Oct302013
Lenders earning huge profits on fake revenue from can-kicking efforts
The housing bust should have wiped out America’s lenders. Instead, we deemed these institutions Too-Big-Too-Fail, and we pumped billions of dollars into keeping them afloat. Since the emergency cash was not enough, we suspended prudent accounting rules and allowed lenders to report the value of bad loans based on financial models rather than actual market prices. As long as lenders didn’t foreclose, they didn’t need to recognize the loss on their non-performing loans.
But it’s really worse than that.
Lenders quickly realized they could turn this accounting loophole to their advantage in several ways. First, they embarked on an aggressive program of modifying loans to keep borrowers making payments. Rather than accept smaller profits, they modified the terms of these loans to interest-only. This reduced the borrowers payments while keeping lender revenues and profits the same. Second, for those delinquent borrowers that didn’t agree to a loan modification, lenders simply booked the lost income as profit anyway. How could they do this? Since the could model whatever they wanted for accounting services, they assumed house prices would rebound, and they would at some point in the future get back their principal plus the accumulated interest payments they booked as profits. Although this scenario isn’t particularly realistic, it past muster with accounting regulators, so banks eagerly booked this phantom income as profit to boost their financial statements.
Banking regulators did require lenders to increase their loan loss reserves “just in case” they actually recorded a loss. Lenders weren’t happy about this because loan loss reserves are dead money they can’t loan out and make a profit on — or so it would seem. Now that home prices are rising, lenders found a third way to make money on their can-kicking. They are reducing their loan loss reserves and booking that as profit too.
I can’t claim we are a Banana Republic, but we appear to have a Banana Banking System.
Lenders are recording profits on non-performing loans!
They are making money by virtue of not recording losses!
Does this seem right to you? Perhaps it’s time to review the sanity of mark-to-model accounting. Without it, lenders wouldn’t be able to play these games. When losing becomes winning, something is very wrong with our financial system.
Big Banks Are Padding Profits With ‘Reserve’ Cash
As Revenue Slows, Some Banks Increasingly Use Loan-Loss Reserves to Boost Income
Michael Rapoport — Updated Oct. 25, 2013 7:23 p.m. ET
Federal regulators have warned banks to be careful about padding their profits with money set aside to cover bad loans. But some of the nation’s biggest banks did more of it in the third quarter than earlier this year.
J.P. Morgan Chase & Co., Wells Fargo & Co., Bank of America Corp. and Citigroup Inc., the nation’s largest banks by assets, tapped a total of $4.9 billion in loan-loss reserves in the third quarter, up by about a third from both the second quarter and the year-ago quarter after adjustments. All the banks except Citigroup showed significant increases compared with the second quarter.
Accounting rules allow the money to flow directly into profits. In all, it made up 18% of the banks’ third-quarter pretax income excluding special items, the highest percentage in a year, according to an analysis by The Wall Street Journal.
I give them credit for creativity. They are taking lemons and making lemonade — it’s nothing I want to drink though. If it weren’t for the implicit backing of our government and their too-big-to-fail status, these banks would be very poor investments.
The moves come at a time when banks are being slammed by revenue slowdowns. Big commercial banks have suffered from a double whammy of plunging mortgage lending and trading activity. Third-quarter revenue for the four banks dropped an average of 8% from the previous quarter. The KBW Bank Index has declined 2% in the past three months, while the S&P 500 stock index has gained 4% over the same period.
The accounting maneuvers show how banks can prop up earnings when business hits a rough patch.
“You’ve seen reserve releases improve the stated numbers,” said Justin Fuller, a Fitch Ratings analyst. “Going forward, I think there’s fewer levers to pull for the banks.” …
They could always go into vice. At least those are cash businesses where nobody lies about their accounting.
The banks justify the releases. They cite improvements in credit quality and economic conditions—which make it less necessary for them to hold large amounts of reserves as a cushion against loans that go sour—and they say they are following accounting rules that require them to release funds as losses ease.A Bank of America spokesman said “the significant impact in credit quality we’ve seen in the last 12 months” has driven the reserve releases. J.P. Morgan, Wells Fargo and Citigroup all pointed to previous comments their top executives recently made indicating that reserve releases were merited because of factors like improving credit quality and the recent increase in housing prices.
The sophistication and brazenness of the ways lenders rob and pillage the US economy are remarkable. They don’t need to justify anything since they’ve bought off all the politicians who might do something about it.
But the Office of the Comptroller of the Currency, which regulates nationally chartered banks and federal savings associations, is reiterating warnings to banks about overdoing it.
In a statement to the Journal, Comptroller Thomas Curry said the OCC is monitoring banks’ loan-loss allowances “very closely” and that “we continue to caution banks not to move too quickly to reduce reserves or become too dependent on these unsustainable releases.” He didn’t comment specifically on the banks’ third-quarter releases, but said OCC examiners “will continue to challenge allowances on a bank-by-bank basis if necessary.”
I imagine the banks are concerned about the big bad regulator, right? What’s the worst they could do?
