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Good Reading -- January 2013

Facts and Figures

  • Updating a prior figure, the 100-year bond issued by Mexico in 2010 was recently yielding 4.5%, down from 6.1% at issue. (Mexico has defaulted three times in the past century, but this bond has been a winner so far!)


  • "U.S. Stocks: Look Out Below?" -- This excellent article by Jason Zweig alerted me to a research paper by Prof. Robert Gordon* ("Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds") that is very worthwhile. There are some very thought-provoking points, and it doesn't stray too far into academia's realm of the theoretical but irrelevant. Highly recommended.

  • Desperately Seeking Growth -- Another good article on the topic.

  • "What's Inside America's Banks?" -- This is a long and excellent article by Frank Partnoy (whose books I recommend) and Jesse Eisinger. I have some differences of opinion in places (notably the overly emotional "gotcha" critcisms of WFC and the cursory treatment of historical cost vs. fair value), but I do agree that most large financial institutions' disclosure and accounting are atrocious. Their public financial filings are impenetrable and leave the reader with zero meaningful insight into the institution's actual risk profile, and in that sense, essentially nothing has changed from the pre-financial-crisis era. Either way, the lack of transparency and trust is a major problem that is not improving over time.

  • "The Fed's Century of Power Started with a Fateful Meeting" -- Roger Lowenstein with some interesting history on the Fed.

  • Interview with Michael Mauboussin -- My friend Miguel Barbosa conducted a great interview with Michael Mauboussin (whose books and articles are always worth reading).

  • "Why the Clean Tech Boom Went Bust" -- The energy industry is home to more bad forecasts than any other industry I know, and so it's no surprise that irrational expectations combined with mispriced risk (free government money) went especially wrong here.

  • Shaky Foundations: How Ottawa's Computers Get Canadian Home Prices Wrong -- Another look at the problems in Canadian real estate, this time focusing on the questionable results of the government's automated valuation system used to price default risk.

  • "Top 10 Longreads of 2012" -- I'm not much for the "best of" articles that proliferate at the end of the year, but this is a good opportunity to mention (again) a great source for reading.

  • Here's another one: The Quartz "favorite charts of 2012" has a lot of interesting information in graphical form.

*Full disclosure: Not that I have anything to gain by promoting Professor Gordon's paper, but as an undergrad I was his research assistant for a different paper he wrote on inflation.


  • "Broken Brics: Why the Rest Stopped Rising" -- I think this is an excellent and important article for many reasons. Highly recommended. "No idea has done more to muddle thinking about the global economy than that of the BRICs...This is not a negative read on emerging markets so much as it is simple historical reality...It is hard to sustain rapid growth for more than a decade..."

  • The FHA: A Home Wrecker -- The financial failure of the FHA has been well chronicled, although I imagine it will get some more attention in the next few quarters when the FHA receives its own federal bailout that will likely stretch into the tens of billions. But in this op-ed in the LA Times, Edward Pinto reframes the debate in terms of the social ills enfranchised by the FHA while also including a sobering recap of its reckless lending practices.

  • Angelo Mozilo is still "really proud" of "world-class" Countrywide; Congress shirks its responsibilities -- Continuing on the cynically theme, here's a mind blowing article about a deposition Angelo Mozilo gave in 2011: "I have no regrets about how Countrywide was run...We were a world-class company in every respect." The second article highlights Congress's complete and utter failure to investigate its own wrongdoing in the matter.

  • Reading Pessimism in the Market for Bonds -- Lots of good history and wisdom in this article.

Broken BRICs

Why the Rest Stopped Rising

Ruchir Sharma

RUCHIR SHARMA is head of Emerging Markets and Global Macro at Morgan Stanley Investment Management and the author of Breakout Nations: In Pursuit of the Next Economic Miracles.

Over the past several years, the most talked-about trend in the global economy has been the so-called rise of the rest, which saw the economies of many developing countries swiftly converging with those of their more developed peers. The primary engines behind this phenomenon were the four major emerging-market countries, known as the BRICs: Brazil, Russia, India, and China. The world was witnessing a once-in-a-lifetime shift, the argument went, in which the major players in the developing world were catching up to or even surpassing their counterparts in the developed world.

