The Dukes of Moral Hazard: The Dangers of Quantitative Easing

 

This brilliant and terrifying column was originally published at ProPublica and is republished here under a Creative Commons license.

by Jesse Eisinger
ProPublica, Nov. 10, 2010, 2:40 p.m.

Across the world, there are booms. Chinese Internet companies are flourishing. Energy companies are finding new sources of power. Commercial real estate is coming back.

Unfortunately, this isn’t happening in the real world, which is still crippled by sagging economies, but in the investing one.

If there’s a doggy stock, a dodgy loan or a slice of a complex credit security made to a questionable borrower — hedge funds want it now. Companies with junk bond ratings are flooding the markets with new issuance. If private equity firms bring a money-losing company saddled with debt to market, investors are eager to snap it up.

Thank the Federal Reserve. The central bank has embarked on its program of “quantitative easing,” a second round of experimental monetary policy in which the Fed buys up assets — like longer term government bonds — to bring down interest rates, which is supposed to spur lending and borrowing, thus reigniting the economy.

Nobody knows whether it will work to bring down the intractable rate of unemployment. But it has already worked in one significant way: the speculative juices of the markets are flowing.

What’s going on? As a Fed official explained it in a recent speech, one supposed benefit of the Fed policy is that it will add to “household wealth by keeping asset prices higher than they otherwise would be.”

So it’s levitation-by-decree. When the Fed moves, financial assets receive the opposite of collateral damage: universal blessing, deserved or not. Lower rates may or may not help more people find work. But there’s no doubt that the central bank has already helped the Henry Kravises and Lloyd Blankfeins of the world.

The Russell 2000 stock index, which is made up of smaller companies, has risen about 21 percent since September, when investors started to anticipate that the Fed would intervene in an aggressive fashion. A tiny Chinese Internet stock, China MediaExpress Holdings, is up more than 250 percent since mid-September. The private investors that own Harrah’s, the money-losing casino company, are bringing it public, and investors are going to gamble on it despite a crushing debt load.

Then there are something called B notes, bonds backed by commercial real estate loans. B-note holders are on the hook for the early losses if the loans go bad. They are as hot a commodity as everything else. Never mind that there’s a huge oversupply of commercial real estate in this country. Or that Wall Street just went through a disastrous episode for complex structured financial products of exactly this sort.

Without knowing a thing about finance, here’s how to tell it won’t work out well. Wall Street is the great master of the euphemism. The Street doesn’t call them junk bonds; they are “high yield.” Here, something isn’t just Triple A. It’s “Super Senior Triple A.” So when the best investment bankers can do is to dress something up with a lowly “B,” you know it’s trash.

Leverage, meanwhile, has made a glorious return. Interactive Brokers, a discount brokerage firm, has been running an advertising campaign that displays money spewing from printing presses. The firm will lend (for certain special customers)$566,000 for every $100,000. Ah, borrowing heavily for the purposes of trading in volatile markets. Maybe some Bear Stearns or Lehman Brothers bankers can explain the wisdom of this.

All of this is Finance 101. The cheaper money is to borrow, the more it makes sense to take a bigger risk with it.

But that doesn’t make it more palatable. It feels like an ominous replay of recent Federal Reserve emergency actions, which led to bigger and bigger bubbles. The Fed brokered the rescue of Long-Term Capital Management, bailing out the investment banks that had lent to the collapsing hedge fund. The Fed pumped money into the economy to save us from the Y2K computer bug. The Fed tried to rescue the economy from the bursting of the Nasdaq bubble, helping to create the housing bubble.

It’s like the exhausted “Saw” movie franchise; this isn’t just a sequel. It’s more like the third iteration of the second reboot — harder core, baser and for serious liquidity heads only.

Is this the price society has to pay for a better economy? Do we care if some hedge funders get rich as long as unemployment goes down, fewer people get thrown out of their homes and household debts are less crushing?

That would be a worthwhile tradeoff. But it’s far from clear that the Fed can get any real traction with its policies.

Over the past year, I’ve been investigating some of the more egregious conduct that occurred in the bubble years. In this column, I’ll be monitoring the financial markets to hold companies, executives and government officials accountable for their actions.

A main focus will be the spectacle of returning speculation. It’s commonplace to lament Wall Street’s lack of a historical memory. But there is something different at work. Professional investors have learned the lessons of the financial markets’ serial bubbles and learned them well.

The lesson is: When the next one comes, I’m going to get mine. I’ll just get out early this time.

You can contact Jesse Eisinger at jesse@propublica.org

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Increase in foreclosure rate could mean banks knew they were seizing properties they didn’t actually own

In the 3rd quarter of this year banks repossessed a total of 288,345 properties – by far the largest quarterly total since the meltdown began. The 4th quarter of this year is likely to have the fewest repossessions of the meltdown because of “the decision by several of the largest lenders to halt filings after it was discovered that paperwork for many loans is missing or incorrect.” The increase is a sharp spike in the total number of repossessions. The 4th quarter numbers were a 7% increase over the previous quarter and a 22% increase over the same period of 2009. According to RealtyTrac: “A record total of 102,134 bank repossessions were reported in September, the first time bank repossessions have surpassed the 100,000 mark in a single month.”

So, did the banks know what was coming and try to get as many properties safely in to their possession as they could before the hammer came down? If this is not the case then why the increase?

