Tag Archives: Bank of America

Bank Of America Calls It: “The Peak In Home Sales Has Been Reached; Housing No Longer A Tailwind”

Bank of America is ringing the proverbial bell on the US real estate market, saying existing home sales have peaked, reflecting declining affordability, greater price reductions and deteriorating housing sentiment. In the latest weekly report from chief economist Michelle Meyer, the bank warned that “the housing market is no longer a tailwind for the economy but rather a headwind.”

“Call your realtor,” the BofA note proclaimed: “We are calling it: existing home sales have peaked.”

BofA’s economists believe the peak was seen when existing home sales hit 5.72 million, back in November 2017. From this point on, sales should trend sideways, as this moment in time is comparable to the rate the economy witnessed in the early 2000s before the bubble inflated.

And while BofA believes existing home sales have plateaued, they do not think the same for new home sales. The reason: new home sales have lagged existing in this “economic recovery” – leaving home builders some room to flood the market with new single-family units before a turning point in the entire real estate market is realized.

The deterioration in affordability can mostly explain the peak in existing home sales. This is due to the Federal Reserve reinflating real estate prices back to levels last seen since before the 2008 crash. The National Association of Realtors (NAR) affordability index prints 138.8, the lowest since August 2008.

Chart 1 (below) shows there is a leading relationship between the trend in affordability and in home sales — a simple regression suggests the lead is about three months. In major cities, affordability continues to be a significant problem for many Americans amid a rising interest rate environment and elevated home prices, existing home sales should remain under pressure for the foreseeable future.

Chart 2 (above right) indicates that the share of properties with price discounts is on the rise, suggesting that sellers are unloading into weakening demand. The data from Zillow reveals that 15 percent of listings have price reductions, the highest since mid-2013 when home sales tumbled last.

The University of Michigan survey (Chart 3 below) reveals a worsening mood in the perception of buying conditions for homes. Respondents noted that home prices have become too high while rates have become restrictive.

BofA said that existing home sales were quick to recover post-crisis given motivated sellers – the lenders who were sitting with millions of distressed properties.

Distressed properties made up between 30 and 40 percent of sales in the early stages of the recovery.

Home prices were discounted until they reached the market clearing price and buyers entered.

The recovery for new homes sales began one year after existing, as homebuilders stayed idol waiting for the dust to settle.

“We are now looking at a market where existing home sales have returned to a solid pace but new home sales are still below normal levels. We think that builders will continue to selectively add inventory in markets where there is demand, allowing new home sales to glide higher. Ultimately we think new home sales will peak around 1mn saar based on the historical relationship between existing and new home sales,” said BofA.

BofA asks the difficult question: If existing home sales have peaked, does it mean the rate of growth of home prices will as well?

Their answer: In the last cycle, existing home sales peaked at 6.26mn saar on September 2005, coinciding with peak home price growth of 14.4 percent the same month (Chart 5). The pre-boom historical data are generally supportive as well, as are the recent data-single family existing home sales peaked at 4.9mn saar in March this year, as did home price appreciation at 6.5 percent. The result, well, existing home sales are pressured by declining affordability, home price growth should slow from here. BofA said a contraction in home prices seems unlikely at the moment, however, if demand is not stoked soon that can all change.

While BofA makes clear the housing market is starting to stall, the Federal Reserve is conducting quantitative tightening and rapidly increasing interest rates to get ahead of the next recession. In other words, liquidity is being removed from the system and the cost of borrowing is headed higher – an environment that is not friendly to real estate, and could be the key factor explaining the weakness in housing.

Which brings up another important question: while financial assets continue to rise, these have largely benefited the Top 10% of the population; meanwhile the bulk of the US middle class net worth has traditionally been allocated to such fixed assets as real estate. And if that is now rolling over, what is the outlook for the US consumer, which remains the dynamo behind the US economy?

There is another, potentially more troubling observation. According to TS Lombard, the current period is now only the third time in US history – after 1968 and 1999 – in which equities have made up a larger percentage of net worth than real estate.

While this may be good news for holders of stocks, it may not last: as TS Lombard observes, sharp bear markets followed shortly after 1968 and even sooner after 1999. And with housing peaking – if BofA is correct – share prices remain the only driver behind continued economic growth, prompting TSL to conclude that “the US economy can not afford a bear market.”

Source: ZeroHedge

“I Was In Shock”: Woman Finds Her BofA Safe Deposit Box Has Vanished (video)

A safe deposit box should, by definition, be “safe.” However, to her surprise, that is precisely the opposite of what a California woman discovered a few days ago.

Susan Nomi said that when she went to open the Bank of America safe deposit box she had for 16 years, the entire box had vanished. The safe is where she kept her family’s jewelry and her dad’s coin collection.

“I was in shock; I was just like what happened to my box,” said Nomi, quoted by CBS Sacramento.

Worse, Bank of America – which was custodian of the safety box – couldn’t explain where her valuables went: “They don’t have an answer. They don’t have an answer. They say thanks for letting us know,” Nomi said.

Making matters worse for the infuriated woman, she herself was a retired Bank of America employee of 40 years; and she’s not alone. Others have complained that Bank of America drilled their safe deposit boxes without permission or notice.

Another dissatisfied customer, Wendy Woo, said her belongings were taken out of her safe deposit box and shipped to her by the bank: “Everything was dumped in a plastic bag,” said Woo. In the process, a ring went missing and a necklace was damaged in the process.

“Safe deposit box… that’s what it’s for, safe,” she said, only not when the safe belongs to Bank of America.

A second family complained that it too had gotten the contents of their safe deposit box shipped back too, but claim $17,000 in jewelry was missing.

“I just got robbed from the bank,” another woman complained: “They just took my stuff.”

Needless to say, what makes these situations bizarre, is that according to federal rules, banks can drill a box without permission only when there is a court order, search warrant, delinquent rental fees, requests from estate administrators, or if the bank is closing a branch. And yet none of those reasons applies to any of these cases.

Safe deposit box consultant Dave Guinn trains bank employees on proper safe deposit box procedures. He says federal law requires that banks give customers adequate notice.

“A notification should be made either by registered letter or by certified receipt letter,” said Guinn.

Meanwhile, in tis defense BofA said it does “…notify customers by mail in accordance with law well in advance prior to drilling a box.” But former employee Nomi’s not buying it: “I worked for them. It’s not like they couldn’t get a hold of me or anything.”

Adding to her Nomi’s frustration, Bank of America still can’t explain what happened to her valuables but said, “We certainly understand how frustrating this matter is for Mrs. Nomi and we are working with her on a resolution. We are looking at this situation to help us identify opportunities to help avoid similar events in the future as we continue to work on improving service to our customers.” She said “I can’t ever replace it. It’s irreplaceable, doesn’t matter how much its worth.”

Eventually, once the CBS news team got involved, the bank finally agreed to cut her a check. BofA also paid to fix Mrs. Woo’s damaged jewelry but left each of them wondering how safe a safe deposit box is.

Nomi has advice for others: “Check what’s in your box,” and “If you haven’t been in it for a while, make sure it’s there.”

The Bank of America rental agreement says they could terminate your rental agreement for your safe deposit box if you don’t give proper identification when requested. The customers in these incidents say that does not apply to their cases.

Banks have strict regulations they must follow, one being they have to have two keys to get into a box, yours and theirs. Plus, if a box has been drilled open, the bank must have a record of it being drilled.

So for all those readers who still hold gold in a bank vault, confident it will be there come rain or shine, now may be a time to quietly take it all out and have a small boating accident…

Source: ZeroHedge

Bank of America Contributed To $102 Million Ponzi Scheme: lawsuit

Plaintiffs charged that BofA lent the scheme an air of legitimacy and provided critical support

Bank of America Corp. was accused in a lawsuit of providing more than 100 accounts used to perpetrate what the U.S. regulators called a $102 million Ponzi scheme.

The class-action suit filed on behalf of people who lost money follows a complaint last week by the Securities and Exchange Commission alleging that five men and three companies defrauded more than 600 investors.

One of the alleged ringleaders once commissioned a song about himself for a party in Las Vegas with lyrics celebrating his $10,000 suits and his partner’s affinity for champagne, according to Monday’s complaint in federal court in Ocala, Florida.

The brother and sister who sued to recover losses from their late father’s investment claim the fraudsters “could not have perpetuated their scheme without the knowing assistance of their primary banking institution, Bank of America, which lent the scheme an air of legitimacy and provided critical support, including at times when the scheme would have otherwise collapsed,” according to the complaint.

Bank of America spokesman Bill Halldin had no immediate comment on the suit.

The lender is accused of failing to spot suspicious activity, including deposits of hundreds of thousands of dollars into accounts with relatively small, negative or nonexistent balances, followed by transfers within the same week to other accounts or investors seeking to cash out.

The architects of the scheme promised they would put investor funds into profitable and perhaps dividend-paying companies, according to the SEC. But they spent $20 million from the investment pool to enrich themselves, made $38.5 million in “Ponzi-like payments” and transferred much of the rest away from the companies that were supposed to receive the money, the regulator said.

Source: Investment News

The Subprime Mortgage Is Back: It’s 2008 All Over Again!

Apparently the biggest banks in the US didn’t learn their lesson the first time around…

Because a few days ago, Wells Fargo, Bank of America, and many of the usual suspects made a stunning announcement that they would start making crappy subprime loans once again!

I’m sure you remember how this all blew up back in 2008.

Banks spent years making the most insane loans imaginable, giving no-money-down mortgages to people with bad credit, and intentionally doing almost zero due diligence on their borrowers.

With the infamous “stated income” loans, a borrower could qualify for a loan by simply writing down his/her income on the loan application, without having to show any proof whatsoever.

Fraud was rampant. If you wanted to qualify for a $500,000 mortgage, all you had to do was tell your banker that you made $1 million per year. Simple. They didn’t ask, and you didn’t have to prove it.

Fast forward eight years and the banks are dusting off the old playbook once again.

Here’s the skinny: through these special new loan programs, borrowers are able to obtain a mortgage with just 3% down.

Now, 3% isn’t as magical as 0% down, but just wait ‘til you hear the rest.

At Wells Fargo, borrowers who have almost no savings for a down payment can actually qualify for a LOWER interest rate as long as you go to some silly government-sponsored personal finance class.

I looked at the interest rates: today, Wells Fargo is offering the exact same interest rate of 3.75% on a 30-year fixed rate, whether you have bad credit and put down 3%, or have great credit and put down 30%.

