Discourse.net

Who Was it Who Said 'Political power grows out of the barrel of a gun'?

Apparently, at Goldman, Sachs they're not just feeling the heat, they're packing it too:

“I just wrote my first reference for a gun permit,” said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied to the local police for a permit to buy a pistol. The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank.

I called Goldman Sachs spokesman Lucas van Praag to ask whether it’s true that Goldman partners feel they need handguns to protect themselves from the angry proletariat. He didn’t call me back. The New York Police Department has told me that “as a preliminary matter” it believes some of the bankers I inquired about do have pistol permits. The NYPD also said it will be a while before it can name names.

(Alice Schroeder at Bloomberg.com)

Yes, the title is ironic.

Herald Covers UM Foreclosure Fellows

Nice article in today's Herald about the UM law foreclosure fellows program, New lawyers help fight foreclosures.

I got quoted as saying,

“When the foreclosure happens, the number of important legal defenses that may be available are not always obvious to people without legal training,” said Michael Froomkin, a University of Miami law professor who heads the Foreclosure Defense Fellowship.

“Some of these options will buy you time, and some of these will do a lot more … even those that buy you time are a way of getting a lender's attention and stimulating a negotiation,” he said.

For a good discussion of what one of those defenses looks like — and some of the pitfalls to which it can be subject — see today's analysis at Calculated Risks, Putting the MERS Controversies in Perspective.

More Great Publicity for the Miami Law Foreclosure Fellowships

You know you are having a good day when 'Above the Law' (ATL) writes something positive about you — and that was my experience this afternoon with University of Miami Law School Puts Some Money into Public Service.

In addition to not making me look bad — indeed, making me look nice — I especially liked the conclusion of the piece,

The recession has created a huge need for legal services. And it has created a glut of laid off or unemployed lawyers. But matching the attorneys to the work is difficult because it is tough to pay off law school debts by helping low income families fight off foreclosure proceedings. Miami’s programs aren’t going to fix that fundamental disconnect between the cost of law school and the need for legal services.

But the school has taken a nice step in the right direction. The fellowship stipend might not be much, but it is infinitely more valuable than lip service.

ATL is best known for ribbing or even bashing lawyers and law schools…and the commentators in its threads are ferocious on a good day, and worse otherwise. (Indeed, the first comment on the article reads, in full, “Suck it.”)

The law school also got a good write-up in the ABA Journal's Miami Law Grads Get $10K Foreclosure Fellowships to Fill Legal Services Gap.

Update: Even nicer write up at South Florida Lawyers. Thanks guys.

UM Foreclosure Fellowships in TIME Magazine

TIME Magazine has a great story by Tim Padgett on UM's Foreclosure Fellowships, Another Housing Crisis: A Shortage of Foreclosure Lawyers.

Nice quotes from Yolanda Paschal, one of our great Fellows, from Carolina Lombardi, a senior attorney at Legal Services of Greater Miami Inc., and a few words from me. I'm glad that our program is getting some recognition. As the article says, the foreclosure defense problem is enormous, the legal resources available are puny compared to the need, and we at the law school are trying to do something about it.

Whether and how we can repeat this year's effort, however, still depends on what sort of funding we can raise for it. Fund raising is very very tough in the current economic climate. Our current plan is to shift away from giving fellowships to graduates and instead ramp up on a student-staffed housing-related clinic that might even be housed downtown. In a perfect world, I'd like to do both the clinic and the graduate Fellowships, but the funding is not yet in hand to make that possible.

Incidentally, the legal defense for borrowers that I mentioned in the the TIME article — that parties foreclosing sometimes don't actually know who owns the note — is featured in a column in today's NYT, Gretchen Morgenson's If Lenders Say 'The Dog Ate Your Mortgage'. In other cases there are different meritorious defenses, but it takes a trained person to identify them. And then no doubt there are the cases where people really will lose their homes no matter what you do; the point is to figure out which case is which rather than just give up. And that takes a lawyer.

UM Hosts Great Foreclosure Defense Training

We had a real happening of a foreclosure defense seminar yesterday. Here's how the law school wrote it up, but it was even better than it sounds:

Fighting the Foreclosure Crisis: Foreclosure Defense Specialist April Charney, JD '80, Shares Expert Advice in Workshop

Over 150 lawyers attended a foreclosure workshop, hosted by the University of Miami School of Law on October 2nd, which featured April Charney, JD '80, a consumer lawyer and nationally recognized foreclosure defense expert. Charney addressed such topics as federal and state law that govern mortgage origination, common law/state law causes of action and affirmative defenses, drafting discovery and motion practice, and ethical considerations in foreclosure practice.

Charney’s daylong “Defending Foreclosures” classes have gained widespread popularity with lawyers throughout the country. She has taught in Ohio, California, Minnesota, South Carolina, Missouri and throughout Florida. Charney requires that all attendees perform 20 hours of pro bono legal work in their communities.

“The workshop has been tremendously informative and has made me realize how complicated this area is,” said Yolanda Paschal, JD ’09, one of the Foreclosure Defense Fellows who will be working with the Legal Services of Greater Miami starting on Monday, October 5th. “I anticipate that this fellowship will be challenging and I look forward to that.”

The Foreclosure Defense Fellowship, recently created by the School of Law, will enable newly minted lawyers to give free help to local residents caught in the foreclosure crisis. The School of Law is one of the first schools in the nation to create a program of this kind. Recent UM graduates will acquire real-world experience and address a serious need in the community at the same time.

Excited to be back at her alma mater, Charney took a moment from the workshop to commend the School of Law for establishing the new Foreclosure Defense Fellowship Program and Professor A. Michael Froomkin for his leadership with the project. “The foreclosure crisis in Florida is troubling,” said Charney, “but at least this program will do good work to help homeowners keep their homes.”

“April Charney delivered a tour de force performance on foreclosure defense, backed up by a CD with over 1,000 pages of sample complaints, depositions, and litigation checklists,” said Froomkin. “I wish all my students could attend lectures like this to learn about the law on the ground as it is playing out in the context of a financial crisis.”

It was an event. Great as it was, April Charney wasn't entirely happy: She groused that some of the attendees were from what she calls “the dark side” — foreclosure specialists coming to find out what defense counsel will be doing to them.

The University Of Miami School Of Law Announces Foreclosure Defense Fellowships

The Law School just issued this news release:

The South Florida community is ground zero for the national foreclosure crisis. In response, the University of Miami School of Law has created Foreclosure Defense Fellowships that will enable newly minted lawyers to give free help to local residents caught in the foreclosure crisis. The School of Law is one of the first schools in the nation to create a program of this kind in response to the crisis that is sweeping the country. Recent UM graduates will acquire real-world work experience and address a serious need in the community at the same time.

The foreclosure crisis is overwhelming the Miami-Dade legal system. One in every 28 homes in Miami-Dade County is in a state of foreclosure. Last year 56,656 foreclosures were filed in Miami-Dade County alone. Almost a third involve “owner-occupied homestead property” (residential homestead mortgage foreclosures) and a very large number of owners are unrepresented. The UM Foreclosure Defense Fellows will work to fill the gaps that this legal crisis has created within the South Florida community.

“These Fellowships engage the Law School and its recent graduates in a difficult but rewarding process that serves a great public need,” said Dean Patricia D. White.

Eight UM Law graduates were the winners of these fellowships. Six fellows – Siobhan Grant, Yolanda Paschal, Matthew Weintraub, Jaclyn Gonzalez, Francisco Cieza, and Bradley Shapiro – will work for the Legal Services of Greater Miami, Inc. (LSGMI). Two additional fellows – James Duffy and Berbeth Foster — will work at the Legal Aid Service of Broward County, Inc. They will receive a limited grant totaling $10,000 in exchange for working at least three days a week for 27 weeks, commencing in early October. The fellows will receive intensive training on October 2nd at a foreclosure workshop hosted by the UM School of Law, featuring April Charney, JD ’80, a consumer lawyer and nationally recognized foreclosure defense expert. The workshop will be held at the Whitten Learning Center on the University of Miami campus from 8:00 a.m. to 5:00 p.m.

In addition, three students from the School of Law’s LL.M. in Real Property – Jessica Davis, Dushyant Amish Jethwa, and James Walter – will inaugurate a clinical track in that program by providing 15 hours per week of free foreclosure defense representation. The LL.M students will work under the supervision of local lawyers who also will be working without pay. These fellows will be placed at “The Foreclosure Project,” created by Richard Burton, JD ’74, which provides free legal representation to homeowners facing foreclosure in Dade and Broward counties.

