Monday, March 17, 2008

Animal Rights (and Wrongs) on Wall Street

What is admiration worth?

No less than Forbes magazine used to rate Bear Stearns among the “most admired” businesses in the country.

How that most-admired status became worth only $2 per share is going to be made more clear in the future, and a good part of it is going to come out in the conflagration of lawsuits that are only now being ignited as angry shareholders howl and lick their wounds.

To say that Cayne (CEO) and his henchmen didn’t see this coming is ludicrous; yet apparently they didn’t take steps with their own holdings to avoid massive personal paper-wealth hits and the company didn’t have golden parachutes for major players.

But as one of the key enablers in subprime mortgage securities, and in owning one of the truly predatory mortgage servicers (EMC Mortgage), Cayne and the directors had to know their scheme could only run so long. Or did they?

We may eventually get answers to the classic: What did they know and when did they know it?

Let’s face it, in 2005, 2006 and 2007, EMC Mortgage’s management was reporting something up through the ranks to Bear’s management. There had to be either signals of impending doom or over-confident fluff moving up the food chain about how quickly the toxic waste dumps could be cleaned up through aggressive loss-mitigation (read: rapid foreclosure) practices. Clearly, while not all of Bear’s portfolios were serviced by EMC, being among the most predatory of special servicers, they should have provided Bear with insight into what could or couldn’t be accomplished by the handful of companies that do the highly-profitable waste-disposal servicing in the subprime arena.

And it may have had that insight. But it seems more likely that the board was getting the fluff version of the story from within the ranks. Either that or we would have seen a lot more action on Bear’s shares from the major players who were in the know.

And that version of the theory makes sense when you consider the culture that has been allowed to thrive at servicers like EMC: Never, ever admit a mistake.

The sudden and stunning collapse of Bear’s value may indeed reflect that culture was being rewarded right up until the bitter end.

The Honorable Judge Roy Bean

Friday, March 14, 2008

Bernanke’s Principal Blunder

What we can learn from the Fed Chairman’s recent calls for reductions in the principal of troubled mortgage loans is that he knows little or nothing about the reality of life faced by subprime borrowers.

Hello, Ben – the problem isn’t the principal – it’s the interest.

You’ve adopted the theory that being upside down in a loan makes it so a borrower will want to walk away because they think there’s no equity to lose.

Hello, Ben – the problem is they can’t afford the payments because of the interest rates they got slammed with. They would like to stay living in the house. It is their home. You’re not helping them keep it and foreclosure is the servicer's best financial option.

Have you played with an amortization calculator lately, Ben?

Try a simple one, just to learn how people in the real world see things:

$150,000.00 ARM loan, 360 months 5.5% interest rate for 24 months = $851.68 per month.

After 24 months at that rate, $4,155.25 has been paid into principal. $16,285.16 has been paid in interest. The principal balance is now $145,844.75.

Then the ARM’s interest rate jumps to 11%, so the new payment zooms to $1,379.68, which is $528.00 more per month for the borrower who is already trapped or would have refinanced.

Let’s say Ben’s goofy idea to lower the principal is acceptable to the noteholder (if you can find one!). And let’s knock off 20% of the principal ($145,844.75 becomes $125,844.75). Guess what the payment is now? $1,189.22, which is still $337.54 more the borrower would have to pay per month that they probably don’t have.

And worse, at 11% APR, the borrower is now faced with over $303,000 in interest for their $150,000 loan instead of $130,000. That's still a good deal for the investor, Ben.

Wake up, Ben. The problem isn’t principal. The problem is USURY. Plain and simple. Subprime lending is a usurious, predatory scam, Ben and until you admit that the interest rates are the problem, you’re only perpetuating it.

But anyone with a subprime loan should be able to figure this out too. Anyone who has half a brain should walk away because they’re being scammed by usurious interest rates, not because they’re upside down or close to it.

And if enough of the victims do the smart thing and walk, the subprime industry and your friends on Wall Street will get even more of what they’re getting, and they richly deserve it.

The Honorable Judge Roy Bean

Wednesday, March 05, 2008

Now wait just a damn minute...

Back in January of this year the New York City Comptroller, William Thompson and the New York State Comptroller, Thomas P. DiNapoli and the New York City Pension Funds became lead plaintiffs in a class-action suit against Countrywide and certain officers (as well as a host of other related defendants) alleging that Countrywide misstated and omitted information regarding its lending practices and other business information, resulting in the artificial inflation of its stock price. Well, we all know what has happened to Countrywide and it's stock value. And a lot of us cheered.

But given the amount of information that is, was and has been out there about Countrywide’s predatory lending and servicing practices over the last several years, what on earth were Thompson and DiNapoli and their pension funds thinking?

Something tells this Judge that NY's participation in the suit should be thrown out under the doctrine of unclean hands; anyone who invested in Countrywide had to have been deliberately ignoring the enormous public outcry regarding subprime predatory lending. And the only possible reasons to have done that are either opportunistic gambling with NY pension funds in Countrywide’s routine abuse of borrower consumers or alternatively, gross ignorance and incompetence. There really can’t be any other position from which to complain, and either one means Thompson and DiNapoli should have nothing to do with managing anything more complex than a lemonade stand.

Any pension fund or investment manager that touches the stock of companies like Countrywide deserves whatever happens to them.

The Honorable Judge Roy Bean.