Common Absurdities

Every so often, I try to envision how ridiculous this period is going to look to future generations. I have to say that I'm glad I have no children, because I can't imagine how I'd explain this to them in 20 years.

1. In 2004, representatives of the five largest investment banks, lead by Henry Paulson, the then CEO of Goldman Sachs, pressured/lobbied the SEC to neuter the net capital rule. This rule set limits on the amount of leverage that brokerages of investment banks could incur. The SEC caved and lifted the restriction on investment banks, who proceeded to acquire a plethora of debt. In 2006, Paulson was appointed Secretary of Treasury and held the position through the 2008 meltdown and resulting bailouts. Thus, the man most responsible for the September 2008 collapse was allowed to use government funds to transfer the consequences of his own wrecklessness to the taxpayers.

2. On 3/13/2009, Discover Financial Services sold $1,224,558,000 worth of 5% preferred stock to the Treasury, under the TARP program. (Yes, I know that TARP is so 2008.) Of course, DFS can follow the Citigroup precedent of gaming the program by converting the preferred shares to common at a premium, which removes the 5% return for taxpayers, dilutes the common share price, and eliminates TARP's principal repayment requirements.

As you can see below, if I want to borrow some of "my" money from Discover, I have to pay an APR of 8.49%.

Per a recently received amendment to my account terms, a late payment constitutes a default event which triggers a higher rate on the balance.

Thus, Discover Financial Services gets to borrow my tax dollars at a nominal rate of 5% (likely less) and lend it back to me at 8.49%. If I miss a payment, due to hardship caused by the current debt-orgy induced Depression, I then get charged up to 29.99%, because I couldn't return my tax dollars to Discover quickly enough. Call me a "wild-eyed Populist," but this is, yet, another absurd example of how the government has been entirely captured by corporate interests bringing me to my next point.

3. The recent 20% rally in equity prices is a Sucker's Rally, but not in the traditional sense. Since the announcement of the Treasury's public/private plan for screwing the taxpayer for the benefit of the banks, part IV, the DJIA has risen about 6%. This is despite continued high unemployment and China's central bank calling for a new reserve currency. In fact, all week long the gleeful media was foisting claims of a definitive bottom on the public. There is nothing economically positive about the Geithner-Summer plan, since it increases public debt over the long term and will further hamstring the taxpaying consumer whose spending has carried the economy for the last 8 years. Wall Street knows this, so what is the cause for celebration? The fact that we are 6 months into this disaster and the public has hardly acknowledged the blatantly corrupt wealth transfer mechanisms that Treasury has implemented on behalf of Wall Street. To add insult to injury, the Suckers are fueling this dead cat bounce, like all of the others, with their retirement funds and will be holding the bag, yet again, when the smart money cashes out.

Perhaps, I'm being too harsh on the general public, since these tumultuous times have caused folks to focus on more pressing matters. After all, Simon's incessant flirting with Paula is beginning to irritate Ryan, which can't be a sustainable situation.

Newsweek Gets It, Eventually

I suppose that late is better than never. On 3/21/09, Newsweek published a story regarding TARP recipients who made campaign contributions to Congress members after receiving bailout proceeds. I'd be shocked and outraged, had I not posted the same thing nearly a month prior: http://osrshortbus.blogspot.com/2009/02/i-bet-you-wont-hear-this-on-teevee.html.

Newsweek went on to state that lawmakers have temporarily ceased accepting TARP funded contributions, at least until it's been confirmed that the public is still braindead:

But House Democratic fundraisers have quietly passed the word that the party's campaign committee will resume accepting them [contributions]—but down the road, not right now. Said one fundraiser, who also requested anonymity, "These are treacherous waters."

It looks more like "treasonous waters" from here, although I'm sure this will fly under the radar, too.

Shattuck and the Enronettes Get a Payday Loan.

If you take nothing else away from this blog, heed this: Don't ever screw with Warren Buffet in matters financial. Never. Ever. Just don't do it. Really.

I came to this realization while looking at Constellation Energy's latest annual report. Constellation is the electricity provider of first and last resort here in Maryland. In 1999, they convinced the legislature to allow them to deregulate, but our rates were capped until 2006. As you might imagine, no real competition materialized, as was promised by Constellation in 1999, so they were able to reap the rewards of being a pseudo-monopoly via a 72% rate increase. Constellation's CEO, Mayo Shattuck III, used the profits to expand the Merchant Energy division of Constellation, which by all descriptions sounded like an Enron-styled energy trader. The outcome was readily foreseeable as evidenced in this excerpt from a 2006 Washington Post article regarding an aborted merger with FPL, ironically titled: Contrarian Shattuck Took Constellation To the Top.

