10 Thursday PM Reads

My afternoon train reads:

• My interview with Wally Forbes: Buy ConocoPhillips, Keep An Eye On Walmart And EMC (Forbes)
• Why the Next Jobs Report Matters More Than the Last (Economix)
Farrell: 6 buys, 7 sells for the new Age of Austerity (Market Watch)
• Debunking goldbugs (FT.com) see also Gold Poised for Worst Monthly Run in 11 Years on Europe (Bloomberg)
• SEC: Taking on Big Firms is ‘Tempting,’ But We Prefer Picking on Little Guys (Rolling Stone)
• Facebook Fed The ‘Ignorant’ Masses An IPO Lite (Forbes) see also In case you still thought markets were efficient… (Mercenary Trader)
• The End of RIM: How BlackBerry Crumbled (The Fiscal Times)
• Freaks, Geeks and Microsoft (NYT)
• David Lynch (Animated Albums)
• Carl Sagan Tribute Series (YouTube)

What are you reading?


Source: Bar Chart

LPS: Foreclosures Sales declined in April, FHA foreclosure starts increased sharply

Note: U.S. District Court Judge Collyer approved the consent order for the mortgage servicer settlement on April 5th, and so far there hasn't been a significant impact from the agreement on delinquencies or foreclosure sales.

LPS released their Mortgage Monitor report for April today. According to LPS, 7.12% of mortgages were delinquent in April, up slightly from 7.09% in March, and down from 7.97% in April 2011.

LPS reports that 4.14% of mortgages were in the foreclosure process, unchanged from March, and also unchanged from April 2011.

This gives a total of 11.26% delinquent or in foreclosure. It breaks down as:

• 1,927,000 loans less than 90 days delinquent.
• 1,595,000 loans 90+ days delinquent.
• 2,048,000 loans in foreclosure process.

For a total of 5,570,000 loans delinquent or in foreclosure in April. This is down from 6,388,000 in April 2011.

This following graph shows the total delinquent and in-foreclosure rates since 1995.

Delinquency Rate Click on graph for larger image.

The total delinquency rate has fallen to 7.12% from the peak in January 2010 of 10.97%. A normal rate is probably in the 4% to 5% range, so there is a long ways to go.

The in-foreclosure rate was at 4.14%, down from the record high in October 2011 of 4.29%. There are still a large number of loans in this category (about 2.05 million).

Foreclosure startsThe second graph shows foreclosure starts by investor.

From LPS: "[O]verall foreclosure starts were down 2.6 percent in April, FHA foreclosure starts spiked significantly, jumping 73 percent during the month. The rise was driven primarily by defaults in 2008 and 2009 vintage loans, though all FHA vintages saw increases in foreclosure starts in April, despite that fact that the more recent vintages – from 2009 forward – have shown improved relative credit performance."

The third graph shows the FHA performance by vintage.

FHA VintageThis graph shows the 90%+ delinquency rate by month since origination (number of payments).

The worst performing loans were in 2006, 2007 and 2008. The best performing loans were made in recent years.

However, as the last graph shows, the FHA made a huge number of loans in 2008, 2009 and 2010. According to the Case-Shiller national index, prices have fallen about about 18% since mid-2008, putting most of those FHA borrowers "underwater" on their mortgages. The price declines since mid-2009 and mid-2010 are much less.

FHA Originations From LPS: “In 2008, when the loan origination market virtually dried up, the FHA stepped in to fill the void,” explained Herb Blecher, senior vice president for LPS Applied Analytics. “FHA originations tripled that year, and increased to five times historical averages in 2009. High volumes like that, even with low default rates, can produce larger numbers of foreclosure starts. That represents a lot of loans to work through – the 2008 vintage alone represents some $14 billion of unpaid balances in foreclosure, and the overall FHA foreclosure inventory continues torise.”

There is much more in the Mortgage Monitor report.

Michael Crimmins: Jamie Dimon’s Illegal “Cookie Jar”

By Michael Crimmins, who has worked on risk management and Sarbanes Oxley compliance for major banks

The bad news just keeps on coming in the JP Morgan CIO scandal. We’re getting a lot of salacious detail, but the media manages to continue to miss the bigger picture.  On Tuesday, David Henry at Reuters coined a wonderful catch-phrase that should prove difficult for JPMorgan to explain away to its depositors and to the rest of us -  “JPMorgan dips into cookie jar to offset ‘London Whale’ losses”.

