Author Archives: Jillayne Schlicke

About Jillayne Schlicke

Educator in the field of mortgage lending and real estate. Follow me on Google+

MILA's Bankruptcy

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The bankruptcy trustee in charge of MILA’s Chapter 11 case says there is evidence that MILA’s founder and CEO allegedly collected $32 million from MILA during the years before its demise, “improperly draining the Mountlake Terrace company’s assets as its fortune declined.”

From the Seattle Times:

“I think the executives at MILA knew by 2004 that this bubble was bursting and did their best to take out as much money as they could before it became obvious to everyone else,” says Brian Esler, who represents the bankruptcy trustee in the suit.

The suit claims Sapp, who owned about 90 percent of MILA, paid himself more than $10 million in dividends in 2004 and 2005 when the company was already “functionally insolvent,” meaning it had insufficient capital to continue normal operations and should have been preserving cash.

It also alleges he took $11.5 million in salary for each of those years, though “by March 2005, MILA was already delaying payments, even to important customers, to conserve cash.”

The trustee’s suit also claims that Sapp damaged MILA — and its creditors — in other ways:

He “surreptitiously seized” the mortgage software MILA developed and had another of his companies bill MILA for using it; charged MILA exorbitant amounts for his private yacht and business jets; and, in a “theft of corporate opportunity,” created separate companies to own a four-story office building and a parking lot that were leased to MILA, rather than having MILA buy the properties.

Sapp’s attorney, Jack Cullen, declined to discuss the allegations in detail but said: “We consider the claims nonsense. We don’t think they are founded in law or fact.”

Sapp did not return a call to his Hunts Point home.

Esler is asking the court to freeze $12 million in cash belonging to Sapp, to keep it available to creditors.

Bankruptcy Trustee Esler’s plan is to convince the court that MILA was technically insolvent for over two years before the company abrubtly closed it’s doors in April of 2007.  Esler cites improper accounting and a  twelve-fold increase in the number of loans MILA was required to repurchase from 2002 to 2004.

To protect creditors, the suit says, as early as 2005 “Sapp should have attempted to sell, liquidate or reorganize MILA at a time when it still had significant value, instead of continuing to manipulate and loot it for personal gain for another two years.”
The suit also takes a microscope to transactions among the various entities owned by Sapp. One example: The company that owned his 130-foot yacht billed MILA $395,374 over two years — although “MILA used that yacht only twice for asserted business reasons,” the suit says.

MILA’s creditor claims have ballooned up to 2 billion dollars.  By asking the court to freeze Layne’s personal assets, is the Bankruptcy Trustee is gathering evidence to try and make a case that the corporate veil was pierced? This means Layne might have co-mingled corporate assets with personal assets.  An example of that would be if personal expenses were paid for with corporate funds. This will be an interesting local case to follow.

Bankruptcy Trustee:
Miller Nash
Brian Esler
206-622-8484
Lisa Peterson or Bruce Rubin
360-699-4771

MILA Legal Counsel:
Jack Cullen
Foster Pepper
(206) 447-4689

The House Votes YES on the Revised Bailout Bill

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Watch live on CNBC here.  Speaker Nancy Pelosi addressing the House.
Voting on the AMDENDMENT now taking place.

So far:
263 Yea
171 Nay
218 needed

Update: Here’s the roll call.
Here’s how Washington State’s Representatives voted (district map)
Hat tip SeattleBubble:

YES:

  • District 2 – Rick Larsen (D)
  • District 3 – Brian Baird (D)
  • District 6 – Norm Dicks (D)
  • District 9 – Adam Smith (D)

NO:

  • District 1 – Jay Inslee (D)
  • District 4 – Doc Hastings (R)
  • District 5 – Cathy McMorris Rodgers (R)
  • District 7 – Jim McDermott (D) (voted YES first time around)
  • District 8 – Dave Reichert (R)

CNBC reporting rumor that Fed will do an emergency 50 bps cut after the bill passes …hat tip CR

Will the bailout bill do what it’s suppose to do: help “stabilize the economy?” Perhaps the markets have been rescued…for now.

Senate Votes YES on the Bailout

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Watching the Senate testimony and voting on the Bailout Bill via C-Span.  I hear that Maria Cantwell and Patty Murray are coming out against the bill from statements posted on their website. Hat tip perfectfire at SB.

Democrat Majority Leader Harry Reid is making a speech pleading for passage.

So far the Ayes are adding up very fast.
Cantwell votes NO.
Murray votes YES.

McCain: YES
Obama: YES

Yes: 74
No: 25

Now the bill will go back to the House.

Draft Proposal on Financial Rescue Regulation

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The House votes on Monday and the Senate apparently will vote on Wednesday.  Here is the “Draft Proposal on Financial Rescue Legislation”

From Office of Speaker Nancy Pelosi — Sept. 28, 2008
REINVEST, REIMBURSE, REFORM
IMPROVING THE FINANCIAL RESCUE LEGISLATION

Significant bipartisan work has built consensus around dramatic improvements to the original Bush-Paulson plan to stabilize American financial markets — including cutting in half the Administration’s initial request for $700 billion and requiring Congressional review for any future commitment of taxpayers’ funds. If the government loses money, the financial industry will pay back the taxpayers.

