Live from Austin!

The mainstream media coverage of the US subprime mortgage meltdown has mostly been about all the folk who have lost their homes, and various plans the government has come up with to try and ease the problem. Thinking about it more carefully, though, doesn’t it seem a little odd for the US government to interfere in the sacred free market merely in order to save a bunch of poor people from ruin?

Well, the SF Chronicle has an interesting article that explains this curious situation. It’s not about saving people from losing their houses, it’s about saving the banks.

During the housing bubble which was fueled by the subprime lending, banks sold mortgage-backed securities. For those who don’t know, mortgage-backed securities are basically in-place mortgage agreements, packaged for resell between financial organizations, or between financial organizations and investors.

The key is to view a mortgage in the abstract, as a promise by person A to pay an amount X for N years. That promise has a value, and can be sold.

For example, we arranged our mortgage through a small financial firm in the Austin area. Once all the paperwork was done, they packaged us up as an asset and sold us to GMAC. GMAC took on the business of extracting money from us over the course of years, and paid the small financial firm a lesser amount in compensation for the value of us as a customer.

This is generally a good thing. Because GMAC does administration for millions of mortgages, they can provide convenient billing and payment services, and reduce per-customer overheads. For the small firm, the benefit was immediate cashflow and no ongoing overheads.

A similar process can be used to package a mortgage and sell it to investors as a bond. The bank gets to remove the liability from their balance sheet; they can then use the cash to provide mortgage funds to more homebuyers. Hence, allowing the transfer of mortgages as mortgage-backed bonds should allow more people to buy their own houses.

For example, suppose John Smith owes the bank $1000 a month for the next 20 years. That’s a total of $1,040,000. The bank could sell that mortgage to an investor as a bond for (say) $750,000. The bank would get the $750,000 immediately, reducing their liabilities. They could use the money to finance some new homebuyer’s mortgage. Meanwhile, the investor would get $1,040,000 over the course of the next 20 years, making a nice profit. And the whole thing could be treated like a regular bond or stock market investment–the bank could continue to process the collection of the actual mortgage payments, just like it would process dividends on a mutual fund investment.

The problem is that since the banks expected to sell off the mortgages to eager investors hoping to cash in on the property boom, they didn’t really care too much about checking that the mortgages were sound; and the investors didn’t really have any way to check on the actual person paying the mortgage.

However, there’s language written into these mortgage transfer securities stating that if there’s fraud, the bank which sold the mortgage is legally obligated to offer to buy it back at the original price–which is now often ten times the actual value likely to be extractable from the homeowner. Fraud like, say, people lying on their mortgage applications, or inflated property appraisals, or e-mails on bank computers suggesting that they knew the market was a bubble that couldn’t last. Then there’s the issue of companies like S&P, who helped the banks to structure the subprime mortgage securities to look as good as possible on paper.

So if too many mortgages fail, and investors start demanding that their junk bonds be repurchased by the selling banks, those banks will go under. At that point, the FDIC and the government will have to step in, and we’ll basically have a taxpayer-funded bailout of a bunch of big corporate banks who defrauded investors. It’ll be the Savings and Loan crisis all over again.

How about pressuring the investors not to call in the cops? Well, unfortunately a lot of the investors are in foreign countries. Some of them are foreign countries. With the current state of US diplomacy, a conversation that starts with “Hey, we were wondering if you could eat a few billion dollars in losses to fraud so that we don’t have to bail out our rich corporate buddies in full public view” might not go too well.

But never mind, it may not come to that. A crack team of financial experts are trying to come up with a way to salvage the situation. We know they’re experts because, as the Chronicle points out, they’re exactly the people who got us into the mess in the first place…

Everyone should have a chunk of cash in an instant access savings account; see Dilbert’s guide to financial success.

If you’re in the US and have $250 spare to put in a savings account, I’ve got a voucher you can use to open an account with ING Direct, and they’ll give you $25 free. (Plus $10 for me.)

I’ve been saving with them for a while, because their rates are so much better than my bank’s savings account rates (4.4% APR with no fees). They’re a proper FDIC insured outfit backed by a real bank, a European multinational. I briefly had all the proceeds from selling my UK apartment in the account, and they didn’t abscond with it, so I’m pretty sure your $250 will be safe.

Also on the subject of free money, a while back Bank of America bought MBNA. I have MBNA credit cards; naturally I pay off the balance each month. Based on my transaction history, Bank of America have sent me mail saying they’ll pay me $100 to open a checking account with them. Maybe I’m crazy, but I haven’t rushed to do so. A quick glance at the relevant Wikipedia page and you’ll see that Bank of America has engaged in various sleazy business practices.

