The Market Ticker

I'm going to start today's Ticker with something I've touched on but a Bloomberg article yesterday poked at the scab and made it bleed again - military members caught up in the foreclosure mess:

"In the midst of the worst surge in mortgage defaults in seven decades, foreclosures in U.S. towns where soldiers live are increasing at a pace almost four times the national average, according to data compiled by research firm RealtyTrac Inc. in Irvine, California. As military families like the VerSteeghs signed up for the initial lower rates and easier terms of subprime mortgages, the number of people taking out Veterans Administration loans fell to the lowest in at least 12 years."

Alright, I'm going to dissect this piece by piece, and probably gore everyone's Ox, including the brass - that is, commanding officers and above.

First, background - I live in an area with a very dense military, both active and retired, population. There are four major military installations within an hour's drive of my home; Eglin, Hurlburt, Pensacola NAS and Tyndall. Many military individuals and families, along with civil-service folks attached to the bases, are very close personal friends of mine. I, however, have not served, and I will not make excuses for it - when I was young enough to do so I was not disciplined enough to volunteer. So there you have it.

Now let's talk reality. Active-duty military members are typically "PCS'd" (that is, "permanent change of station") once every two years. That is, you are typically reassigned to a different location on a permanent basis every 24 calendar months. Of course with the War On Terror going, you could be deployed at any point in time, but that doesn't change your station and where your family, if you have one, resides - but a PCS order does.

Now let's think. The commonly understand rule for buying real estate is that you must be prepared to live in the home for five years to have a reasonable chance of recovering all of your costs and expenses on both sides of the transaction.

This is simple mathematics - the typical real estate commission is 6% on each side - that is, 12% for a "round trip". The typical and sustainable long-term home price appreciation is in the 3-4% a year range, exactly in line with salaries. You also have other transaction costs associated with buying and selling a home, such as deed stamps, title insurance and various other fees and expenses (e.g. mortgage doc stamps in some jurisdictions, etc)

It is quite clear that if you buy and sell a house every two years you are likely to lose very significant amounts of money.

In fact the only way you can profit from that transaction is if housing is in a bubble and appreciating very rapidly.

Further, anyone in the armed forces must expect to be PCS'd every two years - even if you aren't, that's the "base case" expectation.

So what are military families doing buying - instead of renting - in the first place?

I can see it if the member of the family is on his or her last tour and is not going to "re-up", intending to settle wherever their last location might be. That makes sense. But if you're in and staying, tell me how it does?

Ok, that's part 1. And guess what - I bet the military does a piss-poor job of educating people as to the financial realities that are associated with this.

But part 2 is where I get really angry, because lack of knowledge is one thing, but intentional exploitation is another. And when it comes to the Realtors and Mortgage Brokers involved in this "trade", they know good and damn well what I wrote above.

They are professionals in the housing industry and in my opinion have an absolute duty to inform service members that this sort of transaction is highly speculative and fraught with risk. I can tell you with absolute certainty from my conversations with service men and women in this area that they did not and do not.

Furthermore, what is this subprime over representation among people in the service? There is already a program for servicemen and women to buy homes, its called "VA", and it features zero down payment provisions, no mortgage insurance requirements and no piggybacks or games such as prepayment penalties. Furthermore, most VA loans are assumable, which means that when you go to sell your house, provided the buyer meets eligibility requirements they can assume your mortgage instead of getting a new one! This is a MAJOR feature in that virtually NO ordinary mortgages can be assumed.

This is the program that veterans and active duty service folks should be using!

So how come there are so many subprime mortgages held by active-duty servicepeople and why did VA loan volume fall to the lowest level in 12 years?

Good question. Laziness? Ability to play games like cash-back at closing? Fees? Who knows. What is known is that the VA loan volume went off a cliff, and obviously, it wasn't in the best interest of the buyers (or the ramp job in foreclosures wouldn't be happening.)

In short servicemen and women were in many cases railroaded.

Now to be fair, not all servicemen and women were jacked around - in some cases they jacked themselves, or simply got greedy and decided to try to play "house roulette."

Some of the stories that I've seen in the media are simply not believable. And for those who knowingly tried to play the game and lost, I have little sympathy.

But the fact remains that in a lot of these cases lenders did in fact steer these people into other products when they would have qualified for a VA mortgage which would have been more suitable, and I know that the "sales job" was in high gear during the bubble years with servicepeople (as opposed to renting a residence) because I saw it here myself.

This sort of exploitation of the men and women who serve our nation in the name of freedom - whether you agree with the war on terror or not - is wrong. There is absolutely no excuse for it and this underlines in bold, black letters why brokers and lenders must be held to fiduciary standards in terms of borrower's interests. This sort of conduct needs to be criminalized for everyone, but if we're going to start with one group of people, it ought to be here.

