December 2011 archive

Cross posted from The Stars Hollow Gazette

In 2007, Eileen Foster, a former executive vice president in charge of fraud investigations for Countrywide Financial Corp., and her team began looking through documents in the company’s mortgage division. What she uncovered was massive fraud that was being committed on a daily basis. When Countrywide was acquired by Bank of America in 2008, Ms. Foster was fired for “inappropriate and unprofessional conduct.”

Ms. Foster filed a wrongful termination lawsuit with the Department of Labor. During her three year fight to clear her name, the extensive fraud committed by Countrywide employees and executives came to light. Bank of America, as typical, says that this in nothing new and the claims against Countrywide were settled. In the first part of a two part article by Michael Hudson published at i-Watch News, recounts the extent of the fraud committed by Countrywide employees, condoned by executives and covered up by BoA:

In government records and in interviews with iWatch News, Foster describes other top-down misconduct:

   

She claims Countrywide’s management protected big loan producers who used fraud to put up big sales numbers. If they were caught, she says, they frequently avoided termination.

   

Foster claims Countrywide’s subprime lending division concealed from her the level of “suspicious activity reports.” This in turn reduced the number of fraud reports Countrywide gave to the U.S. Treasury’s Financial Crimes Enforcement Network.

   

Foster claims Countrywide failed to notify investors when it discovered fraud or other problems with loans that it had sold as the underlying assets in “mortgage-backed” securities. When she created a report designed to document these loans on a regular basis going forward, she says, she was “shut down” by company officials and told to stop doing the report.

Eileen Foster appeared on 60 Minutes in an interview with Steve Kroft:

60 Minutes also interviewed the head of the criminal division at the Department of Justice, Larry Brewer asking him about the lack of prosecutions that could be done under the Sarbanes-Oxley law. Brewer’s response was “he thinks nobody ‘lacks confidence’ in the department’s ability to prosecute financial crime”:

   60 MINUTES: We spoke to a woman at Countrywide who was a senior vice president for investigating fraud and she said that the fraud inside countrywide was systemic. That it was basically a way of doing business.

   BREWER: Well, it’s hard for me to talk about a particular case. Of course in the Countrywide case, terrific office, US Attorney’s office in Los Angeles, investigated that. Interviewed many, many people. Hundreds of people, perhaps. Reviewed millions of documents.

   60 MINUTES: Do you lack confidence in bringing cases under Sarbanes-Oxley?

   BREWER: Steve, no one is really has accused this Department of Justice, or this division, or me of lacking confidence. If you look at the prosecutors all over the country, they are bringing record cases with respect to all kinds of criminal laws. Sarbanes-Oxley is a tool, but it’s only one tool. We’re confident. We follow the facts and the law wherever they take us. And we’re bringing every case that we believe can be made.

Some state attorney generals are filing suits and conducting investigations. Massachusetts AG Martha Coakley filed papers in state court suing five major mortgage lenders, including Bank of America, and MERS. Meanwhile, there have been no federal prosecutions of any top level executives and federal prosecutions of financial fraud have fallen to a 20 year low but thousands of Occupy Wall Street protesters have been arrested.

As Zaid Jilani concludes at Think Progress:

After all, allowing criminals to help cause a global recession that plunged 60 million people into extreme poverty and then proliferate in an industry will only sully its reputation.

Crossposted from The Stars Hollow Gazette

What’s that?  Never heard of it.

The eurozone’s terrible mistake

Felix Salmon, Reuters

Dec 5, 2011 23:36 EST

The FT is reporting today that the new fiscal rules for the EU “include a commitment not to force private sector bondholders to take losses on any future eurozone bail-outs”. If this principle really does get enshrined into some new treaty, it will be one of the most fiscally insane derelictions of statesmanship the world has seen – but it certainly helps explain the short-term rally that we saw today in Italian government debt.

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To understand just how stupid this is, all you need to do is go back and read Michael Lewis’s Ireland article. The fateful decision in Ireland was to take the insolvent banks and give them a blanket bailout, with the banks’ creditors all getting 100 cents on the euro. That only served to put a positively evil debt burden onto the Irish people, forcing a massive austerity program and causing untold billions of euros in foregone growth, while bailing out lenders who deserved no such thing.