My current bank is Wells Fargo; they have a much cleaner record, and I also get the joy of knowing I’m supporting a company that really irritated Focus in the Family. Plus, they were the only US bank I could find that had all the necessary information about how to transfer money internationally available on their web site.

Update 2006-11-15

A customer was worried that a check for an eBay transaction might be fraudulent, so he asked Bank of America to examine it carefully. They said it was on a valid account, so he asked them to cash it. Then Bank of America changed their minds and decided the check was fraudulent, called the cops, had him put in jail, and effectively wasted $14,000 of his money on legal hassles.

OK, now I’m really sure I don’t want to do business with Bank of America.

The idea behind credit cards is simple: they’re a way for the bank to make money. And they do, billions of dollars of it every year. The trick is to find new ways to get as many customers as possible into the optimum debt profile.

The basic rules of the game are relatively easy to understand: The more you spend, the more you owe. The more you owe, the more you have to pay at the end of the month. And the more you owe after that payment, the more interest gets added on to your bill next month.

It’s a feedback loop: owe more, more interest, owe even more, even more interest, and so on.

At some point, many people let the feedback system run away for a few months, and they arrive at the optimum debt profile: they owe so much money that if they send in the biggest payment they can, it just about covers the additional interest they’re about to be charged that month.

At that point, they’re fucked. They are basically indentured servants to the bank. They can keep working, keep making payments indefinitely, and they will never eliminate the debt or reduce their monthly bill.

There’s a catch, though. Lots of people don’t fall for it, they don’t let their balance accumulate too far; so the banks are always looking for a way to tempt you to spend more.

The time-tested method is to increase your credit limit. Eventually you’ll see something you really want, see that big number on your credit card statement, and think “Wow, I could really have that, if I just give in to temptation and use the card.” That’s why people like me who pay their bills in full each month end up with a credit limit that could pay for a small yacht, while people who actually need it have trouble getting any credit limit at all.

But now, Citibank have found a better way to get people to let their credit card bills accumulate for a while. I have to say, it’s a work of marketing genius. Evil genius, yes, but impressive nonetheless.

The new Citi “Simplicity” card has one extra clause in the credit agreement: no late fees, as long as you spend more money in the month when the fees would be assessed. Oh, the cold, calculated evil.

Lose the bill on your desk, forget to make a payment by the due date, and suddenly you’re faced with a late fee of up to $39. Unless…you spend more money. And then maybe the next month you can’t quite find the monthly payment, plus a month’s interest on the full balance—so why not skip a payment spend more money instead?

And as soon as you do that, they start increasing your APR. After all, you defaulted on a monthly payment, so as per the agreement they’re entitled to increase your APR up to 30.74%, rather than the usual 0-9%.

Basically, this one simple gimmick means that you can keep spending pretty much without consequence until you hit your credit limit. And boy, are you screwed then! No more ways to avoid late fees, a sky-high interest rate, a balance you’ll probably never be able to pay off, and a terrible credit rating (because technically, you defaulted on those payments), so nobody else will take over the debt at a lower interest rate.

Citibank says it’s all about giving you “the treatment you deserve”. They also stress their “[t]ools for helping you keep a good credit history”—an option to change your billing date, e-mail alerts, and a handy automatic system to suck that minimum payment out of your bank account every month for the rest of your life. Now, isn’t that convenient?

Well, it appears I’ve landed myself in the middle of an Internet fraud. The web hosting provider I was using, which vanished overnight, is supposedly one of the numerous web hosts set up by someone known as “Shang”… and also known as Josuee Shang, Joe Shang, Joe Sheikron, Josuee Ortiz, Joe Guadalupe and Joshua Shang Ortiz.

It gets weirder. His step-father is apparently named Daniel Milk, and is a VP at Compaq who managed to lend his son a bunch of Compaq machines to start his hobby web hosting business with.

Yes, his son. “Shang” is apparently a teenage kid. Reports of his precise age vary, but the mode is 19 years, with a range of 15 to 21.

The person “Shang” listed as the head of finance for his companies is a Ms Milk, which means she’s probably his mother… but her full name was on the domain records as Guadalupe Milk, so perhaps it’s just another alias.

Whoever “Shang” is, he lives in Porter, TX, just outside Houston, close enough to Compaq that at least the bit about his dad seems credible. His recent companies include Tacidhost.com, tacidhost.net, eryxma.com, and tacidblue.com.