The main point of the article is that the ‘cookie jar’ contains $8 billion of unrealized gains from the profitable investment of excess deposits. The tricky bit for JPM, its depositors and inquisitive regulators, investors, external auditors, and disgusted citizens  is explaining why $1 billion of that reserve was gifted to the CIO desk to cover its trading losses. Trickier still is Dimon’s pledge of the entire $8 billion to cover any further CIO trading losses. Henry reports:

‘JPMorgan Chase & Co has sold an estimated $25 billion of profitable securities in an effort to prop up earnings after suffering trading losses tied to the bank’s now-infamous “London Whale,” compounding the cost of those trades.’

The story estimates that JPM sold $25 billion of the Investment portfolio assets to generate the initial $1 billion gain used to offset the $2 billion losses Dimon disclosed in the May10 press conference. There is no word yet on the size of the losses JPM has incurred since the announcement.

The size of the investment portfolio was reported as $381 billion as of March 31, 2012. At that time the $381 billion portfolio contained underwater assets of $84 billion. Those underwater assets were worth $1.4 Billion less than JPM paid for them. JPM can’t sell them without realizing additional losses, so they will probably not be touched.  That leaves investments of $297 billion that can be sold at a profit. The unrealized profit on these items was reported as $9.8 billion as of March 31, 2012. Since then JPM has liquidated assets in the portfolio to realize the $1 billion gain used to offset the CIO trading loss. Based on Reuters estimates the balance of the profitable trades remaining in the portfolio is $272 billion and the remaining unrealized gains available to cover additional losses are $7.4 billion.

As a result of the sale, at least 12% of the total investment account reserves that were, in theory, set aside to protect depositors in the event of a market shock, have been raided to prop up the second quarter bottom line. But that assumes you buy the Dimon’s “excess deposits” party line. As Amar Bhide pointed out, much of these funds are actually hot international money, not the cash reserves of retail investors and ordinary businesses. So no matter how you look at this, it isn’t pretty. Either you have JPM raiding deposit reserves to preserve trader and executive pay, or you have Dimon  misleading investors and regulators in depicting a profit-driven, risk-seeking trading unit engaged in “hedging” on behalf of “depositors.”,

The Reuters article focuses on the stupidity of the decision to sell Investment account assets from a tax perspective but barely address the larger long term problems facing the bank.

The financial industry has gone through periods in the past when banks cashed out good assets to cushion losses, said former SEC Chief Accountant Turner. It happened during the U.S. savings and loan crisis in the 1980s, abated during a period of tougher regulatory scrutiny and fewer losses, and then came back during the latest financial crisis.

But the costs are significant. In statements about the latest losses, Dimon has been careful to emphasize the disadvantage of paying more taxes, said Chris Kotowski, an analyst at Oppenheimer & Co.

“I think he was trying to tell you, ‘Don’t expect us to offset all of these losses,’” Kotowski said.

Turner pointed to the elephant in the room, but didn’t address it directly, and Reuters’ David Henry didn’t follow his lead.

Turner is pointing out that one only raids the cookie jar in times of systemic stress. JPMs inclusion of the Investment account assets as part of the trading portfolio defies both accounting norms and historical precedents.

And Kotowski’s conclusion is wrong.  ‘What he was trying to tell us’ is that these losses will continue to be buried in the investment account until such time as JPM determines that it is tax efficient to recognize offsetting gains. He has already hinted that these loss-generating CDS positions will take time to unwind, which signals that JPM will make every effort to reclassify the loss-producing hybrid trading-hedges as held to maturity positions against the investment portfolio.

Or until such time as the SEC and DOJ or any other regulator or the PCAOB  or Congress finally have had enough and call JPMs bluff. That time is now!

Why is all This Accounting Detail Important?

Normally, investment account gains resulting from standard Treasury management operations are earmarked for protection of depositors’ accounts. This is ‘boring utility banking stuff‘.

One of the underreported elements of the JPM scandal is that the CIO considered the investment account as part of the CIOs trading portfolio. This is unprecedented in the historical financial statement interpretation of investment accounts and undermines the basic logic underlying the favorable accounting standards treatment for investment account, or Available for Sale assets.

In the pre-crisis era Available for Sale (AFS) portfolios were relatively small and benign and provided Treasurers with a pool of assets they could tap in a systemic emergency without violating either the spirit or the letter of the accounting rules.  Most assets were designated either as trading account assets, which were marked to market, or as “held to maturity” assets, which were booked at historical cost. Treasurers were given some discretion to designate assets as neither, with the understanding that they were intended to be tapped only in emergencies (as Turner pointed out in the Reuters piece).