UM law professor A. Michael Froomkin describes how he came to create the Foreclosure Defense program: “Last fall, I was standing in front of the courthouse one evening talking to a local lawyer who was telling me about the thousand of foreclosure cases stacking up in the judges’ chambers, many with unrepresented parties who had valid defenses that were not being made because they didn't have a lawyer.” Froomkin recalls that the lawyer stated, “‘Someone should do something.’ And, right there, I decided that if no one else would do it, that it would be me.”

About Legal Services of Greater Miami

Legal Services of Greater Miami, Inc. provides innovative, effective legal services to help thousands of individuals in Miami-Dade and Monroe counties each year, creating a positive impact on the community as a whole. LSGMI is the largest provider of broad-based civil legal services for the poor in Miami-Dade and Monroe counties, and is recognized in the state and in the nation as a model legal services law firm. Its diverse staff provides clients with legal services in three languages from its main, regional and neighborhood offices.

According to Carolina Lombardi, LSGMI Senior Attorney who oversees the Mortgage Foreclosure Defense Project, “There is an unprecedented need for legal assistance for homeowners facing the loss of their homes through foreclosure and we cannot help everyone who asks for our assistance. Legal Services of Greater Miami, Inc. is thrilled to have recent UM law school graduates working with us so that we can provide legal help to more homeowners.”

Despite being staffed by six full time staff attorneys, LSGMI is only able to represent a fraction of the low income home owners in Miami-Dade County who are facing the loss of their family home. The addition of the University of Miami School of Law Mortgage Foreclosure Defense Fellows will expand the number of low income homeowners LSGMI is able to assist while at the same time training new attorneys to address this serious community need.

About Legal Aid Service of Broward County

Legal Aid Service of Broward County, Inc. (LAS) has provided free civil legal services to the poor in Broward County for over 35 years. In 2005, a regional office in Collier County was opened to serve the civil legal needs of the disadvantaged population in Collier County. Despite having an experienced, culturally diverse staff of 60, including 21 attorneys in Broward County, LAS can only meet the needs of 40% of the clients who seek their help.

“In Broward County, we have seen over a 600% increase in foreclosure case filings since 2006,” said Legal Aid Service of Broward County, Inc. Director of Advocacy Shawn Boehringer. “Even before the foreclosure crisis, we had insufficient resources to address foreclosures. We certainly have not seen a 600% increase in funding to assist clients since 2006. We applaud Professor Froomkin and UM Law School for starting this pilot and we are looking forward to working with the talent they have provided us. UM is a great law school, and our clients will benefit tremendously from the assistance the fellows will provide.”

Foreclosure Miami

Here's a Google map of the foreclosure mess in Miami .

Each red dot is a property either in foreclosure or in pre-foreclosure proceedings.

More info on how it was put together at Healdsburg Housing Bubble Info

(spotted via Calculated Risk, Google Maps Shows Foreclosure Status)

Hours of schadenfreude potential. Or counting your blessings.

Stark Foreclosure Data for 2009

Via EYE ON MIAMI, some stark numbers on foreclosures in Miami-Dade county:

In the first 4 months of this year we have had 25,577 foreclosures in Miami Dade County. That is almost as many as we had the entire year in 2007 (26,391) and more than 3 times as many as we had the entire year in 2005 (7,829). During the same 4 months in 2008 we had 16,248 foreclosures, and ended 2008 with 56,656 total. If we keep up with the current trend, we will close 2009 with more than 75,000 foreclosures. If you add all the foreclosures between 2002 and 2007 (6 years) the total is 79,812. We could possibly reach that mark in one year!

Which is why doing something is so important….

International Trade? We Used to Do That

With the appropriate and evocative title of Glurk!, Brad DeLong gives us three very striking graphs of imports, exports, and the trade deficit.

It's a little hard to tell, but they're all cliff-diving, and each appears down by about a third in the last six to nine months.

DeLong: Geithner's Way or Mad Max

Playing the role of semi-official spokesman, Brad DeLong makes the case for the Geithner Plan. At its core, it's the second argument I described in Obama's Vietnam?. Here's DeLong:

Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?

A: Then we have worse things to worry about than government losses on TARP-program money—for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.

Why does the taxpayer have to put up 97% of the money in the form of non-recourse loans, but get only 83% of the upside?

A: The private managers put in $30 billion, but the Treasury puts in $150 billion—and so has 5/6 of the equity. When the private managers make $1, the Treasury makes $5. If we were investing in a normal hedge fund, we would have to pay the managers 2% of the capital and 20% of the profits every year; the Treasury is only paying 0% of the capital value and 17% of the profits every year.

One point for DeLong and Geithner: the taxpayer getting 83% of the upside — if any — is much better than the 0% first rumored.

But the core assumption behind the Geithner Plan, which DeLong endorses, is this: that the so-called 'toxic securities' on bank balance sheets are in fact

risky and distressed but probably fundamentally undervalued assets

You believe that? James K. Galbraith says it's possible to get actual facts ex ante, rather than depending on the Invisible Hand to provide them ex post.

The central Treasury assumption, at least for public consumption, seems to be that the underlying mortgage loans will largely pay off, so that if the PPIP buys and holds, at an above-present-market price governed by auction, the government's loan to finance the purchase will not go bad.

Recovery rates on sub-prime residential mortgage-backed securities (RMBS) so far appear to belie this assumption. IndyMac lost $10.8 bn on a $15bn portfolio (and if you count the wipeout of equity, the total loss is about $12bn). That's an 80 percent loss. It's possible that recovery rates at other banks will be better, but how can we know? No one is examining the loan tapes.

The NYT article points out that pools of RMBS can be sold for about 30 cents on the dollar now. But banks are unwilling to sell for less than 60 cents — either because they really think the loans will experience only a 40 percent loss rate, or because they fear that acknowledging market value will put them into insolvency. Which it might very well.

The way to find out who is right is to EXAMINE THE LOAN TAPES. An independent examination of the underlying loan tapes — and comparison to the IndyMac portfolio — would help determine whether these loans or derivatives based on them have any right to be marketed in an open securities market, and any serious prospect of being paid over time at rates approaching 60 cents on the dollar, rather than 30 cents or less.

Note that even a small loss of capital, relative to the purchase price, completely wipes out the interest earnings on the Treasury's loans, putting the government in a loss position and giving the banks a windfall.

There are only three reasons I can see why one might not adopt Galbraith's suggestion:

1. If one believes that the empirical evidence needed is not in fact on those tapes.
2. If one believes that the empirical evidence needed may be on those tapes, but extracting and analyzing it would take so long that the crisis would deepen too much before one had the answer.
3. If one is afraid to find out the truth because it will cause a Mad Max moment.

Ask yourself this: if the fund proposed by Geithner et al is so great, should we open it up to regular folks to invest? No? Why do you say that?

Obama's Vietnam?

There's a conventional wisdom about the Johnson administration that says, LBJ has all these great plans for domestic policy — Civil Rights, the Great Society — but he didn't understand foreign affairs nearly as well as he understood domestic policy. And the one thing he did understand is that the 50's had been dominated by witch hunts over who “lost China”. And the one thing LBJ knew is that he wasn't going to have the albatross of “losing Vietnam” hung around his neck. And thus the Best and the Brightest, the bombing, the escalation and all the rest of it.

Cut to the banking crisis.

Certainly the plan that Obama's economic team have come up with has all the hallmarks of coming from the used policy shop — Krugman even calls them 'zombie ideas' playing off the idea that we are propping up zombie banks.

Open Left's Department of Solving Problems Using the Same Thinking Used To Create Them has a fine roundup of the professional critiques. They seem pretty damning to me.

To the extent I can find defenders of the plan, they tend to make two points:

• Team Obama is constrained by what can get through the Senate. The best ideas, bigger stimulus, nationalizing banks, or starting a set of new clean federal banks to pick up the financial slack, just won't get past the troglodyte GOP and their enablers like Lieberman, Nelson, and Bayh.
• The bankers are running around in private saying that the sky will fall any day now, civilization will end, ATMs will dry up there will be riots in the streets, unless banks get massive donations to rescue their balance sheets. It's not true, but they may believe it, and their panic is contagious.

