Are Newspapers Stealing a Page From Banks' Playbook?

Don't Hold Your Breath
Waiting for the Newspaper Expose

I first noticed it when my Wall Street Journal subscription continued -- and continued -- well past the renewal date (I didn't).

Then, a client whose home I'm listing reported that he couldn't terminate his New York Times subscription, despite repeated efforts.

Are newspapers stealing a page from the banks' playbook?

Accounting Games

Banks, you'll recall, were able to defer mortgage losses simply by acting as if borrowers were temporarily in arrears.

So, instead of writing down their increasingly impaired loans, the banks kept adding accrued (but unpaid) interest to the loan balance.

The result: "healthy" bank revenues, "healthy" bank balance sheets (in fact, growing!) -- just no cash coming in the door.

Eventually, the accounting fiction caught up to the banks, and the tide of red ink and write-offs engulfed them (at least until the government rode to the rescue).

Phantom Subscribers?

Newspapers, of course, live and die by their circulation statistics.

Pretending that ex-subscribers are still current keeps those statistics -- and therefore advertising revenues -- artificially high.

Just like the banks, it also lets newspapers continue accruing subscription revenue today that they will have to reverse tomorrow.

Ultimately, sending newspapers to people who don't want them could very well be a testament to newspapers' current business model: they're not selling papers to subscribers, they're selling subscribers . . . to advertisers.

Ten Million Multiplied by $.0145

Isn't extrapolating from a sample size of two risky? Perhaps.

And it's certainly possible that the problem is nothing more than sloppy customer service on the newspapers' part.

But it reminds me of a 1980's bank fraud in California that was detected by an especially persistent grandmother.

Determined to balance her monthly statement exactly, she insisted that the bank was shortchanging her one penny . . . every seven months!

It turns out that the perpetrators were lifting an infinitesimal amount from millions of accounts monthly.

P.S.: And who should call on my home line, at 9 p.m, just as I'm typing the last keystrokes on this post? Telemarketing for the local newspaper!

"Our" New Paymasters?? Define, "Our"

Confusing "Us" and "Them"

Today's Wall Street Journal is running a house editorial decrying government wage controls on the top 175 executives at seven companies that are still using money from the Troubled Asset Relief Program ("TARP").

The title of the piece?

"Our New Paymasters: wage controls are politically easier than genuine reforms."

I can see how if you're one of the 175 affected executives, it would certainly seem like the government was your new paymaster.

But where does "our" come in?

"Our" presumes an "us."

"Us," of course, would be the 99.9999% of Americans who don't make millions annually running banks that were bailed out by the government, and are being sustained even now by free money from the Federal Reserve.

Banks Still Calling the Shots

Worst-Kept Secret: Foreclosure Banks
Flaunting MN Disclosure Laws

A problem has arisen in Minnesota regarding lenders who have acquired property through foreclosure and then listed those properties for sale to Minnesota consumers. The problem is that lenders are refusing to comply with Minnesota disclosure laws.

--Donald D. Smith and Brad J. Boyd, "Seller Disclosure Obligations Under Minnesota Law for REO Properties"

The above paragraph, from a memo drafted by the legal counsel to the MN Association of Realtors, is hardly news to anyone representing would-be Buyers trying to buy foreclosures lately (or to readers of this blog).

However, what's interesting is the Board of Realtors' response, undoubtedly borne of futility: instead of getting the appropriate legal authorities (MN Attorney General? U.S. Attorney General? Hennepin County Attorney? The Congress?) to get the banks to stop defying the law, it is shifting responsibility back to the Realtors.

Namely, it advises Realtors, when working with banks that refuse to comply with MN disclosure laws, to obtain from the bank the "legal support for that position." (Good luck with that one!)

Assuming, quite safely, that no "legal support" is forthcoming, then what?

Smith and Boyd again:

Without such evidence, supported by accurate and substantiated legal authority, Realtors in the state of Minnesota are being encouraged to avoid unwarranted personal legal liability and risk to themselves and their brokerage, by resigning from any and all listings with sellers who refuse to comply with these legal obligations.

That's right: put the burden on Realtors to ostracize law-breaking banks.

After everything that's happened to housing (not to mention the broader economy) the last couple years, is it really possible that banks are still running the show?? (and yes, that's rhetorical)

Verbal abracadabra

Quick: Synonym for "Other-than-Temporary?"

Want to get rid of something? Change -- or obscure -- its name.

