"Too Big To Fail?"; JPMorgan's $9B Loss



 BLACK EYE FOR JP MORGAN

The "Too Big To Fail" banks are at the center of the current U.S economic problem. Below is a copy of a comment to an Op/Ed piece that appeared in the American Banker on June 18th. While it deals with issues that do not affect most of us directly, it does affect the entire structure of our Banking system. Unless you have avoided (perhaps wisely) the news, JPMorganChase ("JPM") lost $2,000,000,000 ($2 billion) in trading. Well, that was the initial reported loss. As of this morning (6/28/12) it is up to $9 BILLION. One might say that a comapny lost money - So what? - it only affects the shareholders. NOT IN THIS CASE.
The controversy is that the funds that were lost could test the banking system itself. The money lost wasn't on bad loans it was from GAMBLING. JPM will state that the losses were from "trading securities" used to "hedge" (or insure) against loan losses by buying securities as an offset to the potential losses. The practice is called "Hedging", and no one would argue against a bank's right to take steps to protect the shareholders and the DEPOSITORS from loan losses.

Here however, it is clear (to me in any case) that the loss stems from JPM buying securities/options/contracts or the RIGHTS to these instruments for its PROFIT ONLY. Well, the market went the other way and instead of protecting against losses from loans (hedge) the trading,done just for PROFIT, created a sink hole SO DEEP...

JPM takes in money from depositors. The FDIC backs those deposits up to $250,000 per depositor (lots of rules). What JPM did was to GAMBLE on the financial markets and LOST. Why is that important - the money that was lost, if the loss is big enough, could impinge on the Bank's stability and force another bail-out, but one the Government CANNOT afford.

JPM engaged in "Proprietary Trading". They used depositors money to GAMBLE on the stock market. JPM has enough reserves and capital (saved earnings) that it could absorb the loss without going to FDIC. But, what if it didn't. The loss was $2 Billion, now disclosed to be $9 Billion. What will next week show?

The Op/Ed piece discussed JPM's CEO testifying before Congess. He wasn't asked to explain. Rather Congress asked his advice on the economy. HUH? The following is my reply to the American Banker. PLEASE E-MAIL ME IF YOU HAVE QUESTIONS OR IF THIS WHOLE POST HAS BEEN, WELL BORING AND CONFUSING

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To Mr. Rob Blackwell at American Banker

"I must take issue with the other commentor. $JPM's loss is important, very important. Not because I believe there is a TBTF issue, but it might point out exactly where the Reg[ulatory] system is most vulnerable. For a short time I dealt with a small number of member of Congress for the Mutual Savings Bank industry. Obviously I was of no real stature (only 5'10" - sorry but I couldn't resist), but the Senators with whom I dealt on the Banking Committee were totally committed to insuring that the legislation would serve the stated purpose.

Here we have Senators pandering to a very large Bank's President. Yes, he is important, but it was under his watch the trading losses occurred and no one outside, and probably inside JPM knows the real extent of the loss. Depending on the puts, call, options and other hedges, the loss may not be known for a while - dates of uncertain duration. But, $5B-$7.5B would not be a surprising amount. Dismaying yes but no surprise.

We need some way to stop the gambling from continuing. Even the Football "books" have better controls than JPM does apparently. My view is that we need a Volker,Dodd-Frank combination bill coupled with an SEC and OCC that will enforce those laws (if passed) and the laws already on the books."

Author's Copyright by Richard I. Isacoff, Esq, July 2012

http://www.isacofflaw.com/ rii@isacofflaw.com

Bankruptcy: After Christmas?

It's the time of the year where many people start buying gifts for others for the holidays. That, of course, is in addition to buying food, heat, electricity, telephone(s), gasoline, auto insurance, cigarettes (bad for health - bad for pocketbook), cable, clothes (don't forget shoes, socks, and underwear), and paying rent or mortgage and the car payment. Oh, and remember to buy the medications the Doctor prescribed.

Quite a list! How To Pay For It? Many people use CREDIT CARDS. Then comes February 1st and the bills flood the mailbox overwhelming the Letter Carrier's ability to carry all of the Visa, Mastercard, Discover, JC Penny, Sears, BestBuy, Fingerhut, QVC, Amex, Capital One, Orchard Bank, Bank of America et al BILLS.

