Filed under: International markets, Other issues, Housing, Federal Reserve

The U.S. Federal Reserve stated it will conduct biweekly emergency auctions of loans “for as long as necessary” as part of a coordinated effort among the world’s major central banks to provide liquidity to head off a potential, future credit crunch, the Fed announced Friday in a statement.

The Fed said: “The Federal Reserve intends to conduct biweekly Term Auction Facility (TAF) auctions for as long as necessary to address elevated pressures in short-term funding markets. The Board of Governors will announce the sizes of the January 14 and January 28 TAF auctions at noon on January 4.”

To date, the Fed, in conjunction with the European Central Bank, has loaned more than $40 billion in 35-day loans in two auctions at interest rates of 4.65% and 4.67% per auction, respectively, Bloomberg News reported Friday.

Along with maintaining liquidity in credit markets, the world’s major central banks are attempting to reduce the spread between overnight interest rates and benchmark ECB and Federal Reserve lending rates - - such as the spread between the U.S. LIBOR rate and 3-month U.S. Treasuries. A high LIBOR rate compared to benchmark Fed/ECB rates recommends that banks are reluctant to lend to one another, and/or that banks see increased risk in lending to each other.

Intervention working, so far

That spread continued to narrow Friday, which recommends that the major central bank’s intervention effort has eased credit crunch concerns somewhat. On Friday the spread between three-month U.S. Treasury Bills and the three-month LIBOR decreased 3 basis points to 1.93 percentage points, Bloomberg News reported.

Economist Steve Affinito told BloggingStocks Friday that the initial, emergency central bank fundings appear to be achieving their intended goals, at least so far.

“There is now more liquidity in the system, and the Fed’s and the ECB’s new loans are having their intended effect, and the drop in overnight lending rates reflects that,” Affinito stated. “Banks are not absolutely enamored with one another, balance sheet-wise, but the rates are dropping, which is a positive.”

Second psychological boost

Affinito added that the Fed’s decision to essentially continue to conduct bi-weekly emergency auctions for as long as needed will provide another psychological boost for the credit markets.

“It states the Fed is in-touch, isn’t going away, and that it recognizes that emergency loan needs by banks do not magically stop in January, or February or March. They know it may be a year, maybe longer, before short-term borrowing needs dissipate, and they’re saying that ‘no one is going to go out of business for lack of a $5 billion short-term loan,’” Affinito stated. “It’s a pretty massive statement by the Fed, and when you add it to the ECB’s $500 billion liquidity announcement, it should take considerable pressure off the credit markets.”

Earlier this week, the ECB made $500 billion in short-term loans available to banks to avert a year-end liquidity crunch. The $500 billion move was part of a coordinated effort among the world’s major central banks to increase liquidity in the international finance system to head-off a potential credit crunch stemming from subprime mortgage and related asset defaults.

In that coordinated action, the U.S. Federal Reserve, in consultation with the ECB, the Bank of England, the Swiss National Bank, and the Bank of Canada, decided to inject $40 billion via auctions, in two stages, into the financial system. (Also, in addition to reciprocal currency arrangements, the companion central banks undertook related liquidity actions, including The Bank of England’s decision to accept a wider range of collateral on three-month loans.)

Housing: long-term issue

Still, Affinito cautioned investors that systemic liquidity does not mean that the impact of the housing slump on the U.S. economy has vanished. The growing mortgage default lists and unsold home backlog will continue to negatively affect the U.S. economy thorough at least 2008, and most likely longer.

“Mortgage defaults mean lost household formations and unsold homes mean stalled housing prices and each will act as a drag on the economy in 2008,” Affinito said. “The U.S. economy will need strong exports and other investment activity to offset housing’s drag effect, to keep growing in 2008.”

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Filed under: Law, Money and Finance Today, Washington Mutual (WM), Housing

Both the SEC and New York Say Attorney General Andrew Cuomo are investigating possible appraisal problems at Washington Mutual (NYSE: WM), according to today’s Wall Street Journal. The SEC is just starting its inquiry into whether investors of mortgage-backed securities were informed about how the mortgage lender arranged for home appraisals. WaMu stated it’s fully cooperating with the SEC and the Office of Thrift Supervision, which is WaMu’s federal regulator.

