Thursday, October 16, 2008

Horse Out of the Barn; Feds On the Case!

U.S. Agencies Investigate WaMu Failure

Federal prosecutors are investigating the failure of Washington Mutual Inc., citing the “intense public interest” in the largest bank collapse in the history of the U.S….

The investigation into Washington Mutual is part of the a wider effort by U.S. law enforcement to determine the extent of fraud connected to the subprime-lending troubles that have batter financial institutions.

Federal investigators…have been delving into the books of Fannie Mae, Freddie Mac, Lehman Brothers Holdings Inc….

—The Wall Street Journal

That is the story, and we are not making it up: now that the subprime explosion has littered the landscape with dead banks, vacant neighborhoods and zombie homeowners, the Feds are on the case!

They’re going to look into exactly what might have caused this problem, like, three years ago.

And then they’re going to…well, we’re not sure what they’re going to do.

Write a report? Form a blue-ribbon commission? Whine?

We met a mortgage broker several years ago—when and where we don’t recall—who gave us a hair-raising preview of the impending doom now pending all across the globe.

Money was so easy and brokers so unscrupulous, he told us, that mortgages were being sold to working class urban multifamily home-buyers who would not be able to make a mortgage payment if they missed a day of work or if the illegal tenant in the basement skipped out.

Most sickeningly, in his eyes, was the fact that these poor shlubs did not understand that the fee to the mortgage broker—hidden as it was inside the mysterious stack of documents they could barely read—was often more than the down-payment they were borrowing from relatives.

But, he assured us, neither of the first two points mattered because the mortgages these home-buyers were signing were variable-rate mortgages with absurdly low up-front interest rates: “they won’t be able to pay anyway once the teaser rate evaporates,” he said.

Did anyone investigate those mortgage brokers? Of course not: things were good, and the mortgage lobby was powerful.

Besides, Congress wanted Fannie Mae and Freddie Mac to lend more—not less. And Time Magazine was telling us “Why We Love Our Homes,” so the public wanted in on the game. Plus, all the tax money from those real estate deals was helping governments across this land balance their budgets.

Even the first signs of a crisis did not spur anyone into action.

Last May, when David Einhorn said, in public, the Feds ought to recapitalize Lehman Brothers before the worst-case scenario happened, did anyone think to investigate?


Instead, Einhorn was dismissed as a crank, a short-seller, a guy with an axe to grind. By the very company that went bankrupt last month.

So now that the horse is out of the barn, across the north forty and into the next state, the sheriff is arriving at the scene of the crime to search for clues.

Unfortunately, they will find that the barn has already burned to the ground.

Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Danielle said...

Finally, I post that doesn't involve Warren Buffett - thank goodness! :)

Danielle said...

Finally, a post that doesn't involve Warren Buffett - thank goodness, I was thinking you were going to have to rename your blog!

eeeeeekonjohn said...

Good stuff, Jeff.

What's that saying? "An ounce of prevention is worth a trillion dollars in acronyms." Something like that.

Anonymous said...

I knew trouble was coming in 2005 when a wholesale rep from a major bank (one of the 9 being recapitalized) came by my office to look at a file and told me to "bump" up the income from $10,000 a month to $18,000.

It was easy he told me, just "use our ***** stated income/stated asset program! And voila the rubber stamp of approval was obtained and my customer was the proud new owner of a $1,300,000 house he could barely afford but wanted dearly.

Of course the loan was done with no money down. I think anyone could venture to guess how this turned out once the RE market tanked.

The story is that my customer wanted the house because he knew it "would definitely go up in value," the lender wanted the loan so they could collect fees and then sell the loan, I wanted my commission, the real estate agent wanted her fee, and the county wanted the transfer tax. We were all so happy!

We are all now so broke!

Anonymous said...

Here is another good one. Anyone remember First Franklin of Merrill Lynch fame?

I had a customer with a 560 FICO score (awful), lots of credit card lates, one mortgage late, that wanted to refinance his $670k mortgage. Not only that, he wanted a 100k cash out to pay credit cards (which of course he didn't)!

Well First Franklin came to the rescue. All those lates didn't matter. The fact that he only had $4,000 in liquid assets didn't matter. The fact he only made $42k a year didn't matter. Why? Because he could prove he was self employed for over 2 years (a former painting company he had) and could provide a letter from an accountant!

The rep told me, "don't worry, First Franklin has a very competitive 2/48 ARM that is stated income/stated asset."

She told me exactly what income to write in and how much his liquid assets needed to be inflated in order to qualify. What was most impressive was the 7.00% interest rate!

Again, everybody got paid.

Marc Marc O'sullivan said...

Interesting op-ed in yesterday's NYT by Warren Buffett.

Thanks Jeff for this post.