Directors Disappoint by What They Don't Do

FAIR GAME

" Directors Disappoint by What They Don’t Do" By Gretchen Morgenson – Pub. New York Times - May 11, 2013*

Ms. Morgenson:

I'm surprised you didn't include the classic example of ‘Directors Disappointing’ provided by the Board of Directors at Countrywide Financial.

Shouldn't that board have been suspicious of, and more reluctant to approve, Angelo Mozilo's serial changes to his optioned stock liquidation program? Should that board of directors have been less willing to approve and extend the significant corporate 'stock buyback' program, contemporaneous to Mozilo's option sales? And, should that board have recognized it was a buyback program which gave artificial price support to Mozilo's significant sales of his optioned stock? Should the board of directors at Countrywide have been more curious about Countrywide’s mortgage sales (origination) procedures, the risks of mortgage application falsification, and the non-verification of assets and income of mortgage applicants? Should the Countrywide Board of Directors have questioned, and perhaps even requested, the independent audit details for the quality classifications of Countrywide's mortgage investment portfolio. Should the Countrywide Board of Directors have wondered why Stanford Kurland, Angelo Mozilo's heir apparent, abruptly resigned from Countrywide in 2006? (1) An interesting point, Stanford Kurland is a long time friend (and confidant?) of BackRock CEO, Laurence Fink.

It seems Countrywide board members like Kathleen Brown(2) and Henry Cisneros(3) should have had the financial sophistication to be more concerned about what was happening, in general, in the mortgage market, and, in specific, more concerned about what was happening at Countrywide Financial.(4)

Maybe, that board of directors subscribed to former Citibank CEO, Chuck Prince’s business theory. You may recall what Chuck Prince said about the mortgage bubble, ". . . as long as the music is playing, you've got to get up and dance".(5)

But, I think it’s appropriate to ask, should a board of directors be dancing, or should it be calling the tune?

Footnotes:

1. “Kurland left his job as president and chief operating officer of Countrywide in September 2006, just as the housing market began its descent. The previous year, in 2005, he was paid $19.2 million and made an additional $13.7 million by exercising stock options, according to Reuters. See, “Former Countrywide No. 2 Sees Opportunities in Troubled Mortgages” By Matthew Padilla - pub. Orange County Register - June 10, 2008 - at: http://mortgage.ocregister.com/2008/06/10/former-countrywide-no-2-sees-opportunities-in-troubled-mortgages/

Also see: “Inside the Trillionaires’ Club at BlackRock” By Shawn Tully – CNNMoney - August 17, 2009 From “Lesson No 2 When Investments Get Complex, Do Your Homework” at: http://money.cnn.com/2009/08/12/news/companies/blackrock_trillionaires_club.fortune/http://

In late 2006 the company developed a model that put a lower, more realistic number on the incomes subprime borrowers were claiming on their "no doc" loans. The projections were shocking: BlackRock figured that when the loans reset to their new, higher rates in a couple of years, most borrowers would be spending more than half their real incomes on mortgage payments. Foreseeing an avalanche of defaults, BlackRock dumped subprime bonds in early 2007 when the prices were still lofty.

And see, "Those Valley Boys" at: http://www.scribd.com/doc/141134898/Those-Valley-Boys%20http://

2. Kathleen Brown is the sister of, then State of California Attorney General, now California Governor, Jerry Brown. See: Kathleen Brown, Wikipedia: http://en.wikipedia.org/wiki/Kathleen_Brown

3. Henry Cisneros was the Director of The Department of Housing and Urban Development (HUD) during Clinton's first term as president. In that position he was very instrumental in the implementation of Clinton’s Affordable Housing Initiative which is credited with ‘putting enforcement teeth” into Jimmy Carter’s Community Reinvestment Act. see Henry Cisneros, Wikipedia: http://en.wikipedia.org/wiki/Henry_Cisneros

4. “The Tragedy of Countrywide Financial and Angelo Mozilo” By Gary Jacobson pub. Muckety June 28, 2008, at: http://news.muckety.com/2008/06/26/the-tragedy-of-countrywide-financial-and-angelo-mozilo/3712

5. Citigroup Chief Still Bullish on Buy-Outs By Michoyo Nakimoto and David Wighton - pub. Financial Times - July 9,2007. See the quote, at: http://www.ft.com/intl/cms/s/0/80e2987a-2e50-11dc-821c-0000779fd2ac.html#axzz2T5N8MHGw

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,”

Additional background: Shortly after being inaugurated into his second term as U.S. President, Bill Clinton discusses his Affordable Housing Initiative in a PBS NewsHour interview. “Bill Clinton: Laying the Foundation for The House of Cards”:

Is The Housing Market on a Sugar High?