If the regulator finds problems with a bank’s reserves, it can issue a “matter requiring attention,” a specific finding of a deficiency that a bank must address, an OCC spokesman said. The agency has thousands of such findings outstanding on a variety of subjects, but the OCC spokesman wouldn’t say how many, if any, were related to banks’ reserve releases.
In other words, the regulators will do absolutely nothing.
Mr. Curry has been vocal on the issue for more than a year. In September 2012, he called it a “matter of great concern,” warning banks that “too much of the increase in reported profits is being driven by loan-loss-reserve releases.”
Last month, Mr. Curry said in a speech that when economic growth is slow, as it is now, banks might take more risks to maximize their returns, and so it is “particularly important” they maintain appropriate reserves. While some level of reserve releases is “certainly warranted,” he said, the ease of boosting earnings through the practice “has proved habit-forming” at some banks, though he didn’t single out any specific institutions.
Ordinarily these banks would be singled out by the market, and their stock prices would plummet. But since they are all too-big-to-fail, nobody cares.
Mr. Curry said his previous concerns initially seemed to get banks’ attention, and reserve releases temporarily eased, but that was “an anomaly.” Since then, he said, the releases have increased again, despite “loosening credit underwriting standards” that suggest banks are facing higher risks.
Why should the banks care what this bureaucrat says or does?
Bankers say current accounting rules essentially compel them to release reserves when loan losses ease, because the rules use past and current loan losses as the criteria for determining the proper level of reserves. James Dimon, J.P. Morgan’s chairman and chief executive, has been particularly vocal on the issue—at one point in 2012, he said that, while the bank wants to be conservative on its reserves, “the accountants look at a whole bunch of numbers. They make you take it down. So we had to take it down.”
The accountants made them do it? Give me a break.
But critics said banks have more discretion than that, and rule makers at the Financial Accounting Standards Board have proposed changes that would require banks to recognize losses based on expectations of further losses. Such a move would lead banks to record loan losses sooner and set aside reserves more quickly, analysts say.
Those potential changes are still pending, and Mr. Curry said in his speech last month that he supports the “thrust” of the FASB proposal.
These changes will remain pending forever. There is little or no chance of mark-to-fantasy accounting going away any time soon. As long as banks are potentially exposed to hundreds of billions of dollars in losses due to their borrowers being hopelessly underwater, regulators will not pressure banks to change their ways.
There is a reason these accounting rules are important. The integrity of our banking system is no small matter. If you need a reminder, I suggest you watch the video below.
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…I believe that banking institutions are more dangerous to our liberties than standing armies… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
Thomas Jefferson
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[idx-listing mlsnumber=”PW13218711″ showpricehistory=”true”]
5626 SPRAGUE Ave Cypress, CA 90630
$620,000 …….. Asking Price
$706,000 ………. Purchase Price
4/25/2007 ………. Purchase Date
($86,000) ………. Gross Gain (Loss)
($49,600) ………… Commissions and Costs at 8%
============================================
($135,600) ………. Net Gain (Loss)
============================================
-12.2% ………. Gross Percent Change
-19.2% ………. Net Percent Change
-1.9% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$620,000 …….. Asking Price
$124,000 ………… 20% Down Conventional
4.28% …………. Mortgage Interest Rate
30 ……………… Number of Years
$496,000 …….. Mortgage
$123,493 ………. Income Requirement
$2,449 ………… Monthly Mortgage Payment
$537 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$129 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$75 ………… Homeowners Association Fees
============================================
$3,190 ………. Monthly Cash Outlays
($477) ………. Tax Savings
($680) ………. Principal Amortization
$192 ………….. Opportunity Cost of Down Payment
$98 ………….. Maintenance and Replacement Reserves
============================================
$2,322 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,700 ………… Furnishing and Move-In Costs at 1% + $1,500
$7,700 ………… Closing Costs at 1% + $1,500
$4,960 ………… Interest Points at 1%
$124,000 ………… Down Payment
============================================
$144,360 ………. Total Cash Costs
$35,500 ………. Emergency Cash Reserves
============================================
$179,860 ………. Total Savings Needed
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I knew the banks were padding profits with loan loss reserves, but I didn’t know this: “for those delinquent borrowers that didn’t agree to a loan modification, lenders simply booked the lost income as profit anyway.”
Do you have a link?
Also, are the banks using the reserves the Fed created through QE???
Banks book income on phantom earnings
Phantom Revenues
Some commercial banks have created a mortgage for homeowners and investors that has raised concerns in the banking industry and the investment community. It is the option adjustable rate mortgage or “ARM.” In an option ARM, the mortgagor has four monthly payment options; for example:
minimum payment, which doesn’t cover interest changes (resulting in the principal growing each period and creating negative amortization);
interest only, with no interest added to the principal balance;
regular (interest plus principal) payments on a fully amortizable 30-year loan; and
regular (interest plus principal) payments on a fully amortizable 15-year loan.
