Tag Archives: Merrill Lynch

The Arrogance of Wall Street.

Here’s the actual headline: “This Gorgeous Model Is A Finance Wiz Who Turned Down A Job At JP Morgan!

Xenia Tchoumitcheva - Girls

This headline was in one of our nation’s leading business news dailies yesterday (Friday), and it says all you need to know about the arrogance of Wall Street bankers. It might as well have said: This Dopey Broad Turned Down A Job At JP Morgan. Can you imagine That?

Swiss model Xenia Tchoumitcheva, who interned at JPMorgan London offices last summer, stopped by (this news daily) to talk about her experience working in finance and to fill them in on why she could possibly turn down such an offer. I mean, she was just an intern and the amazing house of Morgan was ready to make her a Wall Street Master of the Universe.

“I have to say it was a very positive experience for me — better than any other industry in the world — I would say, or whatever else I tried — because there was a huge respect for my skills and what I was able to do …”.

Despite receiving an employment offer from JPMorgan, Xenia decided to pursue her own business interests.  Since her internship, the 2006 Miss Switzerland pageant first runner-up (at 17) has been hosting beauty contests and last month she started hosting her own business TV show in Italy called “L’Italia Che Funziona.” (Italy That Works.) She graduated college in 2010 after having achieved a 3-year Bachelor Degree in economics. She speaks five languages (Italian, Russian, German, French and English). Six, if you include economics, having interned in 2011 at Merrill Lynch.

Good for you, Xenia … good for you!

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Housing Remains Bleak. Cash Buyers Not Helping.

A Merrill-Lynch housing report came out today that said  in November, they forecasted that home prices would fall another 8% from 2Q11 through 1Q13. Since then, the 3Q and 4Q data releases showed actual home prices dropped 3.2% in the second half of 2011, implying another 4-5% decline remained based on the earlier forecast.

More information has come their way since the initial forecast, including favorable developments on the policy front, better economic data and a decline in the supply of homes on the market. They have therefore updated their home price model and believe that prices are bottoming now. However, they continue to believe the recovery will not begin in earnest until 2014.

I have trouble believing that, since there is no mention of the inventory overhang from the 4,000,000 foreclosures going through the process right now, which will essentially more than double the 3,000,000 foreclosures that have been finalized, written off, or are up for sale as REO or short-sale properties. 38% of the National RE transactions in January and February were all cash deals. Indicating that opportunists are buying 4 in 10 homes that are on the market. And, it is not helping the recovery.

And, those all cash buyers are expecting and getting 15-25% discounts in price, further exacerbating  the falling housing prices. If sellers have a choice between selling to an investor for cash or to a buyer who plans to seek a mortgage, the investor is a safer choice, even if that means a lower sale price.  Also, cash buyers can close more quickly, usually in less than 30 days, which is attractive to lenders selling off real-estate-owned properties. Buyers seeking a mortgage usually need 45 to 60 days to close, even when everything goes well. Finally, buyers don’t have to deal with bank-ordered appraisals that come in lower than asking price. In a cash deal, the price is what the buyer and seller agree upon, regardless of appraisal.

In Miami-Dade County, for example, cash sales accounted for 63% of closings in December of 2011.

NAR said a survey of its members showed that 31 percent of Realtors experienced contract failures in February, often because buyers saw their mortgage applications turned down, or because appraisals came in below the negotiated price. That compares with 33 percent reporting contract failures in January, and 9 percent in February 2011. Average sales price fell from $166K to $157K and actual sales rose from 3,787,000 to 4,060,000 comparing February 2001 to February of 2012. If you subtract the all cash deals, you will see an increase of only 2.7%. Hardly robust.

Here’s an example from South Florida reported just yesterday, and you can get a sense of what’s coming: 

Foreclosure activity in the area surged in February as lenders sought to clear a backlog of properties from their books.

Foreclosure petitions — the first step in the process — more than doubled in Bristol County, rising from 68 in February 2011 to 158 last month. Plymouth County petitions jumped 57 percent year over year, increasing from 97 to 152, according to a report released Wednesday by The Warren Group, publisher of Banker & Tradesman.