In an April 8, 2013 MSN video interview with former Fannie Mae Chief Credit Officer, Ed Pinto, Mr. Pinto explains the fundamentals of the housing market and how the "wealth effect" fueled by artificially low interest rates and abundant borrowed money, rather than increasing incomes, is effecting housing prices (and other asset prices).

To see the Wall Street Journal article, Is The Fed Blowing a New Housing Bubble - click:

Did Timothy Geithner Fire Economist Robert Shiller?

 

A couple of years ago I was reading Treasury Secretary, Timothy Geithner’s Wikipedia Bio.(1) I was surprised to read that Mr. Geithner served as a Treasury Department Attaché in the U.S. Embassy in Tokyo, Japan during the early years of what has become known as “Japan’s Lost Decade” (A “Lost Decade” which is now approaching its second decade anniversary).(2)

It’s widely recognized that Japan’s “Lost Decade” was a consequence of the deflation of an asset bubble.* Since reading how Geithner was in a unique position to witness the formation and the consequences of a severe asset bubble, and because I believe he has no doubt followed the efforts of the Japanese Government to stimulate its way out of its economic doldrums, I’ve found Mr. Geithner’s policy positions a little strange.

For me, the strangeness of Treasury Secretary Geithner’s policies took on an even more strange dimension this morning.

This morning I was watching a video of a May 11, 2009 New Yorker Summit presentation of a conversation between Nassim Taleb, Robert Shiller(3) and Nick Paumgarten. At about 4.5 minutes into the video Robert Shiller describes how, after being on the New York Federal Reserve Bank’s “Academic Advisory Panel” for 14 years, Timothy Geithner ‘fired’ him (presumably for Shillers presentation to the panel on asset bubbles). Shiller’s ‘firing’ took place shortly after the first meeting of the "Academic Advisory Panel" after Geithner’s appointment as President of the New York Fed.

 * As much as most economists agree on anything, most economist’s attribute Japan’s “Lost Decade” to the [changed] wealth effect and loss of confidence which followed the late 80’s early ‘90’s bursting of the Japanese commercial real estate bubble, which had inflated excessively during the early-to-mid 1980’s.

I copied the portion of the longer video in which Professor Shiller describes what he interpreted as being fired by Timothy Geithner. If you are interested, you can see the video clip here:

The complete video of the May 11, 2009 New Yorker Summit discussion between Nassim Taleb, Robert Shiller and Nick Paumgarten can be found here: https://youtu.be/bIwBEYoSqKY  

Footnotes:
(1) Timothy Geithner - Wikipedia, the free encyclopedia, at: http://www.bing.com/search?setmkt=en-US&q=Timothy+Geithner+Wikipedia
(2) Japan’s “Lost Decade” at: http://en.wikipedia.org/wiki/Lost_Decade_(Japan)
and Japan announces “new dimension” in quantitative easing wsws.org Saturday 6th April, 2013, at:
(3) Robert Shiller is an economics professor at Yale University. He is the author of a book Irrational Exuberance (published in 2000) which describes the role of excessive confidence in the development of economic bubbles. Professor Shiller expressed concern about the stock market bubble before that bubble burst bubble, and he was one of the earliest, if not the earliest, to warn us of the real estate bubble. He is co-developer of the S&P Case-Shiller Real Estate Price Indeces. [see, http://www.irrationalexuberance.com/definition.htm ]

Bill Clinton Explains the Origins of Sub-Prime Lending

In a PBS NewsHour interview aired January 21, 1998, the day after President Clinton was inaugurated into his second term of office, President Clinton explains the origins of sub-prime lending.

