons.

Lt. Gen. Graeme Lamb, a former adviser to U.S Gen. Stanley McChrystal and formerly director of Britain's special forces, said the cuts would not leave the military weakened.

"It's a bit like poker — you never get the hand you want, you get the hand you're given.

The art form is to play it well," said Lamb, whom Cameron has asked to review the use of reserve forces.

Tut, tut. Oh yes, that. Keep the stiff upper lip.


Big Pharma-care

Drug Companies Hire Troubled Doctors As Experts
Drug companies say they hire the most-respected doctors in their fields for the critical task of teaching about the benefits and risks of the companies' drugs.

But an investigation by ProPublica has uncovered hundreds of doctors receiving company payments who had been accused of professional misconduct, were disciplined by state boards or lacked credentials as researchers or specialists.

To vet the industry's handpicked speakers, ProPublica created a comprehensive database that represents the most accessible accounting yet of payments to doctors. Compiled from disclosures by seven companies, the database covers $257.8 million in payouts since 2009 for speaking, consulting and other duties. The companies include Lilly, Cephalon, AstraZeneca, GlaxoSmithKline, Johnson & Johnson, Merck and Pfizer.

Although these companies have posted payments on their websites — some as a result of legal settlements — they make it difficult to spot trends or even learn who has earned the most. ProPublica combined the data and identified the highest-paid doctors, then checked their credentials and disciplinary records.

That is something not all companies do.

We're talking about big money. Just from these seven companies, they've paid out more than $257 million in the past 18 months, and remember not all of these companies have even disclosed their payments for that whole period of time, so it's likely going to be substantially more, just for these seven companies.

What do they get for it? They wouldn't be spending this kind of money if they weren't getting returns from the perspective of increasing their brand in the market, letting doctors know about it, encouraging them to prescribe it. They say that doctors' success at increasing prescriptions is not a means in which they're measured, but some of the lawsuits against the industry have said that prescriptions and return on investment absolutely play a role.

Over 17,000 US Doctors Paid By Drug Companies To Spread Their Message
Giving money to doctors in this way is not against the law. In fact, ProPublica admits that a strong relationship between doctors and companies that make medications can be good, and lead to innovation and better therapies.

However, according to studies, giving doctors payments and even small gifts can undermine their professional approach. A separate Consumer Reports poll revealed that 74% of the American public think doctors should not receive money from pharmaceutical companies which ask them to encourage their peers to prescribe certain drugs.

The authors of the report warn that the 17,000 figure could be significantly higher. The current total represents data on just 7 drug companies. Over 70 companies are keeping their cards close to their chest and not revealing their data.

There is much, much more to read and learn about in these two articles.


Mine what you complain about

Chinese bosses 'mistakenly' shot Zambia protesters: Beijing
China said Tuesday that two Chinese coal mine managers who were arrested in Zambia for allegedly shooting 12 local workers had hurt the Zambians "mistakenly".

The two Chinese nationals have been charged with attempted murder for allegedly shooting randomly at the Zambian miners after they protested poor working conditions at their Chinese-run mine on Friday.

Africa has seen a wave of Chinese investment, despite criticism in the West that Beijing was blatantly ignoring human rights abuses, and environment and corruption issues in some countries as it lunges for the continent's resources.

China pumped 9.3 billion dollars into Africa by the end of 2009, a government report said last week, and Chinese officials have vowed the push would continue.

In particular, China has been criticised by the West over its support for regimes such as Sudan and Zimbabwe, which have been accused of human rights abuses, but many African leaders praise Beijing for not preaching to them on rights.

Ma said China's embassy in Lusaka had asked the Chinese-run company to "properly handle the dispute."

Chinese miners confirmed dead after gas leak

China's turn for mine rescue
China's mining industry is the most dangerous in the world. Before Saturday, at least 515 people had died this year in mining accidents.

Read more: China's turn for mine rescue | | Detroit Free Press

Thursday, May 11, 2006 Miner disasters


Bubbling along

The bubbles on the surface of the markets are from those drowning below.

The following two maps chart the percentages of "underwater" homeowners in Q4 2000 vs 2009:

(Hattip Barry)

(Hattip FT Alphville)


Tuesday, October 19, 2010

How big banks helped to greece the wheels of commerce

Banks Shared Clients’ Profits, but Not Losses
Here is the deal: Pension funds and mutual funds lend some of their stocks and bonds to Wall Street, in return for cash that banks like JPMorgan then invest. If the trades do well, the bank takes a cut of the profits. If the trades do poorly, the funds absorb all of the losses.

The strategy is called securities lending. Mr. Evangelisti said, all of the investments had been permitted under guidelines negotiated with the bank’s clients. JPMorgan, he said, did not take undue risks.

In addition to losing money for New Orleans workers and others, securities lending also played a central role in the near-collapse of the American International Group. Through securities lending, pensions and mutual funds borrow money to make trades, adding to the risks within the financial system.