But if you put down 3% and take the government’s personal finance class, they’ll shave an eighth of a percent off the interest rate.

In other words, if you are a creditworthy borrower with ample savings and a hefty down payment, you will actually end up getting penalized with a HIGHER interest rate.

The banks have also drastically lowered their credit guidelines as well… so if you have bad credit, or difficulty demonstrating any credit at all, they’re now willing to accept documentation from “nontraditional sources”.

In its heroic effort to lead this gaggle of madness, Bank of America’s subprime loan program actually requires you to prove that your income is below-average in order to qualify.

Think about that again: this bank is making home loans with just 3% down (because, of course, housing prices always go up) to borrowers with bad credit who MUST PROVE that their income is below average.

[As an aside, it’s amazing to see banks actively competing for consumers with bad credit and minimal savings… apparently this market of subprime borrowers is extremely large, another depressing sign of how rapidly the American Middle Class is vanishing.]

Now, here’s the craziest part: the US government is in on the scam.

The federal housing agencies, specifically Fannie Mae, are all set up to buy these subprime loans from the banks.

Wells Fargo even puts this on its website: “Wells Fargo will service the loans, but Fannie Mae will buy them.” Hilarious.

They might as well say, “Wells Fargo will make the profit, but the taxpayer will assume the risk.”

Because that’s precisely what happens.

The banks rake in fees when they close the loan, then book another small profit when they flip the loan to the government.

This essentially takes the risk off the shoulders of the banks and puts it right onto the shoulders of where it always ends up: you. The consumer. The depositor. The TAXPAYER.

You would be forgiven for mistaking these loan programs as a sign of dementia… because ALL the parties involved are wading right back into the same gigantic, shark-infested ocean of risk that nearly brought down the financial system in 2008.

Except last time around the US government ‘only’ had a debt level of $9 trillion. Today it’s more than double that amount at $19.2 trillion, well over 100% of GDP.

In 2008 the Federal Reserve actually had the capacity to rapidly expand its balance sheet and slash interest rates.

Today interest rates are barely above zero, and the Fed is technically insolvent.

Back in 2008 they were at least able to -just barely- prevent an all-out collapse.

This time around the government, central bank, and FDIC are all out of ammunition to fight another crisis. The math is pretty simple.

Look, this isn’t any cause for alarm or panic. No one makes good decisions when they’re emotional.

But it is important to look at objective data and recognize that the colossal stupidity in the banking system never ends.

So ask yourself, rationally, is it worth tying up 100% of your savings in a banking system that routinely gambles away your deposits with such wanton irresponsibility…

… especially when they’re only paying you 0.1% interest anyhow. What’s the point?

There are so many other options available to store your wealth. Physical cash. Precious metals. Conservative foreign banks located in solvent jurisdictions with minimal debt.

You can generate safe returns through peer-to-peer arrangements, earning up as much as 12% on secured loans.

(In comparison, your savings account is nothing more than an unsecured loan you make to your banker, for which you are paid 0.1%…)

There are even a number of cryptocurrency options.

Bottom line, it’s 2016. Banks no longer have a monopoly on your savings. You have options. You have the power to fix this.

by Simon Black | ZeroHedge

Supreme Court Outlaws Chapter 7 ‘Stripping Off’ of Second Mortgages

by DS News

The U.S. Supreme Court ruled on Monday that an underwater second mortgage cannot be extinguished, or “stripped off,” as unsecured debt for a debtor in bankruptcy, according to the Supreme Court‘s website.

In the cases of Bank of America v. Caulket and Bank of America v. Toledo-Cardona, Florida homeowners David Caulkett and Edelmiro Toldeo-Cardona had filed for Chapter 7 bankruptcy and had second mortgages with Bank of America extinguished by a bankruptcy judge following the housing crisis of 2008 based on the fact that they were completely underwater. On Monday, just more than two months after hearing arguments for the case, the Supreme Court ruled in favor of the bank.

When the Supreme Court heard arguments for two cases on March 24, attorneys representing Bank of America contended that the high court should uphold a 1992 decision in the case of Dewsnup v. Timm, which barred debtors in Chapter 7 bankruptcy from “stripping off” an underwater second mortgage down to its market value, thus voiding the junior lien holder’s claim against the debtor. Attorneys for the debtors argued that the Dewsnup decision was irrelevant for the two cases.

Bank of America appealed the bankruptcy judge’s ruling for the two cases, but the 11th Circuit U.S. Court of Appeals upheld the bankruptcy court’s decision in May 2014, going against the Dewsnup ruling by saying that decision did not apply when the collateral on a junior lien (second mortgage) did not have sufficient enough value. The bank subsequently appealed the 11th Circuit Court’s ruling.

The Supreme Court ruled on Monday that the second mortgages should not be treated as unsecured debt, hence upholding the Dewsnup decision. Justice Clarence Thomas, in delivering the opinion of the court, wrote that, “Section 506(d) of the Bankruptcy Code allows a debtor to void a lien on his property ‘[t]o the extent that [the] lien secures a claim against the debtor that is not an allowed secured claim.’ 11 U. S. C. §506(d). These consolidated cases present the question whether a debtor in a Chapter 7 bankruptcy proceeding may void a junior mortgage under §506(d) when the debt owed on a senior mortgage exceeds the present value of the property. We hold that a debtor may not, and we therefore reverse the judgments of the Court of Appeals.”

“The Court has spoken, and we respect its ruling,” said Stephanos Bibas, an attorney for defendant David Caulkett, in an email to DS News. “But we are disappointed that the Court extended its earlier precedent in Dewsnup v Timm, even though it acknowledged that the plain words of the statute favor giving relief to homeowners such as Messrs. Caulkett and Toledo-Cardona. We hope that in the near future, the Administration’s home-mortgage-modification programs will offer more relief to homeowners in this situation struggling to save their homes.”

A Bank of America spokesman declined to comment on Monday’s Supreme Court’s ruling.

Click here to read the complete text of the Court’s ruling.

Pension Funds Sue Big Banks over Manipulation of $12.7 Trillion Treasuries Market

At least two government pension funds have sued major banks, accusing them of manipulating the $12.7 trillion market for U.S. Treasury bonds to drive up profits, thereby costing the funds—and taxpayers—millions of dollars.

As with another case earlier this year, in which major banks were found to have manipulated the London Inter bank Offered Rate (LIBOR), traders are accused of using electronic chat rooms and instant messaging to drive up the price that secondary customers pay for Treasury bonds, then conspiring to drop the price banks pay the government for the bonds, increasing the spread, or profit, for the banks. This also ends up costing taxpayers more to borrow money.

In the latest complaint, the Oklahoma Firefighters Pension and Retirement System is suing Barclays Capital, Deutsche Bank, Goldman Sachs, HSBC Securities, Merrill Lynch, Morgan Stanley, Citigroup and others, according to Courthouse News Service. Last month State-Boston Retirement System (SBRS) filed a similar complaint against 22 banks, many of which are the same defendants in the Oklahoma suit.

“Defendants are expected to be ‘good citizens of the Treasury market’ and compete against each other in the U.S. Treasury Securities markets; however, instead of competing, they have been working together to conclusively manipulate the prices of U.S. Treasury Securities at auction and in the when-issued market, which in turn influences pricing in the secondary market for such securities as well as in markets for U.S. Treasury-Based Instruments,” the Oklahoma complaint states.

The State-Boston suit, which named Bank of America Corp’s Merrill Lynch unit, Citigroup, Credit Suisse Group, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, UBS and 14 other defendants, makes similar charges.

SBRS uncovered the scheme when it hired economists to analyze Treasury securities price behavior, which pointed to market manipulation by the banks.

“The scheme harmed private investors who paid too much for Treasuries, and it harmed municipalities and corporations because the rates they paid on their own debt were also inflated by the manipulation,” Michael Stocker, a partner at Labaton Sucharow, which represents State-Boston, said in an interview with Reuters. “Even a small manipulation in Treasury rates can result in enormous consequences.”

Both the suits are seeking treble unnamed damages from the financial institutions involved. The LIBOR action earlier this year involved a settlement of $5.5 billion.

The U.S. Justice Department has reportedly launched its own investigation into the alleged Treasury market conspiracy.

by Steve Straehley in allgov.com

To Learn More:

Banks Rigged Treasury Bonds, Class Claims (by Lorraine Baily, Courthouse News Service)

State-Boston Retirement System, on behalf of itself and v. Bank of Nova Scotia (Courthouse News Service)

Lawsuit Accuses 22 Banks of Manipulating U.S. Treasury Auctions (by Jonathan Stempel, Reuters)

Four Banks Guilty of Currency Manipulation but, as Usual, No One’s Going to Jail (by Steve Straehley and Noel Brinkerhoff, AllGov)

Bank Stock Prices Fall When Interest Rates Rise: Lessons from Bank Of America 1974

by Donald Van Deventer

Summary

Wm. Mack Terry explained the basics of how rates impact bank stocks at Bank of America in 1974. Net income goes up, margins go up, and stock price goes down.
We value a bank by replication, assembling a series of Treasury securities with the same financial characteristics as a bank. All of Mr. Terry’s conclusions are correct.
A more technical analysis and references are provided. Correlations with 11 different Treasury yields are added in Appendix A. Finally, a worked example is given in Appendix B.

We want to thank our readers for the very strong response to our June 17, 2015, note “Bank Stock Prices and Higher Interest Rates: Lessons from History.” For those readers who asked “is the correlation between Treasury yields and bank stock prices negative at other maturities besides the 10 year maturity?” – we include Appendix A. Appendix A shows that for all nine bank holding companies studied, there is negative correlation between the bank’s stock price and Treasuries for all maturities but two. One exception is the 1-month Treasury bill yield, which is the shortest time series reported by the U.S. Department of the Treasury. The 1-month Treasury bill yield has only been reported since July 31, 2001. The correlation between the longer 3-month Treasury bill yield series and the stock prices of all nine bank holding companies is negative. The other series that occasionally has positive correlations is the 20 year U.S. Treasury yield, which is the second shortest yield series provided by the U.S. Department of the Treasury.

In this note, we use modern “no arbitrage” finance and a story from 1974 to explain why there is and there should be a negative correlation between bank stock prices and interest rates. We finish with recommendations for further reading for readers with a very strong math background.