Bill Clinton: Building the Foundation for The House of Cards
 

The Big Sub-Prime Gamble Godfrey Bloom

The Seeds of The Financial Crisis

If you are interested in knowing more about what policies might have contributed to the great financial crises, which began in mid-2006, you will be interested in watching the accompanying two videos.

This video is an excerpt from a longer YouTube video in which Godfrey Bloom discusses some of the problems which led to the financial crisis. This excerpt deals primarily with the Community Reinvestment Act and its role in weakening bank lending standards and credit 'due diligence'. If you are interested in watching the complete discussion key words search for "Godfrey Bloom The Big Sub-Prime Gamble" on YouTube.

Also, in the context of the Community Reinvestment Act's role in the financial crisis, you might want to watch, "Bill Clinton: Laying the Foundation for The House of Cards" - which is a video-clip from PBS NewsHour interview conducted shortly after Clinton was elected to his second presidential term (So, at the time of this interview Clinton had four more years to push The Community Reinvestment Act).

Other Resources:
(1) A Bibliography The Role of the Government Sponsored Enterprises and Federal Housing Policy in The Financial Crisis, at:
(2) Peter Wallison, Why I dissented from the Majority Report of The Financial Crisis Inquiry Commission, at:

They Tried It, and It Didn't Work?

On November 5th 2012 (the day before the election) President Obama spoke to a group in Columbus, Ohio.

After hearing an excerpt from the speech I began to wonder if he actually believes what he said, or if he's just rearranging history to suit his goals. I hope you will watch the video at the following hyperlink to its end. I think I ask some relevant questions in the last minute, or so.

Economics professors will tell you that one of the best ways to create jobs, and to stimulate an economy, is support home building. (Think of all the trades, products and services that are required to build and furnish a home.)

But, I've never heard of any economics professor who advocated a long-term policy of providing loans to people who couldn't afford to repay the loans (However, I think some of what are called "Keynesian Economists" seem to favor such policies over as a short term prescription for economic stimulus.)

I’ve come to believe that many of the policies embraced by President Bill Clinton produced great economic results during (and, for awhile after) his administration. But, as those policies and political pressures went to excess, they eventually led to the housing bubble and the financial crisis.

It seems, the financial bubble that burst during the last year of George W. Bush's administration was a long time in the making.

Just a thought . . . .

The Rate of Foreclosures and The Shadow Inventory (Part II)

Today I noticed a recent MSN Real Estate section article titled, Foreclosure Filings Fall – But Not in All States.(1) After reading the article I began to wonder . . . .

I wondered:
Does fewer foreclosure notices being filed mean there are actually that many fewer mortgage borrowers who are, or are becoming, ‘in default’ of their obligation to pay their mortgage?

Does fewer foreclosure notices being filed mean that the foreclosure process is (temporarily) becoming even slower than it has been in the past? Does it mean that the homes of mortgage borrowers who are “underwater” and have decided to use the ‘strategic default’ strategy are not becoming part of the shadow inventory?(2) Does it mean that borrowers who have fallen on hard economic circumstances are not continuing to squat in the homes they financed with the easy mortgages they were able to get when economic conditions seemed better? Are such borrowers still squatting, biding their time and saving money, until the foreclosure notice comes and the marshal forces them out of the home? Does fewer foreclosures notices being filed mean that defaulted squatters will have even longer to save money (by not paying their mortgages) before the foreclosure notice is filed and marshal forces them to leave the home in which they are squatting?

Is it possible that filing foreclosure notices has slowed because of seasonal factors? Home purchases normally decline significantly over the holidays (during the Thanksgiving and Christmas Holidays and past the New Years Holiday). If you held the mortgage on a defaulted residence would you want that residence vacant for three or four months until the Spring home buying season begins. Is it possible that the large mortgage servicers and investors [like the Government’s GSA’s, large banks and public and private pension plans] are concerned about the public relations ‘fallout’ from continuing foreclosures, at a high rate, during the holiday season? Is it possible that mortgage lenders are delaying foreclosures so they can digest their past losses on foreclosures, and hopefully offset future losses on foreclosures against future investment revenue from other asset classes and from fee income? [Are defaulted, but not yet foreclosed homes, still “the pig in python”? (see note below)]

It seems that filing foreclosure notices is an activity which the holders of the mortgage investment can control, or ‘time’ - depending on a number of factors some of which can benefit them. As, the number and the speed of foreclosure filings varies, watch very closely for changes in the shadow inventory.