Now let's talk a bit about the "back end" of those risky mortgages. See, it is now starting to come out that auditors inside some of these companies - the investment banks on Wall Street - were intentionally overridden by supervisors when they attempted to flag fraudulent or questionable mortgage applications.

"Warren thinks her supervisors didn't want her to do her job. She says that when she would reject, or kick out, a loan, they usually would overrule her and approve it.

"The QC reviewer who reviewed our kicks would say, 'Well, I thought it had merit.' And it was like 'What?' Their credit score was below 580. And if it was an income verification, a lot of times they weren't making the income. And it was like, 'What kind of merit could you have determined?' And they were like, 'Oh, it's fine. Don't worry about it.'""

What have I been saying? That these fraudulent loans were intentionally packaged up and sold to investors. It was not so simple as "ignorance", it was in fact knowing misrepresentation, that is, fraud.

Well, now we've got people who actually worked inside these firms blowing the whistle.

Its about time.

This gets legs and I predict that people will go to prison.

"Bubba loves you" style prison.

Good, says I, and hopefully some investment bank CEOs will be on the list of those who get the perp-walk.

In the "just desserts" department we now have a new twist on the monoline-cum-CDO-hedge game - banks having to obtain approval from the monolines to unwind CDOs, and being unable to secure it, as doing so might risk the monoline's solvency:

"For the past several months as the credit crunch has pummeled mortgages and other forms of debt, a lot of collateral used to form CDOs has triggered defaults due to rating agency downgrades. As a result, if the banks begin dumping these problem securities, financial guarantors would be forced to pay default claims almost immediately - a tall order for companies whose financial future is already murky.

Typically, monolines pay out claims on losses over a period of 20 or 30 years, but the types of sales that the banks are looking to score would accelerate those payments and further hammer companies already hurting.

The banks appear to recognize that the insurers are unlikely to be able to cough up the cash needed to pay off these losses."

Aha! Now we see the truth of what I've been hollering about for a very long time.

The monolines don't have the money to back their so-called "insurance"; that is, the banks in fact bought used toilet paper and not actual swaps on those CDOs!

This ought to trigger intervention to force these banks to recognize the worthless nature of these swaps and mark the underlying instruments at their "native" credit quality immediately.

It is simply unacceptable to allow institutions to claim they have credit "enhancement" in the form of these insurance products once it is recognized that the counterparty cannot pay. These instruments are considered "money good" with no (or very little) reserve against loss specifically because they are allegedly insured - but the insurance is now recognized as worthless by everyone involved!

Your mortgage company would not let you claim your homeowners policy was "good" when your insurer had declared itself unable to pay claims. You would be forced to immediately secure replacement insurance from a company that can pay in the event of a loss, or pay off your note.

So why do we not see the SEC immediately do the same with the investment banks, and The Fed, OCC and OTS do the same for the commercial banks under their governance?

Are these banks are intentionally concealing the true value of these instruments (or lack thereof) while being well aware that they are impaired?

Why are our regulators allowing what appears to be an intentional violation of Sarbanes-Oxley as well as just good old fashioned common securities law?

THIS SHAM HAS GONE ON LONG ENOUGH AND MUST STOP!

Next up, we've got McCain. You know, the Presidential Candidate? Actually, the news is his Economic Adviser Gramm - and his ties to certain firms that have a problem with the United States Internal Revenue Code.

That'd be one Senator Phil Gramm. Most people don't remember Mr. Gramm, but you should. He is one of the architects of the Gramm-Leach-Bliley Law that repealed the last pieces of Glass-Steagall.

That's the pesky little law that led indirectly to both the Tech Bubble and the Housing Bubble by taking the last pieces of Depression-era protection off the banks, allowing them to play their games and rape the public. And let's not forget that three days after the ink was dry on that bill, one Bob Rubin (remember him from Clinton's administration?) went to work for Citibank - as co-chairman.

Nice eh?

Well now to be fair, these banks have spent plenty of money lobbying with both political parties. But that's not the real issue. No, that's the fact that Mr. Gramm has been recently on the payroll of UBS as a lobbyist - as recently as December 2007!

"'Countdown with Keith Olbermann' reported Tuesday night that lobbying disclosure forms, filed by the giant Swiss bank UBS, list McCain's campaign co-chair, former Texas Sen. Phil Gramm, as a lobbyist dealing specifically with legislation regarding the mortgage crisis as recently as Dec. 31, 2007."