"The biggest asset in these deals is the unregulated division and it is very clear, piecing together what's been said about this deal, that they will be using the two regulated utilities to basically underwrite their more risky but profitable merchant business," said Tyson Slocum, director of the energy program at Public Citizen. "What happens if their bets in the wholesale market turn sour?" Slocum said "I don't see anything that will shield customers of problems at the parent company." That could mean higher rates for consumers.

In August of 2008, the worldwide commodities bubble burst, causing prices to tumble. Constellation found itself with a hedge book that was deeply underwater, despite Shattuck's previous, Enron-like claims that they monitored risk closely. In fact, it might be more accurate to call it a speculation book because their derivative positions deteriorated sufficiently to make a credit downgrade a distinct possibility. In the event of a downgrade, Constellation would have had to increase its collateral under the terms of it's debt instruments. Unfortunately, Constellation couldn't borrow the funds required, forcing a fire sale. Enter Warren Buffet and his MidAmerican Energy Holdings Company.

On 9/18, MidAmerican tendered an offer of $26.50/share of CEG totalling $4.7B, with MidAmerican providing $1B upfront in exchange for preferred shares yielding 8%. This capital injection provided the liquidity required for Constellation cover its collateral obligations, essentially saving Shattuck and his ship of fools, but leaving Buffett as the new owner. On 12/17, Constellation declined MidAmerican's offer and accepted a more lucrative offer from Électricité de France (EDF) for 49.99% of Constellation's nuclear generating assets. Additionally, EDF wrote $2B in put options, expiring 12/31/2010, on unspecified generation assets and allowed Shattuck to transfer $700M in bad derivative bets into the joint venture between the companies. For very good reason, Buffet elected to terminate the agreement. Under MidAmerican's terms given in Constellation's 2008 10-k, they were required to provide the following consideration for breaking the deal:
1. $175M for a merger termination fee
2. 19,897,322 shares of common stock valued at $572.6M, which represents 9.99% of the outstanding shares.
3. $418M to make up for the 15.6M of common shares that couldn't be issued due to regulatory limitations.
4. $20M from 8% Interest on $1B in preferred stock for 90 days, until preferred converted to 14% Senior debt.
5. $5M from interest accrued on $1B Senior Note. Repaid 1/12/09.

Summing, Buffet received $175M+$572.6M+$418M+$20M+$5M=$1,190M=$1.19B for investing $1B for 115 days. Annualized that's a mindnumbing, breeches filling, 373%. Essentially, Constellation's shareholders would have been better off if Shattuck had taken the deed for Calvert Cliffs to the nearest pawn shop. Not to mention the 80% loss in value of the common shares that have been diluted by 9.9%, as a result of Shattuck's folly. That is a lot of screwing up, for any one person, yet Shattuck still has a job. Ultimately, the cost of Constellation's incompetence will be passed on to the captive ratepayers, since the Maryland Legislature has done little to stop them so far.

Easy Money from the Sewer

Despite a lifetime of being a cynical bastard, it wasn't until fairly recently, that I realized that corruption is tradable. For example, on 2/24 I posted about Citigroup's proposal to convert its TARP preferred shares to common. I'd like to say that my purpose for examining Citi's proposal was to enlighten all 6.3 of my faithful readers about the corrupt nature of the process, but that would be a pleasant lie. My motives were a bit more practical as I was looking for a trade.

As of 2/27, here is what was known:

1. Citi was being allowed to convert all of its TARP preferred shares to common, at a significant premium to the market price to satisfy an alleged need for Tangible Common Equity (TCE). This need was due to Geithner's impending stress test, which emphasizes TCE.

From this we can conclude:

Citi proposed the conversion and, despite very unfavorable terms, received it from the Treasury. Thus, Citi has likely captured its TARP destiny and little further regard for taxpayers can be expected. The haircut that the taxpayers received by paying $3.25 per common share will likely be reported as income. The TCE farce is irrelevant, as it doesn't affect the bank's health one way or the other and is akin to the mass of a stone remaining unchanged by its measurement in grams or ounces.