The interesting thing is that while lots of people claim to have been fraudulently billed, I’ve checked my credit cards online and he hasn’t attempted to defraud me at all. The services were provided and worked fine right up until the implosion. And sure, I’m out a few months of really cheap hosting, but companies go bust all the time. That’s one of the reasons why the “bargain” 100 year domain registrations from Network Solutions are worth avoiding. (Even more worth avoiding than anything else involving Network Solutions, that is.)

So for a second time, I’m watching an online tempest of allegations and counter-allegations swirling around, with insufficient verified information to let me reach any kind of firm conclusion. However, as this entry will no doubt soon shoot to the top of Google, I will take the opportunity to say that anyone reading this should probably be wary of doing business with any web hosting company with a name starting with “tacid”…

Mean time, my web site is back, sorta, at a company which is based in… Porter, TX. Hmm.

Background: Richard Desmond is the owner of the Daily Express, and publisher of many of Britain’s finest (?) porn magazines. The Daily Express has just switched political allegiance, and is now backing the Conservative Party under Michael Howard.

Desmond wanted to buy the Daily Telegraph, but the price he was quoted was too high. In the mean time, the German Axel Springer publishing group has put in a bid for the Telegraph.

Desmond recently met with the Daily Telegraph’s CEO Jeremy Deedes for a business meeting, to discuss the Eastferry Printing Works which the Telegraph and Express own jointly. Several other members of the Telegraph and Express boards of directors were at the meeting. Now read on…

The meeting started with the directors of the Express greeting Deedes and the Telegraph finance director with a chorus of “guten morgen” and “sehr gut”. A minute or so into the meeting, Desmond put on a mock German accent and asked the Telegraph bosses if they were looking forward to being run by Nazis.

Deedes replied “That’s not very helpful,” and pointed out that Axel Springer’s published philosophy includes a commitment to the state of Israel.

Desmond: “They’re all Nazis.”

Deedes: “That is thoroughly offensive. Could you please sit down so we can start the meeting?”

Desmond: “Don’t you tell me to sit down, you miserable little piece of shit.”

According to witnesses, Desmond then proceeded to launch into a “stream of foul-mouthed abuse, both personal and general”, lasting for several minutes and ending thusly:

Desmond: “After three years dealing with a bunch of crooks I’m starting to enjoy this. You sat down with that fucking fat crook [Conrad Black] and did nothing.”

Deedes once again expressed displeasure at Desmond’s tone, which got the retort “Do you want to come outside and sort it out, then?”

The Telegraph directors decided to abandon the meeting at this point. As they stood up, Desmond ordered the Express board of directors to sing Deutschland Über Alles, and then began goose-stepping around the conference room like Basil Fawlty, complete with index finger above his lip.

An extraordinary performance, the man should be editor of the Daily Mail. Full story is in The Guardian.

Yes, when it comes to grossly unprofessional behavior, Britain can still show the CEOs of America a thing or two…

Microsoft press release, 2002:

Microsoft has announced that the BMW 7 Series features its real-time embedded operating system, Windows CE. This comes shortly after Microsoft’s Automotive Business Unit launched Windows CE for Automotive v3.5. This latest telematics software version based on Windows CE is an open platform that allows developers to create powerful in-car computing systems. It offers flexibility and choice of hardware platforms, peripherals and software components, as well as being able to take advantage of the growing community of experienced CE developers.

Siemens VDO Automotive AG, BMW’s preferred navigation supplier used CE in the Control Display, part of the BMW’s iDrive concept which gives easy operation and access to in-car features including the navigation, telephone, climate control and entertainment systems.

And the inevitable Reuters news story, 2003:

BANGKOK (Reuters)—Security guards smashed their way into an official limousine with sledgehammers on Monday to rescue Thailand’s finance minister after his car’s computer failed.

Suchart Jaovisidha and his driver were trapped inside the BMW for more than 10 minutes before guards broke a window. All doors and windows had locked automatically when the computer crashed, and the air-conditioning stopped, officials said.

“We could hardly breathe for over 10 minutes,” Suchart told reporters. “It took my guard a long time to realize that we really wanted the window smashed so that we could crawl out. It was a harrowing experience.”

Fleet Bank is heavily invested in Argentina—where the economy has collapsed, and Fleet is having to restrict customers to withdrawing less than $1000 a month.

Meanwhile, Fleet has taken a hit of $1.8 billion to cover the money it’s lost in South America, with an overall loss of $507m in 4Q2001. That’s half a billion dollars worse than they predicted. Profits for the full year were down 75%.

Still, your account is FDIC insured, so if the bank goes belly-up the federal government will bail you out. Eventually.