#OT# PMI, smoke and and the taxpayer's sphincter

** T A X P A Y E R S S P H I N C T E R S M O K E A L E R T **
Considerable interest has been expressed in both newsgroups in
the subprime/alt-a mortgage implosion and the serious effect it has had/is having on the banks and other lending institutions, and indirectly on the overall economy.
Today's [04 Mar 09] USAToday had a very short reader letter asking about PMI [Private Mortgage Insurance] and why this was not protecting the banks, etc. when they were forced into foreclosure/short-sales. PMI is specifically intended to insure the lender against exactly the kind of situations we are seeing in many real estate markets. http://loan.yahoo.com/m/basics9.html http://www.google.com/url?sa=U&start=5&q=http://www.cmgmi.com/fv-52.aspx&ei yvSbyiCJ3etgfdsdWIBg&usgQjCNFTR3LkJNHeIqgxGC0dNBwVOy-yHg
This seemed like a *VERY* good question, and in conversation with my brother who is a Realtor, he didn't know either, except to verify that if you bought residential real estate with less than 20% down, you basically *HAD* to buy PMI and keep it in force until you reached a minimum of 20% of equity. Thus all sub-prime and alt-a mortgages, unless they had 20% down [which appears to be none of them] had to have PMI.
My brother checked with 2 banks and 2 PMI brokerages he does considerable business with, and according to (2) mortgage bankers and (2) agents, PMI as indicated in the two above URLs, does indeed pay the difference on default between 80% of the face value of the loan and the actual sale price, so there is no [or much less] net loss to the lender. [Actually the recovery can be much more, as the cut-off appears to be 80% of the loan appraisal value, so if the bank lent 125% of appraisal (which many did), the excess over 80% (i.e 45% of the total) of appraisal is covered.]
There appears to be a very significant [translation: huge dollar] problem here.
Either (1) the mortgage [service] companies have been collecting [the rapidly increasingly expensive] PMI mortgage premiums and not remitting these to the PMI companies; or (2) the PMI companies are not paying off as the policies provide; or (3) the banks are collecting on the PMI policies, and blowing huge amounts of smoke up the taxpayers a** [again] about the amount of money they have lost, and are losing, on "government mandated CRA" subprime/alt-a mortgages as justification for additional taxpayer provided bail-out funds.
Does anyone have some hard data on this apparent massive scam, fraud and taxpayer rip-off?
Of special concern, who are the parent corporations of the major PMI companies? One nightmare scenario would be if this was AIG [United Guarantee Corporation?], or the insurance arms of Citi, BoA, Chase, etc. or even worse were "self insured," [which seems to be the case -- see URLs below]
It also appears that the #1 PMI company in the US, MGIC is in serious trouble, and there is pressure being applied to the local/regional banks and other mortgage holders which required 3rd party PMI, to not collect on their valid PMI policies when foreclosure is required but rather to write down the loan, with governmentment/taxpayer guarantees to cover their expense. This also appears to be the case for short sales and "cram downs." http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aLQ5ZG2n9Tlo ==> does anyone know who the major MGIC creditors/bondholders are?<More critical questions: If the bankruptcy mortgage "cram down" legislation passes, will the PMI compensate the banks, and if so, why should the banks get any special [tax] consideration? What are the tax implication here? Do the banks get a tax loss *AND* PMI coverage for [most of] their loss? Do the PMI companies get to deduct the pay outs as a business loss for tax purposes? ==>With the tax losses and PMI pay outs, how much will a 1$ mortgage cram down cost the US taxpayer? {If its more than a dollar, it's cheaper to just pay the mortgage down for the homeowner out of the treasury.}<some partial info: http://files.ots.treas.gov/56812.pdf http://www.mortgageqna.com/mortgage-insurance/mortgage-guaranty-insurance-corporation-mgic.html http://query.nytimes.com/gst/fullpage.html?res 0DE3D71438F930A35750C0A96E948260&sec=&spon=&pagewanted=all http://www.allbusiness.com/banking-finance/banking-lending-credit-services/7027383-1.html http://www.therealestatebloggers.com/2007/10/01/citigroup-expects-a-60-decline-in-earnings-after-mortgage-writedowns / http://newsroom.bankofamerica.com/index.php?s=press_releases&itemw61
FWIW -- This may help to explain why the local and regional banks appear to be doing so much better in the current economy. They appear to have required "real" third-party PMI on the residential mortgages they wrote with less than 20% down, and the PMI was *NOT* written by another branch of the same company, nor did they attempt to go for the "long dollar" by "self insuring," (with no "loss reserves") Thus, when one of their loans goes bad and they have to foreclose, there is considerable real/actual cash recovery through their PMI policy.
Unka' George [George McDuffee] ------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
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On Mar 5, 10:10am, F. George McDuffee <gmcduf...@mcduffee- associates.us> wrote:

