Tag: finance

By now it was only a formality, as the likelihood of the G-8 meeting taking place in Sochi in June, months after the Russian invasion of the Ukraine, was zero at best. So the fact that G-8, pardon, G-7 countries announced the halting of their preparation for a June vacation on the Black Sea should not surprise anyone.

Full G-7 statement:

We, the leaders of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States and the President of the European Council and President of the European Commission, join together today to condemn the Russian Federation’s clear violation of the sovereignty and territorial integrity of Ukraine, in contravention of Russia’s obligations under the UN Charter and its 1997 basing agreement with Ukraine.  We call on Russia to address any ongoing security or human rights concerns that it has with Ukraine through direct negotiations, and/or via international observation or mediation under the auspices of the UN or the Organization for Security and Cooperation in Europe.  We stand ready to assist with these efforts.

 

We also call on all parties concerned to behave with the greatest extent of self-restraint and responsibility, and to decrease the tensions.

 

We note that Russia’s actions in Ukraine also contravene the principles and values on which the G-7 and the G-8 operate.  As such, we have decided for the time being to suspend our participation in activities associated with the preparation of the scheduled G-8 Summit in Sochi in June, until the environment comes back where the G-8 is able to have meaningful discussion.

 

We are united in supporting Ukraine’s sovereignty and territorial integrity, and its right to choose its own future.  We commit ourselves to support Ukraine in its efforts to restore unity, stability, and political and economic health to the country.  To that end, we will support Ukraine’s work with the International Monetary Fund to negotiate a new program and to implement needed reforms.  IMF support will be critical in unlocking additional assistance from the World Bank, other international financial institutions, the EU, and bilateral sources.

Harsh as this treatment may be for local Sochi caterers, we don’t expect Putin to lose much sleep over this. That said we are closing our 3X ETF long position in Russian caterers and replacing it with a matched exposure in Brussels. We expect much more action out of Europe in the coming months.

via Zero Hedge http://ift.tt/1i5qjRk Tyler Durden

Submitted by Detlev Schlichter via DetlevSchlichter.com,

The Bitcoin phenomenon has now reached the mainstream media where it met with a reception that ranged from sceptical to outright hostile. The recent volatility in the price of bitcoins and the issues surrounding Bitcoin-exchange Mt. Gox have led to additional negative publicity. In my view, Bitcoin as a monetary concept is potentially a work of genius, and even if Bitcoin were to fail in its present incarnation – a scenario that I cannot exclude but that I consider exceedingly unlikely – the concept itself is too powerful to be ignored or even suppressed in the long run. While scepticism towards anything so fundamentally new is maybe understandable, most of the tirades against Bitcoin as a form of money are ill-conceived, terribly confused, and frequently factually wrong. Central bankers of the world, be afraid, be very afraid!

Finding perspective

Any proper analysis has to distinguish clearly between the following layers of the Bitcoin phenomenon: 1) the concept itself, that is, the idea of a hard crypto-currency (digital currency) with no issuing authority behind it, 2) the core technology behind Bitcoin, in particular its specific algorithm and the ‘mining process’ by which bitcoins get created and by which the system is maintained, and 3) the support-infrastructure that makes up the wider Bitcoin economy. This includes the various service providers, such as organised exchanges of bitcoins and fiat currency (Mt. Gox, Bitstamp, Coinbase, and many others), bitcoin ‘wallet’ providers, payment services, etc, etc.

Before we look at recent events and recent newspaper attacks on Bitcoin, we should be clear about a few things upfront: If 1) does not hold, that is, if the underlying theoretical concept of an inelastic, nation-less, apolitical, and international medium of exchange is baseless, or, as some propose, structurally inferior to established state-fiat money, then the whole thing has no future. It would then not matter how clever the algorithm is or how smart the use of cryptographic technology. If you do not believe in 1) – and evidently many economists don’t (wrongly, in my view) – then you can forget about Bitcoin and ignore it.

If 2) does not hold, that is, if there is a terminal flaw in the specific Bitcoin algorithm, this would not by itself repudiate 1). It is then to be expected that a superior crypto-currency will sooner or later take Bitcoin’s place. That is all. The basic idea would survive.

If there are issues with 3), that is, if there are glitches and failures in the new and rapidly growing infra-structure around Bitcoin, then this does neither repudiate 1), the crypto-currency concept itself, nor 2), the core Bitcoin technology, but may simply be down to specific failures by some of the service providers, and may reflect to-be-expected growing pains of a new industry. As much as I feel for those losing money/bitcoin in the Mt Gox debacle (and I could have been one of them), it is probably to be expected that a new technology will be subject to setbacks. There will probably be more losses and bankruptcies along the way. This is capitalism at work, folks. But reading the commentary in the papers it appears that, all those Sunday speeches in praise of innovation and creativity notwithstanding, people can really deal only with ‘markets’ that have already been neatly regulated into stagnation or are carefully ‘managed’ by the central bank.