Because the option ARM is attractive to cash-strapped home buyers and investment-return buyers, most mortgagors chose the minimum payment option. Under that option, the interest rate (which is growing each month) adjusts the loan balance. At some point, the loan principal is reset and a new amortizable balance is set over the 30-year term, resulting in a revised mandatory repayment amount that can readily be three or four times the original monthly payment.Of concern to bank regulators and those investing in commercial bank stocks is the treatment of such loans by the mortgagees. Under existing GAAP, the mortgagee may book revenue on the option ARM at the fully amortized amount, despite the fact that the mortgagor is only paying the minimum amount (the negative amortization case). This booking of “phantom” future revenues is the disturbing result of option ARMs.
EXAMPLE
Mr. and Mrs. Smith enter into a $500,000 mortgage on a $550,000 Florida condominium. It is an option ARM and permits the Smiths, as mortgagors, to pay a minimum monthly amount of approximately $1,600. This does not result in the payment of any principal or the full amount of monthly interest on the 30-year term loan.
The fully amortizable monthly payment for the mortgagors is closer to $4,600, or about an additional $3,000 per month. The Florida bank books the interest portion of the $3,000 that it doesn’t receive as deferred interest revenue (many would say “phantom” revenue). At some point in the negative amortization process, the loan balance resets and the mortgagors must pay the new monthly amount of $4,600. However, in the Smiths’ case, the loan is “upside-down”; that is, the value of the investment condominium (because of a rapidly changing real estate market) is less than $500,000, so foreclosure is their only option.
If the commercial bank has a significant portion of its loan portfolio in such option ARMs, with a rising money market interest rate and declining real estate values, it is a prescription for trading losses. Such affected banks will follow GAAP and book the phantom revenues, increase earnings, and then move the non-performing option ARM mortgages to the held-for-sale marketable classification and, eventually, to collection agencies.
US Banks Reporting Phantom Income on $1.4 Trillion Delinquent Mortgages
The giant US banks have been bailed out again from huge potential writeoffs by loosey-goosey accounting accepted by the accounting profession and the regulators.
They are allowed to accrue interest on non-performing mortgages ” until the actual foreclosure takes place, which on average takes about 16 months.
All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a resullt, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off gthe books of the banks.
This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, among hundreds of other smaller institutions, can report interest due them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed.
Ultimately, these banks face a potential loss of $1 trillion on nonperforming loans, suggests Madeleine Schnapp, director of macro-economic research at Trim-Tabs, an economic consulting firm 24.5% owned by Goldman Sachs.
The potential writeoffs could be even larger should home prices continue to weaken, placing more homes in the nomnperforming category on bank balance sheets.
About 6 million homes are still at risk, according to Schnapp, and at least 10% of them are 25% underwater, meaning their market value is 25% less than the mortgage– but the owners are still paying interest to their banks.
Mortgage applications shoot up 6.4%
Mortgage applications leaped higher for the week ending Oct. 25, increasing 6.4% from a week earlier, the Mortgage Bankers Association said Wednesday.
The refinance index jumped 9%, while the purchase index grew 2% as refinance applications ticked up.
The refinance share of mortgage activity escalated to 67% of total applications, which is the highest level since June 2013.
The average contract interest rate for a 30-year, fixed-rate mortgage with a conforming loan limit dropped to 4.33% from 4.39%.
Meanwhile, the 30-year, FRM jumbo fell to 4.36% from 4.43%.
The average 30-year, FRM backed by the FHA sunk to 4.06% from 4.15%, and the 15-year, FRM dropped to 3.42% from 3.51%.
The 30-year, FRM with a conforming loan balance, the jumbo loan and the 15-year, FRM all fell to their lowest levels since June 2013.
This was expected because the week prior included Columbus Day, a banking holiday. Steadily declining interest rates aren’t hurting either though.
I think we will see a continued increase in applications over the normally dead winter months if interest rates remain low.
Commentary: Investors Still Flooding the National Housing Market
Investors remain a crucial factor in the U.S. housing market. Both large institutional and smaller “mom and pop” investors have been very active purchasing homes at a steep discount, primarily in housing-bust markets that have seen dramatic decreases in prices over the past several years.
RealtyTrac recently released its September Residential and Foreclosure Sales Report, reporting that nearly half of the home sales in September were all-cash transactions, signaling significant investor presence. This proportion is up significantly from 40 percent in August and 30 percent in September 2012.
While all-cash purchases and institutional investors usually go hand-in-hand, RealtyTrac reports that institutional investors (defined by the firm as purchasing 10 or more properties in the last 12 months) accounted for 14 percent of sales in September, the highest percentage since the company’s data tracking began in January 2011.
While RealtyTrac’s definition of institutional investors certainly captures the larger institutions purchasing houses in bulk, we consider the all-cash share of purchases a better gauge for non-occupier home purchase activity, since smaller investors that purchase one home at a time, repair and remodel it, offer it for re-sale, and then repeat the process will generally not fall into the 10-plus purchases per year category but often purchase all-cash.
Mortgage refinancing projected to plunge in 2014 as rates rise
Is this the end of bargain mortgage rates?
Home lending will fall by a third next year as interest rates rise, a mortgage industry group says in a new forecast.
The Mortgage Bankers Assn. said Tuesday that it expects to see $1.19 trillion in new mortgages written during 2014, down 32% from $1.75 trillion this year.