Despite such troubles, the securities lending business has rebounded after plummeting during the crisis. Today shares with a combined value of $2.3 trillion are out on loan, according to SunGard, which provides technology services to financial companies. In 2007, before the bubble burst, the total on loan was worth $2.5 trillion.

The quick revival of securities lending raises concerns about whether banks and their pension customers have learned any lessons.

“What happened was the banks got greedy and they looked at the return they were getting on the collateral and said, ‘Why don’t we go further with this?’ ” said Steve Niss, the managing partner at the NFS Consulting Group, an executive search firm specializing in investment management. “But the clients got greedy right along with the banks.”

The banks did not do it on their own. What we have is fund managers and bank managers playing with other people's money. The can half-rightly point fingers at each other as they try to duck responsibility for their own distractions. But the fingers end up pointing in the eyes of the beholding fund beneficiaries.

Who wins and who loses? The people who saved. Who's accountable? Dunno.

And it's not just the savings funds managers. It's other managers of people's money, right down the Main Street from the savers who live there.

Looting Main Street (with a shadow copy posted here.)
The sewer bill, in fact, is what cost Pack and her co-workers their jobs. In 1996, the average monthly sewer bill for a family of four in Birmingham was only $14.71 — but that was before the county decided to build an elaborate new sewer system with the help of out-of-state financial wizards with names like Bear Stearns, Lehman Brothers, Goldman Sachs and JP Morgan Chase. The result was a monstrous pile of borrowed money that the county used to build, in essence, the world's grandest toilet — "the Taj Mahal of sewer-treatment plants" is how one county worker put it.

What happened here in Jefferson County would turn out to be the perfect metaphor for the peculiar alchemy of modern oligarchical capitalism: A mob of corrupt local officials and morally absent financiers got together to build a giant device that converted human shit into billions of dollars of profit for Wall Street — and misery for people like Lisa Pack.

The original cost estimates for the new sewer system were as low as $250 million. But in a wondrous demonstration of the possibilities of small-town graft and contract-padding, the price tag quickly swelled to more than $3 billion.

County commissioners were literally pocketing wads of cash from builders and engineers and other contractors eager to get in on the project, while the county was forced to borrow obscene sums to pay for the rapidly spiraling costs.

Jefferson County, in effect, became one giant, TV-stealing, unemployed drug addict who borrowed a million dollars to buy the mother of all McMansions — and just as it did during the housing bubble, Wall Street made a business of keeping the crook in his house. As one county commissioner put it, "We're like a guy making $50,000 a year with a million-dollar mortgage."

These [bankers] aren't number-crunching whizzes making smart investments; what they do is find suckers in some municipal-finance department, corner them in complex lose-lose deals and flay them alive. In a complete subversion of free-market principles, they take no risk, score deals based on political influence rather than competition, keep consumers in the dark — and walk away with big money.

"It's not high finance," says Taylor, the former bond regulator. "It's low finance." And even if the regulators manage to catch up with them billions of dollars later, the banks just pay a small fine and move on to the next scam.

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Monday, October 18, 2010

Just 3 examples of how real estate fraud worked

"Putting this behind" them seems to be a common refrain.

2nd UPDATE: NY Real-Estate Developer Pleads Guilty To Fraud
Thomas Kontogiannis pleaded guilty to conspiracy to commit bank and wire fraud in federal court in Brooklyn on Friday. The charges were connected to two New York developments, one in Brooklyn and one in Queens.

U.S. Attorney Loretta E. Lynch called the mortgage fraud "staggering" in its scope. New York Superintendent of Banks Richard H. Neiman said it was "one of the largest mortgage frauds directed by a single individual."

Kontogiannis is already currently serving a 97-month prison sentence after pleading guilty in 2008 to money laundering. Prosecutors had alleged Kontogiannis helped former U.S. Rep. Randy "Duke" Cunningham to launder bribes.

Cunningham was sentenced to more than eight years in prison in February 2008 after pleading guilty in 2005 to accepting $2.4 billion in bribes.

Kontogiannis's indictment said that he employed family and workers who acted as straw buyers on properties he owned and directed false loan files. The mortgages included false appraisals and other documentation. After the loans closed, Kontogiannis prevented the mortgages and deeds from being recorded, so he could sell the same property repeatedly. He eventually sold the loans to Washington Mutual or the Credit Suisse unit, DLJ Mortgage Capital Inc., according to the charges.

Kontogiannis's attorney Gregory O'Connell said his client had taken full responsibility for the matter and "expressed his sincere remorse and hopes to put this difficult manner behind him."

Mortgage company CEO from Colts Neck admits fraud
The chief executive of a Marlboro-based residential loans company pleaded guilty in federal court to bilking mortgage lenders out of more than $11 million to fund a lavish lifestyle through wire fraud, according to federal prosecutors.