These forecasts typically took the developing world's high growth rates from the middle of the last decade and extended them straight into the future, juxtaposing them against predicted sluggish growth in the United States and other advanced industrial countries. Such exercises supposedly proved that, for example, China was on the verge of overtaking the United States as the world's largest economy-a point that Americans clearly took to heart, as over 50 percent of them, according to a Gallup poll conducted this year, said they think that China is already the world's "leading" economy, even though the U.S. economy is still more than twice as large (and with a per capita income seven times as high).

As with previous straight-line projections of economic trends, however-such as forecasts in the 1980s that Japan would soon be number one economically-later returns are throwing cold water on the extravagant predictions. With the world economy heading for its worst year since 2009, Chinese growth is slowing sharply, from double digits down to seven percent or even less. And the rest of the BRICs are tumbling, too: since 2008, Brazil's annual growth has dropped from 4.5 percent to two percent; Russia's, from seven percent to 3.5 percent; and India's, from nine percent to six percent.

None of this should be surprising, because it is hard to sustain rapid growth for more than a decade. The unusual circumstances of the last decade made it look easy: coming off the crisis-ridden 1990s and fueled by a global flood of easy money, the emerging markets took off in a mass upward swing that made virtually every economy a winner. By 2007, when only three countries in the world suffered negative growth, recessions had all but disappeared from the international scene. But now, there is a lot less foreign money flowing into emerging markets. The global economy is returning to its normal state of churn, with many laggards and just a few winners rising in unexpected places. The implications of this shift are striking, because economic momentum is power, and thus the flow of money to rising stars will reshape the global balance of power.


The notion of wide-ranging convergence between the developing and the developed worlds is a myth. Of the roughly 180 countries in the world tracked by the International Monetary Fund, only 35 are developed. The markets of the rest are emerging-and most of them have been emerging for many decades and will continue to do so for many more. The Harvard economist Dani Rodrik captures this reality well. He has shown that before 2000, the performance of the emerging markets as a whole did not converge with that of the developed world at all. In fact, the per capita income gap between the advanced and the developing economies steadily widened from 1950 until 2000. There were a few pockets of countries that did catch up with the West, but they were limited to oil states in the Gulf, the nations of southern Europe after World War II, and the economic "tigers" of East Asia. It was only after 2000 that the emerging markets as a whole started to catch up; nevertheless, as of 2011, the difference in per capita incomes between the rich and the developing nations was back to where it was in the 1950s.

This is not a negative read on emerging markets so much as it is simple historical reality. Over the course of any given decade since 1950, on average, only a third of the emerging markets have been able to grow at an annual rate of five percent or more. Less than one-fourth have kept up that pace for two decades, and one-tenth, for three decades. Only Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong have maintained this growth rate for four decades. So even before the current signs of a slowdown in the BRICs, the odds were against Brazil experiencing a full decade of growth above five percent, or Russia, its second in a row.

Meanwhile, scores of emerging markets have failed to gain any momentum for sustained growth, and still others have seen their progress stall after reaching middle-income status. Malaysia and Thailand appeared to be on course to emerge as rich countries until crony capitalism, excessive debts, and overpriced currencies caused the Asian financial meltdown of 1997-98. Their growth has disappointed ever since. In the late 1960s, Burma (now officially called Myanmar), the Philippines, and Sri Lanka were billed as the next Asian tigers, only to falter badly well before they could even reach the middle-class average income of about $5,000 in current dollar terms. Failure to sustain growth has been the general rule, and that rule is likely to reassert itself in the coming decade.

In the opening decade of the twenty-first century, emerging markets became such a celebrated pillar of the global economy that it is easy to forget how new the concept of emerging markets is in the financial world. The first coming of the emerging markets dates to the mid-1980s, when Wall Street started tracking them as a distinct asset class. Initially labeled as "exotic," many emerging-market countries were then opening up their stock markets to foreigners for the first time: Taiwan opened its up in 1991; India, in 1992; South Korea, in 1993; and Russia, in 1995. Foreign investors rushed in, unleashing a 600 percent boom in emerging-market stock prices (measured in dollar terms) between 1987 and 1994. Over this period, the amount of money invested in emerging markets rose from less than one percent to nearly eight percent of the global stock-market total.

This phase ended with the economic crises that struck from Mexico to Turkey between 1994 and 2002. The stock markets of developing countries lost almost half their value and shrank to four percent of the global total. From 1987 to 2002, developing countries' share of global GDP actually fell, from 23 percent to 20 percent. The exception was China, which saw its share double, to 4.5 percent. The story of the hot emerging markets, in other words, was really about one country.