Those who are lamenting the new – and yet tiny – currency’s volatility and occasional hic-ups are either naïve or malicious. Do they expect a new currency to spring up fully formed, liquid, stable, with a fully developed infrastructure overnight?

Recent events surrounding Mt Gox and stories of raids by hackers would, in my opinion, only pose a meaningful long-term challenge for Bitcoin if it could be shown that they were linked to irreparable flaws in the core Bitcoin technology itself. There were indeed some allegations that this was the case but so far they do not sound very convincing. At present it still seems reasonable to me to assume that most of Bitcoin’s recent problems are problems in layer 3) – supporting infrastructure – and that none of this has so far undermined confidence in layer 2), the core Bitcoin technology. If that is indeed the case, it is also reasonable to assume that these issues can be overcome. In fact, the stronger the concept, layer 1), the more compelling the long-term advantages and benefits of a fully decentralized, no-authority, nationless global and inelastic digital currency are, the more likely it is that any weaknesses in the present infrastructure will quickly get ironed out. One does not have to be a cryptographer to believe this. One simply has to understand how human ingenuity, rational self-interest, and competition combine to make superior decentralized systems work. Everybody who understands the power of markets, human creativity, and voluntary cooperation should have confidence in the future of digital money.

None of what happened recently – the struggle at Mt. Gox, raids by hackers, market volatility – has undermined in the slightest layer 1), the core concept. However, it is precisely the concept itself that gets many fiat money advocates all exited and agitated. In their attempts to discredit the Bitcoin concept, some writers do not shy away from even the most ludicrous and factually absurd statements. One particular example is Mark T. Williams, a finance professor at Boston University’s School of Management who has recently attacked Bitcoin in the Financial Times and in this article on Business Insider.

Money and the state: Fact and fiction

Apart from all the scare-mongering in William’s article – such as his likening Bitcoin to an alien or zombie attack on our established financial system, stressing its volatility and instability – the author makes the truly bizarre claim that history shows the importance of a close link between currency and sovereignty. Good money, according to Williams, is state-controlled money. Here are some of his statements.

“Every sovereignty uses currency.”

 

“Trust and faith that a sovereign is firmly standing behind its currency is critical.”

 

“Sovereigns understand that without consistent economic growth and stability, the standard of living for its citizens will fall, and discontentment will grow. Nation-state treasuries print currency but the vital role of currency management– needed to spur economic growth — is reserved for central bankers.”

Williams reveals a striking lack of historical perspective here. Money-printing, central banking and any form of what Williams calls “currency management” are very recent phenomena, certainly on the scale that they are practiced today. Professor Williams seems to not have heard of Zimbabwe, or of any of the other, 30-odd hyperinflations that occurred over the past 100 years, all of which, of course, in state-managed fiat money systems.

Williams stresses what a long standing concept central banking is, citing the Swedish central bank that was founded in 1668, and the Bank of England, 1694. Yet, human society has made use of indirect exchange – of trading with the help of money – for more than 2,500 years. And through most of history – up to very recently – money was gold and silver, and the supply of money thus practically outside the control of the sovereign.

The early central banks were also very different animals from what their modern namesakes have become in recent years. Their degrees of freedom were strictly limited by a gold or silver standard. In fact, the idea that they would “manage” the currency to “spur” economic growth would have sounded positively ridiculous to most central bankers in history.

Additionally, by starting their own central banks, the sovereigns did not put “trust and faith” behind their currencies – after all, their currencies were nothing but units of gold and silver, and those enjoyed the public’s trust and faith on their own merit, thank you very much – the sovereigns rather had their own self-interest at heart, a possibility that does not even seem to cross William’s mind: The Bank of England was founded specifically to lend money to the Crown against the issuance of IOUs, meaning the Bank of England was founded to monetize state-debt. The Bank of England, from its earliest days, was repeatedly given the legal privilege – given, of course, by its sovereign – to ignore (default on) its promise to repay in gold and still remain a going concern, and this occurred precisely whenever the state needed extra money, usually to finance a war.

