Monday, March 15, 2010

Voice from the Past

It has rained to the tune of 9 inches here since last Friday. Many streets and highway ramps were closed today due to flooding and that made my commute home a lesson in alternative route planning on the fly. Just unreal.

Voice from the Past
A bit short on time due to the weather, but I already wrote tonight's post back on September 19th, 2008. Allow me to set things up.

By now you must have followed the Lehman collapse report which details all the juicy tid bits about cooked books and stress tests run on a sliding scale. For some color Zero Hedge is on top of this as is Naked Capitalism.

I do not need a detailed report to tell me what I already know, but it is great reading!

From my post in September 2008:
Enron Was Ahead of Its Time
You have to feel bad for those poor souls which ran Enron. They were years ahead of their time, they were just unappreciated as clever geniuses. If Ken Lay and crew had only waited a few more years, history would regard them as savvy players that used the whole "systemic risk" pocket aces to great effect.

Those poor Enron guys. While they were attacked for accounting fraud, Fannie Mae had their purchase caps lifted and was able to operate for 2 years without a single shred of quarterly reports. I mean, falsifying earnings reports is bad, but now that is the new good! Too late for Enron.

Enron used wild and complicated derivatives bets to lever up their small initial working capital into a mammoth, if hollow, money base. At the time this was panned as dangerous but today it is known as the investment bank business model. Again, too late for Enron.

Enron hid losses and wildly exaggerated their asset values using internal parameters that had no basis in the real world. Now this is currently known as "Level Three Asset Accounting" and "Mark to Model" pricing. Again, just missed by a sliver of geological time! Poor fools.

Enron shopped around for a buyer to help them survive, but after looking at their books there were no takers. Once again, we see that the Enron model was not wrong, just early. Today we have the FED and Treasury forcing mergers and buyouts for insolvent institutions, and when that fails they just bail them out themselves.

I think it is clear that the so called scandal that was Enron was something else entirely. I think Enron was punished and attacked so harshly because they exposed the clever plan the banks had for screwing the US taxpayer into paying for their never ending party. Enron was early once again, and paid the price. Their model was then copied and amplified to arrive at the point in time we are now at. I am not writing this to be funny. There is no material difference between Enron's behavior and that of today's players. Sick? Yes. Sad? That too. Basically what we deserve for being the losers that vote in fools? You bet your ass.

Any part of that not true or not clear?

Not to worry those of you with a bullish mind, reality has long since departed the collective soul of US markets.

Have a good night.


GawainsGhost said...

Yes, well, Karl Denninger over at Market Ticker has been all over this as well. And it's beyond disgusting.

Let me clue you in on a little secret that was at the heart of the housing bubble, appraisal fraud.

Few people understand this, but I've been railing about it for almost ten years. Prior to the S&L crisis in the 80s, any licensed realtor could perform an appraisal. My mother used to write hundreds of them a year at $200 a pop.

But after the S&L crisis, Congress changed the law. Since then and now only a licensed appraiser can perform an appraisal, and (this is the thing) he must be given a copy of the sales contract prior to writing the appraisal. If the house does not appraise at the sales price or higher, the lender cannot approve the loan.

Because the appraisal is required by the lender, the appraiser actually works for the lender. If he does not appraise the house at the sales price or higher, the lender will not assign him any more appraisals, because the lender wants the loans to be approved. Thus, the appraiser, if he wants to continue to get paid, must appraise the house at the sales price or higher, even if the house is overpriced.

Do you see the conflict of interest? The problem is that the appraiser is working to justify the loan, not to provide an accurate value of the house. He's using comparable prices, to meet or exceed the sales price, rather than using comparable homes to estimate true market value. This was the primary factor that drove up housing prices during the bubble, and in fact was the justification for all the questionable financing.

How many of these HELOCs and second liens, which are now worthless, were made based on fraudulent appraisals? Just asking.

getyourselfconnected said...

I am forwarding all the comments to your mom so you get in trouble! HA

Kidding obviously.

