Morning Report – The market is letting you back in 10/21/13

Vital Statistics:

Last Change Percent
S&P Futures 1738.0 1.5 0.09%
Eurostoxx Index 3026.5 -6.8 -0.22%
Oil (WTI) 99.68 -1.1 -1.12%
LIBOR 0.239 -0.002 -0.81%
US Dollar Index (DXY) 79.76 0.104 0.13%
10 Year Govt Bond Yield 2.59% 0.01%
Current Coupon Ginnie Mae TBA 105.9 0.2
Current Coupon Fannie Mae TBA 105.1 0.0
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.23
Markets are flat this morning on no real news Bonds and MBS are down small. We will get existing home sales later this morning.
The government is still figuring out how it will release the economic reports that piled up during the shutdown. I don’t see anything official from BLS regarding the jobs report, although Bloomberg has it scheduled for tomorrow. I think it will take a massive jump in payrolls (like 300k +) to bring a December tapering back into the picture. Given that we just kicked the can down the road for a few months, we are probably looking at March. FWIW, Chicago Fed President Charles Evans said pretty much the same thing on CNBC.
Homebuilder NVR rerpoted a 37% increase in revenues for the third quarter. Closed loan production was just under $700 million for the quarter. Origination volume actually increased about $50 million from Q2. New orders fell 7% and the cancellation rate edged up to 17%. Earnings came in well above expectations. NVR is more East Coast based and DC-centric (think McMansions in McClean VA) so it will be sensitive to government spending. We will hear from Pulte later this week.
The Bankrate average 30 year fixed rate mortgage fell to 4.23% last week, the lowest since June. We had fantastic lock days on Thursday and Friday. LO’s wake up any borrowers that are on the fence or were thinking about refinancing. The market just let them back in.

JP Morgan is close to a settlement with the government over the sins of Bear Stearns. (Didn’t Jamie Dimon buy Bear as a “favor” to the government?) Anyway, it is looking like it will be $13 billion. Whenever the government needs money, it shakes down Wall Street, I guess. At what point are these things no longer “fines,” but “surtaxes?”

42 Responses

  1. “(Didn’t Jamie Dimon buy Bear as a “favor” to the government?)”

    He should have watched Carlito’s Way

    “Carlito: Favor gonna kill you faster than a bullet. ”

    http://www.imdb.com/title/tt0106519/quotes

    Felix Salmon had an interesting take – The government would go after more banks, but only JP Morgan can afford to pay the fines.

    http://blogs.reuters.com/felix-salmon/2013/10/11/is-jp-morgan-being-unfairly-singled-out/

    Like

    • jnc (from the Salmon piece):

      When the Obama administration was forced to decide whether or not to nationalize America’s biggest banks, it knew that one of the consequences of its ultimate choice — not to nationalize — was that it would see less upside if and when its bailout worked. So in a weird way, JP Morgan’s current legal woes are a way of it paying the US government back for all the help we gave the bank during and after the financial crisis.

      This assumes that JPM needed and wanted the “help we gave it”. There is no evidence that it is a good assumption, and substantial evidence that it is a bad one.

      Like

  2. Reminds me of Goodfellas.. When we needed money, we robbed the airport. For us, it was better than Citibank

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  3. While many seniors believe they are simply drawing out the “savings” they were forced to deposit into Social Security and Medicare, they are actually drawing out much more, especially relative to later generations. That’s because politicians have voted to award the seniors ever more generous benefits. As a result, while today’s 65-year-olds will receive on average net lifetime benefits of $327,400, children born now will suffer net lifetime losses of $420,600 as they struggle to pay the bills of aging Americans.

    http://online.wsj.com/news/articles/SB10001424052702303680404579141790296396688

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    • nova:

      While many seniors believe they are simply drawing out the “savings” they were forced to deposit into Social Security and Medicare, they are actually drawing out much more…

      I have made this very point here at ATiM a long time ago.

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  4. Dimon got a good deal on Bear Sterns originally. As Salmon notes, they still made money even after you account for the costs of doing business fines.