Wm. Mack Terry and Lessons from the Bank of America, 1974

In the summer of 1974 I began the first of two internships with the Financial Analysis and Planning group at Bank of America (NYSE:BAC) in San Francisco. My boss was Wm. Mack Terry, an eccentric genius from MIT and one of the smartest people ever to work at the Bank of America. One day he came to me and made a prediction. This is roughly what he said:

“Interest rates are going to go up, and two things are going to happen. Our net income and our net interest margins are going to go up, and our senior management is going to claim credit for this. But they’ll be wrong when they do so. Our income will only go up because we don’t pay interest on our capital. Shareholders are smart and recognize this. When they discount our free cash flow at higher interest rates, even with the increase on capital, our stock price is going to go down.”

Put another way, higher rates never increase the value of investments of capital funds, and the hedged interest rate spread is a long term fixed rate security that drops in value when rates rise. That is unless the leading researchers are completely wrong in their finding that credit spreads narrow when rates rise.

Everything Mack predicted came true. The 1-year U.S. Treasury yield was in the 8 percent range in the summer of 1974. It ultimately peaked at 17.31% on September 3, 1981. The short run impact of the rate rise was positive at Bank of America, but the long run impact was devastating. By the mid-1980s, the bank was in such distress that my then employer First Interstate Bancorp launched a hostile tender to buy Bank of America.

Their biggest problem was an interest rate mismatch, funding 30 year fixed rate mortgages with newly deregulated consumer deposits when rates went up.

The point of the story is not the anecdote about Bank of America per se. Why was Mack’s prediction correct? We give the formal academic references below, but we can use modern “no arbitrage” financial logic to understand what happened. We model a bank that’s assumed to have no credit risk by replication, assembling the bank piece by piece from traded securities. This was the approach taken by Black and Scholes in their famous options model, and it’s a common one in modern “no arbitrage” finance. We take a more complex approach in the “Technical Notes” section. For now, let’s make these assumptions to get at the heart of the issue:

We assume the bank has no assets that are at risk of default.
All of its profits come from investing at rates higher than U.S. Treasuries and by taking money from depositors at rates lower than U.S. Treasury yields
We assume that the bank borrows money in such a way that all assets financed with borrowed money have no interest rate risk: the credit spread is locked in. We assume the net interest margin is locked in at a constant dollar amount that works out to $3 per share per quarter.
We assume this constant dollar amount lasts for 30 years.
With the bank’s capital, we assume the bank either buys 3-month Treasury bills or 30-year fixed rate Treasury bonds. We analyze both cases.
We assume taxes are zero and that 100% of the credit spread cash flow is paid out as dividends to keep things simple.
We assume the earnings on capital are retained and grow like the proceeds of a money market fund.

We use the U.S. Treasury curve of June 18 to analyze our simple bank. The present value of a dollar received in 3 months, 6 months, 9 months, etc. out to 30 years can be calculated using U.S. Treasury strips (zero coupon bonds) whose yields are shown here:

(click to enlarge)

We write the present value of a dollar received at time tj as P(tj). The first quarter is when j is 1. The last quarter is when j is 120. The cash flow thrown off to shareholders from the hedged borrowing and lending is the sum of $3 per quarter times the correct discount factors out to 30 years.

The sum of the discount factors is 81.02. When we say “the sum of the discount factors,” note that means that the entire 30 year Treasury yield curve is used in valuing the bank’s franchise, even if the bank makes that $3 per quarter rolling over short term assets and liabilities. When we multiply the sum of the discount factors by $3 per quarter, the value of the hedged lending business contributes $3 x 81.02 = $243.06 to the share price. This calculation is given in Appendix B.

How about the value of earnings on capital? And how much capital is there? The short answer is that it doesn’t matter – we’re just trying to illustrate valuation principals here. But let’s assume the $3 in quarterly “spread” income, $12 a year, is 1% of assets. That makes assets $1200 (per share). With 5% capital, we’ll use $60 as the bank’s capital. We analyze two investment strategies for capital: Strategy A is to invest in 3-month Treasury bills. They are yielding 0.01% on June 18. Strategy B is to invest in the current 30 year Treasury bond, yielding 3.14% on June 18. Let’s evaluate the stock price right now under both strategies. If rates don’t move, the current outlook is this if the bank invests its capital in Treasury bills using Strategy A:

Net income will be $12.006 per year. The value of capital at time zero is $60 because we’ve invested $60 in T-bills worth $60. The value of the hedged “spread lending” franchise, discounted over its 30-year life, is $243.060. That means the stock price must be the sum of these two pieces or there’s a chance for risk-less arbitrage. The stock price must be $303.060.

What happens to the stock price if, one second after we buy the stock, zero coupon bond yields across the full yield curve rise by 1%, 2%, or 3%? This is a mini-version of the Federal Reserve’s Comprehensive Capital Analysis and Review stress tests. The stock price changes like this:

Higher rates are “good for the bank” in the sense that net income will rise because earnings on the 3-month Treasury bills will be 1%, 2% or 3% higher. This is exactly what Mack Terry explained to me in 1974. This has no impact on stock price, however, because the investment in T-bills is like an investment in a money market fund. Since the discount factor rises when the income rises, the value is stable. So the value of the invested capital is steady at $60. See the “Technical Notes” references for background on this. What happens to the value of the spread lending franchise? It gets valued just like a constant payment mortgage that won’t default or prepay. The value drops from $243.06 to either $215.04, $191.55 or $171.72. The calculations also are given in Appendix B. The result is a stock price that’s lower in every scenario, dropping 9.25%, 17.00% or 23.54%.

But wait, one might ask. Won’t the amount of lending increase and credit spreads widen at higher rates? Before we answer that question, we can calculate our breakeven expansion requirements. For the value of the lending franchise to just remain stable, we need to restore the value from 215.04, 191.55 or 171.72 to 243.06. This requires that the cash flow expand by 243.06/215.04-1 in the “up 1%” scenario. That means our cash flow has to expand by 13.03% from $12 a year to $13.56 per year. For the up 2% and up 3% scenarios, the increases have to be by 26.89% or 41.54%.

Just from a common sense point of view, this expansion of lending volume seems highly unlikely at best. A horde of academic studies discussed in Chapter 17 of van Deventer, Imai and Mesler also have found that when rates rise, credit spreads shrink rather than expand. Selected references are given in the “Technical Notes.”

Is Strategy B a better alternative? Sadly, no, because the income on invested capital stays the same (3.14% times $60) and the present value of the 30-year bond investment falls. Here are the results:

Good News and Conclusions

There is some good news in this analysis. Given the assumptions we have made, this bank will never go bankrupt. Because the assets funded with borrowed money are perfectly hedged from a rate risk point of view, the bank is in the “safety zone” that Dr. Dennis Uyemura and I described in our 1992 introduction to interest rate management, Financial Risk Management in Banking. The other good news is that Mack Terry’s example shows that the entire spectrum of Treasury yields is used to value bank stocks because the cash flow stream from the banking franchise spans a 30-year time horizon.

This example shows that, under simple but relatively realistic assumptions, the value of a bank can be replicated as a portfolio of Treasury-related securities. This portfolio falls in value when rates rise. The negative correlation between Treasury yields that 30 years of history shows is not spurious correlation – it’s consistent with the fundamental economics of banking when interest rate risk is hedged.

Wm. Mack Terry knew this in 1974, and legions of interest rate risk managers of banks have replicated this simple example in their regular interest rate risk simulations that are required by bank regulators around the world. What surprises me is that people are surprised to learn that higher interest rates lower bank stock prices.

Technical Notes

When writing for a general audience, some readers become concerned that the author only knows the level of analysis reflected in that article. We want to correct that impression in this section. We start with some general observations and close with references for technically oriented readers:

For more than 50 years, beginning with the capital asset pricing model of Sharp, Mossin and Lintner, securities returns have been analyzed on an excess return basis relative to the risk free rate as a function of one or more factors. It is well known that the capital asset pricing model itself is not a very accurate description of security returns as a function of the risk factors.
Arbitrage pricing theory expanded explanatory power by adding factors. Merton’s inter-temporal capital asset pricing model (1974) added interest rates driven by one factor with constant volatility.
Best practice in modeling traded asset returns is defined by Amin and Jarrow (1992), who build on the multi-factor Heath, Jarrow and Morton interest rate model which allows for time varying and rate varying interest rate volatility. Amin and Jarrow also allow for time varying volatility as a function of interest rate and other risk factors.
This is the procedure my colleagues and I use to decompose security returns. An important part of that process is an analysis of credit risk, as explained by Campbell, Hilscher and Szilagyi (2008, 2011). Jarrow (2013) explains how credit risk is incorporated in the Amin and Jarrow framework. This is the procedure we would explain in a more technical forum, like our discussion with clients.
Asset return analysis is built on the Heath Jarrow and Morton interest rate simulation. The most recent 100,000 scenario simulation for U.S. Treasury yields (“The 3 Month T-bill Yield: Average of 100,000 Scenarios Up to 3.23% in 2025“) was posted on Seeking Alpha on June 16, 2015.

References for random interest rate modeling are given here:

Heath, David, Robert A. Jarrow and Andrew Morton, “Bond Pricing and the Term Structure of Interest Rates: A Discrete Time Approach,” Journal of Financial and Quantitative Analysis, 1990, pp. 419-440.

Heath, David, Robert A. Jarrow and Andrew Morton, “Contingent Claims Valuation with a Random Evolution of Interest Rates,” The Review of Futures Markets, 9 (1), 1990, pp.54 -76.

Heath, David, Robert A. Jarrow and Andrew Morton,”Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claim Valuation,” Econometrica, 60(1), 1992, pp. 77-105.

Heath, David, Robert A. Jarrow and Andrew Morton, “Easier Done than Said”, RISK Magazine, October, 1992.

References for modeling traded securities (like bank stocks) in a random interest rate framework are given here:

Amin, Kaushik and Robert A. Jarrow, “Pricing American Options on Risky Assets in a Stochastic Interest Rate Economy,” Mathematical Finance, October 1992, pp. 217-237.

Jarrow, Robert A. “Amin and Jarrow with Defaults,” Kamakura Corporation and Cornell University Working Paper, March 18, 2013.

The impact of credit risk on securities returns is discussed in these papers:

Campbell, John Y., Jens Hilscher and Jan Szilagyi, “In Search of Distress Risk,” Journal of Finance, December 2008, pp. 2899-2939.

Campbell, John Y., Jens Hilscher and Jan Szilagyi, “Predicting Financial Distress and the Performance of Distressed Stocks,” Journal of Investment Management, 2011, pp. 1-21.

