Is Bitcoin Too Risky? Whenever the Bitco…

12-01-2017 Hits:1056 BoomBustBlog Reggie Middleton

Is Bitcoin Too Risky? Whenever the Bitcoin is Mentioned in Financial Pop Media, Ignorance Ensues

I hate to be the one to break bad news to you, but most of the pop media/mainstream media financial pundits that I hear and see opine on bitcoin have...

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What Happens When Rates Rise While the S…

10-01-2017 Hits:586 BoomBustBlog Reggie Middleton

What Happens When Rates Rise While the S&P 500 Relies on Cheap Credit To Boost EPS?

So, the stock market, bond market and real estate markets are all at all-time highs. Everything is Awesome! You know better than that. You see, when the bond market wakes...

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Debt Encumbered Oil, Sovereign Soil, Toi…

10-01-2017 Hits:489 BoomBustBlog Reggie Middleton

Debt Encumbered Oil, Sovereign Soil, Toil & Trouble: Can't You Hear Seems Cracking in the OPEC Empire?

@WSJ reports Libya Ramping Up Oil Production, Threatening OPEC (supposed) Plans to lift global oil place by artificially limiting supply. This would be in violation of federal antii-trust laws in the...

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Ten Years Since BoomBustBlog Was 1st Pub…

09-01-2017 Hits:793 BoomBustBlog Reggie Middleton

Ten Years Since BoomBustBlog Was 1st Published & That Initial Research Still Relevant Today

We have looked into insurance companies' performance last month in regards to our bearish real estate thesis. A small comederie of companies are suffering losses and/or declining profits as we've exected....

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The Macro Truth About The Big Bitcoin Po…

07-01-2017 Hits:951 BoomBustBlog Reggie Middleton

Bitcoin has dropped precipitously, and as is usual, we have the cacophony of instant digital currency pundits cackling about as if they had a clue. This is the inaugural post...

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To Bust or Not To Bust: Are We In A Real…

04-01-2017 Hits:659 BoomBustBlog Reggie Middleton

To Bust or Not To Bust: Are We In A Real Estate Bubble?

Banks are showing thin NIM, yet many of the big banks are able to boast stable if not slightly improving credit metrics. This doesn’t make sense considering the explosive growth...

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What Happens To Real Asset Lending Banks…

03-01-2017 Hits:515 BoomBustBlog Reggie Middleton

What Happens To Real Asset Lending Banks When the Real Funding Rate Appears? We're About to Find Out

During the financial crisis of 2008, money market funds who subjectively agreed to hold their NAV (net asset value) unit prices at $1 “broke the buck”. That is, the unit...

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Stress Test on Banks’ Earnings Facing th…

30-06-2014 Hits:44622 BoomBustBlog Reggie Middleton

Stress Test on Banks’ Earnings Facing the Veritaseum UltraCoin Value Transaction Platform

My last post on the topic of disintermediation during a paradigm shift was Wall Street Should Be First To Invest In Reggie Middleton's UltraCoin, Much Of It Won't Be Here In...

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Introducing the "Unbreakable Promis…

09-06-2014 Hits:39458 BoomBustBlog Reggie Middleton

Introducing the "Unbreakable Promise" As a Method Increasing Efficiencies and Decreasing Risk

Continuing on the margin compression theme originally laid out in Margin Compression Is Coming in the Payment Processing Space As $100 Million Pours Into Startups, I illustrate mathematically how the bit...

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Bitcoin (and Apple) Mythbusting 101

04-06-2014 Hits:40361 BoomBustBlog Reggie Middleton

Bitcoin (and Apple) Mythbusting 101

Yesterday, I did a radio interview with Benzinga. In it I busted myths about Apple, Bitcoin and Coins in general (ABCs). Listen to the interview below and the info sheets...

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Bitcoin (and Apple) Mythbusting 101

04-06-2014 Hits:44957 BoomBustBlog Reggie Middleton

Bitcoin (and Apple) Mythbusting 101

Yesterday, I did a radio interview with Benzinga. In it I busted myths about Apple, Bitcoin and Coins in general (ABCs). Listen to the interview below and the info sheets...

Read more

Margin Compression Is Coming in the Paym…

21-05-2014 Hits:45554 BoomBustBlog Reggie Middleton

Margin Compression Is Coming in the Payment Processing Space As $100 Million Pours Into Startups

After an interesting discussion with those in my laboratory, I've decided to apply the forensic analysis team from BoomBustBlog to the privately funded companies in the Bitcoin space. See my...

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Countrywide is the largest lender in the US and may be deemed too big to fail. It is regulated by the Office of Thrift Supervision and it is a primary dealer, authorized to trade U.S. government and other select securities with the Federal Reserve System. . Fannie Mae (FNMA) and Freddie Mac (FHLMC), the privately chartered United States mortgage giants which are overseen by the department of Housing and Urban Development (HUD) were the chief purchasers of Countrywide’s loans. Although Fannie Mae and Freddie Mac issued securities are not guaranteed, there is an implied moral obligation. The U.S. market perception is that the government would never allow FHMLC or FNMA to default because it would shake the investment community to the core. It is not a secret that Fannie Mae and Freddie Mac bought subprime loans and some non-subprime risky mortgage products, but what amazes me is that they were not vocal early on about what a bad practice this was.

They have some HUD guidelines requiring them to support low income housing, and that virtually guaranteed their involvement. You can ask them more about that, since I do not have the details to hand. On Friday, August 24, I spoke to a Fannie Mae board member about a separate topic, but in passing talked about the HUD requirement.

