Tag: Economics

The Debt Problems of the European Periphery

By Anders Åslund, Peter Boone and Simon Johnson, The Baseline Scenario

November 17, 2010 at 12:18 am

Last week’s renewed anxiety over bond market collapse in Europe’s periphery should come as no surprise.  Greece’s EU/IMF program heaps more public debt onto a nation that is already insolvent, and Ireland is now on the same track. Despite massive fiscal cuts and several years of deep recession Greece and Ireland will accumulate 150% of GNP in debt by 2014.   A new road is necessary: The burden of financial failure should be shared with the culprits and not only born by the victims.

The fundamental flaw in these programs is the morally dubious decision to bail out the bank creditors while foisting the burden of adjustment on taxpayers.  Especially the Irish government has, for no good reason, nationalized the debts of its failing private banks, passing on the burden to its increasingly poor citizens.  On the donor side, German and French taxpayers are angry at the thought of having to pay for the bonanza of Irish banks and their irresponsible creditors.

Such lopsided burden-sharing is rightly angering both donors and recipients.  Rising public resentment is testing German and French willingness to promise more taxpayer funds.  German Chancellor Angela Merkel’s hasty and ill thought out plan to demand private sector burden sharing, but only “after mid-2013”, marks a first response to these popular demands.  We should expect more.

Financial crises are actually not rare, and the rules for their resolution are clear. The fundamental insight is that huge amounts of financial losses, of seemingly real value, need to be distributed across creditors, debtors, equity holders and taxpayers.

My emphasis.

Ireland: How much punishment for British and international banks?

Robert Peston, BBC

09:09 UK time, Wednesday, 17 November 2010

Are haircuts in or out for Ireland? Will the putative experts at the IMF, European Commission and European Central Bank, who will spend the next few days examining Ireland’s intertwined banking and fiscal challenges, recommend that there should be losses imposed on the providers of tens of billions of euros of wholesale debt to banks.

…

It is that phrase “restructuring of the banking sector” which may alarm the banks and financial institutions which are wholesale creditors of Ireland’s banks, the providers of more senior debt which is supposed to be least at risk of non-repayment. The implication is that consideration is being given to forcing losses on them, such that they would share in the costs of rehabilitating Ireland’s banks.

…

(I)t would be a bit odd if the ECB, in the shape of all its senior movers and shakers, were opposed to such haircuts: there is a powerful moral argument, of the sort that normally appeals to central bankers, to the effect that overseas banks and institutions in the UK, Germany and so on should have known better than to encourage Ireland’s banks to lend recklessly and pump up a completely unsustainable property bubble – and that they therefore deserve a bit of a spanking.

What’s more, if Ireland is fundamentally incapable of paying off all it owes – which is equivalent to an oppressive 700% of GDP when banking, public sector and private sector debts are added together -some will say it is grotesquely unfair that the cost should fall entirely on taxpayers in Ireland, the European Union and (if IMF money is drawn) the rest of the world.

…

What would then be triggered would be enormous payments by underwriters of credit default swaps (CDSs), the debt insurance contracts taken out by lenders and speculators. These payments would generate enormous losses for the financial institutions, including banks, which provided the CDS cover.

…

Even without the CDS loss multiplier, the impact of debt haircuts would be painful for British and international banks. According to the Bank for International Settlements, total lending of non-Irish banks to Irish banks is around $170bn, of which British banks provided $42bn, German banks provided $46bn, US banks $25bn and French banks $21bn.

…

What’s more, if there are haircuts imposed on Irish bank debt, it’s very difficult to see how haircuts could be avoided for Greek and Portuguese bank debt too, and also for plain vanilla Irish, Portuguese and Greek government borrowings.

If you add all that together, it comes to $435bn of exposure for international banks to the banking and public sectors of the eurozone’s three weakest economies. If, say, a third of that were written off (enough to make the residual debt almost bearable) that would trigger not far off $150bn of losses for banks alone.

Not much detail yet, but breaking after the bell on CNBC, Ireland has said it will only accept a bank bailout and not a government bailout.

Meetings expected to continue tomorrow.

Update:

Irish rebuff bailout call in euro zone crisis

By Jan Strupczewski and Julien Toyer, Reuters

1 hr 1 min ago

BRUSSELS (Reuters) – Ireland said it was discussing stabilization measures with its European partners on Tuesday and ways to cut its heavily indebted banks’ funding costs in what a top EU official called a “survival crisis” for the euro zone.