David Findel, 45, of Colts Neck, who is president and CEO of Marlboro-based Worldwide Financial Resources, faces 20 years in federal prison and fines that could total more than half the amount he stole, after admitting he prepared and sold fake mortgage loans from 2008 through September 2009, according to U.S. Attorney Paul J. Fishman.

Findel on Thursday told U.S. District Court Judge Peter G. Sheridan that after selling an original loan to a third-party lender, he would create a second set of fraudulent mortgage documents for the same property to sell to another third-party lender and keep the proceeds of the second mortgage loan.

Mozilo Settles SEC Fraud Claims For $67.5 Million
Angelo Mozilo, former Countrywide Financial Corp. Chief Executive Officer, has agreed to settle fraud claims for $67.5 Million. $22.5 million will be paid as penalty and $45 million will be taken from the gains in selling inflated shares. In addition, he was barred by the SEC from serving as an officer or director of a public company.

“Mozilo’s record penalty is the fitting outcome for a corporate executive who deliberately disregarded his duties to investors by concealing what he saw from inside the executive suite, a looming disaster in which Countrywide was buckling under the weight of increasing risky mortgage underwriting, mounting defaults and delinquencies, and a deteriorating business model,” Robert Khuzami, director of the SEC’s enforcement division, said in the statement.

Alongside Mozilo, Former Chief Financial Officer Eric Sieracki and former Chief Operating Officer David Sambol also agreed to settlements. Sambol agreed to pay a $520,000 penalty and $5 million in disgorgement, and Sieracki agreed to pay a $130,000 penalty.

“Countrywide Financial Corporation will advance funds to Mozilo and Sambol as required by the indemnification provisions of its corporate bylaws in these circumstances,” according to the bank’s statement. “Those funds will be used by the defendants to pay the non-penalty amounts ordered by the Court.”

The penalty and disgorgement payments will go to the settlement fund for the Countrywide securities class action that Bank of America agreed to settle in April for $600 million.

See, also, How Countrywide Covered the Cracks
Mr. Mozilo and his two former colleagues were accused of misrepresenting the company’s declining lending standards during 2006 and 2007 and portraying themselves publicly as underwriters of high-quality mortgages even as they learned that the company’s loans were becoming increasingly risky.

The government also contended that Mr. Mozilo and Mr. Sambol improperly profited on inside information about the company’s problematic loans when they sold Countrywide shares. From May 2005 to the end of 2007, Mr. Mozilo generated $260 million from his stock sales, while Mr. Sambol’s sales produced $40 million, the government says.

“As is the case with most settlements, this is a compromise where nobody comes out a complete winner,” said Lewis D. Lowenfels, an authority on securities law at Tolins & Lowenfels. “The S.E.C. gets a substantial monetary settlement and a bar with respect to Mozilo serving as an officer or director. On Mozilo’s side, he is probably satisfied to have this behind him.

Lawyers for Mr. Mozilo declined to comment. Mr. Sambol’s lawyer said his client had “put the matter behind him for the benefit of his family and loved ones.”
That article, in particular, is worth a read-through. It is full of not previously disclosed admissions of how bad things were known to be, but covered up.

Now, one example of how the fraud MAY have worked, but due to technical legalities, we will not find out:

BofA's Countrywide wins dismissal of mortgage case
Investors cannot force Countrywide Financial Corp to buy back mortgages that the lender agreed to modify, a New York court ruled.

Kapnick ruled that the two plaintiff investment funds had not complied with requirements necessary to sue -- including a provision mandating that they gather the support of 25 percent of investors.

Bank of America spokeswoman Shirley Norton said they are pleased the court recognized the 25 percent rule.

"These preconditions protect investors collectively against ill-conceived litigation forays that could prove damaging to investors -- such as the Greenwich plaintiffs' bid, which would effectively halt all modifications of distressed mortgages," Norton said.

The decision by New York State Supreme Court Justice Barbara Kapnick, made public on Wednesday, dismissed a lawsuit brought by two investment funds.

Also, NY judge rules in favor of Countrywide in lawsuit brought by investors over pooled mortgages
The funds, which own securities made up of pooled mortgage loans, claimed Countrywide reduced payments due on hundreds of thousands of home loans by as much as $8.4 billion and failed to buy the mortgages back from investors.

The investors claimed Countrywide was required under a contract to buy back any mortgages that it modified to lower borrowers' payments.

If forced to absorb lower payments on the mortgages, the value of the securities will decline, the funds argued.

William Frey, chief executive of Greenwich Financial Services in Greenwich, Conn., said Wednesday those issues remain unresolved by the ruling.

"This case was not decided on the merits, it was decided on a procedural issue," Frey said, adding that his lawyers are deciding whether to appeal the decision or refile the lawsuit.

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Sunday, October 17, 2010

Integration, of course, is a two way street

The world is getting smaller and the nation-state is slowly becoming a bit of an anachronism.