Very important question that should be answered. I have a couple friends that have real estate loans that are paying this PMI. One just reached the 80% equity level and is now trying to get the payment taken off his mortgage. The kicker is that his house is assessed for tax purposes at a significantly higher value than the current mortgage principal. The lender says the current market value of the home is less than the balance of the loan. Catch 22.
DL
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WAMU self insured in many cases George, they all did. Truly independent PMI's went the way of the dinosaur in the 1990 bust. Remember Lawyers? Poof! The sole survivor of consequence today is AIG. The rest are almost all broker/dealers. What has survived going forward since then, as insurance, is part of something called a wrapped security, or a "bond with a wrapper". The latter is the term most often used and the result is a derivative product. These things have been around so long that you just overlooked them, sort of like "zero coupon" bonds. The coupon in that case was the wrapper and you could strip and sell the warrant (coupon) to increase the upside of an M&A deal at the stage that the bridge was taken out. Stripping the wrapper from mortgage backed securities looks a little different because you are stripping the cash flow from an insurance policy from the mortgage but the result is similar. The one big difference is that when you unwrap a mortgage backed security, the risk stays with the mortgage but that portion of the cash flow is transfered/repackaged/sold again and is, thererfore, absent in the event that the mortgage defaults. You can end up with leverage of up to 1000:1 on the front end and it's legal. The original bond isn't rated again so if you aren't careful you canend up with what is essentially a junk bond trading at preferred rates - until somebody looks under the hood that is. When that happens.... Well, we know the result - collapse.
LOL
Like I said before, nobody would have bought this stuff if there had been even a scintilla of transparency.
JC
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On Thu, 5 Mar 2009 11:15:55 -0800, "John R. Carroll"

See item on MGIC in original post.

But they had an AAA rating... My broker told me they were at least as safe as peanut butter inspected by the FDA...

------------------ This sound plausible, but then where are the premiums going for the PMI that people are still paying for, and why is PMI still showing up on the escrow statements and at closings w/ 80%+ mortgages?
After posting the original msg. I learned that some areas many 80%+ mortgages were made w/o PMI by the giants, but the rates were high enough to (surprise) just about equal what the payments for a "normal" mortgage with standard PMI would have been. [Of course the owner can't drop the PMI when they reach 20% equity with this type of mortgage.] The difference being that there seems to have been no loss reserves established under state insurance department oversight, and this extra "income" was used to goose the bankers' bonuses and stock dividends, so there was de facto "self insurance," even if all the loss reserves have been spent.
All in all, more black, thick, stinky smoke here than a fire at a tire warehouse.
Also it does appear that AIG is indeed the last link in the PMI daisy chain on many of these PMI policies, thus the taxpayer is on the hook no matter what. With valid PMI they pay through AIG, w/o PMI they pay through their ownership in the banks when the 80%+ mortgages are foreclosed. Such a deal....
Unka' George [George McDuffee] ------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
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wrote:

There is a Tort for this George, negligent misrepresentation, and it's a loo loo. What I can't believe is that there hasn't been even a single filing. WTF is up with THAT?

They flow back through the issuer.

Yeah, this is because of the CDS, or "uninsurance" market.

That's my definition of de facto "uninsurance" I'd put a LOL here but it's fraud, not funny. I'll go with FOL ie. Fraud Out Loud, instead.

That seems to be the general impression but it isn't true. Between trade secrets litigation ( or potential litigation) and an act of Congress, the American taxpayer has deliberately been blindfolded in spite of the fact that they own, for example, 80 percent of AIG. We can't even get a look at OUR OWN books legally. Pretty stupid don't you think? Why hasn't the Congress fixed this? They easily could.....