Cuomo filed a lawsuit in November without naming the bank as a defendant, but alleged it “exerted pressure on an appraisal company to inflate property valuations to ensure its loans went through,” according to the Journal story. Cuomo believes that WaMu hand-picked appraisers that brought in high valuations and that bank employees and pressured at least one appraisal company to increase estimates that came in too low. First American, which is named in the suit, asked that the case be thrown out of court because Cuomo doesn’t have jurisdiction. It believes only the Office of Thrift Supervision can take action.

WaMu told the Journal, “After spending a month and a half investigating these allegations, we can say with confidence that there has been no systematic effort by WaMu to inflate home appraisals. We take these allegations seriously.”

While there may not have been a systematic effort, clearly this kind of pressure did go on around the country as mortgage lenders battled for more and more of the mortgage lending pie. As I indicated in an earlier post, mortgage fraud is driving the number of foreclosures up. Inflated appraisals, whether ordered as part of a systematic process by the bank or “winked at” in an effort to bring in more business still feed the same problem.

I don’t know whether this problem was rampant at WaMu, but all indications are that inflated appraisals helped to fuel the real estate bubble nationwide. These inflated appraisals gave investors a false sense of security that they were funding legitimate loans. if any bank or savings and loan is shown to be part of this pressure to drive appraisals higher they should be held just as liable as the others facing criminal charges.

Lita Epstein has written more than 20 books including the “Complete idiot’s Guide to the Federal Reserve.”

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Filed under: Forecasts, Citigroup Inc. (C), Merrill Lynch (MER), Countrywide Financial (CFC), Housing

Countrywide Financial Corp. (NYSE: CFC) Angelo Mozilo sure comes across like a selfless champion of the underdog on his company’s website, which points out that he founded the company in 1969 “on the principle that every family in America desiring to achieve the dream of home ownership should have the opportunity to do so.” This year, that dream turned into a nightmare for many Countrywide borrowers and investors.

Shares of the Calabasas, Calif.-based company have slumped 77% this year as the subprime mortgage meltdown worsened. Many investors have been injured, with the exception of Mozilo. The New York Times reported in October that SEC had opened an informal investigation into the timing of Mozilo’s stock sales, “which allowed him to gain more than $132 million in the months before the price plummeted amid the deepening mortgage crisis.”

The company threw its beleaguered borrowers a bone on October 23, allowing about 52,000 customers with subprime loans to refinance into prime or government-backed mortgages through next year, and gave more affordable terms to another 30,000 either behind or in danger of becoming behind in their mortgages. As Senator Chris Dodd (D-CT), a candidate for president, noted, the problem extends well beyond the people the company has concurred to help.

The next few months will be tough ones for Mozilo. He is the poster child for the mortgage crisis, in which countless borrowers wound up in homes that they never could afford without low-ball “teaser” rates offered by Countrywide and its competitors, creating the worst slump in real estate since the Great Depression. The crisis has already claimed the CEOs of Merrill Lynch & Co. (NYSE: MER) and Citigroup Inc. (NYSE: C). Will Mozilo be next?

The winner of the Alfred Schweitzer Award for his work with the youth of America isn’t a humble guy. As the Times noted, the son of a Bronx butcher has a massive chip on his shoulder, telling the newspaper in 2005 that when he meets a stranger on the golf course, he explains that he is in the financial services business. “I don’t know why,” he told the Times. “It makes me feel better. I guess status.”

The same could be said for the millions of people who became owners of homes they couldn’t afford.

Be sure to check out other Money Losers of 2007.

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Filed under: Law, Scandals, Bear Stearns Cos (BSC), Housing

A multi-million dollar fraud ring [subscription required] exposed in Atlanta may end up explaining more of the foreclosures than anyone imagined. Today’s Wall Street Journal details the how the fraud ring got $6.8 million in mortgages from Bear Stearns (NYSE: BSC).

The Journal story speaks about a New Yorker who told the bank that he and his wife earned more than $50,000 month as top officers of a marketing firm and submitted statements showing he had $3 million in assets, according to the federal fraud indictment. In reality, he was actually a phone technician earning $105,000 per year with only $35,000 in assets and his wife was a homemaker with no outside income. They bought a mansion for $1.8 and it recently sold out of foreclosure for $1.1 million. The scheme was exposed by neighbors who saw multi-million dollar homes sell for sky-high prices and then sit empty. People involved in this Atlanta ring are facing criminal fraud charges.

The FBI told the Journal that the percentage of white-collar agents and analysts devoted to prosecuting mortgage fraud is 28%. That’s four times the number working on those types of cases in 2003 when it was only 7%. Lenders must file Suspicious Activity Reports when they suspect fraud. The number of reports being filed is up by nearly 700% between 2000 and 2006. In 2003 there were 436 active mortgage fraud cases and in 2007 the case load is 1,210.

