Wikileaks 2.0

http://bankofamericasuck.com/

Adrian Chen at Gawker:

A member of the activist collective Anonymous is claiming to be have emails and documents which prove “fraud” was committed by Bank of America employees, and the group says it’ll release them on Monday. The member, who goes by the Twitter handle OperationLeakS, has already posted an internal email from the formerly Bank of America-owned Balboa Insurance Company

The email is between Balboa Insurance vice president Peggy Johnson and other Balboa employees. (Click right to enlarge.) As far as we can tell, it doesn’t show anything suspicious, but was posted by OperationLeaks as a teaser. He also posted emails he claims are from the disgruntled employee who sent him the material. In one, the employee says he can “send you a copy of the certified letter sent to me by an AVP of BofA’s [HR department] telling me I am banned from stepping foot on BofA property or contacting their employee ever again.”

OperationLeaks, which runs the anti-Bank of America site BankofAmericasuck.com, says the employee contacted the group to blow the whistle on Bank of America’s shady business practices. “I seen some of the emails… I can tell you Grade A Fraud in its purest form…” read one tweet. “He Just told me he have GMAC emails showing BoA order to mix loan numbers to not match it’s Documents.. to foreclose on Americans.. Shame.”

An Anonymous insider told us he believes the leak is real. “From what I know and have been told, it’s legit,” he said. “Should be a round of emails, then some files, possible some more emails to follow that.” The documents should be released Monday on Anonleaks.ch, the same site where Anonymous posted thousands of internal emails from hacked security company HBGary last month. That leak exposed a legally-questionable plot to attack Wikileaks and ultimately led to the resignation of HBGary CEO Aaron Barr.

Katya Wachtel at Clusterstock:

Anonymous said late Sunday evening, however, “this is part 1 of the Emails.” So perhaps more incriminating correspondence is to come. And to be honest, these messages could be incredibly damaging, but we’re not mortgage specialists and don’t know if this is or isn’t common in the field. The beauty is, you can see and decide for yourself at bankofamericasuck.com.

But for those who want a simple explanation, here’s a summary of the content.

The Source

The ex-Balboa employee tells Anonymous that what he/she sends will be enough to,

crack [BofA’s] armor, and put a bad light on a $700 mil cash deal they need to pay back the government while ruining their already strained relationship with GMAC, one of their largest clients. Trust me… it’ll piss them off plenty.

The source then sends over a paystub, an unemployment form, a letter from HR upon dismissal and his/her last paystub and an ID badge.

He/she also describes his/herself:

My name is (Anonymous). For the last 7 years, I worked in the Insurance/Mortgage industry for a company called Balboa Insurance. Many of you do not know who Balboa Insurance Group is, but if you’ve ever had a loan for an automobile, farm equipment, mobile home, or residential or commercial property, we knew you. In fact, we probably charged you money…a lot of money…for insurance you didn’t even need.

Balboa Insurance Group, and it’s largest competitor, the market leader Assurant, is in the business of insurance tracking and Force Placed Insurance…  What this means is that when you sign your name on the dotted line for your loan, the lienholder has certain insurance requirements that must be met for the life of the lien. Your lender (including, amongst others, GMAC… IndyMac… HSBC… Wells Fargo/Wachovia… Bank of America) then outsources the tracking of your loan with them to a company like Balboa Insurance.

The Emails

Next comes the emails that are supposed to be so damaging. The set of emails just released shows conversational exchanges between Balboa employees.

The following codes pertain to the emails, so use as reference:

1. SOR = System of Record
2. Rembrandt/Tracksource = Insurance tracking systems
3. DTN = Document Tracking Number. A number assigned to all incoming/outgoing documents (letters, insurance documents, etc)

The first email asks for a group of GMAC DTN’s to have their “images removed from Tracksource/Rembrandt.” The relevant DTNs are included in the email — there’s between 50-100 of them.

In reply, a Balboa employee says that the DTN’s cannot be removed from the Rembrandt, but that the loan numbers can be removed so “the documents will not show as matched to those loans.” But she adds that she needs upper management approval before she moves forward, since it’s an unusual request.

Then it gets approved. And then, one of the Balboa employees voices their concern. He says,

“I’m just a little concerned about the impact this has on the department and the company. Why are we removing all record of this error? We have told Denise Cahen, and there is always going to be the paper trail when one of these sent documents come back. this to me seems to be a huge red flag for the auditors… when the auditor sees the erroneous letter but no SOR trail or scanned doc on the corrected letter… What am I missing? This just doesn’t seem right to me.

We suspect this is the type of email that Anonymous believes shows BofA fraud:

Image: Anonymous

Click here to see why these emails prove nothing interesting, and to see what what Bank of America says about the emails >

Chris V. Nicholson at Dealbook at NYT:

A Bank of America spokesman told Reuters on Sunday that the documents had been stolen by a former Balboa employee, and were not tied to foreclosures. “We are confident that his extravagant assertions are untrue,” the spokesman said.

The e-mails dating from November 2010 concern correspondence among Balboa employees in which they discuss taking steps to alter the record about certain documents “that went out in error.” The documents were related to loans by GMAC, a Bank of America client, according to the e-mails.

“The following GMAC DTN’s need to have the images removed from Tracksource/Rembrandt,” an operations team manager at Balboa wrote. DTN refers to document tracking number, and Tracksource/Rembrandt is an insurance tracking system.

The response he receives: “I have spoken to my developer and she stated that we cannot remove the DTNs from Rembrandt, but she can remove the loan numbers, so the documents will not show as matched to those loans.”

According to the e-mails, approval was given to remove the loan numbers from the documents.

A member of Anonymous told DealBook on Monday that the purpose of his Web site was to bring attention to the wrongdoing of banks. “The way the system is, it’s made to cheat the average person,” he said.

He had set up a Web site to post bank data that WikiLeaks has said it would release, and was subsequently contacted this month by the former Balboa employee. It has been speculated that the documents, which have yet to be released, would focus on Bank of America. The spokesman for Anonymous said he had no direct ties to WikiLeaks, which is run by Julian Assange.

Nitasha Tiku at New York Magazine:

WikiLeaks’ founder, Julian Assange, has threatened to leak damning documents on Bank of America since 2009. And Anonymous has backed WikiLeaks’ mission as far as the free flow of information. But these e-mails date from November 2010. Plus, they don’t exactly amount to a smoking gun. Whether or not the e-mails prove real, it’s clear Bank of America should have expanded its negative-domain-name shopping spree beyond BrianMoynihanSucks.com.

Naked Capitalism:

The charge made in this Anonymous release (via BankofAmericaSuck) is that Bank of America, through its wholly-owned subsidiary Balboa Insurance and the help of cooperating servicers, engaged in a mortgage borrower abuse called “force placed insurance”. This is absolutely 100% not kosher. Famed subprime servicer miscreant Fairbanks in 2003 signed a consent decree with the FTC and HUD over abuses that included forced placed insurance. The industry is well aware that this sort of thing is not permissible. (Note Balboa is due to be sold to QBE of Australia; I see that the definitive agreement was entered into on February 3 but do not see a press release saying that the sale has closed)

While the focus of ire may be Bank of America, let me stress that this sort of insurance really amounts to a scheme to fatten servicer margins. If this leak is accurate, the servicers at a minimum cooperated. If they got kickbacks, um, commissions, they are culpable and thus liable.

As we have stated repeatedly, servicers lose tons of money on portfolios with a high level of delinquencies and defaults. The example of Fairbanks, a standalone servicer who subprime portfolio got in trouble in 2002, is that servicers who are losing money start abusing customers and investors to restore profits. Fairbanks charged customers for force placed insurance and as part of its consent decree, paid large fines and fired its CEO (who was also fined).

