Goldman Sachs disclosed the list of companies to the Senate Finance Committee after a threat of subpoena from Sen. Chuck Grassley, R-Ia.

Asked the significance of the list, Grassley said, “I hope it’s as simple as taxpayers deserve to know what happened to their money.”

He added, “We thought originally we were bailing out AIG. Then later on … we learned that the money flowed through AIG to a few big banks, and now we know that the money went from these few big banks to dozens of financial institutions all around the world.”

Grassley said he was reserving judgment on the appropriateness of U.S. taxpayer money ending up overseas until he learns more about the 32 entities.

Goldman Sachs (GS) received $5.55 billion from the government in fall of 2008 as payment for then-worthless securities it held in AIG. Goldman had already hedged its risk that the securities would go bad. It had entered into agreements to spread the risk with the 32 entities named in Friday’s report.

Overall, Goldman Sachs received a $12.9 billion payout from the government’s bailout of AIG, which was at one time the world’s largest insurance company.

Goldman Sachs also revealed to the Senate Finance Committee that it would have received $2.3 billion if AIG had gone under. Other large financial institutions, such as Citibank, JPMorgan Chase and Morgan Stanley, sold Goldman Sachs protection in the case of AIG’s collapse. Those institutions did not have to pay Goldman Sachs after the government stepped in with tax money.

Shouldn’t Goldman Sachs be expected to collect from those institutions “before they collect the taxpayers’ dollars?” Grassley asked. “It’s a little bit like a farmer, if you got crop insurance, you shouldn’t be getting disaster aid.”

Goldman had not disclosed the names of the counterparties it paid in late 2008 until Friday, despite repeated requests from Elizabeth Warren, chairwoman of the Congressional Oversight Panel.

“I think we didn’t get the information because they consider it very embarrassing,” Grassley said, “and they ought to consider it very embarrassing.”

Continue reading…USA Today

Frankenstein real estate market – $3.5 trillion in commercial real estate debt and $10.3 trillion in residential real estate debt. Will we reach a 50 percent underwater market where 25 million Americans sit in homes worth less than their mortgage?

The real estate market has morphed into a beast that is largely sinking the overall economy into the ground.  If we combine the commercial real estate market ($3.5 trillion in debt) with residential outstanding mortgages ($10.3 trillion) we arrive at a figure that nears the annual GDP of our country.  What makes the figure even more troubling is the amount of leverage found in the real estate market.  Many of these loans will default yet banks are maintaining the notion that at some point par value will be reached; for many the par value scenario is the worst case they have mapped out, and this is highly optimistic.  We have created a real estate Frankenstein that now has a mind of its own and will do everything it can to stay afloat going forward, even at the expense of the real economy.  In fact, the real estate monster thinks it is the economy.

There is a flip side to housing values falling which seems to be ignored since most of the mainstream rhetoric is guided by the FIRE (finance, insurance, and real estate) experts.  The most obvious benefit is those looking to buy their first home don’t need to put themselves into so much debt that they risk their entire financial future for a home.  The next subtle change is the amount of money diverted from housing related spending to other sectors of the economy.  This last change will take time to sink into the overall economy but there is definitely a benefit of moving away from an economy highly dependent on Wall Street finance and real estate.

If we look at the current nationwide situation, the amount of distressed loans is stunning:

I think that the above disaster in distressed mortgages is causing very little reaction because we have somehow adapted to the current shocking situation.  Over 10 percent of all U.S. mortgages are at least one payment behind and another 4 percent are already in the process of foreclosure.  This figure is incredible given the entire mortgage market is made up of over 51 million active mortgages.  In 2007 if you were to tell someone that prices in California would fall by 50 percent (even 10 percent) many would have ignored you.  Now, it is standard practice for the market.

As a country we are much too reliant on real estate.  Commercial real estate is the next tragic saga in the RE bubble bursting with prices already falling by 42 percent.  At one point, CRE values in the U.S. were up to $6.5 trillion (now this was a rough generous estimate at the time).  Today, CRE values are down closer to $3 to $3.5 trillion; this is roughly the same amount of CRE loans outstanding.  This has pushed defaults through the roof:

The exponential rise is cause for serious concern.  There is little energy or political will to bailout the enormous CRE market.  This probably won’t stop the Federal Reserve and U.S. Treasury to game the system yet again and put taxpayers on the hook.  They created this massive monster and now want the public to fight it off with pitchforks.  The above chart is disturbing and the amount of bank failures we are seeing is directly related to the above trend.  Many smaller banks are deep in the trenches with CRE debt and much of this is now going bad.  How many strip malls do we really need?  Maybe having 20 Taco Bells in a one mile radius probably isn’t such a good idea.  Many of the commercial projects were built in the anticipation of sky high residential prices to justify their absurd underwriting expectations.  The above results have no excuse and are largely a reflection of massive delusional speculation in all things real estate.

