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

Abelson on robo-signers last week:

“Truth is, bankers just can’t stand prosperity, even after their near-death experience of a couple of years ago, when so many of them, emphatically including the gargantuas, were kept alive only by grace of rich Uncle Sam generously ladling out our tax dollars. The nub of the problem were the lads and lassies assigned by the banks to review the mortgages and swear to the courts that everything was jake, as required by law before foreclosure received the necessary judicial blessing. They cheerfully signed affidavits to that effect, typically without bothering to actually review the documents or even having the faintest notion of what they were supposed to do.

The irony, of course, is that given the 16 million to 17 million unemployed or underemployed dying to work, the banks and their proxies could easily have gotten qualified folks to do the job. But instead, they chose to save a couple of bucks by hiring any number of unqualified “robo-signers.” It was either unbridled arrogance or simple stupidity—take your pick.

Ever since word got out about the first legal challenge to the legitimacy of such foreclosures, we’ve had the sinking feeling that the banks were once again in hot water. The action of their stocks last week when the story got some play in print and online did nothing to dissuade us from that bleak notion.

Neither we nor anyone else have the foggiest notion of how much damage this latest scandal will inflict on the banks or their investors’ net worth, but the hit, as intimated, could be substantial. And the ultimate effects on the economy’s most prominent invalid—housing—are bound to be baleful.

What is clear is that the banks should have paid the extra $2 an hour.”

Too funny, in a pathetic kind of way.

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Source:
Courting Trouble
Alan Abelson
Barron’s OCTOBER 16, 2010
http://online.barrons.com/article/SB50001424052970204742304575546131193805368.html

Last week, in response to a NYT column by Greg Mankiw, I posed several questions about what I took to be holes in the column’s premise. Namely, that small changes in tax rates had outsized impact on human behavior. The questions also challenged the Harvard Professor (and former CEA chair)’s assertion that this marginal increase in tax rates would significantly reduce his incentive to work.

Rather than merely call the thesis nonsense, I instead posed a series of questions, the answers to which demonstrated how disengenuous the professor’s argument was.

This week, he responded. In an addendum. To “some blogger.”

If you thought the original column was disingenuous, check out the response:

Addendum: Some blogger named Barry Ritholtz poses a bunch of questions for me, which I won’t bother taking the time to answer. Unless, of course, he offers to incentivize me sufficiently. For free, however, I will answer one of them: “You teach at Harvard and live in ‘Taxachusetts.’ If state taxes are so important, have you considered teaching at Yale, and living in much lower state tax land of Connecticut?”

First of all, the top state income tax rate is higher in Connecticut than it is in Massachusetts.

Second, Yale? Are you serious? Yale?

The point, which Mankiw so deftly ignored, was that in the real world, people do not respond aggressively to minor incentives (such as marginal changes in income tax).

As to the corporate rate of taxation at 35% — this week, we learned that Google’s profit machine only pays 2.4% tax.
But as to his Connecticut comment, it was not only disingenuous — it was (mostly) wrong.

Before 1991, Connecticut had no income tax; Up until 2010, their rates were considerably lower than Massachusetts. The change in CT for 2010 is on income > $500,000 rate of 6.5%. So my point being that if marginal rate changes really impacted people’s behavior dramatically, then those incentives would have had him living in CT for most of the past few decades.

As to the actual tax rates, here is what I dug up from the intertubes:

Massachusetts Tax Rates
Income – 5.3%
Capital Gains 12%

Dividends 5.3%

Optional Tax Rate 5.85%

Connecticut
Income – 3 or 4 or 5%
Any income > $500,000 rate of 6.5%.
Capital Gains – 7%
Dividends and interest income are taxed between 1-14% (from 54k to 100k)

So prior to the recent change, the answer was that Massachusetts was appreciably higher than CT.

After the 2010 changes, the answer depends upon your gross income, as well as your cap gains. CT still has a lower tax rate for earner under $500k, and a lower effective tax rate for earners between $500k and XXX (try slapping that into a spreadsheet and see what the numbers are).

