Whistleblower: Wall Street Has Engaged in Widespread Tampering of Mortgage Funds
propublica.org
propublica.org
The whole idea of Adjusted EBITDA is insane to me. We add back "one-time," expenses and other items, but the underlying business ends up seeing similar "one-time," costs every year.
The result is that companies often borrow at a leverage ratio that looks 30% smaller than it actually is. This year we are doing "COVID-19," addbacks. What the fuck? You lost money because of COVID, so add it back to EBITDA so that you are still meeting your loan covenants? Lenders are in on it too, because they don't want to see their clients default and deal with bankruptcy or taking control of the assets.
I wonder about this. I suspect that if the fed keeps buying junk corporate bonds to prop up share prices, there's got to be a reckoning somewhere. For one, it incentivizes stupid & risky behavior among corporations. I wonder if even the fed can absorb the scope of real contractions in GDP with tricks like this. Color me extremely skeptical. Seems like something will have to give.
The mechanic who just uses a cheap fix to get you out of there, the plumber whose work results in a frozen pipe that leaks behind a wall, etc.
Finance is no different. The only issue is that in a capitalist society, bankers hold a lot of political/economic influence, and this results in bad incentives for the rest of us.
There is a difference.
In most cases these metrics may as well just say “Hey, if for a moment you ignore all the things about our business model that make it unsustainable our finances look quite good! Ain’t that cool.”
Of course the creative accounting that goes into these things tries to say they’re just “one time” expenses and other factors that justify ignoring these costs but of course most companies that play these games seem to have tons of “one time expenses” every quarter so...
> The whole idea of Adjusted EBITDA is insane to me.
The straitjacket bank regulators have placed around the ability of banks to go outside of the government defined process of evaluating credit-worthiness doesn’t help. The rules (mainly FDIC insurance requirements) make it near impossible for many companies to get loans. This problem incentivizes companies to play games to get around the crazy restrictions.
This is also why there is an emerging trend of non-traditional lenders (e.g. some VCs and PE firms). I’m sure the government will find a way to regulate them eventually.
> This year we are doing "COVID-19" addbacks.
What’s wrong with that? Ability to repay is based on expected future cash flows. If COVID losses are believed to be non-recurring (a big if), then that makes sense.
I agree with you, with the caveat that many of these receivables are taken off balance sheet through a securitization process, and the resulting structure is almost unable to technically default as long as the AAA tranche interest is paid. Responsibility for originating good loans, meaning they are creditworthy in a downturn, goes down if you can securitize them into a credit enhanced structure or sell them to another investor.
> Generally, I agree. The straitjacket then bank regulators have placed around the ability of banks to go outside of the government defined process of evaluating credit-worthiness doesn’t help. The rules make it near impossible for many companies to get loans. This problem incentivizes companies to play games to get around the crazy restrictions.
In my opinion (not worth much) the industry is simultaneously under and over regulated. Enough bad actors that reducing the regulation is a bad idea, but the existing regulation makes lending more challenging and constrains growth on most businesses, who are operated in good faith.
And if investors (of the banks, or of the securities backed by such loans) are accurately apprised of the risk factors.
It only gives brownie points if you purchased it before the blowup!
The issue is not adjusted EBITDA per se, it's that stuff gets jammed in there dishonestly.
The only true answer is that if this matters to you then you need to dig into the adjusted EBITDA and see how they are really calculating it and decide how good of a picture of the business it's painting. But there is value there.
I get a laugh out of men who say other ephemeral objects can’t exist but stocks and 401ks, indeed even a specific currency or finance is anything more than emotional belief of some hierarchy
“They’re value stores!”
No it’s functional fixedness.
Decades of denialism of science by the god heads and y’all still follow them along believing they’re anything more than just copies of the pasts god headed would be authoritarians
Neuroscience is revealing much about how we transfer and carry on activity in our brains from one another. To suggest history can’t repeat itself seems to not agree with science.
The masters of commerce back in the day bought off the average person with emotionally satisfying promises and literally abusive practices of deflating the value of their efforts to maintain power
The literal expressions in the form of nation state conquest need not exist for an idea like “history repeats itself” to mean something that’s true
It’s random annotations on numbers that don’t mean anything except what we define the annotations themselves to mean.
We don’t get to have say so of course you’re confused. The narrative around economics is out of your hands.