Now I am not a real estate lawyer – to put it mildly – so I don’t know the answer to the following: Is it legal for banks to foreclose if they know that they cannot substantiate ownership? My guess is no. I hope the 50 state attorneys general now looking into this hunt around for any signs of foreknowledge by the banks. If the banks were doing something they knew to be illegal – as opposed to just making more mistakes – then it raises the question of whether or not there was a conspiracy to commit fraud. Were any of this to be true it would worsen the already dubious condition of many banks’ balance sheets.

What makes this even more interesting that it was just yesterday that analysts were cooing over the better-than-expected earnings J.P. Morgan. This was one of the reasons the press gave for explaining the very odd fact that the Dow closed at or over 11,000 for a fourth straight day. It is worth noting that the Dow has risen more than 1,300 points since July 2, presumably on the basis of all the good economic news of late. Could someone please remind what that news was? Anyone? Bueller?

As long-time readers know I view the stock market as much more of a leading psychological indicator than an economic one. I am still hoping for evidence that will convince me otherwise.

THEN AGAIN IT COULD JUST BE A COINCIDENCE: Bill McBride, who writes Calculated Risk, says: The banks are still catching up on the earlier foreclosure moratoriums – and extended periods for trial modifications.  This surge in repossessions was expected and I think unrelated to “foreclosure-gate”

 

A guide for the perplexed to the economic mess

The problem with the economy is clear, but it’s been obfuscated out of most people’s minds. So, to put it simply: Financial institutions loaned out a huge amount of money against assets that are now worth far less and whose value is still falling. Somehow, someway, the difference between these two numbers has to reconciled. Simply put, money loaned (X) – current value of assets (Y) = amount of debt to be accounted for (Z). Solve the equation and you know exactly how solvent our economy is.

This week we have found out that Y equals even less of X than previously thought – and the previously thought numbers were already pretty bad. That is because banks screwed up the paperwork so badly they are having major problems proving they do indeed have a legal right to the homes they gave mortgages on. Short form: The banks effectively gave that money away. So the debit side of their ledgers just got a whole lot redder and Z just got a whole lot larger.

Now Z was bad before this latest fiasco was discovered. How bad? Bad enough the banks and the government have gone out of their way to make to figure out what Z is worth. My theory is they believe – perhaps reasonably – disclosing Z will cause the world’s economy to go into freefall. Unfortunately Z is not going away. So because these groups cannot change the value of X and the value of Y keeps getting smaller, they have resorted to fiddling with the – and the =.

First, the government tried to purchase mortgage debt(X) from the banks. The problem with this is that selling X would mean declaring its value, i.e. providing a real number for Y. This would mean admitting what everyone knows – that a number of banks have debts well in excess of their assets.

Because this didn’t work, the government tried to alter the equation’s minus sign by giving banks enough funds to be able to withstand solving for Y. Under this plan we get X + $100s of billion – Y = Z. Given how hesitant banks were to take toxic asset relief payments (or whatever they’re calling it now) it is reasonable to conclude that Y = way more than hundreds of billions.

But wait, you say! Many of these financial institutions have already repaid the bailout money! Yes, that is true. However keep in mind, they repaid it with money borrowed from the government. This is robbing Peter to pay Paul as imagined by M.C. Escher. Those staircases are never going to meet up but it allows both the banks and the government to say that they do while hoping that no one reads the fine print.

So being unable to either 1) increase X enough to do any good or 2) stop the actual value of Y from declining, the government tried letting financial institutions play lets pretend with the book value of Y. Recent changes in accounting rules let institutions can the value of a property at what they think it would go for in an “orderly” sale, as opposed to a forced or distressed one. Or, to quote the head of the central bank of Wonderland: “When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

What all those measures did was to allow the economy to continue to operate because we all pretended the problem would somehow go away. This is an attempt to put off the day of reconciliation until some time in the far distant future when someone will have figured out a solution that won’t hurt. However, this is impossible. The solution will hurt, and it will hurt a lot.

All talk of growing our way out of the recession is absurd. It is based on the belief that we can continue to increase the size of the economy as was done earlier in this decade. Let’s make one thing clear: The last decade’s worth of growth was funded by loans against assets that were never worth those loans in the first place. Trying to go back to that means continuing to believe in the fiction that it was ever sustainable in the first place.

The healthy economy of our future won’t resemble this in anyway. We will have to accept far more modest growth and lower our expectations about always having the newest stuff. We may have to pay our farm workers enough that those jobs, and others like them, because financially appealing to American citizens. That will mean paying a lot more for food and other things.The US has to become home to manufacturing again. This will mean enacting things – like tariffs – that a lot of powerful corporations don’t want. NAFTA and other free trade agreements are going to have to change drastically.

Of course, we don’t have to do these things. Regardless of what we do, though, the economic equation will be resolved and that debt will somehow be accounted for.

But hey, the Dow’s over 11K so no worries, right?

Why I had to stop reading Michael Lewis’ The Big Short

I’m a fan of writer Michael Lewis. Liar’s Poker, Moneyball, Sandra Bullock Wins An Oscar, are all good books. As is The Big Short, his latest. I started reading it yesterday and by bedtime I was half-way through (it’s a short book and I’m a fast reader). When I got up this morning Mrs. CollateralDamage said I was making very unhappy noises in my sleep and I’ve felt on edge all day. I read some more of the book, realized I was getting increasingly agitated and finally put it down. This book is a non-fiction horror story, and one whose end we don’t yet know.