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The worst case scenario is that the EU kicks the can down the road with one new bailout facility after another, until it eventually gives up throwing good money after bad and imposes the restructuring which was inevitable all along. In that case, as one hedge fund manager was explaining to me last week, private sector creditors get devastated: because the EU and the ECB and the IMF won’t take any losses on their loans, all of the haircut, pretty much, will have to be borne by a private sector which accounts for only a fraction of the debt. So the private sector could end up with very, very little indeed.

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The immediate result of this plan is that everybody will rush into the highest-yielding bonds in Europe, which is exactly what seems to have happened today. The other effect of the plan, however, is that every country in Europe is now effectively guaranteeing everybody else’s debt. Which is more than sufficient to explain why S&P is minded to downgrade every country in Europe, up to and including Germany.

In order for markets to work, lenders need to suffer when they make bad lending decisions. If the Europeans didn’t learn from Ireland, couldn’t they at least learn from the Fed’s much-criticized decision to pay off all AIG creditors at 100 cents on the dollar? Blanket guarantees at par are pretty much always a really bad idea – and this one, if it comes to pass, will be the biggest one yet. It won’t end well.

Crossposted from The Stars Hollow Gazette

You see, the fundamental problem is that their banks are insolvent.

European banks’ asset sales face disastrous failure

By Gareth Gore, International Finance Review

26 November 2011

European banks are being forced to abandon their efforts to sell off trillions of euros worth of loans, mortgages and real estate after a series of talks with potential investors broke down, leaving many already struggling firms with piles of assets they can barely support.

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Deadlocked talks with potential buyers – a mix of private equity firms, hedge funds, foreign banks and insurers – show little sign of making breakthroughs, say bankers taking part in those negotiations, with the stalemate threatening to block the industry’s ability to save itself from collapse through a mass deleveraging.

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People involved in asset sale talks say price is the major sticking point. Lenders want only to sell higher-quality assets near to par value so as to avoid huge write-downs, which would erode capital further. By contrast, potential buyers want high-yielding investments and are offering only knock-down prices.

“There is a huge amount of liquidity among investors right now, but they only want to buy at distressed prices,” said Stefano Marsaglia, a chairman within the financial institutions group at Barclays Capital. “Lots of discussions are taking place but there is a gulf in terms of pricing.”

The homogeneity of assets on offer is also complicating the negotiations – a number of Dutch lenders, for example, all want to sell very similar mortgage-backed securities. Several bankers advising such clients were unanimous in saying that the deals will struggle to happen.

And Now Europe’s Banks Are Starting To Panic As The Oxygen Gets Sucked Out Of The Room

Henry Blodget, Business Insider

Nov. 16, 2011, 9:27 PM

Specifically, traditional sources of bank funding in Europe, such as institutional investors and other banks, are getting cautious as fears grow about the need for sovereign debt restructurings. As liquidity dries up, the only reliable source of funding is often the ECB.

But the ECB only accepts certain types of assets as collateral for loans, and some banks are running out of those assets.

So they’re turning to investment banks and other “counter-parties” that have them. And they’re entering into “swap” agreements in which they exchange their assets for the counter-parties’ assets and then stock-pile the latter assets for use as collateral.

And that’s a fine plan… until the music stops and one big “counter-party” fails.

How does this relate to the sovereign debt crisis?  As Citi’s Willem Buiter puts it-

I think France definitely has its work cut out for itself. It has a government budgeting problem which is structural to a large extent. And then they have a large banking sector. Do not forget that the U.S. banking sector balance sheet is less than 100% of GDP. In Europe and France, it is 300%. Their banks are under fire and so their sovereigns are under fire. I do not think the sovereign will keel over, but they have their work cut out for them.

All the liquidity in the world is not going to solve the problem that European banks are holding over $7 Trillion of valuation on their books that can’t be sold for anything near that AND the sovereign governments have made an implicit promise to bail them and their investors out.