The second coming began with the global boom in 2003, when emerging markets really started to take off as a group. Their share of global GDP began a rapid climb, from 20 percent to the 34 percent that they represent today (attributable in part to the rising value of their currencies), and their share of the global stock-market total rose from less than four percent to more than ten percent. The huge losses suffered during the global financial crash of 2008 were mostly recovered in 2009, but since then, it has been slow going.

The third coming, an era that will be defined by moderate growth in the developing world, the return of the boom-bust cycle, and the breakup of herd behavior on the part of emerging-market countries, is just beginning. Without the easy money and the blue-sky optimism that fueled investment in the last decade, the stock markets of developing countries are likely to deliver more measured and uneven returns. Gains that averaged 37 percent a year between 2003 and 2007 are likely to slow to, at best, ten percent over the coming decade, as earnings growth and exchange-rate values in large emerging markets have limited scope for additional improvement after last decade's strong performance.


No idea has done more to muddle thinking about the global economy than that of the BRICs. Other than being the largest economies in their respective regions, the big four emerging markets never had much in common. They generate growth in different and often competing ways-Brazil and Russia, for example, are major energy producers that benefit from high energy prices, whereas India, as a major energy consumer, suffers from them. Except in highly unusual circumstances, such as those of the last decade, they are unlikely to grow in unison. China apart, they have limited trade ties with one another, and they have few political or foreign policy interests in common.

A problem with thinking in acronyms is that once one catches on, it tends to lock analysts into a worldview that may soon be outdated. In recent years, Russia's economy and stock market have been among the weakest of the emerging markets, dominated by an oil-rich class of billionaires whose assets equal 20 percent of GDP, by far the largest share held by the superrich in any major economy. Although deeply out of balance, Russia remains a member of the BRICs, if only because the term sounds better with an R. Whether or not pundits continue using the acronym, sensible analysts and investors need to stay flexible; historically, flashy countries that grow at five percent or more for a decade -- such as Venezuela in the 1950s, Pakistan in the 1960s, or Iraq in the 1970s -- are usually tripped up by one threat or another (war, financial crisis, complacency, bad leadership) before they can post a second decade of strong growth.

The current fad in economic forecasting is to project so far into the future that no one will be around to hold you accountable. This approach looks back to, say, the seventeenth century, when China and India accounted for perhaps half of global GDP, and then forward to a coming "Asian century," in which such preeminence is reasserted. In fact, the longest period over which one can find clear patterns in the global economic cycle is around a decade. The typical business cycle lasts about five years, from the bottom of one downturn to the bottom of the next, and most practical investors limit their perspectives to one or two business cycles. Beyond that, forecasts are often rendered obsolete by the unanticipated appearance of new competitors, new political environments, or new technologies. Most CEOs and major investors still limit their strategic visions to three, five, or at most seven years, and they judge results on the same time frame.


In the decade to come, the United States, Europe, and Japan are likely to grow slowly. Their sluggishness, however, will look less worrisome compared with the even bigger story in the global economy, which will be the three to four percent slowdown in China, which is already under way, with a possibly deeper slowdown in store as the economy continues to mature. China's population is simply too big and aging too quickly for its economy to continue growing as rapidly as it has. With over 50 percent of its people now living in cities, China is nearing what economists call "the Lewis turning point": the point at which a country's surplus labor from rural areas has been largely exhausted. This is the result of both heavy migration to cities over the past two decades and the shrinking work force that the one-child policy has produced. In due time, the sense of many Americans today that Asian juggernauts are swiftly overtaking the U.S. economy will be remembered as one of the country's periodic bouts of paranoia, akin to the hype that accompanied Japan's ascent in the 1980s.

As growth slows in China and in the advanced industrial world, these countries will buy less from their export-driven counterparts, such as Brazil, Malaysia, Mexico, Russia, and Taiwan. During the boom of the last decade, the average trade balance in emerging markets nearly tripled as a share of GDP, to six percent. But since 2008, trade has fallen back to its old share of under two percent. Export-driven emerging markets will need to find new ways to achieve strong growth, and investors recognize that many will probably fail to do so: in the first half of 2012, the spread between the value of the best-performing and the value of the worst-performing major emerging stock markets shot up from ten percent to 35 percent. Over the next few years, therefore, the new normal in emerging markets will be much like the old normal of the 1950s and 1960s, when growth averaged around five percent and the race left many behind. This does not imply a reemergence of the 1970s-era Third World, consisting of uniformly underdeveloped nations. Even in those days, some emerging markets, such as South Korea and Taiwan, were starting to boom, but their success was overshadowed by the misery in larger countries, such as India. But it does mean that the economic performance of the emerging-market countries will be highly differentiated.