The Big Short is about four people who guessed (and bet) right about mortgage-related ponzi scheme which has led to our current economic “downturn”. What is probably upsetting me about the book is that it confirms my most cynical beliefs about the world. Several of the people in the book repeatedly ask questions of bankers, bond raters, bond salesmen and anyone else they can find in hopes that someone can prove to them that all this buying and selling of sub-prime mortgage securities isn’t just a house of cards. They want to know because they are betting that it is and want to find out if they’ve just blown their money. That, my friends, is a motivated investigator. They are either told they don’t understand how this all works (which we quickly realize means the person who should understand doesn’t) or they are met with blank stares. They try to tell regulators, they try to tell other investors, they even try telling the investment bankers who created this train wreck what is about to happen. AND NO ONE WILL LISTEN. They are Cassandra’s writ huge – except that they make a crap load of money, whereas Cassie just had to suffer.

The other terrifying thing about Big Short, is that it confirms my greatest cynical fears: That most of the people in places of power are either corrupt or fools. Now you’d think that after eight years of George W. I would already have had these fears confirmed but there’s something about Lewis stories of smug, arrogant idiots/crooks gaming the system that scared the feces out of me. It doesn’t help that I really don’t see any reason for the economy to improve. The head of our bankrupt government wants to spend more money. His opposition thinks the best way to deal with the government’s being bankrupt is to keep in place a tax cut for the richest people in the nation. The banks are pretending they’re solvent. People keep saying it’s up to consumers to spend our way out of this mess but it’s overspending that got us into the mess in the first place.  And no one but no one is talking about what happened to all the debt created by the mortgage fiasco. Wall St. and the financial press seem to think that as long as the Dow is over 10K all is right in the world – EVEN THOUGH NONE OF THE PROBLEMS THAT GOT US INTO THIS HAVE BEEN ADDRESSED. Meanwhile no one who was responsible for any of this is going to jail and the nation continues to bleed money and people in two wars everyone knows we have no business fighting.

Sorry, Mr. Lewis, I can’t take anymore. I’m going to go read something much more soothing, like World War Z or John Dies At The End. As my old drinking buddy John Milton once told me, “Stare into the abyss long enough and it starts to stare back.” Well, at least St. Peter told me I was the nicest of the damned…

 

Who could possibly have seen the banking disaster coming?

What was the theory behind the Glass-Steagall Act? Foremost, it was meant to restore a certain sobriety to American finance. In the 1920s, the banker had gone from a person of sober rectitude to a huckster who encouraged people to gamble on risky stocks and bonds. As [chief congressional counsel Ferdinand] Pecora noted, small investors identified banks with security, so that National City salesmen “came to them clothed with all the authority and prestige of the magic name ‘National City.’” It was also argued that the union of deposit and securities banking created potential conflicts of interest. Banks could take bad loans, repackage them as bonds, and fob them off on investors as National City had done with Latin American loans. They could even lend the investors money to buy the bonds. A final problem with the banks’ brokerage affiliates was that they forced the Federal Reserve System to stand behind both depositors and speculators. If a securities bank failed, the Fed might need to rescue it to protect the parent bank. In other words, the government might have to protect speculators to save depositors.

— Ron Chernow, The House of Morgan, 1990, pg. 375. (Emphasis added)

 

The repeal of Glass-Steagall was passed by Congress and signed into law by President Clinton in 1999.

The arguments made to repeal the act were primarily

1. Depository institutions will now operate in “deregulated” financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.
2. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.
3. The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them – by diversification.
4. In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation

Emphasis added

10 Worst Marketing Blunders of 2009

1) NBC GOES ALL LENO ALL THE TIME

Edsel … New Coke … Lenovision.

NBC has joined the immortals of marketing stupidity. This year the molting peacock network and president Jeff “Have They Fired Me Yet?” Zucker decided to turn five of the primest pieces of prime-time real estate — the hour between 10 and 11 PM from Monday through Friday — into the Jay Leno hour.

The result? A 28% drop in viewership (through mid-November). This has not only killed network revenues but done in affiliates who have no lead-in for their late news casts.

Despite this, Jeff “10% Of Americans Are Unemployed and I’m Not?” Zucker recently said that all is going according to plan. “Right now, in terms of its performance on the television network, at NBC, in terms of ratings it’s doing exactly what we thought it would do.” Comcast recently bought NBC in what must have been an attempt to copy the government’s cash for clunkers program. Comcast shareholders can now only hope they are being lied to. The worst case scenario is that Mr. Z believes what he is saying.

On the plus side:

1. It is now possible to buy every ad slot during the Leno show for less than the cost of a house in Detroit.
2. The federal witness protection program is using guest slots to hide people.

2) TIGER, TIGER BURNING BRIGHT

(Originally #9 — Who knew?)

Because I have a really limited imagination I thought the big celeb marketing mishap story of the year would be Michael Vick’s failed attempt to become a spokesperson for PETA. Then along came Tiger who prefers women with bad nose jobs to the Swedish bikini model he is actually married to. The story broke on Nov. 27th, when Mrs. Woods apparently decided to prove her own golfing expertise. This was unfortunate for Accenture which two days earlier had kicked off its annual Tiger campaign. A print ad which ran in the Nov. 30th Wall Street Journal featured Tiger Woods walking in the rough under the headline: “The road to high performance isn’t always paved.” And watch out for the trees and fire hydrants. Accenture has since declawed its Tiger connection.

