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April 17, 2010
Issue 92  -  Recovery is Weak
and Will Fail 
The "recovery" that is being talked about is not all it's cracked up to be.  Most, if not all of the gains, have been generated by outrageous federal government spending.  This chart from the Market Ticker shows the true effect of deficit spending:
What this chart shows is an alarming trend.  The gross domestic product of the country would now be NEGATIVE 10% without the federal deficit spending.  This is an incredible statistic.  We would be in a dramatic depression without government debt spending.  Unlike the federal government, the states and cities can't print their own money.  It makes a difference: 
Los Angeles Likely To Exhaust Reserve Fund By May 10, To Be In The Red By End Of June

Submitted by Tyler Durden on 04/05/2010 16:48 -0500

Earlier Rick Bookstabber wrote a good piece on why with everyone focusing on ignoring the commercial real estate disaster, the muni market is the next thing to appear out of left field and stun everyone with just how bad things really are domestically (they are pretty horrendous in CRE too, and getting worse, but just because everyone is "aware" of this, somehow this is supposed to make things better). Rick's piece could not have come at a better time: LA's controller Wendy Greuel just announced that she expects LA's general fund to be "out of money" by May 10, and that LA will likely deplete all reserve funds by the end of Q2. Hold on a second: wasn't state Treasurer Lockyer saying just a week ago how Greece is so much worse than California? Isn't it ironic that according to the Controller of LA's biggest city, Cali may end up in a liquidity crisis sooner even than Greece. At least Los Angeles has undisputed access to the IMF - the only question is what shape the California austerity package will end up taking.
The LA Times reports:
Greuel alerted Mayor Antonio Villaraigosa and the City Council of the city’s dire financial situation after the head of the Department of Water and Power stated he would oppose sending $73.5 million in utility revenue to the city treasury. Interim General Manager S. David Freeman said the council’s vote to block a proposed electricity rate hike last week threatens to put the utility in a deficit.

Greuel urged the council and mayor to immediately tap the city’s reserve funds so that city has enough cash to cover payroll.

