The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

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Source:
Are the Markets Prepared for Potential November Surprise
Daniel Gross
Yahoo Tech Ticker Oct 20, 2010
http://finance.yahoo.com/tech-ticker/are-the-markets-prepared-for-potential-november-surprise-535523.html

I am digging this calendar from Jim Flora:

This is a series giving a basic explanation of the current foreclosure fraud crisis from Mike Konczal; This is Part Four; you should also see Part One, Part Two, and Part Three)

Right now the foreclosure system has shut down as a result of banks’ own voluntary actions. There is currently a debate on whether or not the current foreclosure fraud crisis could explode into a systemic risk problem that perils the larger financial sector and economy, and if so what that would look like.

No matter what happens, the uncertainty about notes and what is currently going on with the foreclosure crisis is terrible for the economy. Getting to the heart of this problem so that negotiations can be worked out is important for getting the economy going again. There is little reason to trust what comes out of the servicers and the banks in whatever they conclude at the end of the month, and the market will know that. Only the government can credible clear the air here as to what the legal situation is with the notes and the securitizations.

But I wanted to get some unlikely but dangerous scenarios on the table in which this blows up. Bangs, not whimpers.  The kind where Congress is pressured to act over a weekend.  I had a discussion with Adam Levitin about how this could explode into a systemic problem.

Title Insurance Market Breaks Down

First scenario involves title insurance. Specifically if title insurers decide to take a month off from writing title insurance even on performing and current loans to investigate what is going on with note transfers.

If that happened there would be no mortgage sales (except for those involving cash) in the country. The system would simply stop. Everyone with an interest, from realtors to Wall Street to construction to huge sections of the economy, would face a major crisis through this short-term pinch. There would be a call for Congress to step in immediately.

You can tell that the title insurance market, which is largely concentrated and also holding very little capital for a nationwide crisis scenario, is investigating the current problems.   They are holding off on certain types of foreclosed properties;  if they decide to hold off all together you could see a scenario where Congress is pushed to act immediately.

Lawsuits a Go-Go

The second would be a wave of lawsuits. As we discussed in Part Two, many of the servicing agreements allowed for the trustees to force the depositors and sponsors to purchase mortgages without notes. That would be 100 cents on the dollar for mortgages worth pennies. If the trustees don’t take action, the investors could sue them. And the tranche warfare on this issue is intense, as foreclosures versus a few more payments radically change the balance between junior and senior tranche holders (See Tracy Alloway on tranche warfare here).

Here’s what this could look like. Read left side up for what the lawsuit screaming looks like and the right side down for the response:

Much of the activity would center around the four largest participants in these areas, the Too Big To Fail institutions of Wells Fargo, Bank of America, Citi and JP Morgan.

And many of these mortgage-backed securities are cheap. So in an interesting scenario you could see hedge funds buying MBS for pennies just for the option to sue firms that are likely backstopped by the government.

If title insurance froze, or if the financial markets had a panic over fears of waves of lawsuits, there would be pressure for Congress to do something. Much of the law is New York trust law, so it isn’t clear Congress can act.   But there will be pressure.

Because if this bad-case scenario happens, which there is a small but reasonable chance it could, progressives need to have a clear sense of what they want in exchange for negotiations when the financial industry comes flying in over the cliff, a list of demands and questions to replace the in-large-part steamrolling of TARP over anyone’s interests but the banks.  Even if that doesn’t happen, but the slow bleed of the current dysfunctional mortgage market continues, progressive wonk policy initiatives that fix this crisis and get the mortgage market going again should be at the front of the debate.  We’ll cover this in Part 5.

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This is the first of a 5 part series from Mike Konczal, a former financial engineer, is a fellow with the Roosevelt Institute, who also blogs at New Deal 2.0, and is working on financial reform, the 21st century economy, structural unemployment, inequality, risk sharing, consumer access to financial services and more generally what it means to have a social contract in a financialized, post-industrial economy.

Here is a fascinating graphic from the Washington Post about where in the US, by County, foreclosures have taken place, color coded by percentage.
It is rather remarkable:

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click for larger graphic

Map courtesy of the Washington Post
Foreclosure data from CoreLogic | Cristina Rivero and Mary Kate Cannistra/The Washington Post

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And with this post, we add the category Foreclosures, rather than select Credit/Legal/Real Estate each time  . . .

I wish I could recall where I found this — I love these sorts of graphics:

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Thank you Nathan Gilliatt for the source ~!