UPDATE: File this under “Pull the other one, it’s made of wood.”

“We decided several months ago to discontinue Gatorade Tiger Focus, along with some other products to make room for our planned series of innovative products in 2010,” Gatorade spokeswoman Jennifer Schmit said in an e-mailed statement.

3) BANKERS CUT BONUSES, INCREASE SALARY & BLAME JESUS

First the banking industry made a big show of cutting the obscene bonuses it was paying itself for going on the dole. Meanwhile they hoped no one would notice the allegedly eliminated bonuses were now being paid as plain old salary.

But wait … that’s not all!

Apparently still feeling that their efforts to destroys the economy were still underappreciated, bankers started claiming Jesus wanted them to do it.

“The injunc­tion of Jesus to love others as our­selves is an endorse­ment of self-​interest,” Goldman’s [inter­na­tional adviser Brian] Grif­fiths said Oct. 20, his voice echo­ing around the gold-​mosaic walls of St. Paul’s Cathe­dral, whose 365-feet-high dome towers over the City, London’s finan­cial dis­trict. “We have to tol­er­ate the inequal­ity as a way to achiev­ing greater pros­per­ity and oppor­tu­nity for all.”

How much LSD do you have to take to interpret Scripture this way? However much it is, it is certainly being passed out at all the best financial institutions. Two weeks later, Barclays CEO John Varley spoke at the venerable St. Martin-in-the-Fields and tried to wrap the Bible around his bonus.

“There is no conflict between doing business in an ethical and responsible way and making money. We make our biggest contribution to society by being good at what we do. Profit is not satanic.”

I guess it all depends on who gets to determine how we define ethical and responsible. Perhaps Varley could have gotten away with this specious argument had he not added this gloss to the text after the service: “Is Christianity and banking compatible? Yes. And is Christianity and fair reward compatible? Yes.” (Not a good sign when a banker can’t even get his verb and subject numbers to add up.) Hey John, can we parse the word “fair” for a moment?

I believe the renowned 20th century theologian Ray Price put it best when he asked, “Would Jesus wear a Rolex on His television show?”

4: GM EXPLAINS AWAY ITS “LITTLE PROBLEM”

In the face of the greatest single corporate collapse in the history of the world, GM rolled out an ad that inadvertently explains the company’s failure.

It is a veritable symphony of weasel words.

Let’s be completely honest, no company wants to go through this.

By the end of that first sentence it is clear this ad has no intention whatsoever of living up to that initial clause. You can tell because the final pronoun is never made specific. That “this” covers billions of sins. It implies we all know what has happened without saying what that was. It is everything to everyone and thus means nothing. Is “this” an utter failure of leadership? Or is it an inability to have even the vaguest understanding of the needs of the marketplace? Sadly, I suspect “this” is “an economic calamity no one could have foreseen” – the preferred phrase of everyone from Alan Greenspan to, well, the Detroit-based car makers. There is no taking responsibility anywhere in this ad just as there has been no taking responsibility at GM for decades. (Read more here)

5) VOGUE: BLACKFACE IS THE NEW BLACK

The October issue of French Vogue had a photo spread of the very Caucasian Lara Stone painted head to toe in dark make-up. Vogue went with the old “I’m sorry if you found my words insulting” defense and told the Daily Mail “it was unaware it had caused offence, but said it could not give any further comment.” (Worth noting: Italian Vogue’s issue for the same month was filled with actual Black women.) In a keeping up with the KKK move inflight magazine EasyJet ran a photo spread featuring brooding generic models dressed in black POSING IN FRONT OF BERLIN’S HOLOCAUST MONUMENT.

Fortunately for me marketers just can’t seem to figure out that Nazi = Bad. This years examples:

• A wax museum opening in Thailand put up posters of mass murder Hitler with a slogan that said: “Hitler is not dead.”
• Two German coffee companies ran (and then pulled) an ad campaign featuring a slogan almost identical to one used at Buchenwald.
• Red Bull marketing mag calls Werner von Braun a “hero”

LATE BREAKING STUPIDITY UPDATE: NYT runs gift guide with special section devoted to:

“Somali fashion, do-it-yourself henna kits, children’s books that draw inspiration from the lives of Barack Obama and Sonia Sotomayor: it’s not hard to find gifts created for and by people of color this holiday season.” (emphasis added)

Why it’s almost like they’re real people!

6) CHOCOLATES SHAPED LIKE PRESIDENT OBAMA & MORE

CandyExpress said its commemorative Barack Obama heads would only be available for a limited time, unfortunately it wasn’t limited enough. Off the top of my head I would say there are three things Mr. Obama should not be used to advertise: Chocolate, fried chicken (a German company did it), watermelon (that’s a yet). However, the Russians came up with a bunch of things I’d never thought of. They used our President to advertise a tanning salon, a dental clinic and pre-packaged ice cream with the slogan “Everyone’s talking about it: dark inside white!” The bars have a chocolate-flavored center embedded in a layer of vanilla.

However these are just idiocy, the sheer stupidity award goes to Beanie Baby maker Ty. First they decided to sell two new dolls named Sweet Sasha and Marvelous Malia. Then they tried to deny they were named after America’s First Kids.

