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carl_levin.bl.top.jpg Interview by Paul Smalera, senior editorApril 30, 2010: 3:21 PM ET

(Fortune) — At Tuesday’s epic Goldman Sachs hearing, Senator Carl Levin of Michigan led a public grilling of Wall Street not seen by a government panel since the Depression-investigating Pecora Commission. Fortune wanted to know what Levin thought of the answers he got from executives, including CEO Lloyd Blankfein, whether Goldman can save its reputation, and what his committee has learned from its hearings on the financial crisis.

It was surprising how much the Goldman Sachs (GS, Fortune 500) executives talked. How did you get them to reveal what they did?

By confronting them with their own documents. A lot of time and work goes into getting huge amounts, literally millions, of documents … I think when people are confronted by their own documents by someone who’s really studied those documents; it’s easier to force them to respond.

They obviously were trying to delay and evade answering. We had a willingness to take them on and not let them talk forever, telling them, “Hey we’ll stay here all night if we have to, but we’re going to get the information we want.”

And when they did answer?

When they did answer, some people have asked me, “Were they telling you the truth?” The answer is yeah, and that’s what’s even more troubling than the evasions — they are defending what most people would say are indefensible actions. They shouldn’t be betting against what they’re selling at the same time they’re telling you: “Here, these are our securities, our names are on the prospectus.”

I think people think that someone selling something believes their product needs to succeed in some general way; that they want it to succeed. But [Goldman Sachs] are betting against [their product] and basically say they are going to profit from its failure. At that point, in most people’s minds, clearly in mine, there’s a conflict of interest. You’re betting against a product that you’re holding out to the public, by fair assumption, as a good product.

They were trying to turn this into, “We can’t guarantee that people are making money,” but that’s not the point. The point is that at the same time you’re holding this thing out as something that presumably you’d like to see provide something good for your customer, you’re betting against it and making a heck of a lot of money by its failure. And you’re not disclosing that.

To add insult to injury, in those emails that call it “junk” that they’re selling, “crap,” and I won’t get into the “shitty” word but anyway, that adds insult to injury. When you’re putting together a product, hold that out and then are betting against that same product, I think it’s a conflict and at minimum you have to tell people, not some boilerplate that you might be on the other side, but in clear language that you’re betting against [the security].

Regulators have taken a lot of blame for the crisis but doesn’t part of this come from the laws — or lack of laws — surrounding these activities? Goldman seemed to testify that its actions were unseemly but not illegal.

The reaction of one guy when I asked about his reaction to his emails was, “That shouldn’t have been in an email.” There are two different worlds here. My reaction was, “You shouldn’t believe that, you shouldn’t feel that.”

I could have understood the reaction [by Goldman] that they should not be selling stuff that they’re betting against and think is junk, but they don’t say that because they don’t believe it. They think they can do anything they want, that it’s a dog-eat-dog market and all these sophisticated buyers know they disagree. The sophisticated buyers see an AAA rating on something: they’re not then going to go into the 500 mortgages referred to in a synthetic CDO. There’s no way they can. They’re not the underwriter, they haven’t put it together Of course with Abacus, when you have the fact that [John Paulson]., who was betting against it, helped put the referenced mortgages together, that’s just a second insult.

It’s not just Wall Street, it’s upstream: We spent a long time getting into the Washington Mutual issue as an example of lenders putting together shoddy mortgages, securitizing them and getting them off their books. These are mortgages, which never should’ve been issued where the regulator failed to enforce the laws in this case.

The regulators pointed out things in emails and visits to the bank … but they never enforced it. There’s a failure to stop the abuses. Then you have credit rating agencies susceptible to pressure, acknowledge it in emails, and are involved in an inherent conflict of interest. They’re being pressured to put higher ratings on financial documents by the people who will benefit from those ratings and they’re being paid by those people. You have the problem of the person who pays the fiddler calling the tune.

Then you get down to Wall Street with their vacuuming up these securities and getting the risk off their books without disclosing it. It’s not limited to Wall Street’s unbridled greed, it comes all the way from upstream.

How Carl Levin Got Goldman Sachs’s Goat – Paul Smalera, Fortune

Another Stimulus?

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Nov 212009

By Edward Harrison of Credit Writedowns.

A reader at Naked Capitalism asked us to respond to a recent article from the Christian Science Monitor asking Does US need a second stimulus to create jobs?

Marshall Auerback has already done some heavy lifting – and taken all of the heat in the comments. He says emphatically yes.

