Using Veritas to Construct the "Per…

29-04-2017 Hits:93403 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:84622 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:84540 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:89100 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:87580 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:87388 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:58553 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:86918 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:86537 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:86880 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:93197 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:90523 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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Countrywide is the largest lender in the US and may be deemed too big to fail. It is regulated by the Office of Thrift Supervision and it is a primary dealer, authorized to trade U.S. government and other select securities with the Federal Reserve System. . Fannie Mae (FNMA) and Freddie Mac (FHLMC), the privately chartered United States mortgage giants which are overseen by the department of Housing and Urban Development (HUD) were the chief purchasers of Countrywide’s loans. Although Fannie Mae and Freddie Mac issued securities are not guaranteed, there is an implied moral obligation. The U.S. market perception is that the government would never allow FHMLC or FNMA to default because it would shake the investment community to the core. It is not a secret that Fannie Mae and Freddie Mac bought subprime loans and some non-subprime risky mortgage products, but what amazes me is that they were not vocal early on about what a bad practice this was.

They have some HUD guidelines requiring them to support low income housing, and that virtually guaranteed their involvement. You can ask them more about that, since I do not have the details to hand. On Friday, August 24, I spoke to a Fannie Mae board member about a separate topic, but in passing talked about the HUD requirement.

On September 24, 2003, Countrywide expanded its interest-only (IO) programs including 80/20 loans (two loans: one for 80% of the purchase price and the second for 20% percent of the purchase price, a “piggyback” loan, to achieve 100% financing); NINA loans (no Documentation loans: no income and no asset verification), No Ratio loans (no income information is supplied, so no debt to income ratio is calculated allowing the borrower to assume a greater debt load than would be allowed with a traditional mortgage), and SISA loans (the borrower states income and states assets without verification).

By the end of 2006, Countrywide’s loans were showing signs of trouble. By the end of 2006, Countrywide began pricing its first asset backed collateralized debt obligation (ABS CDO) and was interested in doing more in derivatives and synthetics.

In March of 2007, Richard Syron, CEO of Freddie Mac, told CNBC that Freddie Mac would no longer buy NINA loans, loans not underwritten at fully amortized rate and loans that did not take into account insurance or property taxes.

In July 2007, James Lockhart of OFHEO told Bloomberg News that FNMA & FHLMC had bought (not retained) $170 billion of “AAA” rated tranches of subprime backed mortgage backed securities and would provide $40 billion for rescue mortgages, basically bailouts. He did not specify which mortgage loans would be rescued.

The week of August 6, 2007 rumors hit the market that Countrywide was looking for a “white knight,” a deep pocket investor to either take it over or to provide a liquidity injection. It was rumored Countrywide did not like the responses – the price indications – it received to its overtures.

On Friday August 10, 2007 I spoke to Warren Buffett on a matter unrelated to Countrywide. He told me that two as yet non-public situations had come up with large financial institutions that were in trouble. He had been approached by both, but of course, he would not give me details, and I did not ask for them. Warren plays his cards close to the chest. It is likely, however, that Countrywide was one of them, since they were passing the hat. But Mozilo is a bad manager, and Berkshire Hathaway cannot supply management. In fact Mozilo is the epitome of a Berkshire anti-manager: he doesn’t invest in Countrywide (since 1987 according to a recent NYTimes article), he had lax lending standards combined with risky products (and see the classic Warren Buffett quote below). Over the years, Warren Buffett has said many times – and written in his shareholder letters – that he is not a fan of borrowing money and more than that he is not a fan of lending money to people who cannot pay you back. If Countrywide was one of the situations, what was the other one? I do not know, and I am guessing. Bear Stearns? Bear was looking for liquidity in China. But Lehman is also a possibility.

If it sounds odd that Warren would consider owning a bank/thrift or an investment bank or a hedge fund, it should not. Everything has a price. Berkshire used to own a very well managed mid-west bank, Illinois National Bank – remember Gene Abegg? Warren was CEO of Salomon after Gutfreund was disgraced, because Berkshire had a large convertible bond position Warren wanted to protect. Warren also made a bid on Long Term Capital Management when it was in trouble, but the principals did not like Warren’s bid – a fair one in my opinion at the time.

As you are aware, Berkshire Hathaway bought a chunk of stock in BofA, and BofA may be one of the major beneficiaries of the mortgage meltdown. It is a bank stock with a good dividend; good management, good earnings prospects and a P/E of 10.5.

The following week, the week of August 13, the ABCP market showed serious strain. Investors began questioning the quality of the loans and other assets backing commercial paper. They asked for higher interest rates and did not want to extend their investments. Those that had purchased extendable commercial paper found that the extensions were imposed. It was clear that Countrywide’s investors were walking away from its commercial paper unless Countrywide paid exorbitant short-term interest rates. Lines formed at Countrywide as depositors demanded their money back. The thrift tried to reassure depositors that the Federal Deposit Insurance Corporation (FDIC) protected deposits up $100,000, but depositors also knew that if there were a run on Countrywide, it might take some time to recover their funds.

Countrywide let its bankers know it wanted to draw down all of its available liquidity lines; it wanted $11.5 billion from a 40-bank syndicate. Rumors flew that the banks balked asking the Fed for concessions.

On Thursday, August 16, 2007, the U.S. stock market tanked and the Dow fell and at one point during the day was down 343.53 points after Countrywide announced it tapped into the $11.5 billion in liquidity lines. It was rumored the Fed would lower the “overnight” discount window rate and extend borrowings to 30 days with further extensions. The Fed also agreed to accept asset-backed collateral with an “AAA” rating. In effect this would allow banks extending credit lines to post Countrywide’s collateral. The Fed effectively became a buyer of last resort of Countrywide’s 30 day extendable asset backed commercial paper at favorable rates that Countrywide’s former commercial paper investors would no longer accept. This action potentially benefits other ABCP programs, too, including those backed by leveraged corporate loans. The Fed news seemed to have been leaked by one or more of the banks involved and the stock market popped up before the close on August 16, 2007 to finish down only 15 points.

On Friday, August 17, 2007, the Fed announced a discount rate cut of 50 bps to 5.75% from 6.25% and also announced the longer extendable borrowing terms. The Dow closed up 233 points for the day. Countrywide announced it will now focus on loans that meet its criteria for being retained as investments and those that can be sold to Fannie Mae and Freddie Mac. Almost five years after announcing its expanded IO program, Countrywide is adopting sounder lending practices, not because of regulatory pressure, but because of market pressures.

BofA injected $2 billion into Countrywide, and Countrywide is still looking for a private equity investor.

But Mozilo is still in denial and insists his lending standards were not lax; his products were appropriate; and his fees - of up to 15% for some subprime products – were not out of line. The Fed should have asked him to step down.

-Janet Tavakoli
Tavakoli Structured Finance, Inc.