“[We] chose the dolls’ names because “they are beautiful names,” not because of any resemblance to President Obama’s daughters, said spokeswoman Tania Lundeen. “There’s nothing on the dolls that refers to the Obama girls,” Lundeen said. “It would not be fair to say they are exact replications of these girls. They are not.”

Sorry dear, but in order to get away with a lie like that you have to be a bank.

7) STUPIDITY? THERE’S AN APP FOR THAT

The word of the year really should have been app. The ubiquitous iPhone has spawned an industry of companies trying to market their wares by providing allegedly useful and/or humorous apps. To paraphrase Pogo, this confronted Pepsi with an insurmountable opportunity. The company released an app called Before You Score for its Mountain Dew AMP brand. The app gives you 24 different types of women (sorority girl, etc.) and offers “appropriate” pick-up lines for each type and other similar information.

Not to be outdone, LawFirms.com, a legal referral site, decided to get attention with a campaign featuring the (fictitious) app iCoyote. It “packs all of the features of a real immigrant smuggler into the iPhone. Using GPS, navigate through the patrol packed desert without worrying about that pesky Border Patrol.”

The app included a variety of features such as:

• iWife. It “will take care of finding marriage prospects for you. Aggregating and analyzing data from a variety of online sources [to] match you up with only the most promising US Citizen candidates.”
• iLawyer. “Homeland Security is Cracking down. Not to worry. With iLawyer, you can find an attorney to convince the immigration court to grant Asylum Protection. A Green Card is a finger swipe away.”
• Weather Monitors. “The desert can get hot, and trying to cross it when it’s 120 degrees is not fun. Get up-to-date weather forecasts to pick the right time and ensure your trip to the US is comfortable and fun-packed.”
• City Statistics. “San Antonio? Albuquerque? Tucson? San Diego? Not sure which is best? Get unemployment statistics, current average wages, cost of living expenses and more. Get the job you want, at the right wage, tax free!”

8 AMERICAN GIRL SELLS “HOMELESS GIRL” DOLL

Your child can learn that the homeless are just like real people once you spend $95 to buy her a “less fortunate” playmate for her other American Girl doll(s). The latest addition to the American Girl line of how-do-you-justify-it-ly expensive dolls is Gwen Thompson. Ms. Thompson

and her mother Janine fell on hard times when her father lost his job; they later lost the house as they were unable to keep up payments. Soon after, Gwen’s father left them and they became homeless the fall before the start of the book’s events. Initially, Gwen’s mother has them live in their car until the winter comes; she then takes them to Sunrise House, a place for homeless women and children. Sunrise House helps them get on their feet and eventually get a new apartment.

And should you also want to teach the kid that the disabled are people too, American Girl also sells a wheelchair for $30.

9) KFC UNDERESTIMATES OPRAH’S POPULARITY

Why would you pay to have Oprah endorse your product if you didn’t know what the result be? In May the chain formerly known as Kentucky Fried Chicken paid Ms. Winfrey to discuss its new grilled chicken on her show. (This is part of an ongoing effort to rebrand KFC as someplace that serves something besides FC. By the time it’s over KFC will be Rhode Island Clam Shack. But I digress.) In addition to giving product to her audience — and how pissed were they? Other folks got a new car and they get a food experiment – viewers could go to a website and download a coupon for up to four free two-piece chicken meals with two sides and a biscuit. If there’s one thing the US loves more than Oprah, it’s Oprah and free food.

You’ll never guess what happened. OK, so maybe you will.

Several bajillion people downloaded the coupon and sprinted to the nearest KFC. Well, the food disappeared faster than a dollar bill on the floor of the Senate. As a result somefranchisees started refusing to accept the coupon, some told people the promotion was over for the day, some quickly pointed to the “while supplies last” clause, the more creative said that coupons with barcode numbers ending in “1234” are not valid. Look closely at the barcode below to see what that meant.

All this brought new meaning to the chain’s horrible new tagline: “Unthink What You Thought About KFC.”

Another chain, El Pollo Loco, moved smart and fast and sent out a twitter saying they’d accept the coupons on Mother’s Day. Soon Oprah was having to apologize for the stupidity and KFC issued rain checks to the disgruntled.

All of which goes to prove that whatever you have to pay Oprah, the ROI is REAL!

10) (tie) BLACKWATER, NIGERIA & SWINE INDUSTRY LAUNCH REBRANDING EFFORTS

• In an attempt to change all the nasty connotations that go along with being mercenaries, Blackwater Worldwide changed its name to Xe. That’s pronounced zee, as in “zee idiots in marketing thought of it.”

Blackwater president Gary Jackson said in a memo to employees the new name reflects the change in company focus away from the business of providing private security. “The volume of changes over the past half-year have taken the company to an exciting place and we are now ready for two of the final, and most obvious changes,” Jackson said in the note.

That exciting place seems to include a lot of lawsuits.

• Tired of being thought of as the world’s foremost manufacturer of email con jobs, Nigeria decided to tackle it’s massive corruption problems with that most modern approach: Marketing. Its new slogan: At least we’re not AIG.

“At international airports, in trains, in shopping malls, and almost everywhere, every Nigerian is a marked person,” Dora Akunyili, information minister and self-styled chief image maker said at the launch of the re-branding campaign this week. “We are pulled aside for questioning. We are seen as potential drug pushers or fraudsters. We are unfortunately denied the benefit of the doubt.”