So, it's no longer swine flu, it's an acronym.

In finance, all the toxic loans still on too-big-to-fail bank balance sheets are not "toxic loans" -- suddenly, they're "legacy assets."

And how are those to be valued?

According to FASB, by applying new, so-called "other-than-temporary impairment" (OTTI) rules.

English actually has a word for "other-than-temporary": it's called 'permanent.'

"Does This Impress . . Floyd Norris?"

The Quick Way to Bank Profitability

If the roots of today's financial crisis were economic in nature, the vital signs to monitor would be such financial measures as the stock market, unemployment levels, and interest rates.

However, a growing chorus of commentators believe that today's dysfunctional financial system is ultimately a symptom of a political problem. As in, who makes the rules?

So, before investment banks could leverage their bets 35:1, the SEC had to give its ok; before AIG could write billions (trillions?) in exotic credit insurance, regulators had to look the other way; before Citigroup, Bank of America and others could bury hundreds of billions in liabilities in off-balance sheet entities, the Financial Accounting Standards Board ("FASB") had to allow it.

As President Obama has said, the dirty little secret of today's financial crisis isn't how many laws were broken . . but how few.

"Does This Impress . . . Floyd Norris?"

So, have trillions in Wall Street losses and bad bets (so far) weakened bankers' control over regulators? Hardly.

Here's the latest from Floyd Norris, the chief financial correspondent of The New York Times -- not just the unofficial dean of financial journalists, but as impeccable and unimpeachable a commentator as you'll find anywhere:

The world of accounting rulemaking is normally a staid and slow-moving one, with the board offering detailed rationales for changes and giving interested parties months to comment on them. Most comment letters come from people well versed in the accounting literature, arguing points that can seem arcane even if they could have a major impact on financial reports.

The process this time has been different in almost every respect. The board allowed only 15 days for comments, and said it would act after taking just a day to review the comments. Those comments arrived by the hundreds, including bitter reactions from investors. “Market value is market value. Stop letting the financial industry call a duck a whale,” stated an e-mail message signed by Diane Walser. “Who will benefit?” asked Roy Bell. “Only the very ones who already broke all the rules and have brought destruction to the world as we know it.”

--Floyd Norris, "Banks Are Set to Receive More Leeway on Asset Values"; The New York Times (3/31/09)

Leaving all the arcane accounting aside, the basic issue is whether the banks must write down their assets to market value, or use more subjective criteria (their own). The latter approach has been called, deservedly, "mark to management."

Suffice to say, the banks are prevailing.

The Tonight Show has a running bit, called "Does This Impress Ed Asner?," in which amateurs perform kitschy routines to try to win Mr. Asner's approval.

I propose my own version for the financial markets: "Does This Impress . . Floyd Norris?"

The banking industry's latest trick -- anything but the work of amateurs -- decidedly does not (disgust is more like it).

Interest Rates Stable

Banks Not Passing Along Rate Drop?

After a dramatic drop late Wednesday, 30-year mortgage rates have leveled off at 4 5/8% at the moment. Given the size of the Fed commitment -- up to $1 trillion in new cash aimed at mortgages -- you'd expect rates in the low 4's.

Why hasn't that happened (or at least, not yet)?

Here are the reasons being bandied about:

One. There are now many fewer lenders, so they aren't competing as hard for loans (you compete for business by offering the lowest rates).

Two. The lenders still out there are understaffed, and use interest rates as a spigot to increase or decrease loan (and refi) applications. When they're overwhelmed, like they are now, they raise rates (or don't pass along savings).

Three. Banks aren't passing along savings because they're wounded and need to replenish their capital (undoubtedly true, especially for the biggest banks).

The real explanation is probably a combination of all three of these factors; the exact mix likely varies by bank.

Ultimately, mortgages and prevailing interest rates sure seem a lot like gas prices and the price of a barrel of oil: increases show up at the "pump" immediately, while price drops reach consumers more slowly . . .

Predatory Practices Persist

"Yeah, That Will Work" Department

I've been on a (very) brief family vacation -- Duluth water park and puppy scouting -- and returned to lots of mail, mostly business-related and bills. Including one from a large bank where I have had a credit card account -- and several other accounts -- for almost a decade.

