Articles About Trading & Investing

The Feds Are Stockpiling Ammo – Here’s What We’re Going to Do

0 | By Shah Gilani

This is a warning. I’m not kidding.

I heard something yesterday that blew me away.

I can’t further corroborate it, but I trust the source.

My friends know I like to target shoot. I don’t hunt, because I can’t kill anything living, but I like guns. Maybe it has something to do with wanting to be James Bond when I was a kid… OK, I still want to be 007.

As other target shooters know, it’s gotten harder and harder to get ammunition.

Fo a few years now, all kinds of stuff have been going around on the Internet about why ammunition is hard to get. I’ve read a bunch of things, and friends send me links to articles all the time.

But a friend I trust just shared some news that shocked me. I want you to hear this news, too.

Dollar Theory

Not too long ago, I came across some articles about how various federal agencies were stockpiling massive amounts of ammunition. One of the agencies was the IRS, the Internal Revenue Service.

I didn’t think of IRS agents as gun-toting G-Men anymore, so that idea struck me as odd. What’s even odder, however, is that the ammo was supposedly hollow-point rounds.

Hollow-point rounds are deadly. They go into flesh and tissue the size of the bullet but spread out on impact. They’re not for target shooting. Not even police officers are allowed to use hollow points.

Here’s where this all comes together.

My friend asks me yesterday what I think about the U.S. dollar, our currency. I gave him my opinion. Then he asked me if I thought the dollar was going to collapse, as in totally collapse. I answered that I didn’t think there was any reason it would just collapse.

It could lose its reserve status eventually, maybe, possibly – but not immediately, I said.

Then he blew me away. He asked if I’d heard about the government stockpiling hollow-point ammo. I said, as a matter of fact I had heard that. He said, “It’s true.”

He said his “friend,” who is one of the top guys at the Department of Homeland Security, told him why.

Federal government bigwigs are planning for the collapse of the U.S. dollar, he said. They even have a date. They expect the dollar to implode in 2016.

That’s less than two years away.

He explained that there are foreign forces working to undermine the dollar. And it’s working. It’s happening slowly, but it’s going to mushroom, and the net result will be a global panic and massive dollar selling – to the point that it will collapse.

Because we rely on the dollar without questioning its purchasing power, its “store of value” or its government backing, a sudden collapse of the dollar would undermine society.

How’s that? That’s because, my friend told me, the divide between the haves and have-nots in the United States is so wide now that the government expects there to be riots and looting and total chaos all across the country.

It will be about having things or not having things, he said. It won’t be about having dollars, because they won’t be worth anything.

That’s why the feds are stockpiling ammo. That’s why it’s harder for the rest of us to get ammo.

I am not the kind of person who takes rumors and rubbish and extrapolates them into conspiracy theories. But when someone I know, someone I trust implicitly, someone who is very well connected, tells me something like this, I think long and hard about it.

What Comes Next?

But don’t worry. There are ways we can prepare for this.

Indeed, this doesn’t mean there won’t be chances to make money… lots of money.

In fact, that’s what I’m doing now. I’m considering how we will best be able to protect ourselves and, better still, how we can profit hugely from the demise of the dollar.

I’m scanning the globe to determine how we’ll not only get through, but also take advantage of this worldwide crisis. I’m finding the best investments, deciding where we’ll put our money for safekeeping and figuring out which areas will be hardest hit.

No matter what happens, I’m going to be right here.

What do you think?

The Alibaba IPO: Is It Full of 40 Thieves… or 40 Billion Carats?

10 | By Shah Gilani

The Alibaba Group IPO is coming.

Questions about when it’s coming, or how big it will be, or how complicated the deal is don’t matter. They can be answered, and I will answer them here.

The real question is: Should you buy the stock? The answer to that is… keep reading…

Hitting the Road

At this point, it looks like the IPO roadshow featuring Alibaba founder Jack Ma will begin on Sept. 3. The company’s seven investment banks and five outside law firms expect the song-and-dance routine for institutional investors to start in Asia, then head to Europe, and end up playing to packed investor houses all across United States.