Both these points, especially the first, have merit, but not nearly enough to justify preemptive surrender that requires not only rewarding the massively guilty, but creating new entities filled with moral hazard in which the public takes only the bitter and never the sweet.

The Treasury's plan is just plan bad. I hope it will not be Obama's Vietnam.

It's the Known Unknowns That Worry Me

Lawrence Cunningham has a soothing historical perspective on the mass of law firm layoffs at Steel, Patience amid Adversity:

In September 2001, after terrorists attacked lower Manhattan, the stock market closed for several days. Corporate finance and deal activity contracted. Law firms lost work. Associates were let go and firms cut back hiring. Eventually, work resumed, with deal flow flourishing.

Then a professor, I went to the library to leaf through the law reviews published in the period just after the bombing of Pearl Harbor that brought the United States into World War II. I also read books about law firms during that period.

Amid World War II, people were terrified, deal flow contracted, associates at large firms were let go and hiring contracted. Scholarship appeared to have been cut back, but in corporate and securities law, did not seem to abate or shift course due to the attacks or resulting war. Eventually, the war ended, markets resumed, expanded, deals flowed, associates were hired, paid, made partner, and prosperity resumed.

Ditto with the episodic booms, busts, scandals and havoc that have ensued—the 1960s electronics boom and bust; the 1970s foreign bribery scandals; the Vietnam conflict and related upheaval; the 1980s savings & laon crisis; the 1980s/90s junk bond boom and bust; the late 1990s / early 2000s telecom boom and bust; and the current crisis, and its coming resolution.

Patience is a virtue for all those affected by adversity, whether economic, military or otherwise.

There's more, but I want to focus the part I quoted. Yes, it's good to learn from history. And indeed, the business cycle tends to repeat. But there are two reasons why I can't quite feel soothed. First, there's the question of which is the right parallel. We're not in 1929 yet, and I still think the smart bet is that we won't get there, but until we see a floor, we can't be sure about that. Especially since just about the entire minority party in Congress, which includes a blocking minority in the Senate, has wedded itself to idiocies such as being for economic stimulus but against spending. Yes, I actually heard a senator say that on the radio last week. And there's lots of it around.

Second, as regards the legal profession we face structural changes not encountered in a while. And I don't mean the likely collapse of the inflated salary structure (and unhealthy billables/month) for the best-compensated associates (and, I'd argue, partners). That's minor compared to the competition from off-shoring legal suppliers in India and elsewhere, not to mention the looming, inevitable, introduction of computer-assisted legal drafting.

Is it time to start writing the contract-generating AI of the future?

35 Counties in USA Have Half the Foreclosures -- and Boy Are We One of Them

USA Today (which appeared outside my hotel room door) has a very arresting graphic today showing that Most foreclosures pack into a few counties.

More than half of the nation's foreclosures last year took place in 35 counties, a sign that the financial crisis devastating the national economy may have begun with collapsing home loans in only a few corners of the country.

Anatomy of a Panic

Scare talk from [ The Financial Ninja ]: Citigroup, Bank of America: Prisoner's Dilemma, Electronic Bank Runs and Nationalization.

Citigroup © declined 61% from a peak of $4.10 to an intraday low of $1.61 over just 10 trading days. Bluntly put: Citigroup is dead.

Bank of America (BAC) declined 64% from a peak of $7.05 to an intraday low of $2.53 over just 10 trading days. Bluntly put: Bank of America is dead.

Dead actually means dead. It is unlikely they can survive the weekend… and if they do, they most definitely cannot survive the week.

To some extent, talk like this can be a self-fulfilling prophecy…and sometimes market manipulation by short-sellers.

In any case, depositors are as safe as the FDIC. It's the shareholders, and the bondholders, who are at risk, perhaps deservedly so. Which is where the race to the bottom comes in:

The single largest investor in Citigroup is Saudi Prince al-Waleed bin Talal. in November 2008 the Saudi prince increased his stake from 4% to 5%, investing an additional $350 million. In January of 2007, Citigroup had a market capitalization of more than $250 billion. As of Friday's close, the ENTIRE bank is worth about $10 billion. The Saudi prince is down 96% on his 4% stake. Put another way, his original stake was worth about $10 billion in January 2007. Today, he could buy the whole damn mess for the same amount. The prince must be absolutely livid over these developments.

The prince is very exposed to Citigroup. Not only is he an investor, he also does extensive business with the bank. The assets and debts of his financial empire flow through Citigroup in the course of normal business operations. Although his financial dealings are very secretive and opaque, it stands to reason that his advisors would insist he manage this risk. Being long the bank via his ownership stake AND conducting business with the bank is now just too risky. It is the equivalent of doubling up or more in terms of risk on the very same trade. If the bank fails, everything fails. His investment and his business exposures both get severely impaired SIMULTANEOUSLY.

Therefore, the only rational action the prince can take is to shift his business AWAY from Citigroup and towards more stable banks. First the most liquid assets, such as cash deposits would be electronically routed to safer banks. Less liquid assets held in trust from stocks to bonds would be next… all the way down to the least liquid or least transferable assets. Second the credit provided by Citigroup would be swapped out. The prince can't be certain that Citigroup will have the ability to honor the requirements as they come due. This would in fact be an electronic run on the bank.

The prince is damned if he does and damned if he doesn't. The very action of reducing his exposure to Citigroup actually accelerates the death of the bank.

What interests me most about this is that it adds a foreign-relations dimension to the pressure on the Treasury to not just nationalize, but to do so in a way that benefits shareholders at the expense of taxpayers. But of course they could never say that.

Taking the Back of the Envelope to the Homeowner Bailout

The New York Times tells me that President Obama is proposing fifty billion to bailhelp out three million families who can't make their mortgage payments. That works out to an average of $16,666.66 each. Let's say we're going to help cover two year's payments - that's $694.77 /month. Which sounds like a lot.

But if you borrowed, say, $250,000 at 10% for 30 years, your monthly payment is $2193.90.

Let's imagine there's an insurance piece here (and, to make it really easy, that it's free and credible). Then our hypothetical borrower can refinance at the market rate of 5.27% (very optimistic, I know, given the likely credit history), lowering the monthly payment to $1383.61 Our hypothetical unemployed hard-luck case will still have to come up with $688.84 for the next two years, before the federal money runs out. Is that realistic?

I imagine one thing is that there's going to be more focus on insurance to allow refinance and/or encourage banks to swallow a cramdown and less on monthlies?

Oh heck. Should have started by reading Calculated Risk. According to Obama Housing Plan, it's $75 billion, and the NYT summary left out all the good details:

The plan contains two separate programs. One program is aimed at 4 to 5 million struggling homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac to help them refinance their mortgages through the two institutions.

A separate program would potentially help 3 to 4 million homeowners by allowing them to modify their mortgages to lower monthly interest rates through any participarting lender. Under this plan, the lender would voluntarily lower the interest rate and the government would provide subsidies to the lender.
…
Under the modification program which would involve government subsidies to lenders, lenders will be responsible for bringing down interest rates so that a borrower's monthly mortgage payment is no more than 38% of their pre-tax income. After that the government program would match the amount reduced by the lender to bring a homeowner's payments down to 31% of their pre-tax income.

And the money will come from stage two of the TARP Funds.

OK, that makes a little more sense. It will help people in the zone to be helped, but not the destitute. And there's lots of vigorish for the banks/servicing companies to create an incentive to do workouts (right now the servicing companies to whom all this is outsourced make much more money on the foreclosure, which is part of the reason they don't try real hard to do workouts).

[Update: I feel a little better noting that from the timestamps the Calculated Risk post wasn't up when I took out the envelope…]

Bailouts

If I were Ford, which has been run soundly enough not to need bailouts, I'd be fairly unhappy about the prospect of $39 billion going to subsidize my improvident and incompetent competitors.

I'm not Ford, and I'm still unhappy about it.

On the other hand, I'm a homeowner but I don't object to $50 billion going to prop up people who cannot afford their mortgages and have fallen behind on their monthly payments. That's so even though only some are 'deserving': “Many took out loans they were never going to be able to afford, while others have since lost their jobs.”

If there's going to be a windfall, I'd just as soon it went to people who let the American Dream beguile them into buying modest homes they couldn't actually afford, whether or not the ultimate blame belongs to them or a fast-talking mortgage broker. Now, if we're subsidizing folks who traded up to McMansions, on the other hand….

