WALL STREET BETTING: IN SHORT & LONG

The Goldman Sachs so called fraud case filed by the S.E.C. helped bring a very thin layer of understanding to what goes on behind the scenes on Wall Street. It's called betting. At least the average person calls it so, but if your bets are made within Wall Street, the word is hedging.

Hedge funds take high roll casino like chances with billions of dollars that straddle both sides of financial risk taking. If a catastrophe is avoided, money is made and if a catastrophe occurs, money is made. Covering both sides has another word we're coming to hear more of. It's called leveraging.

We've heard words like derivatives and credit default swaps (CDS), which are pseudo-insurance policies that pay billions when borrowers stop paying their mortgage. When the mortgages default, derivatives kick in and someone becomes astronomically wealthy...once again.

Other words like collateralized debt obligations (CDO's), mortgage-backed securities (MBS), and triple-B or triple-A rated bonds are now much more familiar concepts making us even more conversant about these mortgage and financial times.

But perhaps at the core of these casino-like bets is the "short & long" position of risk taking. We know what "long" means. If you ever sat with a financial planner, those mutual bonds they sold you were long because they had the expectation of maturing and performing over the long haul.

But wait a minute. What if you are on the traditional long side and your financial planner still has a reasonable expectation that an adverse event will diminish your investments?

If your financial planner told you, "these bond funds are not the greatest so we have to sell them before they begin to tank". What would you do? Some may say, hold them just long enough to make money but sell them before it's too late. That's exactly what investors do with the less desirables.

This short term expectation changes things. Goldman is more loosely accused of not telling their investors that someone in the background had a more rigidly "short" expectation.

Clearly defining short & long may not be the focus behind Obama's reform push. It's certainly the main ingredient behind the Goldman Sachs controversy.

Goldman's investors had no expectation that they would hold those triple-B (low-grade) securities until maturity. It simply defies logic. The triple-B fund pool was on its face too risky for any appreciable expectation of longevity. The investors knew that it would simply be a matter of time before those triple-B tranches begin to cascade.

In fact, those risky type of securities get sold and resold multiple times and within a relatively short period of time. They're sold on the long side, with the anticipation that there is a not so long window for performance.

It's a game within a game. A game of hot potato within the game of hedging and ultimately someone is caught holding the proverbial bag. There comes a point when those triple-B's can't be sold anymore because the default curve is either too high or simply catastrophic.

If safety and longevity is what those Goldman investors desired, triple-A bonds would be more fitting. But they specifically chose triple-B securities which supports the idea that they also had short expectations.

I doubt we'll even hear the resolution of this case. The SEC's filing of the lawsuit is dramatically symbolic on its own. It resonates with what people perceive and that is that something needs to be done about Wall Street. Exactly what should be done is another question. A dissertation of what's in the SEC lawsuit may not have the populists attention right now.

Both the right and left side of the political spectrum have little sympathy for Wall Street. In fact, House and Senate republicans have recently quailed their health care reform-like opposition to the financial reform push, because of overwhelming public opinion sustained against Wall Street.

WHERE IS THE SEC's CASE AGAINST GOLDMAN SACHS?

Should Goldman Sachs Really Be Worried? (Find the Link to the SEC's Full Complaint Below!)

The SEC's case against the financial giant Goldman, Sachs & Co. is questionable at best. The SEC complaint does not have the prosecutorial teeth you would come to expect from the U.S Gov't.

The Gov't's case: Goldman failed to disclose that a hedge fund manager, Paulson & Co., bet against the same mortgage securities Goldman had offered to its own investors. It's also alleged that Goldman conceiled that these highly risky securities were essentially cherry-picked for Paulson specifically for their promise to fail.

Failed mortgage securities that are insured by derivatives or (Credit-default swaps) pay highly speculative big money. In this case, Paulson's share was $1 billion.

The problem with the Gov't's case seems two-fold. The securites in question were Triple-B rated, which is the lowest-riskiest-junkiest type of security bond available on Wall Street. There's no controversy over the low-grade nature of the bonds. There's no allegation regarding the performing expectations of these highly risky mortgage securites.

The complaint does not specifically allege that investors should have had better disclosure about the risky nature of the securities themselves. The very triple-B nature of the securities was apparently "buyer beware" enough.

The second problem with the SEC's case is that although the Gov't alleges to have jurisdiction, the dispute solely hinges upon representations Goldman made on "marketing material". Really? Marketing material? Highly skilled and knowledgeable portfolio managers were fooled by brochures?