"Separate but equal" was only struck down as a legally sanctioned social form of ethnic balkanization in the US in the 1950's. Guambat grew up with the idea that perhaps the world might some how integrate, like the Star Trek crew, which had a decidedly Anglo-Saxon dominant trait.

It soon became obvious that a total blend of peoples rendered a mud-like, culture-less social norm that soon lost its appeal. So multi-culturism was born as an alternative.

It's an idea that is even more utopian, but still, to Guambat, offers the possibility, over time, of keeping remnants and strains of unique culture, moving at warp speed through the fabric of society.

For it to work, though, both the newly immigrated and the established incumbents must find some way of adapting their own histories to the new reality.

It ain't easy, and it seems to go against human nature, to some extent, even if fed by genuine and enthusiastic human zeal. It is a process that can only ebb and flow, since the social topography is not the same everywhere.

Germany is currently, it seems, feeling a need to ebb.

German multiculturalism 'utterly failed': Merkel
Angela Merkel said Saturday that the concept that different cultures can live happily side by side does not work.

She stressed that immigrants need to do more to integrate, including learning to speak German.
Immigration issues have become a hot topic, and a recent survey by the Friedrich Ebert Foundation think-tank indicated more than 30 per cent of Germans believe the country is "overrun by foreigners."

Read more:

Merkel says German multicultural society has failed
Mrs Merkel told a gathering of younger members of her conservative Christian Democratic Union (CDU) party on Saturday that at "the beginning of the 60s our country called the foreign workers to come to Germany and now they live in our country."

She added: "We kidded ourselves a while, we said: 'They won't stay, sometime they will be gone', but this isn't reality."

"And of course, the approach [to build] a multicultural [society] and to live side-by-side and to enjoy each other... has failed, utterly failed."

In her speech in Potsdam, however, the chancellor made clear that immigrants were welcome in Germany.

Mrs Merkel said: "We should not be a country either which gives the impression to the outside world that those who don't speak German immediately or who were not raised speaking German are not welcome here."

Earlier this month the chancellor held talks with Turkish Prime Minister Recep Tayyip Erdogan, in which the two leaders pledged to do more to improve the often poor integration record of Germany's estimated 2.5 million-strong Turkish community.

The debate first heated up in August when Thilo Sarrazin, a senior official at Germany's central bank, said that "no immigrant group other than Muslims is so strongly connected with claims on the welfare state and crime". Mr Sarrazin has since resigned.

Such recent strong anti-immigration feelings from mainstream politicians come amid an anger in Germany about high unemployment, even if the economy is growing faster than those of its rivals, our correspondent says.

He adds that there also seems to be a new strident tone in the country, perhaps leading to less reticence about no-go-areas of the past.

Guambat sees the signs of economic distress in actions such as these. And, he must say, this disturbs him.

When times are good and there is plenty to go round, the social problems of human liquidity don't seem so paramount.

Sort of like the economic problems associated with financial liquidity.

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A kick in the asset purchase program

Hoist by his own petard?

Bernanke's Caution Doesn't Dim View On Asset Buys
While Federal Reserve Chairman Ben Bernanke was regarded as cautious about a second round of bond-buying to stimulate the economy, economists on Friday said the underlying message was still that some sort of program would be enacted.

"Bernanke knows that the market is allocating more than a 90% probability [of a second round of bond purchases]; he did nothing to slow down that rapidly moving train," said Lou Crandall, chief economist at Wrightson ICAP
`Liquidity Trap' Plagues U.S., More Stimulus Is Required, Fed's Evans Says
Central bankers, seeking ways to boost flagging growth after lowering interest rates almost to zero and buying $1.7 trillion of securities, are weighing strategies for raising inflation expectations as well as expanding the balance sheet by purchasing Treasuries, according to minutes of the Fed’s Sept. 21 meeting released this week.

Federal Reserve Bank of Chicago President Charles Evans said the U.S. is in a “bona fide liquidity trap” and needs “much more” monetary accommodation in the face of high unemployment and inflation that’s too low.
“I believe the U.S. economy is best described as being in a bona fide liquidity trap,” Evans said to the Boston Fed’s 55th Economic Conference. “This belief is not a new development for me; instead it is a dawning realization.In a liquidity trap, additions to the money supply fail to stimulate the economy.
With projections for unemployment to be at 8 percent and for inflation excluding food and energy to be at 1 percent by the end of 2012, “the Fed’s dual mandate misses are too large to shrug off,” Evans said.

He gave his support to a target for the path of the price level over a “reasonable period of time” that is communicated “regularly and often” to the public.

Such a policy could complement large-scale asset purchases and a change to the Federal Open Market Committee’s statement to include a pledge to keep rates near zero for longer than “an extended period.”

By encouraging Americans to believe prices will start rising at a faster pace, the Fed would reduce inflation-adjusted interest rates and stimulate the economy.

“The fact that Japan is still battling deflation highlights how pernicious deflation can be, and how difficult it is to counteract once it has been firmly established,” Rosengren said.

