Wall Street rewards Bank of America (one of their own) with a 6% increase in stock price

1/3/2011
Yes America, Wall Street looks after their fellow banksters and rewards them when the settlement for placing toxic garbage on the American taxpayer is better than expected.

As reported by By Tess Stynes  of The Wall Street Journal, Bank of America Corp. (BAC) expects to take a provision of about $3 billion in the fourth quarter to buy back bad loans from Fannie Mae (FNMA) and Freddie Mac (FMCC) that were issued by its troubled Countrywide Financial unit.

The move represents the latest effort by the Charlotte, N.C.-based banking giant, which acquired mortgage originator Countrywide in 2008, to respond to the housing crisis. Countrywide's mortgages turned into some of the worst mortgages issued during the crisis and, ever since Bank of America bought the lender, the bank has had to handle growing loan losses.

Fannie and Freddie have been stepping up demands that lenders take back defaulted loans when they find that the mortgages didn't conform to their lending guidelines. The two giant mortgage buyers have been operating under federal conservatorship since September 2008. Keeping them afloat has cost taxpayers about $134 billion so far.

Last week, Fannie reached a $462 million settlement with Ally Financial Inc. to cover potential repurchases on $292 billion in mortgages.

Taken together, the Ally Financial and Bank of America settlements will result in a recovery of $3.3 for taxpayers, the Federal Housing Finance Agency said.

"While these agreements are an important step, (Fannie and Freddie) have other outstanding claims across a range of counterparties and they are being pursued," said Edward DeMarco, acting director of the housing agency, in a statement.

Bank of America also said it has received confirmation from the Federal Reserve that the company fulfilled its commitment to boost its equity by $3 billion, a condition of its repurchase of $45 billion in preferred stock in December 2009 acquired as part of the Troubled Asset Relief Program. It faced a year-end deadline to raise the equity and sought to raise the capital by selling assets.

If it hadn't done so, it might have had to pay some employees' bonuses in stock instead of cash. The bank also had warned investors it might need to make a dilutive share offering to raise the capital. Instead, it sold such assets as 51.2 million shares in BlackRock Inc. and the right to purchase additional shares in China Construction Bank Corp.

As part of the loan repurchases, Bank of America's home loans and insurance business is expected to post a $2 billion write-down in the quarter. The bank said the charge will have no impact on its Tier 1 or tangible equity ratios.

"These actions resolve substantial legacy issues in the best interest of our shareholders," said Chief Executive Brian Moynihan. "Our goals remain the same: Put these issues behind us; focus on serving customers and clients; and continue to help distressed homeowners facing difficult times."

The agreement includes a cash payment of $1.28 billion to Freddie and $1.52 billion to Fannie, both of which were made Friday. Executives from both companies said the agreement is in the best interests of all parties.

Last week, Allstate Corp. sued Countrywide over $700 million in residential mortgage-backed securities in which the insurer had invested. The suit contains similar allegations other investors have raised with mortgage creators, namely that lax underwriting standards are to blame for the collapse of the investment vehicles.

"These actions resolve substantial legacy

issues in the best interest of our

shareholders," said Chief Executive

Brian Moynihan. "Our goals remain the same:

Put these issues behind us;

focus on serving customers and clients;

and continue to help distressed

homeowners facing difficult times."

(No mention of the billions of toxic garbage left on

the books of Fannie and Freddie. Mr. Moynihan merely

wants to put these "issues" behind him and let

the children and grandchildren deal with it.)

Best leave defaulting to the real esate professionals (do not try this at home)

While a homeowner who lost a house to

foreclosure would find it difficult to

borrow for years, developers who defaulted

on enormous loans have still

been able to attract money.

(do not try this at home as these are trained professionals)

The New York Times

By Charles V. Bagli
Other Charles Bagli articles

1/1/2011

Larry Gluck, the apartment building king whose company defaulted on loans in New York, San Francisco, Los Angeles and Washington, recently bought the Windermere Hotel in Manhattan and Tivoli Towers, a subsidized housing complex in Brooklyn.