“This is the most urgent fiscal crisis that the city has faced in recent history, and it is imperative that you act now. That is why I am asking you to immediately transfer million from the city’s reserve fund to the general fund so I can continue to pay the city’s bills, and to ensure the fiscal solvency of the city,” Greuel said.
Councilman Greig Smith said the decision by the DWP had put the city in a “very risky” situation.
“Our reserve fund was already very marginal to begin with.  This could push it over the edge,” Smith said. “That would mean we would have nothing in the tank on June 30,” at the end of the fiscal year.
Smith said he could not envision a scenario in which the city could recoup that much money before July 1. Even additional layoffs could not be processed that quickly.  “The question is what are we going to do next? That I don’t know,” Smith said.
Is the California IOU market coming back? And what happens if the Federal government is opposed to bailing out the world's 8th biggest economy (somehow we really doubt this number is valid any longer), just like it was a year ago? We are looking at InTrade to provide the ever critical answers, as nobody else seems to be willing to discuss the unpleasant truth these days.
This is one of the largest cities in the world.  They are bankrupt.  California has one of the highest unemployment rates in the country and their housing market is still weak.  Even Obama house coupons can't lift the housing market out of the malaise.  This headline says it all:
LPS' Mortgage Monitor Report Shows Total Delinquent Loans 21.3 Percent Higher Than Last Year; Foreclosure Rates At Record High
Report Includes Data as of February 2010 Month-End
PR Newswire
JACKSONVILLE, Fla., April 12
The latest Mortgage Monitor report released by Lender Processing Services, Inc. (NYSE: LPS), a leading provider of mortgage performance data and analytics, shows that the total number of delinquent loans was 21.3 percent higher than the same period last year. Although the data showed a small 1.45 percent seasonal decline in delinquencies from January 2010 to February 2010 month-end, the national delinquency rate still stood at 10.2 percent. The report is based on data as of February 2010 month-end.
The nation's foreclosure inventories reached record highs. February's foreclosure rate of 3.31 percent represented a 51.1 percent year-over-year increase. The percentage of new problem loans also remains at a five-year high. The total number of non-current first-lien mortgages and REO properties is now more than 7.9 million loans. Furthermore, the percentage of new problem loans is also at its highest level in five years. More than 1.1 million loans that were current at the beginning of January 2010 were already at least 30 days delinquent or in foreclosure by February 2010 month-end…
This is going to continue for at LEAST another 3 years.  There is about 4 years of inventory hanging over the market.  With so many homeowners under water, foreclosures and short sales will be the order of the day.  Oh, and that government sponsored loan mod program?  We've got some problems:
SACRAMENTO (CN) - JPMorgan Chase instructed homeowners to stop making mortgage payments, as that was the only way to be considered for a loan modification, then repossessed their house when they followed the bank's advice, a couple claims in Federal Court. "I've seen this happen to so many people," their attorney said. "When they come in here to tell me their story, I can actually tell it to them." 
Faiz and Khadua Jahani sued Morgan Chase and its predecessor, Washington Mutual Bank, on their own behalf and on behalf of the public.
     "When they called the 800 number, they were specifically told that as long as they were current on their mortgage they wouldn't even be considered for a loan modification," the couple's attorney, Piotr Reysner, said in an interview.
     In their federal complaint, the Jahanis say they contacted the bank in December 2008 "to indicate that they were having trouble paying their mortgage and would like to discuss a possible loan modification."
     The Jahanis say the bank representative told them "that they would not work with plaintiffs at all because they were currently not in breach of their loan terms. Plaintiffs were specifically advised at that time to stop making payments for a period of three months, at which time defendants would consider a loan modification. Plaintiffs were specifically informed that as long as they were current on their mortgage payments, that defendants would not consider a loan modification. ...
     "Reasonably relying on the direction of defendants, plaintiffs stopped making their loan payments. Plaintiffs are informed and believe and thereon allege that defendants immediately reported to the various credit reporting agencies (Equifax, Experian and TransUnion) that plaintiffs were late on their mortgage payments. ...
     "On or about June 23, 2009, defendants sent a letter to plaintiff entitled 'Notice of
Intent to Foreclose,' indicating that plaintiffs were past due in their mortgage in the amount of $100.65 and that plaintiffs need to bring the account current within 30 days to avoid foreclosure proceedings. No Notice of Default accompanied the letter, nor was any Notice of Default ever served on plaintiffs."
     Months of correspondence between the Jahanis and Chase followed, with the Jahanis repeatedly sending Chase documents it had requested, and Chase repeatedly sending them letters claiming it had not received proper documentation and that their loan modification was "in jeopardy."
     The Jahanis say they called the bank to check on the status of their loan modification, and were told to disregard Chase's letters, that the bank "had in fact received all necessary documentation."
     Then in October 2009, the defendants sold their house at a trustee sale. The Jahanis say strangers came to their house and told them that "the property had sold at auction, that plaintiffs no longer owned the property and that they (meaning the unnamed persons) were interested in buying the house from the bank." (Parentheses in complaint.)
     The Jahanis say they immediately called Chase, which told them that their house "had not been foreclosed and that the people who were approaching the property were doing so illegally."
     The Jahanis say this insanity continued for months. They called the bank again in February 2010, and asked why their house was still listed as having been foreclosed in October 2009.
     Chase told them it was all a "mistake" and that the bank simply had not updated its records, according to the complaint.
     "During that same conversation, plaintiffs asked why defendants continued to accept mortgage payments from plaintiffs if the house had been foreclosed. Plaintiffs demanded to know where their payments were going and demanded a payment history from defendants. Plaintiffs further demanded to know why defendants' REO department had indicated that plaintiffs no longer owned the house and that it was now in fact owned by the bank."
     They say the bank rep, "Janet," "again reiterated that this was a mistake and that she would take care of it. Janet further claimed that she, at that moment, was sending e-mails and correspondence 'everywhere' within the company to rectify the situation and to please allow her 10 days to clear up the mess. The mess, in fact, was never cleaned up. Janet further promised in that same conversation that someone would review the file and get back to them within 10 days. No one did."
     The Jahanis add, "This was never resolved, as the Jahanis received tax documents indicating that their house had been acquired by the bank, even though they continued to send in mortgage payments."
     Their attorney Reysner said the Jahanis' story is all too common.
     "I've heard this story from many, many, many clients," Reysner said. "I've seen this happen to so many people. When they come in here to tell me their story, I can actually tell it to them."
     Reysner said it "makes no sense" for Chase to encourage its customers to put themselves in such an untenable position.
     "I don't know their motivation," the attorney said, referring to the bank. "I just know what happens. They get the person behind in their payments, which puts the bank into the position to foreclose, because as soon as you go late, the bank has the right to foreclose."
     The Jahanis demand general and special damages of $150,000 for breach of contract, fraud, predatory lending and violation of the Fair Credit Reporting Act.
     They also seek an order requiring Chase to return any money fraudulently collected from homeowners.
     "The goal is to hit them hard," Reysner said. "But it's also to try to get them to change their business practices."
Remember the video I linked about the banks benefiting from houses in foreclosure?  This is a prime example.  Shouldn't a homeowner who is doing the right thing by killing themselves to pay a too large payment, get relief?  Well the banks only get a tiny stipend if that happens.  Foreclosures are where the money is made, so that's what we'll continue to see.  Predictable. 
 "The Worst of All Worlds": Fannie and Freddie Losses "Can't Be Calculated," Posner Says
Posted Apr 12, 2010 12:50pm EDT by Aaron Task