3 Phases of a Financial Rescue with Strong Taxpayer Protections

Reinvest in the troubled financial markets … to stabilize our economy and insulate Main Street from Wall Street

Reimburse the taxpayer … through ownership of shares and appreciation in the value of purchased assets

Reform business-as-usual on Wall Street … strong Congressional oversight and no golden parachutes

CRITICAL IMPROVEMENTS TO THE RESCUE PLAN

Democrats have insisted from day one on substantial changes to make the Bush-Paulson plan acceptable — protecting American taxpayers and Main Street — and these elements will be included in the legislation

Protection for taxpayers, ensuring THEY share IN ANY profits

Cuts the payment of $700 billion in half and conditions future payments on Congressional review

Gives taxpayers an ownership stake and profit-making opportunities with participating companies

Puts taxpayers first in line to recover assets if participating company fails

Guarantees taxpayers are repaid in full — if other protections have not actually produced a profit

Allows the government to purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families

Limits on excessive compensation for CEOs and executives

New restrictions on CEO and executive compensation for participating companies:

No multi-million dollar golden parachutes

Limits CEO compensation that encourages unnecessary risk-taking

Recovers bonuses paid based on promised gains that later turn out to be false or inaccurate

Strong independent oversight and transparency

Four separate independent oversight entities or processes to protect the taxpayer

A strong oversight board appointed by bipartisan leaders of Congress

A GAO presence at Treasury to oversee the program and conduct audits to ensure strong internal controls, and to prevent waste, fraud, and abuse

An independent Inspector General to monitor the Treasury Secretary’s decisions
Transparency — requiring posting of transactions online — to help jumpstart private sector demand

Meaningful judicial review of the Treasury Secretary’s actions

Help to prevent home foreclosures crippling the American economy

The government can use its power as the owner of mortgages and mortgage backed securities to facilitate loan modifications (such as, reduced principal or interest rate, lengthened time to pay back the mortgage) to help reduce the 2 million projected foreclosures in the next year

Extends provision (passed earlier in this Congress) to stop tax liability on mortgage foreclosures

Helps save small businesses that need credit by aiding small community banks hurt by the mortgage crisis—allowing these banks to deduct losses from investments in Fannie Mae and Freddie Mac stocks.

Brad DeLong has a better idea: nationalization and “it’s the best way to deal with the moral hazard problem.”

Paul Krugman agrees with Brad DeLong but ponders whether nationalization has broad political support.

Nouriel Roubini says the bailout is a “Disgrace and Rip-Off.”

This way of recapitalizing financial institutions is a total rip-off that will mostly benefit – at a huge expense for the US taxpayer – the common and preferred shareholders and even unsecured creditors of the banks. Even the late addition of some warrants that the government will get in exchange of this massive injection of public money is only a cosmetic fig leaf of dubious value as the form and size of such warrants is totally vague and fuzzy.

Seems like the only people who are happy with the draft proposal are the politicians. Seems like both presidential candidates are supporting it.

“This is something that all of us will swallow hard and go forward with,” Republican John McCain said in an interview with the ABC television network. “The option of doing nothing is simply not an acceptable option.”

Democrat Barack Obama said he was likely to back the package. “My inclination is to support it,” he told CBS television’s “Face the Nation.”
 

Update: Here is the 108 page PDF of the bill, now called the ‘‘Emergency Economic Stabilization Act of 2008’’.

Bailout Bill Agreement Tentatively Reached

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Several news sources are reporting that a bailout bill agreement has been tentatively reached between congressional leaders and the White House. 

Update: the “Summary of the Draft Proposal to Rescue U.S. Financial Markets” has been posted inside the comments.

From the Wall St Journal

“Senate Majority Leader Harry Reid (D., Nev.), in an appearance on the Senate floor Saturday, said there are only a “handful of issues still lingering” for lawmakers to finalize. He said his goal was for the Congress and the Bush administration to at the very least release an outline of the bailout plan before Asian markets open Sunday evening.

Saturday evening, a Senate aide familiar with the talks said a number of specific ideas appeared to be gaining traction, most notably the concept of creating a “financial stability” fund financed by Wall Street…

Also gaining steam was a proposal to eliminate the tax deductions for companies on executive compensation for top officers that is above $400,000….

One issue still to be resolved was how the $700 billion authority to Treasury to buy up toxic assets will be meted out.

Lawmakers want Treasury to receive the authority in tranches, receiving $250 billion immediately and another $100 billion if needed as certified by the president. The remaining $350 billion would be subject to a Congressional vote, giving lawmakers the opportunity to vote to rescind the funds. But a Senate aide familiar with the discussions said Treasury was pushing for a larger initial authority, likely around $500 billion.

Lawmakers appeared to have the advantage on the issue ahead of the evening talks, the Senate aide said, though no part of the deal had been completely finalized.”

From Reuters

WASHINGTON (Reuters) – U.S. congressional leaders on Sunday said they had reached the broad outline of a deal to put in place a $700 billion bank bailout but were awaiting details on paper before declaring it final.
 