Following a much better than expected NY manufacturing survey (+15.7), the Oct Philly Fed figure was punk at +1, 1 pt below expectations but up from -.7 in Sept and -7.7 in Aug. New Orders rose 3 pts but was negative for a 3rd straight month at -5.0. Backlogs fell slightly to -8.9, the lowest since Aug ’09 and Inventories fell by 2 pts to the lowest since Oct ’09. The Employment index rose modestly to 2.4 from 1.8 and the average workweek rose to -6 from -21.6. Following the rise in commodity prices, Prices Paid jumped sharply to 31.5 from 9.8 and is at a 5 month high. Prices Received remained negative for a 5th straight month but rose by 4.9 pts. While the internal components were mostly lackluster and “indicators for growth, although improving from last month, remained at levels that suggest slight growth, at best”, the 6 month outlook rose almost 15 pts to 41, the most since April.

Here is today’s astonishing factoid: The Sun Sentinel paper in Florida publishes a series of  “At a glance” overviews of various Florida firms and people.

Today’s subject: The various RE related holdings of one David Stern — his law firm, his Virgin Island based legal processing firm — publicly traded! — and his Title company.

The numbers were astonishing:

“David Stern’s law firm handles 20 percent of Florida’s foreclosure cases. It does foreclosure work for most of the nation’s top mortgage servicers.

The firm is based in Plantation and has hundreds of employees, with additional offices in Puerto Rico, Miami and Kentucky.

Stern is also CEO of publicly traded DJSP Enterprises (Nasdaq: DJSP), registered in the British Virgin Islands but based in Plantation. The company operates as the non-legal arm of Stern’s law firm, which accounts for more than 90 percent of DJSP’s business. DJSP affiliates include DJS Processing, Professional Title & Abstract Co. of Florida, and Default Servicing LLC.

According to its SEC filings, DJSP and its affiliates had $260 million in gross revenues last year. DJSP handled 70,382 foreclosure cases in 2009.” (emphasis added)

The goal here was not to pursue prosecute foreclosures on behalf of a banking client; rather it was to crank out the assembly line factory to grab 100s of millions of dollars, legally or illegally, consequences be damned.

Vultures and undertakers serve important roles in the biology of all econ-systems.  But the vast wealth from his on-the-cheap, down and dirty foreclosure mill, currently under investigation for forged documents, and fraud, is giving vultures a bad name:

For Americans, the foreclosure crisis has wiped out fortunes, bringing destitution and homelessness. For Florida attorney David J. Stern, it has brought mansions, a Bugatti sports car and a luxury yacht.

Florida has the third-highest residential foreclosure rate in the U.S., and Stern, 50, has made a fortune off the bust. His foreclosure-processing business has generated hundreds of millions of dollars in revenue preparing documents for the cases that his law firm brings on behalf of lenders seeking to reclaim homes from borrowers who can’t pay their mortgages.

Who wants to take the over/under as to whether this f%$ker will be spending some time in the graybar hotel within 5 years . . . ?

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Source:
At a glance: Law offices of David Stern
Diane C. Lade
Sun Sentinel, October 20, 2010
http://www.sun-sentinel.com/business/fl-foreclosures-florida-bar-2-20101020,0,6678962.story

Data Sources: Securities and Exchange Commission, St. Petersburg Times, DJSPenterprises.com

Foreclosure Fortune Buys Bugatti, Yacht for Attorney
David McLaughlin
Bloomberg Oct. 19 2010
http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=ayoBI1pkh.AY

Initial Jobless Claims totaled 452k, 3k less than expected BUT last week was revised up by 13k to 475k. The 4 week average fell to 458k from 463k but the level is still too high and reflects continued sluggishness in the labor market and hesitancy on the part of businesses to hire. Yesterday’s Beige Book said “hiring remained limited.” Continuing Claims were 21k higher than expected and Extended Benefits rose a net 278k after the week’s prior fall of 339k. The last extension of unemployment benefits that was signed in July expires in a month and thus puts pressure on the economy to start creating jobs on a greater scale sooner rather than later.

Another stream of good corporate earnings not just in the US but also in Europe are helping to buoy markets. After seeing this combined with the Fed’s Beige Book which reflects a subdued but still modestly growing US economy in addition to a persistent rise in commodity prices and I just have to scratch my head why the FOMC is intent on expanding their balance sheet by up to another 50%. The other money printing country, the UK, at least has a government that is serious about cutting spending but the pound is falling to near a 7 month low vs the Euro as the BoE will be leaned on for more QE. The Euro Zone manufacturing and services composite index fell to the lowest since Oct ’09 but the manufacturing component unexpectedly rose and didn’t show any ill effect from the rally in the Euro. Brazil’s unemployment rate fell to 6.2%, the lowest since at least ’01 and is down from 13.1% in Aug ’03 and 9% in Mar ’09.