So, now, let's see. What we need is to keep interest rates low for an extended period of time to raise inflationary expectations? Is that right? Is that the prescription?

Well, that last article alluded to the Japanese experience. It included the following data points as well:
The Bank of Japan pledged last week to keep its benchmark interest rate at “virtually zero” until deflation has ended, after first introducing the rate policy in 1999.
So Japan tried this low interest rate policy for more than the last decade and just exactly how did that work out for them?

Guambat is dubious about comparisons of the same experiment in the US.

One very significant difference between the Japanese and US economy is the continuing significant decline in the Japanese population numbers, based both on lower births and on the refusal of Japan to welcome and integrate immigration. See, Getting a bit long in the ha.

Demand destruction in Japan results from social policy and Malthusian effect, not monetary policy, in that circumstance. Of course you're going to have deflationary outcomes, but born of totally different causes.

The structure and character of the Japanese economy and the US economy are not both apples, nor are they gooses and ganders. Guambat doesn't think that a medical experiment that proceeded with such faulty underlying assumptions would even pass FDA muster.


Like a bee to honey

Jailed Australian Neil Campbell claims FBI entrapment
Authorities in India told The Australian police had uncovered $US10,000 in cash from Mr Campbell on his arrest and that he had been lured to India by undercover US agents with the promise he would receive the remaining $180,000 bribe there.

“I never awarded any contract ever on my own,” he said as he was led back to the dingy lock-up.

“The system is set up so the contract can’t be awarded just by an individual. He approached me and offered me money. I told him no. He approached me three times…three times I told him.”

When asked if he felt he was the victim of entrapment Mr Campbell replied: “That’s exactly what it was.

“The FBI knew about it and instigated it. They kept saying ‘come and get your money, come and get your money’.

“I was on my way back to Australia.”

But Mr Campbell’s son Reid told reporters his father had “been through hell” and had been looking forward to a “safe and stress-free retirement”.


Saturday, October 16, 2010

Taking notes

Some people are taking notes, and some aren't.

Guambat has joined the throng to blog on about the so-called "fauxclosure" fanfare of recent times, and this is not the post that will distract him from that hullabaloo.

Because, however hard it may be to swallow, the achilles heel to the security issues facing the real estate securitization cabal is the failure to keep notes, assignments and mortgages together, and the following stories may just be the first swallow of the spring, though, of course, one swallow does not a spring make.

But first, stop reading this post and go read this Washington Post article, for necessary background and color:

For foreclosure processors hired by mortgage lenders, speed equaled money
Millions of homes have been seized by banks during the economic crisis through a mass production system of foreclosures that was set up to prioritize one thing over everything else: speed.

Law firms competed with one another to file the largest number of foreclosures on behalf of lenders - and were rewarded for their work with bonuses. These and other companies that handled the preparation of documents were paid for volume, so they processed as many as they could en masse, leaving little time to read the paperwork and catch errors.

And the big mortgage companies overseeing it all - including government-owned Fannie Mae - were so eager to get bad loans off their books that they imposed a penalty on contractors if they moved too slowly.

The system was so automated and so inflexible that once a foreclosure process began, homeowners and consumer advocates say, there was often no way to stop it.

The financial incentives show that the problems plaguing the foreclosure process extend well beyond a few, low-ranking document processors who forged documents or failed to review foreclosure files even as they signed off on them. In fact, virtually everyone involved - loan servicers, law firms, document processing companies and others - made more money as they evicted more borrowers from their homes, creating a system that was vulnerable to error and difficult for homeowners to challenge.
As was said, go read the article, all of it. The authors did a great job.

Anyway, Michael A. Fox of Johnstown, Ohio, has been taking notes about the goings on down in Florida, because what happens in Florida hardly ever stays in Florida.

Johnstown man sues GMAC Mortgage, alleges fraud in foreclosure process
In his complaint, filed in Common Pleas Court, Fox seeks at least $25,000 in compensatory damages and $25,000 in a civil penalty, plus undetermined punitive damages that his attorney said will be 2 percent of GMAC's 2009 gross revenue.

The complaint states that Jeffrey Stephan, who signed Fox's foreclosure assignment Jan. 26, 2009, also testified in a Florida state foreclosure case that he signed 10,000 affidavits and assignments in a month without knowledge of the cases or verifying the accuracy of the information.

"Stephan knew or should have known that these hundreds of affidavits would be filed in Ohio courts and relied upon by Ohio common pleas court judges in deciding whether one plaintiff in the particular case had a right to foreclose on Ohio residents," Fox states in his complaint. "GMAC knew or should have known the same."

The court has not yet issued a final order, which precedes a sheriff's sale, said Fox's attorney, John Sherrod.

Sherrod said he has no idea who actually owns the promissory note on Fox's mortgage because it has been assigned so many times.