As Roubini put it–

At this point most investors would dump their entire holdings of Italian debt to any sucker – the ECB, European Financial Stability Facility, IMF or whoever – willing to buy it at current yields.

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So using precious official resources to prevent the unavoidable would simply finance the exit of others.

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If, as appears likely, Italy remains stuck in an uncompetitive recession and is unable to regain market access in the next twelve months, then even if such large official resources were mobilised, they would be wasted on financing investors’ exit and thus postponing an inevitable debt restructuring that would then be more disorderly.

As your humble servant put it shortly thereafter-

This is a liquidity fix, not an insolvency fix.  The problem it’s intended to address is that banks will no longer lend to other banks because they suspect (and rightly so) that the other banks’ assets are pieces of crap.

It does nothing at all to address the fact that those assets are pieces of crap.

For their part the governments are making the additional bad choice to pursue a program of austerity that has already stifled growth to the point of Recession and the beginnings of a Deflationary Spiral.

What Can Save the Euro?

Joseph E. Stiglitz, Project Syndicate

2011-12-05

It is increasingly evident that Europe’s political leaders, for all their commitment to the euro’s survival, do not have a good grasp of what is required to make the single currency work. The prevailing view when the euro was established was that all that was required was fiscal discipline – no country’s fiscal deficit or public debt, relative to GDP, should be too large. But Ireland and Spain had budget surpluses and low debt before the crisis, which quickly turned into large deficits and high debt. So now European leaders say that it is the current-account deficits of the eurozone’s member countries that must be kept in check.

In that case, it seems curious that, as the crisis continues, the safe haven for global investors is the United States, which has had an enormous current-account deficit for years. So, how will the European Union distinguish between “good” current-account deficits – a government creates a favorable business climate, generating inflows of foreign direct investment – and “bad” current-account deficits? Preventing bad current-account deficits would require far greater intervention in the private sector than the neoliberal and single-market doctrines that were fashionable at the euro’s founding would imply.

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There is, interestingly, a common thread running through all of these cases, as well as the 2008 crisis: financial sectors behaved badly and failed to assess creditworthiness and manage risk as they were supposed to do.

These problems will occur with or without the euro. But the euro has made it more difficult for governments to respond. And the problem is not just that the euro took away two key tools for adjustment – the interest rate and the exchange rate – and put nothing in their place, or that the European Central Bank’s mandate is to focus on inflation, whereas today’s challenges are unemployment, growth, and financial stability. Without a common fiscal authority, the single market opened the way to tax competition – a race to the bottom to attract investment and boost output that could be freely sold throughout the EU.

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Even if those from Europe’s northern countries are right in claiming that the euro would work if effective discipline could be imposed on others (I think they are wrong), they are deluding themselves with a morality play. It is fine to blame their southern compatriots for fiscal profligacy, or, in the case of Spain and Ireland, for letting free markets have free reign, without seeing where that would lead. But that doesn’t address today’s problem: huge debts, whether a result of private or public miscalculations, must be managed within the euro framework.

Public-sector cutbacks today do not solve the problem of yesterday’s profligacy; they simply push economies into deeper recessions. Europe’s leaders know this. They know that growth is needed. But, rather than deal with today’s problems and find a formula for growth, they prefer to deliver homilies about what some previous government should have done. This may be satisfying for the sermonizer, but it won’t solve Europe’s problems – and it won’t save the euro.

Is there some hope?  How about some new leadership?

Wolf Richter: French Presidential Election – Coup De Grâce For The Euro?

Naked Capitalism

Friday, December 2, 2011

France isn’t doing well. Unemployment, which has been rising since May, breached 9%. Wages haven’t kept up with inflation, and purchasing power has dropped. Industrial orders plummeted. Layoffs have been announced. Yields are rising. Banks are teetering. Sarkozy had tried to reform the French welfare and tax system. Result: rising income disparity, tax loopholes for the rich, diminished pension benefits for the middle class, reduced subsidies for the poor, etc., and now ugly unemployment trends.