Then, the company should debut on the New York Stock Exchange in mid-September.

Market followers have suggested numerous date changes for the initial public offering based on superstition, lucky numbers, religious holidays, summer vacations and persnickety regulatory requirements.

But, no matter – it’s coming.

The initial offering is expected to raise $20 billion for the company, which would make it the largest IPO in history. The IPO for Visa Inc. (NYSE: V) currently holds the record, having raised $19.65 billion in 2008. Facebook Inc. (Nasdaq: FB) raised $16 billion in 2012.

Depending on the first-day closing price of the new stock, Alibaba could be worth anything from $130 billion to $200 billion, which is a wide moat to wade into. But cutting itself a wide swath is what Alibaba is all about – and why this is a complicated deal.

The Long Story

Alibaba is the largest e-commerce company in China – at least that’s the short story. It’s really an eBay, Amazon, PayPal, cloud computing company, venture capital shop and a whole lot more, all rolled into a labyrinth-like company with an increasingly global reach.

Adding to it s complexity, Alibaba is domiciled in the Cayman Islands, does the grand majority of its business in China, and is listing itself on the NYSE. That means it will face regulatory scrutiny in multiple international jurisdictions.

Making its home in the Cayman Islands affords Alibaba an unprecedented amount of freedom and privacy, some of which it will have to give up in the IPO, and some of which will make it less transparent than U.S. regulators and investors are comfortable with.

One big problem comes along with being a Cayman Islands entity. Because it’s domiciled there, Alibaba cannot be included in major benchmarks like the S&P 500 or any of the MSCI indexes.

The S&P 500 only contains U.S.-domiciled companies and has more than $5.1 trillion in assets tracking it, one way or another. Not being eligible for many of the indexes that big institutions track and trade means those mammoth investors won’t be falling over themselves to buy shares.

And because the shares aren’t listed in its home country, Chinese participation will be limited.

The company’s governance structure is another issue for regulators and investors. It empowers insider partners with the right to nominate a majority of the board of directors.

Even though Alibaba is a Cayman Islands company, it has to abide by Chinese rules. And because of China’s strict limits on foreign ownership of Chinese companies, for Alibaba to list its shares on a foreign exchange, the company had to structure its “assets” into separately held vehicles owned by outside companies.

That’s not very transparent.

So, a lot of investors, both institutional and retail, are asking whether they should buy shares when the company debuts.

The short answer to that question is “no and yes,” or “yes and no” – depending on how you look at it.

I wouldn’t buy shares on the first day of trading for many reasons. A big one is the Facebook phenomenon. A deal this big and this global could have trading issues along the lines of what happened with Facebook’s IPO.

The deal is so huge that the company’s investment bankers are saying they need to line up enough investor interest, about four times what will be raised, to help support the share price after the initial IPO frenzy subsides and shares face the “free market.”

Down the Line

As far as buying shares of Alibaba, I’m going to wait and see how they trade on the opening day and for a few weeks after that.

In a perfect world, I’d look to buy Alibaba if there are any early hiccups and after the IPO shares fall. (I missed that “perfect world” with Facebook because I got greedy and thought I’d get in lower as the price was falling – it was down enough – but missed it on the way up.)

Is Alibaba a “buy” in the long run? You bet it is.

There’s so much to this company that I could write about what they’re doing in the open and under the radar and fill up a dozen of these columns.

Here’s what I’ll say for now: Alibaba is going to be one of the greatest global companies of our time.

As retail investors, most of you won’t be able to buy into the Alibaba IPO right away – whether you want to or not. However, there’s another way to play it.

My colleague Bill Patalon, editorial director of Money Map Press, beat me to sharing this “backdoor” investment – and he’s come up with an impressive strategy to follow before the initial offering. Click here for his full report.