Banks were reluctant to launch new foreclosure proceedings a year ago in the aftermath of the “robo-signing” controversy, when lenders were accused of improperly handling paperwork, experts said.

“Now they have got their act together and they’re not waiting any longer,” said Peter S. Barney, administrative assistant to New Bedford‘s Board of Assessors. “Now they are going to take care of it. They want to clear their books.”

The problem of delinquent homeowners never went away and bankers want to get control of those properties and sell them, he said.

Statewide, foreclosure petitions also doubled, rising from 694 a year ago to 1,394 last month. The activity was still tame compared with recent years. More than 2,000 foreclosure petitions were filed in February 2010, according to The Warren Group.

My guess is more like a bottom in 2014 and the beginnings of a recovery in 2015. Barring any European contagion. Hold on to your hats!


25 People to Blame for the Financial Crisis. And, Now the Heavy Hitters.

Joe Cassano, #10.

Joe Cassano

Before the financial-sector meltdown, few people had ever heard of credit-default swaps (CDS). They are insurance contracts — or, if you prefer, wagers — that a company will pay its debt. As a founding member of AIG‘s financial-products unit, Cassano, who ran the group until he stepped down in early 2008, knew them quite well. In good times, AIG’s massive CDS-issuance business minted money for the insurer’s other companies. But those same contracts turned out to be at the heart of AIG’s downfall and subsequent taxpayer rescue. So far, the U.S. government has invested and lent $150 billion to keep AIG afloat.

In fact, Cassano remained on the payroll and kept collecting his monthly million $ through the end of September 2008, even after taxpayers had been forced to hand AIG $85 billion to patch up his mistakes. When asked in October why the company still retained Cassano at his $1 million-a-month rate despite his role in the probable downfall of Western civilization, CEO Martin Sullivan told Congress with a straight face that AIG wanted to “retain the 20-year knowledge that Mr. Cassano had.” If this doesn’t piss you off, you might check for a pulse.

Fred Goodwin

For years, the worst moniker you heard thrown at Goodwin, the former boss of Royal Bank of Scotland (RBS), was “Fred the Shred,” on account of his knack for paring costs. A slew of acquisitions changed that, and some RBS investors saw him as a megalomaniac. Commentators have since suggested that Goodwin is simply “the world’s worst banker.” Why so mean? The face of over-reaching bankers everywhere, Goodwin got greedy. More than 20 takeovers helped him transform RBS into a world beater after he assumed control in 2000. But he couldn’t stop there. As the gloom gathered in 2007, Goodwin couldn’t resist leading a $100 billion takeover of Dutch rival ABN Amro, stretching RBS’s capital reserves to the limit. The result: the British government last fall pumped $30 billion into the bank, which expects the losses to be the biggest in U.K. corporate history

In September 2011, Alistair Darling, the Chancellor of the Exchequer at the time of the RBS collapse noted in leaked excerpts from his upcoming book,’Back From The Brink: 1,000 Days At No 11′ that Mr Goodwin behaved “as if he was off to play a game of golf” while officials struggled to prevent a meltdown. Mr Darling describes the secret discussions which led to the Labour government effectively nationalising RBS and Mr Goodwin being heavily criticized for his management style and conduct and wrote that Goodwin “deserved to be a pariah”.

Goodwin’s pension entitlement, represented by a notional fund of £8 million, was doubled, to a notional fund of £16 million or more, because under the terms of the scheme he was entitled to receive, at age 50, benefits which would otherwise have been available to him only if he had worked until age 60. In other words, leave quietly and we’ll double your pension.

Meet #8, John Devaney.

John Devaney

Hedge funds played an important role in the shift to sloppy mortgage lending. By buying up mortgage loans, Devaney and other hedge-fund managers made it profitable for lenders to make questionable loans and then sell them off. Hedge funds were more than willing to swallow the risk in exchange for the promise of fat returns. Devaney wasn’t just a big buyer of mortgage bonds — he had his own $600 million fund devoted to buying risky loans — he was one of its cheerleaders. Worse, Devaney knew the loans he was funding were bad for consumers. In early 2007, talking about option ARM mortgages, he told Money, “The consumer has to be an idiot to take on one of those loans, but it has been one of our best-performing investments.”