TARP: Let a Thousand Lawsuits Bloom

Alison Frankel writes in the Am Law Litigation Daily, Are Whistle-Blowers Lurking Under the Federal TARP?:

There were few regulations in place when the Treasury Department handed out the first $350 billion. Can the recipients be accused of making false claims when they hardly had to document their claims at all?

Yes, according to a new Fried Frank client alert. The three-page analysis by D.C. partners John Boese and James McCullough points to a letter that TARP special inspector Neil Barofsky recently sent to Iowa senator Chuck Grassley, outlining certifications and documentation that TARP intends to require of all those institutions that received funding. “False certifications,” the Fried Frank alert warns, “have been the basis for FCA claims when they were material to the government's decision to release funds or not to seek return of funds.”

Boese told us that the new paperwork requirements will impose post hoc rules for recipients, heightening their exposure. “Qui tam claims are almost a certainty,” Boese said. “Whether there's liability, that's a different question.”

Fried Frank's client memo also notes that the Treasury Department's interim conflict-of-interest and disclosure rules for contractors and financial agents may mean new False Claims Act exposure for businesses that provide TARP-related services, which are required to report any potential violations to the government.

It might be nice to see some of the hogs at the trough get…well trimmed at least.

Ileana Ros-Lehtinen Still Doesn't Have Our Interests at Heart

Lots of people remarked on how Ileana Ros-Lehtinen and the other two local Florida Republicans who just survived tougher-than-usual re-election races switched their votes on S-CHIP and voted for it last week after being pilloried for a series of no votes back when it mattered.

I didn't join that chorus. I saw these as cheap votes for a bill that was now certain to pass; yes votes a year ago might have actually swung the tide on a bill that will particularly benefit South Florida due to the very large number of uninsured children in our community.

And only a few days later I feel vindicated: our own Ileana Ros-Lehtinen, supposedly one of those chastened Republicans, now more sensitized to our needs after a hard-fought (but ultimately not that close) election is right back to her old tricks: letting ideology trump reality.

One of our current realities is that the State of Florida is facing declining tax revenues, and is balancing its books on the backs of schoolchildren. And the schools of Miami-Dade are taking a fearsome hit in the budget the GOP-controlled legislature has just sent to the Governor.

One consequence of this disaster is a push to provide some funds at the national level. Again, that would be of disproportionate benefit to South Florida because we're in such dire straightsstraits. But — surprise — our own Ileana Ros-Lehtinen is against it.

U.S. House bill would pump millions into S. Fla. schools: Rep. Kendrick Meek, D-Miami, called the economic stimulus plan “a reflection of the state of this nation's priorities.”

“To secure our future, we must invest in our students today by reversing cutbacks in education, preventing teacher layoffs, keeping class sizes small and building modern schools outfitted with 21st-century classrooms,” he said.

Rep. Ileana Ros-Lehtinen, R-Miami, was skeptical.

“Borrowing and spending are out of control in Congress,” she said. “Every week, we are confronted with a new massive bailout plan that is packaged as an emergency must-have bill. The true bill will be passed along to our children in massive deficits.”

I didn't hear any of that stuff when she voted — repeatedly — for tax cuts for rich people, did you? But now that the economy requires massive fiscal stimulus to stave off a Depression, now it's time to ration the children again.

President Shalala on the Recession/Depression: "Overreacting is an important strategy in a crisis"

UM's President Donna Shalala has written a remarkable letter to the UM community,

Some random thoughts before a long weekend:

Overreacting is an important strategy in a crisis. My mind-set is that we always have to do more than necessary during any kind of financial crisis.

In this one, cash is king, so we have asked everyone to eliminate all unnecessary spending—from snacks, to paper, to travel. It is the little things that add up to big dollars. We will sit on the dollars so we don’t have to borrow to pay for necessities and can preserve our reserves.

It’s really not confusing. I’m sure most of you are doing the same thing in your personal budgets.

We can do this. Our goal is to protect your job, our core programs, and continue to get better. We can do this—yes we can!

Concerning yesterday’s jet crash in New York’s Hudson River—one of our students was on that plane. He will graduate in May because he had an angel on his wing and a courageous pilot in the cockpit, and the New York/New Jersey community had an emergency plan that worked.

On the occasion of Monday’s celebration of Dr. Martin Luther King Jr.’s birthday, I would like to share my favorite speech. It is one few have ever read—the address Dr. King delivered in acceptance of the Nobel Peace Prize in 1964. Please click here to access this brilliant speech, which rings every bit as true 45 years later.

As usual, send me your ideas and have a safe and happy weekend.

Overreacting is an important strategy in a crisis. It may even be true; there's a real chance that Pres. Shalala's attitude, and the cost-cutting she's imposing on all of us, is the best policy for the University's long-term flourishing. But the collective action consequence of multiple overreactions to a recession or other financial shock is a depression. The University has basically frozen its considerable construction plans for the next 6-12 months. That will have substantial knock-on effects on the local community. We're all being asked in various ways to economize. It could be much worse of course, and may yet be; I am deeply grateful for tenure, and worry for my friends and neighbors without it.

Clearly, one of the biggest challenges for the Obama financial team will be to turn this psychology around; “fear itself” is emergent and palpable when it prompts even the usually indomitable Shalala to urge us to overreact — something only a step or two from panic.

Alan Grayson: Scourge of Secretive Central Bankers

YouTube - $1.2 Trillion Slush Fund: Congressman Alan Grayson Grills Fed Vice Chair Donald Kohn

$1.2 trillion: We can't be told who got it, what we got as collateral, or how it's doing.

First Blog Post In History to Equate the Fed with Hello Kitty?

I think it's scary when this post (“Easy Credit”) from != illustrated with graphics such as this one …

… makes me think me think of a post on the 'future of fed policy' from Krugman, illustrated with this one…

White House Fear-Mongered With Threats of Martial Law???

According to Rep. Brad Sherman, speaking on the House floor, the administration sought to whip House members into supporting the original bailiout by threatening not just economic collapse but — in some cases — suggesting things would get so bad we'd need martial law.

Here's the YouTube clip:

As far as I know, Rep. Sherman is not one the House's notorious loons. On the other hand, his testimony is hearsay. Plus, he's not saying that the Administration was threatening anything nefarious, rather the White House was just painting disaster scenarios — but that's bad enough, thank you.

There are some rays of light in this gloom. I gather that someone slipped into the redrafted bill the power to demand equity stakes from the banks feeding at the federal trough. That doesn't address the pricing issue, and it's just an option not a requirement, but it's something.

Then again, so far the markets seem to have shrugged off the value of this move. “$700bn and nothing doing” is much worse than “400 channels and nothing on”.

Revealed: Most 'Improvements' to Bailout Bill Were a Fraud

They really did try to roll us — that's the conclusion that flows from the transcript disclosed in Mussolini-Style Corporatism in Action: Treasury Conference Call on Bailout Bill to Analysts (Updated).

I wonder how many people in Congress voting knew about this. Some, I suspect.

Off Into the Uncharted Depths

House Narrowly Defeats Bailout Legislation.

IF Congress can now come up with something better, some good can come out of this.

But it's a scary way to start the year.

Shanah Tovah, everyone.

Experts Agree: The Bailout is Trouble

Not all experts, but many. Here's Dean Baker at TPM:

Why Bail? The Banks Have a Gun Pointed at Their Head and Are Threatening to Pull the Trigger

I've heard lots of phony stories. Much of the country's political and economic leadership has been running around raising the prospect of the Great Depression and a breakdown in the banking system (I actually had taken the latter seriously). These stories are absolutely not true.

There is no plausible scenario under which the no bailout scenario gives us a Great Depression. There is a more plausible scenario (but highly unlikely) that the bailout will give us a Great Depression. There is no way that the failure to do a bailout will lead to more than a very brief failure of the financial system. We will not lose our modern system of payments.

At this point I cannot identify a single good reason to do the bailout.

Staff Summary of Bailout Bill

I previously posted a link to a (locally hosted) copy of the Bailout Bill, aka the Emergency Economic Stabilization Act. For those who can't wade through the 100+ pages on very short notice, here's the text of a brief staff summary, as provided by the Senate Majority Leader's office.

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION 

Section 1.  Short Title.

"Emergency Economic Stabilization Act of 2008." 

Section 2.  Purposes.

Provides authority to the Treasury Secretary to restore liquidity and stability to the U.S. financial system and to ensure the economic well-being of Americans. 