Barry Ritholtz related a little story about that guy, Jeffrey Stephan:
I’ll let Thomas A. Cox, a retired lawyer, describe GMAC’s foreclosure process and the work of its limited signing officer, Jeffrey Stephan in a court filing:
“When Stephan says in an affidavit that he has personal knowledge of the facts stated in his affidavits, he doesn’t. When he says that he has custody and control of the loan documents, he doesn’t. When he says that he is attaching ‘a true and accurate’ copy of a note or a mortgage, he has no idea if that is so, because he does not look at the exhibits. When he makes any other statement of fact, he has no idea if it is true. When the notary says that Stephan appeared before him or her, he didn’t.”

Meanwhile, an alleged mortgage originator seems to have joined Fauxclosures Anonymous, and issued something of a confession, for which Guambat fervently hopes he gets off at least as lightly as Angelo Mozilo.

The art of mortgage fraud
How do you get official approval of large-scale fraud, theft, and racketeering? You become a mortgage originator (i.e. a “Too-big-To-Fail bank”) like me. Let me walk you through the scheme:

Once you entice the “borrower” into your institution, you have them sign an IOU – a promise to pay on a mortgage which is backed by overvalued real-estate.

Now that you have their note, you're ready to make a real killing by trading this thing up. Stay with me, because this is where it gets really interesting. It's time to “secure” this debt by coming to agreeable terms with securitizers and ratings agencies. Let the raters AAA rate pretty much everything you throw at the securitizers who's job it is to bundle your mortgages into a trust. They can do this without even reviewing the paperwork because, and here is the beautiful part, there is no paperwork.

Why is there no securities paperwork, you ask?

Remember, the trust that underlies a mortgage backed security (MBS) must hold the borrower's note. If the trustee isn't given the note within 90 days after signing, the securities are not legal instruments. All that counts is that we “assign” the deed of trust to whomever “holds” the mortgage to keep the charade going.

Now, no one wants to pay pesky taxes and recording fees for every change of custody the mortgage takes. Let's get some background on this last point from L. Randall Wray, Professor of Economics at University of Missouri, a guy who's analyzed the goings on in the securities industry:

“MBSs are typically pooled through a Real Estate Mortgage Investment Conduit (REMIC) that must according to the Internal Revenue Code hold all the paperwork demonstrating a complete chain of title. Done properly, taxes are avoided. Since a number of intermediaries are usually involved from the mortgage originator through to the trustee of the REMIC, there must be endorsements all along the line. However, it now appears that most of the original notes are still held in the loan originator warehouses. There are no endorsements. The trustees do not have the notes.”

So why do we hold on to the promissory notes while fraudulently assigning the mortgages to a trust? Well, exposing the notes to investor scrutiny would be pretty silly. You don't inform the mark they're being conned. Wray does a great job of explaining how the situation has played out thus far:

“...The tranching process actually prohibited assignment of the notes to the REMICs. Bundles of mortgages of varying quality would be tranched into a variety of securities, say from AAA to BBB. But no individual mortgage is actually assigned to a particular tranche—until it defaults. When one defaults, it is assigned to a lower tranche security and then the foreclosure process begins. This means that from inception of that BBB security, there was no way to assign a note to the trustee because the trustee did not know in advance which mortgage would default. The REMIC trustees tried to get around that by using a dummy conduit called MERS (Mortgage Electronic Registration System) that would “hold” the mortgages and assign them to the proper tranches later. But they do not have the paperwork either, and some courts have rejected their claims as owners.”

Let's just hope borrowers don't start asking for their notes en masse (knock on wood). You see, in our greed and haste we successfully separated the note from the trust deed, leaving trustees with only an “accessory” instrument. If mortgage holders try to foreclose with only the mortgage assignment in their possession, well, in 45 US states they'll be out of luck in a court of law.

A foreclosure mess of their own design, by Andrew Leonard
Why do some courts consider a properly prepared document trail for mortgage loans so important? Christopher Peterson, a law professor at the University of Utah, provides part of the answer. He quotes a federal bankruptcy judge:
Lest one think that the ... Courts have exalted form over substance, it is critical to note several concepts.... [W]e are dealing with interests in Land -- not a security interest in an inventory of plumbing fixtures, in chinchillas, in canned corn, or in a lawn and garden tractor. Land. Land is certainly the asset which people deem to be their most important "possession": There is no other "thing" more important historically in our culture tha[n] an interest in land, whether that interest be in a condominium, in a house, or in farm. Land. The transferring of interests in land has been entrusted to a system of records that allows people to be certain that this single most important asset in their lives is indeed going to be theirs, and that the encumbrances recorded with respect to this asset are in fact accurate and valid. It is therefore absolutely imperative that transactions in land be guaranteed to vest title in the people who invested in those transactions, and that the investors know definitively the interests in the land in which they invest which may affect their interests in this singularly important asset. The record of land transactions in the Recorder's Office provides this critical assurance. Perhaps the most critical aspect of this "chain" of assurance is to guarantee as much as possible on the face of an instrument that a person purported to have signed a document which affects interests in land actually did sign that document.