The uneven rise of the emerging markets will impact global politics in a number of ways. For starters, it will revive the self-confidence of the West and dim the economic and diplomatic glow of recent stars, such as Brazil and Russia (not to mention the petro-dictatorships in Africa, Latin America, and the Middle East). One casualty will be the notion that China's success demonstrates the superiority of authoritarian, state-run capitalism. Of the 124 emerging-market countries that have managed to sustain a five percent growth rate for a full decade since 1980, 52 percent were democracies and 48 percent were authoritarian. At least over the short to medium term, what matters is not the type of political system a country has but rather the presence of leaders who understand and can implement the reforms required for growth.

Another casualty will be the notion of the so-called demographic dividend. Because China's boom was driven in part by a large generation of young people entering the work force, consultants now scour census data looking for similar population bulges as an indicator of the next big economic miracle. But such demographic determinism assumes that the resulting workers will have the necessary skills to compete in the global market and that governments will set the right policies to create jobs. In the world of the last decade, when a rising tide lifted all economies, the concept of a demographic dividend briefly made sense. But that world is gone.

The economic role models of recent times will give way to new models or perhaps no models, as growth trajectories splinter off in many directions. In the past, Asian states tended to look to Japan as a paradigm, nations from the Baltics to the Balkans looked to the European Union, and nearly all countries to some extent looked to the United States. But the crisis of 2008 has undermined the credibility of all these role models. Tokyo's recent mistakes have made South Korea, which is still rising as a manufacturing powerhouse, a much more appealing Asian model than Japan. Countries that once were clamoring to enter the eurozone, such as the Czech Republic, Poland, and Turkey, now wonder if they want to join a club with so many members struggling to stay afloat. And as for the United States, the 1990s-era Washington consensus -- which called for poor countries to restrain their spending and liberalize their economies -- is a hard sell when even Washington can't agree to cut its own huge deficit.

Because it is easier to grow rapidly from a low starting point, it makes no sense to compare countries in different income classes. The rare breakout nations will be those that outstrip rivals in their own income class and exceed broad expectations for that class. Such expectations, moreover, will need to come back to earth. The last decade was unusual in terms of the wide scope and rapid pace of global growth, and anyone who counts on that happy situation returning soon is likely to be disappointed.

Among countries with per capita incomes in the $20,000 to $25,000 range, only two have a good chance of matching or exceeding three percent annual growth over the next decade: the Czech Republic and South Korea. Among the large group with average incomes in the $10,000 to $15,000 range, only one country -- Turkey -- has a good shot at matching or exceeding four to five percent growth, although Poland also has a chance. In the $5,000 to $10,000 income class, Thailand seems to be the only country with a real shot at outperforming significantly. To the extent that there will be a new crop of emerging-market stars in the coming years, therefore, it is likely to feature countries whose per capita incomes are under $5,000, such as Indonesia, Nigeria, the Philippines, Sri Lanka, and various contenders in East Africa.

Although the world can expect more breakout nations to emerge from the bottom income tier, at the top and the middle, the new global economic order will probably look more like the old one than most observers predict. The rest may continue to rise, but they will rise more slowly and unevenly than many experts are anticipating. And precious few will ever reach the income levels of the developed world.

Copyright © 2002-2012 by the Council on Foreign Relations, Inc.

The FHA: A home wrecker

The agency's misguided policies are disrupting the American dream for the families and neighborhoods they are supposed to help.

By Edward J. Pinto

December 27, 2012

Imagine that a federal agency wanted to hurt America's working-class families on purpose. How would it inflict maximum damage?

It might start by aggressively marketing homeownership to marginal borrowers. It would tell them that bad credit scores aren't a problem. It would push them into homes they can't afford, saddle them with loans that barely build equity and provide no incentives for fiscal discipline. And when many of these homes go underwater and into foreclosure, it would leave families in financial ruin.

In short, such an agency would follow the Federal Housing Administration playbook.