Now I want to take a crack at this. My short answer is no. But before I go into this, as an aside, I wanted to mention Marshall’s new smiling, happy picture up at the great blog New Deal 2.0 where he now writes. Earlier, when Credit Writedowns was hosted at Blogger, he used a picture best described as a mug shot in his profile, but he has changed that one too (although he smiles there a little less). He thinks we haven’t noticed this sleight of hand. Well I have! Once upon a time, Marshall wrote with a man I called all bearish, all the time this summer. Take a look at that post; you don’t see him smiling now do you? We have Lynn Parramore, New Deal 2.0’s editor to thank for making Marshall Auerback into an optimist.

A CLOSER LOOK AT THOSE GREAT HOUSING FIGURES

Mortgages, Negative Cash Flow, Our phony middle class, Residential Market No Responses »

Jul 292009

Just yesterday, for instance, the Commerce Department reported that new-home sales grew at an annualized rate of 11 percent last month, which was much better than people were expecting.

And if you look under the covers, the annualized rate actually understated the sales pace of 36,000 new dwellings that were bought last month.

Sales of previously owned homes are also improving, although, in the case of both new and used homes, prices are suffering a dramatic drop.

But whether housing is really making a comeback still carries a very big question mark.

What people are failing to realize, says Chris Whalen, who tracks the banking industry for Institutional Risk Analytics, is something that’s being called the “shadow inventory” of homes.

Put simply, these are the homes on which banks and other mortgage holders have foreclosed but which still haven’t worked their way through the courts.

Whalen says that it takes from three to four months for a house to be out of the foreclosure process and ready for sale.

In the case of New York State, he says, the length could be six months.

Experts are apparently concerned that houses are being taken away from delinquent homeowners in much larger numbers than what is now being put up for sale.

In other words, there’s a logjam of foreclosed properties that should hit the market next fall.

And when those properties do come up for sale, banks will unload them as quickly as possible and at whatever price they can get.

That’s where the question (and the question mark) comes in — if the number of houses sold in the fall increases dramatically because of this shadow inventory, is that really a good thing?

And what effect will this flood of foreclosed properties have on solvent people who might just want to move to a different residence?

Will solvent homeowners suddenly be more willing to put their homes on the market at a reduced price?

And banks will feel the shadow’s effect, too — they will finally have to admit that mortgages they are holding aren’t nearly as valuable as they are letting on.

Banks would then have to take additional writedowns.

“Smoooch!!”

President Obama used a lot of words yesterday when he talked about the relationship between China and the US. He was kicking off an economic summit between our two countries.

But what Obama was really doing was planting a big fat rhetorical kiss on the cheek of China’s President, Hu Jintao.

President Hu seems like a sweet guy, but the niceties probably had more to do with the fact that the guy owns the US.

Our president told their president that our two countries need each other. This co-depend ence goes something like this — China has a lot of money it needs to get rid of, and we’ll gladly take it.

“If we advance those interests through co operation, our people will benefit and the world will be better off . . ,” said our president.

No tirade on human rights? No speech on free elections? How about a little lesson on how China should allow people to protest?

Nope, President Obama was the perfect gentleman and gracious host. He even called China a “great country” without even a smirk.

And why not? This is the busiest week for US debt sales in 24 years.

The US Treasury is selling more than $235 billion in various government securities, and we’d certainly like our friends, the Chinese, to buy more than their fair share even if Beijing has been a little nervous about the lack of fiscal responsibility in Washington.

We are coming up to the month’s end, when professional traders try their best to get stock prices higher.

The same thing happens during options expiration week — the week that contains the third Friday of the month.

Same old story, same old scam. Don’t get trapped.

Analyzing Those Great Housing Figures – John Crudele, New York Post

“Increasingly, the determination of when to default is not guided by the moral question: Is this the right thing to do? It is guided by the pragmatic concern: Am I too far underwater on my mortgage?”

A Growing List Of One Term Presidents, A Saturday Break, A State of Distress, A Time To Repent, AIG and all that....., Back to the basics, Bank Failures, Collateral Damage, Coming Social Unrest, Commercial Real Estate Bust, Coup d'etat in America, Credit Card Debt, Creditors Caveat, Death of the Dollar, Deflation-Inflation-Stagflation, Deleveraging, Insolvency, Integrity and Responsibility, It Is Nice To Be Part of the Elite!, Lending Crisis, Mortgages, Obama's Hypocrisy, Our phony middle class, Residential Market, Sub-Prime anytime, TARP fruit loops, The Arrogance of Power, The Democrats Blew It Again, Time For A New Third Party, Unemployment Catastrophe, We Are All Cooked No Responses »

Jul 252009

Walking Away When You Can Pay By Kelsey VanOverloop

Homeowners are turning to the “strategic default” — walking away from a mortgage even when there are funds available to keep paying. “Increasingly, the determination of when to default is not guided by the moral question: Is this the right thing to do? It is guided by the pragmatic concern: Am I too far underwater on my mortgage?” writes Kelsey VanOverloop. Read more »

Who’s to blame for the housing crash?