Now that expectations are coming more into line and the fantasy world of Alt-A, subprime, and option ARM loans are behind us, most people have to qualify to get a loan with actual real income which many are now finding less of.  Banks lending virtually all government money, are now beholden to stricter (aka basic due diligence) in order to give out loans.  Yet if we look at the negative equity situation, the real estate monster grows scarier:

Over 20 million mortgage holders are underwater.  It is amazing that a few years ago, Deutsche Bank estimated that at the ultimate trough of the housing market, nearly half of all mortgages would be underwater.  This “doomsday” scenario seemed extremely farfetched.  Today, another 10 percent nationwide price decline would put us there.  Even without prices declining further, having 20 million Americans underwater is not a good sign going forward.  You figure over 7 million people are one payment behind or in foreclosure.  But what about the other 13 million?  This enormous group is basically a large cohort of renters but in a worse financial situation.  They are stuck.

Continue reading…DoctorHousingBubble

By DinSFLA 6/30/2010

When Fannie Mae announced that she was going to start to penalize people who walk away from underwater mortgages it created a fire storm of angry individuals.

She said it would step up efforts to pursue deficiency judgment—seeking to recoup the difference between the loan balance and the net proceeds of the foreclosure sale—against so-called “strategic” defaulters in states where such suits are allowed. Fannie also will lengthen to seven years, from five, the amount of time borrowers who go through a foreclosure must wait before getting a new loan.

So here is my solution, grab a pen and write this down:

• Homes have lost not a little but an enormous amount of it’s value up to 70% in some areas.
• In my opinion it is going to take more than 7 years to see any hope in Real Estate stabilization.
• Who wants to buy today when we read about possibly 8 million shadow foreclosures that will ultimately bring down the market further to dust?
• We the tax payers are the owners so who the hell asked us if this is appropriate? Were any of us invited to this meeting and discuss this? Did we have a say in this like we never do? DISCLOSURES?
• What about the possible millions that were denied a modification from no fault of their own? Oh but the Obama Administration admitted this too…too…too…late 🙁 Who will be responsible for those who were improperly foreclosed on?
• With the taxes and insurance sky rocketing, it only makes sense to rent for a while.
• Deficiency Judgment? Do you realize what this little pot you stir will cause?? Hmmm think about it.
• Credit who wants credit? We don’t even know where our own money is being used.
• Who do we have to contact to foreclose on Your “arse” Fannie??? After all you are owned by us… Do not bite the hand that feeds you!

You see the threat really has no impact.

Trust is earned my friends and we have absolutely none at the moment.

The evil thing here is that instead of going after the true Run A Ways “the banks” who stole the cash you go after the ones who feed you and behind our back you feed them???

Image source: The Simpsons “Angry Mob”

Dylan Ratigan

The dire straits of the middle class of America has made it near impossible for our politicians to keep up the pretense that our current government truly works for the “people.” Between the multiple overt and secretive bailouts, the massive bonuses and the circular use of our tax money to lobby for these continued handouts, you can no longer hide from the evidence.

When Senator Durbin said “The banks… frankly own this place,” you realize it was not in jest.

Couple this with recent protections handed by the Supreme Court to corporations to directly influence elections and it can make things seem hopeless for those not on Wall Street or their chosen politicians. Favored CEOs and now even foreign countries get all the printed money they need, leaving us paying both our bills and theirs.

And now nearly a quarter of all Americans are currently underwater in their mortgage because of that steadfast honor.

If you are one of them, chances are you didn’t do anything wrong. Almost all of you were not subprime borrowers or speculators, but merely people buying a house that they thought they could afford at the time. You were just unlucky in that you bought a house during a time when an outdated Wall Street and their complicit politicians decided to use housing to regain the income they lost due to the Schwabs and Etrades of the internet age.

You didn’t cause this mess. They did.

Now you are struggling to make the same payments on this mortgage on your now overpriced home even in light of a crashing economy and massive deflation, all while the government does everything in its power to help Wall St. keep the bonuses coming.