Voters are angry. And the poll numbers that came out today show to what extent (L’Exress, article in French). During the first round on April 22, François Hollande of the Socialist Party would obtain 29.5%, Sarkozy 26%, and right-wing populist Marine Le Pen 19.5%. And this after Sarkozy got a 6-point bump from an anti-nuclear imbroglio on the left that Hollande had trouble squelching. In a face-off during the second round on May 6, Hollande would win by a landslide 56% against Sarkozy’s 44%.

If the economy deteriorates further, Marine Le Pen, president of the National Front, might beat Sarkozy in the first round. Media savvy and endowed with a captivating presence, she’d stunned the French political establishment by beating Sarkozy in the polls earlier this year.

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François Hollande is more temperate. … His camp has come up with a five-point plan:

1. Expand to the greatest extend possible the European bailout fund (EFSF)
2. Issue Eurobonds and spread national liabilities across all Eurozone countries
3. Get the ECB to play an “active role,” i.e. buy Eurozone sovereign debt.
4. Institute a financial transaction tax
5. Launch growth initiatives instead of austerity measures.

But the core of their solution-monetizing sovereign debt without central control over national budgets-is totally unacceptable to Germany. So, if the euro and the Eurozone as we know them are still alive by early May, then the French presidential election may well deliver the coup de grâce.

That is, if Germany remains intransigent.

On the other hand it’s highly likely Mr. Market isn’t going to wait that long.  German bonds (I refuse to confuse you by calling them bunds just to pretend to be hip and cosmopolitan) were already under considerable pressure before the latest optimism bubble and projected growth of the German economy has been sharply revised downward even from the anemic 1.5 to 2% of a month ago.

The vast majority of German exports are to EU partners who can no longer afford them under the austerity regimes dictated by the German banks who in fact hold more of that unsellable crap sovereign and commercial debt than most of their peers.  If they continue this policy they’ll be committing economic suicide.

There is no confidence fairy.  You can’t cut your way to prosperity.

I say good riddance to bad rubbish in my very best imitation of Hayek and refer you again to David Apgar-

As far as costs go, massive European bank restructuring comes to mind, especially following a cool €300 billion or so of losses on government bond holdings. It’s hard to say anything nice about bank restructuring, but at least we know how to do it. We know, for example, how to split good banks from bad banks. (Hint: rank balance sheet assets by quality and liabilities by seniority and draw a line across the balance sheet after the last asset of reasonably determinate value.) That’s handy when you need banks with systems in place ready to restart lending. And we know these transactions work when free from political interference as they were in Sweden in 1992.

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(M)assive European bank restructuring may be unavoidable even if Europe somehow enlisted enough ECB printing presses, enough future earnings of all those carefree northern European taxpayers, and enough future benefits of all those docile southerners to plaster a smile on the face of every bond portfolio manager at BNP Paribas and Commerzbank. The scale of the bailout needed to avoid further investor losses as of today – much less tomorrow or next week – would entail cross-border consolidation or de facto nationalization of a significant portion of the euro banking sector.

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The most popular alternative has the ECB stepping in to buy bonds every time investors try to cut their exposure. At first blush, it looks clean – no forced austerity, no messy investor losses and bank restructurings, no burden on taxpayers in creditor countries like Germany.

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With such ECB generosity on offer – and with euro zone inflation looming – why would any bond trader with a pulse stop after dumping her Greek, Portuguese, Irish, Italian, and Spanish exposure? Why not get rid of the French and German paper in the vaults, as well? Get rid of it all.

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This, then, is the impasse euro zone bond investors have reached. To avoid losses, they clamor for alternatives that could disrupt the currency itself – one of the few things that might actually make them worse off in real terms than they are right now.