While loans made to purchase homes are expected to rise by 9%, refinance originations could tumble by 57%, the trade group projects.
Jay Brinkmann, the group’s chief economist, said all-cash home purchases by bargain-hunting investors – a huge driver of home sales the past few years – are expected to taper off next year. That means a greater share of purchases will be financed with mortgages.
Sen. Warren sounds the alarm on irresponsible housing reform
Sen. Elizabeth Warren, D-Mass., outlined five key steps the mortgage market must take to achieve housing finance reform without disrupting the entire system.
While speaking at the Mortgage Banker’s Association 100th Annual Convention and Expo, Sen. Warren made it crystal clear to a massive crowd that reform is ‘absolutely necessary.’ Yet, she urged Congress to act carefully, saying any hiccup during the creation process will hit middle-class taxpayers the hardest.
“No politics here — we just need to focus on getting housing finance right,” the Senator stated.
As a result, Warren has outlined five initiatives that she claims will address moral hazard risk while preserving the good aspects of the pre-crisis housing finance system. She struck a more populist tone by suggesting there’s a definite need to scale back the influence of Fannie Mae and Freddie Mac, replacing them with a privately financed guarantee for whatever entity takes over the enterprises.
The guarantee will be limited and conditioned on private capital occupying significant first loss position — making the 30-year fixed mortgage broadly available.
Additionally, market participants need to be adequately regulated, the CFPB architect said.
“It is essential that originators have adequate incentives to access the ability of borrowers to repay their loans,” Warren expressed.
She added, “The QM and the proposed QRM rules are a critically important start.”
The market also needs to solve the servicer and trustee issues that emerged during the crisis.
Aligning the interests of servicers, trustees and investors in both the guaranteed and private-label market is essential, impacting the size and depth of any housing downturn, the senator said.
Furthermore, the new system should not exacerbate too-big-to-fail issues by increasing the competitive advantages the mega banks have over other institutions, Warren noted.
“A housing market dominated by a handful of Too Big to Fail institutions would reduce access to mortgages in rural and poorer urban areas,” she said. “It would also increase systemic risk and reduce innovation and customization in the primary market.”
Finally – and most importantly – the portion of the secondary market that is government-guaranteed needs to serve the entire primary market, the senator stipulated.
Given that 70% of loans are sold into the secondary market – if that market isn’t interested in these loans – originators will be less likely to write these loans initially, Warren warned.
The main takeaway from Warren’s speech is the $10 trillion housing market impacts every American, and it’s not sustainable in its current form.
“Housing finance reform is a complex puzzle, and it will take a lot of work from a lot of people to make sure the pieces fit correctly,” the Senator concluded.
MBA economists predict mortgage market taper
It may be sunny in Washington D.C., the site of the Mortgage Bankers Association 100th Annual Convention & Expo, but predictions by the host’s economists on mortgage originations turned very gloomy during a group breakfast with the press.
The MBA told journalists over plates of eggs, bacon and sausage that it would revise upwards its predictions for 2013 mortgage originations to $1.7 trillion from $1.6 trillion.
But the good news ended there.
The $1.08 billion in refinances will drop to $463 billion in 2014. The purchase originations will only rise from $661 billion to $723 billion, according to data provided by the MBA.
The MBA believes rates will keep pushing upward, going well above 5%, and remain that way through 2015. This will place downward pressure on refinances, leaving a gap that purchase mortgage originations can’t fill.
“The mortgage market is tapering, even if the Federal Reserve is not,” said MBA chief economist Jay Brinkman, in reference to the Fed buying large volumes of mortgage-backed securities. “If the Fed continues the pace of $40 billion a month, they will be buying in excess of 50% of every mortgage in the country.”
The news comes amid reports that the Federal Reserve would do better holding these mortgages to maturity rather than selling. However, it is widely predicted the Fed will sell early next year, in order to reduce its record balance sheet of nearly $4 trillion.
Michael Fratantoni, vice president of single-family research and policy, said jobs remain a concern, and that not having one is a primary reason Americans aren’t buying homes. And, the numbers may not be telling the whole story.
People have effectively stopped looking for work in many cases, it’s the “discouraged worker” phenomenon,” Fratantoni said. “You won’t see a huge re-entry of people into the job market.”
Excellent post.
Essentially, what we have is a financial system whereby a massive delusion (QE era) is being built upon a foundation of pre-existing delusion that sustains a populace who has been manipulated (dumbed-down) into thinking that the basis of the model ‘getting richer by getting poorer’ is actually beneficial to them. Sad really.
The financial elites have figured out a way to get rich while losing money. It’s a win-win for them.
IR, very informative article, thanks.
What particularly bothers me is that bank execs bonuses are largely based on bank profitability.
I will give 100% probability that the $$ received in those bonus checks aren’t “phantom” dollars.
What a complete and utter scam the US (and probably global) banking system has become.
Those bonus dollars were very real. Further, since stock options are also part of their compensation package, and since manipulating earnings drives up stock prices, it shouldn’t be too surprising banking executives are juicing their earnings this way.
this shit would never fly in a free market with sound money.
all these regulations and it is still a steaming pile of fraud. hell, the regulations license the fraudulent accounting. such folly
Will auditing really change anything? Either way it’s going to fun to watch.