Well, it is becoming time to take matters into your own hands… I suggest that you call your lender and tell them if they don’t lower you mortgage by at least 20%, you are walking away. And if they don’t agree, you need to consider walking away.

It probably doesn’t feel right to you.

That is because you probably are a good person. But your mortgage is a business deal, and it is not immoral to walk away from a business deal unless you went in to the deal with the intention of defaulting.

But somehow, even though the corporations are pumped to exercise their new rights, former bankers like Henry Paulson, current ones like Jamie Dimon and — get this — now even Fannie Mae execs want to keep you from exercising your rights.

But before you let them (or anyone commenting below) force you into paying that $500k mortgage on a $300k house, ask them if they’ll push Jerry Speyer into “honoring his obligation” by breaking into his $2 billion personal piggy-bank to keep paying for Stuyvesant Town?

Or how about asking Hank and Jamie to lecture fellow bailed-out CEO John Mack about how “you’re supposed to meet your obligations, not run from them”? Maybe make him use some of his $50+ million for those buildings he bought in San Francisco?

And before shaming and punishing American homeowners, did they nag Steve Feinberg about helping “teach the American people…not to run away” by writing a check out of his billion-dollar pocket to cover all the stiffed landlords and vendors at Mervyn’s? After all, at least you aren’t single-handedly putting 1,100 employees out of work when you walk on your mortgage.

As part of the deal for your house, your mortgage holder gets interest payments from you and they also use the note to your house for their capital reserves. In return, they take the risk of a foreclosure. In many states, you paid extra to have a non-recourse loan where the lender just gets the house back if you stop paying — your interest rate would’ve been much lower if you were held personally liable like a student loan. But if you still feel bad, then donate the money saved to charity instead of to their bonuses. And when someone tries telling you why it is so wrong, here are some answers:

– Yes, it might seem selfish, but you are actually going to help fix our country the right way, through the use of pure capitalism. There are 3 parties involved in your mortgage — the mortgage holders, the servicing bank and you. You probably want to stay in your house. Most of the people who actually own your mortgage also want you to stay in your house, preferring a mortgage reduction that you keep paying instead of the total loss of a foreclosure. But the major banks (BofA, Wells Fargo, JP Morgan, Citi, etc.) that underwrite and service the loans don’t care about either of you. They (with the aid of their government) just care about hiding their true financial condition for long as possible so they can continue to bonus themselves outrageously. The credible threat of you walking away from your mortgage en masse is the only market-based solution that will force these banks to work with the mortgage holders on your behalf.

– No, you will not “hurt” your neighbors — certainly not near the scale of the banksters. Chances are someone just as nice will you will move in and (unlike you) pay a fair, non-inflated price for the house. Encourage your neighbors to fight back against the banks and ask for their own mortgage reductions as well.

– Yes, it might make getting a loan harder for everyone. Considering the spate 0% down NINJA loans over the past decade, that probably isn’t a bad thing.

– Yes, it might hurt your credit. But with time, people bounce back from having foreclosures on their record. Search online and then talk to a lawyer about the repercussions, which vary by state.

– No, the banks won’t necessarily pass the losses on to customers. They already make a lot of money. If costs are passed on to every consumer without banks competing on price, that’s a sign of illegal collusion or a monopoly. Let’s fix that instead of just letting banks ruin our lives. They might, however, not all make $145 billion in bonuses next year doing something fundamentally so easy that it is an unpaid job in Monopoly.

Meanwhile, our captured government has made it clear that they want to further reward these banksters because there are clearly better ways to “save” the economy without rewarding those most responsible for the damage.

Instead of claw backs for the past theft and strong financial reform for the future, they choose to cover-up the gross misuse of our tax money, making our country worse by helping the criminals on the backs of the most honest.

But thankfully, in this country we still have the tools to fight back and regain our country. Our vote, our voice, our laws and what we choose to do with every penny we have that doesn’t go to taxes are the benefits of our hard-fought freedom, and in this battle we must use them all to fight back. It’s time for the citizens to once again own this place.

Follow Dylan Ratigan on Twitter: www.twitter.com/DylanRatigan

By Lorraine Woellert and John Gittelsohn

June 14 (Bloomberg) — The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.

Fannie, based in Washington, and Freddie in McLean, Virginia, own or guarantee 53 percent of the nation’s $10.7 trillion in residential mortgages, according to a June 10 Federal Reserve report. Millions of bad loans issued during the housing bubble remain on their books, and delinquencies continue to rise. How deep in the hole Fannie and Freddie go depends on unemployment, interest rates and other drivers of home prices, according to the companies and economists who study them.