Even since the CT 2010 tax increase, the state you pay more in will be a function of exactly how much your income is and from what sources.

But the point is for the past 30 years, taxes were lower in Connecticut than Massachusetts, and yet he worked in Mass.

But forget Yale — if we are to really believe the thesis about marginal incentives, then what about Dartmouth? Consider New Hampshire’s tax rate is ZERO. The state has no general income, sales or use taxes. The only tax that would apply is a 5% tax on dividends and interest income of more than $2,400 ($4,800 for joint filers).

Thus, why is the good professor so motivated by a 3% change in marginal rates, but not a 5.3% reduction (plus elimination of a 12% cap gains) ?

There is yet another alternative explanation: Perhaps the chatter about his unwillingness to work due to the impact of a 3% increase in taxes is purely unmitigated academic balderdash.

Even at Hahvahd, they must know how to spell the word “bullshite” . . .

Joe Nocera has the quote of the day (2 actually) in his NYT column this morning: Big Problem for Banks: Due Process:

“That’s why most people, myself included, have no sympathy for Bank of America’s legal predicament — and no patience for its “we’re not the bad guys here” arguments. It is absolutely true that the homeowners that Bank of America wants to foreclose on are in default on loans they should never have gotten in the first place. (Gee, whose fault was that?) But it simply does not follow that the bank therefore has an absolute right to take back the home. Under the law, it has to prove it has that right — by filing documents that show that the owner of the mortgage has conveyed that right to it. That’s why this affidavit scandal isn’t some legal nicety. It’s about the single most important value of American jurisprudence: due process.”

That has been why I have been hammering the fraudclosure issue so hard — my focus is on the rule of law, property rights  and due process. The banks expediency needs does not mean that they get to throw away centuries of laws because they are inconvenient.

Nocera admits that he wants to see the banks pay for their sins:

“I admit it: I want to see the banks feel some pain. Most people do, I think. Banks did terrible things during the subprime bubble, and they still haven’t paid any real price. I find myself rooting for judges to rule against banks in foreclosure cases. I would love to see these big investors put the serious hurt on Bank of America, which will encourage other investors to pile on. I know this colors my thinking. I can’t help it.

Yet I also know the flip side. If the foreclosure lawyers start winning a lot of cases, if judges halt foreclosures on a widespread basis, if investors start to extract billions upon billions of dollars from the banks — and if banks become seriously weakened as a result — we’ll be right back where we were two years ago. The banks will need to be saved for the good of the economy. The taxpayers will have to come to the rescue. That’s an appalling prospect too.”

I disagree. We still have the option of doing what should have been done on the first place: The next time they come to the taxpayers begging for a bailoutm we go Swedish on them:  Pre-packaged bankruptcy, fire management, wipe out shareholders, haircut bondholders, erase all of the outstanding debts and toxic paper.

He ends the article with this bon mot:

Banks: We can’t live with them, and we can’t live without them. It stinks, doesn’t it?

I would rewrite that:

Banks: We don’t have to live with them in their corrupt, incompetent form, but  we can’t live without them. So we best clean uo the mess before these bastards cost taxpayers yet another trilliomn dollars . .  .

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Source:
Big Problem for Banks: Due Process
JOE NOCERA
NYT, October 22, 2010  
http://www.nytimes.com/2010/10/23/business/23nocera.html

The banks admit to not reading the fine print on the crappy mortgages the American taxpayers now own.

Thursday October 7, 2010

I love the cover of Barron’s last week, featuring their story on MB’s comeback:

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Karl Denninger Cites an Interesting Case of a Bankruptcy Judge Denying a Motion Based on the Standing of MERS, and a Trust Not Having a Clear Chain of Title to the Note.

As Denninger notes “Unlike “Rocket Docket” courtrooms and non-Judicial foreclosures, in bankruptcy the procedures are pretty much black-letter and actually followed.”