Post crisis, the reality set in that the banks were loaded to the gills with toxic assets in their trading accounts. A compromise was reached among the regulators, accounting rule-makers and policymakers that the AFS portfolios could be used to house those assets ( i.e super senior tranches of CDO, …etc) that the banks felt they could unwind profitably over time.  The result was a massive transfer of assets from the MTM trading account into the Available for Sale accounts. One major condition was imposed. The changes in the value of the assets would need to be disclosed and recorded as an adjustment to the Equity account. However, the banks were given a great deal of leeway to determine how those assets should be valued while they were parked in the AFS portfolio.

Over time investors stopped paying much attention to the changes in the AFS portfolios. But the CIO offices knew that was where the game was being played and went to town.

So Jamie’s raid on these accounts to cover short term trading losses undermines and abuses the dubious underlying crisis management efforts of the regulators, policy-makers and accounting rule-makers in one fell swoop. Needless to say JPM betrayed the spirit of the US government attempts to salvage the US financial system.

It also violates the letter of the law re SOX: If Dimon knew he was violating GAAP by being so indiscreet as to admit that non-trading assets were available to cover trading losses then his certification was fraudulent. Full stop, He should be prosecuted.

As a result there should be very grave concerns on the part of the SEC and DOJ (and the PCAOB for that matter) that the financial statements covering the periods the CIO was in operation at JPMorgan have been misstated. At its most basic level, it begs the question, if investment account assets were sold to cover trading account losses in 2012, then why weren’t they reported as trading account assets in previous reports? Additionally, if the assets were managed as part of a trading strategy in prior periods then the prior period reports are also wrong.

Prior year gains on the CIO portfolio were included in income (and bonuses were paid to individuals on the performance of the assets in the ’trading account’ portion of the  portfolio, in the hundreds of millions), yet corresponding losses on the ‘hedged’ portion of the portfolio booked as investments have been buried in the Investment account and deferred. These embedded losses had not been properly disclosed in prior periods.

On Wed Cardiff Garcia at FTAlphaville reported that this isn’t the first time Jamie Dimon managed  the CIO and investment portfolio as one unified trading portfolio. It looks like he did the same thing at Bank One.

Bank One did not note whether the underlying hedged items increased in value or not to offset this decline, which may reveal one of the pitfalls of using credit derivatives for credit risk management. For instance, there can be an accounting mismatch if the credit derivative is marked-to-market downward, while the loan is kept at book value and can’t be marked up.

Financial statements matter. SOX exists to ensure that CEOs and CFOs understand and accept the consequences if they don’t. The SEC and DOJ and every regulator have the opportunity and incentive to throw Dimon under the SOX bus. What’s the delay?


Die Stunde der Wahrheit für die Eurozone ist gekommen: Amputation oder dauerhafte hohe Finanztransfers?

Deutschland sprengt in der anhaltenden Krise die Eurozone, statt sie als Wachstumsmotor zu kitten. Die EZB hat ihr ohnehin nur kurzfristig und partiell wirkendes Pulver weitgehend verschossen. Alles andere ist Propaganda aus interessierter Seite in Deutschland oder einfach warten bis zu den nächsten Bundestagswahlen. Wenn nicht bald entscheidende Korrekturen erfolgen, darf man wetten, wann Schluß ist.

Bill Black Invited — Than Disinvited — to Brief Congress on Derivatives

We Must Not Speak Uncomfortable Truths to Power: Why I Won’t be Briefing Congress about Derivatives

Posted on May 29, 2012

When I was the Deputy Director of FSLIC, House Banking Committee Chairman St Germain was helping Speaker Wright hold the FSLIC recapitalization bill hostage to extort favors for Texas control frauds, including Don Dixon’s Vernon Savings (which was providing prostitutes to the State of Texas’ top S&L regulator and was building towards having 96% of its ADC loans in default – which is why we referred to it as “Vermin”). The attack on our agency was that we were mad dogs biased against Texas S&Ls and causing the Texas crisis by closing too many insolvent but well-run Texas S&Ls. Our response had many elements, but one of our principal points was that the Texas S&Ls we were closing were typically control frauds. At this juncture, St Germain’s staffers made a mistake. They requested that we testify on a host of issues, but the invite letter had a zinger, premised on an article saying that the Feds were slow to prosecute frauds in the Southwest. The invite specifically called for us to respond and discuss the role of fraud in the Southwest. We used the opportunity to explain the extensive role of fraud in Texas S&L failures.