‘Worst-Case Scenario’

The Congressional Budget Office calculated in August 2009 that the companies would need $389 billion in federal subsidies through 2019, based on assumptions about delinquency rates of loans in their securities pools. The White House’s Office of Management and Budget estimated in February that aid could total as little as $160 billion if the economy strengthens.

If housing prices drop further, the companies may need more. Barclays Capital Inc. analysts put the price tag as high as $500 billion in a December report on mortgage-backed securities, assuming home prices decline another 20 percent and default rates triple.

Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, said that a 20 percent loss on the companies’ loans and guarantees, along the lines of other large market players such as Countrywide Financial Corp., now owned by Bank of America Corp., could cause even more damage.

“One trillion dollars is a reasonable worst-case scenario for the companies,” said Egan, whose firm warned customers away from municipal bond insurers in 2002 and downgraded Enron Corp. a month before its 2001 collapse.

Unfinished Business

A 20 percent decline in housing prices is possible, said David Rosenberg, chief economist for Gluskin Sheff & Associates Inc. in Toronto. Rosenberg, whose forecasts are more pessimistic than those of other economists, predicts a 15 percent drop.

“Worst case is probably 25 percent,” he said.

The median price of a home in the U.S. was $173,100 in April, down 25 percent from the July 2006 peak, according to the National Association of Realtors.

Fannie and Freddie are deeply wired into the U.S. and global financial systems. Figuring out how to stanch the losses and turn them into sustainable businesses is the biggest piece of unfinished business as Congress negotiates a Wall Street overhaul that could reach President Barack Obama’s desk by July.

Neither political party wants to risk damaging the mortgage market, said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and White House economic adviser under President George W. Bush.

“Republicans and Democrats love putting Americans in houses, and there’s no getting around that,” Holtz-Eakin said.

‘Safest Place’

With no solution in sight, the companies may need billions of dollars from the Treasury Department each quarter. The alternative — cutting the federal lifeline and letting the companies default on their debts — would produce global economic tremors akin to the U.S. decision to go off the gold standard in the 1930s, said Robert J. Shiller, a professor of economics at Yale University in New Haven, Connecticut, who helped create the S&P/Case-Shiller indexes of property values.

“People all over the world think, ‘Where is the safest place I could possibly put my money?’ and that’s the U.S.,” Shiller said in an interview. “We can’t let Fannie and Freddie go. We have to stand up for them.”

Congress created the Federal National Mortgage Association, known as Fannie Mae, in 1938 to expand home ownership by buying mortgages from banks and other lenders and bundling them into bonds for investors. It set up the Federal Home Loan Mortgage Corp., Freddie Mac, in 1970 to compete with Fannie.

Lower Standards

The companies’ liabilities stem in large part from loans and mortgage-backed securities issued between 2005 and 2007. Directed by Congress to encourage lending to minorities and low- income borrowers at the same time private companies were gaining market share by pushing into subprime loans, Fannie and Freddie lowered their standards to take on high-risk mortgages.

Many of those went to borrowers with poor credit or little equity in their homes, according to company filings. By early 2008, more than $500 billion of loans guaranteed or held by Fannie and Freddie, about 10 percent of the total, were in subprime mortgages, according to Fed reports.

Fannie and Freddie also raised billions of dollars by selling their own corporate debt to investors around the world. The bonds are seen as safe because of an implicit government guarantee against default. Foreign governments, including China’s and Japan’s, hold $908 billion of such bonds, according to Fed data.

‘Debt Trap’

“Do we really want to go to the central bank of China and say, ‘Tough luck, boys’? That’s part of the problem,” said Karen Petrou, managing partner of Federal Financial Analytics Inc., a Washington-based research firm.

The terms of the 2008 Treasury bailout create further complications. Fannie and Freddie are required to pay a 10 percent annual dividend on the shares owned by taxpayers. So far, they owe $14.5 billion, more than the companies reported in income in their most profitable years.

“It’s like a debt trap,” said Qumber Hassan, a mortgage strategist at Credit Suisse Group AG in New York. “The more they draw, the more they have to pay.”

Fannie and Freddie also benefited by selling $1.4 trillion in mortgage-backed securities to the Fed and the Treasury since September 2008, bonds that otherwise would have weighed on their balance sheets. While the government bought only the lowest-risk securities, it could incur additional losses.