Bitcoin is cryptographic gold

“Gold is money and nothing else.” This is what John Pierpont Morgan said back in 1913. At the time, not only was he a powerful and influential banker, his home country, the United States of America, had become one of the richest and most dynamic countries in the world, yet it had no central bank. The history of the 19^th century US – even if told by historians such as Milton Friedman and Anna Schwarz who were no gold-bugs but sympathetic to central banking – illustrates that monetary systems based on a hard monetary commodity (in this case gold), the supply of which is outside government control, is no hindrance to vibrant economic growth and rising prosperity. Furthermore, economic theory can show that hard and inelastic money is not only no hindrance to growth but that it is indeed the superior foundation of a market economy. This is precisely what I try to show with Paper Money Collapse. I do not think that this was even a very contentious notion through most of the history of economics. Good money is inelastic, outside of political control, international (“nationless”, as Williams puts it), and thus the perfect basis for international cooperation across borders.

Money was gold and that meant money was not a tool of politics but an essential constraint on the power of the state.

As Democritus said “Gold is the sovereign of all sovereigns”.

It is clear that on a conceptual level, Bitcoin has much more in common with a gold and silver as monetary assets than with state fiat money. The supply of gold, silver and Bitcoin, is not under the control of any issuing authority. It is money of no authority – and this is precisely why such assets were chosen as money for thousands of years. Gold, silver and Bitcoin do not require trust and faith in a powerful and privileged institution, such as a central bank bureaucracy  (here is the awestruck Williams not seeing a problem: “These financial stewards have immense power and responsibility.”) Under a gold standard you have to trust Mother Nature and the spontaneous market order that employs gold as money. Under Bitcoin you have to trust the algorithm and the spontaneous market order that employs bitcoins as money (if the public so chooses). Under the fiat money system you have to trust Ben Bernanke, Janet Yellen, and their hordes of economics PhDs and statisticians.

Hey, give me the algorithm any day!

Money of no authority

But Professor Williams does seem unable to even grasp the possibility of money without an issuing and controlling central authority: “Under the Bitcoin model, those who create the software protocol and mine virtual currencies would become the new central bankers, controlling a monetary base.” This is simply nonsense. It is factually incorrect. Bitcoin – just like a proper gold standard – does not allow for discretionary manipulation of the monetary base. There was no ‘monetary policy’ under a gold standard, and there is no ‘monetary policy’ in the Bitcoin economy. That is precisely the strength of these concepts, and this is why they will ultimately succeed, and replace fiat money.

Williams would, of course, be correct if he stated that sovereigns had always tried to control money and manipulate it for their own ends. And that history is a legacy of failure.

The first paper money systems date back to 11^th century China. All of those ended in inflation and currency disaster. Only the Ming Dynasty survived an experiment with paper money – by voluntarily ending it and returning to hard commodity money.

The first experiments with full paper money systems in the West date back to the 17^th century, and all of those failed, too. The outcome – through all of history – has always been the same: either the paper money system collapsed in hyperinflation, or, before that happened, the system was returned to hard commodity money. We presently live with the most ambitious experiment with unconstrained fiat money ever, as the entire world is now on a paper standard – or, as James Grant put it, a PhD-standard – and money production has been made entirely flexible everywhere. This, however does not reflect a “longstanding bond between sovereign and its currency”, as Williams believes, but is a very recent phenomenon, dating precisely to the 15^th of August 1971, when President Nixon closed the gold window, ended Bretton Woods, and defaulted on the obligation to exchange dollars for gold at a fixed price.

The new system – or non-system – has brought us persistent inflation and budget deficits, ever more bizarre asset bubbles, bloated and unstable banking systems, rising mountains of debt that will never be repaid, stagnating real incomes and rising income disparities. This system is now in its endgame.

But maybe Williams is right with one thing: “If not controlled and tightly regulated, Bitcoin — a decentralized, untraceable, highly volatile and nationless currency — has the potential to undermine this longstanding bond between sovereign and its currency.”

Three cheers to that.

via Zero Hedge http://ift.tt/1hV9AeZ Tyler Durden

With all eyes dismally fixed on Eastern Europe and the esclating tensions between the world’s most powerful nations, we thought perhaps a little levity was appropriate. “Way To Blue” trawls the social media stratosphere of intellect and calculates a “desire to win” index that summarizes who we, the lowly members of the public, would most like to win the celebrated Academy Awards. It appears, in an odd coincidence to real-life, the debt-serfs of the world would most like to see “12 Years A Slave” win for Best Film.

 

via Zero Hedge http://ift.tt/1hyWLZs Tyler Durden

Surprise! The pump on Friday afternoon has given way to the 5th 'dump' in 5 days as US equity futures have crumbled back top Friday's lows and are catching down to USDJPY's early weakness. Gold is up $10 at $1,338. It seems once again that stocks, despite all those talking heads on Friday afternoon so confidently explaining how Ukraine was priced-in, knew nothing…

 

USDJPY in charge…

 

As the "efficient" stock market catches down to reality./..