Footnotes:

1. Foreclosure Filings Fall – But Not in All States By Teresa (Real Estate) at MSN - Pub. October 11, 2012, at: http://realestate.msn.com/blogs/listedblogpost.aspx?post=89cc9dfd-19e4-48c2-b...

2. For a definition of the shadow inventory see the third paragraph of the October 9, 2012 article, CoreLogic Reports Shadow Inventory Continues to Decline in July at: http://www.corelogic.com/about-us/news/corelogic-reports-shadow-inventory-continues-to-decline-in-july-2012.aspx 

CoreLogic estimates the current stock of properties in the shadow inventory, also known as pending supply, by calculating the number of properties that are seriously delinquent, in foreclosure and held as real estate owned (REO) by mortgage servicers but not currently listed on multiple listing services (MLSs). Roll rates are the transition rates of loans from one state of performance to the next. Beginning with this report, cure rates are factored in as well to capture the rise in foreclosure timelines and further enhance the accuracy of the shadow inventory analysis. Transition rates of “delinquency to foreclosure” and “foreclosure to REO” are used to identify the currently distressed non-listed properties most likely to become REO properties. Properties that are not yet delinquent but may become delinquent in the future are not included in the estimate of the current shadow inventory. Shadow inventory is typically not included in the official metrics of unsold inventory.

NOTE: The pig in the python, see:

Fraud at the GSE's?

I commented on an interesting article published September 14, 2012 in the Wall Street Journal, How Greenspan Misread the Risks at Fannie and Freddie. It’s an article based upon an excerpt (written by James Hagerty) from his new book The Fateful History of Fannie Mae: New Deal Birth to Mortgage Crisis Fall By James R. Hagerty.

My Comment:

In December of 2011 the SEC filed lawsuits against several former executives of Fannie Mae and Freddie Mac. One of the allegations in both of the two lawsuits is that former executives of Fannie and Freddie mis-categorized mortgage loans that were being bought by Fannie and Freddie and that they failed to inform investors and Fannie and Freddie’s regulator [The Office of Federal Housing Enterprise Oversight] of the true number (percentage and value) of Sub-Prime and Alt-A loans they purchased.

So, it’s not that shocking that most people who believed what Fannie and Freddie were telling them didn’t know of the significant default risk.

Only people like Michael Burry(2) Laurence Fink(3) John Paulson(4) and perhaps Stanford Kurland(5) who actually studied (or were aware of) the progressively diminishing mortgage qualification standards as the bubble formed, and who studied (or were aware of) the actual mortgage borrower income statistics, were prescient enough to become alarmed about Fannie and Freddie’s exposure to default risk.

Based upon what Fannie and Freddie were claiming as their mortgage loan quality, It should be no surprise that Alan Greenspan, John McCain, George W. Bush, Treasury Secretary, John Snow and the Office of Federal Housing Enterprise Oversight [OFEO] were more concerned about the impact of credit rate risk and accounting fraud at Fannie Mae and Freddie Mac than they seem to have been about default risk.(6) 

Footnotes:

(1) Reference SEC Website SEC CHARGES FORMER FANNIE MAE AND FREDDIE MAC EXECUTIVES WITH SECURITIES FRAUD.  

(2) Reference, Betting on the Blind Side By Michael Lewis – pub. Vanity Fair Magazine | April 2010. 

(3) Reference, Inside the Trillionaires Club at BlackRock pub. Forbes Magazine August 17, 2009. From the article: 

LESSON 2: When investments get complex, do your homework: 

. . . In late 2006 the company developed a model that put a lower, more realistic number on the incomes subprime borrowers were claiming on their "no doc" loans. The projections were shocking: BlackRock figured that when the loans reset to their new, higher rates in a couple of years, most borrowers would be spending more than half their real incomes on mortgage payments. Foreseeing an avalanche of defaults, BlackRock dumped subprime bonds in early 2007 when the prices were still lofty.