‘Hard to Judge’

Treasury Secretary Timothy F. Geithner has vowed to keep Fannie and Freddie operating.

“It’s very hard to judge what the scale of losses is,” Geithner told Congress in March.

One idea being weighed by the Obama administration involves reconstituting Fannie and Freddie into a “good bank” with performing loans and a “bad bank” to absorb the rest. That could cost taxpayers as much as $290 billion because of all the bad loans, according to a May estimate by Credit Suisse analysts.

At the end of March, borrowers were late making payments on $338.4 billion worth of Fannie and Freddie loans, up from $206.1 billion a year earlier, according to the companies’ first- quarter filings at the Securities and Exchange Commission.

The number of loans more than three months past due has risen every quarter for more than a year, hitting 5.5 percent at Fannie as of the end of March and 4.1 percent at Freddie, according to the filings.

Surge in Delinquencies

The composition of the $5.5 trillion of loans guaranteed by Fannie and Freddie suggests that the surge in delinquencies may continue. About $1.98 trillion of the loans were made in states with the nation’s highest foreclosure rates — California, Florida, Nevada and Arizona — and $1.13 trillion were issued in 2006 and 2007, when real estate values peaked. Mortgages on which borrowers owe more than 90 percent of a property’s value total $402 billion.

Fannie and Freddie may suffer additional losses as a result of the Treasury’s effort to prevent foreclosures. Under the program, banks with mortgages owned or guaranteed by the companies must rewrite loan terms to make them easier for borrowers to pay.

The Treasury program is budgeted to cost Fannie and Freddie $20 billion. The companies have already modified about 600,000 delinquent loans and refinanced almost 300,000 more, in some cases for an amount greater than the houses are worth.

The government is using Fannie and Freddie “for a public- policy purpose that may well increase the ultimate cost of the taxpayer rescue,” said Petrou of Federal Financial Analytics. “Treasury is rolling the dice.”

Republican Phase-Out

If the plan works and foreclosures fall, that could help stabilize Fannie’s and Freddie’s balance sheets and ultimately protect taxpayers.

“Avoiding foreclosures can be a route to reducing loss severity,” said Sarah Rosen Wartell, executive vice president of the Center for American Progress, a Washington research group with ties to the Obama administration.

Loans issued since 2008, when the companies raised standards for borrowers, should be profitable and help offset prior losses, Wartell said.

Republicans attempted to include a phase-out of the mortgage companies in the financial reform bill. Democratic lawmakers and the Obama administration opted for further study, and the Treasury began soliciting ideas in April.

Representative Scott Garrett, a New Jersey Republican and co-sponsor of the phase-out amendment, said eliminating Fannie and Freddie would force the government and the housing market to confront the issue.

“It’s somewhat impossible to predict the magnitude of their impact if they continue to be the primary source of lending,” Garrett said in an interview.

Caught in ‘Quandary’

Democrats dismissed the phase-out idea as simplistic.

“We need to have a housing-financing system in place,” Senate Banking Committee Chairman Christopher Dodd said last month. “If you pull that rug out at this particular juncture, I don’t know what the particular result would be. We’re caught in this quandary.”

By delaying action, the Obama administration keeps losses off the government’s books while building a floor under housing prices during a congressional election year.

Keeping Fannie and Freddie functioning could also support an overall economic recovery. Residential real estate — the money spent on rent, mortgage payments, construction, remodeling, utilities and brokers’ fees — accounted for about 17 percent of gross domestic product in 2009, according to the National Association of Home Builders.

‘Already Lost’

Allowing the companies to go under and hoping that private financing will fill the gap isn’t realistic, analysts say. It would require at least two years of rising property values for private companies to return to the mortgage-securitization market, said Robert Van Order, Freddie’s former chief international economist and a professor of finance at George Washington University in Washington.

The price tag of supporting Fannie and Freddie “needs to be evaluated against the cost of not having a mortgage market,” said Phyllis Caldwell, chief of the Treasury’s Homeownership Preservation Office.

Whatever the fix, the money spent will not be recovered, said Alex Pollock, a former president of the Federal Home Loan Bank of Chicago who is now a fellow at the Washington-based American Enterprise Institute.

“It doesn’t matter what you do or don’t do, Fannie and Freddie will cost a lot of money,” Pollock said. “The money is already lost. There’s an attempt to try to avert your eyes.”

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net; John Gittelsohn in New York at johngitt@bloomberg.net.

Last Updated: June 13, 2010 19:00 EDT

Hold on tight when it DOES!