Regardless, this release lends credence a notion too obvious to borrowers yet the banks and its co-conspirators, meaning the regulators, have long denied, that mortgage servicing and foreclosures are rife with abuses and criminality. Here’s some background courtesy Barry Ritholtz:

When a homeowner fails to keep up their insurance premiums on a mortgaged residence, their loan servicer has the option/obligation to step in to buy a comparable insurance policy on the loan holder’s behalf, to ensure the mortgaged property remains fully insured….

Consider one case found by [American Banker’s Jeff] Horwitz. A homeowner’s $4,000 insurance policy, was paid by the loan servicer, Everbank via escrow. But Everbank purposely let that insurance policy lapse, and then replaced it with a different policy – one that cost more than $33,000. To add insult to injury, the insurer, a subsidiary of Assurant, paid Everbank a $7,100 kickback for giving it such a lucrative policy — and, writes Horwitz, “left the door open to further compensation” down the road.

That $33,000 policy — including the $7,100 kickback – is an enormous amount of money for any loan servicer to make on a single property. The average loan servicer makes just $51 per loan per year.

Here’s where things get interesting: That $33,000 insurance premium is ultimately paid by the investors who bought the loan.

And the worst of this is….the insurance is often reinsured by the bank/servicer, which basically means the insurance is completely phony. The servicer will never put in a claim to trigger payment. As Felix Salmon noted,

This is doubly evil: it not only means that investors are paying far too much money for the insurance, but it also means that, as both the servicer and the ultimate insurer of the property, JPMorgan Chase has every incentive not to pursue claims on the houses it services. Investors, of course, would love to recoup any losses from the insurer, but they can’t bring such a claim — only the servicer can do that.

Note there are variants of this scheme where insurance is charged to the borrower (I’ve been told of insurance being foisted on borrowers that amounts to unconsented-to default insurance, again with the bank as insurer; this has been anecdotal with insufficient documentation, but I’ve heard enough independent accounts to make me pretty certain it was real)

David Dayen at Firedoglake:

Just because something has a lot of anecdotal evidence behind it doesn’t necessarily mean the specific case is true. But the forced-place insurance scam has been part of other servicer lawsuits, so it definitely exists. Whether this set of emails shows that taking place is another matter. Apparently this is just the first Anonymous email dump, so there should be more on the way

Derek Thompson at The Atlantic

Parmy Olson at Forbes:

Yet however inconclusive the e-mails may be, the leak may have wider implications as Anonymous gradually proves itself a source of comeuppance for disgruntled employees with damning information about a company or institution. Once the domain of WikiLeaks, the arrest of key whistleblower Bradley Manning suggested the site founded by fellow incarcerate Julian Assange could not always protect its sources. “A lot depends on the impact of this week,” says Gabriella Coleman, a professor at NYU who is researching Anonymous, who added that “Anonymous could go in that [WikiLeaks] direction.”

Anonymous is not an institution like WikiLeaks. It is global, has no leader, no clear hierarchy and no identifiable spokespeople save for pseudo-representatives like Gregg Housh (administrator of whyweprotest.net) and Barrett Brown.

It has some ideals: Anonymous tends to defend free speach and fight internet censorship, as with the DDoS-ing of the web sites of MasterCard, Visa and PayPal after they nixed funding services to WikiLeaks, and the DDoS-ing of Tunisian government Web sites. It is also great at spectacle. The group’s hacking of software security firm HBGary Federal not only gained oodles of press attention, it inadvertently revealed the firm had been proposing a dirty tricks campaign with others against WikiLeaks to Bank of America’s lawyers.

That hack led, rather organically, to the establishment of AnonLeaks.ru, a Web site where the Anonymous hackers posted tens of thousands of HBGary e-mails in a handy web viewer. While it took just five supporters to hack HBGary, hundreds more poured through the e-mails to identify incriminating evidence, leading to more press reports on the incident.

Such is the nature of Anonymous–global, fluid, intelligent, impossible to pin down–that it is could become an increasingly popular go-to for people wishing to vent damaging information about an institution with questionable practices.

The collective already receives dozens of requests each month from the public to attack all manner of unsavoury subjects, from personal targets to the government of Libya, from Westboro Baptist Church to Facebook. It rarely responds to them–as one Anonymous member recently told me, “we’re not hit men.”

Yet for all its facets as both hot-tempered cyber vigilantes and enlighteners of truth, Anonymous is becoming increasingly approachable, as the latest emails between OperationLeakS and the former BoA employee show. Assuming this particular employee doesn’t end up languishing in jail like Manning, more people may now be inclined to follow suit.

After The Love Is Gone…

Andrew Ross Sorkin at Dealbook at NYT:

Daniel S. Loeb, the hedge fund manager, was one of Barack Obama’s biggest backers in the 2008 presidential campaign.

A registered Democrat, Mr. Loeb has given and raised hundreds of thousands of dollars for Democrats. Less than a year ago, he was considered to be among the Wall Street elite still close enough to the White House to be invited to a speech in Lower Manhattan, where President Obama outlined the need for a financial regulatory overhaul.

So it came as quite a surprise on Friday, when Mr. Loeb sent a letter to his investors that sounded as if he were preparing to join Glenn Beck in Washington over the weekend.

“As every student of American history knows, this country’s core founding principles included nonpunitive taxation, constitutionally guaranteed protections against persecution of the minority and an inexorable right of self-determination,” he wrote. “Washington has taken actions over the past months, like the Goldman suit that seem designed to fracture the populace by pulling capital and power from the hands of some and putting it in the hands of others.”

Over the weekend, the letter, with quotations from Thomas Jefferson, Ronald Reagan and President Obama, was forwarded around the circles of the moneyed elite, from the Hamptons to Silicon Valley. Mr. Loeb’s jeremiad illustrates how some of the president’s former friends on Wall Street and in business now feel about Washington.

Mr. Loeb isn’t the first Wall Streeter to turn on the president. Steven A. Cohen, founder of the hedge fund SAC Capital Advisors and a supporter of the Obama campaign, recently held a meeting with Republican candidates in his home in Greenwich, Conn., to strategize about the midterm elections, according to Absolute Return magazine.

Other onetime supporters, like Jamie Dimon, chief executive of JPMorgan Chase, also feel burned by the Obama administration, people close to him say.

That the honeymoon between Washington and Wall Street has turned to bitter recriminations is not news, given that the administration had long pledged to revamp Wall Street regulation in the wake of a crisis that rattled the global financial system.

Less than two years ago, Democrats received 70 percent of the donations from Wall Street; since June, when the financial regulation bill was nearing passage, Republicans were receiving 68 percent of the donations, according to an analysis by the Center for Responsive Politics, a nonpartisan research group.

But what is surprising is that some of the president’s biggest supporters have so publicly derided his policies, even at the risk of hurting their ability to influence the party in the future. Issues like the carry-interest tax on private equity or the Volcker Rule have become personal.

Why so personal? The prevailing view is that bankers, hedge fund mangers and traders supported the Obama candidacy because he appealed to their egos.

Mr. Obama was viewed as a member of the elite, an Ivy League graduate (Columbia, class of ’83, the same as Mr. Loeb), president of The Harvard Law Review — he was supposed to be just like them. President Obama was the “intelligent” choice, the same way they felt about themselves. They say that they knew he would seek higher taxes and tighter regulation; that was O.K. What they say they did not realize was that they were going to be painted as villains.

Paul Krugman:

I talked to some financial-industry backers of Obama back during primary season; they really didn’t know or care much about policy issues, but were in love with Obama over his style — and also over the prospect of being in his inner circle, something they knew wouldn’t happen with Hillary. Now they’re mad because they don’t feel that they’re getting enough stroking.

And you have to bear in mind that this comes after Obama has made immense efforts to placate the financial industry. There were no bank nationalizations; there were hardly any strings attached to bailouts; the financial reform bill was by no means draconian given the scale of the disaster. But Wall Street is furious that Obama might even hint that they caused the crisis — which he does, now and then, because, well, they did.

