Stockton, CA Going Bankrupt

Reuters – Stockton, Calif. to take up bankruptcy budget plan:

Stockton, California was poised on Tuesday to take a major step toward becoming the largest U.S. city ever to file for bankruptcy after talks with its creditors on Monday at midnight.

Despite the cuts, Stockton has not been able to avoid recurring deficits. Its revenue is weak and its financial troubles have been compounded, according to city officials, by generous pay and benefits for city workers and retirees and too much debt taken on by the city when it enjoyed a home-building boom in the early part of the last decade that transformed it into a distant bedroom community for the San Francisco Bay area.

Guess Who’s Going Bankrupt

The company that owns my mortgage. A company whose parent company is 74% owned by the Federal government thanks to the bailouts.

USA TodayFormer GMAC puts mortgage unit in bankruptcy:

Ally Financial, the former GMAC, which still owes taxpayers about $12 billion $17.2 billion in loans it got as part of the General Motors and Chrysler bailouts, has nudged its home mortgage subsidiary into bankruptcy court to try end the drag of its toxic mortgage assets on Ally’s profitable businesses, such as car loans and direct banking.

Ally Financial was founded by GM in 1919 as the General Motors Acceptance Corp. (GMAC) to provide auto loans. Over the years, it expanded into insurance, direct banking, mortgages and commercial finance. GM sold 51% to Cerberus Capital Management during financial troubles in 2006. It changed its name to Ally in 2010.

The government still owns 74% of Ally, and it’s repaid only $5.5 billion of $17.2 billion it got in the bailout so it could keep offering car dealer and buyer financing for GM and Chrysler. Ally received more than twice the taxpayer help as Chrysler.

This happened last month. The USA Today story is dated May 14th. We found out yesterday when we got a letter in the mail informing us that GMAC Mortgage was is in Chapter 11 bankruptcy.

Oh, well. Don’t blame me, GMAC. I’ve never been late on a single payment.

“You’re not stabilizing the market. You’re creating more chaos.”

“You’re not stabilizing the market. You’re creating more chaos.”

It’s only taken six years to learn, but the lesson may finally be sinking in: Public policy designed to keep bad borrowers in homes they don’t want to pay for has been a disaster.

The takeaway here is something Reason readers have been aware of for years but that the establishment media have only recently begun to consider: The real scandal is that lenders are too slow to wrap up foreclosures. And by encouraging lenders to drag out the process, the Obama Administration has taken bad borrowers on a long and costlytrip in a circle, instead of letting them go back into the rental market and get on with their lives. The bottom line comes from a West Palm Beach real estate agent named Frank Verna:

“The truth of the matter is we would have already gotten over it if they just let the properties get out there and get sold,” Verna says. “So what are you doing? You’re not stabilizing the market. You’re creating more chaos.”

Politicians had the best of intentions, but if someone couldn’t lost their job cutting their mortgage 5% wasn’t going to help them. If the market changed and the house was suddenly 20% or 40% underwater cutting their mortgage slightly wasn’t going to change that. If someone wasn’t paying their mortgage reducing the mortgage wasn’t going to keep them out of foreclosure.

One suspects that a large part of the motivation wasn’t to help mortgage holders, but to help banks. If they can avoid foreclosing they can avoid declaring losses. If someone isn’t making payments their losses on paper are small. If they foreclose the losses on paper suddenly become massive and it begins threatening the bank’s solvency.

Did High Oil Prices Cause the 2008 Recession? What About the 2005-2006 Housing Market Collapse?

It’s a theory. One that’s better explored here.

I’m curious about how this ties in to the housing story.

The U.S. housing bubble peaked in 2005-2006. That was before the 2007-2008 oil shock, but gas prices were trending very high in 2005-2006, as seen in historical prices. The collapse of the housing market may have been the canary in the coal mine.

That would explain something else that was always puzzling. Why did housing bubbles all over the world collapse around the same time? Oil prices went higher all around the world at the same time, which might explain the simultaneous popping of housing bubbles.

The Fool in the Shower

‘Fool in the Shower’ to Give Fed a Good Scalding: Caroline Baum:

What the Fed is saying, in essence, is that as the economy improves, it’s appropriate to provide as much stimulus, or support, as it did in late 2008, when the economy was contracting and the financial system was imploding.

This is a dramatic shift. Given the long and variable lags with which monetary policy operates, past Fed officials at least paid lip service to the notion of acting preemptively: withdrawing excess stimulus — a fancy way of saying they will raise interest rates — as the economy improved.

Not so the current committee, which is tilted toward doves after the annual rotation of voting members. This group seems to think it should “continue to ease as long as there is economic slack,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “It’s a classic, elemental mistake,” he said, one described by the late Nobel economist Milton Friedman as the “fool in the shower.”