Our regular featured content-

• On This Day In History December 6 by TheMomCat
• Punting the Pundits by TheMomCat

These featured articles-

• The End of the Euro by ek hornbeck
• Why Can’t The Feds Prosecute Systemic Fraud? by TheMomCat
• Obama’s War On Liberty by TheMomCat

This is an Open Thread

Crossposted from The Stars Hollow Gazette

8% of Japan Contaminated

Post-Fukushima Radiation Mapped

Cesium in soil a problem for agriculture

By Prachi Patel, IEEE Spectrum

December 2011

Three recently published academic studies show that while direct radiation exposure of Fukushima residents isn’t as high as was initially feared, soils across northeastern Japan are contaminated and could affect public health for decades through the produce farmed there. The research, combined with a map of soil radiation-which was based on measurements made during helicopter flights and released by Japan’s science ministry-shows substantial soil contamination in the prefectures of Fukushima and its neighbors: Miyagi and Iwate to the north, Ibaraki and Chiba to the south, and Tochigi and Gunma to the southwest.

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The government’s radiation map shows high levels of radioactive cesium in Fukushima and surrounding prefectures. Some spots have levels between 100 000 and 600 000 becquerels per square meter (148 000 was the standard used for mandatory resettlement after the Chernobyl disaster). That the cesium is mostly in chloride form makes matters worse, Moulder says: “It’s water soluble, easily taken up by the body, and very well distributed in the body-all the things you don’t want.” The contamination could also irradiate anyone who walks on the ground, he adds.

According to the Japanese newspaper The Asahi Shimbun, the science ministry says that about 8 percent of the country’s land has been contaminated with levels higher than 10 000 Bq/m2, a threshold that Japan’s science ministry defines as affected by a nuclear accident. The newspaper also reports that the government has confirmed radioactive materials from the meltdown in all prefectures, including Okinawa, which is 1700 kilometers from the power plant.

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“There’s really no good way to clean up cesium-137 from a large area,” Moulder says. “To decontaminate a playground, you can scoop up the soil and lay down new asphalt, but you can’t scoop up a whole rice field. You’ll then have to dispose all that radioactive waste. These areas could become inhabitable but still couldn’t be used for agriculture.”

Cesium-137 is responsible for radiation in the Chernobyl dead zone.  It has a half life of 30 years.

Ocean contamination

Fukushima nuclear fallout spread through oceans, researchers say

MOST of the radioactive fallout from the disaster at the Fukushima nuclear plant dropped into the ocean and began circling the planet, Japanese researchers say.

AFP

November 17, 2011 8:02PM

Up to 80 per cent of the caesium released by the Fukushima Daiichi power plant after the March 11 disaster landed in the Pacific and made its way into other oceans around the world, scientists at the Meteorological Research Institute said.

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Researchers said the radioactive materials, including caesium-137, an isotope with a half-life of more than 30 years, were widely dispersed when they entered the oceans and each particle would measure less than one micrometre – one seventh the size of a human red blood cell.

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Using computer simulations, they calculated the material was first blown northeast over eastern Russia and Alaska, before falling into the Pacific and reaching the western coast of mainland US around March 17, Takahashi said.

The materials were believed to have completed their first around-the-globe trip by March 24, he said, adding that the results would be presented to an academic meeting in Nagoya, central Japan.

Fukushima disaster’s marine fallout

Nuclear contamination poses long-term threat to ocean ecosystem and to Japan’s fishing industry.

Steve Chao, Al Jazeera

30 Nov 2011 12:11

During the peak of Ukraine’s Chernobyl cataclysm of 1986, the Black Sea was registering 1,000 becquerels per cubic metre of water; this appears miniscule in comparison to nuclear levels at Fukushima’s peak recorded at 100,000 becquerels.

And it hasn’t stopped yet.

More Radioactive Water Leaks at Japanese Plant

By HIROKO TABUCHI and MARTIN FACKLER, The New York Times

Published: December 4, 201

(U)tility workers found that radioactive water was pooling in a catchment next to a purification device; the system was switched off, and the leak appeared to stop. But the company said it later discovered that leaked water was escaping, possibly through cracks in the catchment’s concrete wall, and was reaching an external gutter.

In all, as much as 220 tons of water may now have leaked from the facility, according to a report in the newspaper Asahi Shimbun that cited Tepco officials.

The company said that the water had about one million times as much radioactive strontium as the maximum safe level set by the government, but appeared to have already been cleaned of radioactive cesium before leaking out. Both elements are readily absorbed by living tissue and can greatly increase the risk of developing cancer.