Chinese Q3 GDP y/o/y rose 9.6%, a .1% above expectations. Inflation as measured by the CPI rose 3.6%, in line with forecasts and confirms why the PBOC raised interest rates. Retail Sales were above estimates but IP fell short. An aside, following yesterday’s II data where bulls exceeded bears by 23 pts, the AAII measure of individual sentiment saw Bulls rising to 49.6 from 47.1 and Bears falling to 25.2 from 26.8, both near levels last seen in ’09.

Wow, the WSJ really seems to be on my Thursday S^%$ list:

“It was a first step in the growth of a legal sub-specialty called foreclosure defense that has sown confusion and turmoil in the housing market. Lawyers in the field now commonly use a technique more identified with corporate litigation: probing depositions, designed to uncover any lapses in judgment, flaws in a process or wrongdoing. In the 23 states where foreclosures entail a court hearing, the bank may be ordered to pay the homeowner’s legal bill if a lawyer can convince a judge that the bank has submitted false documents, such as affidavits saying employees personally reviewed the details of loans when they didn’t.”

Excuse me, but why would you write that the identification of fraud and perjury has sown confusion; Isn’t it the fraud and perjury that is to blame?

Its like an episode of Scooby Doo: “And old man Kowalksi would have gotten away with it, if it wasn’t for those meddling kids!”

You see, according to the article, it was not GMAC that caused the problem, by failing to discharge its legal obligations and committing mass perjury — it is the defense lawyers. Apparently, vigorous defense is appropriate when its for a corporate litigant, but when some poor schmuck is losing his house and exercises his legal rights, it is merely an annoyance.

And that is the our Dumb Article of the Day, from the former best paper in America.

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Source:
Niche Lawyers Spawned Housing Fracas
ROBBIE WHELAN
WSJ, OCTOBER 21, 2010
http://online.wsj.com/article/SB10001424052702304410504575560072576527604.html

Just when you think your ability to get any more disgusted or outraged is finally at its zenith — the point where it is unimaginable to think any worse of Wall Street or its related institutions — along comes a story that outrages you even more.

Futures magazine had an article last week about the retirement letter that Commodity Futures Trading Commission (CFTC) Administrative Law Judge George Painter sent announcing his retirement.

In the letter, he announces that his fellow admin judge has never awarded a case to a plaintiff in 20 years, and that he did so at the urging of former CFTC Chair Wendy Gramm.

A reminder to those of you who may be unfamiliar with this particular corporate harlot: Gramm was not only the former CFTC chair, but she was an Enron board member and wife of deregulation architect Phill Gramm, who for reasons unknown to decent society, is gainfully employed as a fluffer at UBS, helping to further besmirch the reputation of that bailed out firm.

“In a notice sent to complainants and their attorneys, Judge Painter claims that Levine told him that he had promised former CFTC Chair Wendy Gramm “that he would never rule in a complainants favor”. Painter’s notice goes on to say, “A review of his rulings will confirm that he has fulfilled his vow.”

In the notice Painter recommends the CFTC request the services of an administrative law judge to be detailed to the Commission from another regulatory agency to handle the remain cases on his docket. Painter writes, “If I simply announced my intention to retire, the seven reparation cases on my docket would be reassigned to the only other administrative law judge at the Commission, Judge Levine. This I could not do in good conscience.”

Now, if that isn’t weird enough, the WSJ has an a article in today’s paper that can only be described as a hit piece. The accusations of mental unfitness and heavy drinking come from the Judge’s wife in the middle of divorce proceedings.

I wrote to Sarah Lynch, asking how the Journal could do a story on this retiring judge — accusing him of being a drunk and mentally unfit — but omit his most explosive charges against his fellow judge and the CFTC chair Wendy Gramm.  “In the Sept. 17 document, Judge Painter said he plans to step down in January and asked the agency to transfer his pending cases to an outside judge instead of Judge Levine.” That hardly does justice to the Judge’s retirement note, and completely omits his charge against former CFTC chair.

Lynch wrote back to note she did a story on the judge last Friday, but it ran on newswires but was not picked up by WSJ. (Reporters have no control over those editorial decision). The current article is a follow up to that prior piece.

I did a WSJ search for “CFTC Judge” seeing when in the past they had covered obscure administrative judges in the past, and other than today’s article, nothing came else was found (Journal search apparently only goes back 2 years).

The whole thing is very curious.