The behavior of credit spreads when interest rates vary is discussed in these papers:

Campbell, John Y. & Glen B. Taksler, “Equity Volatility and Corporate Bond Yields,” Journal of Finance, vol. 58(6), December 2003, pages 2321-2350.

Elton, Edwin J., Martin J. Gruber, Deepak Agrawal, and Christopher Mann, “Explaining the Rate Spread on Corporate Bonds,” Journal of Finance, February 2001, pp. 247-277.

The valuation of bank deposits is explained in these papers:

Jarrow, Robert, Tibor Janosi and Ferdinando Zullo. “An Empirical Analysis of the Jarrow-van Deventer Model for Valuing Non-Maturity Deposits,” The Journal of Derivatives, Fall 1999, pp. 8-31.

Jarrow, Robert and Donald R. van Deventer, “Power Swaps: Disease or Cure?” RISK magazine, February 1996.

Jarrow, Robert and Donald R. van Deventer, “The Arbitrage-Free Valuation and Hedging of Demand Deposits and Credit Card Loans,” Journal of Banking and Finance, March 1998, pp. 249-272.

The use of the balance of the money market fund for risk neutral valuation of fixed income securities and other risky assets is discussed in technical terms by Heath, Jarrow and Morton and in a less technical way:

Jarrow, Robert A. Modeling Fixed Income Securities and Interest Rate Options, second edition, Stanford Economics and Finance, Stanford, 2002.

Jarrow, Robert A. and Stuart Turnbull, Derivative Securities, second edition, South-Western College Publishing, 2000.

Appendix A: Expanded Correlations

The expanded correlations in this appendix use data from the U.S. Department of the Treasury as distributed by the Board of Governors of the Federal Reserve in its H15 statistical release.

It is important to note that the 1-month Treasury bill rate has only been reported since July 31, 2001, and that is the reason that the correlations between bank stock prices and that maturity are so different from all of the other maturities. The history of reported data series is taken from van Deventer, Imai and Mesler, Advanced Financial Risk Management, 2nd edition, 2013, chapter 3.

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Bank of America Corporation Correlations

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Bank of New York Mellon Correlations

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BB&T Correlations

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Citigroup Inc. Correlations

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JP Morgan Chase & Co. Correlations

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State Street Correlations

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Sun Trust Correlations

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U.S. Bancorp Correlations

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Wells Fargo & Company Correlations

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Appendix B

Valuing the Banking Franchise: Worked Example

The background calculations for today’s analysis are given here. The extraction of zero coupon bond prices from the Treasury yield curve is discussed in van Deventer, Imai and Mesler (2013), chapters 5 and 17.

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Consumers Can’t Void Second Mortgage In Bankruptcy, SCOTUS Rules

By Ashlee Kieler

Consumers taking out a second mortgage will now have to consider the fact that if they encounter financial difficulties and file for bankruptcy, they won’t be able to strip off the additional loan obligation.

The Wall Street Journal reports that the Supreme Court ruled in favor of banks when it came to determining that struggling homeowners can’t get rid of a second mortgage using Chapter 7 bankruptcy protection, even if the home’s value is less than the amount owed on the first mortgage.

Monday’s unanimous ruling involved two cases in which Florida homeowners sought to cancel their second mortgages – issued by Bank of America – under the argument that when both primary and subsequent loans are underwater, the second is worthless.

The homeowners in the cases were previously allowed by lower courts to nullify the second mortgages. Back in 2013, those rulings were affirmed by the Atlanta-based 11th U.S. Circuit Court, the Associated Press reports.

However, Bank of America maintained that the rulings conflicted with Supreme Court precedent, arguing that even if the primary mortgage is underwater, it shouldn’t affect the lien securing the second loan.

According to the bank, there remains a possibility that the second loan would be repaid if the property’s value rose in the future.

The company also claimed that after the Circuit Court ruling, hundreds – if not thousands – of struggling homeowners had moved to nullify their second loans, the AP reports.

Justice Clarence Thomas said on Monday that the SCOTUS decision took into consideration the shifting nature of property, the WSJ reports.

“Sometimes a dollar’s difference will have a significant impact on bankruptcy proceedings,” he wrote in the decision.

Supreme Court: ‘Underwater’ Homeowners Can’t Void Second Mortgages in Bankruptcy [The Wall Street Journal]
Supreme Court says homeowners underwater on loans can’t void second mortgage in bankruptcy [The Associated Press]

BofA Analyst Credits Falling Oil Prices for Lower Mortgage Rates

by Phil Hall

The precipitous drop in global oil prices has created a domino effect that led to a new decline in lower mortgage rates, according to a report by Chris Flanagan, a mortgage rate specialist at Bank of America Merrill Lynch.

“The oil collapse of 2014 appears to have been a key driver [in declining mortgage rates],” stated Flanagan in his report, which was obtained by CBS Moneywatch. “Further oil price declines could lead the way to sub-3.5 percent mortgage rates.”

Flanagan applauded this development, noting that the reversal of mortgage rates might propel housing to a stronger recovery.

“We have maintained the view that 4 percent mortgage rates are too high to allow for sustainable recovery in housing,” he wrote. Flanagan also theorized that if rates fell into 3.25 percent to 3.5 percent range, it would boost “supply from both refinancing and purchase mortgage channels.”

Flanagan’s report echoes the sentiments expressed by Frank Nothaft, Freddie Mac’s chief economist, who earlier this week identified the link between oil prices and housing.

“The recent drop in oil prices has been an unexpected boon for consumers’ pocketbooks and most businesses,” Nothaft stated. “Economic growth has picked up over the final nine months of 2014 and lower energy costs are expected to support growth of about 3 percent for the U.S. in 2015. Therefore we expect the housing market to continue to strengthen with home sales rising to their best sales pace in eight years, national house price indexes up, and rental markets continuing to display low vacancy rates and the highest level of new apartment completions in 25 years.”

But not everyone is expected to benefit from this development. A report issued last week by the Houston Association of Realtors forecast a 10 percent to 12 percent drop in home sales over the next year, owing to a potential slowdown in job growth for the Houston market’s energy industry if oil prices continue to plummet.

Bank of America Sees $50 Oil As OPEC Dies

“Our biggest worry is the end of the liquidity cycle. The Fed is done. The reach for yield that we have seen since 2009 is going into reverse”, said Bank of America.

$https://i0.wp.com/media0.faz.net/ppmedia/aktuell/wirtschaft/759001933/1.2727518/article_multimedia_overview/umweltpolitisch-hoch-umstritten-hilft-fracking-hier-in-colorado-amerika-dabei-unabhaengiger-von-den-opec-mitgliedern-zu-werden.jpg$ By Ambrose Evans-Pritchard

The OPEC oil cartel no longer exists in any meaningful sense and crude prices will slump to $50 a barrel over the coming months as market forces shake out the weakest producers, Bank of America has warned.

Revolutionary changes sweeping the world’s energy industry will drive down the price of liquefied natural gas (LNG), creating a “multi-year” glut and a much cheaper source of gas for Europe.

Francisco Blanch, the bank’s commodity chief, said OPEC is “effectively dissolved” after it failed to stabilize prices at its last meeting. “The consequences are profound and long-lasting,“ he said.

The free market will now set the global cost of oil, leading to a new era of wild price swings and disorderly trading that benefits only the Mid-East petro-states with deepest pockets such as Saudi Arabia. If so, the weaker peripheral members such as Venezuela and Nigeria are being thrown to the wolves.

The bank said in its year-end report that at least 15pc of US shale producers are losing money at current prices, and more than half will be under water if US crude falls below $55. The high-cost producers in the Permian basin will be the first to “feel the pain” and may soon have to cut back on production.

The claims pit Bank of America against its arch-rival Citigroup, which insists that the US shale industry is far more resilient than widely supposed, with marginal costs for existing rigs nearer $40, and much of its output hedged on the futures markets.

Bank of America said the current slump will choke off shale projects in Argentina and Mexico, and will force retrenchment in Canadian oil sands and some of Russia’s remote fields. The major oil companies will have to cut back on projects with a break-even cost below $80 for Brent crude.

It will take six months or so to whittle away the 1m barrels a day of excess oil on the market – with US crude falling to $50 – given that supply and demand are both “inelastic” in the short-run. That will create the beginnings of the next shortage. “We expect a pretty sharp rebound to the high $80s or even $90 in the second half of next year,” said Sabine Schels, the bank’s energy expert.

Mrs Schels said the global market for (LNG) will “change drastically” in 2015, going into a “bear market” lasting years as a surge of supply from Australia compounds the global effects of the US gas saga.

If the forecast is correct, the LNG flood could have powerful political effects, giving Europe a source of mass supply that can undercut pipeline gas from Russia. The EU already has enough LNG terminals to cover most of its gas needs. It has not been able to use this asset as a geostrategic bargaining chip with the Kremlin because LGN itself has been in scarce supply, mostly diverted to Japan and Korea. Much of Europe may not need Russian gas at all within a couple of years.

Bank of America said the oil price crash is worth $1 trillion of stimulus for the global economy, equal to a $730bn “tax cut” in 2015. Yet the effects are complex, with winners and losers. The benefits diminish the further it falls. Academic studies suggest that oil crashes can ultimately turn negative if they trigger systemic financial crises in commodity states.

Barnaby Martin, the bank’s European credit chief, said world asset markets may face a stress test as the US Federal Reserve starts to tighten afters year of largesse. “Our biggest worry is the end of the liquidity cycle. The Fed is done and it is preparing to raise rates. The reach for yield that we have seen since 2009 is going into reverse”, he said.

Mr Martin flagged warnings by William Dudley, the head of the New York Fed, that the US authorities had tightened too gently in 2004 and might do better to adopt the strategy of 1994 when they raised rates fast and hard, sending tremors through global bond markets.

Bank of America said quantitative easing in Europe and Japan will cover just 35pc of the global stimulus lost as the Fed pulls back, creating a treacherous hiatus for markets. It warned that the full effect of Fed tapering had yet to be felt. From now on the markets cannot expect to be rescued every time there is a squall. “The threshold for the Fed to return to QE will be high. This is why we believe we are entering a phase in which bad news will be bad news and volatility will likely rise,” it said.

What is clear is that the world has become addicted to central bank stimulus. Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses. Half of all government bonds in the world yield less that 1pc. Roughly 1.4bn people are experiencing negative rates in one form or another.