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/1i5bON9 Tyler Durden

Several unconfirmed reports of two explosions being heard in Crimea’s capital, Semferopol were on the wires and now The BBC has confirmed,

A loud bang was heard about 23:10 local time (21:10 GMT), following by a smaller blast, BBC reporters in Simferopol say.

Reports vary from “didn’t hear any explosions” to Belbek Air Force is under Russian attack.

 

The BBC reports explosions:

 

But reports seem confused at best…

 

#Ukraine‘s Belbek Air Force Base under #Russian attack; attackers aim for arms cache,use stun grenades #RussiaInvadesUkraine #CrimeaInvasion

— Ukrainian Updates (@Ukroblogger) March 2, 2014

Not heard the two reported explosions in Simferopol. @ukrpravda_news and @rykov both saying it was stun grenades. Quiet in the center

— max seddon (@maxseddon) March 2, 2014

via Zero Hedge http://ift.tt/1eS0coU Tyler Durden

Submitted by Peter Tchir of TF Market Advisors,

The Crimean War

The Charge of the Light Brigade is from the Battle of Balaclava in 1854.  Conspicuously missing as any reference from that war was the Ukraine.  In fact, Crimea was effectively “gifted” to the Ukraine in 1954 by Khrushchev.  The Soviet Union had a strong policy of attempting to break up or at least dilute strong groups of a single, non Russian, ethnicity.

So the big problem today is that Crimea doesn’t look or feel Ukrainian, and it is home to one of Russia’s most important naval bases.  For many, this always seemed a recipe for disaster.

You lease cars, not crucial military bases.  Having said that I will admit to never fully understanding Gitmo, which is where the U.S. leases a Naval Base (or interrogation center) from Cuba where we are actually enemies.

So what does this all mean?

The “Best” Case – Independent Crimea
At this stage the “best” case seems to be a deal that creates an “independent” Crimea.  Russia can do some chest thumping and the West gives up relatively little that really they hadn’t given up before.

I don’t see this ending without an independent Crimea.  The situation went too far and there doesn’t seem any way to reconcile.  There does not appear to be much interest in the Crimea to remain part of Ukraine and Russia won’t stop agitating until it gets what it wants.

The Ukraine can get some gas concessions from Russia to save face.

I see that as the best case.  I am not sure it is the most likely case because it is difficult to determine if

1.      Will Russia be content to stop there?
2.      Will the Ukraine or NATO take steps to provoke Russia?

Let’s hope the best case occurs as it shouldn’t have a big impact on the lives of most people, even in the Ukraine, and the markets should remain pretty calm.

The Slippery Slope – Eastern Ukraine
Much of the Eastern part of Ukraine is Russian speaking.  Vitaly Fiks (the F in TF), was born in Odessa and spoke Russian not Ukrainian.  That is the norm.  Much of the heavily industrialized East has strong Russian connections.

The demonstrations have been spreading to cities in this region.

So will Russia be content with the Crimea?

This is where you have to think like a Russian.  I have seen a few articles on the subject that too many analyze Russia with a Western perspective and agree that is what leads to mistakes.  To think like a Russian is relatively easy.  Create a vodka-induced haze of pessimism where everyone seems out to get you and mix in a little anger and cruelty with a strong desire to persevere and win, and you have it.  Okay, that is a bit of an exaggeration, but do think about who are the players here:

• A former colonel in the KGB (which I assume you don’t get to by being soft and naïve) who has managed to come out on top in a country of oligarchs.  The 0.01% in Russia do extremely well, are happy to flaunt it, and go to great lengths (legal and occasionally otherwise) to defend it. This is a hard man who is used to getting his way.
• A constitutional lawyer who turned into a community organizer who can barely get people to agree not to default on our own debt.  He has a great ability to fundraise but seems tired of the job.
• Then you have a woman who has been able to hold together the EU and shape it to suit her and her country.  She has done a great job of balancing internal and external pressure.  She is very smart.  She understands the mindset of the East having come from East German.  Frankly, I think she is the best hope, but she has been extremely quiet, and while cobbling together a bunch of central bankers has been difficult enough within the framework of the EU, putting together something, military or otherwise that gives Russia seems very difficult.

So the next biggest risk is a push into Eastern Ukraine and I think it is quite possible and there is a good lesson from Georgia on this one.