The stuff you know is important so thanks for posting. Maybe I could excerpt some items in a post? Only with your permission.

I ran into the appraiser thing back when the wife and I were first looking for a home. Just unreal.

GawainsGhost said...

Of course you have my permission. But don't tell my mom.

GawainsGhost said...

Just to clarify what I'm talking about, let me give you a real life example.

I got an assignment on this repo in 07. It was a monstrosity of a manufactured home in an unrestricted mobile home park subdivision. I looked up the deed, and the amount for the loan in 06 was $280,000.

Now, an appraiser had to value the house at that price in order for the loan to be approved. I never saw the appraisal, but I know that for a fact.

What did this house sell for as a repo on the open market a little more than a year later? $45,000.

Somebody made a killing on that deal, and somebody got burned real bad. This was brokerage fraud, lending fraud, appraisal fraud all rolled into one. You can't tell me a house can depreciate by $235,000 in a single year. It's just not possible, absent fraud.

This house was never worth $280,000. But somebody listed and sold it at that price, somebody appraised it at that price, and somebody made a loan for it at that price. The seller took the money and ran. The buyer walked away, probably without making a single payment. The appraiser got paid, as did the mortgage broker and the realtor. The lender sold the loan on the secondary market and took a fee. The investor who bought the note, the mortgage insurance company and undoubtedly the American taxpayers took a bath.

I have no doubt this sort of thing occured all across the country, and is in fact occuring on Wall Street at this very moment. None of the banks are solvent if this is the type of loans they were making over the last decade. Forget about HELOCs and second liens, not even the first liens can be covered.

And there will be hell to pay.

getyourselfconnected said...

thanks again for the report. That shows the ponzi type scheme at play. Too bad they had to move into something so important as housing to keep the game going.

Dave in Denver said...

Enron should have been the big warning shot across the bow to our regulators and Govt. All Enron did was give Wall Street a blueprint to concoct even more complicated and well-hidden off-balance-sheet schemes to suck money out of the system and into the pockets of the people working for the big Wall Street banks.

GawainsGhost said...

Here's another example, for those inquiring minds who want to know.

Back in 06 there was this internet site, I believe it was or something like that, which offered realtors $50 for price opinions. It was a simple job--drive to a house, take 3 pictures (front, side, street scene), look up some compls, and give an estimate of market value. I did several of these, but stopped because I didn't get paid upon delivery but rather several months later. So it wasn't worth it.

Anyway, I got this assignment, drove to the house, took the pictures, and did the research. The subject was a typical KB home, 2-story, brick/panelling, 3 bedroom, 2 bath, 2-car garage. I looked up the subdivision and found three sales--one two houses over, one across the street, and one on the next block--all within the last three months. Same builder, same subdivision, these were recent next-door comps. And they all sold for $85,000. This was the easiest price opinion I've ever done, took less than two hours. What is the market value of this subject? $85,000. Duh.

I submitted the report. And everyone threw a fit. I got a call from someone at the site, saying they expected a valuation of over $120,000. (The reason why was because the home owner was trying to take out a HELOC and needed a price opinion at that valuation in order to justify the loan. No doubt an appraiser or some idiot realtor had already provided them with the price opinion they wanted, using comparable prices but not comparable homes, and I was the backstop.)

I was told to find other comps and revise my price opinion. I refused. I was using the nearest, most recent sales to estimate market value. There is no better indication than that.

Needless to say, that was the last price opinion I wrote for this site. And they never paid me for it, by the way.

This is what I'm talking about. Collusion, fake comps, comparable prices not comparable homes, all for the purpose of justifying fraudulent lending. And if you don't go along to get along, play the game, you don't get paid.

This is what passed for finance and real estate during the height of the bubble, rampant fraud and short-term profits. I stopped playing that game four years ago. And I'm one of the few still making money today.

getyourselfconnected said...

No post tonight, hitting the bags as usual. With great conetent in the comments who needs to post anyway! HA!

regularly scheduled programming said...

Great post with the Enron thing. How true.

Poor saps!