That quote comes from the riveting paper, "Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System," published in the Summer 2010 issue of the University of Cincinnati Law Review. (Hat tip, Felix Salmon.)


Saving whose asset ?

Back in the olden days, the Federal Reserve's role in life was to assure price stability, which from the beginning tended to focus on stabilizing unemployment and moderating inflation.

You young-uns may not know that because when Greenspan took the reigns, his focus began to shift. And ever since, the primary focus, based on action and not words, has been on asset price protection. Indeed, the Greenspan legacy is his "put". Not a Laffer curve or other analysis of the natural rate of unemployment. Not the Volker strangle on inflation by raising interest rates, but on pumping money, 24/7.

So what? Well, by focusing on unemployment and inflation, the business cycle was a tangible notion based on real production of real goods and services. By focusing on asset prices, all that has changed. There is no longer a business cycle, and the wealth of the nation is now determined by the price of assets. Certainly not the price of its currency.

Financial policy has shifted heavily from fiscal responsibility and action to monetary irresponsibility and action, helped along the way by Wall Street's wholesale buy-off of Congress and its population of the Treasury and Federal Reserve with its own. See, Goldie as political hedge fund.

And if that sounds a bit scary, it is. Happy Halloween.

Commentary: Quantitative easing will work for only a short time
At one time, news that Americans might be enjoying a little happiness was enough to provoke saturnine Fed chairmen to jack up interest rates, thin the money supply and generally just bum us out.

So you can understand that investors have been slow to understand the new Fed, which appears to be populated by unicorns and leprechauns who spend their days paging through how-to manuals to find new ways to shower the markets with cheap money.

And as proof that asset price is the focal point of Central Bank policy, around the world, consider these articles, all current and easily accessed at a glance from amongst the plethora of same such from multiple public news items, blogs and academic papers: it is no secret nor conspiracy theory.

Policy makers need long-term plan to cut deficits, Kohn argues
Speaking just hours after Federal Reserve Chairman Ben Bernanke urged caution in proceeding with quantitative easing, Donald Kohn also raised some concerns about any plan by the Federal Reserve to buy additional long term securities. Kohn until September was vice chairman of the Fed and spent 40 years at the central bank.

Kohn added that additional purchases by the Fed of securities distort asset prices and lower interest rates to stimulate the economy.

“That’s the whole point of the purchases is to change asset prices and they do induce people to take more credit and interest rate risk than they otherwise would do. That’s the way they stimulate spending and borrowing,” Kohn said.
It seems the whole QE exercise is not to lead a horse to water, let alone try to make him drink it, but simply to increase the size of the water hole with the idea that a bigger hole will be so much more tantalizing to run to and drink from.

Commentary: Oil back above $80 raises question over Fed policy
As crude oil edged dangerously closer to $85 a barrel over the past few weeks, the buzz in oil trading pits and among a number of market strategists is increasingly about potential “demand destruction,” or the impact this might have on retrenched consumers and an already weakening economy.

Ironically, of course, crude’s more than 11% rally in September, and further gains so far this month, are largely symptoms of the Federal Reserve’s determination to help the U.S. economy avoid deflation by pumping more dollars into the system.

By itself, a weakening U.S. currency helps boost commodities, most of which are dollar-denominated. In addition, over the past two years, near-zero interest rates and the Fed’s so-called quantitative easing measures have fueled a carry trade: Investors have borrowed cheap and cheapening dollars to buy assets such as stocks and commodities.

But unlike the last commodity boom of 2007, the unemployment rate is currently at 9.6%, not under 5%.

“There’s definitely concerns about the recovery and demand destruction while crude is being [lifted] by the dollar,” says Tariq Zahir, managing member at Tyche Capital Advisors. “Fundamentally, there’s enough [crude] out there and we should head lower.”

And it’s not so much the exact dollar level that’s a cause of concern but rather the increasingly strenuous conditions in the rest of the economy.

Gluskin Sheff chief economist Dave Rosenberg notes that $84 a barrel means higher gasoline prices ahead, while at the same time food prices are also rising.

While higher food and gasoline prices are most likely not what the Fed wants to see, it might be good to remember that it’s likely there will soon be some reprieve in early November, when the Fed is believed to actually announce new quantitative measures.

But in the longer-run, the problem is likely to return, especially if the effectiveness of quantitative measures remain elusive, while the impact on the dollar and commodities is clear to all.
Note this, too: Cotton Prices Hit 140-Year High. Mrs Main Street won't even be able to afford yardage to make her own clothes.

The Fed is the biggest seller of volatility
Risk measures are inevitably going to become more correlated in a world where the Fed and central banks generally are playing a bigger role in determining market outcomes.