There Russia effectively pushed 10 miles further than they had to.  Then as part of their negotiations they conceded the territory from that last push and pulled back to the borders that they had wanted in the first place.

Why not push and see what happens?

This is our base case.  Russians will creep into Eastern Ukraine.  We expect a reasonably quick resolution that again leaves most people unaffected and can leave the markets calm.

Anschluss
This is where it gets a little more troublesome, at least for the markets.

Germany started with Austria and then moved into other primarily German regions of other countries prior to World War II really getting under way.  Small areas, not deemed essential I guess by the rest of the world, where many of the inhabitants seemed to welcome the change with open arms were allowed to proceed.

Belarus?  Belarus was one of the first to form part of the Soviet Union.  I have never heard a single Westerner suggest a visit to Minsk.  It is heavily Russian speaking, heavily industrialized, and struggling.  Is that next?

While Estonia and Lithuania seem to have re-emerged with strong nationalistic pride, that seems less clear to me in Latvia.  Is that another area where you could see the ethnic Russia’s try and create a situation that could be more to their liking?  It seems less likely than Belarus, but, we have moved from “likely scenarios” to where this could lead.

I don’t think the markets would respond well to Russia, which is resource rich, flexing its muscle in this format.  We don’t think this scenario plays out, but if Russia is allowed to encroach into Eastern Ukraine, expect growing fears of a Russian Anschluss to weigh on markets.

When the Cats Away, the Syria Will Play

Syria has not yet delivered all of its chemical weapons to the authorities.  From what I can tell, we are more in a lull than having seen any real resolution.

With all eyes on Russia, it could create an opportunity for Syria to cause serious problems. How could the U.S. go into Syria but leave Russia alone?  Why wouldn’t the Russians volunteer to help Syria?

This could happen in parallel with the events in the Ukraine and we don’t think the markets would be comfortable with this.

I think it is likely that we see some noise out of Syria and that will be negative.

The Enemy of my Enemy – Chinese Silence

China seems to be very quiet on the subject of Ukraine and territorial rights.  Maybe that is because China has no interest in the outcome?  Maybe it is because China isn’t aware of what is going on?  Those are both clearly not true.

Maybe China is watching the developments and deciding whether now is a good time to resolve their own territorial disputes.

It seems that China has been getting more aggressive in and around the islands that they have an ongoing dispute with Japan.

I doubt China does anything, but if they do, markets will be hit hard as that will put a question into global trade like we haven’t seen in years.

It doesn’t seem to be in Chinese interests to do anything, but then again, maybe they think there won’t be repercussions?

So we view this as unlikely, but will keep an eye out.

Other “Hot Spots”?

Are there other places, off our radar map, that might see this as an opportunity to be more aggressive?

Overall View

We remain bearish risk assets due to our view that they are overvalued.

At this stage we see very little from the Ukraine priced into the market, and with our best case that makes sense and even our base case (encroachment into Eastern Ukraine that is quickly and peacefully) resolved, the impact should be minimal.  Probably creates a little downside to the market but that is it.

As some of the other scenarios potentially come into play, whether in reality or perception, the risk to further downside in the market is significant.

Since we are already recommending being short based on the economy and the misperception of the Fed’s next steps, you effectively pick up the conflict for free.

With VIX being so low, picking up some downside protection makes a lot of sense here.

via Zero Hedge http://ift.tt/1eS0b4g Tyler Durden

While the images and local news have been suggesting that Russia is in control on the Crimean peninsula, US officials (according to Bloomberg) have confirmed this:

• *RUSSIAN FORCES IN COMPLETE CONTROL OF CRIMEA: U.S. OFFICIAL
• *RUSSIA HAS 6,000 TROOPS IN CRIMEA, U.S. OFFICIAL SAYS
• *KERRY TO REAFFIRM SUPPORT FOR UKRANIAN SOVEREIGNITY, PSAKI SAYS

Obama, Merkel, and Cameron are now on a conference call to discuss this “fact” and officials have just reported that US Secretary of State John Kerry will visit Kiev tomorrow (though we suspect not Sevastopol):

• U.S. IS FOCUSED ON ECONOMIC, POLITICAL AND DIPLOMATIC OPTIONS ON UKRAINE, NOT ON ANY POSSIBLE U.S. MILITARY INTERVENTION, U.S. OFFICIAL SAYS
• *U.S. CONSIDERING SANCTIONS ON RUSSIAN BANKS, OFFICIAL SAYS

 

 

Via AFP

via Zero Hedge http://ift.tt/1fAOHlT Tyler Durden

The last two weeks have seen events escalating at a rapid pace in Ukraine with the center of attention quickly shifting from Kiev’s deadly protests to Crimea’s “invasion.” With Russia’s Prime Minister Dmitry Medvedev warning that Ukraine’s new leaders seized power illegally and predicting their rule would end with “a new revolution” and more bloodshed, we thought the following infographic would provide some context for how Ukraine got here so fast.