Total Meltdown

All N-fuel may have fallen to outer vessel / TEPCO: Up to 68 tons likely melted in No. 1 reactor, eroding concrete of containment unit

The Yomiuri Shimbun

Dec. 2, 2011

In the No. 1 reactor, TEPCO believes, almost all of the about 68 tons of fuel melted. This has not only seriously damaged the bottom of the steel pressure vessel enough to create holes, but the fuel has also fallen to the concrete bottom of the containment vessel, eroding it by up to 65 centimeters.

Only 37 centimeters of concrete remains between the fuel and the vessel’s outermost steel wall in the most damaged area, TEPCO said.

That’s 25.6 and 14.6 inches for the metrically impaired.

Crossposted from The Stars Hollow Gazette

Did Black Friday save the season? Beware the retail hype.

By Barry Ritholtz, The Washington Post

Saturday, December 3, 10:20 PM

We begin with a quick review of the retail sector in 2011: Sales improved versus 2010 by 3 to 4 percent. We use year-over-year comparisons because of the highly seasonal nature of retail sales. In 2010, sales were fairly soft, in part because much of the nation experienced severe weather. In the business, we call those “easy comps” – a low comparable data point that should be easy to beat.

Based on the first 10 months of the year, holiday shopping in 2011 should see similar improvements. Consistent with the year-over-year retail numbers, expect sales gains of 3 to 4 percent. Even so, these numbers come with caveats.

Prices in some products have risen – in some cases, substantially. The three most noteworthy are gasoline (up 15 percent), food (5 percent) and cotton (a whopping 230 percent).

The price pressures on these – all consumer staples – are reflected in the total retail sales data. When we look at total sales, we get a sense of how much the nation is spending – but, because of inflation, not how many goods people bought. Based on that data, we can conclude that a decent amount of the total dollar gains in retail sales are not improvements, but rather price inflation.

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The reports released with Black Friday and the holiday weekend are from trade groups representing retailers. (They do not hide this.) Each year, they make wildly optimistic projections, which are repeated in the media like clockwork. By the time the actual data come in, the projections have been forgotten. By then, we learn that early reports were pure hokum, put out by trade groups to create a “positive shopping environment.”

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“Traffic and spending were up both online and in stores, reaching historic highs. According to the survey, a record 226 million shoppers visited stores and Web sites over Black Friday weekend, up from 212 million last year. Digging deep into their holiday budgets, the average holiday shopper spent $398.62 this weekend, up from $365.34 last year. Total spending reached an estimated $52.4 billion.”

That would suggest that retail sales climbed 16 percent. They did not. Surveys where people forecast their future spending are pretty much worthless. They are far too unreliable to base sales forecasts upon.

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How far off have these surveys been in the past? Enormously. In 2005, based on a survey on Black Friday and Saturday, the NRF forecast a 22 percent increase in holiday shopping gains for the Thanksgiving weekend. The results? Up just 1 percent.

The same foolishness resurfaced again in 2006, with an 18.9 percent sales increase forecast. Of course, the reality was nowhere near that, with sales gains below 5 percent. Incidentally, it is not just Shopmas: The back-to-school-season was another opportunity to repeat the error. And in 2007, just as the recession was getting underway, they forecast a 4 percent gain in sales. What happened? Sales at U.S. retailers “unexpectedly” dropped 0.4 percent in December 2007, the weakest holiday season since 2002. In 2008, given the broad scale of the economic collapse, what’s perhaps most surprising was the expectations for a 2.2 percent sales gain (sales fell 6 percent). In 2010, Black Friday weekend sales rise were estimated at 9.2 percent, and overall sales were forecast to rise in November and December 2010 by 11 percent. (They rose 5.5 percent.)

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So when those breathless retail sales surveys were released (this year), we had no idea as to whether, and by exactly how much, sales might climb. The most that could be accurately said was that more people appeared to be in stores on Black Friday 2011 than in 2010. Indeed, that can be explained in part by the unseasonably warm weather around the country; as well as the extended store hours (including midnight Thanksgiving Day).