Friday, 17 December 2010

America's Banks are in Trouble - as is the Bank of America

I've blogged about the US Mortgage Debacle before. Now the first chickens are coming home to roost - with the Bank of America.
From DailyFinance
Testimony in a New Jersey foreclosure case decided last week may spell big trouble for Bank of America (BAC). If what one bank employee said on the stand proves to be accurate, paperwork problems it acquired when it purchased the failing mortgage provider Countrywide in 2008 could leave BofA on the hook for billions of dollars.

As first reported by Kate Berry for American Banker, Linda DiMartini, a supervisor and operational team leader for the Litigation Management Department of BAC Home Loans Servicing, testified in the foreclosure case of John T. Kemp that it was "customary for Countrywide to maintain possession of the original note and related documents."

If that's true, then Bank of America may discover that it has millions of loans on its books that it thought it had transferred to trusts that issued mortgage backed securities, because 96% of Countrywide loans were ostensibly securitized. As the Congressional Oversight Panel explained, that outcome alone could cause massive damage to a bank's balance sheet. And as bad as that would be, it isn't the only problem that could result from Countrywide hanging on to the notes.

If the mortgage-backed securities aren't in fact "mortgage-backed," investors who bought them could be able to force BofA to buy the securities back. A significant number of buybacks could on its own destroy BofA's balance sheet. Nor could BofA stave off either outcome retroactively by delivering those notes today. First, the contracts that created the trusts would typically forbid transferring the loans into the trusts now. Second, even if somehow that could happen, such a transfer would destroy the special tax status the mortgage backed securities enjoy and give the investors a different reason to put back the securities or sue over them.
This is what is known as "being in deep doo-doo". And the BAC is not the only major financial institition in this situation.

The US economy is starting to stage a comeback; but my bet is that it's the eye of the storm, with more to come soon.

The traditional lifeboat for assets has been Gold. The Filthy Rich have tons of the stuff sitting in bank vaults, "just in case".

Or so they think... because some of the world's banks have been playing a little fast and loose with more than just mortgages....

From NZ Gold Survival Guide :
First Jim Rickards reported that a Swiss bank refused to deliver roughly $40 million of gold bullion to a wealthy client for 30 days, and only finally physically delivered his gold when the client brought in his lawyers and threatened to take his story to Reuters and other syndicated financial news networks.

Later in the week, James Turk reported that he is aware of another individual who has been trying to take physical possession of approximately $550,000 of silver for two months now from a Swiss bank with zero luck. Turk further elaborated that the bank has been trying to pressure the client into accepting the cash equivalent market value of the silver, rather than deliver the physical silver to the client.

In both of these cases, I presume that neither of these Swiss banks ever held allocated gold and silver for their clients … or, if they did, had then leased out the gold/silver or sold the same gold/silver to multiple clients, and thus were forced to stonewall their clients until they could secure the physical metal. Why else would a bank take 30 days to deliver something that was supposed to be sitting in a vault in an allocated account?

Of course, none of this is really shocking, as the two above cases merely mirror the circumstances of the 2005 class-action lawsuit against Morgan Stanley (MS) in which it told its clients it was selling them silver in allocated accounts and storing it in its vaults. However, when one of their clients, Selwyn Silberblatt, demanded physical delivery, Morgan Stanley failed to deliver, prompting the class-action lawsuit that MS eventually settled for $4.4 million.

Time after time, bankers have been caught committing likely fraud regarding the sales of gold and silver. This likely fraud extends to more than physical sales. In the futures markets, bankers have been discovered to be selling 100 ounces of paper gold for every one ounce of physical gold that actually exists in the market. With PM ETFs, it is highly likely that multiple claims exist on whatever physical gold and silver back the GLD and SLV … if any physical gold and silver even back them at all.
Luckily, we don't have that problem. There's something to be said for owning the roof over your head (but little else), no debts, and a meagre but reliable income, supplemented by the occasional windfall.

"Financial Freedom's just another word for nothing left to lose". Plus No Debts, and a frugal lifestyle tailored to a meagre income.

I'll be teaching two courses at the ANU next year. A part-time associate lectureship is just my style when I'm completing my PhD, so that counts as a "windfall". My partner's retired, and she's actually getting more in her fully-indexed government-guaranteed pension than she did while she was working. God knows she'd earnt it, being in the Public Service can corrode the soul, and is something I've always managed to avoid.

So we're about as well prepared as we can be if things start turning to custard.


Jamiegottagun said...

You have no idea how close to hitting the nail on the head you have come.

There's a lot of people in the next few years who are going to wake-up one morning to discover that everything they thought they had, and have worked for so long, was little more than a figment of the collective imagination.

Anonymous said...


I can tell you where I live (East Coast U.S.) that many banks, starting with BofA have been freezing HELOCs(Home Equity Lines of Credit) without warning since early Summer. Big banks and small banks. Usual excuse is that the Market Price to Value ratio has changed (gone up) so that their line or credit one has borrowed from is "too risky." For them. What about the folks who borrowed against their LOC to continue funding businesses, etc. and now are cut off? Are credit cards (the last resort) going to be the guillotine for the American middle class and working poor?