HFT Rats Find New Targets Even as They Flee Banks

11 | By Shah Gilani

Rats are fleeing their listing ships.

Of course, that’s not surprising.

The Financial Times reported yesterday that high-frequency traders are leaving investment banks for hedge funds, prop trading houses and their own startups.

Oh, you didn’t realize that investment banks – in other words, too-big-to-fail banks – had high-frequency trading (HFT) desks?

Surprise, surprise, surprise. HFT isn’t the exclusive purview of specialized trading shops.

HFT is a proven money-raking machine, and today I’m going to tell you that’s why it’s part of most so-called investment banks’ trading operations…

Get Into the Game

HFT is a complicated game – um, I mean, business model.

Super-smart computer scientists design mega-fast machines that intercept trading orders from the airwaves or cable conduits. Their machines read these orders – the orders you send to your discount broker, the orders institutions send to dark pools… everybody’s orders.

And before all those orders can be brought together and matched up so a trade gets executed, HFT boys pick off the orders they want.

They also send out their own orders, billions of them every day. They don’t want these orders executed, but want other machines to see their orders and move after them, which are canceled before they can be acted on. It’s about faking out other traders’ machines to set them up to be picked off.

It’s beautiful.

What’s the endgame? Insider trading. Legalized insider trading.

These aren’t tips from an insider. It’s trading on inside data flows that aren’t protected, but sold to HFT desks to be traded against, with an advantage that only the HFT players have.

The HTF rats are leaving the TBTF banks because of the Volcker rule.

The Volcker rule, which has to be implemented by July 2015, puts an end to certain “proprietary” trading. Proprietary, or “prop,” trading is that done for the house and not on behalf of any clients.

Yes, banks trade for clients. And yes, banks are liars about trading for clients by taking the other side of their clients’ trades and not calling that what it is… prop trading.

Anyway, prop trading is going to get a closer look as we get to July 2015. European banks are looking at maybe two years before they get their own Volcker-type rules.

So, the rats are leaving their listing ships (they’re listing because their trading revenue streams are going to dry up) for swamps where they can run wild and get paid what they’re worth.

Good News, Bad News

Anything that reduces the risk TBTF banks take with depositors’ and taxpayers’ money is a good thing.

The bad news is that these same banks will just buy big brokerage operations in order to sell their order flow to the HFT players. And those players will pay them handsomely to pick off their brokerage customers. In fact, they’ll be able to pay even more to peek under skirts everywhere, because not being “banks” means they won’t be subject to having their own skirts looked up and will pay their traders whatever they’re worth.

The TBTF banks are already selling out their brokerage customers. They’re selling raw order data to HFT desks and giving their own HFT desks access to their clients’ dark pool orders. Barclays is under investigation for abusing its dark pool clients, and inquiries have been sent to Goldman Sachs, UBS, Deutsche Bank and Credit Suisse about how they operate their dark pools.

What does this all mean? Nothing. It’s just moving around deck chairs.

Until HFT is brought to heel, it will remain a legalized, institutionalized pick-off-the-suckers game. All the exchanges will make their profit, and so will all the trading desks.

It’s business as usual.

“The strong seem to get more, while the weak ones slave. Empty pockets don’t ever make the grade. Momma may have and Poppa may have, but God bless the child that’s got his own.”

Connecting the Dots on the DOJ’s Latest Moves

10 | By Shah Gilani

Two things hit my radar today, and they’re both interesting, for different reasons.

On the surface, you might think they’re not connected, but they might be.

First of all there’s Bank of America Corp. (NYSE: BAC). That poor wee bank was too-big-to-fail even before it bought Countrywide (ground zero for the mortgage crisis) and Merrill Lynch (which was itself TBTF).

And now BoA is in tentative talks with the U.S. Department of Justice (aka the Obama Mafioso Collection Agency) to pay between $16 billion to $17 billion for its part in selling shoddy mortgages, or originating them, or packaging them, or being a TBTF bank that wasn’t allowed to fail but now has to pay the piper.