• Swine flu is no laughing matter. Especially if you’re the American Pork Association. They went into overdrive screaming about how it was hurting their sales and enlisted Iowa Sen. Tom Harkin who constantly referred to the “so-called swine flu.” Unfortunately humor trumps branding every time. Thus we got headlines like:
  • Pork Industry Has Beef With Swine Flu (NPR)
  • Swine flu not kosher in Israel (Reuters)

“We will call it Mexico flu. We won’t call it swine flu,” Deputy Health Minister Yakov Litzman, a black-garbed Orthodox Jew, told a news conference Monday, assuring the Israeli public that authorities were prepared to handle any cases.

CIO writer and friend Al Sacco came up with this: Swine flu isn’t a scary enough name. It needs a slogan, too: “Pork Plague, the (Other) White Death,” for example.

DISHONORABLE MENTIONS

AMAZON DELISTS GAY AND LESBIAN BOOKS

The online retailer blamed an “employee in France” for a “software glitch” which oddly delisted gay and lesbian themed books from its search listings. (Example: Annie Proulx’s Brokeback Mountain vanished, but not her book The Shipping News in which all the sex is hetero.)

Amazon managers found that an employee who happened to work in France had filled out a field incorrectly and more than 50,000 items got flipped over to be flagged as “adult,” the source said.

CRAIGSLIST CEO SAYS SITE HAS NO SEX RELATED ADS

“I would not describe any section of our site as ’sex related,’ ” [Craigslist CEO Jim] Buckmaster wrote in response to a series of e-mailed questions from the Globe. He acknowledged that Craigslist offers an “erotic services” section that should not include more than “legitimate escort services, sensual massage, exotic dancers, etc.,” but said that offers to exchange sexual favors for money are “strictly prohibited” and removed from the site.

SPECIAL PENGUIN OF IRONY CITATION:

THE WISCONSIN TOURISM FOUNDATION
had to change its name to the Tourism Federation of Wisconsin

BONUS: A few other totally wrong products from the year

• Hanah Montana brand Cherries,
• Linger, mints for your lady bits all but guaranteed to cause a yeast infection.
• Godfather-branded Italian organic vodka
• Starbucks instant coffee – the exact opposite of everything the brand stands for.

New reg lets banks ignore actual value of “underperforming” loans

It is only fitting that on Halloween the Federal government is increasing the number of zombies among us.

Federal bank regulators issued guidelines allowing banks to keep loans on their books as "performing" even if the value of the underlying properties have fallen below the loan amount.

The rationale?

While CRE (commercial real estate) borrowers may experience deterioration in their financial condition, many continue to be creditworthy customers who have the willingness and capacity to repay their debts. In such cases, financial institutions and borrowers may find it mutually beneficial to work constructively together.

Nothing inspires confience in me like the phrase “financial institutions and borrowers may find it mutually beneficial.” Especially since banks are not required to only apply this rule to “creditworthy customers who have the willingness and capacity to repay their debts.”

I really can’t top what Doug McIntyre wrote at DailyFinance.com:

The FDIC appears simply to be taking losses that would be incurred in the normal course of business and pushing the true accounting for them into the future. It is to the political benefit of Washington to make it appear that the banking sector is getting better. It also probably helps the FDIC, which is essentially insolvent, from having to come up with billions of dollars to insure deposits at failing banks.

Some can argue that this regulation just does for commercial real estate what had already been done for home mortgages. In April, the Financial Accounting Standards Board approved a new set of rules allowing financial firms to fiddle with how big their real-estate losses are. (New accounting rules let bankers set the value of their own toxic assets)

When I use a word," Humpty Dumpty said in rather a scornful tone, "it means just what I choose it to mean – neither more nor less.”

Bank fails after taking “Jesus saves” literally

Riverview Community Bank of Ostego, MN, whose founder said God told him that He “would take care of the bottom line,” was closed by the FDIC last Friday.

Chuck Ripka, one of the bank’s founders, once told the Star Tribune that God spoke to him and said, "Chuck, if you pastor the bank, I’ll take care of the bottom line." Ripka and his staff would pray with customers in the bank’s Otsego branch and even at the drive-up window. (A story I once heard about not mixing money lenders and temples suddenly comes to mind.)

Seems the Good Lord didn’t tip Mr. Ripka to the fact that home prices do not always head toward Heaven. The bank was an aggressive real estate lender and at one point had the fourth-highest concentration of real estate loans-to-capital of any community bank in the Minnesota. Riverview’s mistakes weren’t limited to bad loans it seems. Earlier this month it had reached an agreement with the Fed to cease paying dividends and correct violations of law spelled out in a May letter from the Fed. The order didn’t identify what laws were broken.

 

(And speaking of banks in need of divine intercession, check out: Citigroup’s "Hail Mary Pass": How To Know Citigroup Is In Serious Trouble)

Why is Citi still in business?

Last week saw some quite impressive accomplishments, even by Citi’s august standards. In just a few days it tried to come up with a new way to overpay its investment bankers and traders, then it had to remind its staff NOT to accept undocumented mortgages and finally its Japan operations were shut down because of money laundering.

Woot!

Last Tuesday, Citigroup walked into a feces storm entirely of its own making by announcing it would raise salaries by 50% to offset cuts in bonuses.