50 years from now this won't be believed and you can take that to the bank. HA!
JC
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On Thu, 5 Mar 2009 14:03:05 -0800, "John R. Carroll"

--------------- Even more stinky stuff seeping out. Now combine this with massive tax evasion [see other post this thread]
For a copy of their 73 page paper "Looting: The Economic Underworld of Bankruptcy for Profit" and/or info click on http://papers.ssrn.com/sol3/papers.cfm?abstract_id "7162 http://ideas.repec.org/e/pak7.html
==========The Looting of Americas Coffers
By DAVID LEONHARDT Published: March 10, 2009
Sixteen years ago, two economists published a research paper with a delightfully simple title: Looting.
The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.
In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a total disregard for even the most basic principles of lending, failing to verify standard information about their borrowers or, in some cases, even to ask for that information.
The investors acted as if future losses were somebody elses problem, the economists wrote. They were right.
<snip> And Looting provides a really useful framework. The papers message is that the promise of government bailouts isnt merely one aspect of the problem. It is the core problem.
Promised bailouts mean that anyone lending money to Wall Street ranging from small-time savers like you and me to the Chinese government doesnt have to worry about losing that money. The United States Treasury (which, in the end, is also you and me) will cover the losses. In fact, it has to cover the losses, to prevent a cascade of worldwide losses and panic that would make todays crisis look tame.
But the knowledge among lenders that their money will ultimately be returned, no matter what, clearly brings a terrible downside. It keeps the lenders from asking tough questions about how their money is being used. Looters savings and loans and Texas developers in the 1980s; the American International Group, Citigroup, Fannie Mae and the rest in this decade can then act as if their future losses are indeed somebody elses problem.
Do you remember the mea culpa that Alan Greenspan, Mr. Bernankes predecessor, delivered on Capitol Hill last fall? He said that he was in a state of shocked disbelief that the self-interest of Wall Street bankers hadnt prevented this mess.
He shouldnt have been. The looting theory explains why his laissez-faire theory didnt hold up. The bankers were acting in their self-interest, after all.
<snip>
Think about the so-called liars loans from recent years: like those Texas real estate loans from the 1980s, they never had a chance of paying off. Sure, they would deliver big profits for a while, so long as the bubble kept inflating. But when they inevitably imploded, the losses would overwhelm the gains. As Gretchen Morgenson has reported, Merrill Lynchs losses from the last two years wiped out its profits from the previous decade.
What happened? Banks borrowed money from lenders around the world. The bankers then kept a big chunk of that money for themselves, calling it management fees or performance bonuses. Once the investments were exposed as hopeless, the lenders ordinary savers, foreign countries, other banks, you name it were repaid with government bailouts.
In effect, the bankers had siphoned off this bailout money in advance, years before the government had spent it.
<snip> Above all, as Mr. Romer says, the federal government needs the power and the will to take over a firm as soon as its potential losses exceed its assets. Anything short of that is an invitation to loot.
Mr. Bernanke actually took a step in this direction on Tuesday. He said the government needs improved tools to allow the orderly resolution of a systemically important nonbank financial firm. In laymans terms, he was asking for a clearer legal path to nationalization.
At a time like this, when trust in financial markets is so scant, it may be hard to imagine that looting will ever be a problem again. But it will be. If we dont get rid of the incentive to loot, the only question is what form the next round of looting will take.
Mr. Akerlof and Mr. Romer finished writing their paper in the early 1990s, when the economy was still suffering a hangover from the excesses of the 1980s. But Mr. Akerlof told Mr. Romer a skeptical Mr. Romer, as he acknowledged with a laugh on Tuesday that the next candidate for looting already seemed to be taking shape.
It was an obscure little market called credit derivatives.
<snip> ------------ http://www.nytimes.com/2009/03/11/business/economy/11leonhardt.html?em
Unka' George [George McDuffee] ------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
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WAMU self insured in many cases George, they all did. Truly independent PMI's went the way of the dinosaur in the 1990 bust. Remember Lawyers? Poof! The sole survivor of consequence today is AIG. The rest are almost all broker/dealers. What has survived going forward since then, as insurance, is part of something called a wrapped security, or a "bond with a wrapper". The latter is the term most often used and the result is a derivative product. These things have been around so long that you just overlooked them, sort of like "zero coupon" bonds. The coupon in that case was the wrapper and you could strip and sell the warrant (coupon) to increase the upside of an M&A deal at the stage that the bridge was taken out. Stripping the wrapper from mortgage backed securities looks a little different because you are stripping the cash flow from an insurance policy from the mortgage but the result is similar. The one big difference is that when you unwrap a mortgage backed security, the risk stays with the mortgage but that portion of the cash flow is transfered/repackaged/sold again and is, thererfore, absent in the event that the mortgage defaults. You can end up with leverage of up to 1000:1 on the front end and it's legal. The original bond isn't rated again so if you aren't careful you canend up with what is essentially a junk bond trading at preferred rates - until somebody looks under the hood that is. When that happens.... Well, we know the result - collapse.
LOL
Like I said before, nobody would have bought this stuff if there had been even a scintilla of transparency.
JC
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Warren Buffett, after buying GRE, realized that have a time bomb of toxic "financial products", a.k.a derivatives portfolio, and was very scared. He spent five years, and lost 400 million dollars, to liquidate that "portfolio".
Had he not done this, we'd possibly be reading about "General Re Bailout" now.
For all the talk about "Warren Buffett's worst year", his worst year was losing 9.7% of equity. Compare this with other numerous train wrecks of the last year. Last year was his seventh best outperformance of S&P 500, by 27%.
-- Due to extreme spam originating from Google Groups, and their inattention to spammers, I and many others block all articles originating from Google Groups. If you want your postings to be seen by more readers you will need to find a different means of posting on Usenet. http://improve-usenet.org /
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I remember it well. That was why I mentioned it. For some reason my initial response to George isn't going through so I'll include my comments to his original below.