When asked how they expect to pay, many will say "Well, I HAD to get those presents. I mean, it was Christmas (or Chanukah or whatever other holiday "requires" gift giving)". Says the lawyer at the first consultation about debt relief, "Okay, but how did you expect to pay the bills?" - the classic answer "I didn't think about that. I figured I be able to pay a little on each card, I guess." This response is typical from clients with sufficient income to pay the bill with minimum payments over the next 20 years, and from those who HAVE TO GO WITHOUT FOOD AND HEAT TO MAKE ONE PAYMENT!!

There are several problems here, actually many more than several. The biggest, in a sense, is that with debt that has accumulated over the past 3, 5, or 10 years there is no way ANY PAYMENTS are affordable. Then comes "Can I file bankruptcy?" The real question is "Can I file bankruptcy and still get rid of my bills (a discharge) even though I was foolish...?" There is no easy answer.

In order to eliminate/discharge debt, the Bankruptcy has to be filed in good faith. You cannot intentionally incur debt that you know you cannot pay. At a minimum, that debt cannot be discharged (made to go away). But wait...There's more! When the gifts were being bought and the plastic nearly melting from over-use, did the purchaser intend to repay the credit card company? The easy answer is "Yes, I always pay my bills!" But, is that the honest answer.

Many people just do not think about or know how to think about budgeting. People of all ages get caught up in the "I have to buy a gift for..." mode. So, what can be done for the honest but horrid money manager/giver?

Rule 1. Know how much you take home every month and how much must be spent on essentials, like the list above

Rule 2. If there is any extra, before deducting current credit card payments, be certain that it is truly disposable income immediately. Do not count the money you will save when you stop smoking.

Rule 3. Add up all of your credit card and other unsecured debt (debt not attached to collateral, like a car loan)

Rule 4. Multiply the amount of debt by 3% or 0.03

Rule 5. If the result after following Rule 4 is more than your "extra" (your disposable income) you should not incur more debt.

Rule 6. To figure how much unsecured debt you can support reasonably, DIVIDE your extra/disposable income by .03. So, if you have $200/month truly extra, the Most unsecured debt you can have is $6,000. And, remember that "extra" is what's left after paying all of the expenses listed in the beginning of this posting and any other NECESSARY expenses you have.

Even at the level shown, paying will be a bit of a struggle - things happen that cost money and are unexpected. Missing one month of the payment on any unsecured debt will make everything fall apart and you might never catch up.

If you have done those calculations, and after being careful you find that 6 months (I just picked a number) into the new year that you cannot pay because "Life comes at you fast!", then yes, you can file a bankruptcy with a clear conscience and peace of mind.

Author's Copyright by Richard I. Isacoff, Esq, November, 2011

rii@isacofflaw.com
http://www.isacofflaw.com

"Danger Will Rogers...Danger" *

Steven Pearlstein, a columnist for the Washington Post wrote about the "Global Economy Comes To The End Of Its String" and went on to explain, quite "readably" why it's happening. The column, in the 8/6/11 online edition, discusses the fact that we are cycling back to 2008 levels (maybe), because we never fixed the underlying problems with ours and the global economies. The only issue I would have with the characterization is that we are finding it increasingly difficult to separate our economy from the global economy.

As was written in the prior post here, the U.S. has been spending more than it's been making. We have relied on foreign countries, like China, to continue to buy our Treasury Bonds, which is just lending us money. That's what the whole "Debt-Ceiling" debate was all about. It took Congress 3 months to decide if we would be allowed by law to borrow more so we could keep operating our Country without a DEEP cutback in services, like Defense, Medicaid, Parks, EPA protections, Federal Aviation Admin., and on & on & on.

Brian Wolfman posted a short piece of the article on the Consumer Law & Policy Blog and asks at the end "So, what's the chance that will happen given what we've just seen in Congress?" Here is my response:

"You ask, somewhat rhetorically, about the chances for Congress to adopt policies like those Mr. Pearlstein outlined and accept his analysis of the "how we got here". If you know how to bring back from the un-living (on earth anyway) Sam Rayburn, Tip O'Neill, Dwight Eisenhower, Louis Brandeis, Earl Warren, Hugo Black, Ronald Reagan, and Gerald Ford, we might have a chance. As partisan as some of those folks were, they put the Country first when the chips were down (don't really know what that expression means but...).

