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Who is Meredith Whitney?

Back in April I wrote about the failure of Countrywide and Indy Mac and Washington Mutual. At the time I was accused of glossing over Senator Chuck Schumer’s role in bringing down Indy Mac and the whole financial industry. The real story is long and more complex than simply Chuckie did it.  It was in late June 2008 when Chuck Schumer was making noise about Indy Mac. But what about months earlier? What about the little-known analyst who is stuck in the bowels of CIBC World Market and had the nerve to write the truth? She was specifically writing about Citigroup, but could’ve been writing about any of the large Wall Street firms. Their problems were similar.

She wrote:

Our thesis is simple. We believe in the near term, Citigroup will need to raise over $30 billion in capital through either assets sales, a dividend cut, a capital raise or a combination thereof. We believe such a catalyst will pressure the stock significantly lower and accordingly downgrade to sector underperformer from sector performer as of October 31.

Citigroup stock opened at $42 per share on October 29, 2007. This was a Monday. By Friday, after Meredith Whitney released her stock analysis, the stock dropped to $38 a share. Within weeks the stock was trading at $30 a share. Nearly a third of its value had been lost. The Dow Jones industrial average lost more than 350 points over $369 billion were lost.

Citigroup is currently a shadow of its former self. Its stock price and selling somewhere around $3.50. Its CEO, Chuck Prince resigned less than a week later. Interestingly, Prince took the CEO position in 2003. He was being paid $25 million a year and Citigroup stock did nothing besides lose value. So, for doing less than nothing, he got a severance package worth $140.1 million.

So, I guess, this puts Indy Mac into a little bit better perspective. Stanley O’Neal, CEO of Merrill Lynch, resigned in October of 2007 after reporting the largest loss in ML history. Citigroup gets called out by Meredith Whitney in late October 2007. They actually had to slash their dividend two weeks after her announcement, just as her analysis predicted. Meredith Whitney is now looking like a guru on Wall Street. The underlying problems of Wall Street, though, should have been seen by everybody. Everybody jumped into the pool of toxic mortgage derivatives. Whether Meredith Whitney was lucky or not isn’t the point. She was right more times than not in 2007 and 2008. She had the strength and the courage to stand up and say, “The Emperor has no clothes.” For this she should be applauded.

By |2010-08-23T17:51:14-04:00August 23rd, 2010|Economy|Comments Off on Who is Meredith Whitney?

Did Senator Chuck Schumer cause IndyMac to fail?

You remember what happened, don’t you? Everything started to unravel late in 2007. The first one who was found without a chair when the music stopped was Countrywide. Bank of America was able to buy Countrywide for $4 billion (a stock swap) in early 2008. Just a year earlier Countrywide was worth over $50 billion. Countrywide’s founder and CEO Angelo Mozilo (Time wrote that he was one of the top 25 people to blame for the financial crisis) was once the darling of Wall Street. He ended up being charged by the SEC for taking more than $139 million in profits. It was Countrywide who first introduced us, the American people, to credit default swaps and CDOs. In a wonderful bit of irony, IndyMac was founded in 1985 by David Loeb and Angelo Mozilo as a means to collateralize Countrywide Financial loans that were too big to be sold to Freddie Mac or Fannie Mae. In 1997, IndyMac (Independent National Mortgage Corporation) was spun off as a separate company. I mention all this about Countrywide because we’re going to see this exact same cycle again with IndyMac. IndyMac, Washington Mutual and Countrywide were birds of a feather. Each company pushed subprime mortgages. Each company pushed adjustable-rate mortgages. Each company packaged the mortgages into securities which could be sold to Wall Street.

Case: 80-year-old retiree in Savannah, Georgia, loan in 2005 to build a modular house. The mortgage was approved by IndyMac. They approve the application based on the applicant’s Social Security income, which was written down as $3825 per month. The only problem is the maximum social security benefit is less than half this amount.

In late June of 2008, Senator Chuck Schumer released a letter which was volatile to say the least. Unfortunately, I’ve been unable to find the original letter on the Internet. I have been able to find portions of the letter quoted in several articles. (If someone is able to find the letter please send me the link.) In a statement the senator mentioned that he was “concerned that IndyMac’s financial deterioration poses a significant risk to both taxpayers and borrowers.” He went on to say that IndyMac “could face a failure if prescriptive measures are not taken quickly.”

Let’s back up and look at what the Los Angeles Times wrote in January of 2008. (This was six months before Schumer opened his yap.) This particular article looked at adjustable-rate mortgages. The author noted that adjustable-rate mortgages were usually given to small business owners, self-employed professionals and salespeople with consultative finances and fluctuating earnings. The article notes that adjustable-rate mortgages were given out by Countywide and IndyMac to people who previously would not qualify. Adjustable-rate mortgages usually have a “teaser rate” for around two or three years. So loans written in 2005 and 2006 were now resetting at their higher interest rate in 2008. The article noted delinquency rates in some parts of California of 13-15%. (One particularly egregious variation of adjustable-rate mortgages for something called an option adjustable-rate mortgage. This mortgage gave the homeowner three choices at the end of every month — pay principal plus interest, pay interest only or pay less than interest-only and allow the principle to increase.) So, in January, the Los Angeles Times called out Countrywide, which had just been bought by Bank of America, and IndyMac by name.