To be fair to Citi, they are taking (well-deserved) crap for the entire industry on the salary issue. BofA, Morgan Stanley, UBS and others are also trying to dodge the bad PR when huge bonuses are awarded following huge losses. So now instead of bonuses for bad performance execs will just get a huge salary for bad performance. It’s all about retention – or so Citi would like us to believe. Quote from the NYT: “Citigroup executives are so eager to keep employees from fleeing, that in some cases, they are offering them guaranteed pay contracts.” Well, given that those contracts are being paid for with $45 billion of US taxpayer debt who can blame them. Citi is once again free to play with someone else’s money and are being just as responsible as they were the last time. BTW, the idea that these raises are going to the rank-and-file is absolute hogwash. As Alphaville notes, “the biggest increases will go to investment bankers and traders.”

Also on Tuesday, Citi temporarily stopped buying new loans after “discovering” it was missing property appraisals and documents showing borrowers’ incomes.

The discovery came in Citi’s correspondent division, which buys loans from banks and independent mortgage firms, and was responsible for about half of the bank’s $115 billion in mortgages last year. Two great quotes about this:

“There remain key areas that fall short of our quality- control process. We ask you to review your processes and join us in this effort to collectively address these areas of concern.”  — Brad Brunts, a managing director at the bank’s CitiMortgage division.

And this from an analyst

“It is better to pull people off the line, and have a thorough re-education of what goes into a loan, so they can come back and do this the right way.”

Not a good sign when you have to re-train people processing mortgages on the most basic elements of how to do their jobs. Are these some of the folks being offered those guaranteed contracts?

• Finally, on Friday Japan ordered Citi to halt the marketing of all financial products to retail customers for a month because of bank “failed to implement sufficient measures aimed at preventing suspicious transactions, including money laundering.” 

This really takes the idea of not verifying income to a new level.

RealityFrame’s comment about the raises could really be applied to pretty much everything the bank touches: Anybody want to dispute that those banksters aren’t indeed the "best and the brightest"?

Easy way to tell truth from spin on fixing the banks

Originally ran at BlownMortgage

There’s way more chaff than wheat in the air when it comes to understanding what’s wrong with the bank. Because of this it can be easy to get caught up in jargon and sound-bites and lose track of what the issues really are.

Two National Public Radio entities are doing a superb job at managing the noise-to-signal ratio. One is the show This American Life and the other is the blog/podcast Planet Money (the Planet’s pieces are also heard on regular NPR news shows). The two shows frequently team up and their latest look at the the big picture – entitled Bad Bank — is particularly worth listening to.

In the episode, Adam Davidson and Alex Blumberg explain in an easy-to-understand-without-being-stupid way exactly what went wrong. They also make a strong case for some very simple solutions. Not fun. Not easy. Just simple. These solutions are simple enough that it is also easy to see exactly why no one in power is yet willing to initiate them.

Alex Blumberg: If you want to understand this crisis right now, this banking crisis, you need to understand this one thing. And it’s one thing, Adam, that the mainstream media is afraid to touch.
Adam Davidson: They’re afraid because they think it’s really boring.
Alex Blumberg: Right because, what this central thing is, this thing that we need to discuss right is a bank balance sheet.
Adam Davidson: But please, do not despair, because we think we’ve come up with a way to explain this to you, and we actually think it will be pretty enjoyable. So, to begin, let’s imagine the simplest bank in the world. I would like to call it Adam’s Bank.

The pair then go on to explain the basics of mortgages and how banks work and make a profit in an amusing and interesting way. They do this by using an imaginary mortgage on an imaginary dollhouse and with the help of various experts like Columbia Business School professor David Beim.

Alex Blumberg: David Beim is saying, you don’t want to mark it to market. Mark to market, that’s another phrase you might have heard. And it applies to exactly the situation Adam is in right now. He’s got a dollhouse on his books for 100, but if he had to sell it now, he could only get 50 – that’s the market price, what he could get right now. Marking it to market means Adam would have to enter the market price – 50 dollars – or 20 dollars – or whatever it really is – into his books.
BEIM: And the bankers have all been saying ‘please don’t make me do that,’ because if you do, I’ll be declaring bankruptcy. If I show all those, the reduction from 100 all the way down to 20, you’ve just wiped out my entire capital and more, I’m going to have to go to the government and say, close me down, I’m broke. And bankers find that hard to do. and furthermore, regulators don’t want it to happen to all the banks at once. Certainly not all the big ones.
Alex Blumberg: Now obviously, in the real world, the assets that the banks have on their books are more complicated than dollhouses. But, if the banks had to sell them now, in today’s market, they’d almost certainly take a huge loss. A loss big enough to wipe out their capital and shut them down.

Also helping out is a former IMF economist named Simon Johnson and it is Johnson who lays it all out in language so clear even a politician, CEO or journalist can understand it.

JOHNSON: You know, what would the U.S. tell the IMF to do if this were any country other than the U.S.? If you covered up the name of the country, and just showed me the numbers, just show me the problems, talk to me a little about the politics in a generic way. With the financial system, you have a boom, and then the crash, what would the U.S. tell the IMF to do, I know what we would do, I know what the advice would be, and that would be, take over the banking system. Clean it up, re-privatize it as soon as you can.

Account for the bad debts, throw out the bad management, take the hit and move on. That really is the only way out of this mess. Until that happens – and it doesn’t matter if you call it nationalization or some other euphemism – nothing will change. Keep that in mind when listening to the chattering classes and it becomes quite easy to know when you are being lied to.