And as far as I can tell, hardly any of the new anti-Obamanites is thinking at all about what will really happen once John Boehner is speaker.

You know, one might have thought that having all the money in the world would make people less petty, less concerned about whether they feel that they’re in the in-group. But nooooo [/Belushi]

Daniel Indiviglio at The Atlantic:

In fact, most of those who I know on Wall Street aren’t particularly politically principled. They basically have the view that the government can do its thing, and they can do theirs. More regulation? They’ll just shrug and find loopholes or new ways to make money. Higher taxes? They have accountants with sophisticated income recognition strategies that handle that sort of nuisance. Their involvement in politics essentially consists of donating money to important politicians so that they can be relatively sure that government will generally leave them alone, or lend them a helping hand in case of emergency.

And that’s what they expected from President Obama. Instead, he adopted the popular narrative that Wall Street was the villain. This was a shock, because these bankers don’t share that view. As far as they’re concerned, a very small portion of them actually were responsible for the problems that led to the financial crisis. Indeed, many of them suffered disproportionally, as they had a year or two where their bonuses were far below what was anticipated, even though their individual performance hadn’t declined. They felt that they were in many ways victims of the housing bubble as well, even if their consequence wasn’t foreclosure or long-term unemployment like so many Americans.

That’s not to say people — or even President Obama — should necessarily by sympathetic to their bruised egos. This is just the explanation. If these Wall Street bankers and traders had analyzed President Obama and his base’s politics on a deeper level, then they would have seen precisely the treatment they got. Frankly, it could have been worse if the far-left progressive wing got their way. Of course he would vilify Wall Street after a credit crunch nearly caused another depression. After all, politicians need someone to blame in such situations. What other outcome could they have reasonably expected?

Naked Capitalism:

Please. Are you going to seriously tell me big financial players are up in arms because Team Obama occasionally calls them bad names? That explanation is so obviously bogus as to call for a look for the real reason. There’s a much more straightforward explanation, and it’s called “follow the money.”The key omission from this story is the name Rahm Emanuel. Rahm, a former partner at Wasserstein Perella, was particularly effective at fundraising from private equity funds and hedge funds.

So re-read this key phrase: ” They say that they knew he would seek higher taxes and tighter regulation; that was O.K.” But what the article buries in plain sight is the fact that the plans to tax hedge and PE funds carried interest at ordinary income tax rates, rather than a preferential capital gains tax rates, has the 2 and 20 crowd seeing red. And in case you had any doubts, there was no justification for this special treatment in the first place. Loren Steffy of the Houston Chronicle noted (hat tip Independent Accountant) provides a deft skewering:

Dear IRS: Please note that beginning this year, I am no longer earning an income. From now on, I am compensated through what I like to call column interest. It isn’t pay. It’s a capital gain that I receive in exchange for providing about 2,000 words a week to this newspaper. Please lower my tax rate accordingly. hey, you can’t blame me for trying. After all, a similar strategy has worked for years for money managers at hedge funds and private equity firms. … The private investment community is decrying the move as a massive tax increase, is if oblivious to the fact that it’s enjoyed an unfair tax break for years. … Let’s set aside the rather silly notion of private equity as an engine of job creation–most buyouts result in big job cuts–and focus on the inequality. Private equity managers typically collect a 2 percent annual fee on assets in the fund, which is taxed as income. They also scoop up 20 percent of their funds’ annual profits, which is known as carried interest. … Profit-sharing plans for just about everyone else are taxed as income. … Tax law is a murky world, but one basic principle of our tax code is that people who perform similar jobs for similar pay should receive similar tax treatment. That’s not the case in the investment world.

Sorkin does mention Steve Schwarzman’s infamous outburst (”likened the administration’s plan for taxes on private equity to ‘when Hitler invaded Poland in 1939.’”) but does not indicate the fact that this is the major reason for the falling out among Obama’s former backers. It’s one thing to raise taxes generally, the big boys can stomach that. But it’s quite another to raise taxes in a way that targets them. (And note, by the way, that this measure failed, but the industry was still deeply offended at this show of disloyalty).

Similarly, Sorkin later argues for the reasonableness of the revolting businessmen:

Mr. Loeb’s views, irrespective of their validity, point to a bigger problem for the economy: If business leaders have a such a distrust of government, they won’t invest in the country. And perception is becoming reality.

Just last week, Paul S. Otellini, chief executive of Intel, said at a dinner at the Aspen Forum of the Technology Policy Institute that “the next big thing will not be invented here. Jobs will not be created here.”

Yves here. This is patently ridiculous and disingenuous. First, Sorkin chooses to overlook that Otellini’s comments about inventions and jobs is based on his throwing in his weight with the venture capital industry, which was one of the groups that fought the proposed taxes on carried interest. The argument, implicitly is that the VC industry would shrink or disappear were there no carried interest tax break, and that we’d therefore see much less new business formation.

Both those ideas are questionable. Yes, the VC business as it is currently constituted might shrink, but a lot of angel investors do deals as principals or with small syndicates. One can as easily argue with so many people now possessing Wall Street experience, we’d likely see capital move through new channels to small ventures.

But more important, the idea that VC is critical to new business growth is complete urban legend. Amar Bhide, in the first systematic study of successful new ventures, determined that VC contributes very little to the funding of new businesses, even the most successful ones (his proxy was the Inc. 500).

Second, the line that Sorkin parrots from big businesses, “Be nice to us or we’ll quit investing,” is also bunk. Guess what? As we’ve indicated, big businesses were net disinvesting even during the corporate-friendly Bush Administration. And to the extent they are leery of investing now, far and away the biggest reason is macro uncertainty. It’s awfully hard to plan if you aren’t sure whether the outlook is for inflation or deflation. But businesses will cavil like crazy about government intervention because it is one of the few variables they might be able to influence.

And it’s also remarkable that Sorkin can treat the self-serving and misleading canard, “We’re mad that Obama is treating us like bad guys” seriously. For anyone at the TBTF firms, it’s patent rubbish. The firms got overt and back door bailouts so they could shore up their equity capital, and what do they do? Pay a big chunk of government-provided largesse out to themselves in record 2009 bonuses. It’s one of the most blatant acts of looting on record, and the industry deserves every bit of scorn the authorities can muster dumped on its head.

Felix Salmon:

Now Sorkin and Dealbook are the exemplars, at the NYT, when it comes to the journalistic virtue of putting primary documents online. Their Scribd account has over 100,000 subscribers and has had over 2 million visits; it’s much more active than the parallel documents.nytimes.com format used by much of the rest of the paper.

But anybody reading Sorkin’s column today simply has to take him at his word when he says that Loeb’s letter “sounded as if he were preparing to join Glenn Beck in Washington over the weekend.”

If I wanted, I could paint I different picture of the letter. I could point out that there are no fewer than three quotes from Barack Obama on its first page, talking about the importance of helping others and spreading wealth across the whole American population. I could note that Loeb is just as harsh on capitalists as he is on the government.

Many people see the collapse of the sub-prime markets, along with the failure and subsequent rescue of many banks, as failures of capitalism rather than a result of a vile stew of inept management, unaccountable boards of directors, and overmatched regulators not just asleep, but comatose, at the proverbial switch.

And he also sees new government rules being helpful on this front:

Many of the boards we have come across are populated by individuals who rely on the stipends they receive from numerous corporate boards and thus appear motivated primarily to ensure continuing board fees, first-class air travel and accommodations, and a steady diet of free corned beef sandwiches until they reach their mandatory retirement age. We are therefore encouraged by the recently finalized proxy rules, which will ease the nomination and election of directors by shareholders.

He’s even pulling with the government when it comes to cracking down on sleazy for-profit colleges:

Our perspective on the government’s increased willingness to use its regulatory muscle enhanced our short positions in the for-profit education space. Indeed, this summer certain government actions taken regarding these companies served to accelerate the unfolding of our thesis on these names.