A euro zone source said finance ministers of the 16-nation currency area meeting in Brussels would declare support for Dublin’s austerity measures and express readiness to help financially, if it asks for aid, but would not announce any practical measures.

In Dublin, Prime Minister Brian Cowen rebuffed calls to request a bailout, saying the government was fully funded until mid-2011, and insisted that only the banks may need help.

In other news, kiss goodbye any Stock Market gains in November.  As Atrios says is seems that only when the Market goes down do our “leaders” in Washington pay attention, so, more days like this please.

In about half an hour (2:30 pm ET) the Senate Banking Committee will be holding hearings on Title Fraud.  You can watch it here @ senate.gov (h/t dday).  It’s not on C-Span unfortunately.

Among the scheduled witnesses are- Barbara Desoer, president of Bank of America Home Loans, and David Lowman, chief executive of Chase Home Lending.  Also Tom Miller, Attorney General of Iowa, Adam J. Levitin of Georgetown University Law, and Diane E. Thompson with the National Consumer Law Center.

There may be fireworks but attentive readers will remember I’ve been outlining many of the myriad problems for a long time and once again as recently as yesterday so I’m not really expecting any surprises.

The good news is that finally at least some of our brain dead political class seems to be waking up to the facts which have been apparent for months and years now.  emptywheel highlights a newly released study from the TARP Congressional Oversight Panel that’s worth taking a look at.

It’s Title Fraud Damnit!

Of the 10 diaries I’ve posted in the last 2 weeks about economics, fully 5 of them have been on bank fraud.

• The Morality of the Market Mon Nov 01, 2010 at 09:12:22 AM EDT
• BoA: Feeling The Heat? Fri Nov 05, 2010 at 06:14:02 AM EDT
• BoA: The Heat Is On Sat Nov 06, 2010 at 07:34:48 AM EDT
• Allonge! Thu Nov 11, 2010 at 11:21:45 AM EST
• Just a scrap of paper Sat Nov 13, 2010 at 10:06:40 AM EST

The latest develoment is rumors that Washington and Wall Street are conspiring to retroctively “legalize” the MERS records under the general Versailles Villager principle of looking foward and never punishing anyone important no matter how badly they fuck up.

I mean, if it works for torture, war crimes, anonymous indefinite detetion, and targeted assassination, what’s $1.4 Trillion between friends?

So I duly reported this on Saturday and today dday has a piece that is not quite as sanguine that this is a problem that can be solved by brute force-

This Week’s Developments in Foreclosure Fraud

By: David Dayen Monday November 15, 2010 8:18 am

Finally, a word on the "MERS Whitewash bill" floated by John Carney last week. Carney has been bloviating about this for well over a month, based mainly on speculation. He may have the history of Congress making mischief on behalf of the banks on his side, but he really doesn’t have a clue on this issue. Foreclosure operations are state issues governed by state laws, and lawmakers know they would have a difficult go of trying to adjudicate a constitutionally viable solution that would indemnify the banks in this case. They’d have to stick out their necks quite far, and it would almost certainly be challenged all the way up the legal ladder. The outcry that would ensue during that time would be tremendous. I’m not sure it’s something that risk-averse politicians would want to put up with. And Carney certainly has no evidence one way or the other. I’m happy to fight something that exists, but nothing does at the moment.

I am quite happy to fight potential problems, because the Vacuity, Vanity, and Venality of our Versailles Villagers shouldn’t ever be underestimated.

And there are other problems-

One Mess That Can’t Be Papered Over

By GRETCHEN MORGENSON, The New York Times

Published: October 23, 2010

O(n) the other hand, resolving paperwork woes in the world of mortgage-backed securities may be trickier. Experts say that any parties involved in the creation, sale and oversight of the trusts holding the securities may be held responsible for any failings – and if the rules weren’t followed, investors may be able to sue the sponsors to recover their original investments.

Mind you, the market for mortgage-backed securities is huge – some $1.4 trillion of private-label residential mortgage securities were outstanding at the end of June, according to the Securities Industry and Financial Markets Association.

…

All of this suggests that while a paperwork cure may eventually exist for foreclosures, higher hurdles exist when it comes to remedying flaws in mortgage-backed securities. The only way to wrestle with the latter, some analysts say, is in a courtroom.