These are astonishing figures, evidence of a 1930s-style depression, albeit one that is still contained. Nobody knows what will happen as the Fed tries to break out of the stimulus trap, including Fed officials themselves.

Housing Price Gains Slow For 9th Straight Month, Says S&P/Case-Shiller

by Erin Carlyle

Growth in home sales prices continued to slow across the nation in September, marking nine straight months of deceleration, data from S&P/Case-Shiller showed Tuesday.

U.S. single-family home prices gained just 4.8% (on a seasonally-adjusted basis) over prices one year earlier, down from a 5.1% annual increase in August, the S&P/Case-Shiller National Home Price Index shows. The measure covers all nine Census divisions. Significantly, September also marked the first month that the National Index decreased (by 0.1%) on a month-over-month basis since November 2013.

“The overall trend in home price increases continues to slow down,” says David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices. “The only region showing any sustained strength is the Southeast led by Florida; price gains are also evident in Atlanta and Charlotte.”

Price gains have been steadily slowing since December after a streak of double-digit annual price increases in late 2013 and early 2014. Eighteen of the 20 cities Case-Shiller tracks reported slower annual price gains in September than in August, with Charlotte and Dallas the only cities where annual price gains increased. Miami (10.3%) was the only city to report double-digit annual price gains.
CaseShiller

The chart above depicts the annual returns of the U.S. National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 4.8% annual gain in September 2014. The 10- and 20-City Composites posted year-over-year increases of 4.8% and 4.9%, compared to 5.5% and 5.6% in August.

National Index, year-over-year change in prices (seasonally adjusted):

June 2013: 9.2%
July 2013: 9.7%
August 2013: 10.2%
September 2013: 10.7%
October 2013: 10.9%
November 2013: 10.8%
December 2013: 10.8%
January 2014: 10.5%
February 2014: 10.2%
March 2014: 9.0%
April 2014: 8.0%
May 2014: 7.1%
June 2014: 6.3%
July 2014: 5.6%
August 2014: 5.1%
September 2014: 4.8%

“Other housing statistics paint a mixed to slightly positive picture,” Blitzer said. “Housing starts held above one million at annual rates on gains in single family homes, sales of existing homes are gaining, builders’ sentiment is improving, foreclosures continue to be worked off and mortgage default rates are at precrisis levels. With the economy looking better than a year ago, the housing outlook for 2015 is stable to slightly better.”

Blitzer is referring to a report last week that showed housing starts (groundbreakings on new homes) down 2.8% in October, but still at a stronger pace than one year earlier. What’s more, single-family starts showed a 4.2% increase over the prior month. Also, in October existing (or previously-owned) home sales hit their fastest pace in more than one year. (Both reports are one month ahead of the S&P/Case-Shiller report, the industry standard but unfortunately with a two-month lag time.) Taken together, the data suggest that the rapid price gains seen late last year and in the first part of this year are mostly behind us.

“The days of double-digit home value appreciation continue to rapidly fade away as more inventory comes on line, and the market is becoming more balanced between buyers and sellers,” said Stan Humphries, Zillow’s chief economist. “Like a perfectly prepared Thanksgiving turkey, it’s important for things to cool off a bit in the housing market, because too-fast appreciation risks burning both buyers and sellers. In this more sedate environment, buyers can take more time to find the right deal for them, and sellers can rest assured they won’t be left without a seat at the table when they turn around and become buyers. This slowdown is a critical step on the road back to a normal housing market, and as we approach the end of 2014, the housing market has plenty to be thankful for.”

As of September 2014, average home prices across the U.S. are back to their spring 2005 levels for the National Index (which covers 70% of the U.S. housing market), while both the 10-City and 20-City Composites are back to their autumn 2004 levels. For the city Composite indices, prices are still off their mid-summer 2006 peaks by about 15% to 17%. Prices have bounced back from their March 2012 lows by 28.8% and 29.6% for the 10-City and 20-City composites.

S&P/Case-Shiller is now releasing its National Home Price Index each month. Previously, it was published quarterly, while the 10-City and 20-City Composites were published monthly. The “July” numbers above for the National Index above reflect a roll-up of data for the three-month average of May, June and July prices.

The Next Housing Crisis May Be Sooner Than You Think

How we could fall into another housing crisis before we’ve fully pulled out of the 2008 one.

by Richard Florida

When it comes to housing, sometimes it seems we never learn. Just when America appeared to be recovering from the last housing crisis—the trigger, in many ways, for 2008’s grand financial meltdown and the beginning of a three-year recession—another one may be looming on the horizon.

There are at several big red flags.

For one, the housing market never truly recovered from the recession. Trulia Chief Economist Jed Kolko points out that, while the third quarter of 2014 saw improvement in a number of housing key barometers, none have returned to normal, pre-recession levels. Existing home sales are now 80 percent of the way back to normal, while home prices are stuck at 75 percent back, remaining undervalued by 3.4 percent. More troubling, new construction is less than halfway (49 percent) back to normal. Kolko also notes that the fundamental building blocks of the economy, including employment levels, income and household formation, have also been slow to improve. “In this recovery, jobs and housing can’t get what they need from each other,” he writes.

Americans are spending more than 33 percent of their income on housing.

Second, Americans continue to overspend on housing. Even as the economy drags itself out of its recession, a spate of reports show that families are having a harder and harder time paying for housing. Part of the problem is that Americans continue to want more space in bigger homes, and not just in the suburbs but in urban areas, as well. Americans more than 33 percent of their income on housing in 2013, up nearly 13 percent from two decades ago, according to newly released data from the Bureau of Labor Statistics (BLS). The graph below plots the trend by age.

Over-spending on housing is far worse in some places than others; the housing market and its recovery remain highly uneven. Another BLS report released last month showed that households in Washington, D.C., spent nearly twice as much on housing ($17,603) as those in Cleveland, Ohio ($9,061). The chart below, from the BLS report, shows average annual expenses on housing related items:

The result, of course, is that more and more American households, especially middle- and working-class people, are having a harder time affording housing. This is particularly the case in reviving urban centers, as more affluent, highly educated and creative-class workers snap up the best spaces, particularly those along convenient transit, pushing the service and working class further out.

Last but certainly not least, the rate of home ownership continues to fall, and dramatically. Home ownership has reached its lowest level in two decades—64.4 percent (as of the third quarter of 2014). Here’s the data, from the U.S. Census Bureau:

Home ownership currently hovers from the mid-50 to low-60 percent range in some of the most highly productive and innovative metros in this country—places like San Francisco, New York, and Los Angeles. This range seems “to provide the flexibility of rental and ownership options required for a fast-paced, rapidly changing knowledge economy. Widespread home ownership is no longer the key to a thriving economy,” I’ve written.

What we are going through is much more than a generational shift or simple lifestyle change. It’s a deep economic shift—I’ve called it the Great Reset. It entails a shift away from the economic system, population patterns and geographic layout of the old suburban growth model, which was deeply connected to old industrial economy, toward a new kind of denser, more urban growth more in line with today’s knowledge economy. We remain in the early stages of this reset. If history is any guide, the complete shift will take a generation or so.

It’s time to impose stricter underwriting standards and encourage the dense, mixed-use, more flexible housing options that the knowledge economy requires.

The upshot, as the Nobel Prize winner Edmund Phelps has written, is that it is time for Americans to get over their house passion. The new knowledge economy requires we spend less on housing and cars, and more on education, human capital and innovation—exactly those inputs that fuel the new economic and social system.

But we’re not moving in that direction; in fact, we appear to be going the other way. This past weekend, Peter J. Wallison pointed out in a New York Times op-ed that federal regulators moved back off tougher mortgage-underwriting standards brought on by 2010’s Dodd-Frank Act and instead relaxed them. Regulators are hoping to encourage more home ownership, but they’re essentially recreating the conditions that led to 2008’s crash.

Wallison notes that this amounts to “underwriting the next housing crisis.” He’s right: It’s time to impose stricter underwriting standards and encourage the dense, mixed-use, more flexible housing options that the knowledge economy requires.

During the depression and after World War II, this country’s leaders pioneered a series of purposeful and ultimately game-changing polices that set in motion the old suburban growth model, helping propel the industrial economy and creating a middle class of workers and owners. Now that our economy has changed again, we need to do the same for the denser urban growth model, creating more flexible housing system that can help bolster today’s economy.

Dream housing for new economy workers?

Energy Workforce Projected To Grow 39% Through 2022

by Ray Perryman

The dramatic resurgence of the oil industry over the past few years has been a notable factor in the national economic recovery. Production levels have reached totals not seen since the late 1980s and continue to increase, and rig counts are in the 1,900 range. While prices have dipped recently, it will take more than that to markedly slow the level of activity. Cycles are inevitable, but activity is forecast to remain at relatively high levels.

An outgrowth of oil and gas activity strength is a need for additional workers. At the same time, the industry workforce is aging, and shortages are likely to emerge in key fields ranging from petroleum engineers to experienced drilling crews. I was recently asked to comment on the topic at a gathering of energy workforce professionals. Because the industry is so important to many parts of Texas, it’s an issue with relevance to future prosperity.

Although direct employment in the energy industry is a small percentage of total jobs in the state, the work is often well paying. Moreover, the ripple effects through the economy of this high value-added industry are large, especially in areas which have a substantial concentration of support services.

Petroleum Engineer

Employment in oil and gas extraction has expanded rapidly, up from 119,800 in January 2004 to 213,500 in September 2014. Strong demand for key occupations is evidenced by the high salaries; for example, median pay was $130,280 for petroleum engineers in 2012 according to the Bureau of Labor Statistics (BLS).

Due to expansion in the industry alone, the BLS estimates employment growth of 39 percent through 2022 for petroleum engineers, which comprised 11 percent of total employment in oil and gas extraction in 2012. Other key categories (such as geoscientists, wellhead pumpers, and roustabouts) are also expected to see employment gains exceeding 15 percent. In high-activity regions, shortages are emerging in secondary fields such as welders, electricians, and truck drivers.

The fact that the industry workforce is aging is widely recognized. The cyclical nature of the energy industry contributes to uneven entry into fields such as petroleum engineering and others which support oil and gas activity. For example, the current surge has pushed up wages, and enrollment in related fields has increased sharply. Past downturns, however, led to relatively low enrollments, and therefore relatively lower numbers of workers in some age cohorts. The loss of the large baby boom generation of experienced workers to retirement will affect all industries. This problem is compounded in the energy sector because of the long stagnation of the industry in the 1980s and 1990s resulting in a generation of workers with little incentive to enter the industry. As a result, the projected need for workers due to replacement is particularly high for key fields.