That's a shame, because Republicans and Democrats alike rightly applaud the FHA's mission to provide responsible mortgage credit to low- and moderate-income Americans and first-time home buyers. But all too often, the FHA turns the American dream into a nightmare, setting up failure for the very families and neighborhoods its mission is to help.

This is not an isolated problem. A new study I completed at the American Enterprise Institute identified no fewer than 9,000 lower-income ZIP Codes where the projected foreclosure rate on loans insured by the FHA in fiscal years 2009 and 2010 is more than 10%. Overall, 1 in 7 families in these ZIP Codes stands to lose their home and their savings. Many areas had failure rates of 20%, 30% and even higher.

FHA policies are creating a real-life "tale of two cities," with the worst of times concentrated in working-class neighborhoods. In Chicago, the five ZIP Codes with the highest projected failure rate ranged from 35% to 73%, while the five lowest stood at just 0% to 4%. The comparable figures for Los Angeles/Riverside/San Bernardino are 13% to 17% for the five ZIP Codes with the highest failure rate, while the five lowest were all at 0%.

Remember, these loans were written well after the housing collapse. Today, the FHA's risky underwriting policies are backfiring in dramatic fashion in cities across America. Even in 2012, 40% of the FHA's loans are subprime — having a credit score below 660 or a debt-to-income ratio of 50% or more. To put this in perspective, the median FICO score for all individuals in the U.S. is 720, and the foreclosure risk on FHA loans increases substantially once the debt ratio exceeds 35%. When combined with minimal down payments and a 30-year term that builds equity slowly, the result is mortgage malpractice.

The FHA doesn't need to give up its mission. But it does need to acknowledge the harm its programs have caused. And it needs to follow a few simple principles that will stop setting up working families to fail.

First, end the practice of knowingly lending to people who cannot afford to repay their loans. The FHA uses its pricing advantages and lending policies to entice many low- and moderate-income families to take out irresponsible loans. Congress and the FHA refuse to stop this financing of failure because of special-interest groups. Start with the National Assn. of Realtors, which always supports looser standards because each marginal buyer represents another home sale, no matter how risky. Add community advocacy groups that promote "flexible" lending standards, which really mean risky loans with high default rates. Finally, the FHA focuses only on national averages while ignoring that the subprime loans it guarantees inevitably become highly concentrated in limited geographical areas.

To stop this harmful lending, the FHA should aim to cut its failure rate roughly in half, setting a maximum foreclosure rate of 10% on the loans it insures with an average foreclosure rate of 5%.

Second, help borrowers become owners, not debtors. The FHA nudges families onto a tightrope with no safety net, leaving them a broken water heater away from failure. Low-credit-score borrowers are eight to 14 times more likely to fail than a slightly less stretched borrower with the median credit score. Helping more borrowers take on 20-year, instead of 30-year, loans could cut their chance of losing a home 40%.

Third, concentrate on families that truly need help purchasing their first home. In recent years, the FHA has strayed far from its original mission, instead serving wealthier and wealthier home buyers as it quadrupled its insurance portfolio to $1.1 trillion. In fiscal year 2011, 54% of the FHA's dollar volume went to finance homes that were greater than 125% of an area's median house price. Since the FHA's mission is to help low- and moderate-income home buyers, the homes it finances should cost less than the median. Additionally, first-time home buyers should be limited to below-median incomes and repeat home buyers to incomes less than 80% of the median.

Fourth, step back from markets that can be better served by private lenders and insurers. The FHA has advantages that allow it to offer much lower rates than the private sector. Unless these advantages are narrowly targeted, they lead to unfair and dangerous competition with the prime and subprime private sector and political interference. The FHA should reduce its market share from today's 30% to a healthier 10% to 15%.

Taxpayers also have cause for concern. While recent data about sales volume and construction starts are encouraging, the same government mortgage complex that precipitated the crisis is still distorting the market. The FHA is just one part of that complex, and it's in deep denial. Were it a private mortgage insurer, regulators would shut it down for having a current net worth of negative $25 billion. It hasn't kept its own house in order, and as my research shows, it's continuing to push low- and moderate-income borrowers to make big, bad bets on homes they can't afford, with painful consequences.

Pursuing the American dream starts with a reality check. When Americans are given honest information about prices and risks, we make smart choices. But when the government tries to convince us that price and risk don't apply, hope turns to hopelessness.