2. As of 2/13, Citi implemented a 30 day foreclosure moratorium, meaning no charge-offs would be recorded, which will pad the balance sheet and income statement. Additionally, in some states, this will reset the mandatory foreclosure countdowns, further delaying asset reductions.

As a result, I'd assumed that would some positive guidance before Citi's earnings announcement in April. Ironically, I'd underestimated the level corruption in Citi, since I never envisioned that Pandit would personally handle the pump and dump. Thus, while I didn't like C at $2.14, at $1, I'd found my trade:


I kept thinking that C, at $1, might be the long-term trade of a lifetime, not because they've turned the corner or are actually profitable, but because they seem to have carte blanche at the Treasury. Barring a derivative induced implosion, they won't be allowed to fail. Perhaps, in 10 years, once the current cast of Valdez captains has cashed out on our dime, Citi may return to real profitability. However, I can't make much sense of their derivative positions from their annual report and I am absolutely not down with the idea that everybody but AIG was perfectly hedged, so I passed. Regardless, I'm up 72% in less than two weeks purely on corruption and chicanery, so I'll call it a win, albeit a dirty one.

I'm Not So Wild About Harry

If you had to choose one word to describe the SEC's performance in the Madoff scandal, what would it be? Incompetence, no? That was your "take away" from Markopolos's 2/4/09 House Financial Services Committee testimony and his 60 Minutes interview, which is infinitely preferable to the alternative: Utter corruption. On Wall Street, it was fairly common knowledge that Madoff was not executing Split-Strike Conversions, aka collars, as advertised, leaving two possibilities:

1. Madoff was front running trades.
2. Madoff was running a Ponzi scheme.

Knowing that in all of human history no Ponzi scheme has ever succeeded without the assistance of a printing press (and the jury is still out on that one), would you have believed that a former NASDAQ chairman and respected regulatory consultant would commit financial suicide by playing Ponzi? No? I can't believe that the SEC did, either. Thus, we are only left with the first possibility: Upper level SEC management assumed that Madoff was front running large orders, when they closed their case in 2006. In fact, and this is pure speculation on my part, I'd lay odds that their investigation was performed to protect against the embarrassing possibility of Madoff getting caught front running. After all, they had secret agent Markopolos warning them for years and that might get ugly down the road had they done nothing. Unfortunately, for everyone involved, truth turned out stranger than fiction and Wall Street's complete capture of the SEC was about to become very public.

Enter Harry Markopolos, to save the day. His testimony to the House's Financial Services committee was nearly an infomercial for SEC incompetence. Who can forget, "I'm suggesting that if you flew the entire SEC staff to Boston, sat them in Fenway Park for an afternoon, that they would not be able to find first base." Or, when asked whether the SEC had been corrupted, Markopolos replied, "...I never thought the SEC was corrupt. In fact, I'm living proof here today that they are not, but FINRA is definitely in bed with industry." In the last statement, Markopolos was implying that if the SEC was corrupt, they would have leaked his identity to Madoff, who would dispatched his Russian Bogeyman on Markopolos. (I'd have given $20 to see his lawyer's EKG every time he talked about the Russian Mafia.) There are other holes in his testimony, but the bottom line is that, while he did discover Madoff's Ponzi scheme, Markopolos is being used to exonerate the SEC with the defense of ignorance. The alternative of having senior SEC officials refusing to seriously investigate Madoff because they thought he was running a sustainable front running scam would dictate indictments and real SEC reform, which is something that Wall Street and it's "employees" on the Financial Services Committee couldn't abide by.

You Waltz Away LLC: Let me help you help yourself.

Previously, I posted about You Walk Away LLC, which is a foreclosure consulting service that provides foreclosure "protection" to troubled homeowners. Basically, I concluded that their $1195 Walk Away Protection Kit is a ripoff, since it yielded the same results as simply not paying the mortgage; eviction and a trashed credit report. This lead me to examine at the foreclosure process from the standpoint of the homeowner, to determine if more reasonable means of relief are available. What I determined is that the primary problem facing an overleveraged homeowner is the lack of home equity.