On September 24, 2003, Countrywide expanded its interest-only (IO) programs including 80/20 loans (two loans: one for 80% of the purchase price and the second for 20% percent of the purchase price, a “piggyback” loan, to achieve 100% financing); NINA loans (no Documentation loans: no income and no asset verification), No Ratio loans (no income information is supplied, so no debt to income ratio is calculated allowing the borrower to assume a greater debt load than would be allowed with a traditional mortgage), and SISA loans (the borrower states income and states assets without verification).

By the end of 2006, Countrywide’s loans were showing signs of trouble. By the end of 2006, Countrywide began pricing its first asset backed collateralized debt obligation (ABS CDO) and was interested in doing more in derivatives and synthetics.

In March of 2007, Richard Syron, CEO of Freddie Mac, told CNBC that Freddie Mac would no longer buy NINA loans, loans not underwritten at fully amortized rate and loans that did not take into account insurance or property taxes.

In July 2007, James Lockhart of OFHEO told Bloomberg News that FNMA & FHLMC had bought (not retained) $170 billion of “AAA” rated tranches of subprime backed mortgage backed securities and would provide $40 billion for rescue mortgages, basically bailouts. He did not specify which mortgage loans would be rescued.

The week of August 6, 2007 rumors hit the market that Countrywide was looking for a “white knight,” a deep pocket investor to either take it over or to provide a liquidity injection. It was rumored Countrywide did not like the responses – the price indications – it received to its overtures.

On Friday August 10, 2007 I spoke to Warren Buffett on a matter unrelated to Countrywide. He told me that two as yet non-public situations had come up with large financial institutions that were in trouble. He had been approached by both, but of course, he would not give me details, and I did not ask for them. Warren plays his cards close to the chest. It is likely, however, that Countrywide was one of them, since they were passing the hat. But Mozilo is a bad manager, and Berkshire Hathaway cannot supply management. In fact Mozilo is the epitome of a Berkshire anti-manager: he doesn’t invest in Countrywide (since 1987 according to a recent NYTimes article), he had lax lending standards combined with risky products (and see the classic Warren Buffett quote below). Over the years, Warren Buffett has said many times – and written in his shareholder letters – that he is not a fan of borrowing money and more than that he is not a fan of lending money to people who cannot pay you back. If Countrywide was one of the situations, what was the other one? I do not know, and I am guessing. Bear Stearns? Bear was looking for liquidity in China. But Lehman is also a possibility.

If it sounds odd that Warren would consider owning a bank/thrift or an investment bank or a hedge fund, it should not. Everything has a price. Berkshire used to own a very well managed mid-west bank, Illinois National Bank – remember Gene Abegg? Warren was CEO of Salomon after Gutfreund was disgraced, because Berkshire had a large convertible bond position Warren wanted to protect. Warren also made a bid on Long Term Capital Management when it was in trouble, but the principals did not like Warren’s bid – a fair one in my opinion at the time.

As you are aware, Berkshire Hathaway bought a chunk of stock in BofA, and BofA may be one of the major beneficiaries of the mortgage meltdown. It is a bank stock with a good dividend; good management, good earnings prospects and a P/E of 10.5.

The following week, the week of August 13, the ABCP market showed serious strain. Investors began questioning the quality of the loans and other assets backing commercial paper. They asked for higher interest rates and did not want to extend their investments. Those that had purchased extendable commercial paper found that the extensions were imposed. It was clear that Countrywide’s investors were walking away from its commercial paper unless Countrywide paid exorbitant short-term interest rates. Lines formed at Countrywide as depositors demanded their money back. The thrift tried to reassure depositors that the Federal Deposit Insurance Corporation (FDIC) protected deposits up $100,000, but depositors also knew that if there were a run on Countrywide, it might take some time to recover their funds.

Countrywide let its bankers know it wanted to draw down all of its available liquidity lines; it wanted $11.5 billion from a 40-bank syndicate. Rumors flew that the banks balked asking the Fed for concessions.

On Thursday, August 16, 2007, the U.S. stock market tanked and the Dow fell and at one point during the day was down 343.53 points after Countrywide announced it tapped into the $11.5 billion in liquidity lines. It was rumored the Fed would lower the “overnight” discount window rate and extend borrowings to 30 days with further extensions. The Fed also agreed to accept asset-backed collateral with an “AAA” rating. In effect this would allow banks extending credit lines to post Countrywide’s collateral. The Fed effectively became a buyer of last resort of Countrywide’s 30 day extendable asset backed commercial paper at favorable rates that Countrywide’s former commercial paper investors would no longer accept. This action potentially benefits other ABCP programs, too, including those backed by leveraged corporate loans. The Fed news seemed to have been leaked by one or more of the banks involved and the stock market popped up before the close on August 16, 2007 to finish down only 15 points.

On Friday, August 17, 2007, the Fed announced a discount rate cut of 50 bps to 5.75% from 6.25% and also announced the longer extendable borrowing terms. The Dow closed up 233 points for the day. Countrywide announced it will now focus on loans that meet its criteria for being retained as investments and those that can be sold to Fannie Mae and Freddie Mac. Almost five years after announcing its expanded IO program, Countrywide is adopting sounder lending practices, not because of regulatory pressure, but because of market pressures.

BofA injected $2 billion into Countrywide, and Countrywide is still looking for a private equity investor.

But Mozilo is still in denial and insists his lending standards were not lax; his products were appropriate; and his fees - of up to 15% for some subprime products – were not out of line. The Fed should have asked him to step down.

-Janet Tavakoli
Tavakoli Structured Finance, Inc.