The current Congress is so ideologically focused and unyielding in their world view, that they belong back to a time when the "world was flat". Common sense tells them that if you go to a beach and look out to the horizon, you can see that the world is flat. That was the prevailing common sense. Oh, and, of course, from Wasilla, AK you can see Russia (I tried with military issue binoculars, from the highest point in Wasilla, in March of 2010, on a clear day, and could NOT see the "Hammer and Sickle").

We are truly at a turning point for the Country and the world. The EU (European Union) is as divided as our Congress, so they will be no help. At least here, the big issue for BOTH Congressmen and Senators is GETTING RE-ELECTED in the same country. The pandering to lobbyists and ideologues must stop. The hard core Tea Partyists are at least true to their beliefs, but remember the flat world.

The future looks grim. Voters cast out the evil-doers in the mid-terms. The world economic crisis was only in part our fault. We allowed the most selfish politicians and "bankers" to run us into the ground. No regulation, no brakes, no-mind to the constitutional interpretations of the past, and a skilled manipulation of the concepts of a "free-market economy" ruled for 8 years. But, this coincided with Europe deciding to try getting along. No one hired a Cat Herder.

Maybe if we remember Peter Pan's plea that we all believe in Tinker Bell (metaphorically only) our economic system will survive. If it doesn't and we don't begin to rebound quickly, we are facing a future that we have fought 2 world wars, our own revolution, a civil war, and the "baby-boomer wars" for nothing.

*from the CBS Show -"Lost in Space" - fitting!

Author's Copyright by Richard I. Isacoff, Esq., August, 2011
rii@isacofflaw.com
http://www.isacofflaw.com

Bigger & Fewer: "Banks" Rule

There is a new mosaic, or one that was just not recognized, developing in the Economy, and somewhat specifically in the mortgage area. Banks, systematically getting bigger and bigger, and fewer and fewer, are dictating the rules.

The Big 4 (or 4 1/2) BANKS have made it clear through their elected, and properly paid for members of Congress (politely referred to as "Lobbying"), that they do not want Elizabeth Warren to head the Consumer Financial Protection Board (CFPB) but in case she gets there (during a recess appointment), they want to emasculate (no offense Prof/Dr/Atty Warren) the agency first. The argument or rationalization: No agency should have the authority to enforce existing regulations that affect consumers or pass new regulations to fix really bad problems that hurt the economy as a whole. Even Hemp has more supporters than HAMP!

The same interests have been keeping Congress itself where it is possible, from passing enacting legislation that would force mortgage modifications and punish those who knowingly created, hyped and sold securities that they themselves bet against (hedges). These "Security Instruments", known as Mortgage Backed Securities and more generally categorized as Collateralized Debt Obligations were the mainstay of Lehman Brothers' (remember them?) profits; oh, and don't forget about Goldman Sachs! The play was that if enough mortgages were written, there would be enough good ones to overcome the bad ones: Quantity always wins but only if you are the creator/seller! As Phil McGraw, PhD, better known as "Dr. Phil" says "Well, how's that workin' for you now?" NOT SO WELL DOC!!!!

Wells Fargo is in Court in Tennessee and Maryland trying to avoid being convicted of "Reverse Redlining", the pernicious practice that promised lower income and less educated/sophisticated borrowers, usually minorities, the AMERICAN DREAM - Home Ownership but lied and cheated to make the sale. "Mrs. Jones, the payments will only be $300 per month - for the first month then the rate will equal the 6 month rate of the percentage, the denominator of which is 100 and the numerator is 10 plus no greater than 7% nor any less than 7%,. and, Mrs. Jones, that rate will be in place until the first change date after which the loan will float to the regular level for this type of loan".

"Don't worry Mrs Jones, we at "Fast Talking Mortgage" would never steer you wrong. Just check our rating at the BBB. Here is the telephone number 1-800-waitforever; and if you have any problem with the loan, one of our Loan Specialty Team (for borrowers who complain), will assist you - that telephone number is 1-877-waitforever". If it wasn't so real and so devastating, that kind of "pitch" would make a great Saturday Night Live spoof. People struggling to pay rent are told they can own a home; and then they end up on the street.