Section 3.  Definitions.

Contains various definitions used under this Act. 
 

Title I.  Troubled Assets Relief Program. 

Section 101.  Purchases of Troubled Assets.

Authorizes the Secretary to establish a Troubled Asset Relief Program ("TARP") to purchase troubled assets from financial institutions.  Establishes an Office of Financial Stability within the Treasury Department to implement the TARP in consultation with the Board of Governors of the Federal Reserve System, the FDIC, the Comptroller of the Currency, the Director of the Office of Thrift Supervision and the Secretary of Housing and Urban Development. 

Requires the Treasury Secretary to establish guidelines and policies to carry out the purposes of this Act. 

Includes provisions to prevent unjust enrichment by participants of the program. 

Section 102.  Insurance of Troubled Assets.

If the Secretary establishes the TARP program, the Secretary is required to establish a program to guarantee troubled assets of financial institutions.   

The Secretary is required to establish risk-based premiums for such guarantees sufficient to cover anticipated claims.  The Secretary must report to Congress on the establishment of the guarantee program. 

Section 103. Considerations.

In using authority under this Act, the Treasury Secretary is required to take a number of considerations into account, including the interests of taxpayers, minimizing the impact on the national debt, providing stability to the financial markets, preserving homeownership, the needs of all financial institutions regardless of size or other characteristics, and the needs of local communities. Requires the Secretary to examine the long-term viability of an institution in determining whether to directly purchase assets under the TARP. 

Section 104.  Financial Stability Oversight Board.

This section establishes the Financial Stability Oversight Board to review and make recommendations regarding the exercise of authority under this Act.  In addition, the Board must ensure that the policies implemented by the Secretary protect taxpayers, are in the economic interests of the United States, and are in accordance with this Act. 

The Board is comprised of the Chairman of the Board of Governors of the Federal Reserve System, the Secretary of the Treasury, the Director of the Federal Home Finance Agency, the Chairman of the Securities and Exchange Commission and the Secretary of the Department of Housing and Urban Development. 

Section 105.  Reports.

Monthly Reports:  Within 60 days of the first exercise of authority under this Act and every month thereafter, the Secretary is required to report to Congress its activities under TARP, including detailed financial statements. 

Tranche Reports:  For every $50 billion in assets purchased, the Secretary is required to report to Congress a detailed description of all transactions, a description of the pricing mechanisms used, and justifications for the financial terms of such transactions.   

Regulatory Modernization Report:  Prior to April 30, 2009, the Secretary is required to submit a report to Congress on the current state of the financial markets, the effectiveness of the financial regulatory system, and to provide any recommendations.  

Section 106.  Rights; Management; Sale of Troubled Assets; Revenues and Sale Proceeds.

Establishes the right of the Secretary to exercise authorities under this Act at any time.  Provides the Secretary with the authority to manage troubled assets, including the ability to determine the terms and conditions associated with the disposition of troubled assets.  Requires profits from the sale of troubled assets to be used to pay down the national debt. 

Section 107.  Contracting Procedures.

Allows the Secretary to waive provisions of the Federal Acquisition Regulation where compelling circumstances make compliance contrary to the public interest.  Such waivers must be reported to Congress within 7 days.  If provisions related to minority contracting are waived, the Secretary must develop alternate procedures to ensure the inclusion of minority contractors.   

Allows the FDIC to be selected as an asset manager for residential mortgage loans and mortgage-backed securities. 

Section 108.  Conflicts of Interest.

The Secretary is required to issue regulations or guidelines to manage or prohibit conflicts of interest in the administration of the program. 
 

Section 109.  Foreclosure Mitigation Efforts.

For mortgages and mortgage-backed securities acquired through TARP, the Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs.  Allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures.  Requires the Secretary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present value to the taxpayer. 

Section 110.  Assistance to Homeowners.

Requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency, the FDIC, and the Federal Reserve to develop plans to minimize foreclosures.  Requires federal entities to work with servicers to encourage loan modifications, considering net present value to the taxpayer. 

Section 111.  Executive Compensation and Corporate Governance.

Provides that Treasury will promulgate executive compensation rules governing financial institutions that sell it troubled assets.  Where Treasury buys assets directly, the institution must observe standards limiting incentives, allowing clawback and prohibiting golden parachutes.  When Treasury buys assets at auction, an institution that has sold more than $300 million in assets is subject to additional taxes, including a 20% excise tax on golden parachute payments triggered by events other than retirement, and tax deduction limits for compensation limits above $500,000.     

Section 112.  Coordination With Foreign Authorities and Central Banks.

Requires the Secretary to coordinate with foreign authorities and central banks to establish programs similar to TARP. 

Section 113.  Minimization of Long-Term Costs and Maximization of Benefits for Taxpayers.

In order to cover losses and administrative costs, as well as to allow taxpayers to share in equity appreciation, requires that the Treasury receive non-voting warrants from participating financial institutions. 

Section 114.  Market Transparency.

48-hour Reporting Requirement:  The Secretary is required, within 2 business days of exercising authority under this Act, to publicly disclose the details of any transaction. 

Section 115.  Graduated Authorization to Purchase.

Authorizes the full $700 billion as requested by the Treasury Secretary for implementation of TARP.  Allows the Secretary to immediately use up to $250 billion in authority under this Act.  Upon a Presidential certification of need, the Secretary may access an additional $100 billion.  The final $350 billion may be accessed if the President transmits a written report to Congress requesting such authority.  The Secretary may use this additional authority unless within 15 days Congress passes a joint resolution of disapproval which may be considered on an expedited basis. 

Section 116.  Oversight and Audits.

Requires the Comptroller General of the United States to conduct ongoing oversight of the activities and performance of TARP, and to report every 60 days to Congress.  The Comptroller General is required to conduct an annual audit of TARP.  In addition, TARP is required to establish and maintain an effective system of internal controls. 

Section 117.  Study and Report on Margin Authority.

Directs the Comptroller General to conduct a study and report back to Congress on the role in which leverage and sudden deleveraging of financial institutions was a factor behind the current financial crisis. 

Section 118.  Funding.

Provides for the authorization and appropriation of funds consistent with Section 115. 

Section 119.  Judicial Review and Related Matters.

Provides standards for judicial review, including injunctive and other relief, to ensure that the actions of the Secretary are not arbitrary, capricious, or not in accordance with law. 

Section 120.  Termination of Authority.

Provides that the authorities to purchase and guarantee assets terminate on December 31, 2009.  The Secretary may extend the authority for an additional year upon certification of need to Congress. 

Section 121.  Special Inspector General for the Troubled Asset Relief Program.

Establishes the Office of the Special Inspector General for the Troubled Asset Relief Program to conduct, supervise, and coordinate audits and investigations of the actions undertaken by the Secretary under this Act.  The Special Inspector General is required to submit a quarterly report to Congress summarizing its activities and the activities of the Secretary under this Act.  

Section 122.  Increase in the Statutory Limit on the Public Debt.

Raises the debt ceiling from $10 trillion to $11.3 trillion. 

Section 123.  Credit Reform.

Details the manner in which the legislation will be treated for budgetary purposes under the Federal Credit Reform Act. 

Section 124.  Hope for Homeowners Amendments.

Strengthens the Hope for Homeowners program to increase eligibility and improve the tools available to prevent foreclosures. 

Section 125.  Congressional Oversight Panel.

Establishes a Congressional Oversight Panel to review the state of the financial markets, the regulatory system, and the use of authority under TARP.  The panel is required to report to Congress every 30 days and to submit a special report on regulatory reform prior to January 20, 2009.  The panel will consist of 5 outside experts appointed by the House and Senate Minority and Majority leadership.   

Section 126.  FDIC Enforcement Enhancement.

Prohibits the misuse of the FDIC logo and name to falsely represent that deposits are insured.  Strengthens enforcement by appropriate federal banking agencies, and allows the FDIC to take enforcement action against any person or institution where the banking agency has not acted. 

Section 127.  Cooperation With the FBI.

Requires any federal financial regulatory agency to cooperate with the FBI and other law enforcement agencies investigating fraud, misrepresentation, and malfeasance with respect to development, advertising, and sale of financial products. 

Section 128.  Acceleration of Effective Date.

Provides the Federal Reserve with the ability to pay interest on reserves. 

Section 129.  Disclosures on Exercise of Loan Authority.