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Sheridan Decision Idaho Bkr j Myers

Succinct summation of week’s events:

Positives

1)Solid start for Q3 earnings vs expectations 2)Philly Fed 6 mo outlook rises to highest since Apr 3)Home builder sentiment up to 4 mo high 4)Housing starts rise, good for GDP, permits drop, good as we don’t need new homes 5)German IFO at highest since May ’07 and Euro Zone mfr’g index up even with rise in Euro 6)Solid Q3 Chinese GDP growth, PBOC hikes rates, goldilocks 7)Brazil unemployment rate falls to 6.2%, lowest in a long time vs 9% in Mar ’09 and 13.1% in ’03

Negatives

1)Philly mfr’g lackluster 2)Jobless Claims remain too high 3)MBA says purchases fall to 2 mo low and refi’s fall after last week’s 21% jump 4)Housing permits fall to lowest since Apr ’09, slows GDP, Starts rise, we don’t need new homes 5)IP falls for 1st time since June ’09 6)China inflation needs to be tamed 7)II and AAII showing rising bullishness 8)Euro Zone services index falls

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Comments here

Here is this week’s succinct summation

Positives

1) Solid start for Q3 earnings vs expectations
2) Philly Fed 6 mo outlook rises to highest since Apr
3) Home builder sentiment up to 4 mo high
4) Housing starts rise, good for GDP, permits drop, good as we don’t need new homes
5) German IFO at highest since May ’07 and Euro Zone mfr’g index up even with rise in Euro
6) Solid Q3 Chinese GDP growth, PBOC hikes rates, goldilocks
7) Brazil unemployment rate falls to 6.2%, lowest in a long time vs 9% in Mar ’09 and 13.1% in ’03

Negatives

1) Philly mfr’g lackluster
2) Jobless Claims remain too high
3) MBA says purchases fall to 2 mo low and refi’s fall after last week’s 21% jump
4) Housing permits fall to lowest since Apr ’09, slows GDP, Starts rise, we don’t need new homes
5) IP falls for 1st time since June ’09
6) China inflation needs to be tamed
7) II and AAII showing rising bullishness 8)Euro Zone services index falls

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I did an interview with Wally Forbes a few weeks ago — its on Forbes.com, along with specific stock recommendations.

Here’s an excerpt:

We recently put out a commentary that quotes Ned Davis’ book Being Right or Making Money that originally came out in ’91. Our comments stimulated a lot of e-mails from people telling me, “The Fed is debasing the currency. And the stimulus is bad. And zero interest rates are bad.”

And there’s every reason why the world is going to hell in a handbasket. But meanwhile the market is up 80% plus over the past two year, and staying up there. So if you want to be an armchair policy wonk, go ahead. But if your job is to identify opportunities and risks in the market, you have to recognize the line that I think I used in the commentary: When the Fed is pouring fuel on the fire, when they send their minions out to discuss the Greenspan put, some people rush for the fire hoses.

But my job is to go grab some marshmallows and sticks and head over to the Boy Scout jamboree campfire. If your job is a policy analyst, well that’s a different situation. But if you’re an asset manager, you can’t fight the tape constantly. You have to recognize when massive Federal Reserve liquidity is going to goose the market. But I’m not going to argue with people who say this ends badly. Hey, every bull market eventually ends badly. You know, I can’t tell you if it’s a 25% correction or down 1,000 [points]. But you know what? You’ll have plenty of time to make that decision. Right now, as long as they are giving us an opportunity to make some hay, you have to participate while the sun is shining.

Wally is always a fun interview.

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Source:
Stocks To Ride Ben’s Latest Bubble
Wallace Forbes
Forbes, 10.20.10
http://www.forbes.com/2010/10/20/toll-brothers-fed-intelligent-investing-verizon.html

Fantastic chart, very consistent with my view that politics has been utterly corrupted by dirty corporate money.

If you want to understand why the Banks and investment houses are so influential in DC, why Financial Regulation was so milquetoast (or why Deregulation occurred in the first place), look no further:

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click for ginormous chart

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Source:
Top Corporations Aid U.S. Chamber of Commerce Campaign
ERIC LIPTON, MIKE McINTIRE and DON VAN NATTA Jr.
NYT, October 21, 2010   
http://www.nytimes.com/2010/10/22/us/politics/22chamber.html