The fool turns on the water in the shower, steps in and finds that it’s still cold. So he turns the knob all the way to hot, only to get scalded when the water heats up with a predictable lag.

And it was low interest rates that helped fuel the housing bubble. Low interest rates got us into this mess and by golly they’ll got us out, sez the Fed.

SEC Charges Former Fannie and Freddie CEOs with Fraud

FOX NewsSEC Charges Ex-Fannie, Freddie CEOs With Fraud:

Freddie told investors in 2006 that it held between $2 billion and $6 billion of subprime mortgages on its books. The SEC says its holdings were actually closer to $141 billion, or 10 percent of its portfolio in 2006, and $244 billion, or 14 percent, by 2008.

Amazing. People are actually being charged for wrongdoing. It feels like, like … justice.

Homeowners Foreclose on Bank of America


U.S. Patent and Trademark Office publishes patent for neonatal jaundice. this web site jaundice in newborns

Gastroenterology Week December 27, 2004 2004 DEC 27 – ( & — WellSpring Pharmaceutical Corporation announced that the U.S. Patent and Trademark Office (USPTO) has awarded a patent for a novel synthetic method of preparation for stannsoporfin (Stanate), a new drug being developed for the treatment of jaundice in newborns.

This patent (U.S. 6,818,763 B2) grants exclusive rights to WellSpring for this novel and cost-effective method of synthesis. The process involves fewer steps, increased yields and lower costs. Foreign patent equivalents have also been filed.

A second patent for water-soluble stannsoporfin analogs (a composition of matter patent) has also been submitted to the USPTO. This second patent is under regulatory review and has been previously published. The new stannsoporfin analogs covered by this patent may be suitable for either oral or parenteral administration. Review of this second patent is ongoing. Foreign equivalents have also been filed.

Stanate is an investigational drug in late stage development being studied for the treatment of neonatal jaundice and prevention of kernicterus, a form of cerebral palsy. Kernicterus (a form of brain damage) is attributed to high levels of bilirubin, a byproduct of heme metabolism. Bilirubin is a bile pigment, which is normally eliminated from the body after conversion into a water-soluble form by the liver. Newborns often temporarily lack the necessary liver maturity to eliminate bilirubin and require several days to develop this capability.

Neonatal jaundice is normally a transient phenomenon, but left untreated in more severe forms can result in irreversible brain damage. About 60% of babies readmitted to the hospital after well baby discharges are readmitted for treatment of jaundice.

Stanate is an enzyme inhibitor which blocks the conversion of heme into bilirubin for a few days, which is normally sufficient time for the baby’s liver to mature and facilitate bilirubin’s excretion. The use of Stanate may obviate the need for other medical intervention and protects the infant from the possibility of brain damage. The national incidence of kernicterus and cerebral palsy has been reported to be on the rise. Stanate is given by injection.

The second patent is a composition of matter patent for a series of water- soluble metalloporphyrin analogs of stannsoporfin that can be given by oral administration. Both patents, when issued, will provide 20 years of coverage for WellSpring. this web site jaundice in newborns

WellSpring acquired exclusive worldwide rights to the drug from Rockefeller University. U.S. rights to Stanate have been granted to InfaCare Pharmaceutical Corporation.

WellSpring is a privately held pharmaceutical company that manufactures and sells Dyrenium, a potassium sparing diuretic which is used to manage congestive heart failure and the edema associated with certain liver diseases.

Economic Nutpunch: Real Estate Bubble Pops in China. Australia Next?

Zero HedgeChinese Real Estate Bubble Pops: Beijing Real Estate Prices Plunge 27% In One Month:

Prices of new homes in China’s capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city’s Housing and Urban-Rural Development Commission.

Average prices of newly-built houses in March fell 10.9% over the same month last year to CNY19,679 per square meter, marking the first year-on-year decline since September 2009.

Home purchases fell 50.9% y/y and 41.5% m/m, the newspaper said, citing an unidentified official from the Housing Commission as saying the falls point to the government’s crackdown on speculation in the real estate market.

MishHousing Denial in Australia Feeds Off Same Myths We Heard in the US:

Apartment prices in the luxury beachside Australian town of Noosa Heads have tumbled by a fifth since 2008 as cracks emerge in a housing market that’s so far escaped the rout seen in the U.S., U.K. and Ireland.

The median apartment price in the tourism and retiree town 150 kilometers (93 miles) north of Brisbane has slumped 21 percent in three years to A$570,000 ($594,000), according to the Real Estate Institute of Queensland. Sales have more than halved across Queensland state’s Sunshine coast, home to “Crocodile Hunter” Steve Irwin’s Australia Zoo, and the Gold Coast, known for its surfing beaches and casinos.