The day of the hearing, I walked toward the witness table, but was called over by St Germain’s chief of staff. He proceeded to disinvite us from testifying on the grounds that we had filed non-responsive testimony. (We had, of course, responded to every inquiry they made. They simply hated the response because we documented the enormous role that control fraud was playing in causing Texas S&Ls to fail.)

Today, I received definitive word that I had been disinvited from a bipartisan briefing of members of Congress on the subject of financial derivatives. I have deleted the name of the staffer because he is not the issue. The relevant email thread is below.

The member of Congress putting the event together is one of the strongest advocates of the need for banking reform. I have assisted the Member’s staff in the past in such efforts. The Member’s chief of staff called me today. His position is that I was never invited to participate and that it was unfortunate that I booked the flights and put UMKC on the hook for the non-refundable fares and hotel before informing his office that I was accepting their inquiry about participation (as opposed to invitation). He explains that it is impossible physically to have me participate and that the decision not to have me participate has nothing to do with concerns about “balance” or “bank bashing.” I emphasize also that, unlike St Germain’s disinvitation the email thread states an interest in inviting me to speak at future briefings. I hope that such invitations will be made. The Member and the Member’s staff were polite while St Germain’s chief of staff was deliberately rude.

Nevertheless, I think that the Chief of Staff’s phone call to me explaining their view that I was never invited makes my point. We all know that is simple to add a panelist. What is really going on is that things are so toxic in Congress now, and the largest banks are so sensitive to any criticism, that the progressives fear that any criticism of bank practices that will cause the next financial crisis will be considered “bank bashing” and will cause Republicans to be unwilling to participate. The fact that I have a 30 year record of non-partisan service to the nation on banking matters, including service as a banker with the Federal Home Loan Bank of San Francisco, does not count in such a world. We must not speak uncomfortable truths to power. You will see that it is his staff that informed me that the concerns that prevented me from joining the panel were maintaining a “consensus” about the panel’s “balance” and avoiding “bank bashing.”

I remain supportive, of course, of members of Congress reaching out and getting facts about our financial system, so I hope that the Member’s efforts to create a series of bipartisan briefings succeed. Self-censorship, however, is most debilitating form of censorship. A “consensus” that seeks to minimize any criticism of the “too big to fail” banks on the grounds that criticism equates to “bank bashing” is a consensus to play ostrich.

Excerpts from the e mail thread:

Sent: Wednesday, May 23, 2012 5:34 PM
To: Black, William
Subject: Re: Financial Services Panel Series: Derivatives

Mr. Black,

It was nice speaking with you earlier and I thank you for your consideration. Currently, the panel information is as follows:

Financial Services Panel Series: Derivatives Thursday, May 31
2:00 p.m. to 4:00 p.m.
Rayburn 2226

Moderator: – CNBC or Bloomberg


-Wallace Turbeville – Senior Fellow, Demos (Formerly of Goldman Sachs) -John Parsons – Senior Lecturer in Finance, MIT -Nela Richardson – Senior Economic Analyst, Bloomberg Government (formerly of Freddie Mac and the Commodities Futures Trading Commission) -Marcus Stanley – Policy Director, Americans for Financial Reform (AFR) -Chris Young – International Swaps and Derivatives Association (ISDA) -Mark Calabria – Dir. Of Financial Regulation Studies, CATO Institute

Please let me know if you have any questions or suggestions.

From: Black, William [mailto:blackw@umkc.edu]
Sent: Thursday, May 24, 2012 10:28 PM
Subject: RE: Financial Services Panel Series: Derivatives


I am pleased to accept your invitation to participate on the panel. My cell is [redacted]. I’ll be flying in from California. Please send me information on logistics/venue etc. as soon as you have more details.


Best regards,

May 25, 2012 10:36 a.m.

I want to sincerely thank you for your willingness to participate and contribute to the discussion. Unfortunately, we cannot add any additional participants to the panel. In efforts to proceed in a bipartisan manner, we have achieved a nice balance of individuals who will accommodate various points of views on derivatives regulations. Accordingly, adding another participant at this time would disrupt that balance and will spark concerns with our Republican colleagues.

I apologize for any inconvenience this may have caused, but I do hope you will consider joining us for the next panel we are convening to discuss the Volcker Rule. Next week’s panel is intended to be the first in a series and I intend to reach out to you again and Mr. Greenberg.