So, who has the more accurate view of Loeb’s letter, me or Sorkin? The answer is Sorkin: I’ve been quoting very selectively. But in one crucial respect I’m being much more open and transparent about the letter than he is: I’m linking to it. He’s not.

There’s no legal or journalistic reason why Sorkin shouldn’t link prominently to the letter. When I spoke to Richard Samson, the NYT’s top lawyer on such matters, he was clear that although there are copyright reasons why the NYT might not post the letter itself, there’s absolutely nothing to stop the paper from linking to where the letter is posted elsewhere. And in general, Sorkin’s Dealbook blog is pretty good when it comes to external links.

I see a few possible reasons why Sorkin might not link to the letter, none of them good.

First, he might be moving Dealbook away from the blog concept (and it was always more of an email newsletter than a blog to begin with) to something much more self-contained. Dealbook has been hiring aggressively, and is clearly setting itself up in opposition to, and in competition with, other online sources of financial news. Maybe that makes Sorkin more hesitant to link out than he was in the past.

Alternatively, maybe Sorkin is happy to link out in theory, but he has problems linking specifically to the relatively juvenile and tabloid Dealbreaker. I don’t think that’s true: Dealbook does link to Deabreaker on a semi-regular basis.

There’s a couple of other possibilities, too, which are more worrying. Perhaps Sorkin got the letter directly from Loeb himself, on the condition that he not publish it, and he felt that linking to it would violate the spirit of that agreement. Or maybe there was no formal agreement at all, but Sorkin just felt that linking to the letter would annoy Loeb, and therefore decided not to do so in order to help maintain his relations with a source.

Or maybe it was just an oversight, further evidence that linking to primary sources simply isn’t very important at the NYT.

James Kwak at The Baseline Scenario:

I’ve criticized the Obama administration in many more words than Daniel Loeb. But putting the blame on certain categories of people does not somehow absolve “capitalism.” Our capitalist system–which until recently we considered the best, most pure version in the world–allowed incompetent people to become executives (and to run hedge funds), allowed incompetent people to become directors and to avoid any responsibility for their actions, and allowed companies to swamp regulators with battalions of high-priced lawyers and lobbyists.

This is a basic category error. Capitalism is an economic system; managers, directors, and regulators are people. They are not mutually exclusive. If you want to say that capitalism necessarily means universally good managers, responsible directors, and effective regulators, then that’s an argument you have to make (and good luck making it).

Just because you make a lot of money doesn’t mean you know what you’re talking about. Unfortunately, in this country if you make a lot of money, a lot of people listen to you.

(Here’s the full letter. Along the way, Loeb says that the current decline in confidence and economic activity is due to the SEC’s lawsuit against Goldman.)

K-Thug And The Kid

Andrew Ross Sorkin at Dealbook at NYT:

You may recall that during the most perilous months of 2008 and early 2009, there was a vigorous debate about how the government should fix the financial system. Some economists, including Nouriel Roubini of New York University and The Times’s own Paul Krugman, declared that we should follow the example of the Swedes by nationalizing the entire banking system.

They argued that Wall Street was occupied by the walking dead, and that no matter how much money we threw at the banks, they would eventually topple the system all over again and cause a domino effect worldwide.

So were they wrong after all?

Paul Krugman:

Andrew Ross Sorkin Owes Several People an Apology

I certainly never said anything like that, and I don’t think Nouriel did either. First of all, I never called for “nationalizing the entire banking system” — I wanted the government to take temporary full ownership of a few weak banks, mainly Citigroup and possibly B of A. I defy Sorkin to find any examples of me calling for a total takeover.

And the argument was never that “no matter how much money we threw at the banks, they would eventually topple the system all over again”. Again, where did I say that? The argument was always that if we were going to rescue the banks — and we were — taxpayers should get the potential upside as well as the potential downside.

If you want to say that the advocates of nationalization were excessively pessimistic about the prospects for a light-touch bank strategy, fine. But caricaturing their position, making it sound far more extreme than it actually was, is definitely not OK.

Jessica Pressler at New York Magazine:

As New York noted this past winter, Andrew Ross Sorkin is somewhat of a polarizing figure at the Times. A number of his fellow reporters are jealous of his success, unconvinced of his reportorial skills, and suspicious of his fawning attitude toward sources. And this morning, Sorkin made a new enemy at the Times, when in an amazingly credulous column (even for him) lauding the effectiveness of the bailout, he declared confidently that “some economists, including Nouriel Roubini of New York University and The Times’s own Paul Krugman, declared that we should follow the example of the Swedes by nationalizing the entire banking system.”

This did not please Krugman, who equally disdains imprecision and being referred to, even obliquely, as wrong. So the graybearded Times columnist did what he always does when he gets angry: He padded over to his computer and wrote a somewhat blistering rebuttal on his Times blog. The resulting post, unsubtly headlined “Andrew Ross Sorkin Owes Several People An Apology,” takes issue with Sorkin’s statement and makes clear that the person who is owed an apology is Krugman. “I certainly never said anything like that, and I don’t think Nouriel did either,” he wrote. “I never called for ‘nationalizing the entire banking system’ — I wanted the government to take temporary full ownership of a few weak banks, mainly Citigroup and possibly B of A.”

Joe Weisenthal at Clusterstock:

So did Krugman really want to nationalize all the banks?

No.

Here’s Krugman’s best defense, a post written on March 11, 2009, right at the bottom and in the fog of war.

John Hempton somewhat misunderstands my point, but that’s OK. I should have been clearer — and he and I actually seem to be mainly in agreement.

I was not saying “nationalize all the banks”; I was saying do what the Swedes did — in tandem with a guarantee on bank liabilities, take the banks with zero or negative capital into receivership. It’s really important that you do this: if you offer a blanket guarantee on the assets of a bank that’s already underwater, you (a) are very likely to take a large hit on taxpayers’ money, without any share in the upside (b) create a huge moral hazard/looting incentive.

Is he picking nits?

We don’t think so. Winding down banks that are technically insolvent is not the same thing as nationalizing all the banks.

Here’s another post where he’s saying that nationalization wouldn’t involve all the banks.

That being said, in retrospect, it’s hard to imagine this approach having worked any better than Geithner’s, given how surprisingly smooth things have gone.

So Sorkin’s critique of Krugman (and perhaps Roubini) is narrowly correct, if overstated.

Foster Kamer at Village Voice:

SCORING: on February 1st, 2009, Krugman wrote:

If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found? But the Obama administration appears to be tying itself in knots to avoid this outcome.

Later, on February 23, 2009, Krugman noted:

What Alan Greenspan, the former Federal Reserve chairman — and a staunch defender of free markets — actually said was, “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” I agree.

And just how were Krugman’s views characterized by other publications back then? Two headlines:

“Paul Krugman: Nationalize the banks” – Pittsburgh Post-Gazette

“Obama Should Nationalize U.S. Banks, Krugman Says” – Bloomberg

As opposed to, say

“Paul Krugman: Temporarily Nationalize the banks” – Pittsburgh Post-Gazette

“Obama Should Temporarily Nationalize U.S. Banks, Krugman Says” – Bloomberg

See how one word changes everything?

The closest he might’ve come in context to noting something resembling Sorkin’s piece is this, from a March 2009 Newsweek profile of him:

Krugman’s suggestion that the government could take over the banking system is deeply impractical, Obama aides say. Krugman points to the example of Sweden, which nationalized its banks in the 1990s. But Sweden is tiny. The United States, with 8,000 banks, has a vastly more complex financial system. What’s more, the federal government does not have anywhere near the manpower or resources to take over the banking system.

But (1) that’s Sweden, not Switzerland, and (2) Newsweek doesn’t specify what kind of takeover he’s referring to in the piece, only writing about it in vague terms as a “takeover.”