Boggle hasn't done to terribly bad either.
Here is my original response in this thread - maybe it will go through.....
WAMU self insured in many cases George, they all did. Truly independent PMI's went the way of the dinosaur in the 1990 bust. Remember Lawyers? Poof! The sole survivor of consequence today is AIG. The rest are almost all broker/dealers. What has survived going forward since then, as insurance, is part of something called a wrapped security, or a "bond with a wrapper". The latter is the term most often used and the result is a derivative product. These things have been around so long that you just overlooked them, sort of like "zero coupon" bonds. The coupon in that case was the wrapper and you could strip and sell the warrant (coupon) to increase the upside of an M&A deal at the stage that the bridge was taken out. Stripping the wrapper from mortgage backed securities looks a little different because you are stripping the cash flow from an insurance policy from the mortgage but the result is similar. The one big difference is that when you unwrap a mortgage backed security, the risk stays with the mortgage but that portion of the cash flow is transfered/repackaged/sold again and is, thererfore, absent in the event that the mortgage defaults. You can end up with leverage of up to 1000:1 on the front end and it's legal. The original bond isn't rated again so if you aren't careful you canend up with what is essentially a junk bond trading at preferred rates - until somebody looks under the hood that is. When that happens.... Well, we know the result - collapse.
LOL
Like I said before, nobody would have bought this stuff if there had been even a scintilla of transparency.
JC
JC
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Ignoramus15384 wrote:

I remember it well. That was why I mentioned it. For some reason my initial response to George isn't going through so I'll include my comments to his original below.

Boggle hasn't done to terribly bad either.
Here is my original response in this thread - maybe it will go through.....
WAMU self insured in many cases George, they all did. Truly independent PMI's went the way of the dinosaur in the 1990 bust. Remember Lawyers? Poof! The sole survivor of consequence today is AIG. The rest are almost all broker/dealers. What has survived going forward since then, as insurance, is part of something called a wrapped security, or a "bond with a wrapper". The latter is the term most often used and the result is a derivative product. These things have been around so long that you just overlooked them, sort of like "zero coupon" bonds. The coupon in that case was the wrapper and you could strip and sell the warrant (coupon) to increase the upside of an M&A deal at the stage that the bridge was taken out. Stripping the wrapper from mortgage backed securities looks a little different because you are stripping the cash flow from an insurance policy from the mortgage but the result is similar. The one big difference is that when you unwrap a mortgage backed security, the risk stays with the mortgage but that portion of the cash flow is transfered/repackaged/sold again and is, thererfore, absent in the event that the mortgage defaults. You can end up with leverage of up to 1000:1 on the front end and it's legal. The original bond isn't rated again so if you aren't careful you canend up with what is essentially a junk bond trading at preferred rates - until somebody looks under the hood that is. When that happens.... Well, we know the result - collapse.
LOL
Like I said before, nobody would have bought this stuff if there had been even a scintilla of transparency.
--