“The whole essence of this crisis is fraud and unless we restore the rule of law and transparency of disclosure, we are not going to fix this,” said Laurence J. Kotlikoff, an economics professor at Boston University.

These are groups like PIMCO, Blackrock, and the Federal Reserve Bank of New York.  So far.

Then there’s also the problem pointed out by bmaz on Friday originally, these banks and real estate trusts owe a lot of money in filing fees in States hard hit by the Bank Induced Financial Collapse and Depression.

Are Obama and Congress Set To Screw American Counties, Homeowners and Give Wall Street Mortgage Banksters a Retroactive Immunity Bailout?

By: bmaz Friday November 12, 2010 7:40 pm

There are rapidly emerging signs the Obama Administration and Congress may be actively, quickly and covertly working furiously on a plan to retroactively legitimize and ratify the shoddy, fraudulent and non-conforming conduct by MERS on literally millions of mortgages.

…

As quoted above, even the most conservative estimate (and that estimate is based on only a single recording fee per mortgage, when in reality there are almost certainly multiple recordings legally required for most all mortgages due to the slicing, dicing and tranching necessary to accomplish the securitization that has occurred) for the state of California alone is $60 billion dollars. That is $60,000,000,000.00. California alone is actually likely several times that.

And there are those pesky Sections 9 and 10 of Article I.

There are at least 11 criminal frauds going on and the charitable and optimistic part of me thinks that they cain’t git all them thar’ worms back in the bait can.

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

Property rights, and their transfer, are governed by laws with factually thousands of years of precedent.  The earliest records are in hieroglyphics and cuneiform.

Are Obama and Congress Set To Screw American Counties, Homeowners and Give Wall Street Mortgage Banksters a Retroactive Immunity Bailout?

By: bmaz Friday November 12, 2010 7:40 pm

Why would the Obama Administration and Congress be doing this? Because the foreclosure fraud suits and other challenges to the mass production slice, dice and securitize lifestyle on the American finance sector, the very same activity that wrecked the economy and put the nation in the depression it is either still in, or barely recovering from, depending on your point of view, have left the root balance sheets and stability of the largest financial institutions on the wrong side of the credibility and, likely, the legal auditory line. And that affects not only our economy, but that of the world who is all chips in on the American real estate and financial products markets.

What does that mean to you? Everything. As quoted above, even the most conservative estimate (and that estimate is based on only a single recording fee per mortgage, when in reality there are almost certainly multiple recordings legally required for most all mortgages due to the slicing, dicing and tranching necessary to accomplish the securitization that has occurred) for the state of California alone is $60 billion dollars. That is $60,000,000,000.00. California alone is actually likely several times that. Your county is in the loss column heavy from this too.

…

This is a death knell to the real property system as we have always known it and the county structure of American society as we have known it. And millions of people will have lost the ability to benefit from the established rule and process of law that they understood and relied on. After the fact. Retroactively. So Obama and Congress can once again give a handout and bailout to the very banks and financial malefactors that put us here.

I don’t weep for the counties, they’re not much more than lines on a map in Connecticut, but I do for the rule of law.  If you don’t give a rat’s ass about the 5th Amendment, you might about ex post facto.

We can only hope.  Or changiness, I forget which.

In my piece yesterday, Democratic Party Death Wish, TheMomCat added a chart by Kevin Drum of Mother Jones that illustrates the “deficit” problem.  It’s kind of small so I’m blowing it up (I apologize for the sacrifice in resolution).

In case you can’t see it so well there are 3 blue colored areas and one thick blue line.

• The light blue area at the bottom is labeled Other Federal Noninterest Spending
• The dark blue area in the middle is labeled Social Security
• The medium blue area at the top is labeled Medicare and Medicaid
• The thick blue line is labeled Revenues

The thick blue line cuts through the big Medicare and Medicaid area and makes it look like there are two of them, but it’s really just the one.

Is the Deficit Commission Serious?