The Banks have uniformly maintained that the laws do not apply to them - state vs federal - and even if they do, the banks didn't make the loans, they are just the Trustee or manager or they sold the loan and had just acted as an intermediary, owning the loan for mere seconds. What's worse is that they have all of the money in the world (well not really but more than any Plaintiff does) and are willing to spend ten (10) times the amount needed to fix the problem in order to justify their actions.

In all seriousness, what can be more despicable than convincing low income struggling families that they can buy a home of their own, when the game is just to make a sale of a mortgage and not care whether it's affordable. In fact, most of these loans were granted where the Loan Originator knew the loan would adjust to a point where the borrower would not be able to make the payments. Once again, no one cared. No entity was "on the risk". No bank or mortgage company would lose $0.05, because the loans were sold into a pool - securitized with 2,500 other loans. Again, the thought was that quantity made up for quality and if not, so what! No one loses, except the homeowners and, as we have seen, the Economy.

Add to the mortgage mess - we have the "Interchange Rate" debate. Regulators (formerly called "Revenooers") are trying to force the price charged for each "swipe"/use of a credit or debit card down from an average of $0.44 to $0.12, at least for the big 4 1/2. That is a huge drop in Bank revenue but also a huge drop in what merchants, and therefore consumers, pay for use of the debit card. Folding money looks better every day. Maybe we should all buy stock in Crane & Co., the company that makes the paper for U.S. money.

Group 4 1/2 are fighting the change mightily as they stand to lose $hundreds of millions if the change takes place.

We can then move to the issues about whether a Bank,the kind where you can go and open a checking or savings account, should be allowed to directly make loans and Securitize pools of Loans themselves, avoiding the middleman. In 1974 we had 14,000 banks in the country. By 2017 the count is expected to be 2,500. If you realize that this represents 50 banks for each state, they "Hometown Bank" is dead. Even now, in a city like Pittsfield, MA which has a population of 40,000+/-, a merger of TWO (2) Savings Banks is taking place (thank you FDIC) - the rub is between them they have nearly 50% of the deposits in the entire County. The next largest entity is a Federal Credit Union.

Bigger isn't better, it's just bigger. And, bigger means more power - a greater ability to force laws on or off the books through trade organizations and their lobbyists. Is big bad? Not conceptually; but in practice?. As of Friday 5/06/2011, the ABA (American Bankers Ass'n) seemed to have changed its position regarding Elizabeth Warren and will support the nomination. The CEOs of Group 4 1/2 must be furious. Congress, especially the GOP side, is forcing a "recess appointment" .

There is no easy, or even difficult, answer to this issue. The consolidation of the Financial Services Industry is moving faster and faster. The was a time, not so long ago, when Banks and Insurance companies and Stock Brokerages all had to be separate. Now we have one stop financial shopping. Convenient, maybe. Dangerous - ABSOLUTELY

Author's Copyright by Richard I Isacoff, Esq, May, 2011

rii@isacofflaw.com
http://www.isacofflaw.com

Credit Card Rules - Explained (sort of). What to Do Until Then

On June 11, 2009, I wrote extensively about the new credit card laws - the ones that do us no good at the moment but might as the varied effective dates arrive.

Attached/Linked title of this posting, and again at the end of this entry, is a video that goes through the major points of the new rules.

None of the rules will erase any debt that has already been incurred, regardless of how unfair the borrower believes the debt to be. Interest rates jumping to 30% , late fees of $39 on a balance of $100 with a report of late payments (over 30 days) to the credit agencies, with, of course the accompanying rate increase, and perhaps the most difficult for regular card users, the arbitrary elimination of the available credit/decrease in credit line, without warning or apparent reason.

The 2 real banks, and the 1 "investment bank" (see last post for that definition) that had record profits, Bank of America, CitiBank/CitiGroup, and Goldman Sachs respectively, are the worst offenders. Yesterday, in the Sunday edition of the New York Times, there was a story by David Streitfeld dealing with Bank of America specifically, but the industry in general. In it he describes a woman who could not keep up with the higher and higher interest rates being charged. After pleading with Bank of America to lower the interest rate on her account without success, she just stopped paying her monthly bill. A wise decision? - probably not! - except in this case it was born out of desperation. The result: Bank of America called her with "deals" so she could afford her payments.