In 2008 after the fund collapsed, John Devaney sold his treasures, hoping to forestall what was in the end inevitable. He sold his Renoir and his Gulfstream, his home and his helicopter. Even his cherished yacht — gone. And, I know you feel as sorry for him as I do.

Stanley O'Neal

Merrill Lynch‘s celebrated CEO for nearly six years, ending in 2007, he guided the firm from its familiar turf — fee businesses like asset management — into the lucrative game of creating collateralized debt obligations (CDOs), which were largely made of subprime mortgage bonds. To provide a steady supply of the bonds — the raw pork for his booming sausage business —O’Neal allowed Merrill to load up on the bonds and keep them on its books. By June 2006, Merrill had amassed $41 billion in subprime CDOs and mortgage bonds, according to Fortune. Every Merrill employee I know hates this guy.

O’Neal walked away with a golden parachute compensation package that included Merrill stock and options valued at $161.5 million at the time. The board hired John Thain to replace O’Neal, believing that he could save the business. A year later, he did the same thing O’Neal had planned to do; sold the company. This time, though, it was for a much lower price, and he sold it to Bank of America.

O’Neal is said to have an “abrasive” personality. CNBC includes O’Neal in their list of “Worst American CEOs of All Time”. When Thain arrived at Merrill he scrapped O’Neal’s practice of having the security guards always hold an entire elevator bank open excusively for him. In The New York Times Magazine on April 18, 2010, O’Neal was described as one of the “feckless dolts” who helped precipitate the financial crisis of 2007.

And, Now #6, The Incredible Chris Cox.

Christopher Cox

The ex-SEC chief’s blindness to repeated allegations of fraud in the Madoff scandal is mind-blowing, but it’s really his lax enforcement that lands him on this list. Cox says his agency lacked authority to limit the massive leveraging that set up the financial collapse. In truth, the SEC had plenty of power to go after big investment banks like Lehman Brothers and Merrill Lynch for better disclosure, but it chose not to. Cox oversaw the dwindling SEC staff and a sharp drop in action against some traders.

Cox was nominated by President George W. Bush to be the 28th Chairman of the United States Securities and Exchange Commission (SEC) on June 2, 2005 and unanimously confirmed by the United States Senate on July 29, 2005. He was sworn in on August 3, 2005.

The Housing and Economic Recovery Act of 2008, enacted in July 2008, gave Cox one of five seats on the Federal Housing Finance Oversight Board, which advises the Director of the Federal Housing Finance Agency with respect to overall strategies and policies regarding the safety and soundness of Fannie MaeFreddie Mac, and the Federal Home Loan Banks. In September 2008, the U.S. Congress passed and President Bush signed the Emergency Economic Stabilization Act of 2008, which placed Cox on the newly established Financial Stability Oversight Board that oversees the $700 billion Troubled Assets Relief Program.

In an interview with the Washington Post in late December 2008, Cox said, “What we have done in this current turmoil is stay calm, which has been our greatest contribution — not being impulsive, not changing the rules willy-nilly, but going through a very professional and orderly process that takes into account unintended consequences and gives ample notice to market participants.” Yeah, participants like Bernie Maddoff, Joe Cassano and John Devaney.

Tomorrow: The REAL Bad Guys. The Top 5!


A Wipeout That Didn’t Have to Happen.

BOBBY L. HAYES, an engineering entrepreneur in Incline Village, Nev., used to trust financial institutions. This is the story of why he no longer does.

Mr. Hayes won a securities arbitration last week and was awarded $1.38 million from the panel that heard the case. Banc of America Securities, now Merrill Lynch, must pay the award, which represents all the money Mr. Hayes lost on a complex security, plus accrued interest, lawyers’ costs and hearing fees.

The Hayes case highlights this question: Exactly how did Wall Street price the loans that it bundled into securities and sold to investors?

For anyone hoping to hold firms and individuals accountable for misconduct in the credit crisis, valuation practices are a rich vein to mine. Last week, for example, prosecutors in New York City wrung guilty pleas from two former mortgage traders at Credit Suisse who admitted inflating the values of mortgage bonds that the bank held on its books. As the subprime disaster spread in 2007 and 2008, one trader said he mismarked the bonds to please his superiors; another said the fraud was intended to keep him in line for a rich bonus. The bank itself was not charged.