Ian Bruce Eichner, who lost two major New York skyscrapers to foreclosure in the early 1990s and defaulted on a $760 million loan for a Las Vegas casino resort in 2008, is working on a plan to rescue One Madison Park, a troubled 50-story condominium project.

Even Harry Macklowe, whose $7 billion gamble on seven Midtown skyscrapers at the top of the market almost cost him his entire empire, is out looking for new deals.

Industry lore has it that New York is one of the toughest, most unforgiving real estate markets in the world. The costs are so high, the unions so ornery, the politicians so demanding and the rivalries so fierce, that one false move invites financial disaster.

But the truth is that there have been surprisingly few career fatalities among New York developers, even though they have lost billions of investor dollars on overpriced real estate and have littered the city with unfinished apartment buildings. While a homeowner who lost a house to foreclosure would find it difficult to borrow for years, developers who defaulted on enormous loans have still been able to attract money.

The reasons, experts say, are that there is still plenty of money floating around and that the market has a very short memory.

“You can always find an investor who’ll put up equity with a guy, unless he’s Attila the Hun,” said Daniel Alpert, managing partner at Westwood Capital, a real estate investment bank.

For some of these developers, however, putting together a deal is not as easy as it used to be. Large banks and pension funds that endured huge losses have become very picky. Scott Lawlor, the founder of Broadway Partners, bought 28 office buildings in 2006 and 2007 and is now stuck with heavy debts on what is left of a portfolio whose value has dropped by at least a third. He is trying to come back with a focus on distressed residential real estate but has been unable to attract institutional money, according to lawyers and real estate executives who know him. He is now trying to line up wealthy investors.

Hedge funds and private equity funds are still offering backing for deals, believing that the real estate market will warm up again this year. There are also new investors looking to get into real estate, including funds based in China, and Norwegian pension funds.

And there have been casualties. Shaya Boymelgreen, the once-ubiquitous developer who built more than 2,400 apartments during the boom, broke with his money partner, was peppered with lawsuits from condominium buyers and was evicted from his offices in Brooklyn.

The $3 billion real estate portfolio that Kent Swig, a scion of a West Coast real estate family, put together over the past two decades is slowly slipping through his hands, and he warned last year that personal bankruptcy could be in the offing.

But while a homeowner who is foreclosed upon is often on the brink of financial ruin, many developers who defaulted emerged relatively unscathed themselves. Most of them invested relatively little of their own money in the deals, preferring “O.P.M.,” or “other people’s money.” One of the best-known examples is Tishman Speyer Properties, which lost $56 million on Stuyvesant Town and Peter Cooper Village, while lenders and other investors lost over $2.4 billion. Read On Garth



Don't believe the rosy forecasts (Shawn Tully)

Most economists and pundits predict

a continued upward trend for most assets

next year, but they will eventually

be proven wrong.

(thank you Mr. Tully for a breath of fresh air)

By Shawn Tully
Fortune
Other Shawn Tully Articles
12/30/10

In one of my classes at the University of Chicago Business School in the 1970s, the eminent statistician Harry V. Roberts liked to tell a story showing the homespun wisdom of his colleague and idol, economist Milton Friedman. The great monetarist was part of a panel evaluating a PhD presentation on forecasting growth rates for the U.S. economy. The candidate painstakingly described his methodology for fitting a broad array of variables––global capital flows, future exchange rates, immigration trends, and sundry other factors––into a computer model that, presto, spat out a prediction for the following year's GDP.

According to Roberts, Friedman delivered a brief, cutting critique––probably in the same nasal monotone I remember when, decades later, he returned my long-distance calls collect. Declared Uncle Miltie: "Why would this extremely complex model, based on factors that are themselves hard to forecast and could easily be wrong, produce a better number than taking the growth rates for the past five years, and dividing by five?"