Angelo Mozilo Unbowed Says Countrywide Was ‘World-Class Com pany’


Angelo Mozilo Unbowed Says Countrywide Was ‘World-Class Company’

2012-12-13 05:00:03.0 GMT

By Hugh Son and Edvard Pettersson

Dec. 13 (Bloomberg) -- Countrywide Financial Corp. co- founder Angelo Mozilo said under oath last year that he had “no regrets” about how he ran the mortgage firm and that he only agreed to a record $67.5 million regulatory settlement in 2010 to protect his children.

Mozilo, who led the lender blamed by lawmakers and regulators for contributing to the housing collapse, said in a June 2011 deposition as part of a lawsuit between his firm, which was bought by Bank of America Corp., and MBIA Inc., according to documents filed this week in state court in New York. MBIA, once the biggest bond insurer, claims Countrywide committed fraud by securitizing loans that were riskier than promised.

The crisis was “not caused by an act of Countrywide,” said Mozilo, 73, according to a transcript of the deposition. “This is all about an unprecedented, cataclysmic situation, unprecedented in the history of this country. Values in this country dropped by 50 percent.”

Bank of America, the second-biggest U.S. bank by assets, has spent more than $40 billion to clean up mortgages inherited from the 2008 Countrywide purchase. Congressional investigators released e-mails from Mozilo, the Countrywide chief executive officer, showing that as early as 2004 he was concerned about the decline in quality of mortgages the lender was originating. Mozilo was responding to questions from an MBIA attorney who asked if he regretted how Countrywide was run after “all the foreclosures and ruined lives and lawsuits.” Mozilo called the lawyer’s question “nonsensical and insulting.”

Mortgage Mess

“I have no regrets about how Countrywide was run,” Mozilo said. “We were a world-class company in every respect.” Mozilo sought to defend his company’s role in the mortgage mess even before the U.S. housing market showed signs of recovery from the bursting of the housing bubble. The firm only made loans that it was confident would be repaid, Mozilo said. Countrywide was the third-largest subprime lender in 2006, with about $40.6 billion in the mortgages, compared with $44.6 billion in 2005, according to data from Inside Mortgage Finance.

“We never made a loan knowingly -- and it would be stupid to do so -- that we knew the borrower could not pay. Never,” Mozilo said. “All our loans had that one standard from 1968 to the end of my rein at Countrywide.” While publicly reassuring investors about the quality of his loans, Mozilo issued “dire” internal warnings and engaged in insider trading accelerating stock sales to reap about $140 million, the U.S. Securities and Exchange Commission alleged in a 2009 lawsuit. In one e-mail, he described a “particularly profitable subprime product as ‘toxic.’” He also wrote that Countrywide was “flying blind” and had “no way” to determine the risks of some adjustable-rate mortgages, the SEC said.

Criminal Investigation

In 2010, Mozilo agreed to a $67.5 million settlement to resolve SEC claims that he misled investors, without admitting or denying the allegations. The Justice Department ended a criminal investigation of Mozilo without bringing charges, a person familiar with the investigation said in February 2011. He paid the $22.5 million fine included in the SEC deal to protect his nine grandchildren and five children from the effects of his notoriety, Mozilo said.

“It had nothing to do with anything that I did at Countrywide or anything I did in my personal life,” Mozilo said. Relatives “were being harassed in school. My name was in the paper every day nationally and internationally, accusing me of things that were absolutely untrue. I could not have my family go through it anymore, and that’s why I settled.”

‘Really Proud’

Mozilo “remains really proud of his company and this institution he built,” said his attorney, David Siegel. “It would be unfair to say he doesn’t feel a great deal of empathy for the honest, hard-working Americans who suffered in the financial crisis.”

A wealth of information in the public record contradicts Mozilo’s contention that Countrywide never knowingly made a bad loan, said Joel Bernstein, the lead lawyer for plaintiffs in a shareholder lawsuit that Charlotte, North Carolina-based Bank of America settled for $600 million.

“A lot of people would find a different solution for their grandchildren being pestered than agreeing to a $67 million settlement,” Bernstein said. If he were in Mozilo’s position, Bernstein said, he would have found a different school for them. David Brown, a spokesman for the SEC’s Los Angeles office, said he had no immediate comment on Mozilo’s deposition. Kevin Brown, an MBIA spokesman, declined to comment on the deposition. Bank of America spokesman Lawrence Grayson didn’t immediately respond to an e-mailed request seeking comment on it.