Krugman, who apparently was always advocating the temporary takeover solution and he appears to be correct in having pimpslapped Sorkin earlier today.

DECISION: Krugman. To be fair, we didn’t look into what Nouriel Roubini might’ve said, but unless Sorkin comes up with something better on Krugman, in that respect, he was wrong. Not only was he wrong, but his attempt to shell-shock readers by calling someone out in his own building backfired, miserably, and in doing so, likely just threw his “haters” both in and outside of the Times some fuel for their fire.

We contacted both Times executive editor Bill Keller for quote on the matter, we didn’t hear back. New York Times spokesperson Robert “Call Me Bob” Christie declined to comment.

Felix Salmon

Hamilton Nolan at Gawker:

Big time beef at the New York Times! Paul Krugman, chief beard-wearing columnist, took to his blog to attack Andrew Ross Sorkin, chief young reporter who will one day be an investment banker. Krugman says Sorkin mischaracterized Krugman’s position in his column today. He says Sorkin “Owes several people an apology.” First and foremost, Paul Krugman! In any case, this simply must end in a celebrity boxing match, which we will be happy to set up guys, just let us know.

Sorkin responds to Krugman:

Dear Professor Krugman,

I read your blog post about my column in Tuesday’s newspaper.

As you know, I’m a big fan of yours. I just want to point to some of the source material I had consulted for the column.

You quoted part of my column that said, “Some economists, including Nouriel Roubini of New York University and The Times’s own Paul Krugman, declared that we should follow the example of the Swedes by nationalizing the entire banking system.”

On your blog, you wrote, “I certainly never said anything like that, and I don’t think Nouriel did either.”

Just so there is no confusion, I based that passage on what you and Mr. Roubini had said and written during the crisis about a Swedish-style nationalization of the banking system.

Mr. Roubini began an Op-Ed in The Washington Post by writing, “The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is to nationalize it.” Later in the piece, he added, “We believe that, if applied correctly, the Swedish solution will work here.”

On your blog on Sept. 28, 2008, after reading a piece by Brad DeLong, an economist, which you linked to, you wrote, “Brad DeLong says that Swedish-style temporary nationalization is the right answer to a financial crisis; he’s right.”

In your column on Feb. 23, 2009, you asked, “Why not just go ahead and nationalize? Remember, the longer we live with zombie banks, the harder it will be to end the economic crisis.”

I appreciate that you may have articulated the details of your views differently, or more specifically, in other columns and forums.  And I appreciate that you could quibble with my words. But I do think it is clear that both you and Mr. Roubini had pressed for a Swedish-style nationalization. (By the way, at the time, I had thought the Swedish model was a pretty interesting approach, too.)

Again, I love reading your column and the bailouts are certainly an issue that is the subject of much debate.

Best,

Andrew

Andrew Leonard at Salon:

Now, I’m pretty sure Krugman doesn’t need my help in a duel-to-the-death, but I went and read the full text of both columns Sorkin linked to. And in both cases the authors make it explicitly clear that when they say “nationalization” they are talking about temporarily putting only specific insolvent banks into receivership. Sure, you can cherry pick a sentence from the lead paragraph and ignore the lengthy explication that comes afterward, but excuse me for my naive impertinence: I expect better from a New York Times reporter.

Krugman:

How would nationalization take place? All the administration has to do is take its own planned “stress test” for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary. Yes, the whole thing would have a Claude Rains feel to it, as a government that has been propping up banks for months declares itself shocked, shocked at the miserable state of their balance sheets. But that’s O.K.

And once again, long-term government ownership isn’t the goal: like the small banks seized by the F.D.I.C. every week, major banks would be returned to private control as soon as possible. The finance blog Calculated Risk suggests that instead of calling the process nationalization, we should call it “preprivatization.”

It is of course true that Krugman advocated a more forceful approach to the banking system than that ultimately chosen by the White House. History has yet to rule on whether the Obama administration will get away with the path of least aggressiveness. It would not have taken much rewriting of Sorkin’s original column to make his same point. But Sorkin was sloppy, and made a factually incorrect claim that Krugman had recommended “nationalizing the entire banking system.”

Hey, no big deal. People make mistakes like that all the time. But when called on it, proper form demands that you admit what you got wrong. The classic formulation for this might be something along the lines of “My statement that Krugman demanded the complete nationalization of every bank in the United States was inartful, but my main point still holds.”

Instead, Sorkin dug in and cited evidence that proved his opponent’s point. And careless sloppiness suddenly becomes willful disingenuousness.

Clark Hoyt, NYT’s Public Editor:

I am not an economist or a business writer, but I have always understood nationalization to be a government takeover, not guarantees to creditors.

Sorkin did not address Krugman’s contention that he misstated Krugman’s reason for supporting the nationalization of some banks. Krugman has had “20 reasons,” Sorkin said.

Andrew Rosenthal, the editorial page editor, who is in charge of the Op-Ed page, where Krugman’s column appears, said, “Paul does not favor a Swedish-style nationalization of the banking system because they would fail no matter how much government threw at them. He never did.”

Bill Keller, the executive editor, who has responsibility for the Business section, where Sorkin works, said he had not reviewed the record, but if Sorkin got it wrong, “he – and we – should correct it, of course.”

Krugman and Sorkin told me that they talked Thursday. Sorkin said the conversation was “very cordial.” Krugman called it “not much fun.” They agreed that they disagree on the definition of nationalization.

I think the right thing to do is to simply acknowledge that, in trying to quickly summarize Krugman’s nuanced position, Sorkin over-simplified and got it wrong. Krugman did not call for the nationalization of the entire banking system, and, unless Sorkin can produce a citation to the contrary, he did not say it was necessary because otherwise the banks would fail again and cause a worldwide domino effect.

Sorkin said he is going back to his editors to discuss whether some sort of clarification is needed.

Maureen O’Connor at Gawker:

The winner is Nobel-winning economist and crotchety columnist Paul Krugman. The loser is Dealbook wunderkind Andrew Ross Sorkin, who got a slap on the wrist in today’s New York Times Corrections page.Lest you forget (or didn’t bother to follow this feud in the first place) Sorkin said Krugman is dumb because he wanted to nationalize the U.S. banking system, so Krugman said am not and did not, but Sorkin said yuh-huh you did because Krugman’s position was the temporary nationalization of banks, but Sorkin thought he meant nationalize forever. Anyway, mom finally stepped in to settle this fight once and for all. And it’s Professor Krugman for the win! In a Times correction dated April 17, 2010:

The DealBook column on Tuesday, about the possibility of the government’s making a profit on its bailout of banks, overstated the position of the economists Paul Krugman and Nouriel Roubini, at the height of the financial crisis, on nationalizing banks. While both supported guaranteeing the liabilities of the banking industry and a temporary government takeover of certain failing institutions, they did not recommend nationalization of the entire banking system. (Go to Article)

Banks Play Hide The Rancid Salami In The Hudson Castle

Kate Kelly, Tom McGinty and Dan Fitzpatrick at WSJ

Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.

A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.

Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.

That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.

Andrew Ross Sorkin at Dealbook at NYT:

“You want your leverage to look better at quarter-end than it actually was during the quarter, to suggest that you’re taking less risk,” William Tanona, a former Goldman analyst and head of financial research in the United States at Collins Stewart, told The Journal.

The newspaper suggests this practice is a symptom of the 2008 crisis in which banks were harmed by their high levels of debt and risk. The worry is that a bank displaying too much risk might see its stocks and credit ratings suffer.

There is nothing illegal about the practice, though it means that much of the time investors can have little idea of the risks the any bank is really taking.

Michael Scherer at Swampland at Time:

Some advice* for you the next time you need a loan: Before you go to the bank, move about 42 percent of your existing debts “off balance sheet,” so you don’t have to report them. That pesky credit card bill you will never be able to pay off–hide it. Those car payments you probably won’t be able to make–make ’em disappear, if only for a few days.