For Roberts, the anecdote amounted to a parable on the pitfalls of economic forecasting. Friedman also liked to use the aphorism, "Predictions are extremely difficult, especially when they're about the future."

Friedman's lesson isn't that forecasting is impossible, but that the best prediction is usually the basic assumption that prices and growth rates will go back to their historic averages, or in economic parlance, "revert to the mean." What's difficult is guessing when that will happen. Indeed, the timing is truly unpredictable. But it invariably does happen.

Now, we're in the heart of the predictions season. The forecasts for the New Year from the pundits on Fox Business News, CNBC, Bloomberg TV and dozens of websites vary a bit, but the overall message is overwhelmingly the same for most assets: stocks will remain on a roll, generating double-digit gains for 2011. The prices of gold, oil and other commodities will continue their upward march. As for bonds, rates will keep rising, but slowly. And almost no one has a good word to say about the housing sector, where prices have fallen for months, and according to the prediction mill, are destined to follow the same downward trend.

The problem with these predictions isn't that they rely on complex economic assumptions. It's just the opposite––they're really not forecasts at all, but extrapolations. The pundits are telling us that recent trends will simply keep rolling.

They could be correct, but only for a while. In the longer term, these forecasts will prove wrong, for a simple reason. Most assets are already selling at prices far above their historic averages. As economic gravity takes over, they'll inevitably return to those benchmarks -- meaning stocks, bonds and commodities have a long way to fall.

So let's briefly examine these assets, and look at the factors that govern their long-term value. For commodities, it's production cost. For stocks, it's the multiple of price to average earnings. For real estate -- the surprise in this package -- it's the cost of owning versus the cost of renting.

Pricey equities

How about stocks? The best measure of the whether stocks are cheap or expensive is the price earnings formula devised by Yale economist Robert Shiller, which divides the current S and P price by a ten-year average of inflation-adjusted earnings. By smoothing earnings, Shiller avoids the error of judging that equities are cheap when profits are unusually high, as they are today.

Today, the Shiller PE is a lofty 22.7 -- that's more than 40% higher than its long-term average of 16. Indeed, stocks could keep rising for months or even longer. But that would make them simply more overvalued than they are today. In other words, a Friedmanesque reversion to the mean does not signal a rise in equity prices at all, but a sharp drop. The only question is when it will happen.

Let's move on to bonds. The sudden rise in yields on the 10-year Treasury from 3% in early December to 3.49% yesterday is a chilling reminder of the high risk to bond prices at these extraordinarily low rates. Despite the recent rout, the prices of 10-year Treasuries have plenty of room to decline. If yields return to their historic average yield of 6%, Treasury prices would drop by 20%.

The murky economy

It's extremely hard to forecast what changes we'll see in economic policy. Those changes may not affect the health of our economy this year or next, but they could greatly influence its future course. A prediction made by one of Friedman's heroes, the legendary Austrian economist F. A. Hayek, demonstrates the treacherous challenge of charting public policy. Complete Article






In 1979, when inflation was raging and the Federal Reserve was deploying cheap money to battle rising unemployment, Hayek gave a speech declaring that the Fed could not be trusted managing the money supply. Hayek stated that it would always succumb to political pressure to use cheap money to create jobs, and that the effort would bring not prosperity, but greater inflation.






Hayek was wrong. Three months before Hayek issued his warning, Paul Volcker became chief of the Fed. Over the next several years, Volcker defied Hayek's predictions by reversing course and taming inflation.






So here are the best predictions for the New Year: Prices of stocks, bonds and commodities will gravitate towards their long-term averages––meaning the odds are they'll go lower. As for economic policy, if Hayek can be wrong, why try to forecast the truly unpredictable?

Kudo's Mr. Tully for sharing your

perspective based on "real" fundamental

data versus the ever popular and

extremely misleading "Seasonal Adjustments".