RAND PAUL SAYS HE WILL BLOCK YELLEN’S NOMINATION AS FED CHAIR UNLESS THE SENATE VOTES ON THIS
Sen. Rand Paul (R-Ky.) told Senate Majority Leader Harry Reid (D-Nev.) Tuesday that he will move to block Dr. Janet Yellen’s nomination as the next Federal Reserve Chair unless the Senate votes on his legislation which allows the Fed to be audited
“I am writing to convey my objection to floor consideration of the nomination of Dr. Janet Yellen to Chair the Board of Governors of the Federal Reserve without also considering legislation to bring much-needed transparency to the Fed,” Paul said in a letter to Reid.
‘[I] will object to any unanimous consent agreement or waiver of any rule with respect to the noimination of Dr. Yellen without a vote on S. 209,” Paul continued. “I know you have been a supporter of similar legislation in the past, and I hope that we can work together to pass this important legislation.”
The bill in question, the “Federal Reserve Transparency Act,” would allow the Government Accountability Office to audit the Federal Reserve
“Will auditing really change anything? Either way it’s going to fun to watch.”
Will it change anything. The hope in me hopes that a bit of education on how much power and secrecy the Fed operates with and under will open the voter’s eyes. The cynic in me thinks, “Nah, people don’t want to acknowledge anything that says they are not entitled or threatens their economy, not matter how fraudulent.
To be clear, Rand Paul is not saying that he will block the nomination if the bill does not pass. He just wants a vote, in the hopes that people can see how corrupt their senator is or isn’t. Will people actually care? I dunno.
The largest campaign contributors to the senators who would vote on the Fed bill will tell their senators to vote ‘NO’.
it will change nothing. what we have is voter deficiency. they have been counter-educated to accept the fraudulent money, fraudulent accounting, and fraudulent interest rates as their lifeboat.
“Of all tyrannies a tyranny sincerely exercised for the good of its victims may be the most oppressive”
“I can’t claim we are a Banana Republic, but we appear to have a Banana Banking System.”
It certainly seems that way. As I was signing my 15 page note on my mortgage this week, I was struck by the amount of boilerplate T&Cs the bank was more or less shoving down my throat. All of this legalese is standard for every home loan, and is absolutely non-negotiable – if you want the loan, that is.
Reading through the clauses is like reading a housing bubble history. Each of those clauses was there because some borrower did something, or Congress passed some rule in response to the financial crisis.
I commented to the notary that it seemed a little unfair that I had accept their T&Cs without being able to negotiate. Her response, predictably, was that they had the money, so they get to make the rules! I shit you not. She actually said that to me! My jaw hit the floor.
I considered trying to explain to her that the banks don’t actually have money, they are in fact insolvent if not for the mark to model accounting rules circa 2009. I briefly considered mentioning that banks don’t actually have money, they have first access to money and a government granted license to leverage the small amount of fictitious reserves to the sky. In fact, I am the one with the money, in the form of future earnings that makes the entire transaction possible, and yet I have no negotiating power? WTF?
I didn’t say anything, of course. I mean, what is the point? She just wanted me to sign as quickly as possible so she could earn her fee and get home. So, I just made her watch me for the next hour as I read through every sentence. It’s the little things in life that make it so sweet…
” I briefly considered mentioning that banks don’t actually have money, they have first access to money and a government granted license to leverage the small amount of fictitious reserves to the sky. In fact, I am the one with the money, in the form of future earnings that makes the entire transaction possible, and yet I have no negotiating power?”
Does it ever occur to us that our earnings and our potential earnings no longer belong to us? Our current government considers our earnings and our assets to belong to the state and they have the ability to tax or confiscate it at any time. Just something to think about.
Thems fight’n words.
From where I sit, it has already happened, and except for a few Americans that are labeled ‘extremists’, no one is fighting.
fait accompli
bread and circus still flow, thus no fight.
Governments have always had claims on future earnings and assets. Think back to feudal lords of the middle ages. Whatever you made belonged to them. If you were fortunate, they would leave you enough to survive from year to year. If not, they really didn’t care.
Democracy helped facilitate a middle class, and our founding fathers strongly embraced individual freedoms and the right to own property with limited government interference and confiscation, but everyone must tolerate some amount of this if we are to have a working government and the benefits that come from it.
I would disagree that democracy facilitated either a middle class or individual freedoms or limited government interference or confiscation. Democracy is mob rule and the founding fathers knew it. It is/was the Constitution that facilitated the former listed values and it was adulation of democracy that corrupted our Constitution. Our great country was founded as a Constitutional Republic, not a democracy.
the economic system called capitalism is what created a middle class. giving the mob democratic license to subsidize/regulate economy is what has destroyed it.
Capitalism certainly helped create a middle class, but what was really necessary was a limit on the powers of the ruler. As long as a monarch has absolute power, they own and control everything, and the middle class only gets what the Monarch allows them to have. Even during the middle ages, Monarchs would tolerate the Jewish merchants (the only middle class) because they valued the commerce these merchants brought to the kingdom. The Monarch was limited by his own desires for increased commerce. Of course, these Monarchs often capriciously changed their minds and took the wealth of the middle class anyway.