Today, I’m going to tell you the story behind the story on this. And I’m even going to give you a stock pick…

Welcome to the Moronicracy

It’s ironic (or maybe the better word is moronic) that BoA bought Countrywide because it thought the mortgage crisis was a chance to add to its mortgage-origination business.

But it’s not ironic (and definitely not moronic) that BoA bought Merrill Lynch, partly because the US. Treasury Department begged it to, so we wouldn’t have another Lehman Brothers moment. I’m talking the kind of moment that would have been Lehman Squared.

Because what looked moronic at the time – especially on account of having to pay God-only-knows how many billions of dollars in fines, settlement deals, shareholder suits and litigation costs – turns out to be anything but moronic after all.

How come the Countrywide and Merrill deals weren’t moronic, you ask? Because BoA can easily pay all the “associated costs” of the two acquisitions… thanks to the two acquisitions.

Oh, and as BoA nears its deal to probably, maybe put most of these “legacy” mortgage issues behind it, at least the biggest ones, BoA announced yesterday that it’s raising its dividend. You know, as a way to thank shareholders for their equity.

OK, maybe BoA is raising its dividend to attract more equity stakeholders. Either way, the point is the bank is flush after almost being flushed down the toilet itself.

And for that, reader of WSII who pretty much said, “Shut up and give us some stock picks” – and for the rest of you, too – I say now is a good time to buy some BoA.

Yep, I say buy it here, buy more if it drops to $14 and load up the boat if for whatever reason it drops to $13. It’s way too big to fail – and it won’t.

I actually like Wells Fargo & Co. (NYSE: WFC) better, but it’s a little expensive dollar-wise at almost $50 bucks a share. (Though it’s actually cheaper price/earnings multiple-wise)

Driveway Drive-By

The other thing on my radar today also involves the DOJ and subprime loans.

Preet Bharara, the U.S. Attorney for the Southern District of New York, subpoenaed General Motors Financial. He wants documents related to subprime auto loans that GM finances and packages into securities.

Someone apparently smells a rat in the subprime auto loan origination, securitization and dump-on-investors hot potato game. Is there fraud going on there? Maybe.

But that’s not what’s interesting to me. It’s uninteresting to me because cars aren’t homes.

As big as the subprime auto loan business has become – even if there’s some monumental level of underperforming loans or nonperformance (meaning people keep their cars and just don’t pay) – the “foreclosure” process just isn’t the same.

Lenders send a tow truck and take the car back. Increasingly, the cars are fitted with location devices and turn-off switches so lenders can easily recover them. So, I’m not inclined to think burned investors in subprime auto loans are going to panic out of their securities and cause the Greater Recession.

I’m more interested in the “nuances” of what the DOJ is after.

Is this a consumer protection thing? Is this an investor protection thing? Or is this another wrap them on the knuckles, threaten to sue them and “collect” more money from them because there may be more easy money out there to go after thing.

What this auto loan expedition could be – and this is interesting – is that DOJ could, yet again, be using the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (aka FIRREA) to see if auto lenders are committing fraud against any federally insured institutions. That, after all, is what FIRREA is all about.

What’s interesting about that, you ask? It’s the irony thing. The DOJ can use FIRREA to go after fraud on a federally insured financial institution if the fraud is caused by the same federally insured financial institution being affected by it. How’s that for interesting?

General Motors Financial isn’t a federally insured institution. It was formerly a subprime lender known as AmeriCredit, which GM bought in 2010. As of now, it is the only subprime auto player that admits to being subpoenaed. There may well be others.

Ally Financial Inc. (NYSE: ALLY) just went public, and I hope you didn’t buy it, because it’s trading below its IPO price and I warned you about it right here.

Last December, Ally settled for $98 million by not admitting or denying it ripped off minority subprime auto buyers by arbitrarily jacking up its total loan costs, for the pure profit of it.

Is that what the DOJ is after here?

No one knows – and that’s what makes it so interesting.