By Kevin Drum, Mother Jones

Wed Nov. 10, 2010 8:46 PM PST

Here’s what the chart means:

• Discretionary spending (the light blue bottom chunk) isn’t a long-term deficit problem. It takes up about 10% of GDP forever. What’s more, pretending that it can be capped is just game playing: anything one Congress can do, another can undo. So if you want to recommend a few discretionary cuts, that’s fine. Beyond that, though, the discretionary budget should be left to Congress since it can be cut or expanded easily via the ordinary political process. That’s why it’s called “discretionary.”
• Social Security (the dark blue middle chunk) isn’t a long-term deficit problem. It goes up very slightly between now and 2030 and then flattens out forever. If Republicans were willing to get serious and knock off their puerile anti-tax jihad, it could be fixed easily with a combination of tiny tax increases and tiny benefit cuts phased in over 20 years that the public would barely notice. It deserves about a week of deliberation.
• Medicare, and healthcare in general, is a huge problem. It is, in fact, our only real long-term spending problem.

…

Bottom line: this document isn’t really aimed at deficit reduction. It’s aimed at keeping government small. There’s nothing wrong with that if you’re a conservative think tank and that’s what you’re dedicated to selling. But it should be called by its right name. This document is a paean to cutting the federal government, not cutting the federal deficit.

Now consider Krugman-

The Hijacked Commission

By PAUL KRUGMAN, The New York Times

Published: November 11, 2010

We’ve known for a long time, then, that nothing good would come from the commission. But on Wednesday, when the co-chairmen released a PowerPoint outlining their proposal, it was even worse than the cynics expected.

Start with the declaration of “Our Guiding Principles and Values.” Among them is, “Cap revenue at or below 21% of G.D.P.” This is a guiding principle? And why is a commission charged with finding every possible route to a balanced budget setting an upper (but not lower) limit on revenue?

Matters become clearer once you reach the section on tax reform. The goals of reform, as Mr. Bowles and Mr. Simpson see them, are presented in the form of seven bullet points. “Lower Rates” is the first point; “Reduce the Deficit” is the seventh.

…

(W)hat the co-chairmen are proposing is a mixture of tax cuts and tax increases – tax cuts for the wealthy, tax increases for the middle class. They suggest eliminating tax breaks that, whatever you think of them, matter a lot to middle-class Americans – the deductibility of health benefits and mortgage interest – and using much of the revenue gained thereby, not to reduce the deficit, but to allow sharp reductions in both the top marginal tax rate and in the corporate tax rate.

…

It’s no mystery what has happened on the deficit commission: as so often happens in modern Washington, a process meant to deal with real problems has been hijacked on behalf of an ideological agenda. Under the guise of facing our fiscal problems, Mr. Bowles and Mr. Simpson are trying to smuggle in the same old, same old – tax cuts for the rich and erosion of the social safety net.

My emphasis.

The truth is that the Catfood Commission wasn’t hijacked at all.  It was set up by Barack Hussein Obama and his Administration to produce exactly the results it did-

(T)his document isn’t really aimed at deficit reduction. It’s aimed at keeping government small. There’s nothing wrong with that if you’re a conservative think tank and that’s what you’re dedicated to selling. But it should be called by its right name. This document is a paean to cutting the federal government, not cutting the federal deficit.

To her credit here is Nancy Pelosi’s official take–

This proposal is simply unacceptable. Any final proposal from the Commission should do what is right for our children and grandchildren’s economic security as well as for our nation’s fiscal security, and it must do what is right for our seniors, who are counting on the bedrock promises of Social Security and Medicare. And it must strengthen America’s middle class families-under siege for the last decade, and unable to withstand further encroachment on their economic security.

In middle school I was a member of the Fencing Club.

Bank of America Allegedly Foreclosing Fraudulently in Kentucky

Yves Smith, Naked Capitalism

Thursday, November 11, 2010

Many foreclosures show this process was not observed on a widespread basis: the notes were assigned (as in transferred) to the trust right before closing, a violation of the PSA, the New York trust statutes that govern virtually all mortgage securitization trusts, and IRS rules for these trusts (REMIC). When foreclosure defense attorneys started contesting these assignments, suddenly a new ruse started to show up: allonges, which are sheets of paper that contained the needed endorsements, would magically appear out of nowhere. The problem is that an allonge is supposed to be used only when there is no space left on the note for endorsements, including margins and the reverse side, and when it is used, it is supposed to be so firmly attached to the original as to be inseparable. But these “ta da” allonges were always somehow discovered at the custodian, quite separate from the note.

…

This means the odds are awfully high that Bank of America committed multiple frauds on the court, first on the state court in the foreclosures process, and now on the Federal bankruptcy court.