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Last updated March 18, 2010 5:38 a.m. PT

AP IMPACT: Gov’t bank auditors got big bonuses

By MATT APUZZO
ASSOCIATED PRESS WRITER 

WASHINGTON — Banks weren’t the only ones giving big bonuses in the boom years before the worst financial crisis in generations. The government also was handing out millions of dollars to bank regulators, rewarding “superior” work even as an avalanche of risky mortgages helped create the meltdown.

The payments, detailed in payroll data released to The Associated Press under the Freedom of Information Act, are the latest evidence of the government’s false sense of security during the go-go days of the financial boom. Just as bank executives got bonuses despite taking on dangerous amounts of risk, regulators got taxpayer-funded bonuses despite missing or ignoring signs that the system was on the verge of a meltdown.

The bonuses were part of a reward program little known outside the government. Some government regulators got tens of thousands of dollars in perks, boosting their salaries by almost 25 percent. Often, though, rewards amounted to just a few hundred dollars for employees who came up with good ideas.

During the 2003-06 boom, the three agencies that supervise most U.S. banks – the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the Office of the Comptroller of the Currency – gave out at least $19 million in bonuses, records show.

Nearly all that money was spent recognizing “superior” performance. The largest share, more than $8.4 million, went to financial examiners, those employees and managers who scrutinize internal bank documents and sound the first alarms. Analysts, auditors, economists and criminal investigators also got awards.

After the meltdown, the government’s internal investigators surveyed the wreckage of nearly 200 failed banks and repeatedly found that those regulators had not done enough:

-“OTS did not react in a timely and forceful manner to certain repeated indications of problems,” the Treasury Department’s inspector general said of the thrift supervision office following the $2.5 billion collapse of NetBank, the first major bank failure of the economic crisis.

-“OCC did not issue a formal enforcement action in a timely manner and was not aggressive enough in the supervision of ANB in light of the bank’s rapid growth,” the inspector general said of the currency comptroller after the $2.1 billion failure of ANB Financial National Association

-“In retrospect, a stronger supervisory response at earlier examinations may have been prudent,” FDIC’s inspector general concluded following the $1.8 billion collapse of New Frontier Bank.

-“OTS examiners did not identify or sufficiently address the core weaknesses that ultimately caused the thrift to fail until it was too late,” Treasury’s inspector general said regarding IndyMac, which in 2008 became one of the largest bank failures in history. “They believed their supervision was adequate. We disagree.”

-“OCC’s supervision of Omni National Bank was inadequate,” Treasury investigators concluded following Omni’s $956 million failure.

Because most bank inspection records are not public and the government blacked out many of the employee names before releasing the bonus data, it’s impossible to determine how many auditors got bonuses despite working on major banks that failed.

Regulators says it’s unfair to use those missteps, seen with the benefit of hindsight, to suggest any of the bonuses was improper.

“These are meant to motivate employees, have them work hard,” thrift office spokesman William Ruberry said. “The economy has taken a downturn in recent years. I’m not sure that negates the hard work or good ideas of our employees.”

At the OCC, spokesman Kevin Mukri noted that the national banks his agencies regulate generally fared better than others during the financial crisis.

“In making compensation decisions, the OCC is mindful of the need to recruit and retain the very best people, and our merit system is aimed at accomplishing that,” Mukri said. “We also believe it is important to reward those who worked so hard and showed such great professionalism throughout the crisis.”

David Barr, a spokesman for the FDIC, which handed out two-thirds of the bonuses during the boom, had no comment.

In government, as on Wall Street, bonuses are part of the culture. Federal employees can get extra pay for innovative ideas, recruiting new talent or performing exceptional work. Candidates being considered for hard-to-fill jobs may be offered student loan reimbursement or cash bonuses to get them in the door and keep them from leaving.

The bonus data released to the AP does not say specifically why each person received a bonus. For instance, one person in the OCC’s financial examining division got a $41,000 recruitment bonus on top of a $179,000 salary in 2005. In 2006, the last boom year for banks buying risky mortgages, the FDIC gave out more than 2,000 bonuses to financial examiners.

In 2008, the year the market collapsed, OTS gave 96 financial examiners bonuses of up to $3,000 for exceptional work.

At the three regulatory agencies, the value of the bonuses stayed roughly constant from before the banking boom, through the good times and into the collapse. While the total pales in comparison with the billions spent on Wall Street perks, the justification was similar.

