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This is pretty cool:

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click for interactive graphic

Speaking of untidy accounting issues:

The American Banker reports today that “Bank of America, in a new public filing, said it had $11.2 billion of “unresolved” mortgage buyback requests at June, a 50% spike since the beginning of the year.”

These buyback disputes are with Fannie Mae and Freddie Mac ($5.6 billion), although AB reported BofA “is having trouble with claims made to mortgage insurance firms” — in particular, the monoline insurers, for another $4 billion.

AB quoted the bank’s 10-Q SEC filing as acknowledging that “disputes have increased with buyers and insurers regarding representations and warranties.”

BofA is the second largest residential funder in the US

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Source:
Bank of America FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Quarterly Period Ended June 30, 2010
Commission file number: 1-6523
SECURITIES AND EXCHANGE COMMISSION, August 6, 2010
http://www.sec.gov/Archives/edgar/data/70858/000095012310074181/g24023e10vq.htm

Bank of America Buyback Disputes Top $11.2B
American Banker | Wednesday, August 11, 2010
http://www.americanbanker.com/issues/175_153/bank_america_buyback_disputes_11.2b-1023892-1.html

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Source:
Bill Black’s ‘Alternative’ to the Rating Agencies: “Get Rid of Them”
Aaron Task
Yahoo Tech Ticker, Aug 11, 2010

http://finance.yahoo.com/tech-ticker/bill-black%27s-%27alternative%27-to-the-rating-agencies-%22get-rid-of-them%22-535315.html

While it’s interesting to see how the Fed statement changes from one meeting to the next, it’s also instructive to see how it changes over time.  That said, let’s look at almost one year’s worth of commentary on the housing market and see how far we’ve come:

Sept. 23, 2009 (link is to all statements and minutes):

Conditions in financial markets have improved further, and activity in the housing sector has increased.

Nov. 4, 2009:

Activity in the housing sector has increased over recent months.

Dec. 16, 2009:

The housing sector has shown some signs of improvement over recent months.

Mar. 16, 2010

However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls.

April 28, 2010

Housing starts have edged up but remain at a depressed level.

June 23, 2010

Housing starts remain at a depressed level.

Aug. 10, 2010

Housing starts remain at a depressed level.

When something is “depressed” long enough, is it fair to say it’s a “depression”?

And my post would not be complete without a few words about Mr. Hoenig’s dissent (making five in a row).  Today’s Yesterday’s release says:

Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected.

“As projected?”  As projected by whom?  Back in April, the Fed upgraded — yes, upgraded — its central tendency for 2010 GDP from its January forecasts.  January’s forecasts had been for 2010 to fall in a range of 2.8 to 3.5, and that was raised in April to a range of 3.2 to 3.7.  We’ve now got Q2 coming in at 2.4 (with a downward revision likely) and no one looking for anything better for the balance of the year.  So what, exactly, is he talking about?

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This week we look at some mostly bullish analysis from my friends at GaveKal for the Outside the Box. Much of the letter is devoted to looking at why Europe may fare better than many think (which will make uber-European bull David Kotok happy to read!). But be very sure to read the last page as Steve Vannelli analyzes the latest speculation about the Fed and quantitative easing. All those calling for QE2 may not actually do what they think it will. His conclusion?

“Once again, if there is no growth in broad money, no increase in velocity and no increase in Fed credit (hybrid money), then the only source to finance growth in the real economy will remain the sale of risky assets. When confidence seems to be stuck in a low plateau and talk of reigning in fiscal deficits is growing louder, a policy of undermining the value of risky assets couldn’t be more counterproductive to growth.”

I find myself in New York this morning (I once again did Yahoo Tech Ticker) leaving for DC later. Then sadly will have to forego Turks and Caicos, but that does allow for me to go to Baton Rouge for a one day course on the affects of the gulf oil spill on the regional economy, helicopter flyovers, etc. I will report back in this week’s letter what I learn.

Have a great week.

Your wishing he was still fishing in Maine analyst,

John Mauldin, Editor
Outside the Box

By Francois-Xavier Chauchat, Pierre Gave, Steve Vannelli

The German Question

Looking at consensus growth forecasts for 2010-12, most believe that Germany’s current export boom will fail to translate into a convincing improvement for the domestic economy. Needless to say, this issue is of crucial importance for the sustainability of growth in Europe, and for its much-needed rebalancing. Simply put, Europe needs Germany to be more than an export power-house.