…

This sort of abuse is far more serious than robo signing. As much as the likely misconduct here and robo signing would both be considered frauds on the court, the robo signing is arguably cost cutting gone mad and riding roughshod over proper legal procedures. By contrast, this practice has all the appearances of multiple coverups of the fact that Countrywide trust did not have standing to foreclose on the house. The steps undertaken here look to be a deliberate, concerted effort for the bank to get its way, the law be damned. And this clearly took more parties and more thought than the robo signing abuses.

At a minimum, the attorneys at the law firm and the parties at the servicer had to be aware of this device. And if our reading of this document is correct, this is fraud, pure and simple. It’s high time we see some attorneys disbarred and some law firms go out of business as a result of foreclosure chicanery, as well as serious investigations of the people involved in foreclosure litigation at the servicers and the banks’ general counsel’s office.

(h/t lambert @ Corrente)

Also-

Alan Greenspan: “Fraud, fraud is a fact.” And the banksters are doubling down, with the help of the Obama administration

Thu, 11/11/2010 – 10:51am – lambert

Background- Ireland is in some ways a model of the current state of the U.S. economy in miniature.  Same Real Estate bubble fueled by the same fraud, 3 big banks now all insolvent but bailed out.  Ireland eagerly embraced an austerity program early on.  How is that working out?

“Morgan Kelly is Professor of Economics at University College Dublin.”

If you thought the bank bailout was bad, wait until the mortgage defaults hit home

Morgan Kelly, The Irish Times

Monday, November 8, 2010

WHEN I wrote in The Irish Times last May showing how the bank guarantee would lead to national insolvency, I did not expect the financial collapse to be anywhere near as swift or as deep as has now occurred. During September, the Irish Republic quietly ceased to exist as an autonomous fiscal entity, and became a ward of the European Central Bank.

It is a testament to the cool and resolute handling of the crisis over the last six months by the Government and Central Bank that markets now put Irish sovereign debt in the same risk group as Ukraine and Pakistan, two notches above the junk level of Argentina, Greece and Venezuela.

…

With the €55 billion repaid, the possibility of resolving the bank crisis by sharing costs with the bondholders is now water under the bridge. Instead of the unpleasant showdown with the European Central Bank that a bank resolution would have entailed, everyone is a winner. Or everyone who matters, at least.

The German and French banks whose solvency is the overriding concern of the ECB get their money back. Senior Irish policymakers get to roll over and have their tummies tickled by their European overlords and be told what good sports they have been. And best of all, apart from some token departures of executives too old and rich to care less, the senior management of the banks that caused this crisis continue to enjoy their richly earned rewards. The only difficulty is that the Government’s open-ended commitment to cover the bank losses far exceeds the fiscal capacity of the Irish State.

…

This €70 billion bill for the banks dwarfs the €15 billion in spending cuts now agonised over, and reduces the necessary cuts in Government spending to an exercise in futility. What is the point of rearranging the spending deckchairs, when the iceberg of bank losses is going to sink us anyway?

…

As a taxpayer, what does a bailout bill of €70 billion mean? It means that every cent of income tax that you pay for the next two to three years will go to repay Anglo’s losses, every cent for the following two years will go on AIB, and every cent for the next year and a half on the others. In other words, the Irish State is insolvent: its liabilities far exceed any realistic means of repaying them.

…

Banks have been relying on two dams to block the torrent of defaults – house prices and social stigma – but both have started to crumble alarmingly.

People are going to extraordinary lengths – not paying other bills and borrowing heavily from their parents – to meet mortgage repayments, both out of fear of losing their homes and to avoid the stigma of admitting that they are broke. In a society like ours, where a person’s moral worth is judged – by themselves as much as by others – by the car they drive and the house they own, the idea of admitting that you cannot afford your mortgage is unspeakably shameful.

That will change. The perception growing among borrowers is that while they played by the rules, the banks certainly did not, cynically persuading them into mortgages that they had no hope of affording. Facing a choice between obligations to the banks and to their families – mortgage or food – growing numbers are choosing the latter.

…

The gathering mortgage crisis puts Ireland on the cusp of a social conflict on the scale of the Land War, but with one crucial difference. Whereas the Land War faced tenant farmers against a relative handful of mostly foreign landlords, the looming Mortgage War will pit recent house buyers against the majority of families who feel they worked hard and made sacrifices to pay off their mortgages, or else decided not to buy during the bubble, and who think those with mortgages should be made to pay them off. Any relief to struggling mortgage-holders will come not out of bank profits – there is no longer any such thing – but from the pockets of other taxpayers.