“Bonuses were determined based upon the performance and the retention of the people,” said John Thain, the former CEO of Merrill Lynch, the troubled brokerage firm that paid out $3.6 billion in bonuses just before selling itself to Bank of America. “And there is nothing that happened in the world or the economy that would make you say that those were not the right thing to do for the retention and the reward of the people who were performing.”

To be sure, Washington policymakers eased regulations and encouraged banks to write risky loans. Families bought homes they couldn’t afford. Brokers found them mortgages. Bankers quickly snatched them up, never asking whether they could be repaid. And rating agencies certified it all as safe.

But regulators were part of the problem, and the bonuses were a symptom, said Ellen Seidman, a research fellow at the New America Foundation think tank and the former head of OTS from 1997 to 2001.

“Is it probably the case that the standards for evaluating how well people in the regulatory system were doing were not as high as they should have been? Probably,” Seidman said.

But the bigger question, she said, is why government regulators thought they were doing so well: “Why did the system fool itself?”

The next big bailout is on the way. Prepare to get reamed!

Mike Whitney
Smirking Chimp
March 16, 2010

Housing is on the rocks and prices are headed lower. That’s not the consensus view, but it’s a reasonably safe assumption. Master illusionist Ben Bernanke managed to engineer a modest 7-month uptick in sales, but the fairydust will wear off later this month when the Fed stops purchasing mortgage-backed securities and long-term interest rates begin to creep higher. The objective of Bernanke’s $1.25 trillion program, which is called quantitative easing, was to transfer the banks “unsellable” MBS onto the Fed’s balance sheet. Having achieved that goal, Bernanke will now have to unload those same toxic assets onto Freddie and Fannie. (as soon as the public is no longer paying attention)

Bernanke’s cash giveaway has helped to buoy stock prices and stabilize housing, but market fundamentals are still weak. There’s just too much inventory and too few buyers. Now that the Fed is withdrawing its support, matters will only get worse. 

Of course, that hasn’t stopped the folks at Bloomberg from cheerleading the nascent housing turnaround. Here’s a clip from Monday’s column:

“The U.S. housing market is poised to withstand the removal of government and Federal Reserve stimulus programs and rebound later in the year, contributing to annual economic growth for the first time since 2006. Increases in jobs, credit and affordable homes will help offset the end of the Fed’s purchases of mortgage-backed securities this month and the expiration of a federal homebuyer tax credit in April. Sales will rise about 6 percent this year, and housing will account for 0.25 percentage point of the 3.6 percent growth, according to forecasts by Dean Maki, chief U.S. economist for Barclays Capital in New York…“The underlying trend is turning positive,” said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York.”

Just for the record; there has been no “increases in jobs”. It’s baloney. Unemployment is flat at 9.7 percent with underemployment checking-in at 16.8 percent. There’s no chance of housing rebound until payrolls increase. Jobless people don’t buy houses.

Also, while it is true that the federal homebuyer tax credit did cause a spike in home purchases; it’s impact has been short-lived and sales are returning to normal. It’s generally believed that “cash for clunker-type” programs merely move demand forward and have no meaningful long-term effect.

So, it’s likely that housing prices–particularly on the higher end–will continue to fall until they return to their historic trend. (probably 10 to 15% lower) That means more trouble for the banks which are already using all kinds of accounting flim-flam (”mark-to-fiction”) to conceal the wretched condition of their balance sheets. Despite the surge in stock prices, the banks are drowning in the losses from their non performing loans and toxic assets. And, guess what; they still face another $1 trillion in Option ARMs and Alt-As that will reset by 2012. it’s all bad.

The Fed has signaled that it’s done all it can to help the banks. Now it’s Treasury’s turn. Bernanke will keep the Fed funds rate at zero for the foreseeable future, but he is not going to expand the Fed’s balance sheet anymore. Geithner understands this and is working frantically to put together the next bailout that will reduce mortgage-principal for underwater homeowners. But it’s a thorny problem because many of the borrowers have second liens which could amount to as much as $477 billion. That means that if the Treasury’s mortgage-principal reduction plan is enacted; it could wipe out the banks. Here’s an excerpt from an article in the Financial Times which explains it all:

“A group of investors in mortgage-backed bonds dubbed the Mortgage Investors Coalition (MIC) recently submitted to Congress a plan to overhaul the refinancing of underwater borrowers by writing down the principal balances of both first and second mortgages. The confederation of insurers, asset managers and hedge funds hope to break a logjam between Washington DC and the four megabanks with the most exposure to writedowns on second lien mortgages, including home equity lines of credit.

