Ticker Classics

Their lips are moving.

Let's start with the simple:

"By the end of July, the G-7 wants financial companies to fully' disclose in mid-year earnings reports their investments that are at risk of loss. Firms should also establish 'fair-value estimates' for the complex assets that investors have shunned and boost their capital as needed, the G- 7 said.

Regulators must revise liquidity risk management rules, improve accounting standards for off-balance-sheet units and enhance guidance on how assets are fairly valued, the group said. International panels of supervisors will also be formed by the end of this year for each of the largest global financial companies."

Liars. Here are a few things that Bernanke actually said:

"Ben Bernanke, chairman of the Federal Reserve, has laid the blame for the credit crunch on the ratings agencies, the investors in sub-prime securities who believed them, and inappropriate incentive structures." (honest, its not my fault, even though I was warned and let the banks play in the unregulated derivative pool - Lie #1)

"There is nothing fundamentally broken on Wall Street that a little regulation and incentives for participants to be slightly more honest couldn't fix, said Federal Reserve Chairman Ben Bernanke said Thursday." ("slightly more honest"? You mean actual honesty is not part of what you stand for Ben? Thanks for telling us - in print.)

So now that we have established that Mr. Bernanke not only will tolerate intentional deceit from the banking system but is actually encouraging it - just as long as there's "a little less" of it, can we have an indictment or impeachment handed up by the Congress please?

After all, he's now admitted that he recognizes that Wall Street is laced with fraud and intentional deception but that its ok with him and The Federal Reserve, and in fact they'll even make loans to liars, so long as they lie "a little bit less."

The "G7" says it will not "sit by and watch the dollar continue to slide."

Really? Are you prepared to find a way to remove Bernanke and bring in a Fed Chair that will insure that we actually get the truth? If not, then the dollar will continue to slide because in point of fact the problem is one of confidence, and Bernanke has said, publicly, that he is just fine with lying so long as "there's a little less of it."

How much confidence do you have in a known liar?

Wachovia is both trying to secure capital and is tightening standards for mortgages. Or are they? Its tough to tell but this this is the sort of deterioration that is being cited:

"The proportion of U.S. borrowers at least 30 days late on their payments rose to 4.5 percent in March, compared with about 2.9 percent in the same period a year ago, according to data collected by credit reporting bureau Equifax Inc. and analyzed by Moody's Economy.com. Mark Zandi, chief economist at the Moody's unit, yesterday called the report 'astonishingly bad.'"

Uh, yeah. 4.5% overall delinquent eh? That, by the way, is an increase of 55% year/over/year.

Congratulations bankers, this is what happens when you're a "little less honest."

In a special act of stupidity, we now have this comment on the bond market:

"The dollar isn't the only casualty of the Federal Reserve's rescue of seized-up credit markets. Bond traders are finding there is nothing special about Treasuries anymore, now that the Fed accepts substitutes for government securities as collateral -- having concluded it wasn't enough to reduce the benchmark interest rate for overnight bank loans six times since September."

Let me decode this bit of Orwellian-speak - its not that mortgage securities have come back to "normal" levels, its that Treasuries are now considered "contaminated" and worth less - a lot less - than they used to be.

A casual reader might think that this is good news, but only if you have a brain the size of a pea. Its like arguing that if I am driving a car with a smashed in door, the solution to my car being worth less than yours is for me to T-bone you so you have a smashed door too.

Down this road lies disaster and a potential bond market dislocation, which, by the way, is what Depressions are made of.

You might want to stop looking the other way when people lie Ben, and "a little bit more honest" won't do.

Fannie and Freddie are apparently issuing threats about people who "jingle mail" their keys.

"The country's two largest sources of mortgage money have a blunt warning for anyone thinking about joining the growing "walkaway" trend, where homeowners stop making payments and months later send the house keys back to their lender: You will feel the pain."

Awww, cry me a river. Let's see what their "new rules" are:

"On March 31, Fannie Mae sent out new guidelines to lenders intended for walkaways and other foreclosure situations. Fannie will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years, unless there are "documented extenuating circumstances." In those cases, the mortgage prohibition is for three years.