Even if your banker eventually finds out that you fooled him, you won’t have to sweat it. After all, banks make it a policy to hide their debt from the public, as the Wall Street Journal explains today in a story that you should not miss.

[…]

* I am joking. Do not take this advice. It is illegal for you to lie to your bank. But of course, it is perfectly legal for the bank to misrepresent its own level of risk before making public reports. Why the disparity? When you run the casino, you play by different rules. And the bonuses are really good.

Jennifer Taub at Baseline Scenario:

These revelations by Martin Kelly, Lehman’s controller, and Marie Stewart, the global head of accounting policy, invited many questions.

First, how reliable are they? Recall that Kelly is the first addressee listed on the May 2008 letter from Lehman whistleblower, Matthew Lee. Second, how could they know what the practices were at the competitor CSEs (CSE was the regulatory designation from 2004 – 2008 of the five large independent investment banks – Bear, Lehman, Merrill, Morgan Stanley and Goldman)? Third, if there was no legal change at that time, what was the magic of 2007? In other words, if the examiner, Anton Valukas, is correct in suggesting the “repo 105” practice was actionable, are these other investment banks vulnerable to litigation for pre-2007 practices? Fourth, was it possible that the other investment banks had been hiding billions of dollars of debt off balance sheet? Fifth, what was the connection between these practices and the financial crisis? Sixth, was this still going on at the firms?

Prior to finding the answers to these questions, I noticed that the SEC had posted a sample letter that it sent to “certain public companies requesting information about repurchase agreements, securities lending transactions, or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets.” The illustrative letter was signed by the Senior Assistant Chief Accountant. Pleased that the SEC was on the job, I turned my attention to other matters, until this morning.

It is hard to predict what will happen next. However, it is quite possible, that the Valukas Report will be the global financial crisis analog to the Pecora Hearings, helping to energize robust regulatory reform. At the very least, this reinforces the need that all debt and all transactions that have the economic effect of debt or leverage must be on balance sheet. Only time will tell.

Annie Lowrey at The Washington Independent:

The Securities and Exchange Commission — in the wake of the revelation last month that Lehman Brothers used such transactions to park billions of debt off its balance sheet shortly before its collapse — is investigating banks’ use of the tactic. In my mind, there is one dead simple way to preclude banks from skewing their debt and leverage levels using repo transactions (which are, I should note, common, important and perfectly legal): Require banks to report not just their debt levels at the time the reports come out, but their quarterly average debt levels, thus removing the incentive to alter them.

Naked Capitalism:

The fact that the existence of widespread fraud is finally being addressed in polite company is a good first step.

But where are the prosecutions?

Neither happy talk nor propaganda will fix the economy. The governments of the world have spent trillions trying to wallpaper over the fraud, and have become insolvent doing so.

But it’s not working. Indeed, polls show that people no longer trust our economic “leaders”. See this and this.

Only honest talk – and holding the people who committed fraud accountable – will stabilize the economy.

Barry Ritholtz at The Big Picture

Louise Story and Eric Dash in NYT:

It was like a hidden passage on Wall Street, a secret channel that enabled billions of dollars to flow through Lehman Brothers.

In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.

The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.

While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.

None of this was disclosed by Lehman, however.

Felix Salmon:

This is all, obviously, extremely complicated. Hudson Castle was borrowing short and then lending that money out to banks like Lehman, which would post securities as collateral. (That’s the first thing that doesn’t make sense: since when are repo rates higher than CP rates?)

But obviously Hudson was lending unsecured as well, or else its security interest wasn’t well structured, because now it’s a major Lehman creditor.

Yet at the same time Hudson — or its Fenway subsidiary — borrowed $3 billion from Lehman. And those notes “were used to back a loan from Fenway to a Lehman subsidiary” — this is the point where I completely fail to understand what’s going on. And that loan from Fenway to Lehman was also secured by another loan, to a California property developer — so now it was secured twice? And the Fenway notes were used as security twice over, as well, since besides being pledged back to Fenway they were also pledged to JP Morgan?

Certainly there was some very crazy stuff going on around Hudson Castle — and knowing what we know about Lehman, it’s entirely plausible that the crazy stuff was all designed “to shift investments off its books”. But the main reason I have to believe that story that is that I trust the NYT. If I read this story on a blog somewhere, I’d dismiss it as borderline-incomprehensible conspiracy-theory rambling; but since I saw it featured prominently in the NYT, I know that some highly respected and respectable journalists and editors really believe there’s a story here.

I just wish they’d done a better job of showing us what Lehman was doing, rather than just telling us — and then trying to support their assertions with a series of details which really doesn’t make any sense.

John Cole:

Look- I know I’m just a layman, but this sounds like EXACTLY what Andrew Fastow, the Chief Financial Officer at Enron, did for years before Enron finally crashed and burned. He’s in jail.

But these guys raped everyone, walked away with millions, and are probably thick as thieves with a new crowd in some other organization where we are told it would be Stalinesque to tax their bonuses.

John Lounsbury at Seeking Alpha:

The next item reminds me of the child’s argument: “But Mom, everybody does it. It must be okay.”

Last week Kate Kelly, Tom MCGinty and Dan Fitzpatrick had a report in The Wall Street Journal showing how all banks manipulate their balance sheet to accommodate the accounting cycle. In this case, banks use repos to raise cash for trading during the quarter and then close out the positions in time for the quarterly accounting date.

According to the WSJ article, the total of repos in banks averages 42% higher at the highest point in the quarter compared to the accounting date. The following graph shows the total repo activity by banks, plotted weekly.

(Click to enlarge)

It’s Okay Mom, It’s Not Illegal

There is apparently nothing illegal about all of this. If that is the case, then the term “a nation of laws” is itself a deception. It should not be legal to hide assest off the books by maneuvers such as Repo 105. It should not be legal to hide the fact that excess leverage is used every month for trading, hidden from the official balance sheet.

Disclosure: No positions

I’d Like To Be Under The Sea, In A Commercial Mortgage Garden In The Shade

Andrew Ross Sorkin‘s Dealbook at NYT:

Elizabeth Warren, head of Congressional oversight for TARP and a major backer of the idea of a consumer protection agency, told CNBC on Monday that the U.S. economy still had a hard road ahead.

“By the end of the year, about half of all commercial real estate loans are gonna by underwater, and they are concentrated in the midsize banks,” she said. (Short-sellers, at least, may have something to look forward to.) “We now have 2,988 banks that have these dangerous concentrations of commercial real estate lending.”

She said that the banks’ exposure to shaky commercial real estate would have two upshots: 1) since they were already suffering since the subprime crisis, their stability might be affected; and 2) the midsize banks “are the banks that are supposed to be doing small business lending, and when they’re getting a sock in the teeth over over commercial real estate loans, they’re not in a position to be lending to small business,” Ms. Warren told CNBC.

“I think we have another very serious economic problem that we’re going to have to resolve in the next three years,” she said.

Philip Davis at Seeking Alpha:

An example of how fast things are falling apart on the CRE side is LNR Property Corp, who are managing $22Bn worth of distressed CRE loans which were obtained through the discounted purchase of CMBS. As a workout shop, LNR either negotiates with borrowers to make a loan current or forecloses on the property to extract as much cash as possible from the delinquent mortgage. And while LNR used to make a nice profit working out the occasional bad loans, now the company and its competitors face a flood of bad debt. “It’s tough going for everybody right now,” said Lisa Pendergast, managing director of CMBS strategy and risk at Jefferies & Co. and the incoming president of the Commercial Real Estate Finance Council. ``I don’t think anybody built these [workout] shops to see these huge volumes of loans going bad.”