Shanty towns and bank runs: recession may be the optimist’s outcome

Before the fiddlers have fled
Before they ask us to pay the bill
And while we still
Have the chance
Let’s face the music and dance

Last March, the BBC ran a story about shanty towns springing up in the US.

At the time BoingBoing and those few others who saw it asked why we were learning about this from the UK media and not from the US media. Now, a scant six months later, the US press has paused from parsing porcine lipstick and noticed.

The relatively tony city of Santa Barbara has given over a parking lot to people who sleep in cars and vans. The city of Fresno, Calif., is trying to manage several proliferating tent cities, including an encampment where people have made shelters out of scrap wood. In Portland, Ore., and Seattle, homeless advocacy groups have paired with nonprofits or faith-based groups to manage tent cities as outdoor shelters. Other cities where tent cities have either appeared or expanded include include Chattanooga, Tenn., San Diego, and Columbus, Ohio.

We’ve already had a bank run in the classic sense and one updated for today’s world: Yesterday’s announcement that Putnam was liquidating a “$12bn prime money market fund because of a spike in redemption requests from clients.” Just because they have the money to cover this — as it appears they eventually will — doesn’t make it any less of a run.

Today the early headlines say Stocks soar at opening after gov’t rescue plan. Forgive me for thinking the markets are indulging in some irrational exuberance. We’ve seen this sort of response before. This is from the Wall Street Journal on March 19:

Stocks and commodities plummeted on Wednesday as the euphoria that carried equity markets to massive gains a day earlier gave way to nervousness that the broader U.S. economy hasn’t yet escaped the dangers of the credit crisis.

At some point we are going to see a huge impact from the Fed’s determination to once again deal with another issue by printing more money. Some commentators say this will simply mean an explosion in the size of the national debt. I wish that was all. The current crisis was created by pumping increasing amounts of money and credit into the economy, it is beyond me to understand why doing more of this will help fix it.  You know what they call it when you keep repeating the same behavior and expect different results, right?

I am not smart enough to determine if we are about to hit a period of inflation or deflation but I know something is going to happen and will keep happening until all the difference between the amount loaned and the actual value of assets comes into balance. (If you’re a debtor start rooting for deflation — it means any money you do use to pay off a debt will be worth less than the money you originally borrowed. A net gain, if not a happy one.)

As the year has gone along, I’ve tagged a number of items under Recession? What Recession? I can’t say they make for happy reading:

• Economists emerge from drug-addled haze long enough to say US will avoid a recession March 11, 2008 · 1 Comment Being high on crack seems to me the only plausible explanation for saying: “This is a tough call, but I will be very surprised if this thing actually precipitates into recession.”
• The horse having long ago left the barn, economists think maybe it’s time to close the door and declare a recession March 14, 2008 · 6 Comments The U.S. has finally slid into recession, according to the majority of economists in the latest Wall Street Journal economic-forecasting survey, a view that was reinforced by new data showing a sharp drop in retail sales last month. What part of the word Duh don’t you understand?
• No matter how many times it bounces, the cat isn’t getting any less dead March 20, 2008 · 2 Comments Has anyone else noted that we are no longer trying to avert a recession? Now the news stories all say that various actions are being taken in order to avert either a “deep” or “prolonged” recession. Expect to soon read about the steps being taken to end the recession without any formal announcement of its actually having begun. Of course, as M Horn likes to point out, the word recession has been redefined to a point of uselessness. Where it once meant “a decline in GDP for two or more consecutive quarters,” it now is a synonym for “the current mess.”

In March, when the BBC ran that shanty town story, it still seemed possible to have a reasonable disagreement over whether or not we were in a recession. Now the D word is in play. Soon we will be hearing that we are not in a depression and that we are trying to avert one. That is becoming the economic equivalent of promising to have the troops home by Christmas. As soon as you hear it, you know it’s a lot worse than anyone is willing to say.

The leading indicator of the “we are not in a Depression” meme came last week when Alan Greenspan — who is mostly responsible for the crisis — tried to put lipstick on this pig by saying, “First of all, let’s recognize that this is a once-in-a-half-century, probably once-in-a-century type of event.” Given that the Mississippi river keeps getting hit by floods that were once described as “once in a century” events, this is not a heartening phrase. Another troubling indicator is that the folks who decided what’s in the Dow Jones Industrial Average have replaced the now defunct AIG with Kraft. I suspect the real problem with leaving AIG is that it would have made the Dow actually reflect the economy.

Someone once asked Tom Lehrer why he stopped writing those wonderful, witty songs about the news. Having turned out anthems on topics from pollution to nuclear proliferation, Lehrer said he had begun to feel like a citizen of Pompeii being asked to say funny things about lava. Without having matched Mr. Lehrer’s accomplishments, I can certainly empathize. I have been saying for the last seven years that the real problem with the Bush administration is that it took all the fun out of being able to say “I told you so.” Unlike Mr. L, I refuse to leave the scene — especially when we are in such a target rich environment.

There may be trouble ahead
But while there’s moonlight and music
And love and romance
Let’s face the music and dance

While many people have recorded this song — but not Roxxy Music, for some reason — I still prefer the original by Fred Astaire. It’s on the soundtrack to Follow The Fleet. A happy little musical by Irving Berlin that was made into a movie in 1936.