Beginning later this month, the letter notified me, the interest rate on any unpaid credit card balance will be *28.99%! In fact, nowhere in the letter was the name of the bank even identified; rather, the correspondence, from "Cardmember Service" in ND, simply referenced the last 4 digits of my credit card (I had to check my wallet to realize which credit card account was affected)

Bad credit?

Hardly.

My wife and I have 800 credit scores, and just refinanced at 4 5/8% (we're part of the lucky minority that had enough equity and qualifying credit histories). And it's hardly like we are a new or unknown customer to the bank in question: our credit card account goes back years, and has never even incurred a late payment fee. We also have a mortgage with them -- also never late -- and multiple savings accounts.

Fortunately, it's not like it really affects us: we use credit relatively sparingly, and pay off the balance in full every month. (I also have several other credit cards that I can -- and quickly will -- switch my business to.)

But still.

What if we couldn't pay off the balance? The new rate would literally eat us alive in no time.

Predatory Practices Persist

At 29% compounded annual interest, $1 in debt balloons to $6(!) in seven years!

Clearly, anyone who fell into this pit would never be able to climb out. Is this how the banks propose to dig out of the crater they've dug for themselves -- and us, too?

Do the big banks really need to give people another reason to hate them right now??

*There are supposed to be usery laws on the books of most states. I can only guess that the card is issued from someplace like North or South Dakota, with a very "liberal" interpretation. In what has been called "a race to the bottom," some states compete for corporate business by gutting their consumer protection laws.

"57 Channels (And Nothin' On)"??

Three Reasons Why Deals
Are Tougher in a Recession

What amuses me about 99% of the articles written about the housing market -- and there's been an explosion lately -- is that they're not written by active, working Realtors.

Most are simply journalists whose "beat" (area of focus) is the housing market. On a scale of 1-10, their writing skills are a "10." But in terms of first-hand experience, they're . . not very high.

Obviously, brains and good sources can compensate immensely. But you still need to know which sources, and how to filter what they say. And even then, there's still slippage between direct and vicarious experience.

In that vein . . . here's a first-person, Realtor's take on the local housing market right now.

"Low-Low" Offers vs. "Lowball-Low"

Generally speaking, deals are fewer and harder to come by now -- foreclosures being the very big exception -- for three reasons.

One. Buyers and Sellers are starting farther apart.

Between the daily headlines blaring housing's woes, or seeing a neighborhood with one (or two) too many "For Sale" signs, Buyers seem to be overestimating how much leverage they have over Sellers.

As a result, Buyers' initial offers are often -- if not "lowball-low" -- just "low-low."

Needless to say, that doesn't get negotiations off to a rousing start. (Again, foreclosures being a notable exception. Banks don't get p-ssed off. They don't get . . . anything. They just say "no" -- and take their time doing it.)

While both sides may gradually yield ground, the operative word is "gradually" -- and the initial gap can be quite wide. As a consequence, the momentum that's needed to drive a deal through to conclusion is often lacking. (Bonus question: what deals have that quality today? Houses selling in multiple offers -- which is more common than you'd think right now).

Two. Money is tighter.

I've never really worked with clients who are cavalier about money -- people with that attitude tend to be quickly separated from theirs (just like fools). However, in flush economic times, Buyers and Sellers just seem to be more, well, "generous." And flexible.

Now, every dollar counts. Even little issues that are routinely disposed of in easier times can threaten to torpedo deals now.

Three. Inventory can feel surprisingly "thin."

It sounds odd to say in a market with 30,000-plus homes for sale, but I've heard more than one agent working with Buyers now say -- and have experienced it myself -- that it seems like there's a ton of inventory . . . until you have a client actually looking for something.

Then . . it's nowhere to be found (sort of the housing market's equivalent of Bruce Springsteen's song, "57 Channels (And Nothin' On)."

Realtors vs. "Laymen"

No doubt one reason for that is that discretionary Sellers -- people who can afford to wait -- are waiting, until perceived conditions improve (as I've written previously, those perceptions can be very wrong -- See, "Now You See it . . .Now You Don't").

But it's also true that once a home has been on the market for awhile, Buyers tend to look for flaws. (Note to Sellers: the pendulum swings from overlooking flaws to zeroing in on them as a direct function of time on the market.) And market time is appreciably higher in a soft, slow market.

So the same house that everyone would have "oohed and ahhed" over when it first hit the market around Labor Day is chopped liver in late Feb. (and now overpriced, given the drop in the market last Fall).

While Realtors are much less susceptible to this phenomenon than "laymen," they're still human.