…

By next year Ireland will have run out of cash, and the terms of a formal bailout will have to be agreed. Our bill will be totted up and presented to us, along with terms for repayment. On these terms hangs our future as a nation. We can only hope that, in return for being such good sports about the whole bondholder business and repaying European banks whose idea of a sound investment was lending billions to Gleeson, Fitzpatrick and Fingleton, the Government can negotiate a low rate of interest.

…

Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term.

(h/t dday, Kevin Drum, and Tyler Cowen)

How’s that austerity thing working out for you? by ek hornbeck, 11/8/10

Let me explain slowly and clearly-

The problem is overcapacity and lack of aggregate demand.

Austerity by definition means less spending and less aggregate demand.

Irish Debt Woes Revive Concern About Europe

By LANDON THOMAS Jr., The New York Times

Published: November 7, 2010

LONDON – When interest rates soared last week on Irish government bonds, it served as a grim warning to other indebted nations of how difficult and even politically ruinous it could be to roll back decades of public sector largess.

An Irish bond market already in free fall plunged further after Ireland announced on Thursday that it planned to nearly double its package of spending cuts and tax increases to try to rein in its huge deficit. Investors took it not as a sign of resolve but rather of Ireland’s desperation and uncertainty about the true extent of its problems.

…

A year ago, as cascading mortgage defaults brought down the biggest Irish banks, Ireland became the first major developed nation to impose an austerity program. The country was hailed worldwide as an exemplar of probity and national consensus.

But as the full extent of the banking and real estate bust became evident, it was clear that the government of Prime Minister Cowen, which has been in power since the onset of the crisis more than two years ago, had underestimated the cost of fiscal recovery. Now the possibility that he will be forced from office or compelled to call a new election grows by the day.

…

The British chancellor, George Osborne, perhaps the keenest deficit hawk among policy makers in the developed nations, was taken to task last week by lawmakers. They accused him of exaggerating the extent of the country’s fiscal problems to justify broad cuts in middle-class benefits like universal payments to parents with children.

“How many children will be forced to leave their homes?” demanded one furious member of Parliament. “Will the numbers of homeless increase or decrease under your government? Will there be a reduction in special needs education for children in our schools?”

Pitchforks.

I’m reliably informed Keith will be back tomorrow.

So yesterday I highlighted Black and Wray’s counter response to Bank of America and today Part 2 is available, but before I get to that I’d like to provide some context.

You’ll remember that PIMCO, Blackrock, Freddie Mac, and The Federal Reserve Bank of New York had requested that Bank of America repurchase some $47 Billion Mortgage Backed Securities that violated the performance and disclosure provisions of the contracts they were sold under.  You might also recognize these names as financial players every bit as big and powerful as Bank of America itself.

Well, yesterday BoA rejected that request.  As Atrios says- It’s On.

But you shouldn’t think that Bank of America is the only one with these problems.  Although it is the biggest, JPMorgan Chase & Co, Wells Fargo & Co, Citigroup Inc, US Bancorp and PNC Financial Services Group have $43 Billion or more in exposure to the same types of losses.

While some of Black and Wray’s Part 2 touches on that exposure, what it’s mostly about is the story of Bank of America’s purchase of Countrywide Financial.

An interesting factoid about BoA’s purchase of Countrywide (from the Jonathan Weil, Bloomberg article cited yesterday)-

Here’s how Bank of America allocated the purchase price for that deal. First, it determined that the fair value of the liabilities at Countrywide exceeded the mortgage lender’s assets by $200 million. Then it recorded $4.4 billion of goodwill, a ledger entry representing the difference between Countrywide’s net asset value and the purchase price.

That’s right. Countrywide’s goodwill supposedly was worth more than Countrywide itself. In other words, Bank of America paid $4.2 billion for the company, even though it thought the value there was less than zero.

Since completing that acquisition, Bank of America has dropped the Countrywide brand. The company’s home-loan division has reported $13.5 billion of pretax losses. Yet Bank of America still hasn’t written off any of its Countrywide goodwill.

What genius!  Surely these Masters of the Universe are worth every penny they’re paid, but, it being a free market capitalist system and all, I can’t help myself from pointing out that I personally am willing to lose $17.7 Billion for a much more reasonable rate of compensation.  Since they’re great believers in the efficiency of markets I expect an offer any time.