Even after five years, borrowers with foreclosures in their files will be required to make at least a 10 percent down payment, and will need minimum FICO credit scores of 680."

Gee, you mean we're going to need a whole ten percent down now? Didn't you clowns know that the standard for a "safe and secure" mortgage is twenty percent? This means you're still taking liar loans and loans with zero skin in the game no?

You're not going to want to actually buy a house for three to five years anyway - that will be about when we get to an actual sustainable bottom in housing prices - if we're lucky.

You're better off renting until then.

Uh, wait a second.

I thought Fannie and Freddie only made sound conforming loans? You mean you can (today and during the bubble) can and could get a Fannie or Freddie loan with middling to somewhat-crappy credit (680 ain't THAT good) and with less than 10% down?

Aha - is that an admission buried in there that Fannie and Freddie have been buying trash mortgage paper? Now we know why they're concerned, eh? They've been buying the same sort of toilet paper that sunk AHM, CFC, New Century and others, and that's why they're worried about the Jingle Mail!

Now there's an admission that you'd hope investors would pay attention to!

It is becoming increasingly clear that both of these firms will go under, with the only wager left to take is an "over/under" on when.

I'll take "before January 2010" please.

In addition this little "threat" means is that people should jingle-mail NOW if it is to their advantage to do so, in order to start the clock. Oh, do go see a lawyer first and make sure you weren't bamboozled into turning your original mortgage into a "recourse" note (or worse, you live in a "recourse" state) - that would be bad (if you were conned in that fashion maybe its time to see that lawyer about a bankruptcy instead!)

Oh, speaking of liars, here's a whopper in that article:

"Federal legislation enacted last year allows homeowners who negotiate loan modifications with lenders and have portions of their principal debt eliminated to escape income tax liability for the amount forgiven. Walkaway borrowers, by contrast, have nothing forgiven, and the IRS may demand income taxes on the balance they never paid, according to Migala."

That's a lie. Here's the official IRS statement on the matter:

"Update Feb. 4, 2008 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.

This provision applies to debt forgiven in 2007, 2008 or 2009. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition."

Need another reason to Jingle Mail? How about being lied to by the lenders, including Fannie and Freddie? That article is dated just a couple of days ago, and this update was filed on February 4th. (Oh by the way, that exemption does only apply to no-recourse loans - again, it is very important to go see a lawyer)

Chalk up (another) knowing lie.

Oh by the way, under the IRS code if you sell the house at a loss, you can't deduct that - its a personal loss and you eat it - no deduction.

If your choices are to jingle mail a no-recourse loan or sell at a loss, the former may be a "win" twice! Go see a lawyer!

It also appears that Volcker is tired of the lying too. He has been speaking out about Bernanke's Fed the last week or so, and this is an extraordinary act in and of itself - no matter the subject. In this case its even more extraordinary because his words are uncommonly sharp:

"But last week Mr. Volcker spoke his mind bluntly. He said, in effect, that the current Fed is not doing its job.

This would have been unusual enough. But Mr. Volcker went further. Not only is the Fed not doing its job, he said, but it is doing the wrong job: It is defending the economy and the market, instead of defending the dollar. And just to stick the knife in, Mr. Volcker added that this bad job now will make the real job - defending the greenback - much harder later. It'll cause even greater economic suffering.

In plain words, Mr. Volcker implied that the current Fed is not only incompetent, but that its actions are dangerous.

There is no record of Mr. Bernanke's reaction, nor that of anyone else inside the Fed. But there was plenty of buzz in the market because what Mr. Volcker said amounted to a rousing call to raise interest rates. Yes, raise rates, and do it now."

On that, Mr. Volcker and I agree.

Lying is a common trait when playing Poker and is considered part of the game. Its called "bluffing" and is well-recognized as essential to winning play - misrepresenting your hand on purpose in order to get the other players to fold their (stronger) cards instead of "calling" your bet.

There is, however, a secondary purpose to the bluff that is not understood among weaker players - by being "caught on purpose" once in a while you make it more likely that when you bet with a very strong hand that someone will call the bet - and lose!