    Having said that, I don’t think that Salmon is correct on it being one of the motivations. They weren’t thinking that far ahead.

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    • More from the Salmon piece:

      If you look at misbehavior like the Libor scandal or the London Whale debacle…

      I still don’t know what the “misbehavior” involved in the London Whale debacle was. The individual traders may have actively tried to hide positions/losses from management, but that is not corporate “misbehavior” that justifies government extorition fines. It may be that JPM had poor internal controls (although I question even that), but if so the “penalty” for such a thing is the resulting losses on the positions. Why should the government collect revenue for JPM’s poor internal controls, especially since JPM is crawling with federal regulators who themselves failed to see the presumed lack of proper internal control? Why aren’t the regulators themselves to blame? What are they there for if not to catch these kinds of things?

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    • Is any of the proposed settlement related to conduct of JPM as opposed to B-S and WaMu? Is any related to B-S and WaMu? Did JPM take the assets of the two entities but not the liabilities?

      I know what the deal looked like from newspaper accounts – I am actually wondering what was the legal structure of those deals. Handy reference link would be great!

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      • Mark:

        Is any of the proposed settlement related to conduct of JPM as opposed to B-S and WaMu? Is any related to B-S and WaMu?

        It is both, although I have not seen an accounting of how much relates to which.

        Did JPM take the assets of the two entities but not the liabilities?

        JPM took everything, although without normal due diligence, since it was an “emergency” and the government wanted it done now.

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  5. wow. fun to go through the old comments.
    I see I was in favor of private accounts as a compromise.

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  6. I believe that this Urban Institute study was the original analysis for that article.

    http://www.urban.org/publications/1001553.html

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    • jcn, on a different note…

      I believe that this Urban Institute study was the original analysis for that article.

      I looked and could find no indication of how it was that they calced average lifetime SS contributions. Do you have any idea? I actually did it myself once (for the post I linked to earlier) and got nothing even close to what they claim is the lifetime contribution.

      Like

  7. I tend to agree with you Scott on the London Whale episode, but I believe that the argument for the fines was that the reports to the regulators on the banks leverage and positions were also falsified.

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    • jnc:

      …but I believe that the argument for the fines was that the reports to the regulators on the banks leverage and positions were also falsified.

      I’m not aware of any accusations that they were actually falsified, except perhaps by the traders themselves.

      Like

  8. This however is pure BS:

    “The CFTC, in its case, charged the bank with violating a prohibition on manipulative conduct when it traded in the credit default swaps that the bank had built an outsized exposure to by early 2012 and then needed to quickly exit to try to minimize the losses.

    By selling a huge volume of swaps in a concentrated period, the bank’s traders “recklessly disregarded” the principle that legitimate market forces should set prices, the CFTC said.

    “JPMorgan traders acted recklessly with respect to this fundamental precept by employing an aggressive trading strategy,” the CFTC said in a portion of the settlement to which the bank admitted to.

    The reckless conduct occurred on one day, February 29, 2012, according to the agreement.”

    http://www.reuters.com/article/2013/10/16/us-jpmorgan-cftc-idUSBRE99F0JW20131016

    Reckless trading with malice aforethought?

    And here you go:

    “By charging the bank with “employing a manipulative device,” the agency relied on new powers granted it by the 2010 Dodd Frank financial regulatory overhaul.

    The agency previously had to prove a defendant intended to engage in manipulate conduct, a bar so high that the commission was able to bring few cases under it. The new authority, introduced by Democratic Senator Maria Cantwell, allows the CFTC to rely on evidence of “reckless” misconduct rather than any specific intent.

    The CFTC case against JPMorgan “is exactly what were looking for” in providing the new authority, Cantwell said in an interview.

    “We think it really does create a bright line in the marketplace,” she said.”

    See also Dealbook

    http://dealbook.nytimes.com/2013/10/16/jpmorgan-to-pay-100-million-and-make-admission-of-wrongdoing-in-london-whale-pact/

    Like

    • jnc:

      This however is pure BS:

      So given that this is the kind of regulatory action that banks face, how can you condemn them for treating it as simply a cost of doing business, in much the same way that payoffs to corrupt local officials or mobsters is a cost of doing business in a locale where such people have the power to make up the rules as they wish?