Fortunately, the inability of most to see beyond Germany’s exporting prowess (see, for example, every other Martin Wolf column) may just reflect the extrapolation of the previous economic upswing of 2003-2008. Indeed, the previous German export boom did not trigger an increase in domestic consumer spending (annual growth of private consumption averaged, over that period, a discouraging +0.25%). But looking forward, things may be different for the following reasons:

• To start with the obvious, domestic growth is not just about consumption; it is also about investment. Fixed capital formation grew very strongly in Germany from late 2005 to 2008, after a decade of sustained weakness, and contributed to no less than 40% of German GDP growth over that period. The same could easily happen from late 2010 to 2012. Interestingly, for the first time since early 2008, German banks are now reporting higher loan demand by companies for investment needs.

• From 2003 onwards, the sustained rise of the Euro and the overall inflexibility of the corporate environment made companies unable, and unwilling, to sacrifice their emerging profitability. Among other things, this resulted in nonexistent wage growth. But today, corporate Germany is competitive and profitable, the Euro has declined by -10% since last year, and unemployment has reached an 18-year low. As such, capping wage growth is no longer useful, nor is it feasible.

• The consolidation of government accounts from 2000 to 2007 hurt households considerably. Social contributions were hiked, social spending and pensions were cut, and the VAT was raised by a significant 3 percentage points in January 2007. For the years 2011-2014, the government plans a series of gradual spending cuts and tax increases on banks and utility companies. This time around, households should be spared. Meanwhile, the Ricardian effect of fiscal consolidation will likely be quite powerful as this could be the last push before Germany finally achieves the solid budgetary stability that it enjoyed before the country’s unification.

• Finally, evidence is increasing that former East Germany is emerging from a twenty year lethargy that cost some 3% of GDP each year in budget transfers from the West (see Green Shoots in the East German Desert). According to the latest IFO survey, companies of all kinds in the New Landers—from industrials to retailers—have the best assessment of the economic situation in the region’s History. Unemployment in DDR is also decreasing fast. Thus, for the first time since reunification, East Germany is no longer a headwind. For the above reasons, and even though the German economy will remain extremely dependent on global trade, the case for a gradual and sustained revival of investment and consumption in the biggest economy of Europe is probably more compelling than what most believe. After a decade of near-deflation comes normalization. And this normalization, coming on the heels of years of stagnation, could well look like a boom.

A US$2,000bn Rebalancing

As we have argued repeatedly in numerous reports, the Western World faces two distinct challenges:

• Over-extended banks that have over-collateralized real estate linked assets.

• Governments with massive unfunded liabilities (pensions, healthcare, etc…)

But needless to say, the picture is not uniform across the OECD and some nations are actually in fine shape (see The Nordic Hedge). Scandinavia or Switzerland, for example, will enjoy very favorable monetary conditions and rapidly recovering economic growth for the foreseeable future. In fact, these economies are already seeing their export boom morph into a strong pick-up in domestic demand, a recovery enhanced by rising consumer confidence and falling unemployment rates. According to the Swiss national bank and to the Swedish Riksbank, the domestic macro-situation justifies a continued normalization of monetary policy. However, with Euro, US$ and Sterling interest rates bound to remain close to zero for the foreseeable future, the SEK or CHF risk going to the roof if monetary policy is tightened significantly.

This constraint upon monetary policy in fiscally-sound countries (see The Riksbank Dilemma) implies that interest rates in these economies will very likely remain well below neutral over the next few years. The flipside is that the boom of domestic growth in Scandinavia and Switzerland thus has much further to go. For the Eurozone, this is significant as Scandinavia and Switzerland are even larger clients (12.7% of Euroland exports) than the US (11.6%) or China (5.8%). Interestingly, and importantly for the debate about Europe, the size of these economies almost exactly matches that of Portugal, Ireland, Greece and Spain (roughly US$2,000bn). So while the deflationary forces in these latter countries will remain a drag on European growth, the dynamism in Scandinavia and Switzerland could very well counter the downside pressures emanating from the PIGS.

The regional rebalancing of growth within continental Europe remains one of our central themes for the area (see Euroland’s Growth Prospects and Europe’s Outperformance and Strong Data). In the coming quarters, monitoring this rebalancing will be of crucial importance to assess the nature and the magnitude of risks attached to European financial assets. In our view, the ability of fiscally healthy countries in Europe to compensate for the very poor economic performance of the PIGS is one, usually underestimated, element of comfort.

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If one of the Fed’s goals in yesterday’s statement was to instill confidence in the market that they will do anything to make things better, they accomplished the exact opposite in that today we are even more worried about economic growth not only by the recent data but by the constant desire on the part of the Fed to do something. If there is one country in the world who can vote on the path the Fed has taken and has seen this movie already first hand, it’s the Japanese. The Nikkei closed down 2.7%, also hurt by a weaker than expected gain in June machinery orders. The Yen is at a 15 yr high vs the US$. The Shanghai index closed higher on the soft landing theme after bank loans, retail sales, and fixed asset investment were below expectations and CPI and IP were in line. The BoE cut its UK GDP forecast.