L8TR 'Tater



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On Mar 5, 11:10am, F. George McDuffee <gmcduf...@mcduffee- associates.us> wrote:

Perhaps some piece of it is that the securities went bust to a degree out-of-proportion to the degree mortgages were actually defaulted on?
That is, maybe the securities became worthless at a rate and to a degree much greater than they necessarily should have based on the actual default rate?
Since they could not tie individual mortgages to security instruments, maybe this played a role.
If that were true, seems it would be more correct to call this a securities bubble collapsing.
Dave
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On Thu, 5 Mar 2009 12:20:15 -0800 (PST), snipped-for-privacy@yahoo.com wrote: <snip>

<snip> ------- PMI payments still showup on the individual mortgage mortgage escrow account statements every month, even when bundled into CDOs.
Unka' George [George McDuffee] ------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
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On Mar 5, 11:10am, F. George McDuffee <gmcduf...@mcduffee- associates.us> wrote:

some reading/sites that may be of general interest
http://www.pmi-us.com / http://www.pmi-us.com/map /
http://seattlebubble.com/blog/tag/risk-index /
http://www.mortgagemag.com /
http://www.socketsite.com/archives/real_estate_economics /
http://housingbubble.blogspot.com/2005_03_01_archive.html
Dave
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http://www.google.com/url?sa=U&start=5&q=http://www.cmgmi.com/fv-52.aspx&ei yvSbyiCJ3etgfdsdWIBg&usgQjCNFTR3LkJNHeIqgxGC0dNBwVOy-yHg
http://www.mortgageqna.com/mortgage-insurance/mortgage-guaranty-insurance-corporation-mgic.html
http://query.nytimes.com/gst/fullpage.html?res 0DE3D71438F930A35750C0A96E948260&sec=&spon=&pagewanted=all
http://www.allbusiness.com/banking-finance/banking-lending-credit-services/7027383-1.html
http://www.therealestatebloggers.com/2007/10/01/citigroup-expects-a-60-decline-in-earnings-after-mortgage-writedowns /
Because MGIC is broke. Same as AIG. They over leveraged, and legally the executives should go to jail for selling insurance they could not cover. http://www.bizjournals.com/milwaukee/related_content.html?topic=Mortgage%20Guaranty%20Insurance%20Corp
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0
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On Thu, 5 Mar 2009 19:04:03 -0500, "ATP*"

----------------- Thanks for the information. What part of the country are you locate in?
This may be the case but then why are the taxpayers taking it in the shorts because these bankers circumvented the "prudent lender" standard? How these "bankers" have been fired? How many of these "bankers" under indictment? How much of their bonus money has been "clawed back," because it was obtained by fraud?
In the 4 state area [where Kansas, Oklahoma, Arkansas and Missouri meet] PMI is still required by all the local and regional banks, and many people are having trouble getting their PMI dropped until their equity is much greater than 20% because the loan/repo value of their homes has dropped so far (c.30-40% in some areas).
It appears there are huge sums of money involved here, and much of the claimed bank "losses" are not real, but simply accounting numbers used to scare Congress into pumping yet more taxpayer money into a bottomless rat hole.
I am working up both an email to Congress and FOYA letters to the OTS, OCC, etc. to see what information they have on this. (The FRB, FDIC, etc. are *PRIVATE* corporations and AFAIK are not covered by FOIA.) The whole thing stinks.
Unka' George [George McDuffee] ------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
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The northeast, although the chicanery was apparently widespread. Bankers have powerful friends. Chuck Schumer, for one:
http://polecolaw.blogspot.com/2007/12/more-subprime-from-schumer.html
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ATP* wrote:

George,
I'm still half convinced the bailout scheme is all smoke and mirrors and something else entirely is going on.
But then I always a bit suspicious when someone else sticks his hand in my pocket.
Richard
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On Fri, 06 Mar 2009 00:11:21 -0600, cavelamb
<snip>