The outcome of Mr. Hayes’s case seemed to confirm his argument that prices on some of the loans in the pool were artificially inflated at the time of purchase. We can’t know for sure, though, because the arbitrators did not say why they ruled as they did.

Mr. Hayes said he told his broker that he didn’t want to take risks with the money that went into the investment, a collateralized loan obligation known as Lyon Capital Management VII that was issued in July 2007. “I was a trusting client, and it was like a bad dream,” Mr. Hayes said. “I had a lot more assets in the bank, and it was unfathomable to me that they would deliberately do this to even a small depositor.”

When Banc of America Securities was concocting the Lyon Capital deal, a $400 million collection of commercial loans that it planned to sell to investors, Wall Street’s labyrinthine and lucrative loan-pooling machine was starting to break down.

An expert witness who testified at the arbitration said that as the security was being cobbled together, the loans purchased over previous months were losing value. Instead of owning up to that fact, this witness said, Banc of America Securities sold the investment as if the loans still carried prices from months earlier.

By selling the Lyon Capital deal with inflated asset values, Banc of America Securities was able to make sure that it did not incur losses on the loans purchased for the security.

Thomas C. Bradley, a lawyer based in Reno, Nev., who represented Mr. Hayes, said that while the security was being created, the loans lost 5 percent of their value. “Our whole case rode on the premise that the investment was intrinsically worthless as of the day the investments closed,” Mr. Bradley said. “The panel agreed.”

MR. HAYES had been sold the riskiest piece of the loan pool, known as the equity or E tranche. Because of the way losses are distributed in these instruments, the loans in the pool had to decline only by one-half of 1 percent before Mr. Hayes’s investment would be wiped out. The entire security was liquidated at a loss of around $75 million about 16 months after it was sold.

Bill Haldin, a spokesman for Bank of America, the parent company, said it disagreed with the arbitrators’ decision. “Following the purchase of this investment, the market experienced extreme volatility,” he said. The bank denied that the investment was worthless when it was sold to Mr. Hayes. Of course they did.

Craig J. McCann, founder of the Securities Litigation and Consulting Group in Fairfax, Va., testified on behalf of Mr. Hayes at the arbitration. His firm has done research on the problems posed to investors by firms that collect loans during a period of steep asset price declines. He has identified several cases where securities contained loans that had been bought at prices substantially higher than their market value when the pools were issued.

“If the loans drop in value during the warehousing period, as they did in this case precipitously, then the trust is agreeing to pay something significantly more than the market value of the securities,” Mr. McCann said. “The right thing for Banc of America to do would have been to only charge the trust the current market value of the loans or at least disclose to investors the trust is paying $400 million when the loans are worth $380 million.”

The loans were gathered for the LCM security from November 2006 to June 2007, as the credit markets were coming unglued. The prospectus for the deal did point out that the loan purchases made during the period would be reflected on account summaries at acquisition costs. What was not made clear, though, was that those costs were considerably above current values; investors, therefore, would incur immediate losses when they bought the security, Mr. McCann said.

Banc of America Securities later changed its disclosures about the potential for losses embedded in loan pools like the Lyon Capital deal. In a similar offering dated August 2007, the prospectus noted that because of declining market values of loans, it was likely that the value of the portfolio “on the closing date will be substantially less than the principal amount” of the loans in the pool.

Another problem with the Lyon Capital deal, Mr. McCann said, was a conflict of interest in its structure, which was disclosed in the prospectus. Affiliates of Banc of America Securities, it noted, were among those selling loans to the firm for inclusion in the pool. Collecting loans for lengthy periods also allows for opportunistic trade allocation, Mr. McCann said. If, for example, the loans had risen in value while the security was being created, one might well wonder if those loans would have ever made it into the final product. Well, one doesn’t really wonder. One KNOWS they wouldn’t.

Even though he won his case, Mr. Hayes said he was still livid. “I no longer trust any financial institution,” he added.

Something tells me he’s not alone in that.