Proving again that low rates just doesn’t matter in a world of deleveraging and sluggish job growth, a new low in the average 30 yr mortgage rate barely moved the needle for refi’s and purchases according to the MBA. Refi’s rose .6% and purchases rose .3%. The ABC weekly confidence poll rose by 3 pts to -47 but remains 1 pt below the 12 month average. The yield curve continues to flatten post yesterday’s Fed announcement. The spread b/w 2′s and 10′s at 222 bps is the narrowest since May ’09. As if banks didn’t have a tough enough environment already to deal with, the FOMC flattens the curve. II: Bulls 41.7 v 38.9 Bears 27.5 v 33.3.

Over the past few months, we have learned about extraordinary levels of excessively bad corporate behavior.

As bad as the Bailouts were from an economic, wealth transfer, and moral hazard perspectives, it turns out that the grim reality was an order of magnitude worse than previously believed.

We have since learned that many TARP recipients, bailed out banks and other ne’er-do-wells were actively engaged in cooking their books. I don’t mean various FASB 157 permission to lie, and other legal but nefarious activities. I am referring to the 2002-2007 era of scams, frauds, and outright theft.

The public’s righteous indignation over the lack of just desserts for the perpetrators of these frauds has morphed since September 2008 into an unresolved, unfocused anger. When this all plays out, we might very well see bonus clawbacks, fines and penalties, disgorgement of ill gotten gains, and criminal arrests for some of the major names at the biggest brokerage houses.

Why do I think that 2 years later, some justice might be done? The truth is slowly coming out, as insiders provide testimony, release papers, and even offer up recordings of conversations to various investigators and prosecutors.

• Lehman Brothers: used “Repo 105 transactions” to remove $50 billion of liquid assets from the balance sheet at quarter-end in 2008 in order to mislead investors as to Lehman’s net leverage. It also hid from view billions of dollars worth of troubled assets. The latest reveal is that Lehman CEO Dick Fuld was aware of this accounting technique. Do not be surprised to see some form of indictment of Dick Fuld over the next 12 months;

• Merrill Lynch: Engaged in a different but just as nefarious technique to hide leverage and losses , thereby to misleading public investors, the NYT reported yesterday:

“Pyxis was created at the height of the mortgage mania as a sink for subprime securities. Intended for one purpose and operated off the books, this entity and others like it at Merrill helped the bank obscure the outsize risks it was taking.”

This took place during the riegn of Stan O’Neal, who left Mother Merrill with an egregious $161.5 million in severance.

• Citigroup: Similarly shifted CDO risks and leverage off its books, failing to disclose them to investors and regulators during the era of Citi with Chuck Prince as CEO (who walked away with over $40 million in severance).

• Morgan Stanley, Bear Stearns, Wells Fargo, Wachovia, Wamu, B of A: What of the rest of the major banks and investment houses? I recently asked a very savvy credit analyst about who else engaged in these SIVs, swaps, off balance transactions, and other fraud with the intent to deceive investors and regulators.

His answer?

“Pretty much all of them. The only exceptions are probably Goldman Sachs and JP Morgan (I have no evidence they did this). The rest of the Street either are known to, or are unknown but likely to have engaged in the same behavior. Morgan Stanley, Bear Stearns, Wells Fargo, Wachovia, Wamu, B of A, all of them.”

Lacking evidentiary proof, I was not permitted to quote him by name.

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I have long believed that the general anger of the public about the bailouts were about the inherent injustice in bailing out incompetent bankers who made tidy profits and huge bonuses through their own incompetence.

It turns out that this was more than mere incompetence, this was a malicious fraud, a full on intent to deceive the investing public in order to grab huge bonuses, economic consequences tot he nation be damned.

But the noose is slowly tightening. The FCIC has undercovered documented illegal behavior, while a newly revitalized SEC opens more cases.

In the post Sarbanes-Oxeley era, where CEOs signed off on their accounting statements and quarter earnings release, that calls for investigation, prosecution, confiscation — and jail time. As much as the public has been frustrated, they may very well see some justice soon . . .

Futures are off on QE1.5, slowing US economic growth, and a slowdown in China. The Nikkei Dow fell -2.70%, while most European Bourses are off 1.5-2.0%.

The US pattern over the past few weeks has been for a weak opening to be ground gradually higher, erasing most of the losses by days end on anemic volume. Let’s see if that holds true today . . .

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Click for Updated Futures

Here are a few (lower res) shots from Leen’s Lodge, Grand Lake Stream, and Big Lake:

Soaring Eagle

19 Inch Freshwater Salmon

Sunset off the Deck

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10 more photos after the jump . . .

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Interesting:

Fed side by 20100810

Hat tip Andrew H.!