None of these fellows seem to have understood Godel wasn’t talking about the universe. He was putting constraints on consciousness. They keep trying to find that complete recursive set of axioms for economics by ignoring it’s all just people
Old language acquires new annotations
The goal, whether it’s intuitive or planned, is to keep it from looking like the system itself can ever grind to a halt
They don’t care about your buy in to some language but keeping agency at scale economically active
Varoufakis was literally in the room as masters of market finance made shit up to keep markets moving
Humans do it all the time. To ever pretend some language model that “fits society” will ever stay the same is a fools errand
In some big cities you have many large buildings where their primary tenant was WeWork, which appears to be imploding, and now adding onto that the whole covid WFM shift where companies are starting to cancel and downsize future leases. When you start to dig into the revenue streams behind these buildings and the owners ability to pay the mortgage back it starts to look really shady in some cases.
Most buildings need a fairly high percentage of the floors to be leased out for the building rent to cover the mortgage and moving forward it seems a lot of buildings will struggle to hit that number. It’s going to be an interesting time for commercial office real estate.
On the plus side if you’re looking for office space there are going to be some amazing deals!
Every default should trigger a re-assessment when the property changes hands. CA recently put into place a rule (law?) where a change of control of the ownership entity also triggers re-assessment, thereby ending the long running scheme of selling the LLC owner rather than the property itself.
If enough of these bad (metric-wise) loans default, there could be a very far reaching negative valuation impact, ie well beyond just the defaulted properties. I expect rents will go up, even as property values go down.
If this happens, I wonder what happens to cities afterwards where the ratio between residential to commercial in a city shifts permanently. I reckon we could end up with more WFH or flexible work arrangements because commercial real estate becomes scarcer and more expensive.
I can imagine 50 years ago, when they all got the ability to check electronically, and knew that everybody was cheating, but they couldn’t do anything because it would it would crash the economy, and also these computers were taking their jobs, so the agencies decided to be willfully ignorant and inefficient and setting rules according to whatever people were doing already. So now it’s like, “OMG we never saw this coming!”
I don't know how to rein in the seemingly endless stream of schemers... and the thought that "everybody does it" (think LIBOR), and that shining the proverbial sunlight into the back rooms will cripple what financial system we have just makes me want to burn it all down anyway.
Lots of frustration, little action. No answers.
If this was true, then pretty much every government in the US (and around the world) wouldn’t be saddled with enormous debt for labor performed in previous decades.
Government defined benefit pension plans assume 7%+ return on investment, that doesn’t scream risk averse. Nor does the fact that pensions regularly place their bets with VC funds, PE firms, REITs, and other risky investments.
The only thing defined benefit pensions do is give control of a huge pot of money to a small group of people with no transparency, inevitably resulting in corruption. With taxpayer funded pensions, you get the added bonus of today’s voters and workers and politicians pushing all the costs onto future generations of taxpayers.
The pain would be considerable. But we're used to that now, and it's like ripping a band-aid off: it hurts a lot more for a lot shorter time.
But what I think a lot of this misses is that the more a financial system is prone to cash extraction, the less good it becomes at value generation. As an example, we can look in software at the era of Microsoft's dominance. Microsoft was a great cash generator, but its dominance (and misuse of its market power) discouraged a lot of startups). Then antitrust enforcement and the rise of the browser unleashed a whole wave of innovation.
Pretty much all big companies are good at making cash while killing innovation. Compared to their size the innovation output of the big tech companies is pretty low.
Since 2008 it has become clear that the financial sector is viewed as an industry that needs to be protected no matter what the cost so you should expect them to keep doing crooked stuff while making boatloads of money. This comes at the expense of other sectors in the economy.
In the meantime, even now the primary target of those audits are the upper middle class. People who have enough that it's worth taking but not enough to defend themselves effective.. via legitimate or illegitimate means.
In fact the CMBS market blew massive holes in banks balance sheets in 2008 but not because of fraud, but because the commercial property market tanked so much (and will likely not do much better after covid).
So it is always possible that underwriting standards drifted downward, and there are perhaps different standards in the US than Europe. But I find this story surprising and unlikely and would like to see more before forming an opinion.
[...]
> The SEC has the power to fine companies and their executives if fraud is established. If the SEC recovers more than $1 million based on Flynn’s claim, he could be entitled to a portion of it.
Hope he got a good lawyer!
No business with any company that employs even one of them, ever again. Starting today.
Damn the chaos, signal that this kind of profiteering and crash-building is not tolerated.
Is there a way to add incentives so investors don’t analyze information from summaries?
You can’t fix people, only incentives.
The person quoted seems to indicate "investors" in this case means institutional funds as well, which is just frightening. Hope they can do their job otherwise this will go from big loss-causing mistake to contagion.
TL;DR
https://www.wsj.com/articles/carl-icahn-placing-a-big-bet-ag...
Or make automation that abstracts on top of the automation.
Finance is just dirty.
Since we'll never prove anybody had the necessary knowledge of breaking the law and ignorance is an excuse when you write the law specifically that way