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  9. “how can you condemn them for treating it as simply a cost of doing business”

    I’m not condemning the banks for trying to do that. I condemn the government for letting them get away with it in certain cases. I’m in favor of trials with actual guilt being determined where if the banks didn’t do it then they get off and if they did, then there’s a penalty sufficient to ensure that they can’t engage in the same behavior in the future.

    I’m purely cynical at this point and consider the current financial system to be the equivalent of a criminal enterprise. The fines are the bribes that the banks pay the government for the sake of appearances.

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    • jnc:

      I condemn the government for letting them get away with it in certain cases.

      So in some cases it is OK? Which cases, and how do you determine whether or not it is acceptable?

      I’m purely cynical at this point and consider the current financial system to be the equivalent of a criminal enterprise.

      I think you are not cynical enough. You apparently actually believe that the regulations (not laws passed by congress, but regulations put in place by a constitutionally questionable bureaucracy) under which banks labor actually are designed to prevent “crime”. That is an extremely naive view, in my opinion.

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  10. “I’m not aware of any accusations that they were actually falsified, except perhaps by the traders themselves.”

    Based on what I read, I think you are correct. That’s why those traders are being charged individually or cutting deals. Looks like the fines are from the new Dodd-Frank rule where the government gets to determine after the fact if the bank traded recklessly.

    Presumably the answer will be to start pre-clearing trades and trading strategies with their regulators. I.e. welcome to the world of a regulated utility.

    Like

  11. weird, mark

    Like

  12. “So in some cases it is OK? ”

    Poor phrasing by my part in the original statement. I mean that sometimes the government actually takes them to trial,sometimes they collude with them in settlements and other times puts on a political PR show. Each case should be judged individually.

    I.e. I think the London Whale episode is more of a BS show than for example going after Goldman Sachs for the Abacus deal or JP Morgan for the Jefferson County sewer deal.

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    • jnc:

      I think the London Whale episode is more of a BS show…

      So by this do you mean that you don’t think JPM is guilty of what they are actually accused of, or that the regulation that they are accused of breaking is a BS regulation?

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  13. “or that the regulation that they are accused of breaking is a BS regulation?”

    This – basically they (JPM, the company) are being fined for incurring trading losses. As distinct from the criminal investigation to the individual traders for covering up and falsifying data.

    However, this is apparently part of the new regime in Too Big Too Fail. The government will bail you out and give you free money, but they will come after you if you lose it.

    Like

    • jnc:

      This – basically they (JPM, the company) are being fined for incurring trading losses.

      So how does this – being pursued by Justice/SEC over “BS” violations – fit into your contention that JPM is just part of some vast “criminal enterprise”?

      Like

  14. PL quote of the day regarding the problems with Healthcare.gov and what the poster would have done as an alternative:

    “They could have started with WordPress, used existing plugins or created their own, and it would have worked fine.”

    Like

    • jnc:

      Scott – related document

      Thanks. That is useful.

      So almost immediately I see this: “All estimates are shown in 2011 dollars.” Which is what I suspected and is in fact a huge methodological error. It makes no sense to adjust contributions for inflation. A dollar contributed in 1970 is still only a dollar in 2011, even if that dollar can’t buy nearly as much in 2011 as it did in 1970. As any economist will tell you, inflation destroys savings. If, instead of giving that dollar to the SS trust I deposited in a bank for 40 years, I will have earned some interest on it, but the principle would not have magically transformed itself into the 2011 equivalent of a 1970 dollar. It would still just be a dollar.

      Th truth is that SS recipients can expect to receive vastly more money than they contributed, even if we include compounded interest on their contributions, which itself is just hypothetical since the money was not actually invested but rather simply spent by the government, and so doesn’t actually produce any real return.