The BLS estimates that 9,800 petroleum engineers (25.5 percent of the total) working in 2012 will need to be replaced by 2022 because they retire or permanently leave the field. Replacement rates are also projected to be high for other crucial occupations including petroleum pump system operators, refinery operators, and gaugers (37.1 percent); derrick, rotary drill, and service unit operators, oil, gas, and mining (40.4 percent).

Putting together the needs from industry expansion and replacement, most critical occupations will require new workers equal to 40 percent or more of the current employment levels. The total need for petroleum engineers is estimated to equal approximately 64.5 percent of the current workforce. Clearly, it will be a major challenge to deal with this rapid turnover.

Potential solutions which have been attempted or discussed present problems, and it will require cooperative efforts between the industry and higher education and training institutions to adequately deal with future workforce shortages. Universities have had problems filling open teaching positions, because private-sector jobs are more lucrative for qualified candidates. Given budget constraints and other considerations, it is not feasible for universities to compete on the basis of salary. Without additional teaching and research staff, it will be difficult to continue to expand enrollment while maintaining education quality. At the same time, high-paying jobs are enticing students into the workforce, and fewer are entering doctoral programs.

Another option which has been suggested is for engineers who are experienced in the workplace to spend some of their time teaching. However, busy companies are naturally resistant to allowing employees to take time away from their regular duties. Innovative training and associate degree and certification programs blending classroom and hands-on experience show promise for helping deal with current and potential shortages in support occupations. Such programs can prepare students for well-paying technical jobs in the industry. Encouraging experienced professionals to work past retirement, using flexible hours and locations to appeal to Millennials, and other innovative approaches must be part of the mix, as well as encouraging the entry of females into the field (only 20 percent of the current workforce is female, but over 40 percent of the new entries).

Industry observers have long been aware of the coming “changing of the guard” in the oil and gas business. We are now approaching the crucial time period for ensuring the availability of the workers needed to fill future jobs. Cooperative efforts between the industry and higher education/training institutions will likely be required, and it’s time to act.

New RICO-Fraud Class Action Against Ocwen For Abusive Fee Schemes Against Home Loans Serviced

by Reclaim Our Republic

This new class action against Ocwen addresses the marked-up default services fees that Ocwen is charging homeowners, particularly distressed homeowners, as part of a scheme of self-dealing with companies such as Altisource, and with the involvement of William C. Erbey, Executive Chairman, who has a leadership role on the Board of Ocwen and Altisource:

Weiner v Ocwen Financial Corporation a Florida Corporation COMPLAINT.
Weiner v. Ocwen Fin. Corp. and Ocwen Loan Servicing, LLC, No 2:14-cv-02597 (E.D.Cal.), filed Nov. 5, 2014.

52. Ocwen’s scheme works as follows: Ocwen directs Altisource to order and coordinate default-related services, and, in turn, Altisource places orders for such services with third-party vendors. The third-party vendors charge Altisource for the performance of the default-related services, Altisource then marks up the price of the vendors’ services, in numerous instances by 100% or more, before “charging” the services to Ocwen. In turn, Ocwen bills the marked-up fees to homeowners.

58.Thus, the mortgage contract discloses to homeowners that the servicer will pay for default-related services when reasonably necessary, and will be reimbursed or “paid back” by the homeowner for amounts “disbursed.” Nowhere is it disclosed to borrowers that the servicer may engage in self-dealing to mark up the actual cost of those services to make a profit. Nevertheless, that is exactly what Ocwen does.

[Ed.: Explanation of Modern Relationship Between Loan Servicers and Home Loan Borrowers]

America’s Lending Industry Has Divorced itself from the Borrowers it Once Served

18. Ocwen’s unlawful loan servicing practices exemplify how America’s lending industry has run off the rails.

19. Traditionally, when people wanted to borrow money, they went to a bank or a “savings and loan.” Banks loaned money and homeowners promised to repay the bank, with interest, over a specific period of time. The originating bank kept the loan on its balance sheet, and serviced the loan — processing payments, and sending out applicable notices and other information — until the loan was repaid. The originating bank had a financial interest in ensuring that the borrower was able to repay the loan.

20. Today, however, the process has changed. Mortgages are now packaged, bundled, and sold to investors on Wall Street through what is referred to in the financial industry as mortgage backed securities or MBS. This process is called securitization. Securitization of mortgage loans provides financial institutions with the benefit of immediately being able to recover the amounts loaned. It also effectively eliminates the financial institution’s risk from potential default. But, by eliminating the risk of default, mortgage backed securities have disassociated the lending community from homeowners.

21. Numerous unexpected consequences have resulted from the divide between lenders and homeowners. Among other things, securitization has led to the development of an industry of companies which make money primarily through servicing mortgages for the hedge funds and investment houses who own the loans.

22. Loan servicers do not profit directly from interest payments made by homeowners. Instead, these companies are paid a set fee for their loan administration services. Servicing fees are usually earned as a percentage of the unpaid principal balance of the mortgages that are being serviced. A typical servicing fee is approximately 0.50% per year.

23. Additionally, under pooling and servicing agreements (“PSAs”) with investors and note holders, loan servicers assess fees on borrowers’ accounts for default-related services. These fees include, inter alia, Broker’s Price Opinion (“BPO”) fees, appraisal fees, and title examination fees.

24. Under this arrangement, a loan servicer’s primary concern is not ensuring that homeowners stay current on their loans. Instead, they are focused on minimizing any costs that would reduce profit from the set servicing fee, and generating as much revenue as possible from fees assessed against the mortgage accounts they service. As such, their “business model . . . encourages them to cut costs wherever possible, even if [that] involves cutting corners on legal requirements, and to lard on junk fees and in-sourced expenses at inflated prices.”3

25. As one Member of the Board of Governors of the Federal Reserve System has explained:
While an investor’s financial interests are tied more or less directly to the performance of a loan, the interests of a third-party servicer are tied to it only indirectly, at best. The servicer makes money, to oversimplify it a bit, by maximizing fees earned and minimizing expenses while performing the actions spelled out in its contract with the investor. . . . The broad grant of delegated authority that servicers enjoy under pooling and servicing agreements (PSAs), combined with an effective lack of choice on the part of consumers, creates an environment ripe for abuse.4 (citing See Sarah Bloom Raskin, Member Board of Governors of the Federal Reserve System, Remarks at the National Consumer Law Center’s Consumer Rights Litigation Conference, Boston Massachusetts, Nov. 12, 2010, available at http://www.federalreserve.gov/newsevents/speech/raskin20101112a.htm (last visited Jan. 23, 2012).

Don’t Count On A Major Slowdown In U.S. Oil Production Growth

$https://i0.wp.com/upachaya.com/wp-content/uploads/2014/05/fracking.jpg$ by Richard Zeits

Summary

The presumption that North American shale oil production is the “swing” component of global supply may be incorrect.
Supply cutbacks from other sources may come first.
Growth momentum in North American unconventional oil production will likely carry on into 2015, with little impact from lower oil prices on the next two quarters’ volumes.
The current oil price does not represent a structural “economic floor” for North American unconventional oil production.

The recent pull back in crude oil prices is often portrayed as being a consequence of the rapid growth of North American shale oil production.

The thesis is often further extrapolated to suggest that a major slowdown in North American unconventional oil production growth, induced by the oil price decline, will be the corrective mechanism that will bring oil supply and demand back in equilibrium (given that OPEC’s cost to produce is low).

Both views would be, in my opinion, overly simplistic interpretations of the global supply/demand dynamics and are not supported by historical statistical data.

Oil Price – The Economic Signal Is Both Loud and Clear

The current oil price correction is, arguably, the most pronounced since the global financial crisis of 2008-2009. The following chart illustrates very vividly that the price of the OPEC Basket (which represents waterborne grades of oil) has moved far outside the “stability band” that seems to have worked well for both consumers and producers over the past four years. (It is important, in my opinion, to measure historical prices in “today’s dollars.”)

(Source: Zeits Energy Analytics, November 2014)

Given the sheer magnitude of the recent oil price move, the economic signal to the world’s largest oil suppliers is, arguably, quite powerful already. A case can be made that it goes beyond what could be interpreted as “ordinary volatility,” giving the hope that the current price level may be sufficient to induce some supply response from the largest producers – in the event a supply cut back is indeed needed to eliminate a transitory supply/demand imbalance.

Are The U.S. Oil Shales The Culprit?

It is debatable, in my opinion, if the continued growth of the U.S. onshore oil production can be identified as the primary cause of the current correction in the oil price. Most likely, North American shale oil is just one of several powerful factors, on both supply and demand sides, that came together to cause the price decline.

The history of oil production increases from North America in the past three years shows that the OPEC Basket price remained within the fairly tight band, as highlighted on the graph above, during 2012-2013, the period when such increases were the largest. Global oil prices “broke down” in September of 2014, when North American oil production was growing at a lower rate than in 2012-2013.

(Source: OPEC, October 2014)

If the supply growth from North America was indeed the primary “disruptive” factor causing the imbalance, one would expect the impact on oil prices to become visible at the time when incremental volumes from North America were the highest, i.e., in 2012-2013.

Should One Expect A Strong Slowdown in North American Oil Production Growth?

There is no question that the sharp pullback in the price of oil will impact operating margins and cash flows of North American shale oil producers. However, a major slowdown in North American unconventional oil production growth is a lot less obvious.

First, the oil price correction being seen by North American shale oil producers is less pronounced than the oil price correction experienced by OPEC exporters. It is sufficient to look at the WTI historical price graph below (which is also presented in “today’s dollars”) to realize that the current WTI price decline is not dissimilar to those seen in 2012 and 2013 and therefore represents a signal of lesser magnitude than the one sent to international exporters (the OPEC Basket price).

(Source: Zeits Energy Analytics, November 2014)

Furthermore, among all the sources of global oil supply, North American oil shales are the least established category. Their cost structure is evolving rapidly. Given the strong productivity gains in North American shale oil plays, what was a below-breakeven price just two-three years ago, may have become a price stimulating growth going into 2015.

Therefore, the signal sent by the recent oil price decline may not be punitive enough for North American shale oil producers and may not be able to starve the industry of external capital.

Most importantly, review of historical operating statistics provides an indication that the previous similar WTI price corrections – seen in 2012 and 2013 – did not result in meaningful slowdowns in the North American shale oil production.