 

Via AFP

The rhetoric continues to strengthen from the Russians…

As Reuters reports, Medvedev said that while Viktor Yanukovich had practically no authority he remained the legitimate head of state according the constitution, adding: “If he is guilty before Ukraine – hold an impeachment procedure … and try him.”

 

“Everything else is lawlessness. The seizure of power,” Medvedev said on his Facebook page.

 

“And that means such order will be extremely unstable. It will end in a new revolution. New blood.”

via Zero Hedge http://ift.tt/1fAMuqB Tyler Durden

So you want to be a rock’n’roll star

Then listen now to what I say

Just get an electric guitar

And take some time and learn how to play

And when your hair’s combed right and your pants fit tight

It’s gonna be all right

 

“So You Want to Be a Rock ‘n’ Roll Star”

The Byrds/Jim McGuinn & Chris Hillman (1967)

Last week confirmed many of the things about the financials and housing that we have been talking about since last summer.  Those of you who were on the conference call for JPMorgan Chase’s 2Q 2013 earnings results will recall that Chief Financial Officer Marianne Lake disclosed that the bank was expecting a substantial drop in mortgage volumes in the second half of the year.  In fact that is just what has happened.  And as Lake predicted, revenues are falling faster than costs, meaning that JPM is losing money on mortgage originations.   The other TBTF banks are in much the same situation.  

The entire mortgage industry is in the midst of a massive consolidation in mortgage finance, with banks cutting back staff and operational infrastructure in an effort to right size business to the volumes expected in 2014.  With mortgage applications at a two decade low and origination volumes running about half of last year’s levels, nobody is really sure just what expected volumes will be in 2014.  

For example, the total of 1-4 family loans securitized by all US banks fell almost 5% over the past year to a mere $610 billion.  Real estate loans secured by 1-4 family properties held in bank portfolios as of Q4 2013 fell to $2.4 trillion in the last quarter, the lowest level since Q4 2004.  FDIC reports that the amount of 1-4 family loans sold exceeded originations by almost $30 billion or 20% of the total sold into securitizations.

Meanwhile JPM and other banks are hiring armies of new compliance officers to watch the employees who remain after the next round of cost cutting occurs.  Reuters reported with respect to JPM:  

The company said it expected total headcount to fall by 5,000 to 260,000 in 2014. Around 6,000 full-time and contractor jobs in JPMorgan’s home loans unit and 2,000 jobs in its branch and credit-card network will be cut. At the same time, the bank expects to add 3,000 new jobs in its control function, including areas like compliance.

Sadly those new compliance officers cannot make loans, but they can certainly prevent their colleagues from making loans or doing any other sort of business.  A lot of the pain you see at banks like JPM, Wells Fargo, Citigroup and Bank of America comes from the 2010 Dodd-Frank legislation.  Next time CNBC has former Rep. Barney Frank on for a chat, they ought to ask him how it feels to be responsible for cratering the markets for US housing and financials single handed. 

The banks as a group are running away from the mortgage sector, another reason why mortgage applications and volumes are falling.  Most banks, if they make mortgage loans at all, will only write business that can be sold to one of the GSEs – Fannie Mae, Freddie Mac or Ginnie Mae.  And even these loans are losing their allure because of the new regulations being spewed by the Consumer Finance Protection Bureau.  The most recent 10-K for JPM has the following disclosure:

The CFPB issued final regulations regarding mortgages, which became effective January 10, 2014, and which will prohibit mortgage servicers from beginning foreclosure proceedings until a mortgage loan is 120 days delinquent. During this period, the borrower may apply for a loan modification or other option and the servicer cannot begin foreclosure until the application has been addressed. 

What this means is that a home owner can default on their mortgage and basically live in the house for free for at least half a year before the bank can even contact the debtor.  In states like Massachusetts, the home of Democratic Senator Elizabeth Warren, there is an additional cooling off period set by state law that starts after the federal cooling off period is done.  

Bottom line is that an MA resident can default on their mortgage and live in the house for free for a year before the lender/servicer is allowed to contact them.  So now you know why banks don’t want to touch a borrower with less than a mid-700 FICO score.  But it gets better.  Because of the pro-consumer legal regime in states like MA, home sales volumes are a fraction of pre-crisis levels.  Prices for non-performing loans in states like MA, CT, NY and NJ are typically among the lowest in the nation.