In a nutshell, the Fed has become the ultimate seller of volatility into the market and that is because it was always the Fed’s goal to force investors to make one decision and one decision only — to put their money in risk assets rather than cash.

And this is why all the are going up in unison.

By design, the Fed is seeking to punish those who want to hide in cash. As a result, investors are either embracing “risk assets” or unwinding exposure and raising cash. This leads to a high degree of correlation both among equities as company specific factors are overwhelmed by macro consideration and across risk assets that largely serve as proxies for one another.

Don’t get used to the new Fed
The bottom line is that QE2 should work for a spell. At some point, though, any rally that ensues will shut down if marked improvements in these indicators do not begin to appear: unemployment claims, payrolls, the First Call earnings revision index, the Rasmussen consumer confidence survey, the ECRI weekly leading index, the oil and gas rig count, and a rise in bond yields.

More specifically, here are some benchmarks that pessimists use to show the glass is half empty: ADP’s employment measure has stalled at a very depressed level; for the first time, the labor force is declining year-on-year (down 0.4% in September); state and local employment in September fell at a negative 5% annualized rate; the unemployment rate remained close to 10% for a ninth month; the global composite Purchasing Managers Index fell in September to 52.4%, from its recent peak at 57.3%; U.S. and U.K. house price surveys are weakening; and manufacturing and trade sales, after surging 13.3% from their recession low, have been unchanged for five months.

There are at least 15 similar points that optimists may use to buttress their own arguments, including a significant rebound in recent weeks in the ECRI leading index. The point is that the stock market can only rally for so long on the prospect that the new Fed is omniscient, caring, and will make everything better. At some point, that actually needs to happen.

Now, at this point in that last article, the author loses Guambat. He says:
Now the best weapon that the Fed has at its disposal is a rise in the market itself. A swell in stocks would be the cheapest stimulus measure available, as it increases confidence and household net worth, and makes businesses and individuals alike more confident to invest and spend.

Guambat cannot for the life of him understand how Mr and Mrs Main Street are going to be gladdened and have their confidence restored if Wall Street keeps getting wealthier. That will not be such a swell idea for those without jobs, homes and hopes.

Indeed, it will more likely engender greater resentment than already exists, social divide and political crisis, if not higher problems with law and order. It may be simply marvelous for those with assets who see their assets rise, but for those who have not been able to get back up off their assets after the shocks of this last decade of living with Greenspan's legacy, it will hardly be a party.

Wall Street confidence may be emboldened, but Main Street confidence cannot be lifted, in this economic environment, by a rise in stock prices. Not when there is no salary and no pension and no savings, and not when household net worth is generally zero to negative. You cannot get any confidence from household net worth until it rises to a point you can actually spend some of it.

The way those Wall Street hotshots do.

Keynes may not have been entirely right. At least, it may be that not all Keynesian follower's ideas have all worked out as planned.

But Guambat is now pretty sure that a busted economy needs real productive growth that comes with real spending on the ground that creates jobs and demand and tangible production.

Particularly in these circumstances, monetary policy in the main or on its own, cheap currency and artificially inflated asset prices is nothing but a bunch of fairy floss, peddled by people who know exactly what they're doing and grabbed up by people who don't know what's good for them.

And, at some point after the sugar rush, look out for the big let down.

MORE ON THIS: Our Fiscal Policy Paradox, by Alan Blinder
The practice of monetary and fiscal policy is fraught with difficulties, but the central concept is straightforward, compelling and, by the way, 75 years old: The government should push the economy forward when unemployment is high and slow it down when inflation threatens.

To do so, governments normally have two principal sets of weapons. Fiscal policy means moving some taxes or elements of public spending up or down to either propel or restrain total spending. In the United States, such decisions are made politically, by Congress and the president. Monetary policy normally (but not now) means lowering or raising short-term interest rates to either speed up growth or slow it down. That power, of course, resides in the technocratic Federal Reserve.

In 2008 and 2009, the U.S. government rolled out the heavy fiscal and monetary artillery to stave off Great Depression 2.0. Taxes were cut, spending was increased, and the Fed pushed the federal-funds rate all the way down to virtually zero. It worked.

But that was then and this is now. Today, the economy still needs a boost. But we seem to be trapped in what I call the paradox of macroeconomic policy: The policies that might work won't be tried, and the policies that will be tried might not work. If that sounds irrational, well, you've got the message.

There are plenty of powerful weapons left in the fiscal-policy arsenal. But Congress is tied up in partisan knots that will probably get worse after the election. On the other hand, the Fed stands ready—indeed, seems eager—to act. But it has already deployed its most powerful weapons, leaving only weak ones. That's the paradox.


Get Ready For The Fed's Great Experiment
The Board has used all of its conventional tools and some not so conventional, and now is in the position of entering into a great experiment with unknown outcomes and possible unintended consequences. The truth is that the Fed cannot use monetary policy to force companies, banks and consumers to take credit that they do not want.

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