Government officials want you to know the cost of the bank bailout is going to be around $90 billion, much less than previously feared. But there is, as The Wall Street Journal put it, "one glaring exception" to this otherwise welcome news: The optimistic tally doesn't include Fannie Mae and Freddie Mac.
Technically, that's two glaring exceptions, but let's not split hairs. The troubled mortgage giants currently enjoy an unlimited line of credit from Uncle Sam, and the CBO projects their investment portfolios -- stuffed with subprime and other toxic mortgages -- will suffer combined losses of $370 billion through 2020.
"I don't think it's time to celebrate [because] the losses inside Fannie and Freddie can't be calculated," says Kenneth Posner, author of Stalking the Black Swan. "Not only do we have those [CBO estimated] losses but we still have $5 trillion in mortgage-backed securities that they guarantee and $2 to $3 trillion in debt. All of this is potentially on the U.S. government's balance sheet until we figure out how to restructure these entities."
The GSE's business model is "broken" but their role in guaranteeing mortgages is still critical to the housing market, says Posner, the former head of Morgan Stanley's financial services research group. "Once they give their stamp of approval, those securities can then be sold and traded with great liquidity in the capital markets. If you shut that down right now, that would be counterproductive."
Instead of shuttering Fannie and Freddie and putting the nascent housing recovery at risk, he recommends auctioning the mortgage guarantee role to a group of large banks. "Make [banks] pay taxpayers for the right to issue those securities [and] let them do it with their deposits and shareholder equity."
Of course, that will be politically difficult given the populist backlash against the banking sector after the bailout bonanza of 2008-09, as we discuss in the accompanying video.
But big banks already enjoy the implicit backing of the U.S. government and this plan could potentially cut the official federal deficit by trillions of dollars, Posner says.
"Nothing is going to be easy right now," but maintaining the status quo "is probably the worst of all worlds," he says. "You have this broken business model that the government is operating as if Congress had appropriated $7 trillion for direct U.S. government involvement in the mortgage business."
Wow, what a shock.  The banks are going to be ok, but the albatrosses the American taxpayer got stuck with are giant stinking black hole vortexes which inhale billions of dollars.  Oh, and Freddie and Fannie are holding almost ALL of the mortgage market.  But the banks are ok, so don't worry....sheesh.... 
In case you thought I was exaggerating regarding Goldman Sachs being crooked:

Goldman charged with fraud over Paulson CDO trade

Shares of investment bank drop 13% on news of SEC lawsuit

By Alistair Barr, MarketWatch

SAN FRANCISCO (MarketWatch) -- The Securities and Exchange Commission on Friday charged Goldman Sachs Group Inc. and one of its vice presidents with defrauding investors by misstating and omitting key facts about a financial product related to subprime mortgages.

Now knowing what I know about Goldman working for the government, I'm a little suspicious.  Maybe there are a few honest people at the SEC, or maybe they strayed off the reservation too far, we can't be sure, we'll watch this close to see if it's all a ruse.  What this does confirm is that the big banks are crooks.  Like you didn't know....well in case you're still on the fence, or maybe on sleeping medication, take a look at this chart from Midas:
Look at that.  The stock was driven straight down right before the company issued stock options.......hmmmmmm.....just lucky I guess.  Why do these guys always get lucky?  Because their crooks, that's why.  But then again, the whole system is corrupt, look at this from Midas in regards to silver:
A major Wall Street firm has defaulted to two of their clients on delivery of mini-silver contracts which were supposed to be delivered in JANUARY. Mini contracts! Stay tuned on this one.

A mini contract in silver is only a thousand ounces.  If they are having trouble getting a couple thousand ounces, then things could get real interesting.  Last week I told of the story regarding a whistleblower who said the London silver market was rigged.  A lawyer went to the London Bullion Metal Association home page and tried to get a copy of the prospectus and rules.  There was no pdf version.  This is very unusual.  I've never seen a prospectus NOT be available in pdf format.  To make matter worse, the only way to get the document was by mail!  What is this, 1970?  The kicker to the whole thing was the charge....$350!  When I see all types of roadblocks thrown up to what should be a simple document (what product could be simpler than gold or silver) I get suspicious.

This whole recovery is a just another chapter in the fleece the taxpayer saga.  You take it in the shorts, and they run off the girl and the money.  What a country.  I'll finish this week with a video, which, if you haven't seen it, is a little hard to believe.  A congressman talking about Guam and his questions are.....shall we say....curious.  (thanks to my cousin Linda)

All right, I couldn't end on something that depressing.  I know it's funny, but this guy is RUNNING the country!  If that doesn't depress you than I don't know what will.  To pick you back up, here's a video you should watch if your ever feeling like the odds are stacked against you.  This guy persevered!  Have a great week!