Requires the Federal Reserve to provide a detailed report to Congress, in an expedited manner, upon the use of its emergency lending authority under Section 13(3) of the Federal Reserve Act.  

Section 130.  Technical Corrections.

Makes technical corrections to the Truth in Lending Act. 

Section 131.  Exchange Stabilization Fund Reimbursement.

Protects the Exchange Stabilization Fund from incurring any losses due to the temporary money market mutual fund guarantee by requiring the program created in this Act to reimburse the Fund. Prohibits any future use of the Fund for any guarantee program for the money market mutual fund industry. 

Section 132.  Authority to Suspend Mark-to-Market Accounting.

Restates the Securities and Exchange Commission's authority to suspend the application of Statement Number 157 of the Financial Accounting Standards Board if the SEC determines that it is in the public interest and protects investors. 

Section 133.  Study on Mark-to-Market Accounting.

Requires the SEC, in consultation with the Federal Reserve and the Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including its effects on balance sheets, impact on the quality of financial information, and other matters, and to report to Congress within 90 days on its findings. 

Section 134.  Recoupment.

Requires that in 5 years, the President submit to the Congress a proposal that recoups from the financial industry any projected losses to the taxpayer. 

Section 135.  Preservation of Authority.

Clarifies that nothing in this Act shall limit the authority of the Secretary or the Federal Reserve under any other provision of law. 
 

Title II--Budget-Related Provisions 

Section 201.  Information for Congressional Support Agencies.

Requires that information used by the Treasury Secretary in connection with activities under this Act be made available to CBO and JCT. 

Section 202.  Reports by the Office of Management and Budget and the Congressional Budget Office.

Requires CBO and OMB to report cost estimates and related information to Congress and the President regarding the authorities that the Secretary of the Treasury has exercised under the Act. 

Section 203.  Analysis in President's Budget.

Requires that the President include in his annual budget submission to the Congress certain analyses and estimates relating to costs incurred as a result of the Act; and   

Section 204.  Emergency Treatment.

Specifies scoring of the Act for purposes of budget enforcement. 
 

Title III--Tax Provisions 

Section 301.  Gain or Loss From Sale or Exchange of Certain Preferred Stock.

Details certain changes in the tax treatment of losses on the preferred stock of certain GSEs for financial institutions. 

Section 302.  Special Rules for Tax Treatment of Executive Compensation of Employers Participating in the Troubled Assets Relief Program.

Applies limits on executive compensation and golden parachutes for certain executives of employers who participate in the auction program.  

Section 303.  Extension of Exclusion of Income From Discharge of Qualified Principal Residence Indebtedness.

Extends current law tax forgiveness on the cancellation of mortgage debt.

Economic Chicken

Brad is optimistic about the long-run effects of the bailout: won't cost us too much, won't constrain an Obama administration too much.

This is good. Instinctively I like to outsource my macro worrying to Brad, Robert, and a few others.

But.

But.

Brad also told me years ago not to worry about the dollar no longer being a reserve currency (although to be fair he did worry — a lot — about the deficit). I think that the decline in the willingness of foreigners to hold dollars is part of the problem the Fed faces today - we can't borrow much more. So I face the problem of having to think for myself.

And I don't much like the latest draft of the bailout plan. It's not as bad as versions 1.0 and 1.1 — they brought the APA back in for minimal judicial oversight, there are going to be warrants or other equity stakes — but even version 1.2 is a missed opportunity on multiple levels, and it feels like the country (and the Democrats) got rolled yet again.

Where's the surtax on the people who got us into this mess? (And don't get me started on bonuses and parachutes.) Where's the bankruptcy mortgage cramdown to spread some windfall to the improvident middle class instead of just to the wildly improvident upper class? And what's to be done about the moral hazard?

If I were in Congress, I'm not at all sure I'd vote for this. Of course, the looming threat that if you don't All Hell Will Break Loose is indeed worrying. Responsible people can be forgiven for caving in the face of somewhat credible threats of doom, even if those threats come from an administration whose track record on Threats of Doom inspires no trust. But there also are sensible voices out there telling us that the crisis isn't going to get worse in the next few days and that this isn't even the second best answer, even if it's no longer the very worst answer.

And if there's going to be a game of economic chicken, how come the banks always win, and I always lose?

Brad DeLong Seeks an Adjustment

Brad DeLong had a bad experience, recounted at Every Time I Try to Crawl Out, They Pull Me Back in!

Sample:

I trot over to the J-School TV studio as part of the sober, sensible, bipartisan consensus, intending to carry water for Ben Bernanke and Hank Paulson.

And what do I find also on BBC/Newsnight when I get there?

I FIND THAT I AM ON WITH GROVER-FRACKING-NORQUIST!! I FIND THAT I AM ON WITH GROVER-FRACKING-NORQUIST!!! WHO HAS THREE POINTS HE WANTS TO MAKE:

• Barack Obama wants to take your money by raising your taxes and pay it to the Communist Chinese.
• Oil prices are high today and the economy is in a near recession because of Nancy Pelosi: before Nancy Pelosi became speaker economic growth was fine—and she is responsible for high oil prices too.
• Economic growth is stalling because congress has not extended the Bush tax cuts. Congress needs to extend the Bush tax cuts, and if it does then that will fix the economy, and if it doesn't then the economy cannot recover.

Brad says he has to be medicated better to deal with this nonsense. (“OK. Calm down. Adjust my meds…”)

Or, it seems, being an economist, instead of being better medicated, he could just be better paid….

I am not paid enough to deal with this lying bullshit. I am not paid enough to deal with Grover Norquist and his willful stream of defecation into the global information pool.

It is is amazing how few liberal equivalents to Fred Barnes, Grover Norquist and that whole merry crew exist. Or maybe they exist and don't get media time. I'm not saying there's no one, but there's few and they're not on nearly as often.

Then again, on these issues, there probably are not a lot of responsible conservative economists willing to attack Ben Bernanke and Hank Paulson right now.

Court Holds Bank's Reliance on Transparently Fake Loan Docs Not 'Objectively Reasonable' Hence Dischargable

Via Calculated Risk, BK Judge Rules Stated Income HELOC Debt Dischargeable, news of a decisions that does indeed seem likely to be important if followed — and also seems reasonable enough to be followed:

This is a big deal, and will no doubt strike real fear in the hearts of stated-income lenders everywhere. … Judge Leslie Tchaikovsky ruled that a National City HELOC that had been “foreclosed out” would be discharged in the debtors' Chapter 7 bankruptcy. Nat City had argued that the debt should be non-dischargeable because the debtors made material false representations (namely, lying about their income) on which Nat City relied when it made the loan. The court agreed that the debtors had in fact lied to the bank, but it held that the bank did not “reasonably rely” on the misrepresentations.

I argued some time ago that the whole point of stated income lending was to make the borrower the fall guy: the lender can make a dumb loan—knowing perfectly well that it is doing so—while shifting responsibility onto the borrower, who is the one “stating” the income and—in theory, at least—therefore liable for the misrepresentation. This is precisely where Judge Tchaikovsky has stepped in and said “no dice.” This is not one of those cases where the broker or lender seems to have done the lying without the borrower's knowledge

Lots more good stuff where that came from.

Recession: The Movie

Recession: The Movie

JP Morgan/Bear Stearns -- The Legal (Malpractice?) Angle

This is seriously weird:

JPMorgan in Negotiations to Raise Bear Stearns Bid - New York Times

No, not that they're upping the price of the deal — it looked like a possible steal for JPM, and the market had already anticipated a tripling of the offer price, albeit not the quintupling that the NYT thinks is on the table.

The weird part is this:

JPMorgan and Bear were prompted to renegotiate after shareholders began threatening to block the deal and it emerged that several “mistakes” were included in the original, hastily written contract, according to people involved in the talks.

One sentence was “inadvertently included,” according to a person briefed on the talks, which requires JPMorgan to guarantee Bear’s trades even if shareholders voted down the deal. That provision could allow Bear’s shareholders to seek a higher bid while still forcing JPMorgan to honor its guarantee, these people said.

When the error was discovered, James Dimon, JPMorgan’s chief executive, who was described by one participant as “apoplectic,” began calling his lawyers at Wachtell, Lipton, Rosen & Katz to seek a way to have the sentence modified, these people said. Finger pointing over the mistakes in the contracts began as bankers blamed the lawyers and vice versa.