<snip> ---------------
More "stuff" dribbles out. It now appears that there were *MASSIVE* tax evasion frauds being comitted.
The deals were so complex that many misfired, and in other cases, some of the people involved apparently just took [some of] the money off the top and told the banks, if you don't like it, call the cops -- and we are sure they will be very interested in what we have to say. Note this is *ONE* bank, and there are at least 10 of this size or bigger, world wide.
FWIW 1LB(GB) = 1.37$US 500 million LB(GB) = 687 million $US
========RBS avoided 500m of tax in global deals
State-supported bank admits billions were put into schemes to cut tax bill
* Felicity Lawrence and David Leigh * The Guardian, Friday 13 March 2009
Royal Bank of Scotland tied up at least 25bn in complex international tax-avoidance schemes during its boom years, costing the British and US treasuries more than 500m in lost revenue, the Guardian can disclose.
It is the first time that a major bank has admitted the existence of such deals on this scale. The new management at RBS, mindful of the fact that it is now 70% owned by the taxpayer, has disbanded the department responsible and will put an end to the controversial practice.
<snip>
The Guardian has identified at least 13 such deals, many using the offshore facilities of the Cayman Islands, in the Caribbean, in ingenious ways.
The deals involved "investments" of as much as 6bn at a time. The cash was moved in circles between RBS and other banks. One former British official close to the US revenue's intelligence efforts said tax deals such as this were an important factor in driving the "securitisation" boom which led to the worldwide financial calamity.
Banks enthusiastically bought huge tranches of so-called mortgage-backed securities as part of tax deals.
The British official said: "Mega tax-avoidance schemes demanded the movement of mega funds. The web of notes passing between banks to effect avoidance schemes was so big and complex that no-one knew quite what they had.
"The profit is actually only a tax relief and the underlying reality of many of these deals was a loss."
<snip> ---------- http://www.guardian.co.uk/business/2009/mar/13/rbs-tax-avoidance
Unka' George [George McDuffee] ------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
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On Wed, 11 Mar 2009 02:30:35 GMT, przemek klosowski

===========The fundamental error here appears to be the assumption that the "investors" have any say what so ever in running a large corporation, other than selling their stock and walking away.
While "private equity" firms like KKR & Black Rock have been successful in "throwing the bums out," this has always been to loot the company themselves.
Because of the "green mail" and "hostile take over" defenses enacted by the corporations themselves and the influence the existing management has with the regulators and courts, action by even a majority of stockholders comes to nothing. For example, votes on excessive executive compensation cannot even get on the ballot, even as an advisory [non binding] action.
The large stock holders such as the mutual and pension funds have been largely co-opted & preempted to always vote with the existing management.
The one group with a large enough hammer to occasionally get the attention of corporate boards and officers has been the major debt holders who can put a very large knot in the corporate pantyhose by refusing to roll-over a loan, or enforcing existing loan covenants to the letter.
Until and unless the directors and executives of these huge corporations are held to the same standards of accountability and performance as everyone else, things will never change. [and why should they?]
I don't know how to structure this, but there must be some mechanism put in place to remove the directors and senior officers of a corporation that are running it into the ground, before they destroy it completely, possible through some sort of structured court action analogous to a competency hearing for a natural person.
It would not seem to be too difficult to create a list of a dozen or more symptoms of management incompetency, and provide for the removal of the existing directors and officers when say any 4 symptoms could be demonstrated to exist to the satisfaction of a judge.
Consider how different things might be if the directors and executives of AIG, GMC, Citi, BoA, Chase, Lehman Brothers, etc. etc. had been removed 3 to 5 years ago for managerial incompetency, and replaced with more rational people [living in this universe].
Naturally, any employment contracts would be voided, including provisions for severance or termination payments.
The people in these groups are invited to suggest such "symptoms" for judicial consideration.
Some "symptoms" (I am sure there are many other identifiable characteristics) I came up with (in no particular order) are:
(1) The approval and/or acceptance of excessive direct and indirect compensation for the officers, executives and directors.
(2) Any exhibition of "conspicuous consumption" in the offices of the officers and directors.
(3) Utilization of company funds for the personal expenses of the directors or senior officers, particularly where this involves "conspicuous consumption," or entertainment.
(4) The continued operation of the corporation at a loss, particularly when dividends and bonus are being paid using borrowed money.
(5) Any continual increase in debt, particularly for normal operating expenses, with no structured plan to retire it.
(6) Failure to implement and/and enforce strict GAAP accounting, or the continued use of irrational rates of return [LIBOR + 2%?] when calculating pension funding liabilities.
Any suggestions or re wordings? Something is needed about "leverage" when calculated using "tangible common equity" even for the non-banks.
Unka' George [George McDuffee] ------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
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