Arthur Prieston, chairman of the Prieston Group, which provides mortgage fraud insurance and training, believes 2006 losses from mortgage fraud could total a record $4.5 billion, which is a 100% increase from the previous year, according to the Journal. Based on the increasing FBI caseload, I’ll bet that number jumps even higher when the 2007 statistics are in.

Prieston believes that in some regions of the country half of all foreclosures may be due to fraud. He told the Journal, “We’ve created a culture where a great many people know how to take advantage of the system.” This system he refers to are “stated income” loans, where little or no documentation is needed, also known inside the industry as “liar’s loans.” The Mortgage Asset Research Institute, another fraud protection firm that works with lenders, told the Journal it has found 60% of those stated amounts were exaggerated by more than 50%.

While people who are self-employed often must depend on these stated-income loans, if you do fall in that category you will have to jump through a lot more hoops to get a loan this day as new mortgage rules are implemented. Unfortunately, as people learn to the game the system, honest folks get injured in the process.

Obviously with all that’s been exposed, it’s clear that in the rush to make money and compete with other lenders for the business, financial institutions were lax in their fraud monitoring. Why did things get so bad? Who was watching the store?

Lita Epstein has written more than 20 books including “The 250 Questions You Should Ask to Avoid Foreclosure” and the “Complete Idiot’s Guide to the Federal Reserve.”

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Filed under: Products and services, Consumer experience, Competitive strategy, Apple Inc (AAPL), Marketing and advertising

The long-running Apple Inc. (NASDAQ: AAPL) fan site Think Secret is being shut down after almost three years of litigation and a confidential settlement. Nicholas Ciarelli, a 22- year-old Harvard student has been running the site since he was thirteen years old.

Think Secret’s claim to fame was publishing top-secret information about upcoming Apple products before it was supposed to be made public. Apple unveils new products each January at its Macworld conference, and the race is always on in December to scoop Steve Jobs on his company’s offerings.

And Think Secret apparently did an excellent job of tipping everyone off on Apple’s secret plans. Apple filed suit to try to get the names of Ciarelli’s sources.

At one point it seemed as if Ciarelli had the upper hand in the litigation. Apple filed suit on the basis that ThinkSecret was publishing trade secrets about Apple’s strategic plans. Ciarelli’s attorney, Terry Gross, filed a motion to dismiss the suit, citing First Amendment rights. Apple essentially stopped litigating at that point.But on Thursday, Think Secret published the following brief press release: Apple and Think Secret have settled their lawsuit, reaching an agreement that results in a positive solution for both sides. As part of the confidential settlement, no sources were revealed and Think Secret will no longer be published. Nick Ciarelli, Think Secret’s publisher, said “I’m pleased to have reached this amicable settlement, and will now be able to move forward with my college studies and broader journalistic pursuits.”

So the saga ends with the site being shut down. Ciarelli says it was time anyway, as he would rather pursue other interests. But it’s really not clear who won this case. Ciarelli says he’s “very satisfied” with the settlement, but no one knows for sure if he received any money from Apple.

Forensic accountant Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations through her company, Sequence Inc. Forensic Record-keeping.

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Filed under: Bad news, Rumors, Products and services, Conventions and conferences, Marketing and advertising, Media World

December has not been very kind to music company EMI Group PLC (OTC: EMIPY) and its new owners, the private equity group Terra Firma, led by Guy Hands. The company has come under fire from former artists like Paul McCartney and Radiohead, and it is now rumored that current artist Robbie Williams is looking to go elsewhere after the release of his next album.

Paul McCartney, that famous Beatle, recorded with EMI for 45 years before ditching the label earlier this year to sign a one-album deal with Starbucks Corporation (NASDAQ: SBUX) Hear Music label, then a new creation. McCartney came out last week and vented his dissatisfaction with EMI, though his comments were about the company before Terra Firma purchased a majority holding. In an interview with The Times, the former Beatle “accused EMI of being unimaginative” in the demands that he market the album by speaking to multiple journalists and giving EMI at least six months to market the album. McCartney also bashed the excessive time for marketing by comparing his situation to former band mate John Lennon’s success at releasing a song in 1970 within a week of recording it. Reportedly, Guy Hands concurs with these sentiments about EMI under former CEO Eric Nicoli, but that does not change the fact that artists since the takeover have voiced similar concerns.