Look at the video - read the article in the Times and think about your position. Are you able to go without Credit Cards? Can you pay the minimum payments PLUS 1% of the balance owed to lower the principal and actually pay down the debt? If you can, then you may be able to get out of debt.

Factor in all of your debt - especially the credit cards. IMPORTANT!! - Put together an accurate list of your regular monthly living expenses. Include such things as cigarettes (if you smoke), a reasonable amount for food, eating out if it's unavoidable, enough for gasoline and a monthly budget for car repairs (during the entire year), all of your insurances, clothing (include shoes and underwear), income taxes expected to be paid over and above payroll deductions, student loans, cell phone, cable, Internet, utilities, rent/mortgage, and everything else that you really need to spend or save for each and every month. After all of that, can you pay the minimum PLUS at least 1% of the outstanding balance on all debts, whether each is a credit card, a personal loan from CitiFinancial/HFC,HSBC,Beneficial, or from anywhere else.

If after doing that budget exercise you can make the payments GREAT!! Do not be late on one payment or your plan might become dust in the wind. BUT try. If you cannot, seek financial counseling - not from a TV advertiser promising to reduce your debt to "pennies on the dollar" for a mere $XXXX.XX per month and a non-refundable processing fee of $XXX.XX

Author's Copyright by Richard I. Isacoff, Esq, July 2009
http://www.isacofflaw.com/
rii@isacofflaw.com

http://video.nytimes.com/video/2009/05/19/your-money/1194840368370/guide-to-new-credit-card-rules.html

They're Back!!! (With a Vengence)

Our favorite charities are back in business, but this time not asking for handouts - just taking the money from us. CitiBank/CitiFinancial/CitiGroup (well, you get the idea), Bank of America, JPMorgan Chase, Goldman Sachs, Smith Barney (whatever the full name is now), and a cast of other "BANKS", reported huge profits for the 2nd quarter or 2009. That must mean that the financial crisis that threatened life on the planet is now past! Well, yes and no or maybe, but we are not at all certain yet.

It is true that there were record earnings at some of these banks and they all did great, but it is where that got there profits that is disturbing, more so than the fact that after pleading for a bailout, they are ready to give out huge bonuses again. Little of the profits came from "banking" as consumers and small to mid-size businesses understand the term. Bank of America and CitiXxx had huge one-time profits from the sale of assets and from "investment banking". Ah ha you say - "banking is how they made money"! Not so quick grasshopper.

"Investment banking" is to "banking" (as most of us understand the word) as Burger King(R) is to a cooking a barbecued hamburger in your back yard. Char-broiled but to a different scale. Buying and selling securities, selling short, trading in commodities, dealing in derivatives, buying other businesses - and selling its assets at a profit, is what investment banking is. Making loans to small and mid-size business, or to people (unclean) is what it IS NOT.

Keep in mind that Goldman Sachs was one of the top firms that put mortgage loans into packages (securitization) and sold them at huge profits. When the value of mortgage-backed securities (MBS) began to crash Goldman "sold short. They "gambled" that the price would go down FAST and that they would fill the order to sell MBSs at the lower price. They made a small fortune while the rest of us lost millions in our 401Ks, IRAs, and had all credit stopped.

So, almost none of the money received from the government and from other financial incentives given during the crisis, went to new home mortgages, was used to modify existing mortgages to stop foreclosures, was used to keep the "mom-and pop shops" in business, or was loaned to small and mid-size firms to help them through the cycle so they would not have to lay-off 50% of their staffs, creating a nearly 10% unemployment rate. The rate of job losses is slowing, but still increasing in numbers.

The promised home loan modification process is not yet functioning. Mortgage modifications are more difficult to get than they were a month ago. Businesses keep laying-off workers because they have no business because other companies have had to minimize operations and they have reduced staff which has caused more foreclosures which has killed the building trades which has caused bankruptcies which has prevented many companies from being paid which has...

There are those economists and financial types who say now - "see, the free-market system is working". They were many of the same experts who cried foul at the bailout of AIG and Bank of America and Citi. The "free-market system" needed some help because of the lack of regulation in the late '90s and through 2007 that led to the crash from which we are trying to recover.

We have reached the point that we now know you cannot put CheezeWiz(R) back into the can.

Author's Copyright by Richard I. Isacoff, Esq., July 2009

http://www.isacofflaw.com/
rii@isacofflaw.com