Let’s continue that same paragraph from JPM’s 10-K:

The CFPB issued another final regulation which became effective January 10, 2014, imposing an “ability to repay” requirement for residential mortgage loans. A creditor (or its assignee) will be liable to the borrower for damages if the creditor fails to make a “good faith and reasonable determination of a borrower’s reasonable ability to repay as of consummation.” Borrowers can sue the creditor or assignee for up to three years after closing, and can raise an ability to repay claim against the servicer as a set off at any point during the loan’s life if in foreclosure. A “Qualified Mortgage” as defined in the regulation is generally protected from such suits.

What is means is that not only can the borrower default on the mortgage loan and sit in the house for a year, undisturbed, but he can also sue you.  In states like CA, the borrower can get a shopping mall plaintiff lawyer, who can sue the lender/servicer/note holder for relatively minor errors.  The defendant must actually foot the bill for the litigation in the People’s Republic of California.  Assuming the case goes to trial, a settlement will cost as much as $50,000 or about 10x the maximum profit on the loan.

Q: How many times you think a lender/servicer/investor in mortgages will write a $50,000 settlement check before they stop making loans to below-prime borrowers?  

A: The commercial banks are already there.  This is one reason, mind you, that the market for below-prime lending is still not coming back.  

Think of the current regulatory regime for mortgage lending as a menage à trois among state and federal politicians, the Big Media and regulators, many of whom were in politics before they mounted the ramparts to “defend consumers.”  Just imagine Barney Frank, Liz Warren and CFPB chief Richard Cordray enjoying one another’s company in the political hot tub and you get the idea.  The trial lawyers are serving the drinks, BTW.

Cordray, lest we omit, before he went to Washington, was OH AG where he frequently bullied lenders into large cash settlements for supposed violations of consumer protection laws.  Now at CFPB Cordray is operating on a bigger stage, where he can extort settlements from all manner of lenders, loan servicers and anybody else who makes a living in the consumer finance sector.  The unitary model of the CFPB gives Cordray unilateral control over the agency with none of the political accountability of a commission structure. And he is directly allied with the Big Media, who breathlessly report his latest offensives against “abusive lenders.”

The most overt attack against the lending industry came several weeks ago when a New York State regulator halted the transfer of about $39 billion in unpaid balance (UPB) of mortgage loans rights to Ocwen Financial (OCN) from Wells Fargo (WFC).  Since last summer, federal regulators have quietly put in place a review process for loan transfers that requires both the seller and buyer of loans and mortgage servicing rights to gain approval. 

The action by New York State is yet the latest layer of regulatory oversight over loan transfers dating back to the various settlements for “foreclosure abuse.”  The credit rating agencies, who demand big dollars to assess the operations of bank and non-bank servicers, are also part of the shakedown game.  Never mind that the people who work for the rating agencies are completely clueless about how the loan servicing business works. They want a fee.

Here is a list of the various regulatory agencies and their areas of responsibilities when it comes to the sales of loans and/or mortgage servicing rights (MSRs):

CFPB:  Primary role consumer protection under Dodd-Frank as well as enforcement of compliance with the state AG foreclosure settlements.  Any consumer loan from autos to mortgages to credit cards and student loans falls under Cordray and the CFPB.  CFPB has also asserted authority over institutional loan and MSR sales.

FHFA:  The Federal Housing Finance Agency enforces the AG settlement broadly and also seeks to protect Fannie Mae, Freddie Mac and the Federal Home Loan banks from risk of loss.  In the settlement last year with Bank of America, FHFA announced that it would put in place an applications process for sales of loans and MSRs.

FHA/HUD:  The Federal Housing Administration enforces the AG settlement and reviews transfers of loans that are securitized by Ginnie Mae, including FHA, VA and USDA loans. Again, the agency has final say over any sales of loans or MSRs by the agencies under its purview.

Fed/OCC/FDIC:  The three major federal bank regulators oversee bank compliance with the AG settlement more generally, especially as it impacts bank financial soundness and reputational risk.  All three have made clear to the largest banks that they do not want to see any further settlements for violations of law or regulation, another reason why the CFPB and state regulators can extract any sort of concessions from the TBTF banks.  Note that the OCC has essentially become subordinate to FDIC, a remarkable turnabout that is due to the astute political skills of FDIC Chairman Martin Gruenberg.

