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Buy The Rumor, Sell The News


This graf from a Taibbi blog post reminds me of something. First the graf:

The potential liability each of the banks faces from foreclosure litigation is vastly greater than $25 billion, and uncertainty surrounding that litigation is holding the stock prices of all of the major companies (in particular struggling ones like Bank of America) down.

A settlement would release those firms from that potential liability and likely bring massive surges in stock-market investment. It would therefore have a profound strengthening effect on the Too-Big-To-Fail banks.

Now, if you see a big multi-day run up in bank stocks you know what's going on: the fix is in and a settlement has been made in principle. That's how we'll know: word will leak out to the main players and insiders before the news is announced.

So, buy the rumor and sell the news.


Sean Paul Kelley January 27, 2012 - 12:34pm
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( categories: Economics | The Markets )

The banks have another exposure

beyond the liability for improper actions. Maybe fear of prosecution for improper mortgage practices is not the only reason foreclosures have slacked off a bit.
A bank's loan capability and net worth are predicated on their assets and they are overvaluing the assets by evaluating their mortgages at face value rather than 'mark to market'. A very large number of their mortgages are seriously 'under water'. If they had to foreclose on those underwater mortgages and got true market value for the properties, the resulting cash assets would be a lot less than they currently claim as assets.

It is worth remembering that the Founding Fathers were all traitors.

steeleweed January 27, 2012 - 1:50pm
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This is a true point, but loans are not marked to market

The mortgages in question are second or third liens, known as Home Equity Lines of Credit. The banks haven't securitized these home equity loans, and since they hold them on their balance sheet, they don't have to mark them to market.

Now it is certainly true that many of these second liens have no collateral behind them, because the first mortgage is already underwater and has a prior legal claim to whatever equity there might have been. If the first and second mortgages are current, then the bank has no reason to register an impairment on the second mortgage. Just because a home is underwater doesn't mean the bank is going to experience a loss - it just means the homeowner is going to live there forever until all the mortgages are paid off.

However, and here is where your point becomes important, steelweed - if the first mortgage is late or in foreclosure, the second mortgage is clearly at risk. Interestingly, homeowners are in some cases continuing to pay on their HELOCs, because they consider them short term debt like credit cards, even if they have already defaulted on the first mortgage. In these cases, what may be happening is the banks are still carrying the second mortgage at 100% value. What they should be doing is taking a loan loss provision on the second mortgage even if it is current, because the homeowner is in default on the first mortgage. After all, banks have these clauses in consumer loans that allow them to call in the loan (accelerate it) if the lender is in default on some other loan to someone else. This is called a cross-default clause, which is intended to work in the bank's favor, but should also be used by the regulators and auditors to force a loan loss provision on a HELOC when a cross default exists.

Clearly we are not seeing banks taking loss provisions on their mortgage book. Such provisions have been in a steady decline for over two years, and the amounts previously taken are now being brought back to income, giving bank earnings a real shot in the arm. This gets directly to your point - how can they get away with this for that group of HELOCs that are no longer collateralized, and which are linked to a first mortgage in default or foreclosure?

Numerian January 27, 2012 - 2:14pm
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Banks will not get a release from criminal and other liabilities

This just in from HuffPost:

http://www.huffingtonpost.com/2012/01/27/obama-administration-mortgage-fraud-settlement_n_1236708.html

The $25 billion will be limited to robo-signing offenses only. All other liabilities, such as for securitization fraud, MERS, criminal acts of any other sort, fraud against the GSEs, civil suits, etc., will still expose the banks to hundreds of billions of dollars of liability.

If that is the deal, I'm not sure why banks would sign off, other than robo-signing offenses are easy to prove and could result in losses much higher than $25 billion.

I see the hand of Michelle Obama behind this change in White House attitudes to Wall Street. She was ostracized by Rahm Emanuel, and now that he is gone it sounds like her husband is starting to realize how much damage has been done to his image as a change agent, starting with the fact that he is viewed by so many of his supporters as a tool of rich donors and other well-connected people. The departure of Bill Daley also seems to figure into this, as does yesterday's announcement that Geithner won't be reappointed.

At this stage it is probably too late to salvage Obama's reputation among liberals and independents, unless by chance there are some high profile indictments in the summer. Bringing Eric Schneiderman on to the federal investigation committee might mean that he is being co-opted, but it is equally like that his co-heads have been told to get busy on the indictments. Schneiderman has been doing serious investigatory work for over a year now. He has the stuff the federal guys don't have because they ignored all the crime around them. If someone wanted to jump start the indictment process as the reelection campaign gets underway, Schneiderman is the one guy who can do that for them.

Veddy.....interesting!......as they used to say on Laugh-in (for all you American baby boomers).

Numerian January 27, 2012 - 1:57pm
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Interesting indeed.

I can't wait to hear the banksters say, "Sock it to me!"

It is worth remembering that the Founding Fathers were all traitors.

steeleweed January 27, 2012 - 2:54pm
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The takeaway is the same, no matter how you slice it

Support OWS this Spring, as nothing will push this to the front more than an active, large, and resilient protest movement calling for bank accountability and social (financial?) justice. To claim they haven't changed the political dynamic in the last 6 months is utter foolishness. OWS has shifted the seas of the true culture war (rich/poor) more than one other single force since Reagan incepted the modern formula. If we get behind our fellow citizens and get this done, we could be setting up a 30 yr virtuous cycle of financial change in the western world.

Schneiderman just said so himself, that his new "job" came about because of the pressure from OWS. No one of us can change this system, but together we can sure get something done. Seize the day people, this is the (election) year to get your concessions.

zot23 January 29, 2012 - 12:29pm
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Hehe, since Matt Taibbi started this discussion

Let's let him lead us out while he puts in the hooks for his next article. This might be what Schneiderman got for agreeing to cool his subpeona jets:

http://www.rollingstone.com/politics/blogs/taibblog/a-big-change-on-the-foreclosure-front-20120128

Wow, if true this is not a bad deal at all IMHO. We'll have to see though.

zot23 January 29, 2012 - 12:44pm
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Nice as it would be to

Nice as it would be to believe that this is the beginning of good news I am more inclined to see this as just another terrible to bad deal being arranged to handle a problem to the bankers of the bankers' own creation while promising us a bundle of goodies for pre-election salavation while the actual follow through must wait till after the election. At which time ala Guantanamo and due process and a real health care plan etc., etc. etc., we will have the carpet pulled out from under us. Fool me once shame on you, fool me twice ...

hvd January 29, 2012 - 4:39pm
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