Countrywide Loan Probe Ended by House Panel With No Action Taken

2012-12-28 16:18:43.955 GMT

By Cheyenne Hopkins

Dec. 28 (Bloomberg) -- A U.S. House panel ended a probe of alleged preferential lending by Countrywide Financial Corp. to lawmakers and aides without taking action, saying the “serious matters” submitted for review fall outside its jurisdiction.

Allegations surrounding mortgage loans to House members and staffers through Countrywide Chief Executive Officer Angelo Mozilo’s “Friends of Angelo” initiative or other so-called VIP programs are either too old or involve people no longer employed in the House, the Ethics Committee’s Republican chairman and ranking Democrat said in a statement yesterday.

“While these allegations concern serious matters, almost all of the allegations concerned actions taken outside, or well outside, the jurisdiction of this committee,” Ethics Committee Chairman Jo Bonner of Alabama and Representative Linda Sanchez of California said in their statement. House rules preclude sanctions for violations that occur more than three Congresses -

- or six years -- before the current one, they said.

The investigation was sought by Representative Darrell Issa, the California Republican who leads the House Oversight and Government Reform Committee. Issa said in a July report that Countrywide gave discount loans to lawmakers and Fannie Mae executives from 1996 to 2008 as the government-sponsored mortgage-finance company lobbied to block legislation that would’ve diminished its sale of subprime loans.

Bonner and Sanchez said the Ethics Committee conducted its own review of the role of Countrywide’s VIP unit, finding that while it offered quicker, more efficient processing and some discounts, the loans met basic underwriting standards and didn’t offer the best deals available in the marketplace.

Best Deal

“Participation in the VIP or F.O.A. programs did not necessarily mean that borrowers received the best financial deal available either from Countrywide or other lenders,” they said in the statement. “Therefore, mere inclusion in one of these programs is not, in and of itself, a violation of any rules, laws, or standards of conduct governing members, officers, or employees of the House of Representatives.”

The Senate Ethics Committee completed an investigation in

2009 saying lawmakers including former Banking Committee Chairman Christopher Dodd and Senator Kent Conrad didn’t violate rules when they refinanced loans with Countrywide.

Fannie Mae, which bought billions of dollars in mortgages from Countrywide under an exclusive agreement, has been under U.S. conservatorship since September 2008, when it was seized along with Freddie Mac amid losses that pushed them to the brink of bankruptcy. Countrywide had been acquired two months earlier by Bank of America Corp., which has spent more than $40 billion to clean up mortgages inherited in the deal.

Mozilo, 74, agreed to a record $67.5 million regulatory settlement in 2010 to resolve claims that he reaped about $140 million by selling Countrywide stock while misleading investors about the quality of the company’s loans.

Reading Pessimism in the Market for Bonds


“Certificates of Confiscation.”

Three decades ago, that was what some people said bonds really were. The interest the bond paid would not be enough, they said, to offset the declining value of dollars as inflation added up. The “real” — after-inflation — bond yield would be negative.

That was just as the great bull market in bonds began. Bonds were great investments, and the bond bears turned out to have been dead wrong.

Now we have come full circle. The government is selling bonds that are absolutely, positively guaranteed to not pay enough to offset inflation over the coming years. It is even possible that someone who bought a new Treasury security that will be issued on Monday will end up getting fewer dollars back than he or she invested — interest and principal combined — between now and when the bond matures in 2017.

The securities are inflation-protected Treasury notes. If inflation ticks up significantly over the coming years, investors will get back more dollars than originally invested. But not enough to come close to keeping up with inflation. If there is no inflation, they will get back less than they invested.

When those securities were auctioned last week, buyers agreed to accept a real yield of negative 1.496 percent. It takes a lot of pessimism — about the economy and the future of the United States — to think an investment certain to lose money is an investment worth making.

The great bear market in bonds, both corporates and governments, lasted 35 years, from 1946 to 1981. The bull market lasted about 30 years. A new bear market almost certainly has begun.

If that is true, those seeking a little income now by going out the yield curve will come to rue the decision. They will get the promised interest, but as market interest rates rise, the price of those bonds will decline and decline and decline.

On Oct. 26, 1981, which can be dated as the bottom of the great bond bear market, the yield on 30-year Treasury bonds rose to 15.21 percent. On that date, a Treasury bond issued in 1970 and scheduled to mature in 2000 was quoted at less than 56 percent of face value. It had a coupon of 7.875 percent, but that was not deemed enough to compensate investors for the risk.