In the end, the connection between these BoA and Ally stories may be simple. Maybe the DOJ is extracting money from federally insured financial institutions to help pay the federal deficit.

After all, only the Feds can act as enforcer of last resort.

Related Reports:

Wall Street Insights & Indictments: I Can’t Believe The Government Wants To Unleash This On The Public.

Wall Street Insights & Indictments: The Latest Subprime Scandal May Be Sitting in Your Driveway.

The Rating Agencies Feel Heat – It’s About Time

17 | By Shah Gilani

Sometimes it’s all about time. Things take time. Time catches up to things.

In the case of the many crimes and misdemeanors that led up to the credit crisis, time seems to be finally catching up with some crooked institutions.

As for the real crooks, as in the individuals who lied, cheated, stole, and directed others to lie, cheat, steal, and more for their share of the almighty bonus pool… not so much.

But sometimes, you take what you can get.

This time it’s a rating agency’s turn… It’s not enough. But today I’m going to share this bit of good news.

Rated G… for Garbage

In February 2013, the U.S. Department of Justice slapped Standard & Poor’s with a $5 billion civil suit. Apparently, for fraud, filing criminal suits is not civilized, at least not if you want to keep getting political donations.

S&P and its parent, McGraw Hill Financial Inc. (NYSE: MHFI), pooh-poohed the 119-page suit – of course. They called it “meritless” and vowed to defend themselves “vigorously.”

The lawsuit charges S&P with egregiously rating residential mortgage-backed securities and related structured products it knew were garbage as USDA Choice or AAA Yummy Good. And believe it or not, a lot of people bought it.

S&P is only the largest rating agency in the world. It only rated some $2.8 trillion worth of residential mortgage-backed security (RMBS) junk and $1.2 trillion worth of structured dreck during the run-up. And then it subsequently downgraded all that supposed Prime Cut to “Oops, it’s stinky rotten. How were we supposed to know things would change?”

So, at least the economy and the American people weren’t affected. Because what’s a few trillion dollars of rot in an otherwise healthy buffet of Wall Street entrées?

Some serious stuff, as in smoking-gun internal emails at S&P, has surfaced. According to a Reuters article that came out after the suit was filed, “By July 5, 2007, as the credit crisis began taking hold, a new S&P structured finance analyst told an investment banking client: ‘The fact is, there was a lot of internal pressure in S&P to downgrade lots of deals earlier on before this thing started blowing up. But the leadership was concerned of p*ssing off too many clients and jumping the gun ahead of Fitch and Moody’s.’”

Of course, there is a lot more. In due course, we may get to see some of the more enlightening emails. I’ve seen some, and they are funny – while at the same time sickening.

So, with all the time that’s passed since the DOJ filed its suit, what’s happened?

Not much.

S&P has stonewalled the government. It wants to break up the suit into different parts. It also wants to countersue the government, saying the lawsuit is retaliation for S&P lowering the U.S. credit rating down a notch from AAA during the debt-ceiling impasse in Congress. But S&P says it might negotiate a less than $1 billion settlement deal.

It’s ongoing. The thing that gives me hope is that we’ve seen successful cases won against big banks, including admissions of guilt, in a few circumstances.

If in time this case is won and S&P has to plead guilty, there will be more and more lawsuits all over the place. And because no one has gone to jail, which is a tragedy, at least stripping pigs of some of their money – though sadly it’s all shareholders’ money – is better than a stick in the eye.

Serving Notice

The U.S. Securities and Exchange Commission is finally getting in on the game and may be going after S&P. A so-called Wells notice has been served to S&P. The SEC issues such notices when it wants to let a target know it’s being looked at.

It’s comforting to know the SEC is on the case, because without the SEC where in heaven’s name would we all be?

You also might be wondering about that other massive rating agency, Moody’s, and why it hasn’t been implicated in any wrongdoing. After all, the folks there were doing the exact same thing as S&P was being paid billions of dollars to do: lie.