IndyMac Stock Price

A report that was published by the Department of Treasury after IndyMac’s implosion shows us the magnitude of the problem. According to this report, by May 2005, officials at IndyMac were aware of problems with their adjustable-rate mortgages. This market completely collapsed in 2007. The bank could no longer sell its mortgage securities because there were no buyers. By May 2008, over 12% of these loans were greater than 90 days in delinquency. Another reason for IndyMac’s failure lies in its lack of deposits. The bank did not have many retail branches. Therefore there were many customers opening up savings accounts and checking accounts. IndyMac had to rely on Federal Home Loan Banks and brokered deposits for funds. Basically, as I understand it, this is simply another way to borrow money. At one point in 2006, IndyMac had over $9 billion in these loans. Finally, every bank is supposed to have a certain amount of cash on hand to balance out possible loan losses. In early 2008, IndyMac hired an outside accounting firm and the firm showed that IndyMac did not have enough cash on hand. As if this wasn’t bad enough, Standard & Poor’s and Moody’s decided in April 2008 to re-rate the number of mortgage-backed securities (before this time they simply rubberstamped many of the securities that were brought to them by J.P. Morgan and Goldman Sachs). This included over $160 million in mortgage-backed securities that Indy Mac was holding, thus lowering IndyMac’s capital ratio (when it rains it pours). Around the same time, IndyMac announced its third consecutive quarterly loss (see graph).

I think it’s been pretty much established that the Office of Thrift Supervision ignored warning signs. Had they acted in a timely manner, the implosion could have been prevented. There is one little side note that I thought was interesting. The Office of Thrift Supervision allowed Indy Mac to accept an $18 million deposit from its holding corp. and backdate that deposit in order to help balance its books. This transaction happened on May 9, 2008. On May 6, 2008 the FDIC told the Office of Thrift Supervision that Indy Mac was “close to failing and needed new money quickly.” (Some at OTS were forced to resign because of IndyMac.)

So, I think that after further investigation it is clear that IndyMac was going to fail with or without Chuck Schumer’s help. Did Senator Chuck Schumer drive the final stake through the heart of a dying Rasputin who already been shot, poisoned and burned? Yes, I think that’s a fairly accurate metaphor. On the other hand, I have clearly shown that IndyMac was dying. Federal regulators were going to have to step in soon. In hindsight, they should’ve stepped in sooner. IndyMac was going to die with a without Chuck Schumer’s help. Their business model simply could not stand the catastrophic failure of the subprime mortgage market.

By |2010-04-20T22:03:47-04:00April 20th, 2010|Business, Economy, Senate|9 Comments

Where are the Liberals with a backbone?

Amendment IV

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

You know, I’m tired. I’m tired of liberals acting like conservatives. Now, as I flipped through the liberal handbook I can’t find anywhere where supporting spying on Americans is a liberal ideal. So, can somebody explain to me, why this new FISA legislation is good for us, liberals, or good for the country. There is so much about its domestic spying program that we know nothing about.

Remember back in 2006/2007 the Bush administration blocked all of our efforts to investigate this program. The Office of Professional Responsibility in the Department of Justice began an internal investigation which was thwarted by the Bush administration. This office was denied security clearance which meant that their investigation ground to a halt. How does this legislation help us investigate what happened?

Over the last three years a number of liberal senators have stood up and denounced the domestic spying program including Senator Jay Rockefeller, Senator Chuck Schumer and Senator Patrick Leahy. These three senators have been in the Senate and public service for a long time. Where are they now? Senator Rockefeller has gone out of his way to support this FISA legislation. Why? What is he seeing in this legislation that we aren’t or is he playing politics? All of our so-called liberal Democratic senators need to stand up and tell us where they stand on this issue and why.

I have avoided criticizing Barack Obama. But now both he and Hillary Clinton need to be taken to the woodshed. Barack Obama has spoken out strongly against domestic spying in the past but yet he is going to support this legislation which does nothing to protect our civil liberties. Hillary Clinton, who has nothing to lose, and everything to gain from opposing this legislation, has been completely and totally silent on this issue.

I’m sorry, I do not buy the argument that you are soft on terrorism just because you don’t want the president to listen in on every one of your conversations. I understand that this is an issue that does not raise the ire of the American public but there are principles. Long-standing principles against unnecessary government intervention (I thought that Republicans wanted a hands-off government — I guess it depends) should be upheld. We cannot depend on winning the White House in November or advancing our majorities in the House and the Senate. None of that may happen.

There’s no better time than the present to stand up against telecom immunity and a bill that is deeply flawed. It is time for progressives to stand up and support the Constitution and support the American people. We need to find out what happened (where’s Alberto Gonzales and why isn’t he in jail for something). We need to find out what laws were violated. We need to clip the wings of the unitary executive. None of this can wait until November.

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