At market extremes, it is often worth analyzing what has to be true for a given investment to be a good, or bad, value. Back in 1981, you had to assume that inflation would not only remain in double digits for decades, but that it would also continue to rise, for a newly issued Treasury bond to turn out to be a bad investment. Yet many investors assumed it would be. After all, a lot of people on Wall Street in 1981 could not remember a time when bonds were good investments.

A few weeks before rates peaked, Seth Glickenhaus, an experienced bond trader and head of Glickenhaus & Company, an investment advisory firm, spoke the conventional wisdom when he said, “Anyone who buys a bond today to hold for more than five years is out of his mind.”

Michael Gavin, the head of United States asset allocation for Barclays, pointed out this month that over the past 30 years an investor who stayed invested in American, or British, 10-year government bonds would have earned more than 5 percent a year over inflation.

“It does not require advanced market math to understand that returns like these are no longer remotely plausible,” he wrote. “But they say that fish don’t know that they live in water — until they are removed from it — and we wonder if some of the many market participants whose entire professional experience has been conditioned by the financial backdrop created by the bond market rally might underestimate some consequences of its termination.”

Even if rates stay where they are for the next five years, and investors collect the interest coupons, he said, “bonds will be transformed from wealth creators into wealth destroyers.”

Or at least they will be unless there is severe deflation. For that is the only situation that will allow today’s new long-term bonds to turn into good investments.

Is that possible? To think it is likely, you pretty much have to assume that economic growth is a thing of the past in both the United States and Europe. It is not an optimistic outlook.

James Grant, the editor of Grant’s Interest Rate Observer — and a bear on bonds for some time — argues there are parallels between 1981 and now, at least in conventional wisdom. “Central banks are harmless, said the bond bears in 1981; in a social democracy, inflation is ineradicable,” he writes in the current issue of his publication. “Central bankers are harmless, charge the bond bulls of 2012; in an overleveraged economy, inflation is unachievable.”

One reason bond yields are so low now — at least in markets like Britain and the United States — is the fact that after the Greek fiasco investors have come to fear default more than currency depreciation. That had led to a rush to default-proof bonds, which means bonds issued by countries that can print the currency they borrowed. (It may be that Treasuries will not always be default-proof because a Tea Party-influenced Congress will refuse to allow the government to pay its bills. But so far markets assume the politicians will not be that stupid.)

It is interesting to look at the relationship of stocks and bonds when the bond market is near extremes in valuation. Those moments tend to come when economic uncertainty is high and fears are widespread. In the past, such fears have proved to be wrong.

In 1946, there was a consensus among many economists that a new depression was likely. After all, the 1930s depression did not end until armies put unemployed people to work. Now that the war was over and armies were shrinking, would not the economy retreat again?

Bond prices turned down — and yields up — in the spring of 1946. Stocks sold off that fall, and it was not until 1950 that the stock market got back to where it was when the bond bear market began.

Then stocks enjoyed a phenomenal period. One reason interest rates were rising was that economic growth presented good investment opportunities. The stock market was a very good place to put money throughout the 1950s and into the mid-1960s, occasional recessions and bear markets notwithstanding.

During the last 10 or 15 years of the bond bear market, however, the stock market gyrated but went nowhere. In 1981, as the bond bear market was ending, the Dow Jones industrial average was lower than it had been 15 years earlier. The economy was in recession and optimism was hard to find. There was a consensus that the United States had lost its competitive edge and could not compete with Japan. Share prices did not hit bottom until the summer of 1982.

But in 1982 the golden age of American stock and bond markets began. For nearly two decades, both were usually good places to invest, and the United States economy did well. But the technology stock bubble’s bursting in 2000 signaled an end to an era in the stock market. A share of Fidelity Magellan — one of the most successful mutual funds of the 1980s and 1990s — is now worth less than a share was worth 13 years ago.

As 2012 ends, pessimism is high. Some economists talk of a prolonged period without economic growth in the industrialized world, as the United States and Europe fail to compete with China and India. Investors find a bond guaranteed to lose value — but not to lose all value — to be worth buying.

It is no wonder that major corporations now are issuing long-term bonds even though they don’t appear to have any need for the money. As economic growth picks up in coming years, those companies will appear to have been prescient. The buyers, on the other hand, will seem to have been as foolish as were those who disdained bonds 30 years ago.

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