Mortgages, Our phony middle class, Political Chaos, Residential Market, Unemployment Catastrophe, Wage Deflation, Who Guarantees the Guarantor?-You Do! No Responses »

Jul 022009

To read “Our Lot: How Real Estate Came to Own Us” is to relive, in painful, anecdotal detail, the real estate bust that brought our economy low. Through Alyssa Katz, a journalism professor at New York University and the former editor of the magazine City Limits, we remeet the exploited homeowners and the naive investors, and we cringe again at the blundering politicians and opportunistic lenders.

But “Our Lot” is also a reminder that our memories are short, and that the same mix of hope, greed, good intentions and bad policy has been inflating and popping real estate bubbles since the days of LBJ. Behind it all is a conviction shared by nearly all Americans, be they Democrats or Republicans, Wall Streeters or the ARMed and desperate masses, that home ownership is a good thing — good for the neighborhood, the country and the average citizen holding the deed and the debt. “Our Lot’s” long view is perhaps most unnerving for the doubt it casts on that timeworn belief. Salon interviewed Katz by phone.

Isn’t homeownership actually good for you? I thought it was the panacea for almost all social ills, it drove the crime rate down, educational achievement up, and so on.

Yes, well, homeownership is only as good as the amount of home you actually own, and I think the big problem in the last generation or so is that Americans have turned to more and more and more debt to reach for the American dream.

There’s a lot of great examples out there — the Nehemiah homes that transformed East New York in Brooklyn from a really devastated and dangerous place to someplace that’s still really poor and has a high crime rate but has an opportunity to really grow and have a stable bunch of families really invested in building a home there. So all that’s great. Certainly there’s a lot of evidence that homeowners do tend to stay in one place for longer, their kids perform better in school. They tended to be more involved in local politics, community affairs, and block cleanups. The problem is, it’s very hard to separate out the effects of homeownership itself from the fact that people who have a certain economic or social standing are more likely statistically to be homeowners in the first place.

Does this mean that we shouldn’t actively encourage homeownership, using government money or government policy?

I think there’s nothing wrong with using government money, policy, pressure, all those tools to make homeownership more of a possibility than it would otherwise be in the marketplace, simply because the market left to its own devices discriminates aggressively. It rewards people who already have wealth, who have already had a leg up economically, and it’s great to give other people the opportunity as well.

The problem is that homeownership is the only housing policy that this country has ever shown any commitment to. Renters are treated miserably.

And that’s one big distinction you see between the U.S. and European countries that also had very loosely regulated mortgage-security markets and have had problems there. I think one reason you’re not seeing mass foreclosures on quite the scale that you had in the U.S. is that for large proportions of the population in many European countries, including the Netherlands, Germany, France, Switzerland, renting is supported through government policies that, for instance, protect tenants so that they don’t have to worry about getting kicked out at the end of the year.

Whereas in the U.S., homeownership was always the only option. And anyone who can afford to, or thought they could afford to, would choose that option. So that’s really the problem here.

Whose fault is the mess that we’re in now? And how far back do we need to go to start tracing the blame?

I think the message of my book, unfortunately, is that it’s to some degree everybody’s fault, including, I should say, liberal activists, with whom I’m extremely sympathetic, and think were right.

But what we really had was a collision of ideologies over this question of: How do we make it possible for everyone to be a homeowner? How do we eradicate this horrible legacy of discrimination, which had left the homeownership rate for whites much, much higher than that for blacks and Latinos? There was real work that needed to be done there. So I think we really have to go back to the 1970s, when we started to see pretty aggressive policy measures on the part of the federal government to try to level the playing field.

You talk about another real estate bubble in the early ’70s, when everybody who wanted one could get a mortgage. The wreckage that was left behind looks totally familiar.

Yes. Rather infamously, the federal housing administration, which is the government agency that insures mortgages — it’s what built Levittown and all those 1950s suburbs after the war — discriminated very aggressively, on the basis of what was thought to be sound statistical evidence, that the insurance fund would only be safe if it were to insure suburban and overwhelmingly white areas.