Is it possible that management didn't know about this at the time? I remember reading about it online, where it was described as something the Fed demanded as a condition of its guaranteeing such a large share of the most toxic securities.

I'd like to hear a lot more about this.

Good Reading

Calculated Risk, A Tale of Real Estate Predation deconstructs the Washington Post's My House. My Dream. It Was All an Illusion.

Liquidty Trap Watch

Two days ago, Krugman said, “the one-month Treasury rate was 0.57; the three-month rate was 0.825” and he worried about a liquidity trap.

Then then Fed cut the discount rate 0.75%, to a low low 2.25 %. Would the T-rate crater? Apparently not.

This morning, Krugman says, the one-month T-bill rate is 0.539, the 3-month rate 0.728. Working the math out on my thumbs suggests that the change in the T-rate was a lot smaller than the cut in the discount rate.

I think this is actually sort of good news. It seems that although the Fed is running out of ammo, there's still a little elbow room left….

Update: for a gloomier view, see Calculated Risk, Financial Crisis: Third Wave Still Growing.

Krugman Is Scaring Me

Back when I studied economics in college, a liquidity trap was something that happened (1) before the New Deal and/or (2) to small economies run by dorks. Of course, that was before the Japanese crisis.

And, almost, it's our turn. No wonder the Fed is freaking out.

Paul Krugman's Blog, How close are we to a liquidity trap?:

Here's one way to think about the liquidity trap — a situation in which conventional monetary policy loses all traction. When short-term interest rates are close to zero, open-market operations in which the central bank prints money and buys government debt don't do anything, because you're just swapping one more or less zero-interest rate asset for another. Alternatively, you can say that there's no incentive to lend out any increase in the monetary base, because the interest rate you get isn't enough to make it worth bothering.

…

As of 10:38 this morning, the one-month Treasury rate was 0.57; the three-month rate was 0.825.

Are we there yet? Pretty close.

Cf. Krugman, Thinking About the Liquidity Trap (1999).

Although my macro is very rusty — I always liked micro better — it seems to me that the large pre-existing deficit overhang puts some nasty limits on the government's ability to do stimulative fiscal policy: the expectation that paying it all back will be brutal acts as a nasty brake on the stimulative effects.

The sinking dollar, on the other hand, seems more of the mixed blessing. Foreign investment, good in the short run, not so good in the long run (as they lead to more fiscal outflows). Better would be increases in foreign demand. And how's that big mac index looking today?

Hedge Fund Humor

Calculated Risk: Hedge Fund Humor

Who is this guy Margin that keeps calling me???

The Return of Lemon Socialsim

Last week it was the British government doing it. Now mainstream US economists are proposing that we respond to the mortgage crisis with some home-grown lemon socialism.

I understand the importance of keeping markets liquid. But I have absolutely no desire at all to bail out the shareholders of the banks that made stupid choices, and actually not so much desire to do income transfers to people who bought bigger houses than mine and can't pay for them.

Isn't there some way to do the income transfer from the intermediaries who made all the profits and created the moral hazards?

Note: “lemon socialism” has been defined as the subsidization of weaker firms at the expense of stronger firms, but I believe the better definition to be “a form of market organization in which the private sector is allowed (or encouraged) to take above-average risks and pocket the gains, but the public is required to shoulder the ultimate losses.”

Another example of lemon socialism is when the public is asked to take over ownership of loss-making enterprises which have suffered from under-investment while private profits were being taken. But that was last round.

BankUnited Blacklists 191 Miami Condos

I don't pretend to understand the ins and outs of the Miami real estate market, and especially not the condo market (which seems largely divorced from the single-family housing market), but this looks like a big deal to me: via Eye On Miami, the news that BankUnited blacklists 191 condo projects.

The Ownership Society, version 2.0

Calculated Risk has a graph which shows Homeownership Rate: Cliff Diving.

What this means is that the home ownership rate today is back to where it was in, say, 2001 and still falling.

In other words, most of the million or so families who have been foreclosed on this year are not buying new homes — how could they get the credit? — but renting (if they can pass the credit check for that!) or moving in with family. Or living rough? (Or is that what comes next?)

The Tyranny of Systems Think

It's a risky thing to do on the day of the NH primary, when in all likelihood the results — whatever they are — will bring forth a flood of bloggy eloquence, but here goes: I nominate the following blog post at Calculated Risk, a post which has nothing to do with politics, only a little to do with the mortgage crisis, and everything to do with the tyranny of corporate (or, really, any) systems and mental blinders, as the best blog post of the day.

Turns Out Judges Don't Like “Efficient” Servicers

100% Leverage?

Does this mean what I think it does?

Credit Crisis? Just Wait for a Replay: One of the more remarkable facts about the subprime crisis is that total losses to the financial system may be about equal to the amount of subprime loans that were issued. On the face of it, that appears absurd, since many such loans will be paid off, and those that default will not be total losses. But, Mr. Seides said in an interview, “the financial leverage placed on the underlying assets was so high” that the losses multiplied, as the profits did when times were good.

“When there is more leverage” and things go wrong, he said, “there are more losses.”

They resold layered participations in the same underlying loan so many times that it ends up with leverage over 100%? Given that substantial profits are taken out along the way, how does that work even if everyone pays off like they are supposed to?

Update: Krugman is puzzled too.

That Didn't Take Long (Failed Treasury Plan Dept.)

The “super-SIV” bailout fund — which never made much sense, and for which the commitments had been dropping almost daily, is now officially dead before being born: Big Fund to Prop Up Securities Is Scrapped. Its death leaves some egg on the face of the Treasury, which had suggested this was part of the answer to the emerging mortgage crisis.

Note that this is different from the other Treasury scheme to have banks adopt some FICO-score based criteria to allow some fraction of the people who would otherwise default next year to refinance instead (so long as they are up to date on payments, etc. etc.). That band-aid makes some economic sense and may survive, although it's only a few drops in the leaky bucket.

Calculated Risk on the Paulson-Brokered Voluntary 'Freeze' on (Some) ARMs

Calculated Risk, Ten things to know about the Freeze. Actually it gives you eleven. And they all sound right to me.

Catching Up With the Florida Funds Scandal

Forgot to check in with the Florida funds scandal yesterday.

The local media has finally gotten engaged here, and there are several relevant stories in the Miami Herald, even if they have to get one from the AP rather than reporting it all themselves.

• AP, Governments continue investment withdrawals; managers positive:

  Local governments withdrew about $560 million of their money from Florida's state-run investment pool Friday, but the beleaguered fund's managers were pleased that figure was about half the amount from a day before.

• Beatrice Garcia, Citizens assesses its risk: The state-run insurer is the biggest investor in a troubled investment pool, and it wants to reduce its holdings:

  It has about $1.7 billion in Part A of the fund, which has been reopened for withdrawals, and about $260 million in Part B, which remains closed.
  
  In all, Citizens has about $7 billion of the $10 billion it has stockpiled — in cash, credit lines and borrowings to pay future claims — invested with the State Board of Administration, which runs the investment pool and other funds. It began to move funds over to be managed by the SBA last fall because of its good investment results and also to save money on management fees.

• Gary Fineout, The State Board of Administration reported that it has more than $2.5 billion in downgraded investments in several accounts, including the state retirement fund. It's a little hard to follow, but it seems that the Local Government Investment Pool (LGIP) may not be the only state-managed fund with problems:

  The SBA said Wednesday the state pension fund has $756 million in investments that have fallen below purchase guidelines, as have more than $800 million in investments that it manages on behalf of Citizens Property Insurance and the Hurricane Catastrophe Fund. The SBA manages nearly $200 billion in its various accounts.

• In that same story, the local angle: “Donald Nelson, finance director for the City of Coral Gables, which has $32 million frozen in the pool, has plenty of cash to meet obligations, particularly with tax revenues flowing in. Still, he said the city plans Thursday to withdraw $2 million.”

Earlier items:

• Details on Florida Fund Restructing (Plus Full List of Bag-Holders)
• Citizens Insurance and Other South Florida Public Bodies May Lose Big If State Fund Collapses
• Florida Fund Crisis: The Jeb Bush Connection
• Florida Quarantines the Radioactive Securities

Not irrelevantly, there's also this amazing piece of news: South Florida homeowners are in trouble, with one in 32 Miami-Dade homes in foreclosure; in Broward, it's one in 30.

I suppose the silver lining is that for all the aspiring faculty to whom we've extended offers this may be a good time to buy. Assuming you plan to hold on to the property for a while….