New Zealand is looking real good right now. But, I can't afford the plane ticket and can't swim that far. What's a girl to do?

BTW, if you have any suggestions or anecdotes on moving/living a frugal life style without debt - please let us know. One can always learn something new.


Karin ("I'm Just A Girl (I Think) blog), USA

Jamiegottagun said...


New Zealand doesn't allow Americans to emigrate, permanently. I believe you can only reside there for 6-months out of the year.

Give some thought to Costa Rica, however. The cost of living is small, the weather is beautiful, the people are very friendly, and there's plenty of Americans already there.

Anonymous said...

You can not eat gold. It is worthless to most people it is only the faith like paper money that gives it value.

cornince said...

Hi Zoe,

I'm wondering if this goes boom, or if peak oil, for example, really starts restraining growth, then what should transsexual people do, especially those who need surgeries? Also, what about hormones?

Zoe Brain said...

Tips on living frugally: Your local envoironment is so variable that I can't give specifics: what is good in one place may not be in another.

But I can give a few general principles.

When times are good, pretend that they're not. Save, save, save for a rainy day. Which may be a rainy year or even rainy decade.

Suze Ulmann is good, but she only recommends a 9 month cushion. I recommend a 5 year one. Until you are able to say that you can survive 5 years with zero income, no new car, no house renovation, no holidays, no movies, no starbucks coffee, no restaurants, and no debt. If you have a credit card, pay it off. If you have a mortgage, put every cent into paying it off early.

If you can't pay off your house in 10 years, it's too expensive.

Now, for a period of one month, keep track of every nickel and dime you spend. See how much you could do without if you absolutely had to.

Then, budget in some luxuries. Pickles and sauces to make the brown rice and home-grown vegetables you're living on into gourmet feasts. Figure out how much lack of Internet access would cost you in missing out on sale items.

You may be able to exist on far less than you'd dreamed. But you probably won't have to. If your expenses (without food, clothing etc) aren't too much, you can afford to live a little. Save $50 over a year to give Xmas presents. Maybe go insane and see a movie once every 2-3 years.

When you have your 5 year cushion, you can even see a movie every year. Once a month, a cream cake. Maybe a family treat on a birthday - go to McDonalds and hang the expense, you have $20. Or you could give it to charity - that's a luxury I've never denied myself.

With money in the bank, you can get a freezer, and take advantage of budget specials, reducing your outlays further. A pair of expensive shoes, that will last 5 years, rather than ones half the price that barely last one.

It costs a lot of money to be poor. Once you're not poor, and have some money in the bank, you can afford to pay less.

Zoe Brain said...

We don't need to live on $30 a month for food. In fact, we pay more than 3 times that. We don't live like paupers now, because we did in the past, so can afford not to.

We're way below the average income for a family in Australia. Not enough so we qualify for any government assistance though.

We live pretty well, actually. OK, my car's a 1988 model, but it's reliable, gets 45mpg, even if its resale value is less than the cost of registration ($750 a year).

From what I can see, we live better than many earning far more.

wreckage said...

"Costs expand infinitely to consume all available income."

Depending on your career, it is possible to move to a country town for very low rent, or a farmhouse for zero rent. Some living expenses will go up but with rent written off the books you'll be surprised how much excess money you can end up with.

Vegetable seeds are dirt cheap. Six chooks make a LOT of eggs. The absence of dial-a-pizza saves big bucks and a lot of excess dietary fat!

cornince said...

Hi Zoe,

What about for a trans person looking to transition?

Carolyn Ann said...

$40M is "filthy rich"? Since when? 1930?

Last I checked, not that many are intelligent investors are investing in gold. The inane are; they typically drive prices through the roof, and then lose a bundle when they inevitably decline. (I'm guessing you're not thinking "gold bubble"?) And you're taking the word of what appears to be an alarmist (and partizan) web site over, oh, The Economist?

If you want to hide your money, invest in gold. It's the equivalent of sticking it under a mattress. And lighting a small fire.

So what if someone's bank refuses to give him gold bullion? Do you know the conditions of his agreement with the bank? Are you familiar with the laws about such things?

If a bank, any bank, has trouble delivering $40,000,000 (US) in gold, it's not because they fear the press. Can you imagine the headlines? "Oh, poor me! The bank wouldn't give me my $40 million in gold, like I asked them to!" Oh yeah, lots of sympathy would come out such a story. I doubt Reuters would be interested, to be honest.

On the "allocation" argument? No, and I mean NO bank allocates bullion for its clients. Heck, most banks would panic if you turned up with bullion. (By the way: Morgan Stanley wouldn't promise that. They don't have vaults. the case in question, for a paltry $4½ million, was more about the fact that Morgan Stanley was making investments of lesser value. Please, Google the people you want to use as examples. Sometimes you'll be surprised by what you find.

Good for you on your "frugal" lifestyle. Some of us want a little more than that. I've done frugal. I don't like it.

Look, I know you're anti-America, but surely the world's biggest economy gets something right? Perhaps it's innovation? Something I believe you're familiar with?

You still haven't explained why you mentioned quantitative easing in your missive about US mortgages. The one has nothing to do with the other.