The following graph shows the trajectory of oil production in the Bakken play. From this graph, it is difficult to discern any significant impact from the 2012 and 2013 WTI price corrections on the play’s aggregate production volumes. While a positive correlation between these two price corrections and the pace of production growth in the Bakken exists, there are other factors – such as takeaway capacity availability and local differentials – that appear to have played a greater role. I should also note that the impact of the lower oil prices on production volumes was not visible in the production growth rate for more than half a year after the onset of the correction.

(Source: Zeits Energy Analytics, November 2014)

Leading U.S. Independents Will Likely Continue to Grow Production At A Rapid Pace

Production growth track record by several leading shale oil players suggests that U.S. shale oil production will likely remain strong even in the $80 per barrel WTI price environment. Several examples provide an illustration.

Continental Resources (NYSE:CLR) grew its Bakken production volumes at a 58% CAGR over the past three years (slide below). By looking at the company’s historical production, it would be difficult to identify any impact from the 2012 and 2013 oil price corrections on the company’s production growth rate. Continental just announced a reduction to its capital budget in 2015 in response to lower oil prices, to $4.6 billion from $5.2 billion planned initially. The company still expects to grow its total production in 2015 by 23%-29% year-on-year.

(Source: Continental Resources, October 2014)

EOG Resources (NYSE:EOG) expects that its largest core plays (Eagle Ford, Bakken and Delaware Basin) will generate after-tax rates of return in excess of 100% in 2015 at $80 per barrel wellhead price. EOG went further to suggest that these plays may remain economically viable (10% well-level returns) at oil prices as low as $40 per barrel. The company expects to continue to grow its oil production at a double-digit rate in 2015 while spending within its cash flow. EOG achieved ~40% oil production growth in 2012-2013 and expects 31% growth for 2014. While a slowdown is visible, it is important to take into consideration that EOG’s oil production base has increased dramatically in the past three years and requires significant capital just to be maintained flat. Again, one would not notice much impact from prior years’ oil price corrections on EOG’s production growth trajectory.

(Source: EOG Resources, November 2014)

Anadarko Petroleum’s (NYSE:APC) U.S. onshore oil production growth story is similar. Anadarko increased its U.S. crude oil and NLS production from 100,000 barrels per day in 2010 to close to almost 300,000 barrels per day expected in Q4 2014. Anadarko has not yet provided growth guidance for 2015, but indicated that the company’s exploration and development strategies remain intact. While recognizing a very steep decline in the oil price, Anadarko stated that it wants “to watch this environment a little longer” before reaching conclusions with regard to the impact on its future spending plans.

(Source: Anadarko Petroleum, October 2014)

Devon Energy (NYSE:DVN) posted company-wide oil production of 216,000 barrels per day in Q3 2014. While Devon will provide detailed production and capital guidance at a later date, the company has indicated that it sees 20% to 25% oil production growth and mid‐single digit top‐line growth “on a retained‐property basis” (pro forma for divestitures) in 2015.

The list can continue on.

In Conclusion…

Based on preliminary 2015 growth indications from large shale oil operators, North American oil production growth in 2015 will likely remain strong, barring further strong decline in the price of oil.

No slowdown effect from lower oil prices will be seen for at least six months from the time operators received the “price signal” (August-September 2014).

Given the effects of the technical learning curve in oil shales and continuously improving drilling economics, the current ~$77 per barrel WTI price is unlikely to be sufficient to eliminate North American unconventional production growth.

North American shale oil production remains a very small and highly fragmented component of the global oil supply.

The global oil “central bank” (Saudi Arabia and its close allies in OPEC) remain best positioned to quickly re-instate stability of oil price in the event further significant decline occurred.

Single Family Construction Expected to Boom in 2015

Kenny DeLaGarza, a building inspector for the city of Midland, at a 600-home Betenbough development.

Single-family home construction is expected to increase 26 percent in 2015, the National Association of Home Builders reported Oct. 31. NAHB expects single-family production to total 802,000 units next year and reach 1.1 million by 2016.

Economists participating in the NAHB’s 2014 Fall Construction Forecast Webinar said that a growing economy, increased household formation, low interest rates and pent-up demand should help drive the market next year. They also said they expect continued growth in multifamily starts given the nation’s rental demand.

The NAHB called the 2000-03 period a benchmark for normal housing activity; during those years, single-family production averaged 1.3 million units a year. The organization said it expects single-family starts to be at 90 percent of normal by the fourth quarter 2016.

NAHB Chief Economist David Crowe said multifamily starts currently are at normal production levels and are projected to increase 15 percent to 365,000 by the end of the year and hold steady into next year.

The NAHB Remodeling Market Index also showed increased activity, although it’s expected to be down 3.4 percent compared to last year because of sluggish activity in the first quarter 2014. Remodeling activity will continue to increase gradually in 2015 and 2016.

Moody’s Analytics Chief Economist Mark Zandi told the NAHB that he expects an undersupply of housing given increasing job growth. Currently, the nation’s supply stands at just over 1 million units annually, well below what’s considered normal; in a normal year, there should be demand for 1.7 million units.

Zandi noted that increasing housing stock by 700,000 units should help meet demand and create 2.1 million jobs. He also noted that things should level off by the end of 2017, when mortgage rates probably will rise to around 6 percent.

“The housing market will be fine because of better employment, higher wages and solid economic growth, which will trump the effect of higher mortgage rates,” Zandi told the NAHB.

Robert Denk, NAHB assistant vice president for forecasting and analysis, said that he expects housing recovery to vary by state and region, noting that states with higher levels of payroll employment or labor market recovery are associated with healthier housing markets

States with the healthiest job growth include Louisiana, Montana, North Dakota, Texas and Wyoming, as well as farm belt states like Iowa.

Meanwhile Alabama, Arizona, Nevada, New Jersey, New Mexico and Rhode Island continue to have weaker markets.

by Appraiser News Online

BofA Banker Arrested In Hong Kong For Double Murder Of Two Prostitutes

Rurick Jutting, a Cambridge University graduate, has been named as the suspect of the double murder

by Tyler Durden

The excesses of 1980s New York investment banking as captured best (and with just a dose of hyperbole) by Bret Easton Ellis’s American Psycho may be long gone in the US, but they certainly are alive and well in other banking meccas, such as the one place where every financier wants to work these days (thanks to the Chinese government making it rain credit): Hong Kong. It is here that yesterday a 29-year-old British banker, Rurik Jutting, a Cambridge University grad and current Bank of America Merrill Lynch, former Barclays employee, was arrested in connection with the grisly murder of two prostitutes. One of the two victims had been hidden in a suitcase on a balcony, while the other, a foreign woman of between 25 and 30, was found lying inside the apartment with wounds to her neck and buttocks, the police said in a statement.
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A spokesman for Bank of America Merrill Lynch told Reuters on Sunday that the U.S. bank had, until recently, an employee bearing the same name as a man Hong Kong media have described as the chief suspect in the double murder case. Bank of America Merrill Lynch would not give more details nor clarify when the person had left the bank.

Britain’s Foreign Office in London said on Saturday a British national had been arrested in Hong Kong, without specifying the nature of any suspected crime.

The details of the crime are straight out of American Psycho 2: the Hong Kong Sequel. One of the murdered women was aged between 25 and 30 and had cut wounds to her neck and buttock, according to a police statement. The second woman’s body, also with neck injuries, was discovered in a suitcase on the apartment’s balcony, the police said. A knife was seized at the scene.

According to the WSJ, the arrested suspect, who called police to the apartment in the early hours of Nov. 1, was until recently a Hong Kong-based employee of Bank of America Merrill Lynch.

Filings with Hong Kong’s securities regulator show that the suspect was an employee with the bank as recently as Oct. 31.The man had called police in the early hours of Saturday and asked them to investigate the case, police said.

Hong Kong’s Apple Daily newspaper said the suspect had taken about 2,000 photographs and some video footage of the victims after the killings including close-ups of their wounds. Local media said the two women were prostitutes.

The apartment where the bodies were found is on the 31st floor in a building popular with financial professionals, where average rents are about HK$30,000 (nearly $4,000) a month.

According to the Telegraph the suspect, who had previously worked at Barclays from 2008 until 2010 before moving to BofA, and specifically its Hong Kong office in July last year, had apparently vanished from his workplace a week ago. It has also been reported that he resigned from his post days before news of the murders emerged.

And as usual in situations like these, the UK’s Daily Mail has the granular details. It reports that the British banker arrested on suspicion of a double murder in Hong Kong has been identified as 29-year-old Rurik Jutting.

Mr Jutting, who attended Cambridge University, is being held by police after the bodies of two prostitutes were discovered in his up-market apartment in the early hours of yesterday morning.

Officers found the women, thought to be a 25-year-old from Indonesia and a 30-year-old from the Philippines, after Mr Jutting allegedly called police to the address, which is located near the city’s red light district. The naked body of the Filipina victim, who had suffered a series of knife wounds, was found inside the 31st-floor apartment in J Residence – a development of exclusive properties in the city’s Wan Chai district that are popular with young expatriate executives.

The second woman was reportedly discovered naked and partially decapitated in a suitcase on the balcony of the apartment. She is believed to have been tied up and to have been left there for around a week.

Sex toys and cocaine were also reportedly found, along with a knife which was seized by officers.

Mr Jutting’s phone is today being examined by police in a bid to identify possible further victims, according to the South China Morning Post.

It is understood that photos of the woman who was found in the suitcase, apparently taken after she died, were among roughly 2,000 that officers found on the device.

Mr Jutting attended Winchester College, an independent boys school in Hampshire, before continuing his studies in history and law at Pembroke College, Cambridge, where he became secretary of the history society.

He appears to have worked at Barclays in London between 2008 and 2010, when he took a job with Bank of America Merrill Lynch. He was moved to the bank’s Hong Kong office in July last year.

A spokesman for Bank of America Merrill Lynch confirmed that it had previously employed a man by the same name but would not give more details nor clarify when the person had left the bank.

CCTV footage from the apartment block, located near Hong Kong’s red light district, showed the banker and the Filipina woman returning to the 31st floor shortly after midnight local time yesterday.

He allegedly called police to his home at 3.42am, shortly after the woman he was seen with is believed to have been killed.

She was found with two wounds to her neck and her throat had been slashed. She was pronounced dead at the scene.

The body on the balcony, wrapped in a carpet and inside a black suitcase, which measured about three feet by 18 inches, was not found by police until eight hours later.