So what happened in ’67 and ’68 was that federal housing officials reversed that entirely. They proclaimed, initially just in the riot areas and then more broadly across cities, that FHA, the Federal Housing Administration, would now be open everywhere! And in fact, as I note in the book, the only circumstances under which HUD did not insure mortgages is if the house is literally falling down.

Real estate agents and loan brokers descended on inner cities, trying to find borrowers who would be unlikely to pay their mortgages back, because the real-estate speculator would get paid in full by the federal government, and paid more quickly and more generously, because of forgone interest that they would get compensated for. The sooner that borrower went into foreclosure the more generously that entrepreneur would get paid.

When was that mess cleaned up?

About ’73, ’74. There were tens if not hundreds of thousands of abandoned houses all over the country as a result of the FHA debacle, and it got a lot of attention at the time and was almost forgotten to history after that.

And then we have the Reagan presidency and — correct me if I’m wrong — but that’s when the securities market for mortgages really blossoms, right?

Absolutely. Mortgage-backed securities had existed since about 1970. They existed in the ’20s too, and that was part of why the Depression happened — they had been made illegal after that. But they came back as a government product in 1970. As I recount in the book, Lewis Ranieri of Salomon Brothers, which was trading in government-backed securities, thought, “Couldn’t we just do this ourselves? Why do we need to have Freddie Mac or Fannie Mae in the middle, why don’t we create these securities?”

In order to do that, they needed to rewrite all those laws that had been passed following the crash in 1929 and thereafter, which was as much a housing and real estate bubble crash as it was a stock market crash.

Who’s to Blame For the Housing Crash? – Mark Schone, Salon

Where’s the (Remaining) Housing Wealth?

Mortgages, Our phony middle class, Residential Market No Responses »

Jun 292009

Falling home prices have eroded the equity that American homeowners have in their homes, as David Wessel observes in his Capital column.

More than half of American home equity is in homes for which there are no mortgages; there never was one or it has been paid off. Of the remainder, the bulk isn’t in homes with high-end jumbo mortgages or in homes with subprime mortgages, it’s in homes with conventional mortgages, the sort backed by Fannie Mae and Freddie Mac.

The situation may have to get worse before it gets better. Most economists in the latest Journal forecasting survey expect home-price declines to continue at least through this year.

Here are the numbers, courtesy of Greenspan Associates, the former Fed chairman’s consulting firm.

Value of Equity in Homes

Total: $8 trillion

Without mortgages: $4.4 trillion.
With mortgages: $3.6 trillion

Subprime negative $0.1 trillion
Alt-A $0
Prime Jumbo $0.6 trillion
FHA/VA $0.1 trillion
Conventional/conforming $2.9 trillion
First lien home-equity loan $0.1 trillion

Source: Greenspan Associates

Where’s the (Remaining) Housing Wealth? – David Wessel, RT Economics

Not Paying the Mortgage, Yet Stuck With the Keys

Mortgages, Our phony middle class, Residential Market No Responses »

Jun 282009

A growing number of American homeowners are falling into financial limbo: They’re badly behind on payments, but their banks have not yet foreclosed.

The backlog of seriously delinquent mortgages, which so far affects about 1 million borrowers, is a shadow over hopes for a rebound in the nation’s housing markets. It masks the full extent of the foreclosure crisis and threatens to depress prices even further just as some parts of the country are hinting at recovery. For lenders, it could portend even more financial losses tied to the mortgage meltdown.

“It just means foreclosure rates are going to keep rising,” said Patrick Newport, an economist for IHS Global Insight.

Rising mortgage delinquencies were at the root of the recession, and many economists say an economic recovery will be difficult until the housing market recovers and home prices stabilize.

And even though a delayed foreclosure can be a blessing for some troubled homeowners, for others, it simply prolongs the financial distress, leaving them on the hook for the condition of the property. Even if they move out, they cannot move on.

“I have even begged them for a foreclosure,” delinquent mortgage-holder Charlotte Jensen said. When she realized she couldn’t save her Glen Allen home last year, she filed for bankruptcy, packed up her family and moved out. Nearly a year later, Bank of America has yet to take back the home.

During the first quarter of this year, the share of all homeowners seriously delinquent on their mortgage but not yet facing foreclosure more than doubled to 3.04 percent, or about $227 billion in loans. There was a total of $97 billion in such loans during the same period in 2008, according to Inside Mortgage Finance. In more prosperous times, the rate is much lower — it was less than 1 percent in the first quarter of 2007, according to the industry publication.