The broader point is that governments, whatever their inner workings, have always had claims to future earnings and assets of the populace. The more limited the powers of government, the more future earnings remain in the hands of the citizens. As our central government grows in power, taxes will inevitably increase, and the claims to future earnings and wealth of the people will increase along with it.
Once you understand that the housing market is very interest rate sensitive, you are not surprised when buyers perk up at an off time of year if interest rates drop. This report gets it all wrong by suggesting the cause was the government shutdown.
Falling Interest Rates from Fed Fake Bringing Buyers Back to Market
This week, Redfin’s homebuyers surprised us: They came back. In the aftermath of the shutdown and debt ceiling debacle, a storm of news media and economists tallied the damage done to consumer confidence and predicted that anxious Americans would spend less through the New Year. In the housing market, however, these predictions aren’t panning out.
Indeed, buyers paused their search during the government shutdown. However, data from the second half of October suggest that Redfin’s homebuyers are shrugging off Congress’s spending quarrel and getting back to their house hunt.
The year-over-year growth in new clients contacting a Redfin agent increased from 41% to 58%.
The year-over-year growth in clients touring a home increased from 21% to 33%.
The year-over-year growth in clients making an offer on a home increased from 15% to 24%.
This boost in demand is a little puzzling. After all, consumer confidence indicators show that the face-off in Washington left Americans more worried about the economy than they have been all year. Redfin’s recent survey of home sellers, conducted between October 24-29, confirmed the increased anxiety. Thirty-nine percent of respondents cited “general economic conditions” as a concern in October, compared to 25 percent in July.
Occasionally, even Barney Frank gets it right.
Rep. Frank: Revamped Mortgage Rules a ‘Grave Error”
WASHINGTON–An architect of the 2010 Dodd-Frank law is accusing federal regulators of watering down new mortgage rules in the face of opposition from the housing industry.
Former Rep. Barney Frank (D., Mass.) slammed federal regulators for their decision to dial back a proposal to impose new rules on the mortgage-securities market–a key piece of the Dodd-Frank law that bears Mr. Frank’s name.
“This is a grave error, and contrary to the assertion that it would best carry out the statutory intent, significantly repudiates it,” Mr. Frank wrote in a comment letter being sent to regulators Tuesday.
At issue is a proposal from August by six regulators — including the Federal Reserve and Federal Deposit Insurance Corp. — to revamp proposed rules requiring issuers of mortgage securities to retain 5% of the credit risk on their books. Supporters of this requirement, including Mr. Frank, argue it will force Wall Street to be more cautious when packaging assets such as mortgages into securities.
The regulators’ original proposal from 2011 contained a narrow exemption focusing on only high-quality loans, where the borrower brings a 20% down payment and meets other stringent criteria. But a proposal released in August for the so-called “qualified residential mortgage” exemption is much broader and covers most loans being made today.
Mr. Frank castigated the regulators, saying they are heeding a fierce lobbying campaign from the real-estate industry. Mortgage lenders, real-estate agents, home builders, civil-rights groups and consumer advocates formed a group, called the Coalition for Sensible Housing Policy, that lobbied heavily against the original proposal for tighter rules.
“If all of these people were correct in their collective judgment, we would not have had the crisis that we had,” Mr. Frank wrote. “More importantly, what their arguments reflect, and what I believe unfortunately is carried over in proposal, is the view that things must always be exactly as they are today.”
I think Barney is mistaken to believe that a 5% requirement would have prevented the crisis. Many of the large subprime and alt-a lenders held the first loss position on the securities they created. Quite a few lenders formed as REIT’s for this very purpose. It was the reason that outside investors were willing to take the “safer” tranches in the securities, because they figured the lenders wouldn’t put themselves in such a risky position if the loans were destined to go bad. Oops..
To summarize, this has already been tried, and failed miserably.
The lenders who held first-loss positions on these loans had liabilities that greatly exceeded their capacity to pay them. They basically had no capital reserves to cover losses. These were empty shells designed to provide executives a way to divert all the income to themselves while shielding themselves from liability. it worked beautifully for them.
The institutions buying the garbage from these companies had counterparty risk which they ignored. Everyone ignored the risk in the system because they all falsely believed prices could only go up.
Someone, somewhere in the system must carry this risk, and that party must have sufficient capital reserves to cover a significant amount of losses. Counterparty risk should be largely absent from the system for it to work appropriately. The only way to do that is through sufficient capital reserves — not the BS risk modelling variety used by credit default swap companies like AIG in the past.
Realistically, 5% may not be enough depending on the security. It probably is for residential mortgages, particularly if they are further backstopped by mortgage insurance.
I can’t agree with your assessment that 5% capital requirements were attempted and failed.