A police source quoted by the South China Morning Post said: ‘She was nearly decapitated and her hands and legs were bound with ropes. ‘She was naked and wrapped in a towel before being stuffed into the suitcase. Her passport was found at the scene.’

Wan Chai, the district where the apartment is located, is known for its bustling nightclub scene of ‘girly bars,’ popular with expatriate men and staffed by sex workers from South East Asia. Police have today been contacting nearby bars in an attempt to find out more about the background of the two murdered women.

One resident in the 40-storey block, where most of the residents are expatriates, said he had noticed an unusual smell in recent days. He told the South China Morning Post that there had been ‘a stink in the building like a dead animal’.

And just like that, the worst excesses of the “peak banking” days from 1980, when sad scenes like these were a frequent occurrence, are back.

Government workers remove the body of a woman who was found dead at a flat in Hong Kong’s Wan chai district in the early hours of this morning. A British man was been arrested in connection with the murders.

A second victim was found stuffed inside a suitcase on the balcony of the residential flat in Hong Kong

The 40-storey J Residence is reportedly a high-end development favored by junior expatriate bankers

Update

Bank Of America Psycho Killer Was Busy Helping Hedge Funds Avoid Taxes During His Business Hours

The most bizarre story of the weekend was that of Bank of America’s 29-year-old banker Rurik Jutting, who shortly after allegedly killing two prostitutes (and stuffing one in a suitcase), called the cops on himself and effectively admitted to the crime having left a quite clear autoreply email message, namely “For urgent inquiries, or indeed any inquiries, please contact someone who is not an insane psychopath. For escalation please contact God, though suspect the devil will have custody. [Last line only really worked if I had followed through..]”

But while his attempt to imitate Patrick Bateman did not go unnoticed, even if it will be promptly forgotten until the next grotesquely insane banker shocks the world for another 15 minutes, the question that has remained unanswered is what did young Master Jutting do when not chopping women up.

The answer, as the WSJ has revealed, is just as unsavory: “he had been part of a Bank of America team that specialized in tax-minimization trades that are under scrutiny from prosecutors, regulators, tax collectors and the bank’s own compliance department, according to people familiar with the matter and documents reviewed by The Wall Street Journal.”

Basically, when not acting as a homicidal psychopath, Jutting was facilitating full-blown tax evasion, just the activity that every developed, and thus broke, government around the globe is desperately cracking down on, and why every single Swiss bank is non-grata in the US and may be arrested immediately upon arrival on US soil.

Obama’s TTP Trade Officials Received Hefty Bonuses From Banks

Source: Republic Report

Officials tapped by the Obama administration to lead the Trans-Pacific Partnership trade negotiations have received multimillion dollar bonuses from CitiGroup and Bank of America, financial disclosures obtained by Republic Report show.

Stefan Selig, a Bank of America investment banker nominated to become the Under Secretary for International Trade at the Department of Commerce, received more than $9 million in bonus pay as he was nominated to join the administration in November. The bonus pay came in addition to the $5.1 million in incentive pay awarded to Selig last year.

Michael Froman, the current U.S. Trade Representative, received over $4 million as part of multiple exit payments when he left CitiGroup to join the Obama administration. Froman told Senate Finance Committee members last summer that he donated approximately 75 percent of the $2.25 million bonus he received for his work in 2008 to charity. CitiGroup also gave Froman a $2 million payment in connection to his holdings in two investment funds, which was awarded “in recognition of [Froman’s] service to Citi in various capacities since 1999.”

Many large corporations with a strong incentive to influence public policy award bonuses and other incentive pay to executives if they take jobs within the government. CitiGroup, for instance, provides an executive contract that awards additional retirement pay upon leaving to take a “full time high level position with the U.S. government or regulatory body.” Goldman Sachs, Morgan Stanley, JPMorgan Chase, the Blackstone Group, Fannie Mae, Northern Trust, and Northrop Grumman are among the other firms that offer financial rewards upon retirement for government service.

Froman joined the administration in 2009. Selig is currently awaiting Senate confirmation before he can take his post, which collaborates with the trade officials to support the TPP.

The controversial TPP trade deal has rankled activists for containing provisions that would newly empower corporations to sue governments in ad hoc arbitration tribunals to demand compensation from governments for laws and regulations they claim undermine their business interests. Leaked TPP negotiation documents show the Obama administration is seeking to prevent foreign governments from issuing a broad variety of financial rules designed to stem another bank crisis.

A leaked text of the TPP’s investment chapter shows that the pact would include the controversial investor-state dispute resolution system. A fact-sheet provided by Public Citizen explains how multi-national corporations may use the TPP deal to skirt domestic courts and local laws. The arrangement would allows corporations to go after governments before foreign tribunals to demand compensations for tobacco, prescription drug and environment protections that they claim would undermine their expected future profits. Last year, Senator Elizabeth Warren warned that trade agreements such as the TPP provide “a chance for these banks to get something done quietly out of sight that they could not accomplish in a public place with the cameras rolling and the lights on.”

Others have raised similar alarm.

“Not only do US treaties mandate that all forms of finance move across borders freely and without delay, but deals such as the TPP would allow private investors to directly file claims against governments that regulate them, as opposed to a WTO-like system where nation states (ie the regulators) decide whether claims are brought,” notes Boston University associate professor Kevin Gallagher.

Banks, Mortgage Companies Defrauded HUD, Veteran Whistleblower Says

Source: Mortgage Servicing News

A whistle blower with a track record of wresting large settlements from banks is suing 22 companies for allegedly filing fraudulent mortgage documents with the Department of Housing and Urban Development.

Lynn E. Szymoniak, famous for her 2011 “60 Minutes” interview on the robo-signing scandal, filed a lawsuit late Monday against the companies, including Deutsche Bank, Wells Fargo, JPMorgan Chase and Bank of America. The Palm Beach, Fla., plaintiff’s lawyer alleges the 22 banks, mortgage servicers, trustees, custodians and default management companies created fraudulent mortgage assignments and submitted tens of thousands of false claims to HUD.

The lawsuit is a stark reminder that banks still face massive litigation and potential settlements for wrongdoing from the mortgage boom and financial crisis. On Wednesday, JPMorgan Chase acknowledged that it violated the False Claims Act and agreed to pay $614 million to settle claims that it improperly approved Federal Housing Administration and Veterans Affairs loans that did not meet underwriting standards.

HUD oversees the FHA, which reimburses servicers for losses and fees when government-guaranteed loans go into foreclosure.

Banks can be held liable for treble damages under the False Claims Act if they are found to have “falsely certified” that mortgages met all FHA requirements. The act also gives whistle blowers the right to file suit on behalf of the government.

“It’s been very difficult to uncover how fraudulent documents were created and spread through the system,” says Reuben Guttman, Szymoniak’s attorney at the firm of Grant & Eisenhofer. “Lynn Szymoniak did the original analysis, looked at documents and put the pieces together in a way that nobody else did.”

The new lawsuit was filed in the U.S. District Court in South Carolina. Several of the defendants, including Deutsche Bank and Wells Fargo, said they are reviewing the lawsuit and could not immediately comment.

In 2012, Szymoniak helped the government recover $95 million from the top five mortgage servicers, as part of the $25 billion national mortgage settlement. She personally received $18 million for providing information on the filing of false claims on FHA loans.

The suit also seeks to recover damages and penalties on behalf of the federal government, 16 states, the District of Columbia and the cities of Chicago and New York for the financial harm incurred in the purchase of private-label mortgage-backed securities that allegedly used fraudulent documents in foreclosure filings since 2008.

As investors in mortgage bonds, the government and others paid fees and expenses for services such as reviewing all mortgage documents put into trusts that were supposed to be performed by trustees. The federal government bought mortgage-backed securities with missing or forged documents through several avenues, including the Federal Reserve’s direct purchases and Maiden Lane vehicles, and the Treasury Department’s purchases through public-private partnership investment funds, the suit states.

The complaint does not specify damages but Szymoniak says she expects them to total around $10 billion.

The fraudulent mortgage documents were created because the original loans documents either were never delivered to the securitization trusts, or they were lost or destroyed, the lawsuit states. Many of the documents were created years after the trusts’ closing dates and showed the trusts acquired the loans only after they were in default.

Servicers “devised and operated a scheme to replace the missing documents,” the lawsuit states, and to conceal the fact that the trusts and servicers never actually held the mortgage notes and assignments, which are needed to initiate a foreclosure.

Szymoniak was also instrumental in uncovering fraud and forged documents at DocX, a now-defunct subsidiary of Lender Processing Services. She worked with the Federal Bureau of Investigations and U.S. Attorney’s office in Jacksonville, Fla., that ultimately led to the conviction of an LPS executive, the closure of DocX, firm, and various settlements by LPS, which is now owned by Black Knight Financial Services.

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Summary

Wm. Mack Terry and Lessons from the Bank of America, 1974

Good News and Conclusions

Technical Notes

Appendix A: Expanded Correlations

Appendix B

Valuing the Banking Franchise: Worked Example

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“Our biggest worry is the end of the liquidity cycle. The Fed is done. The reach for yield that we have seen since 2009 is going into reverse”, said Bank of America.

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by Erin Carlyle

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How we could fall into another housing crisis before we’ve fully pulled out of the 2008 one.

There are at several big red flags.

Americans are spending more than 33 percent of their income on housing.

It’s time to impose stricter underwriting standards and encourage the dense, mixed-use, more flexible housing options that the knowledge economy requires.

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by Reclaim Our Republic

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Summary

Oil Price – The Economic Signal Is Both Loud and Clear

Are The U.S. Oil Shales The Culprit?

Should One Expect A Strong Slowdown in North American Oil Production Growth?

Leading U.S. Independents Will Likely Continue to Grow Production At A Rapid Pace

In Conclusion…

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Kenny DeLaGarza, a building inspector for the city of Midland, at a 600-home Betenbough development.

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Rurick Jutting, a Cambridge University graduate, has been named as the suspect of the double murder

Government workers remove the body of a woman who was found dead at a flat in Hong Kong’s Wan chai district in the early hours of this morning. A British man was been arrested in connection with the murders.

A second victim was found stuffed inside a suitcase on the balcony of the residential flat in Hong Kong

The 40-storey J Residence is reportedly a high-end development favored by junior expatriate bankers

Bank Of America Psycho Killer Was Busy Helping Hedge Funds Avoid Taxes During His Business Hours

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