Maybe in due time. But don’t hold your breath.

While all that was going on, a little old man everyone reveres – a man who chastises Wall Street and then comes to its aid, in the name of helping America of course – owned a giant chunk of Moody’s when it was making all that greasy money.

Of course, in time Warren Buffett got rid of the albatross around his neck. But as far as the government going after Moody’s and dragging in the venerable one himself, that’s going to take time.

Like I said, don’t hold your breath.

The Latest Subprime Scandal May Be Sitting in Your Driveway

8 | By Shah Gilani

Back in April I wrote about the initial public offering from Ally Financial Inc. (NYSE: ALLY). I told you about how they were loading up the truck with subprime auto loans, and how that lending game was too reminiscent of the subprime mortgage buildup and subsequent crisis to not warrant a déjà vu-all-over-again feeling.

I’m no longer one of the only muckrakers warning that the subprime auto loan space is sleazy and potentially dangerous to our economic health.

I usually don’t trust or link to pieces in the mainstream media. But this really caught my attention… so I wanted to share…

And the Next Subprime Bubble Is…

The DealBook blog from The New York Times had an absolutely brilliant piece the other day titled “In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates.”

Here’s the piece by Jessica Silver-Greenberg and Michael Corkery. This ties in with so much of what I’ve been saying recently: the so-called housing recovery, the student loan fiasco, the dangerously sky-high stock market. I could go on…

You have to read it.

I don’t do this often, but I can’t add much to what Silver-Greenberg and Corkery have exposed. So, I’ll let you digest this today and ask you for your comments.

Related Reports:

Wall Street Insights & Indictments: I Can’t Believe the Government Wants to Unleash This on the Public.

DealBook: In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates.

Wall Street Insights & Indictments: Here Comes That “Yogi” Feeling: It’s 2009 All Over Again.

Wall Street Insights & Indictments: Higher Education: The Biggest Scam Going.

Wall Street Insights & Indictments: Airplanes, Automobiles, and Market Crashes.

Here Comes That “Yogi” Feeling: It’s 2009 All Over Again

25 | By Shah Gilani

Housing is in trouble… again.

As I write this, several housing stocks I recommended my Short Side Fortunes subscribers get in on are down fairly sizeably today. One stock is trading right now at $39.85. If it breaks below $38, that’s bad news. Another is trading at $23.75. If it breaks below $23, that’s bad news. And yet another is trading at $31.05. If it breaks below $30, that’s bad news.

That will be good news for the shorts, but bad news for housing.

Why are there still dark clouds over our supposed economic recovery? We’re five years on from the mortgage meltdown, after all, and housing prices have bounced back dramatically and interest rates at near record lows.

I’ve been saying it all along. The housing rally is fabricated. It is, as Pete Townshend sang in The Who’s last great single, an “Eminence Front”

An Eminence What?

Housing’s so-called resurgence is not about individuals and families buying back into the market, though of course some have. Home prices have bounced back because of institutional buyers paying cash for “affordable” housing.

I’m talking about the homes that were bid up when banks were giving mortgages away. These are houses in the $200,000 to $450,000 range… you know, the ones that banks foreclosed on in the tens of millions.

Institutions with cheap borrowing capabilities have been buying, with cash, foreclosed homes hand over fist in order to rent them out. And now they’re securitizing packages of those homes and selling interests in pools of them to other institutional buyers looking for decent yielding investments.

It’s a trade.

Traders bid up those homes. It’s not about a real recovery in housing.

Like I said, it’s a trade.

As far as more expensive homes go, the buyers there are mostly foreigners taking money out of their respective countries – China, Russia, Ukraine, Latin America, Europe, South Africa, South Korea. These are people with money who want to park it here in real estate.

After all, there’s more to gain from homeownership than 2.5%-yielding 10-year U.S. Treasury securities.

And the high, high end?