Someone's Feeling Cheerful

Maybe it's my weird sense of humor, but I really enjoyed this video from The Richter Scales, YouTube - Here Comes Another Bubble.

(Spotted via Unfogged.)

Certainly more cheerful than their Fine Line: Sub-Prime Decline

SIV Rot Found in Money Funds

WSJ.com, SIV Exposure Seen at Some Money Funds

Liquidity crisis?

Details on Florida Fund Restructing (Plus Full List of Bag-Holders)

Via the Miami Herald, Agency head quits as state fund reels, come links to very useful documents for those trying to follow what's happening in the Florida Local Government Investment Pool (LGIP) (administered by the State Board of Administration):

• Plan to restructure the fund
• List of cities and counties that withdrew money from the state fund last week
• List of cities and counties that still have money in the account

The Herald also highlights some local winners and losers:

Among those who got their money out before the state froze the fund:

Broward County: $227,534,594.02

Broward County School Board: $274,130,570.93

City of Fort Lauderdale: $277,366,602.43

City of Miami: $49,350,000.00

Miami-Dade School Board: $111,879,297.14

Miami-Dade County government: $514,657,752.68

Among those with money still in the fund:

Miami Dade College: $146,026,551.67

Citizens Property Insurance Corporation: $1,974,709,602.79

City of Coral Gables: $32,009,946.93

City of North Lauderdale: $24,566,106.14

Broward Community College: $39,010,779.35

So at a (maximum — could be significantly less if they don't rush to liquidate) 14% haircut, my hometown, Coral Gables, stands to lose up to $4.5 million, and Miami-Dade Community College could lose up to $20 million? Those are big numbers, but I suppose it could have been even worse. The hapless Citizens Insurance remains the biggest potential loser, at up to almost a quarter billion.

Earlier items:

• Citizens Insurance and Other South Florida Public Bodies May Lose Big If State Fund Collapses
• Florida Fund Crisis: The Jeb Bush Connection
• Florida Quarantines the Radioactive Securities

Florida Quarantines the Radioactive Securities

Florida Moves to Guard Assets:

… the pool, whose assets were hit by mass withdrawals after reports it had about $2 billion of holdings tied to wobbly subprime mortgages, could be reopened on a restricted basis as early as Thursday. … about 86 percent of the pool's assets would be placed in one fund. A second fund would be walled off and would contain worrisome assets, totaling about 14 percent of the total. The restructuring places limits on withdrawals.

Oh, and they found the first candidate for scapegoat:

Immediately before the vote, the board's executive director, Coleman Stipanovich, resigned after seven years in the post.

Earlier posts:

• Citizens Insurance and Other South Florida Public Bodies May Lose Big If State Fund Collapses
• Florida Fund Crisis: The Jeb Bush Connection

Another Two

Add Montana and Connecticut to the list of states with funds holding dubious mortgage-backed paper.

Florida Fund Crisis: The Jeb Bush Connection

A money scandal with a Bush connection — who would have thought it? Forbes did. Where Was Jeb?:

A government money market debacle unfolding in Florida is raising questions about former governor and presidential brother Jeb Bush's possible involvement in the mess.

Florida froze withdrawals from a state investment fund earlier this week when local governments withdrew billions of dollars out of concern for the fund's financial stability.

In the past few days, municipalities have withdrawn roughly $9 billion, nearly a third of the $28 billion fund (which is similar to a money market fund) controlled by the Florida's State Board of Administration (SBA). The run on the fund was triggered by worries that a percentage of the portfolio contained debt that had defaulted.

A majority of this paper was sold to SBA by Lehman Brothers. Bush, as the state's top elected official, served on a three-member board that oversaw the SBA until he retired as governor in January. In August, Bush was hired as a consultant to the bank. Lehman spokesperson Kerrie Cohen, speaking on behalf of Bush, said they had no comment and would not say when the bank had sold Florida the paper. SBA did not return calls.

Let's not jump to conclusions just because it looks bad. But it doesn't look good.

Update: Does this sound like the time Jeb's state pension fund held on to Enron despite warnings to sell?

Citizens Insurance and Other South Florida Public Bodies May Lose Big If State Fund Collapses

I'm not reading much about it in the local newspaper, but I gather from the Tallahassee Democrat that we here in South Florida are at risk of bearing a large share of the losses coming from the collapse and likely fire-sale liquidation of Florida's Local Government Investment Pool (LGIP). And this even though the local county government pulled out its money before the fund temporarily (?) closed redemptions.

The LGIP is a 25-year-old fund that was designed to let local governments, especially smaller ones without investment advisers, to make some short-term returns on tax revenues. The money is supposed to be readily available for payments of bills and payroll, so it's basically a money-market fund for local government. One that has fancy financial advisers, and still ended up holding some dodgy mortgage-backed securities and being long in Countrywide Financial Corp.

Calculated Risk is all over this story. The basic facts of the run on what amounts to a non-bank bank fund are at Bloomberg, Florida Schools Struggle to Pay Teachers Amid Freeze (Update4): The smarter investors pulled out somewhere between $8-$13 billion during the past month. The slower dumber ones are stuck with an illiquid investment of uncertain value — and many of them need the cash for operating expenses.

Add in the unintentionally darkly funny Florida Governments Reject Idea of Accepting Losses on Pool, in which politicians acted as if bluster could replace economic reality,

A newly formed advisory panel composed of Florida school and local government officials with money frozen in a state-run investment pool said they won't accept a return of less than 100 percent of their investment.

Slow-moving parties are left holding the bag, which still has $14 billion invested in it, but much less if you try to take it out. And who are among the top 20 investors in this decaying fund? Why lots of people around here. Of the (nominal) $14 billion left in the fund, a full seventh, $2 billion, was left there by my insurance company, the state insurer of last resort, Citizens Insurance Co. Depending on the size of the losses, I can imagine much higher premiums next year.

Number seven on the top-20 list is the Southwest Florida Water Management District, which has $285.4 million at risk. Miami-Dade Community College, with $146 million, is number 20. Several near-by counties are also on the list, but not it seems Miami-Dade itself, which pulled out its money before the fund stopped permitting withdrawals.

The strangest part of this story is that it does seem like panic is the worst thing that could happen here. From what I can figure out, originally the mortgage-backed paper was only a small percentage of the fund's holdings. As it has been liquidating assets to pay the governments pulling out, the fund has been selling more quality paper than the illiquid stuff. But as a result, the mortgage-backed paper becomes a larger percentage of the remaining holdings, making remaining investors ever-more nervous. Which is why the fund called a halt to redemptions.

At present, it may be that the 'bad' paper (not all of which is necessarily bad — the problem is no one knows so no one wants to buy it at anywhere near face value) is still only 10% of total assets. But it's a bank run: no one is going to put money in here, and everyone has a rational fear of coming at the tail end, when the mortgage-backed securities might be all that is left.

Actually, it's not even all mortgage-backed structured investment vehicles (SIVs):

The fund's $900 million of asset-backed commercial paper that was downgraded to default amounts to 6 percent of its assets. Another $650 million, or 4 percent, is invested in certificates of deposit at Countrywide Bank FSB, a unit of Countrywide Financial Corp. The bank's rating was cut to Baa1, three levels above junk status, by Moody's Investors Service on Aug. 16.

The pool owns $168 million of debt from KKR Atlantic Funding Trust cut to D from B by Fitch Ratings on Oct. 8. It also has $356 million issued by KKR Pacific Funding Trust, cut to D from B by Fitch Ratings on Oct. 2. Fitch said the cut to default on the debt reflected non-payment under the original terms. The debt was restructured to extend the maturities to February and March, and interest payments are continuing.

…Florida's pool has $180 million of paper from Ottimo Funding, cut to D from C by S&P on Nov. 9. S&P said an auction of Ottimo's collateral “did not generate cash proceeds'' to repay the asset-backed commercial paper.

The pool also holds $175 million of short-term debt issued by Axon Financial Funding, the SIV also held by Montana. It was cut to D from C by S&P this week. S&P said Axon failed to pay liabilities maturing Nov. 26, causing an “automatic liquidation event.''

Florida isn't alone here: there are similar problems in many other states.

Oh yes, and PayPal too: PayPal customers' cash exposed to illiquid assets.

Update: And Norway, U.S. Credit Crisis Adds to Gloom in Arctic Norway. Norway?