But when it comes to monetary policy and banking regulation, these concepts are anathema to trust. I never trust anyone at the poker table to be telling me the truth with their bets, and yet that trust is essential in monetary policy and among the citizens when it comes to the banking system.

The truth when it comes to banks is this - all banks are subject to being destroyed by a run. All. This is a fundamental reality of fractional reserve banking - if too many people show up and want their cash at the same time, the bank goes under even though it is otherwise ok!

As such it is paramount that our banking system be based 100% on honesty and truth. "Slightly more honest" won't do.

I don't know about you but when I choose a bank one of my primary considerations is that they not lie to me at all. In fact over the years I have closed bank accounts instantly upon my detection of anything that smells like "dead fish."

If I'm now being told by the Chairman of The Federal Reserve that essentially all financial institutions are lying and its ok with him so long as they are "slightly more honest".....

I've said it before, but I'll put the short list of what we need to do to fix this out here for those who want to see it again.

• No commercial bank of any sort (that is the subject of federal insurance or a "backstop" of any kind, including access to the Discount Window) may be permitted to buy or sell any derivative not traded on a public exchange.
• No off-balance-sheet vehicles of any kind may be permitted.
• Mark-to-market and margin requirements must be enforced nightly.
• No "slightly more honest." 100% honest must be the only acceptable standard, with any financial institution unwilling to live up to this standard forcibly merged or put into receivership.

All of this needs to be done now, not a year, two or three from now. The "100 day" barrier that the G7 put forward is enough time. Yes, its a tight schedule but we're on a tight deadline. Let's get it done.

No, the upcoming election is no reason to sit on this. In fact quite the opposite - its a reason to accelerate the effort to get this accomplished, as we never know what we'll have come November in the White House or Congress.

If Investment Banks or other institutions wish to play in the world of unregulated credit instruments, let them. However, it must be made clear that those institutions will not be backstopped in any way, shape or form should they fail, without exception.

There are those who say that this is "unrealistic" in that much of what banks hold are illiquid "hard asset" paper such as raw mortgages. This, of course, is pure nonsense - in other words, its yet another lie.

Whether a mortgage is in fact illiquid and "hard to value" depends entirely on the value of the property behind it.

With 20% down behind the note essentially no mortgage is exposed to significant risk of loss even in the event of a default as the owner pays down the note faster than negative value adjustments can accrue in most cases.

In addition the 20% down requirement, plus a requirement that all mortgages be amortizing, stomps on these speculative property bubbles before they can get going, as it limits leverage to 5:1 and prevents the sort of insanity we had occur in the first instance.

The regulatory solution to this problem of "hard to value" mortgage securities is for banks is to require them to hold reserves against all value in excess of 80% LTV on a dollar-for-dollar basis.

Therefore, if a bank wants to write a 90% mortgage on a $200,000 house (a $180,000 note) it must hold $20,000 in reserve against that note until the principle is paid down by $20,000, irrespective of the presence of PMI or other so-called "guarantees." If you "originate to distribute" then no regulated entity can hold a piece that is subject to loss with with less than a 20% decline in resale value unless they reserve dollar-for-dollar against that decline.

For instance, if the bank wants to hold an "Equity Tranche" on a CDO that is exposed from the first dollar and is wiped out with a 5% default rate, it must reserve dollar-for-dollar against that CDO - it has no "credit quality" to it whatsoever in the reserve computation world.

These changes are not difficult to make. They will result in many institutions being forced to raise a lot of additional capital immediately, massively diluting existing shareholders, but that's the price of imprudence. Those institutions that lack a solid enough brand to be able to bring convertible and secondary offerings to the market will be forced out of the market - again, this is as it should be.

Do we want an honest credit and financial system, or are we willing to accept one that is "slightly more honest"?

Call, email, fax or write your Congressfolk.

America deserves - and needs - better.

PS: Wachovia (NYSE:WB) missed badly and is called down more than $3 premarket and Circuit City (NYSE:CC) got an unsolicited bid between $6-8 that the bidding company (Blockbuster) says was improperly interdicted by the company. PPI tomorrow and CPI Wednesday are expected (by me anyway) to be smoking hot - those should be fun.