By LNR’s estimate, the front is widening with no relief yet visible on the horizon. “We’re seeing vacancy rates in most markets going up. We’re seeing rental rates in most markets going down,” Ronald Schrager, LNR’s chief operating officer, told a recent real estate conference in Miami Beach. “There’s still a lot more distress ahead of us.” This distress is not isolated in Florida either – Downtown Manhattan, which had, until recently, seemed immune to the CRE problems, is about to lose its spot as the best-performing U.S. market. Vacancies may exceed 14 percent of the area’s 87 million square feet by late 2011, empty space that’s equivalent to four Empire State Buildings and is the highest rate since 1997. “The amount of space that’s potentially going to come to the market will increase availabilities and put pressure on pricing,” said Kenneth McCarthy, Cushman’s head of New York- area research. “It will be quite awhile before it can be absorbed.”

Mark Hemingway at The Washington Examiner:

On the plus side, Warren seems to be aware that Fannie Mae and Freddie Mac are disasters for the taxpayer:

// //

Speaking on troubled mortgage lenders, Warren said it’s time for the government to “pull the plug” on mortgage lenders Fannie Mae and Freddie Mac.

“I’m one of those people who never liked public-private partnership to begin with. I think what they did was use public when public was useful and private when private was useful,” she said. “And I think we’ve got to rethink that whole thing.”

But before you get too hopeful, bear in mind that this is also the same Elizabeth Warren who thought that bailing out the mortgages of vacation homes was a good idea.

James at Bubble Meter:

I also think we should pull the plug on AIG and the FHA. AIG is a zombie. The FHA is just getting into deeper and deeper financial trouble, all in an effort to prop up home prices above their intrinsic value.

Megan Carpentier at The Washington Independent:

Elizabeth Warren warned in February that commercial real estate was the next recovery-killer, and since nothing improved by March, Tim Geithner yesterday took to CNBC to acknowledge the problem with commercial real estate and push the administration’s program to incentivize small banks to lend to small businesses as the solution.

One way to help manage the commercial loan distress, Geithner said, is through the $30 billion fund proposed by President Barack Obama to provide money to midsize and community banks if they boost lending to small businesses.

He did not clarify how giving money to some banks for an entirely unrelated purpose would solve a commercial real estate crisis.

Earlier in the day, TARP Congressional Oversight Panel chair Elizabeth Warren warned that more than half of commercial real estate would be underwater by the middle of 2010.

“They are [mostly] concentrated in the mid-sized banks,” Warren told CNBC. “We now have 2,988 banks—mostly midsized, that have these dangerous concentrations in commercial real estate lending.”

In February, Warren noted that $1.4 trillion in commercial real estate loans would need to be refinanced between 2011 and 2014 when the shorter-term commercial real estate mortgages end, and a significant proportion of those are underwater already. More than $50 billion in commercial real estate mortgages are already in default or foreclosure — both figures are far larger than Geithner’s $30 billion plan to extend credit to small businesses. Sheila Bair, the chair of the FDIC, expects that commercial real estate defaults and losses will be the number-one factor that drives small and medium-sized banks into failure this year at a higher rate than they experienced in 2009. Extending credit to small businesses to the tune of $30 billion doesn’t seem like the best solution to the coming commercial real estate crisis or its downstream effects on businesses or the banks holding the loans.

All The Kewl Kids In Switzerland Still Drinking Expensive Wine

Two posts from Felix Salmon, here and here. Salmon:

Davos is great at throwing a couple of archbishops onto a panel with Niall Ferguson entitled “Restoring Faith in Economics” (geddit?) — but what I see none of in the programme is an indication that much if not all of the crisis was caused by the arrogance of Davos Man and by his unshakeable belief that the combined efforts of the world’s richest and most powerful individuals would surely make the world a better, rather than a worse, place. Excitement about the opportunities afforded by the Great Moderation (as the credit bubble was known before it burst), financial innovation, the rise of the bankers — Davos was ahead of the curve on all of them. And as the annual symposium of smug sermonizing became increasingly established, it served as a crucial reinforcement mechanism.

It’s not like CEOs and billionaires (and billionaire CEOs) need any more flattery and ego-stroking than they get on a daily basis, but Davos gives them more than that: it allows them to flatter and ego-stroke each other, in public. They invariably leave even more puffed-up and sure of themselves than when they arrived, when in hindsight what the world really needed was for these men (it’s still very much a boys’ club) to be shaken out of their complacency and to ask themselves some tough questions about whether in fact they were leading us off a precipice.

Now that it’s clear that many of them were leading us off that cliff, there’s still no sign of contrition, although you can be sure that a few fingers will be pointed at various past attendees who aren’t here to defend themselves. Is anybody here seriously examining the idea that Davos was institutionally responsible, at least in part, for the economic and financial catastrophe which befell the world in 2008? I’ll be on the lookout for that over the next few days. But I suspect that the preening potentates will be far too busy giving themselves the job of rebuilding the world to stop and ask where they went wrong in building the last one, and whether they might actually owe the rest of us a large collective apology.

And more Salmon:

One of the more annoying aspects of the Davos echo-chamber is the way in which people are constantly asking each other what “the mood” is this year; the result is an inchoate consensus that since the crisis is over, markets are up, and countries are growing again, there must be grounds for optimism and the kind of yes-we-can thinking in which the World Economic Form has always specialized.

I’m moving the other way, however, siding with the pessimists like Nouriel Roubini and Martin Wolf. They’re both convinced that the problems of southern Europe are both grave and intractable, although they differ in their prediction of what the consequences will be: Nouriel sees a good chance of the eurozone breaking up, while Martin sees the PIGS (Portugal, Italy, Greece, Spain) staying in the euro and ending up stuck in a long-term slump, able to neither cut interest rates nor devalue their currencies in an attempt to regain competitiveness. The only other option is an across-the-board cut in nominal wages, on the order of 30% or so. That’s something which is pretty much inconceivable, although Ireland seems to be trying to move in that direction.

Of course the one entity which will benefit from this is the Squid: Goldman Sachs seems to be taking the lead in trying to orchestrate a desperate and expensive sale of Greek debt to China. Expect more such desperate moves as the southern European macroeconomy continues to deteriorate; anybody who watched the world’s investment bankers swarming all over Domingo Cavallo in the final weeks of Argentina’s currency board will remember just how vulturish they can be in such situations.

Andrew Sullivan:

The theories of self-regulating markets that guaranteed no collapse turned out to be profoundly flawed – as most intelligent conservatives (Posner, Bartlett, et al.) have now observed. And the oh-so-clever mechanisms the bankers invented to give themselves more and more and more turned out – surprise! – to be mathematically flawed. And those of us who’d saved for retirement, paid our mortgages punctiliously, paid our taxes without armies of accountants to squeeze every last drop from Uncle Sam, and worked to build real things … we became their victims. That’s when the temptation for vengeance comes in. But when we then rescue them and burden ourselves with more debt, and they turn around and do all they can to restore the insanity that brought us all so low, and enrich themselves some more, we enter a new period.

I have no doubt there are many good men and women working in the banking sector. But the system is so corroded with vice, with selfishness, and, most importantly, with contempt for the common good, it needs real reform. I like what Obama has proposed and what the chairman of the Bank of England is now endorsing. I think the bailouts were necessary, just as I think the stimulus was necessary. But passing the toughest financial regulation bill we can at this point seems to me to be an urgent priority. The diffuse anger out there is a function of this deep sense of injustice – and it’s correct.

We need to make banking not just boring but as profitable as any other sector in the economy: no more and no less. We need to remove the mystique that led us to this morass. And we need to do it to rescue capitalism itself from its own hubris and naive belief that economics can operate in a vacuum without virtue.

Kevin Drum on Salmon’s second post:

For what it’s worth (and you can guess how much that is), I think I agree about Europe but I’m not quite so pessimistic about the U.S. The American economy seems unlikely to come roaring back to life or anything this year, and a midyear dip seems at least plausible, but overall I suspect we’re just going to see a long, hard slog to recovery, not a second disaster.