Not Paying the Mortgage, Yet Stuck With the Keys – Washington Post

Foreclosure Fiasco

Insolvency, Interest Rates, Jacksonian Democracy, Lending Crisis, Mortgages, Our phony middle class, Residential Market, Securitization No Responses »

Jun 262009

It’s not working. The Bush-Obama strategy of throwing trillions at the banks to solve the mortgage crisis is a huge bust. The financial moguls, while tickled pink to have $1.25 trillion in toxic assets covered by the feds, along with hundreds of billions in direct handouts, are not using that money to turn around the free fall in housing foreclosures.

Foreclosure Fiasco: Obama Does Banks’ Bidding – Robert Scheer, The Nation

ARMs Away!

Lending Crisis, Mortgages, Negative Cash Flow, Our phony middle class, Residential Market, Sub-Prime anytime No Responses »

May 272009

Subprime is done. All the teaser rates are over, the interest rates have reset and the writing is on the wall.

But in the coming quarters, the scenario will play out with other exotic mortgages, Option ARM (pick-a-pay), Alt-A, etc. The homebuyers may have had better credit, but they had the same strategy: Get a low interest rate upfront, and then deal with the reset down the road, by either refinancing or selling the home. But, whoops, home values are way lower and the economy sucks. Plan derailed.

The subprime mortgage issue is largely past, here comes the Option ARM and Alt-A mess. (Clusterstock)

A boost to consumers?

A Saturday Break, Analysis & Commentary, Residential Market 1 Response »

May 162009

The Biggest Stimulus Won’t Come from Obama – Randall Forsyth, Barron’s

THE BIGGEST STIMULUS to the economy in the next 12 months won’t come from the Obama administration’s vaunted fiscal plans but from the rather arcane operations of the Federal Reserve.

David Greenlaw, chief fixed-income economist at Morgan Stanley, estimates that mortgage refinancings will put nearly twice as much money in the pockets of U.S. consumers as the fiscal stimulus over the next 12 months.

Meanwhile, the slowing of the wealth losses of Americans will also be a major swing factor over the next year, he estimates.

The rebound in prices of equities and corporate and municipal bonds, along with the deceleration in house-price declines, owe much to the Fed’s massive provision of liquidity, along with the federal government’s efforts to shore up the financial system.

But incomes will continue to fall as employment declines, albeit at a slightly slower rate. Net-net, various factors affecting consumers’ spending power should be slightly in the black in the next 12 months, a reversal from the deep negative over the last year, according to the Morgan Stanley economist’s projections.

In assessing the consumer, Greenlaw estimates that job losses drained some $250 billion from consumers’ wallets over the past 12 months. Even more severe was the drop of $400 billion from the loss of wealth from the decimation of securities and property values.

The decline in energy prices was equal to a $150 billion boost to consumers’ purchasing power, according to Greenlaw’s sums. But that didn’t come close to offsetting the hit to their income from job losses or drop in wealth.

That helps demonstrate the silliness of the notion that falling energy and commodity prices would rescue the economy last year when that deflation was the result of the same credit collapse that produced massive job cuts and wealth losses.

Be that as it may, Greenlaw estimates mortgage refinancings and tax refunds kicked in $25 billion each in the last 12 months. Unemployment benefits provided consumers an additional $60 billion. Bottom line: he reckons the net effect of all these factors was a $390 billion loss of spending power for U.S. consumers in the past 12 months.

Looking ahead, the economist forecasts job losses will drain $175 billion from consumers’ purchasing power while wealth losses will deduct $80 billion over the next 12 months. The latter is based on the assumptions stock prices will be flat while house prices drop another 10%.

Unemployment benefits will add $75 billion over the next 12 months while fiscal stimulus will provide $65 billion, according to Greenlaw’s estimates.

But mortgage refinancings will nearly equal impact of those fiscal boosts, totaling some $125 billion of increased purchasing power, according to his projections. That’s based on relatively conservative assumptions about who can actually take advantage of the decline in conforming mortgage rates, from an average of over 6% to the high 4% range.

Significantly, Greenlaw is not assuming that homeowners with all sorts of wacky, aggressive subprime loans are suddenly going to get safe, conforming, Ozzie-and- Harriet-style fixed-rate mortgages. He assumes many of the latter cohort will be able to take advantage of current, historically low fixed rates. But not everybody, given the stringent terms being imposed by lenders these days, as evidenced in the Fed’s most recent loan-officer survey.

Greenlaw says this boost to consumers is consistent with the Fed’s objectives in bringing down mortgage rates via its program to purchase Treasury and agency obligations and mortgage-backed securities.