I’m talking about homes well north of $1 million. When I’m not at home, I’m usually back and forth between Miami and the Hamptons. And the prices of “luxury” homes there are skyrocketing

The 1% never had it so good.

Anyone out there looking for a $10 million weekend home in the Hamptons? Good luck finding one. Inventory is tight because there are so many buyers.

That would be well and good if there was some trickle down to the rest of America. But there is no real housing “recovery.”

The housing recovery is an institutional trade. It’s a lot of cash-rich people trading foreign assets for U.S. assets.

Make that “trading up” because their portfolios are spilling over with gains.

The “recovery”… it’s an “Eminence Front.” The folks in Washington and Wall Street are so insecure that this is the pose – the front – they’re taking.

Well, they’re not only insecure – they’re transparent, and so I can see right through them.

That Yogi Berra Feeling

Sure, I could point to the lack of decent full-time jobs. Or that wages haven’t budged. Or that low interest rates haven’t trickled down to benefit average Americans. There are too many things to point to… but this isn’t about that.

This is about what happens next.

Where is housing headed?

Some of you might believe the recovery will pick up steam and middle-class Americans will come back into the market and that the American Dream is still alive.

It isn’t. It’s a Rental Dream now.

Middle Americans aren’t buying homes in droves again, even though last week the national average for a 30-year fixed mortgage was 4.33%. And for a 15-year mortgage, 3.41%. Or that a Federal Housing Administration-backed 30-year fixed loan would cost you only 4.04% annually.

It worries me a lot that middle-class Americans aren’t buying houses.

I’m feeling déjà vu – and it worries me.

Non-bank mortgage lenders (because the big banks aren’t lending like they used to) are growing their share of mortgage originations and refinancings. And they’re selling the loans they make to Fannie and Freddie, as they all did before the crash.

The Federal Housing Finance Agency, which supposedly regulates Fannie and Freddie, just released its Office of Inspector General‘s latest report on non-bank lenders. And the folks there are worried.

They’re worried because in 2012 one of the top 20 sellers of mortgages to Fannie and Freddie, who they knew had previously engaged in “abusive lending practices” was found to have “deficiencies” and insufficient “fraud prevention” practices. Oh, what a surprise. They were cut off from selling their mortgages to F&F by the Federal Housing Finance Agency in 2013.

Probably a lot too late.

The Inspector General is worried that Fannie purchases from non-bank lenders rose to 47% of all purchased mortgages in 2013 from 33% in 2011. For Freddie, the numbers are just as troubling. From 2011 through 2013, the smallest mortgage lenders, those below the top 50 mortgage originators, increased their share in Freddie to 43% of mortgages sold from 24%.

What’s the problem with these smaller non-bank lenders making loans and selling them to the government-sponsored enterprises?

They’re not banks, they aren’t regulated like banks, they don’t have capital like banks, they aren’t going to be around when it comes time for them to repurchase crappy loans they’re making.

It’s déjà vu all over again.

All this is worrying me. As housing goes, so goes America. Remember that.

Portuguese Bank’s Newfound Clarity Just Makes Things Foggier

27 | By Shah Gilani

So what there was some momentary panic over some bank in Portugal yesterday?

So what if contagion fears spilled out across the globe and markets tanked?

It’s all better now. Everything has been cleared up. Really, it was nothing.

How do we know it was nothing? Because the bank’s regulators and the country’s central bank, Banco de Portugal, are telling us so.

It’s all contained, they say.

We got similar assurances from the Federal Reserve and U.S. bank regulators after Bear Stearns collapsed. After Lehman failed, we were assured everything would be contained.

If you are reassured, don’t read on, because I’m going to ruin your day.

Bring in the Clouds

Banco Espirito Santo SA is the largest lender in Portugal. It’s also the second-largest bank in Portugal in terms of its market valuation. Well, maybe not any more.

Whatever Banco Espirito Santo is – or was – it definitely isn’t transparent.

Banks are supposed to be transparent. At least that’s what we expect them to be.