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  15. I think the important thing to remember is that while this might be a technical problem for healthcare.gov, all the decisions leading to this were made for political reasons and not because it was the best way to design and run the exchanges. This of course, is the fault of everyone but those tasked with implementing the system.

    Like

  16. “So how does this – being pursued by Justice/SEC over “BS” violations – fit into your contention that JPM is just part of some vast “criminal enterprise”?”

    Like I said earlier, you have to judge each on a case by case basis. This is mostly about making an example of JPM under the new Dodd-Frank law and thus was pretty weak from a standpoint of crime & punishment or justice.

    However, Felix Salmon noted how it fit into the criminal enterprise framing:

    “The profits and the fines share a common cause: the internal behavior which produces massive profits also — eventually — has a tendency to produce massive fines.”

    Eventually, someone has to take the fall.

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    • jnc:

      However, Felix Salmon noted how it fit into the criminal enterprise framing:

      But that framing assumes that the behavior which produces both profits and fines is, indeed, criminal. I would dispute such a general contention as an absurd and unsubstantiated caricature of how profits have been and are achieved, but even you acknowledge that, at least in the instance at hand, the behavior that is producing the fines is not, in fact, criminal. So still I find the “criminal enterprise” claim to be oddly hyperbolic coming from someone like you. Neither JPM in particular nor the financial world in general is even remotely akin to a criminal enterprise as usually understood.

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  17. I thought w/SS you’re paying g the benefits of currrent recipients. There is no Savibgs or even logic behind adjusting for inflation because there is not gaurantee of benefit and the benefit, should Congress decide to grant it to you, is based on what Congress allows you to have.

    Like

    • McWing:

      I thought w/SS you’re paying g the benefits of currrent recipients. There is no Savibgs or even logic behind adjusting for inflation because there is not gaurantee of benefit and the benefit, should Congress decide to grant it to you, is based on what Congress allows you to have.

      As a legal matter, that is definitely correct. But as a political matter, the dual myth of SS as some kind of quid pro quo which ultimately pays for itself was and is essential to popular support for the program. But even if framed in such a way, it still makes no sense to adjust contributions for inflation in order to say people are only taking out what they put in.

      Like

      • I was just thinking about it, and the true measure of whether or not one has ultimately paid for one’s own SS benefits is the number of children one has raised into tax-paying citizens. That being the case, why not eliminate the middle man and let the kids themselves directly take care of their parents in their old age.

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  18. Scott you may like this Wonkblog summation of the JP Morgan settlement:

    So what did JPMorgan Chase do wrong in all of this?

    They bought Bear Stearns.

    Wait, what?

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/21/everything-you-need-to-know-about-jpmorgans-13-billion-settlement/

    Like

  19. I was just thinking about it, and the true measure of whether or not one has ultimately paid for one’s own SS benefits is the number of children one has raised into tax-paying citizens.

    That is good.

    Like

    • Does it matter to the calculation that the first SS money I paid in at the age of 14 was bookkept as having been paid into interest bearing Treasuries? Does it matter that SS is a creditor of the USA?

      I am asking whether it matters to the calculation of my “contribution”, not what was actually done with my withholding and the employer’s match.

      Like

  20. No Mark, once the Congress and Supreme Court decided that who gets it and what it consists of are the domain of Congress, there is nothing else that matters. You , along with the rest of us victims of the scheme are beholden to the whims of Congress.

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  21. Mark:

    Does it matter to the calculation that the first SS money I paid in at the age of 14 was bookkept as having been paid into interest bearing Treasuries?

    If you want to construe your payroll tax payments to be an “investment”, then sure, you could consider any annual interest that you did not receive to also be a “contribution”. In fact back when I did my calculation for the “average” earner, I included compounded interest at a generous average rate of 6.35% and it still didn’t come close to the expected payout for a person of 65 in 2010.

    Of course, as McWing points out, your SS contributions are not, in fact, an investment in any real sense of the word.

    Does it matter that SS is a creditor of the USA?

    No, because SS and the USA are the same thing. That SS “lends” money to the US government and earns an interest rate is nothing more than an accounting gimmick.

    Like

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