“We have a very overvalued housing market and even a small adverse shock can be magnified by a large adverse impact on property values,” said Gerard Minack, Sydney-based global developed markets strategist at Morgan Stanley (MS), who asserts Australian home prices are as much as 40 percent overvalued. “We’re seeing that now in parts of Queensland.”

Hacker Group Anonymous Targets Federal Reserve, Bank of America

Hacker Group Anonymous Brings Peaceful Revolution To America: Will Engage In Civil Disobedience Until Bernanke Steps Down:

The world’s most (in)famous hacker group – Anonymous – known for effectively shutting down their hacking nemesis security firm (with clients such as Morgan Stanley and, unfortunately for them, Bank of America)- HBGary, advocating the cause of Wikileaks, and the threat made by one of its members that evidence of fraud by Bank of America will be released on Monday, has just launched communication #1 in its Operation “Empire State Rebellion.” The goal – engage in “a relentless campaign of non-violent, peaceful, civil disobedience” until Ben Bernanke steps down and the “Primary Dealers within the Federal Reserve banking system be broken up and held accountable for rigging markets and destroying the global economy effective immediately.

“Operation LeakS” Releases Initial BofA Emails Indicating Premeditated Intent To Deceive Government And Auditors:

Balboa Insurance/Countrywide knowingly hiding foreclosure information from federal auditors during the federal takeovers of IndyMac Federal (a subsidiary of OneWest) and Aurora Loan Services (a subsidiary of Lehman Bros Holdings), falsifying loan documentation in order to proceed with foreclosures by fixing letter cycles in the system, reporting incorrect volumes to all of their lenders and to the federal auditors to avoid fines for falling behind on Loan Modifications, purposefully and knowingly adjusting premiums for REO insurance for their corporate clients while denying forebearances for individual borrowers, etc, etc, etc. In addition, if anyone can get me a copy of the image of the hard drive that Jullian Assange reportedly has from the BofA executive, it will not take a dozen financial analysis to decipher it like I’ve read in the news. I could find all the dirt on that hard drive within a week.”

Two Approaches to Broken Banks: Iceland vs. Ireland

If your country’s banking system is about to fail should you rescue it or let it collapse?

Iceland’s banking system fell into a crisis before most. The government let it fall. Now some people are saying that was the best way to handle it. Rip the Band-Aid off quickly and get it over with. Let the insolvent banks go under, suffer the consequences, and start rebuilding.

The alternative is to try to keep sticking 2 x 4s under the rickety banks to keep them running at all costs. Take money from the government (which really means the people) and plow it into private banks that hand out big bonuses to their managers and traders.

The Atlantic has a great writeup on the Irish real estate bust and the resulting banking crisis. It illustrates the banks’ incredible irresponsibility in loaning out money that would never be repaid, followed by a bailout that’s going to take generations of the Irish to pay for. Why are ordinary people bailing out banks and bondholders?

When Irish Eyes Are Crying:

The Irish banks, like the big American banks, managed to persuade a lot of people that they were so intertwined with their economy that their failure would bring down a lot of other things, too. But they weren’t, at least not all of them. Anglo Irish Bank had only six branches in Ireland, no A.T.M.’s, and no organic relationship with Irish business except the property developers. It lent money to people to buy land and build: that’s practically all it did. It did this mainly with money it had borrowed from foreigners. It was not, by nature, systemic. It became so only when its losses were made everyone’s.

In any case, if the Irish wanted to save their banks, why not guarantee just the deposits? There’s a big difference between depositors and bondholders: depositors can flee. The immediate danger to the banks was that savers who had put money into them would take their money out, and the banks would be without funds. The investors who owned the roughly 80 billion euros of Irish bank bonds, on the other hand, were stuck. They couldn’t take their money out of the bank. And their 80 billion euros very nearly exactly covered the eventual losses inside the Irish banks. These private bondholders didn’t have any right to be made whole by the Irish government. The bondholders didn’t even expect to be made whole by the Irish government. Not long ago I spoke with a former senior Merrill Lynch bond trader who, on September 29, 2008, owned a pile of bonds in one of the Irish banks. He’d already tried to sell them back to the bank for 50 cents on the dollar-that is, he’d offered to take a huge loss, just to get out of them. On the morning of September 30 he awakened to find his bonds worth 100 cents on the dollar. The Irish government had guaranteed them! He couldn’t believe his luck. Across the financial markets this episode repeated itself. People who had made a private bet that went bad, and didn’t expect to be repaid in full, were handed their money back-from the Irish taxpayer.