“… ‘If all of these people were correct in their collective judgment, we would not have had the crisis that we had,’ Mr. Frank wrote. …”
Sure, I can’t argue too much with that, but that’s one half of the coin Mr. Frank, no? If Congress, and especially you, and the regulators (Fed and state) had better collective judgment in the 2000s, then would not have had the crisis that we had, right? Go ahead and keep pointing that finger outward, but lift your other hand and point one at yourself. Thank you.
As expected….
Federal Reserve to continue broad asset purchases
The Federal Open Market Committee once again opted to continue purchasing agency mortgage-backed securities at its current pace to ensure a more sustainable housing economy.
In its most recent statement, the committee said the economy and labor market have made significant progress, but more time and analysis is needed before they will have enough evidence to ensure a pullback in MBS or Treasury purchases is the right move.
For now, the Fed will continue buying agency MBS at a pace of $40 billion per month, while acquiring longer-term Treasury securities at a pace of $45 billion per month.
“Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate,” the committee explained.
Going forward, the committee plans to keep a close eye on incoming economic date until the forecast for the labor market posts greater improvement.
As long as the unemployment rate remains above 6-1/2%, the committee will keep the target range for the federal funds at 0 to 1/4 percent. Fed officials view this exceptionally low range for the federal funds rate as appropriate for now.
Gold Permabull Says Gold Looks Scary Good
Down 19% since the start of this year, gold hasn’t had such a bad year since 1997, when the yellow metal closed down 20.5%. The fall in gold has come even though the Federal Reserve Bank has added nearly $1 trillion into the financial system since December, 2012. Even though the Fed has indicated in September it will continue its $85 billion monthly bond-buying “quantitative easing” policy unabated for some time to come, gold is still down 3% alone in the last two months. Not even the Fed’s easy money seems to help gold longs.
But bullion may be headed towards $1,500 per ounce, according to Bank of America Merrill Lynch’s Head of Global Technical Strategy MacNeil Curry. In a recent note to investors, Curry says moves over the past two weeks were reason for his reversal in outlook, writing:
“We have changed our view on gold from bearish to bullish. The impulsive gains from the 1251 low of Oct-15 and break of the 2m downtrend (confirmed on the break of 1330) say a medium term base and bullish turn is unfolding. We look for an ultimate break of the 1433 highs of Aug-28, with POTENTIAL for a push to 1500/1533 long term resistance. In the next several sessions we would buy a dip into 1309. THIS VIEW IS WRONG ON A BREAK BELOW 1251. For those awaiting additional confirmation of a turn, you need to see a break of 1375 (Sep-19 high & right shoulder off a multi-month Head and Shoulders Top).”
In other words, now that gold has broken above $1,330, Curry sees it next going towards $1,433 and potentially as much as $1,500 to $1,533. To be double sure it’s headed up, wait for gold to trade above $1,375. All bets are off, though, if it drops below $1,251. Bullion traded at $1,357 on Wednesday.
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Wow, that’s just incredible. I wonder if this guy also predicted the epic 35% decline in gold? Hmmm…. Crystal ball, take me back one year to see what this guy was predicting…. mecca lecca hi mecca hiney ho… mecca lecca hi mecca hiney ho…
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Gold Prices Could Peak at $5,000: Permabull
Published: Friday, 21 Sep 2012 | 12:36 PM ET
“We will be focusing in on gold. Ultimately we think gold can trade between $3,000 and $5,000 an ounce going forward,” MacNeil Curry, head of foreign-exchange and rates technical strategy at BAML, told CNBC’s “Worldwide Exchange.”
Sabine Schels, senior director and head of fundamental commodity research at BAML, added: “The best long story for commodity markets right now is gold. In the type of aggressive monetary policy easing environment we have right now, post what the Fed has done with an open-ended QE, and what the ECB has done, you really want to be invested in gold.”
Schels forecast gold prices would reach $2,000 within six months, before rising to $2,400 by the end of 2014.
In a Deutsche Bank report published on Tuesday, analysts Daniel Brebner and Xiao Fu forecasts gold prices will exceed $2,000 in the first half of 2013.
“We believe the growth in supply of fiat currencies [those without intrinsic value] such as the U.S. dollar and dollar-linked currencies such as the renminbi is a key driver, followed by concerns regarding inflation and inflation volatility which could follow,” Brebner and Fu said in the report.
They added that the low interest rate environment meant investing in commodities rather than other asset classes came with negligible opportunity cost.
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Neglible opportunity cost… Uh, huh… Ok…
S&P since 9/21/12: +23%
Gold since 9/21/12: -25%
That’s a -48% opportunity cost for listening to the likes of awgee, matt138, el O, BofA, and Deutsche Bank.
Why do you pick 9/21/12 ?
That is the date of the article when the Deutsche Banke analysts made the irresponsible statement that investing in commodities rather than other asset classes came with negligible opportunity cost.
I understand that, but why would you pick a date of an article that I had nothing to do with to use as an example of opportunity cost attributed to me?
“That’s a -48% opportunity cost for listening to the likes of awgee, matt138, el O, BofA, and Deutsche Bank.”
I have never even heard of the writer of the article that you cite, nor do I have any association with anything he has written. Do you even understand what you are doing?