In the same queue, Radiohead has now come out slamming Terra Firma’s policies and pushes at EMI since the takeover. If you remember, Radiohead created quite a stir in the music industry, the blogging world, and news outlets, after announcing in early October to immediately release In Rainbows, the band’s seventh album, as a digital download first. Since then, the band has signed deals to release the album physically as a CD, but not with the band’s longtime label EMI. The band’s guitarist Ed O’Brien recently gave an interview to BBC “claiming that [Terra Firma] don’t comprehend the music industry.” Apparently, EMI was the band’s first choice to release the album, but the new owners were unwilling to give the band what they wanted, and “didn’t comprehend where a band like us sat on a label like EMI, so they weren’t able to give us what we needed.” Front man Thom Yorke mirrored these sentiments commenting, “now you’re in a situation with private equity firms, [Terra Firma] looks at music as something to buy and then sell on.”
It is that statement that speaks directly to the disarray the music industry seems to be trapped in, and that is not because all the companies are owned/managed by private equity firms. The connection between that sentiment and the delay in the music companies realizing that anti-piracy software might have injured sales is obvious. The Digital Rights Management technology is an apparent harmful tactic the labels have taken to prevent consumers, fans from enjoying and sharing music. Unfortunately, that aspect of music is probably the one that the labels should have tried to exploit, rather than selling tracks that consumers couldn’t easily share with one another.

Therefore, the success of Radiohead’s ploy is very meaningful. Not only can fans easily share the new album, but the band effectively shared the album with its fans, giving it to them via the “pay-what-you-want” scheme long before the CD before available. If that is not instant gratification, or acknowledgment of the importance of fans, I don’t know what’s.

Even though it is a shame to see EMI under attack like this, especially in light of the fact that the label was the first to fully drop the use of DRM technology, it isn’t impossible to overlook the statements by major artists. They might have more options in the record industry, but if they have the ability to push change and succeed, it opens more doors for emerging and potential artists in the future.

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Filed under: Products and services, Consumer experience, General Motors (GM)

Just as General Motors (NYSE: GM) begins digging itself out of a sales slump in the U.S., the automaker said this week that its car prices would go up in 2008 amid rising costs for steel and other commodities used in vehicles and trucks.

GM estimates that 2008 model year vehicle prices will rise from $100 to $500 effective immediately, with some cars seeing a price increase of up to $1,500. Why GM released this information to the press at the end of 2007 is odd, but it probably wanted to head off heavy criticism it would have faced if these price increases were made covertly.

Applicable price increases at the retail sticker level took effect for automobiles invoiced to GM dealers nationwide starting yesterday, so if you’re one of the few shopping for a GM automobile this day or in the near future, expect to see these increases in effect from here on out.

If you’ve already had some negotiations in progress before yesterday, be prepared for your dealer to use this increase to raise that car or truck price. However, there are a few vehicles whose prices won’t increase over 2007 models according to GM, including the Saturn Aura and the new Camry and Accord competitor, the Chevrolet Malibu LS.

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Filed under: Economic data, Presidential elections, Housing, Federal Reserve

Today’s report that the US economy grew purchase 4.9% in the 3rd quarter even with pressure from the housing market, is a tribute to the strength of the economy. The fact that in the third quarter, the housing slump cut a sizable 1.08% off GDP, makes you admire just how strong and resilient the economy is. I hate to burst the bubble of the mainstream media (could they’ve a political agenda?), but facts are facts. Unemployment remains low at just 4.7%, the economy is growing, taxes remain low, and interest rates are falling. I admit that fourth quarter (Q4) GDP numbers wont equal Q3’s but a recession? Not going to happen. The pessimist always state that the consumer will stop spending and that’ll be the nail in the coffin. Well I have been hearing this for years and years, and they continue to spend and there is no reason to think they will stop spending.

The claim will be made that foreclosures are surging and that’ll be a big drain on the economy. What the FED needs to do is drop short-term rates even more. The sub-prime adjustable-rate mortgages (ARMs) are due to reset and since they’re linked to Fed Funds markets as well as the LIBOR rate, so if the FED cuts these rates it will provide relief to the mortgage holder.

Economist Larry Kudlow has a brilliant piece about what needs to be done to solve the sub-prime problem. He calls on the FED to drop short-term rates.

“The bottom line remains simple: The Fed must right-size the inverted Treasury yield curve by bringing its 4.25% target rate much closer to the 3-month Treasury bill, which is trading below 3 percent, and below all the other Treasury rates that are lower than the fed funds rate.