(4) See, John Paulson, Trader Made Billions on Sub-Prime By Gregory Zuckerman pub. Wall Street Journal January 15, 2008. 

(5) See, Stanford Kurland - Former Countrywide No.2 Sees Opportunity in Troubled Mortgages By Matthew Padilla Orange County Register - June 10, 2008.   From the article:  

Q. How did this venture come about?

A. I was somewhat in a state of retirement. I left Countrywide in 2006 after 27 years. From the sidelines, I was watching the mortgage market meltdown and was in communication with associates of mine over what it was going to take to improve or revitalize the mortgage market. Wall Street firms were reaching out to me on whether I had an interest in participating with them. I got a call from the chairman of BlackRock, Laurence Fink, who asked if I would meet a group of executives who were talking about how to address issues in the mortgage market, and they were working with another company (Highfields Capital Management).
I was very receptive to talking to Larry Fink. We had grown up together and have been friends since grade school days.

Q. Where did you and Mr. Fink grow up?

A. We grew up in Van Nuys. That’s the valley. 

(6) See, YouTube video-clip, Timeline: George Bush, John McCain Warn Democrats of Housing Crisis, at:

 

 

 

Don't Forget The Role of The Rating Agencies

Don't forget the role of the rating agencies in the financial crisis. In the 1975 the U.S. Congress designated the Nationally Recognized Statistical Rating Organizations (NRSRO's). When Congress passed the legislation anointing the NRSRO’s it gave this limited number of organizations oligopoly status and unique competitive advantage. At the same time, Congress appointed the Securities and Exchange Commission as regulator of the NRSRO's. 

Most investment advisors and portfolio managers use rating agency guidelines (ratings) to assist their evaluation of the quality and risk associated with the securities they purchase* and fiduciaries are restricted by law as to the minimum rating level from which they can select the investments they can purchase and manage. So, the rating agencies provide a seal of approval, so to speak, for the securities and companies they rate.

* In most cases, the ratings securities an investment advisor, or a portfolio manager will use are defined in a prospectus, offering circular, or by some other form of disclosure. 

If you would like to see a CEO of a rating agency squirm, watch and listen to, The Role of The Rating Agencies

and Too Little, Too Late 

 

 

 

 

Smoke, Mirrors and The Shadow Inventory

The Wall Street Journal “Smart Money” Will Short Sales Hit Home Prices?  By Anna Maria Andriotis - pub. August 22, 2012

 Why is there a ‘shadow inventory’ of homes?

  

In last quarter of 2008, U.S. banks and their lobbyists pushed the U.S. Congress to force the Financial Accounting Standards Board (FASB) to postpone the implementation of mark-to-market accounting (FAS #157).* The FASB eventually acquiesced.  So, after the acquiescence, banks and other collateralized mortgage obligation [CMO] investors can continue to carry these investments at origination value, rather than at the investment’s current market value.

 

But, if a bank or other mortgage investor forecloses, renegotiates the mortgage, or sells the home (the collateral) the new ‘book value’ of the investment is based upon the new selling price (or mortgage value) - as determined by the terms of the new deal (auction, renegotiation, or sale).

 

By not foreclosing, renegotiating, or formally taking back properties (REO) banks and other mortgage investors can, to some extent, manage what  their losses appear to be, and hopefully offset the losses - they recognize - against other revenue, over time.

  

Key-words-search: “Congress Helped Banks Defang Key Rule” By Susan Pulliam & Tom McGinty WSJ 6/3/2009 | Professor Adam Levitin Congressional testimony “Federal Regulators Don’t Want to Know” YouTube | Zombie Banks | Japan Lost Decade (Please note that, at the beginning of Japan’s lost decade our current Treasury Secretary, Timothy Geithner was living and working in Japan as a Treasury Department attaché in the U.S. Embassy.)

 

*  See, FAS #157 [mark-to-market accounting] and scroll down to the section heading: Effect on subprime crisis and Emergency Economic Stabilization Act of 2008 , at http://en.wikipedia.org/wiki/Mark-to-market_accounting

 

Federal Regulators Don't Want To Know