I can not speak for matt138, el O, BofA, or Deutsche Bank, but I truly doubt that they had anything to do those articles, the dates they were written, or that author’s opinion. If you have a point that stands on it’s own merits, so be it. Say it.
But if all you can do is mislead and misrepresent others, you may want to consider that your misdirection is extremely transparent.
The point is that your views are in line with mainstream commodities analysts, and you have been dead wrong.
”dead wrong” indeed; ie., gold up $152 oz. since your 6/28 ‘call’
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Mellow Ruse says:
June 28, 2013 at 12:43 pm
el numeraire is toast.
My prediction: Gold will bottom at $500 and stay there. What has changed is that we’ve entered the acceleration phase of the decline.
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Gold price
Jun 28 2013: $1190
Oct 30 2013: $1342
Here is a view of mine that you can point to. I have said it before and hold to it. You will never again see $1000 or less per ounce gold.
And that is specific to dollars as you know them today; not after the coming reset.
BTW, the first time I said it was the 3rd time the pog broke through $1000.
My guess is that using hindsight, you can find an even lower ‘opportunity cost’, as you call it, by expanding your repertoire of assets and dates. Or is that the only date and asset that cradles you and makes you feel good?
Why not use 2005 and 2013? Or any date in 2006 and any date in 2013? Or how about any date in 2003 and any date in 2011? Why do you find it necessary to pick dates that correspond to your paradigm? Why do you pick a specific date that fits your preconcieved ideation? What would happen if you used dates that showed an increase?
Choose any date since the gold bubble peaked and match up against any asset class of your choosing. Let me know your findings.
these gold bubble peak quotes are going to be such fodder in several years
Why since what you are calling a peak? Why not before?
And why do you call it a gold bubble? What is the difference between a bubble and a bull market?
Why not choose 2002 to present? It does not fit your paradigm? It does not assuage your ego? Why only your point of view? I did not buy at what you see as a peak. Indeed, I sold and bought a house. I never told anyone to buy on 9/21/12.
See definition of egocentric
“The point is that your views are in line with mainstream commodities analysts, and you have been dead wrong.”
Wow, that is something I did not know. Can you please tell me who these mainstream commodities analysts are? And what exactly is my view that is so inline with these analysts? How have I been dead wrong?
You mean mainstream commodities analysts like this one:
http://online.wsj.com/news/articles/SB10001424052702304470504579163871056778000
Don’t get me wrong. I am perfectly happy to have mainstream commodities analysts agree with me. It would just mean that they were right.
“Why since what you are calling a peak?”
Because that is the point that compounding stopped working in your favor. It was a turning point in the market. Gold has also underperformed the S&P since the stock market bottomed in ’09. That’s going back 4 1/2 years.
“What is the difference between a bubble and a bull market?”
A bubble is characterized by a complete detachment from fundamentals and a sense of euphoria at the market peak.
“Because that is the point that compounding stopped working in your favor. It was a turning point in the market. Gold has also underperformed the S&P since the stock market bottomed in ’09. That’s going back 4 1/2 years.”
It was a turning point, but it may not be the turning point, and I doubt it is.
“A bubble is characterized by a complete detachment from fundamentals and a sense of euphoria at the market peak.”
Darn smartest thing I have ever seen you write, and I could not come up with that myself. But, I would add, that the difference between the two can not be determined by price or price movement and those who are buying euphorically are doing so with either leverage, (borrowing), or with funds usually delegated for some other purpose than speculation.
I do remember that you, as Liar Loan, once wrote on the four fundamentals affecting gold. You were dead wrong on three of them. Sorry, I do not remember what they were. The fundamentals that affect the pog long term are still in effect and now amplified and although from time to time the price will detach from the reality of those fundamentals, the corrections will bring it back into line. The most basic of gold fundamentals is supply and demand.
BTW, over the last couple of years, since the pog in dollars temporarily peaked, I have challenged the posters who said that gold was in a bubble to declare what the difference between a bubble and a bull market was. You are the first to answer.
I find these gold threads amusing.
I still think Mello Ruse is right….
good lord, a Thomas Jefferson quote on central banking institutions and a gold bear. can it get any more contradictory?
IR – Right about what, exactly?
From “TheFreeDictionary”;
Egocentrism 2. Psychol a stage in a child’s development characterized by lack of awareness that other people’s points of view differ from his own.
And how would listening to me, since you mentioned me by name, present someone with an opportunity cost of -48%? I truly doubt that excepting family, I have ever told anybody that they should either buy or own gold.
Why do you pick articles that support your point of view?
Let’s review here:
US printing $1T+ annually. ZIRP for 5 yrs. It’s not working. Need more printing. Law of diminishing returns. Ooops we cant taper. RE bubble 2.0 fallout coming.
gold bull has a major correction. Weak hands flushed. Very few bullish on gold. morons believe RE and economy recovered. gold bugs mocked. “we buy gold” signs everywhere – poor are net sellers. Poor countries selling to pay debts.
Let them print. I prefer honest money. Still buying.
bwahahahahhaahahaaa, dude, if you….
ah nevermind.
Enjoy!
http://brokenmarkets.files.wordpress.com/2013/03/sp-500.png