And if we can’t see through them, and of course we can’t, we expect their regulators to have X-ray vision. After all, we count on regulators and central banks (the ultimate regulators) to safeguard us from bad banks.

Then again, some people depend on winning the lottery as their retirement plan.

Banco Espirito Santo is 25% owned by Espirito Santo Financial Group. Espirito Santo Financial Group is 49% owned by Espirito Santo Irmaos SGPS SA. Espirito Santo Irmaos SGPS is wholly owned by Rioforte Investments SA. Rioforte Investments is wholly owned by Espirito Santo International.

That’s transparent, right?

Espirito Santo International, the top dog in the food chain, said on July 8 that it missed payments to some investors holding its short-term commercial paper. Oops.

Panic ensued because Espirito Santo International controls Banco Espirito Santo, and creditors of International could go after assets of Banco Espirito.

That’s the tip of the iceberg.

The collective group of Espirito Santo companies and Rioforte has borrowed a lot of money from Banco, its clients and its depositors.

Retail clients of Banco Espirito Santo were sold 255 million euros of Espirito Santo International’s commercial paper, 342 million euros of Rioforte’s paper, 44 million euros of Rioforte subsidiaries’ paper, and 212 million euros of commercial paper and bonds issued by Espirito Santo Financial Group and its subsidiaries.

Institutional clients of Banco Espirito Santo are holding 511 million euros of Espirito Santo International’s debts and 1.5 billion euros of Rioforte paper.

And there’s the bank itself. Banco Espirito, in the spirit of lending to family, lent Espirito Santo Financial Group and Rioforte more than 1.1 billion euros.

So here’s why there’s nothing to worry about.

Despite Banco Espirito itself having a 517.6 million euro loss in 2013, it says it’s got a 2.8 billion euro cushion. It always says it’s cushioned up. In fact, back in 2011 when panic was sweeping the European banking system and the International Monetary Fund and the European Union rolled out a massive bailout fund, Banco Espirito was the only one of Portugal’s three biggest banks to not take any money on account of its determination to prove to markets it was in fine shape, thank you. Sound familiar?

Despite Banco Espirito having a 6 billion euro-plus book of loans to companies and borrowers in Angola (a former Portuguese colony), of which 84% are now characterized as “bad loans,” it says it’s got a 2.8 billion euro cushion.

Despite what may look like a lack of transparency, which hopefully I’ve cleared up for you, if Banco Espirito’s regulators and the Banco de Portugal say there’s nothing to worry about, and they should know because they obviously didn’t see any of this coming, then there’s nothing to worry about and this is already all contained.

We can all sleep better now.

Once the FED Says This… Down Goes the Market

7 | By Wall Street Insights and Indictments Staff

On Tuesday market watchers got to pore over the minutes of the Federal Reserve’s June meeting. The “end of stimulus” shoe is going to drop, but no one knows when.

Shah Gilani talked about that, and other top stories, on Fox Business‘ “Real Halftime Report.” Find out when Shah thinks Janet Yellen will act to sends rates up and pull the market down.

In other news, much-vaunted momentum stocks took a beating. Shah reveals the 3 momentum names he wouldn’t touch with a ten foot pole. Also: learn what people have to say about American companies moving to Ireland to save on taxes.


Still More Record Highs for the DOW and S&P

0 | By Wall Street Insights and Indictments Staff

Fourth of July fireworks came early this year, at least for the markets. The DOW hit its 12th record close of the year.

The S&P hit its 23rd record close. Netflix (NASDAQ: NFLX) saw a record high after Goldman Sachs upgraded the stock from ‘Neutral’ to ‘Buy.’

“Cloud Computing” also headed for the clouds as IT hosting company Rackspace (NYSE: RAX) fueled rumors of “going private.” Are they serious? Or is the Texas-based firm simply preening for potential buyers?

Shah sat in on Fox Business’ “Varney and Co.” on Tuesday to mull over the market’s biggest stories. Shah looks past the headlines and offers a word of caution.