The SEC does not regulate "marketing material" do they? They regulate the exchange of securities hence their title, and no said securities exchange is expressly alleged in the complaint to have been illegally conceived. Instead the Gov't's emphasis is mainly on the obscurity of this Paulson fellow during the structuring of this massive deal.

Paulson, who purchased the derivative insurance against the fund's default, was not identified to investors as a participant in the fund's selection process. The SEC alludes to the notion that investors may not have participated with the highly risky fund if they knew Paulson had a contradictory short position.

That is highly speculative since investors take short positions on risky mortgage-backed securities all the time. It wouldn't make much sence to short a triple-A security because the derivative profit is in its failure. Agency conforming borrowers have good credit and plenty equity, they fully income qualify for their home loan and their paper performs well most of the times.

There's a much greater probability that the junkiest triple-B securities will fail so it makes more sence to short those. The probability of the AAA good stuff failing, not so much.

http://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf

Connecticut Sues Moody’s, S&P Over Subprime Ratings (Update3) - Bloomberg.com

Connecticut Sues Moody’s, S&P Over Subprime Ratings (Update3) - Bloomberg.com

DO I NEED AN ATTORNEY TO MODIFY MY LOAN?

You absolutely do not need an attorney to request a loan modification. In fact you lender would prefer that you don't have one. Why? Your lender is the only party that can voluntarily modify your loan. An attorney can send a modification request to your lender just like you can, except the attorney will charge you a lot of money for doing so.

It may be helpful to hire a document preparation service that can draft the correspondence for you if you have difficulty with the necessary language. A document preparation service (www.DocsToWork.com) will only charge a small fraction of what an attorney will charge to help you. You can expect to pay about $100 dollars for document preparation services in connection with a loan modification request.

The lender does not shake when they see a modification request prepared by an attorney and many lawfirms or "loan modification companies" market their services as an assured bridge between you and a much lower payment. The lender is not going to say "let's settle this one" like the old Jacoby & Meyers commercials that dramatized the moment the insurance company receives a demand letter from the world renown law firm. You lender will honor a scensible request prepared by you, their customer, as long as it is written, well thought out, and demonstrates good faith on your part.

CHAPTER 13/ Federal Debt Consolidation: Out of Reach by Attorney Fees?

Chapter 13 is the Federal Government's version of debt consolidation. It's filed in Bankruptcy Court and it works by shrinking all your bills into one payment (not just credit cards). Many that need debt relief under Chapter 13 and have discussed their case with an attorney, realize that although federal debt consolidation is widely available, the "up-front" cash needed for attorney fees to prepare and file the plan in Court may not be.

Attorneys can charge an average of $4500 to file a Chpater 13 debt consolidation plan, which raises the question: Do attorneys make Chapter 13 Debt Consolidation out of reach? An inexpensive but yet effective alternative to hiring an attorney, is using a non-attorney bankruptcy preparation service, www.DocsToWork.com.

What an attorney will not confess is that Bankruptcy Court does not require an attorney to approve your new monthly payment plan. Bankruptcy Court will accept your petition made on your own behalf, so long as it is compliant.

MY LOAN WAS SOLD.. WILL THAT AFFECT MY LOAN MODIFICATION?

Loans being sold is the reality of lending today. This occurs because most lenders actually don't have a vault of money from which to lend you money from. Most lenders simply have "wharehouse credit lines" which are essentially high limit credit cards in the multiple millions. They fund your new loan by charging it to their wharehouse line until the loan is actually sold to a much larger investment banking organization.

The investment buyer, usually Bank of America, Chase, Wells Fargo, or Citicorp, can hold your loan for a much longer period of time because of their robust liquidity. The main reason lenders sell loans off their wharehouse line is because their wharehouse credit line is limited, just like the space on your credit card has a limit. Holding a loan too long limits the average lender's line and eats up their capacity to fund new loans. Selling the loan also gives the investment banker buying the loan a security instrument that can be traded as an investment vehicle on Wall Street.

You should keep this in mind when speaking with your lender who in all likelyhood is really actually not holding your loan at all. The lender's name that appears on your monthly statement is actually called the "servicer" of the loan. They are the ones that report the status of your loan to the credit bureaus, provide customer service, collect and post the payments to the account and let's not forget, handle your loan modification request.

There is actually an unseen investment community receiving the interest benefit of your payments. This investment community is more like a complicated nexus of junior and senior ranking investors, all who are positioned in a food chain of sort to get their share of the revenue that's generated from your monthly payments. It's your lender's (servicer) job to communicate with the investor community to rework your terms. Also keep in mind that they probably have not hired additional staff to do this for you. In fact they may even have laid off a bunch of workers because of the state of the economy.