Forever Stamps Tell Us Much (Peter Schiff)

By: Peter Schiff
Friday, December 31, 2010

The United States Postal Service announced this week that all future first class postage stamps sold will be the so–called “forever stamps” that have no face value but are guaranteed to cover the cost of mailing a first class letter, regardless of how high that cost may rise in the future. Currently these stamps are sold for 44 cents, but will increase in price if and when the Post Office hikes rates.

Apart from sounding the death knell of the one cent stamp, the news is interesting on two fronts: it provides insight into remarkably irresponsible government accounting, and it provides investors with the most attractive Federally-guaranteed inflation protected asset available on the market today.

Over the past fifty years, the USPS has raised the rates on first class postage 20 times. During that time the stamp prices have gone up more than 1,100%. Given the increasing frequency of rate hikes (three in the last four years) the Post Office claims it made the move to forever stamps to save money on printing costs and to increase customer convenience. The public seems to appreciate the product and has snapped up a staggering 28 billion forever stamps since they became available in 2007.

But the real reason behind the permanent switch is that it allows the Post Office to hide its insolvency behind phony accounting numbers, setting itself up for a massive taxpayer financed bailout in the not too distant future.

Much the way Greece used phony accounting to qualify for euro zone inclusion, the USPS is using creative accounting to avoid making significant cuts in current wages and benefits. By offering forever stamps, the Post Office moves forward future revenues to pay current expenses. But every forever stamp sold today represents a stamp not sold in the future. The revenues booked now will not be put in escrow to deal with revenue shortfalls that are guaranteed to plague the Post Office in the years ahead. This simply kicks farther down the road any intractable fiscal problems that the USPS can’t solve through more conventional means.

The Post Office also ignores that their ability to sell higher priced forever stamps in the future will be restricted. Those individuals and institutions who hoard the stamps now could offer them for sale in competition with the Post Office. Even though the Post Office will not redeem forever stamps for cash, there is no law against reselling them for whatever price the market will bear. How many forever stamps will the Post Office be able to sell at full price if customers can buy them at a discount on Ebay?

On that note, forever stamps provide the most conservative investors with a much more attractive alternative to zero interest checking accounts, low yielding Treasury bonds, or even inflation protected government securities (known as TIPS).

Given these stamps will always be completely liquid, the only way an investor can lose money on forever stamps is if the price of postage goes down. There may not be a single human on the planet who thinks that this is a likely scenario. On the other hand, if postage rates rise with inflation then the stamps are a very, very safe bet.

And unlike Treasury bonds or TIPS, investors do not have to pay a premium above face value for the privilege of buying stamps. While it is true that stamps do not pay interest, the extremely low rate offered by government securities should not fundamentally alter the investment calculations comparing bonds with stamps. More significantly, stamps are backed by an actual tangible service, postal delivery, whereas U.S. Treasury debt is backed by nothing but a printing press.

Forever stamps are about as close to a sure thing as most people will ever get. Over the past 10 years stamps are up 29%, while the S and P 500 is up a measly .1%. With labor and other costs continuing to mount inside the Post Office, there can be little doubt that many price hikes are coming. Minimum investment in forever stamps is just 44 cents, with no brokerage fees. Plus as an added bonus, if you use the stamps yourself, you pay no income tax on your capital gains.

Sure, without a federal bailout there is a chance the Post Office will go under, and those forever stamps will end up lining bird cages. However, given the track record of government bailouts and the clout of unionized postal workers, chances are very high that the Post Office will always get the bailouts it needs. As a result, forever stamps are a better bet than Treasury debt. They also have prettier pictures.

Economics Video of the Year :Fear the Boom and Bust: A Hayek versus Keynes Rap Anthem" (Thanks to Economic Policy Journal)

Economics Video of the Year

Fear the Boom and Bust: A Hayek

versus Keynes Rap Anthem

(thanks to Economic Policy Journal 

for the Head's Up)

 
Creative Director John Papola
Creative Economist Russ Roberts
Music produced by Jack Bradley at Blackboard3 Music and Sound Design.
Music composed and performed by Richard Royston Jacobs.
Performed by Billy Scafuri and Adam Lustick.