Let’s Set the Record Straight on Bank of America, Part 2: Eliminating Foreclosure Fraud

William K. Black and L. Randall Wray, The Huffington Post

Posted: November 5, 2010 01:23 PM

Bank of America did not purchase Countrywide for the good of the public. It purchased a notorious lender to feed the ego of their CEO, who wanted to run the biggest bank in America rather than the best bank in America. They certainly knew at the time of the purchase that is was buying an institution whose business model was based on fraud, and it had to have known that a substantial portion of Countrywide’s assets were toxic and fraudulent (since Bank of America’s own balance sheet contained similar assets and it could reasonably expect that Countrywide’s own standards were even worse). The response does not contest the depth of the bank’s insolvency problems should it be required to recognize its liability for losses caused by its frauds.

…

Bank of America’s response to our articles ignores its foreclosure fraud, which we detailed in our articles. News reports claim that the bank sent a 60 person “due diligence” team into Countrywide for at least four weeks. The Countrywide sales staff were notorious, having prompted multiple fraud investigations by the SEC and various State attorneys general. The SEC fraud complaint against Countrywide emphasized the games it played with the computer system. Countrywide had a terrible reputation for its nonprime lending. Nonprime loans were already collapsing at the time of the due diligence, the FBI had warned about the epidemic of mortgage fraud, and the lending profession’s anti-fraud firm had warned that liar’s loans were endemically fraudulent. Is it really possible that Bank of America’s due diligence team missed all of this and that the CEO thought even months later that the Countrywide lending personnel and Countrywide’s computer systems were exceptionally desirable assets?

…

As we explained, fraud begets fraud. Bank of America created over $4 billion in “goodwill” and placed it on its books as an asset when it paid money to acquire Countrywide at a time when it was deeply insolvent on a market value basis. Instead of acquiring an asset, they got thousands of fraudulent employees and officers, a failed computer system and catastrophic losses. So, we have a question for Bank of America, its auditors, and the SEC: why haven’t you written off that entire goodwill account?

And why aren’t people in jail or bankrupted by shareholder and bondholder lawsuits (yet)?

Obama’s Problem Simply Defined: It Was the Banks

James K. Galbraith, The Huffington Post

Posted: November 5, 2010 04:16 PM

(O)ne cannot defend the actions of Team Obama on taking office. Law, policy and politics all pointed in one direction: turn the systemically dangerous banks over to Sheila Bair and the Federal Deposit Insurance Corporation. Insure the depositors, replace the management, fire the lobbyists, audit the books, prosecute the frauds, and restructure and downsize the institutions. The financial system would have been cleaned up. And the big bankers would have been beaten as a political force.

Team Obama did none of these things. Instead they announced “stress tests,” plainly designed so as to obscure the banks’ true condition. They pressured the Federal Accounting Standards Board to permit the banks to ignore the market value of their toxic assets. Management stayed in place. They prosecuted no one. The Fed cut the cost of funds to zero. The President justified all this by repeating, many times, that the goal of policy was “to get credit flowing again.”

…

With free funds, the banks could make money with no risk, by lending back to the Treasury. They could boom the stock market. They could make a mint on proprietary trading. Their losses on mortgages were concealed — until the fact came out that they’d so neglected basic mortgage paperwork, as to be unable to foreclose in many cases, without the help of forged documents and perjured affidavits.

But new loans? The big banks had given up on that. They no longer did real underwriting. And anyway, who could qualify? Businesses mostly had no investment plans. And homeowners were, to an increasing degree, upside-down on their mortgages and therefore unqualified to refinance.

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To counter calls for more action, Team Obama produced sunny forecasts. Their program was right-sized, because anyway unemployment would peak at 8 percent in 2009. So Larry Summers said. In making that forecast, the Obama White House took responsibility for the entire excess of joblessness above eight percent. They made it impossible to blame the ongoing disaster on George W. Bush. If this wasn’t rank incompetence, it was sabotage.

Remember “Recovery Summer(s)“?  Nothing has changed.  And until people go to jail for their fraud and the “To Big To Fail” Banks are placed into FDIC Receivership, their incompetent management tossed out on their asses, and broken up, nothing will.

Barack Hussein Obama and the Democratic Party have no one to blame but themselves.