In retrospect, now that the Irish bank losses are known to be world-historically huge, the decision to cover them appears not merely odd but suicidal. A handful of Irish bankers incurred debts they could never repay, of something like 100 billion euros. They may have had no idea what they were doing, but they did it all the same. Their debts were private-owed by them to investors around the world-and still the Irish people have undertaken to repay them as if they were obligations of the state. For two years they have labored under this impossible burden with scarcely a peep of protest. What’s more, all of the policy decisions since September 29, 2008, have set the hook more firmly inside the mouths of the Irish public. In January 2009 the Irish government nationalized Anglo Irish and its 34-billion-euro (and mounting) losses. In late 2009 they created the Irish version of the tarp program, but, unlike the U.S. government (which ended up buying stakes in the banks), they actually followed through on the plan and are in the process of buying 70 billion euros of crappy assets from the Irish banks.


Mortgage Insurer AMBAC Skips Payment, Expects to go Bankrupt

Zero HedgeAmbac Does Not Make November 1 Coupon Payment, To File Bankruptcy Within A Month If Unable To Raise Additional Capital:

From a just released 8-K:

On October 29, 2010, the Board of Directors of Ambac Financial Group, Inc. (the “Company”) decided not to make a regularly scheduled interest payment on the Company’s 7.50% Debentures due May 1, 2023 (the “2023 Notes”). The interest payment was scheduled to be made on November 1, 2010. If the interest is not paid within 30 days of the scheduled interest payment date, an event of default will occur under the indenture for the 2023 Notes. The occurrence of an event of default would permit the holders of the 2023 Notes to accelerate the maturity of the notes. As of June 30, 2010, the Company had total indebtedness of $1,622 million. The next scheduled payment of interest on the Company’s indebtedness is November 15, 2010.

The company has $1.6 billion in assets and $8 billion in liabilities. Expect to see more stories like this. Things that can’t go on forever don’t. Debt that can’t be repaid won’t.

And hey, guess what AMBAC does for a living? They insure bonds and other financial instruments, including mortgages. Bad line of business to be in these days, doncha know. Boombustblog has a roundup of the mortgage companies they insure, including Countrywide, GMAC/Ally, and IndyMac. It’s a who’s who of deathpool candidates.

And if that isn’t enough schadenfruede, CNBC’s Jim Cramer recommended buying AMBAC stock as recently as six months ago. How is it that guy still has viewers, much less a job?

PreviouslyAmbac: 97% of Countrywide Mortgages Failed Underwriting Standards

Crummy mortgage underwriting at Deutsche Bank, too

BloombergAssured Guaranty Sues Deutsche Bank Over Mortgages:

Assured said more than 83 percent of 1,306 defaulted loans examined in one of the transactions, ACEs Home Equity Loan Trust, Series 2007-SL2, breached Deutsche Banks representations and warranties. In the second deal, Home Equity Loan Trust, Series 2007-SL3, 86 percent of the 1,774 loans breached the agreements, Assured said.

Via Mark Deninger at The Market Ticker, who is all over this stuff.

PreviouslyBank of America may have to take back $47 Billion in Countrywide mortgages

Bank of America may have to take back $47 Billion in Countrywide mortgages

Pimco, NY Fed Said to Seek BofA Repurchase of Mortgages

PreviouslyAmbac: 97% of Countrywide Mortgages Failed Underwriting Standards

Dept of Housing and Urban Development May Fine First Tennessee Bank

The Bank DraftOfficial floats possibility of civil penalty for First Tennessee:

Late last month, a regional inspector general for the Department of Housing and Urban Development, released a report detailing the government’s findings. The report said the IG’s office tested 18 loans underwritten by First Tennessee that had gone into claim status within 30 months of their endorsement.

The report alleged that five of the 18 loans were not underwritten in accordance with HUD/FHA regulations, and that the FHA insurance fund suffered losses of $435,574 on those five loans.

PreviouslyAmbac: 97% of Countrywide Mortgages Failed Underwriting Standards

Mortgagegate: MERS processed 60% of U.S. mortgages, had zero employees

What Is MERS and What Role Does It Have in the Foreclosure Mess?

You’ve heard the name Mortgage Electronic Registration Systems or “MERS” mentioned in relation to the foreclosure problems in the residential real estate market.

But what is MERS?

It is the company created and owned by all of the big banks to process title to property in the U.S. Approximately 60% of the nation’s residential mortgages are recorded in the name of MERS.

MERS is a shell corporation with no employees, but thousands of officers.

Why no employees in a corporation that processed trillions of dollars in mortgages? I’d guess either for tax purposes or to limit liability. Any law-talking guys out there want to venture a guess?