New-home Purchases Fall, 2011 Worst Ever for Sales!

This is a hopeful AP story that I have edited in an effort to remove its reality cone.

Thanks, Mimi!

AP Photo

Fewer people bought new homes in December. The decline made 2011 the worst year for new-home sales on records dating back nearly half a century.

The Commerce Department said Thursday new-home sales fell 2.2 percent last month to a seasonally adjusted annual pace of 307,000. The pace is less than half the 700,000 that economists say must be sold in a healthy economy.

About 302,000 new homes were sold last year. That’s less than the 323,000 sold in 2010, making last year’s sales the worst on records dating back to 1963. And it coincides with a report last week that said 2011 was the weakest year for single-family home construction on record.

The median sales prices for new homes dropped in December to $210,300. Builders continued to slash prices to stay competitive in the depressed market which gets worse daily as the flow of foreclosures and REO properties continue onto the market at fire-sale prices. Still, no one is buying.

Still, sales of new homes rose in the final quarter of 2011, supporting other signs of a slow turnaround that began at the end of the year. NOT!

Sales of previously occupied homes rose in December for a third straight month. Mortgage rates have never been lower. Homebuilders are slightly more hopeful because more people are saying they might consider buying this year. And home construction picked up in the final quarter of last year.

“Although this decline was unexpected, it does not change the story that housing has likely bottomed,” said Jennifer H. Lee, senior economist at BMO Capital Markets. I totally disagree with Ms. Lee and I have a copy of Bank of America‘s internal analysis published in mid-November titled: “Housing: More pain, then gain” which predicts 2015 as the bottom, barring further global economic volatility. I would tend to believe two Merrill Lynch economists over a BMO Capital economist.

Ian Shepherdson, chief economist at High Frequency Economics, said easier lending requirements, historically low mortgage rates and improved hiring all point to consistent, albeit slow, rises in sales in the coming months. What improved hiring? The minimum wage jobs that were created over the Holiday season? Last time I looked, you needed to earn more than $16,000 a year to qualify for a new mortgage.

“A sustained rise in new home sales is imminent,” he said. “Homebuilders say so too, and they should know.” Homebuilders, HAVE to begin building or lose crews and capital and credit lines. Would you lend money to a builder who plans to build $240,000 homes in a neighborhood that has an inventory of $180,000 homes and is continuing South? No? I didn’t think so.

Hiring is critical to a housing rebound. The unemployment rate fell in December to its lowest level in nearly three years after the sixth straight month of solid job growth. Of which kind again? I contend that this unemployment measure is the result of some part-time and min wage hiring combined with people simply disappearing from the job market and giving up, combined with some service level jobs that pay $10-14 an hour. This isn’t going to change the trajectory of home purchasing any time soon.

Economists caution that housing is a long way from fully recovering. Builders have stopped working on many projects because it’s been hard for them to get financing or to compete with cheaper resale homes. For many Americans, buying a home remains too big a risk more than four years after the housing bubble burst. No kidding.

Though new-home sales represent less than 10 percent of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to the National Association of Home Builders. Even if they were to start 30,000 new homes tomorrow, that only creates 90,000 jobs which isn’t enough to make a dent in the unemployment rate. According to Calculated Risk (http://www.calculatedriskblog.com/2011/12/jobs-needed-to-reach-8-unemployment.html) it would take 267,000 new jobs PER MONTH for a year to get the unemployment rate down to 8%!

A key reason for the dismal 2011 sales is that builders must compete with foreclosures and short sales – when lenders accept less for a house than what is owed on the mortgage. Well, that flow is just now kicking into high gear as the 17 banks that Washington held up their foreclosure processes until September of last year for robo-signing investigations are just now finishing up their work converting defaults to foreclosures and clawing back those homes to REO status. If you think it has been bad so far, wait until you see this year unfold.

Builders ended 2011 with a third straight year of dismal home construction and the worst on record (a HALF-CENTURY) for single-family home building. But in a hopeful sign, single-family home construction, which makes up 70 percent of the market, increased in each of the last three months. There are no hopeful signs folks, and wait until Greece craters in March and the Euro falls apart. Much more fun to come.