Financiers can’t borrow short to lend long unless the key borrowing rate is well below medium- and short-term rates. Because the yield curve remains inverted, and money-market credit is frozen, the U.S. monetary base is growing at less than 2%. This is very tight money. (Incidentally, this is why no one should be worried about future inflation, even after last week’s price-index flare-ups.)”

The economy is fine. With these steps we’ll continue to see 4%+ growth going forward.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. Disclosure: Writer has no position in any stock mentioned as of 12/20/07.

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Filed under: Home Depot (HD), Newsletters, Stocks to Buy, Housing, Best Stocks for 2008

For 25 years, Steven Halpern, editor of TheStockAdvisors.com, has surveyed the leading financial newsletter advisors asking for their favorite stocks for the coming year. This article is one of 100+ ideas in the Ideal Stocks for 2008 report.

“Our favorite conservative pick for 2008 is Home Depot (NYSE: HD),” says Daniel Frishberg, editor of The MoneyMan Report and host of BizRadio.

“This is a stock that has been beaten down due to the weak housing market. We believe, based on the fact that it owns most of the real estate its stores sit on and these are typically in the ideal areas of town, that it’s undervalued.

“With new management in there and a housing market that’ll stabilize, home improvement will do very well over the next several years. Home Depot typically trades at 14X cash flow since 1995. Based on that one parameter, the stock could be a double over the next couple of years.

“The company’s balance sheet is in excellent shape at this point. We believe most of the bad news is priced in and with a Fed that’ll continue to cut interest rates, Home Depot will be an economically sensitive stock that’ll benefit. In our view, this is a 2-3 year hold.

“In addition, management recently announced it would be buying back about 1/3 of its outstanding shares. Return on equity has consistently been over 20% and is accelerating. Home Depot’s price/sales is .68 and its PEG ratio is just about 1. Gross margins are consistently above 30%.

“Their P/E ratio in the late 1990s was around 45 and is now sitting at around 14. All the bad news that’s been around the company with slowing same store sales, bad management, and a bad housing market is priced in, we believe. In addition to all this, you get a reasonable 3% dividend going forward. We like the stock right now and do own it.”

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Filed under: Merrill Lynch (MER), McGraw-Hill Companies (MHP), Economic data, Bear Stearns Cos (BSC), Housing

The New York Times reports that McGraw-Hill Co.’s (NYSE: MHP) Standard & Poor’s (S&P) has downgraded bond insurer ACA Financial Guaranty Corporation from A to CCC, a sub-investment grade. S&P is saying that ACA’s financial guarantee is worthless and thus bond holders must write-down the assets ACA insured.

As of September, ACA insured $7 billion in municipal and $43 billion in corporate debt. S&P’s downgrade could cost Merrill Lynch & Co. (NYSE: MER) $3 billion and Canadian Imperial Bank of Commerce (NYSE: CM) estimates it will take a $2 billion write-down.

A few decades from now when economic historians look back on the current financial market implosion, there will be books written about the role that ratings agencies played in blowing up the bubble and then bursting it. That’s because the ratings agencies competed with each other to offer the highest ratings to bundles of loans such as Collateralized Debt Obligations (CDOs). Now that this market has collapsed, the ratings agencies see no profit in rating new CDOs so they’re trying to salvage their reputations by bending over backwards to downgrade those same debt instruments.

The delisted ACA Capital Holdings needs to cough up $1.7 billion by January 18, 2008 because it contracted to do that if its rating fell below A. This is also a problem for The Bear Stearns Companies (NYSE: BSC) — about which I posted earlier this day — which owns 29% of ACA. As the ratings agencies continue downgrading debt issues and their insurers, the true costs of the current system will suddenly become apparent.

As a instructor, I have the ability to envision the mess that would result if my students competed to see who could pay me the most money to get an A in my class. But that’s the relationship between the ratings agencies and the banks. As I posted in August, the ratings agencies competed with each other to offer the highest ratings to the securities the investment banks issued. The ratings agencies willing to give the highest rating won the bidding.

That tiny wrinkle in the system will need to be fixed in order to restore confidence in our credit markets. In the meantime, those ratings downgrades could us trillions. The interesting question is whether all the value created while the ratings agencies were blowing up the bubble will be completely wiped out by what they are now destroying.

Peter Cohan is President of Peter S. Cohan & Associates. He also instructs management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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