Thanks again for your assistance and the resources you provided earlier in the week. And I hope you enjoy the Memorial Day weekend.

Best regards,

Sent using BlackBerry

> From: Black, William [mailto:blackw@umkc.edu]
> Sent: Friday, May 25, 2012 02:17 PM
> To:
> Subject: Re: Financial Services Panel Series: Derivatives
> We have already booked the flights and hotel in response to your invitation. Please reconsider.
> This will cause our school a serious loss and me considerable embarrassment after I called in favors to be able to accept.

From: Black, William [mailto:blackw@umkc.edu]
Sent: Friday, May 25, 2012 02:33 PM
Subject: Re: Financial Services Panel Series: Derivatives

FYI, I have testified to Congress five times about this crisis and two of those appearances (once in each chamber) were as the Republican designated witness so I won’t throw off any bipartisan balance — quite the opposite.


Sent: Sun 5/27/2012 11:16 AM

In case you did not receive my voice message I wanted to once again apologize for any incovenience you may have incurred and thank you for your willingness to participate. As I mentioned before, in the time between my initial call to your office and when we spoke last week, I had confirmed the participation of several others who agreed to do so under the understanding that the panel would be bipartisan and non confrontational. Quite frankly, many of the trade associations were hesitant to speak in public because of what they thought would be a public ‘bank bashing.’ So for this initial panel, we have tread carefully because we want Republican participation and we want to keep these forums ongoing. It is my hope that your colleagues and university will understand that we tried to accomodate another participant, but we just could not make it work without disrupting consensus. I will be in touch with you regarding the next panel we are organizing to discuss the Volcker Rule.

Tuesday 5/29/12 10:41 a.m.

Unfortunately, we cannot accommodate an additional participant. I understand and appreciate your experience, but the factors I outlined in the previous email still exist and this change would compromise the consensus we have achieved. I do wish you would have confirmed your availability with me before making arrangements. When we last spoke, it was my understanding that you had to check your schedule first. So I was a little surprised that you were so quickly able to clear your schedule and make flight arrangements before we had a follow-up conversation. In any event, your previous work as a regulator during the S&L crisis is highly noted and I do think your primary knowledge and insight is helpful as Congress and the agencies grapple with the 21st century financial regulation. To that end, I do hope you will consider participation in the follow up panel, and I sincerely apologize for any inconvenience you have incurred.

Bill Black

Fed Watch: Push Comes to Shove

Another one from Tim Duy:

Push Comes to Shove, by Tim Duy: The Spanish banking crisis is forcing another showdown in Europe with the German-led Northern contingent increasingly under siege not just from the South but now from just about everyone else. Spain is under pressure to finance a bank recapitalization, but worries that that path will push them straight into a Troika bailout program. And we all know just how well that has worked for Greece and Ireland and Portugal. And Spain holds real leverage. No one is under the delusion (well, almost no one) that Spain can exit the Euro without significant economic damage throughout Europe. Hence we are seeing increasing pressure on Germany to step-up the timetable to real fiscal integration, starting with a Euro-wide banking rescue using ESM funds. From Bloomberg:

German Chancellor Angela Merkel was besieged by critics for letting the euro crisis smolder, with the leaders of Italy and the European Central Bank demanding bolder steps to stabilize the 17-nation economy.

Italian Prime Minister Mario Monti and ECB President Mario Draghi pushed Germany to give up its opposition to direct euro- area aid for struggling banks. Monti further antagonized Germany by urging a roadmap to common borrowing.

The idea is to let banks tap the funds directly without going through their respective national governments - thus avoiding another Troika bailout disaster. Germany, of course, continues to resist, as this would force them to give up one of their tools to enforce austerity throughout Europe. Perhaps, however, German Chancellor Angela Merkel is starting to break under the pressure:

Merkel put some nuance into the German position today. While promising “no taboos” in attacking the crisis, she floated a timeline of “five to 10 years” for fixing flaws in a currency shared by countries with divergent wealth and attitudes toward taxing and spending.

Of course, Europe doesn't have a 5 to 10 year horizon. I am thinking they have something closer to a 5 to 10 week horizon to get their act together. Something big is going to happen in Europe this summer, and I think the odds of a tail-end outcome are increasing, at both ends of the tail. Either Europe pulls together sooner than the German timeline, or finally blows apart. The middle-ground, muddle-through option looks less attractive each day.

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