The wild card, though, is whether a disaster somewhere else will ripple across the globe and eventually touch off a disaster here. That’s certainly possible, and it’s part of the risk I think Tim Geithner took when he chose to rescue the banking system the way he did. It’s left the entire system in fragile shape, which is OK if nothing terrible happens in the next couple of years and everyone has time to earn their way back to full strength. But if something terrible does happen, we’re still not in very good shape to handle it. So let’s hope for a lack of disasters, OK?

Yaël Bizouati at Dealbreaker:

Everybody’s pissed off at everybody at the World Economic Forum. It’s not the love fest it used to be. Not even humanity-lover Bono is showing up this year.

Here’s a roundup:

Barclays President Robert Diamond would like to point out that everyone at the bank is “immensely proud” that the bank didn’t take any direct money from any government anywhere in the world. A word of acknowledgment would be much appreciated, thank you.

“I think that what goes unnoticed is that the banks which stayed strong and were well managed through this are angry at the banks (that) had poor management (and) were allowed to have poor management and ineffective regulations,” Diamond said.

Take that, all of you TARP-ed failures.

Meanwhile, George Soros -siding with his pal Roubini- is mad at Obama’s proposals, saying he’s not going far enough and the largest financial institutions may be “too big to fail” even under his plans to rein them in.

“Some of the banks will spin off investment banks that will still be too big to fail,” Soros said.

On the other hand, Deutsche Bank CEO Josef Ackermann said the Obama plan is BS as it will hinder global economic growth.

“If you have fragmented, small players in the financial sector, meeting the requirements of global trade and production, you will have a dichotomy which is not going to work and would not be for the benefit of the real economy at the end,” Ackermann said.

Vincent Fernando at Clusterstock:

Nouriel Roubini at Davos has announced in none too uncertain terms how he feels about Greece right now — it’s a lost cause that Europeans will be forced to back-stop.

CNBC:

“Greece is bankrupt,” Roubini told CNBC.com at WEF. “Look, they have to ask China to help them out.”

If the situation becomes dire enough the European Union will be forced to help bail Greece out because it’s such a threat to the monetary union, he said.

Gideon Rachman at Financial Times:

Jesus drove the money-changers out of the temple. Now the World Economic Forum has driven the wine-tasters out of Davos. In previous years, one of the highlights of the forum was a small but spectacular tasting of fine wines. But last year Klaus Schwab, the forum’s mastermind, decided that guzzling first-growth clarets was an inappropriate way of celebrating the global economic meltdown – and the wine-tasting was cancelled. We all hoped that this was a temporary abberation, but apparently not. The new Puritanism is here to stay – Davos wine-tastings are off the menu until further notice.

But you cannot deter dedicated wine-tasters that easily. Last night a wine-tasting was organised by former Davos employees who have formed a new organisation called the Wine Forum. It took place in a conference room in an airport hotel in Zurich at 6pm – a time and a location that was specifically designed to intercept delegates en route to Davos.

Jancis Robinson of the FT was mistress-of-ceremonies and the wines were provided by Krug, and Chateaus Cheval Blanc and Yquem. One of the malign results of globalisation is that these wines, which were once affordable to the likes of me, are now global brands cherished by the super-rich and so mesmerisingly expensive. I’ve never understood why the anti-globalisation movement doesn’t make more of this issue. The 1959 Chateau Yquem that we tasted last night now sells for about £1600 a bottle – each gulp that I took would have made a small contribution to paying off my mortgage. The Cheval Blanc 1998 is about £400 a bottle.

[…]

Under the circumstances, I feel remarkably perky. This morning I went to a really good session on geo-politics, which did what Davos does so well – bring together participants from all over the world; in this case from Beijing, Moscow, London, Cairo, Harvard, Afghanistan and Pakistan. Now I am off to a lunch with George Soros. This evening, I am meant to be moderating a dinner debate called “From Piracy to Pandemics – From Past to Present Dangers”, which seems to have been organised by somebody with a taste for alliteration. It says that the dress code is “smart casual”, but I think it would be more fun if the participants could be persuaded to come in fancy dress. Somebody should come dressed as a pirate; somebody else could come as a pig with flu. Now that the wine-tasting is no more, we need to think of new ways of enlivening Davos.

NYT’s Dealbook in Davos:

The Washington Post notes that while the industry and government leaders who descend on the Alpine village for the event have historically been confident about sharing their outlook on the future, they are far from reliable. The Post rounds up some of the the worst predictions by Davos attendees.

Among them, The Post says:

In 2001, Enron’s chief executive, Kenneth Lay, declared that his company was a “21st century corporation.” Enron filed for bankruptcy that December, and Mr. Lay was indicted for fraud in 2004 and found guilty in 2006.

In 2004, Bill Gates told the world “Two years from now, spam will be solved.” Enough said.

In 2008, former Treasury Secretary John Snow said that the United States recession would be ‘’short and shallow,” while Fred Bergsten, director of the Peter G. Peterson Institute for International Economics, declared: “It is inconceivable — repeat, inconceivable — to get a world recession.” They should think about starting their own stand-up routine.

The Atlantic’s Davos page

UPDATE:More Felix Salmon

Matthew Yglesias

Meep, Meep, Mr. Geithner

Hugh Son at Bloomberg:

The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican. Taxpayers “deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information.” President Barack Obama selected Geithner as Treasury secretary, a post he took last year.

Dealbook at NYT

Henry Blodget at Clusterstock:

Bloomberg unearths more details on the nauseating bailout of AIG and the 100-cents-on-the-dollar payouts to Goldman, et al.

Once again, Tim Geithner was in charge.

Geithner will probably say he ordered AIG to conceal the details of the bailout to save the world. (This seems to be the generic excuse for everything that happened in the fall of 2008).

We suspect there was another reason: The details were outrageous.

Felix Salmon:

Was the Fed demanding secrecy because, as Henry Blodget says, it wanted to keep the “outrageous” details of the government bailout a secret? Yes, that’s probably part of it. And maybe there was an element of worry that public disclosure would make it more obvious what the Fed’s Maiden Lane funds comprised, making it easier for the market to try to trade against them.

But mostly I suspect that this was just a knee-jerk thing, with Fed officials (yes, Tim Geithner, that means you) and their lawyers always wanting to tell the public only what they wanted the public to know, and to keep everything else secret. If you read Sorkin’s Too Big To Fail, one of the themes running through it is that public-sector officials were in serious panic mode for months, and were convinced that things were much worse than the markets and the press were indicating. It seems they thought that if they just kept things secret, maybe the markets wouldn’t find out, and could keep on running in thin air indefinitely. A bit like in the Road Runner cartoons: it’s only when you look down and see how bad things are that you actually plunge.

Jim Geraghty at NRO:

In a sane world, Treasury Secretary Tim Geithner would be cleaning out his desk right now, right?

Ed Morrissey:

Almost a year ago, Democrats hyperventilated over the machinations of AIG execs and screeched about their bonuses.  Now it appears that the problem wasn’t AIG at all, but the sneaky way the New York Fed and Geithner rode to Goldman Sachs’ rescue, and that of other banks.  Geithner and his cohorts wanted to make sure they covered their tracks while using AIG as both a whipping post and a money-laundering device in order to effect the rescue of politically-connected private institutions.

Should we have rescued GS and the banks?  Opinions differ, but even if we needed to do so, that should have been done with enough transparency for everyone to understand where the money went and why.  Playing shell games with the money while demonizing the people who were forced to run the laundry should have been a prescription for excluding Geithner from positions of authority — and so should have the tax evasion revelations.  Instead, the administration of Hope and Change chose obfuscation and deceit.

Naked Capitalism:

He was on the job when these firms levered up and took reckless risks that endangered our financial system. For him to absolve himself of responsibility is a disgrace. And to add insult to injury, we now learn that he urged a systemically important company to withhold evidence of his looting of taxpayers.

Tim Geithner must go.