Remember, after your loan closed, it was packaged up, bundled, pooled and in many instances, sliced up into hundreds of pieces and sold off. Your loan is probably in a thousand different pieces all over the world. This does not mean that you cannot have your loan modified but the details of reworking a product that has already been rationed, distributed and sold is arduous so be patient and know that getting a resoultion can take months. The good news is that lenders have working arrangements with the investor community due to the high volume of loan modification requests.

Do I Need an Attorney to Modify My Loan?

You absolutely do not require an attorney to request a loan modification. In fact you lender would prefer that you don't have one. Why? Your lender is the only party that can voluntarily modify your loan. An attorney can send a modification request to your lender just like you can, except the attorney will charge you a lot of money for doing so. It may be helpful to hire a document preparation service that can draft the correspondence for you if you have difficulty with the necessary language. A document preparation service will only charge a small fraction of what the associated legal costs are. You can expect to pay about $100 dollars for document preparation services in connection with a loan modification.

The lender does not shake when they see a modification request prepared by an attorney and many lawfirms or "loan modification companies" market their services as an assured bridge between you and a much lower payment. The lender is not going to say "let's settle this one" like the old Jacoby & Meyers commercials that dramatized the moment the insurance company receives a demand letter from the world renown law firm. You lender will honor a scensible request prepared by you, their customer, as long as it is written, well thought out, and demonstrates good faith on your part.

SOLUTION TO UNEMPLOYMENT? RAISE INTEREST RATES, NOT GOV'T

So what's the solution to this recession? Not the technical recession, which according to most economists has ended, due to the small expansion of the GDP and the slowdown in job loss. Ok, I buy the argument that 12 months ago, the question was "great depression"? and today it's "is recovery quick enough"? However, despite the recognition that technically the economy is very slowly making a turn-around, too many people are out of work for that so-called turnaround to make an appreciable difference, especially if you're out of work.


Employers are simply not hiring and small business, who by the way are our biggest employers, are simply not getting the capital they need to expand even in instances when they can demonstrate that they are a great risk. The problem is not that banks don't have capital to lend small businesses, even though 133 banks have went out of business this year alone. The problem is more so the capital itself.. that is the greenback... the dollar. It seems that banks are simply not that turned on by the dollar to take wholesale and categorical lending risks on small businesses. The dollar is in fact attractive to buyers of the American currency, since it's so cheap and can be purchased even cheaper as the US continues it's money printing spree. The dollar is not so sexy for lenders that fear marginal back-end profits due to a poor U.S. currency exchange rate.


The Federal Target Rate, that is the interest rate the Federal Reserve charges banks to borrow its dollar is at almost 0%. 0.25% the be exact. The reason the Feds lowered the bank lending rate was to somehow stimulate the economy. The thought was that if lending were cheap then banks will borrow more and lend more. Makes sence but it hasn't quite played out that way. Yes, lending is cheap but the lending has primarily been pretty active with mortgages. Despite the cries about how it's so hard to get a loan, in today's economy, you can obtain a gov't backed mortgage with a 550 credit score and very little down payment or equity. Even though mortgage debt makes up about 12% of our American consumer debt, the focus on stimulating the economy through home purchases and refinancing hasn't been as fruitful in jumpstarting the economy as the Federal Reserve had intended. We still have a pretty bad unemployment problem, despite the official declaration of the end of the recession.


So what is the solution? It's not very popular but RAISE INTEREST RATES! Raise the Federal Target rate and make it more expensive to borrow American money. I believe that this will in fact adversely affect the mortgage refinance market much more than it will the home purchase market since refinancers are motivated by the lowest possible rate and home buyers really just want a nice home they can afford. Remember, the bank-to-bank lending rate is almost 0% and it's done very little to date for unemployment.


What industry is desperate for capital and will likely pay a higher premium to access that capital? Of course, small businesses. Small business will pay more money to borrow money because frankly, they need it most. Why create more deficite spending for small business initiatives when the problem can be solved in the free market. If the Feds raise the lending rate, it also affects the exchange rate so you get more bang when you buy into the buck. The IMF (International Monetary Fund) does a similar practice with impoverished nations. The IMF has been criticized for adding to a countries misery, by extending poor nations astronomically high interest rate loans. However, the method to the madness is to attract capital into that impoverished country through an influx of currency investors seeking big gains from a high exchange. The influx of capital encourages lending and lending circulates cash.

The reality is that banks would much rather rent you a higher priced dollar than a cheaper one because they make so much more money on the exchange. The problem is finding that consumer that is willing to pay the much higher price to borrow that money and small businesses seem to be a pretty good fit.