The private sector initiative coincides with House Financial Services Committee Chairman Barney Frank’s open letter dated 4 March to the CEOs of the banks in question – Bank of America, Citigroup, JP Morgan Chase and Wells Fargo – urging them to start forgiving principal on the second lien loans they hold.

But the banks are unlikely to take action until they get new accounting guidance from regulators that would ease the impact of such significant principal reductions on their capitalization ratios.”

(Ed.–”Accounting guidance”? Either the banks are holding out for a bigger bailout or they’re looking for looser accounting standards to conceal their losses from their shareholders. Either way, it’s clear that they’re trying to hammer out the best deal possible for themselves regardless of the cost to the taxpayer.)

Financial Times again: “The four banks in question collectively own more than USD 400bn of the USD 1trn in second lien mortgages outstanding. BofA holds USD 149bn, Citi holds USD 54bn, JP Morgan holds USD 101bn and Wells Fargo holds USD 115bn, according to fourth quarter 2009 10Q filings with the Securities & Exchange Commission.

As proposed, the MIC’s plan entails haircuts to the first and second lien loans to reduce underwater borrowers’ loan to value ratios to 96.5% of current real estate market prices, according to two sources close.

For the program to work, HAMP would place principal balance forgiveness first in the modification waterfall. The associated second lien would take a principal balance reduction but remain intact through the process – ultimately to be re-subordinated to the first lien, the sources close said.

A systemic program to modify second lien mortgages called 2MP does exist but Treasury has stalled on implementation because the banks that hold them can’t afford it, six buyside investors said. The sources all said implementation of the program, called 2MP, would result in “catastrophic” losses for the nation’s four largest banks, which collectively hold more than USD 400bn of the USD 1trn in second lien mortgages outstanding.” (”Mortgage investors push for banks to write down second liens”, Allison Pyburn, Financial Times)

Hold on a minute! Didn’t Geithner just run bank “stress tests” last year to prove that the banks could withstand losses on second liens?

Yes, he did. And the banks passed with flying colors. So, why are the banks whining now about the potential for “catastrophic” losses if the plan goes forward? Either they were lying then or they’re lying now; which is it?

Of course they were lying. Just like that sniveling sycophant Geithner is lying.

According to the Times the banks hold $400 billion in second lien mortgages. But –as Mike Konczal points out–the stress tests projected maximum losses at just “$68 billion. In other words, Geithner rigged the tests so the banks would pass. Now the banks want it both ways: They want people to think that they are solvent enough to pass a basic stress test, but they want to be given another huge chunk of public money to cover their second liens. They want it all, and Geithner’s trying to give it to them. Wanker.

And don’t believe the gibberish from Treasury that “they have no plan for mortgage principal reductions”. According to the Times:

“Treasury continues to tell investors that any day now they will be out with a final program and they will be signed up”….“The party line continues to be they are a week away, two weeks away,” the hedge fund source said. ”

So, it’s not a question of “if” there will be another bank bailout, but “how big” that bailout will be. The banks clearly expect the taxpayer to foot the entire bill regardless of who was responsible for the losses.

So, let’s summarize:

1–Bank bailout #1–$700 billion TARP which allowed the banks to continue operations after the repo and secondary markets froze-over from the putrid loans the banks were peddling.

2–Bank bailout #2–$1.25 trillion Quantitative Easing program which transferred banks toxic assets onto Fed’s balance sheet (soon to be dumped on Fannie and Freddie) while rewarding the perpetrators of the biggest financial crackup in history.

3–Bank bailout #3–$1 trillion to cover all mortgage cramdowns, second liens, as well as any future liabilities including gym fees, energy drinks, double-tall nonfat mocha’s, parking meters etc. ad infinitum.

And as far as the banks taking “haircuts”? Forget about it! Banks don’t take “haircuts”. It looks bad on their quarterly reports and cuts into their bonuses. Taxpayers take haircuts, not banksters. Besides, that’s what Geithner gets paid for–to make sure bigshot tycoons don’t have to pay for their mistakes or bother with the niggling details of fleecing the little people.

The next big bailout is on the way. Prepare to get reamed!

I honestly see the vision of Obama snapping under world pressure. Watch you’ll see. He will throw his hands up in the air and shout …

“You are so right WORLD, we live in a BOGUS world of make believe”.

[youtube=http://www.youtube.com/watch?v=gdjVISS6NP0]