Fortunately, I have formulated a fool-proof solution. For a mere $795, my new program, You Waltz Away LLC, will guarantee that you sell your home for the principal of your mortgage, often within 1 week of enrollment. After pain-staking analysis, OSR Industries has developed a program that matches homeowners with motivated institutional buyers. Now, you're probably thinking, "How can you guarantee a buyer who will pay up to 30% over market value?" Well, the exact details of our system are proprietary, but for only $795, we'll send you the You Waltz Away Extraction Kit, which includes simple instructions that anyone can follow. The contents of this fantastic product are as follows:

1. Equity Restoration Reagent- The overwhelming success of this program is based on a synthetic breakthrough by OSR Laboratories. Using cutting edge combinational chemistry, we've isolated a reaction whose product is actually Home Equity. Simply apply the Equity Restoration Reagent liberally throughout your home, with an emphasis on rooms with significant electrical service, and wait for the magic to begin.


2. Counterparty Motivation Catalyst- Motivated institutional buyers are a key to the success of our program. The beauty of the You Waltz Away Extraction Kit is that you provide the motivation on your terms. Once you've decided to sell, simply combine the Equity Restoration Reagent with the Counterparty Motivation Catalyst and you're getting paid.


3. Hedging Strategy - Any successful investment strategy requires the effective management of risk. While the You Waltz Away Extraction Kit is virtually fool-proof, we've included a risk management system for the unlikely possibility of non-success. Remember, in the rare instances of failure, you will immediately qualify for relief under our warranty program.


4. Warranty- We guarantee that, if after using the You Waltz Away Extraction Kit, you will sell your home within 90 days for the amount of your mortgage. We are so convinced of this program's success that, if you are unsuccessful, we will provide you with free housing and board for the next, say, 10-15 years. You'll be housed in a luxury living community that caters to your every need, to include free laundry, prepared meals, gym access, and plenty of companionship, often with investors much like yourself. Think about it, what other foreclosure consultant can make that kind of claim?


In conclusion, I can't tell you how excited I am about this plan. So much so, that if you act now I'm willing to throw in the Almost Ouchless Employee Benefits Maximizer, which is a program that is guaranteed to give you 8-12 weeks of paid vacation every year. So what are you waiting, get out of that mortgage and start enjoying your life again!

You Walk Away

Today, on Mish's Global Economic Trend Analysis, Mike Shedlock posted about You Walk Away LLC, which is a California mortgage foreclosure consultant for homeowners who are underwater. Per Shedlock, You Walk Away LLC is the defendant in a class action lawsuit that asserts the company provides little practical advice to distressed homeowners and charges a significant fee for doing so. According to the company's FAQ page, for $1195 you are entitled to the following (my comments in red):

1. We provide a personalized cease and desist letter addressed to your lender to stop harassing phone calls. Under 15USC 1692c, the homeowner can do this. Here is a sample letter.
2. We will provide you with the amount of days you have to live in your house payment free. We stay on top of your walk away plan and keep you up to date with weekly progress emails.We also will notify you if the lender is taking longer than expected subsequently giving you more time in your home payment free. Get a calendar, a pen, and read this.
3. You get a personal consultation with a highly experienced real estate attorney in your state, making sure that you know your rights and that you are protected by the law. This might be useful, but unless the loan was fraudulently issued, I doubt the attorney will tell anything different from Item 2.
4. You will have an experienced YouWalkAway advocate available to answer any questions you may have during the entire process. In MD, this is provided by the state.
5. You will get a personal consultation with a CPA to go over any tax questions related to walking away. This could be helpful if you can afford to pay but choose not to or if you are trying to recover equity after an auction.
6. You get access to our attorney network to answer questions via email about your foreclosure throughout the entire process. E-mail? You might be corresponding with the law firm's restroom attendant.
7. You will be referred to a 3rd party BBB accredited law firm who has legally removed thousands of foreclosures. They sell your name to a bankruptcy law mill. You can probably handle this all by yourself.

You also receive a Walk Away Protection Kit, which provides the documents to accomplish the goals listed above. While the above "services" aren't entirely worthless, they are severely overpriced. Shedlock posts ads for You Walk Away, LLC on his site and defends their services. Shedlock is a knowledgeable and reputable blogger, so I was surprised to see him support them so adamantly. (In this age of unrestrained greed, I don't know why anything surprises me anymore.)

Regardless, You Walk Away LLC is charging a hefty sum to tell you what is easily discovered public information. At the end of the process, the homeowner still loses their home and gets their credit rating trashed, which is exactly the same outcome realized if the homeowner simply did nothing. Considering that $1195 is a potential house payment, I can't see how the You Walk Away LLC is nothing more than another sub-prime predator--Shedlock endorsed, or otherwise.