But my outrage isn't just directed at the fact that UBS had Mr. Gramm lobbying on the housing bailouts (specifically, against for homeowners and one would assume "for" the banks), although perhaps it should be, given that Mr. Gramm worked tirelessly to (successfully) kill the bill that would have allowed bankruptcy judges to "cram down" modifications on delinquent mortgages - a right that judges used to have before bankruptcy "reform" removed it.

Oh no. My ire is directed at the fact that UBS has apparently directed its staff not to visit the United States:

"UBS has told members of its former private banking team responsible for rich US clients not to travel to America.

The Swiss bank has also made lawyers available to the more than 50 bankers involved, many of whom have left UBS since it decided last November to wind down its cross-border private banking business for US ­customers."

What's this about? Oh, its rather quite simple. You see, UBS is alleged to have helped some very rich clients of the bank evade (illegally, it would appear) the Internal Revenue Service. You know, tax evasion?

Yeah. See, according to US law you are subject to tax no matter where you stick your assets. But many wealthy people have been known to establish offshore bank and brokerage accounts in places like Lichenstein and Switzerland, which have rather solid bank secrecy laws. They then trade or otherwise make money using that money, and don't report it. The IRS, having no means to compel a bank or other institution in a nation beyond the United States to produce records, is stuck.

But whether you can get away with it or not doesn't change the law, which is that as a United States Citizen you have a duty to report all your income and pay taxes on it.

UBS is alleged to have helped a significant number of very wealthy Americans evade paying those very same taxes by hiding income offshore. That's a serious federal offense, if its true.

But heh, it all seems to be ok, right? After all, UBS still has regulatory authority to operate in the United States; there are still plenty of UBS offices all over the land, including one near me.

Yet the company is directing its executives not to travel to the United States.

Oh, and Gramm, who is McCain's economic adviser, is taking money from this very same company as a lobbyist.

How very nice.

As I've pointed out, if we elect Senator Obama in November (as I believe we will) as President your taxes will go up. That's a foregone conclusion. But Senator Obama at least has been honest enough to tell you that your taxes will go up.

Senator McCain, on the other hand, has as a chief economic adviser a guy who is lobbying on behalf of a firm that is alleged to have helped a certain very few, very rich United States citizens evade paying those very same taxes, which of course means that you and I, who aren't so wealthy and aren't inclined to felonious conduct, get to pay extra taxes. That very same advisor has put a significant amount of effort into insuring that when you are ripped off due to unfair or even deceptive loan practices, and you go bankrupt as a result, the judge can't modify the terms of that loan - a right that he used to have before it was stripped from him as part of bankruptcy "reform."

Now I accept that taxes are going to go up one way or another after the November elections. It is inevitable that Bush's tax cuts will expire, given the composition of The House and Senate. I accept that.

But Senator Obama is honest enough to tell us that these outcomes will be headed our way, and, at least as far as I can tell, the very wealthy who are inclined to take their money and stick it in an offshore account won't be exempt.

McCain, on the other hand, has as his chief economic adviser a guy who is doing lobbying work for a bank that is accused of helping some very wealthy clients illegally evade paying those very same taxes, along with (successfully) lobbying to insure that if you got screwed by one of those very nice bankers the bankruptcy judge can't help you.

And people wonder why, for the first time since I first gained the franchise at the age of 18, I'm inclined to vote for Obama for President come November?

(PS: And lest you think this is simply a Democrat thing, its not. If Hillery were the front-runner I'd have to vote for Mickey. After all, it was her husband that led to this unprecedented financial rape of the public in the first place with that same Senator Gramm's bill in the late 90s....)

One final thing. While the market liked the Durables report, have a peek inside and look at defense and non-defense. Defense orders up 4.8%, non-defense down 1.4%.

CNBS, of course, made a lot of noise about the fact that "ex transport" durables were up, but they said nothing about the non-defense decline, nor the fact that inventories are at the highest level since the series tracking them was started in 1992.

In other words manufacturers are building a lot of "stuff" but it ain't getting sold, and the civilian economy continues to slow significantly. The entire "improvement" this month was on the back of defense spending, presumably to replace the bullets and bombs that our boys are expending over in Iraq.

Our national lie-and-spin "bubblevision" network, of course, said the exact opposite this morning - that the civilian economy is stronger than expected and "there are no signs of a recession."

CNBS has become Goebbels-Vision at its finest, sucking the American Investor in through blatantly and intentionally omitting key pieces of information from their "reporting."

Dow Chemical (NYSE: DOW) is hiking prices 20% come June 1st. Price inflation? Yeah, you got that right. Why? Duh. Huge increases in their costs for energy, transportation and raw material. Twenty percent folks. Read that before you go get the next can of "Scrubbing Bubbles" for your bathroom.