But what makes the WSJ piece truly weird is it ignores an article Judge Painter used to show Judge Levine was biased — from the WSJ itself! The December 2000 article about Judge Levine was titled: “If you got a beef with a futures broker, This Judge Isn’t for You—In Eight Years at the CFTC, Levine Has Never Ruled In Favor of an Investor (PDF)”

And as the Columbia Journalism Review noted:

Dow Jones-owned database Factiva and can’t find it. But it exists. Here’s a link from the Investigative Reporters and Editors website and a Factiva print from the judge that looks like a Wall Street Journal story to me.That piece reported that Judge Levine “In Eight Years at the CFTC, Levine Has Never Ruled In Favor of an Investor.”

So this is going to be a mess to untangle, but it’ll be quite the story if you can. Despite Judge Painter’s apparent infirmities, he’s not completely out to lunch on Judge Levine’s record. What’s Levine done since that 2000 WSJ story? What’s been going on at the CFTC?

Something is not right with this story. A retiring judge accuses a former CFTC chair of criminal conduct. The response — he is accused in the WSJ of being mentally unfit and a drunk, pulled from his wife’s accusation in a divorce action — is quite unseemly.

There is much more to this story, and the chief administrative law judge and/or the US Attorney should investigate these charges.

UPDATE October 21, 2010 10:31am:

The editors at the WSJ did Sarah Lynch a disservice — her piece from today is out of context without the prior article (excerpted below). And she notes that the details in her piece came form the guardianship case — not the divorce filing.

As a standalone article, it reads like a hit piece, with lots of holes and missing factors, but within the context of the prior piece, it makes more sense. The missing items are in the previous article:

“A retiring administrative law judge has asked the Commodity Futures Trading Commission to prevent his colleague from ruling on his leftover cases, saying investors won’t get a fair shake.

CFTC Administrative Law Judge George Painter, in a letter released Wednesday, accused fellow CFTC administrative law judge Bruce Levine of bias in his handling of complaints by investors against their futures brokers.

The notice, received by the CFTC’s Office of Proceedings, asks the CFTC to formally request a judge from another federal agency to take up his seven remaining cases instead of reassigning them to Levine.

In a highly unusual public rebuke of his colleague, Painter rails against the way Levine has handled cases involving investors who don’t have attorneys and come to the commission with grievances against their brokers.

Painter claims Levine told him nearly 20 years ago that he promised then-CFTC Chairman Wendy Gramm he’d never rule in favor of a complainant.

“A review of his rulings will confirm that he has fulfilled his vow,” Painter wrote. He added that Levine forces plaintiffs without legal representation “to run a hostile gauntlet until they lose hope, and either withdraw their complaint or settle for a pittance, regardless of the merits of the case.”

Judge Levine declined to comment about Painter’s allegations and a CFTC spokesman also declined to comment. But former CFTC attorney Robert Zwirb, who also worked at the agency during Gramm’s tenure, defended Levine’s record and said Painter’s letter is nothing more than a political attack.

“The allegation that Judge Painter makes is like a pathetic caricature,” said Zwirb, an attorney at Cadwalader, Wickersham & Taft. “It’s really aimed at the person that appointed him–Wendy Gramm. It’s so absurd. No chairman of either party…would enter into some kind of understanding like that.”

He added that Levine is the kind of judge who applies both the law and economics to his decisions, calling his opinions “intellectual works of art.”

Zwirb also provided some documents to show examples where Levine has ruled in favor of investors who filed reparations cases. In some instances, however, the defendants didn’t appear to fully participate in the proceedings.

Painter’s letter has caught the attention of lawyers around Washington, many of whom say they are stunned by what it says. It also raises questions about whether the letter will force the CFTC to look into the allegations and potentially take action.

Attached to Painter’s letter was a 10-year-old article from The Wall Street Journal, titled “If You’ve Got A Beef With A Futures Broker, This Judge Is Not For You–In Eight Years at the CFTC, Levine Has Never Ruled In Favor Of An Investor.”

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Sources:
“If you got a beef with a futures broker, This Judge Isn’t for You—In Eight Years at the CFTC, Levine Has Never Ruled In Favor of an Investor”
Michael Schroeder
Wall Street Journal December 5 2000
URL Unknown; PDF here

CFTC judge claims colleague issued biased rulings
DANIEL P. COLLINS
Futures Mag 10/14/2010
http://www.futuresmag.com/News/2010/10/Pages/CFTC-judge-claims-colleague-is-biased-.aspx

The Plot Thickens at the CFTC
A judge accuses another judge of improprieties. But there’s more to the story.
Ryan Chittum
CJR, October 20, 2010
http://www.cjr.org/the_audit/plot_thickens_cftc_judge.php

Case Sheds Light on Judge
SARAH N. LYNCH
WSJ, OCTOBER 21, 2010
http://online.wsj.com/article/SB10001424052702304011604575564610646663830.html