NY & Other States:  The State of New York is a player in all of this because it did not agree to the original AG settlement and instead decided to take an independent course in enforcing consumer protection.  Most banks and non-banks are licensed as mortgage lenders in NY, giving the state direct jurisdiction.  Remember too that virtually all of the mortgage loans in question are owned by an RMBS trust that is governed by NY law, thus the State of New York also has direct jurisdiction via the Martin Act.  The other states are involved in overseeing the AG settlement and enforcing their own laws against mortgage abuses.

Part of the problem facing banks and non-banks is that we have the blind leading the blind when it comes to the understanding of regulators and the Big Media regarding the mortgage lending industry.  For example, the NYT and Financial Times, among others, repeatedly report that specialty mortgage servicers like OCN have been purchased “tens of billions of dollars of mortgage servicing rights from large global banks.”

No, in fact the total fair value of all MSRs held by US banks is less than $50 billion, according to the FDIC.  The services like OCN, Nationstar (NSM) and Walter (WAC) have purchased loans with a UPB in the hundreds of billions of dollars.  And remember that the total first lien loan holdings of all US banks and RMBS trusts totals into the many trillions of dollars, right?  So everybody just calm down.

Another frequent error made by the Big Media, which is picked up by regulators and our esteemed professionals in the ratings industry, is the idea that non-bank servicers don’t have to follow the same laws and regulations as commercial banks.  Again this is wrong.  

Not only do the non-bank servicers like OCN and WAC have to follow Dodd-Frank and the regulations from the CFPB, but they also inherit all of the legal undertakings from a bank when they acquire loans.  All non-bank servicers that acquire loans from any party subject to the AG settlement inherit the very same duties and responsibilities, period. 

One of my favorite errors that you see constantly in the Big Media and from regulators like the CFPB and the State of New York is the idea that it is good business to push a home owner into foreclosure.  Anybody with even the slightest idea about the world of distressed servicing knows that the law now requires that loan modification is the first order of business when a borrower gets into trouble.  But apparently the folks at the CFPB and the State of New York, where it can take a creditor up to three years to foreclose on a house, have not gotten the memo.  

If you actually know the world of distressed servicing, there are three golden rules when it comes to a non-performing loan.  First is keep the owner in the house.  Second is protect the asset and make sure that maintenance, taxes and insurance are current. And third is to preserve the cash flow of the loan via loan modification, if possible.  Keeping  the family in the house and protecting the asset and cash flow, even with a substantial modification, is always better for the note holder, whether that is Uncle Sam or a private investor.

Because of the phalanx of regulators how involved in reviewing loan transfers, the top four TBTF banks are having profound problems moving legacy assets off of their books.  The case involving WFC and OCN is a case in point, but that situation does not even begin to describe some of the operational problems facing other TBTF lenders who cannot perfect the documentation of legacy loans up to current standards.  

If you cannot bring a loan made by, say, Countrywide or WaMu up to the full doc standards that are now the law of the land, then you cannot sell the loan – period.  Neither the regulators nor the potential buyer of the asset will play if the loan file is not complete.  

Since the AG settlement as well as federal bank regulators are expecting that all distressed legacy loans be transferred to a special servicer, you can understand why this is a problem.  A big problem.  Bank of America, for example, has taken legacy residential mortgage assets down from $953 billion in 2011 to just $516 billion at the end of 2013. BAC’s 10-K confirms that  “the decline in the Legacy Residential Mortgage Serviced Portfolio in 2013 was primarily due to MSR sales, loan sales and other servicing transfers, modifications, paydowns and payoffs.”

Keep in mind too that the TBTF banks really want to sell any loans that are either distressed or likely to be distressed in order to avoid future problems.  This is one reason why, despite the current noise from regulators, the non-bank servicers as a group led by the likes of WAC, NSM and OCN are going to have pretty attractive prospects going forward.  This opportunity is driven by Dodd-Frank as well as acts of idiocy like the Basel III capital rules, which penalize banks for making private loans but set sovereign exposures as having no risk.  More on this in a future note.

The key takeaway of all this is that the pain and suffering of commercial banks when it comes to residential mortgages is not nearly done.  Over the next several quarters, lower expenses for loan-loss provisions and a reduction in litigation reserves will be more than consumed by expenses related to downsizing mortgage operations for the top four banks.  

Look for increased regulatory scrutiny to slow the pace of loan sales and MSR transfers, hurting efforts by the top banks to shed problematic legacy exposures.  And most important, the regulatory attack on bank and non-bank lenders will continue to adversely impact the housing sector.  Indeed, due to the good works of the likes of Richard Cordray and Elizabeth Warren, the housing prices could actually decline in many markets as 2014 unfolds.  In Northeastern judicial states such as CT, NY and MA, prices are already falling and inventories of unresolved foreclosure remain very elevated.

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