Quote of the Day: James Montier

James is an unusually clear eyed analyst:

“In good times, few focus on such ‘mundane’ issues as earnings quality and footnotes. However, this lack of attention to ‘detail’ tends to come back and bite investors in the arse during bad times. There are notable exceptions to this generalization…

Contrary to the silly populist backlash which sees short sellers as rumor mongers and conspirators, they are actually amongst the most fundamentally driven of all the investors I interact with. Rather than being some malignant force within the markets, in my experience short sellers are closer to the accounting police (something the SEC once purported to do!).

Whilst companies often accuse short sellers of lying and conspiracy, it turns out that the accusers are often the guilty party. Owen Lamont from Chicago University has examined the battles between corporates and short sellers in the U.S. between 1977-2002. He found that ultimately it was the shorts that were right; the stocks underperformed the market by a cumulative 42% over three years after the start of the battle.”

-James Montier
Mind Matters: Cooking the books, or, More sailing under the black flag
June 30, 2008

via Welling@Weedon

Category: Data Analysis, Earnings, Short Selling, Trading

My Experience at Indy Mac: Fraud, Corruption, Criminality

Long time readers are familiar with my fascination with antique sports cars. One of my pals, Jan, is a well known Porsche collector who is also affiliated with the International Automotive Appraisers Association (IAAA). Its a hobby for him, and he specializes in the rehabilitation and appraisal of antique sports cars. He has rebuilt and appraised everything from celebrity Bugattis to classic Ferraris to modern supercars.

I call Jan "landed gentry" — he’s owned a major car rental firm (sold it), develops real estate, buys/sells land and houses. He is quasi-retired, leaving him plenty of time to play with his many fine automobiles — and for us to discuss the housing market collapse.

Amongst our many discussions, we have gone over the issue of housing appraisal fraud. So when the IAAA newsletter sent out the tale (below) to its members as a warning against fraud, conflict of interest, and corruption, it got his attention — and he forwarded it to me. His comments were: "This is even worse than the nightmare of corruption you described."

Let me hasten to add that many appraisers were offended by the corruption of colleagues in their industry, especially those greased by the worst elements among mortgage brokers and real estate agents. In 2005, more than 8,000 appraisers — roughly 10 percent of the industry — signed a petition asking the federal government to take action; the White House and Federal agencies demurred, and appraisal fraud continued unabated. Eventually, Phony and Fraudy cut a deal with NYS AG Cuomo to stop enabling the appraisal fraud.

Which brings us to the now defunct Indy Mac, and the below diatribe about the criminality, corruption, and rampant appraisal fraud that was the CountryWide spinoff’s stock in trade.

The original piece was published by Vernon Martin at the Appraiser’s Forum (http://appraisersforum.com). His story is utterly fascinating, and it deserves wider distribution.

Martin was the chief commercial appraiser for Indy Mac from October 15, 2001, to when he was terminated six months later for failing to look the other way or actively engage in fraud. Most of the details below are culled from the public record of his wrongful termination litigation, which was eventually settled in Martin’s favor.

My quick overview of the conflicts, fraud, and criminality at Indy Mac —

Fraud:

• Underwriting loans based on appraised values well above purchase prices;

• Fabricating rent rolls for commercial properties to be appraised;

• Over-stating Construction work as 80% complete versus 15% in actuality;

• Attempting to change discounted cash flow models for subdivisions in order to increase appraised value;

Criminality:

• Attempted intimidation of Appraisers;

• Providing false information to appraisers;

Conflict of interests:

• Appraising a development where the land was being purchasing from David Loeb, IndyMac’s Chairman of the Board;

• On one transaction, the CEO’s father and father-in-law were
commercial construction inspectors for the firm; the loan officer was
the CEO’s brother (a former police officer with no loan experience);

That’s just the overview.

Amazingly, these events took place before the enormous Housing and Construction boom from 2003-06. One is left to imagine just how insane the place must have been during that period. I’d love to find the details, and given the enormous lending losses — $8B and counting — we can only begin to imagine what sort of rampant fraud took place. I hope the FDIC releases a full report of their investigation of the collapse of Indy Mac. (Gee, I wonder how Senator Schumer caused THOSE problems back in 2001? CNBC should know better than to publish trash such as this.)   

You really need to read the entire piece to get a feel as to just how much of a criminal enterprise Indy Mac was before it went under.Is it any surprise the entire firm, and not just any individuals, are under FBI investigation for Fraud?

~~~

These things have a tendency to disappear, so I am capturing a PDF and the text (after the jump) in case it somehow vanishes.

~~~

>

Previously:
Idiots Fiddle While Rome Burns (July 2008) 
http://bigpicture.typepad.com/comments/2008/07/idiots-fiddle-w.html

Source:
My experience at IndyMac
Vernon Martin, Certified General Appraiser
Appraiser’s Forum, 07-14-2008, 12:41 AM

http://appraisersforum.com/showthread.php?t=141764

Appraisal fraud: your home at risk
Appraisers say they’re being pressured by lenders to inflate their estimates of home values
Sarah Max
CNN/Money  June 2, 2005: 9:56 AM EDT
http://money.cnn.com/2005/05/23/real_estate/financing/appraisalfraud/index.htm

Fannie Mae, Freddie Mac agree to new appraisal standards
Walter Hamilton
L.A. Times, March 04, 2008   
http://articles.latimes.com/2008/mar/04/business/fi-appraise4

My experience at IndyMac- General Real Estate, Mortgage, and Economic Discussions – Appraisers Forum PDF  Download my_experience_at_indymac.pdf

IndyMac fraud probe launched; FBI looking into firm, not individuals
Lara Jakes Jordan, The Associated Press 07/16/2008 09:08:13 PM PDT 
http://www.dailynews.com/business/ci_9901941

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