“We’ve made great progress,” House of Representatives Speaker Nancy Pelosi told reporters after a night of marathon talks. “We have to get it committed to paper so we can formally agree.”

Jillayne here. So, they’ve reached an agreement, but they still have some disagreements. To me this sounds like we still don’t have an agreement, but the pressure was on to announce that perhaps they’re closer.

I’d like to know if we the taxpayers are going to be able to read the agreement and give our feedback to our elected representatives BEFORE the House votes.

The Bad Reputation of RMBS

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I was in Mill Creek earlier this evening having sushi with my daughters and everytime we drive down into Mill Creek I say the same thing: “I remember when this whole place was nothing but trees!” They’ve already heard the stories about how I use to leave the house at dawn with the neighborhood boys and play in the woods all day until dinner time.  But they haven’t heard the stories about the banks.  As I was driving back up the hill, I was stopped at a horribly long stop light which gave me time to ponder the bank to my left, a Wells Fargo, and educate my children: “That bank use to be a First Interstate Bank.  Before that it was an Olympic Bank.” Before that it was something else.

With so much shock and awe over the past few days about the possible imending doom headed our way unless we quickly pass Paulson’s bailout plan, and all the taxpayer backlash on the blogs as well as being reported in the MSM, the new question becomes, well what are some other worthwhile ideas for how to get us out of this mess?  Today, Dr. Krugman suggests that we consider anything coming out of Henry Paulsen’s mouth to be a lie.  This might be a good way to solve the financial crisis extremely fast.

“So, this morning Hank Paulson told a whopper:

“We gave you a simple, three-page legislative outline and I thought it would have been presumptuous for us on that outline to come up with an oversight mechanism. That’s the role of Congress, that’s something we’re going to work on together. So if any of you felt that I didn’t believe that we needed oversight: I believe we need oversight. We need oversight.”

What the the proposal actually did, of course, was explicitly rule out any oversight, plus grant immunity from future review. Read more here.

 
Want to see Henry Paulson in action? Watch this quick video. When he’s testifying, at the part where he says “I want oversight” watch his head go back and forth in a “no” motion.  I tend to believe people’s nonverbal signals over the words they say. 

The Paulson/Bernanke bailout plan details are starting to rise to the surface:

One thing is clear – something we all guessed correctly – is that the intention of the plan is to pay premium prices for troubled assets to recapitalize the banks. It’s still not clear how the price mechanism will work, and unfortunately Paulson and Bernanke are unable to describe how this will work..

This means the TARP plan would buy assets from banks at a higher price than what the banks could get if they tried to sell them at fair market value. Bernanke and Paulson believe the assets are being unfairly underpriced in the free market because of their bad reputation so instead, they’re proposing that the taxpayers subsidize the re-capitalization of the banks.

One analyst says it would take at least 5 trillion for the proposed plant to work.

Why not let the banks come clean and sell their assets at today’s prices, and we can spend taxpayer money building back up the FDIC insurance fund. Weaker banks will fail and stronger banks will buy the assets of the weaker banks from bankor from the FDIC after failure.  Big banks like WaMu could be split up into smaller entities which will be easier for many different banks to absorb. 

Eleua, a frequent commenter on this blog, has been working with a group of other like-minded individuals and he has penned an outline for a solution here:

There is a solution that costs the government nothing, eliminates “moral hazard,

Blog Roundup on the Bailout Proposal

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Calculated Risk
Paulson Plan: Will it Work?

The primary goal of the Paulson Plan is to get the banks to lend again – or “unclog the system” as Secretary Paulson put it. Secondary goals are to “protect the taxpayer” and hopefully minimize moral hazard.

Will the plan achieve the primary goal? I think the answer is yes. By removing these troubled assets from the balance sheets of the financial institutions, the banks will able to lend again without lingering doubts about their solvency and viability. At first glance, the size of the plan seems sufficient.

It is almost guaranteed that there will be unintended and unanticipated consequences, but the plan will probably achieve the primary goal. And making sure the banks continue to lend will minimize the impact of the credit crisis on the general economy.

Unfortunately the Plan fails to address the secondary goals….

Yves at Naked Capitalism:
Why You Should Hate the Treasury Bailout Propsal

the shockingly short, sweeping text of the proposed legislation has lead to reactions of consternation among the knowledgeable, but whether this translates into enough popular ire fast enough to restrain this freight train remains to be seen.

First, let’s focus on the aspect that should get the proposal dinged (or renegotiated) regardless of any possible merit, namely, that it gives the Treasury imperial power with respect to a simply huge amount of funds. $700 billion is comparable to the hard cost of the Iraq war, bigger than the annual Pentagon budget. And mind you, $700 billion is not the maximum that the Treasury may spend, it’s the ceiling on the outstandings at any one time. It’s a balance sheet number, not an expenditure limit.

But here is the truly offensive section of an overreaching piece of legislation: Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Dr./Prof. Paul Krugman
Thinking the Bailout Through

…the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.
So what should be done? Well, let’s think about how, until Paulson hit the panic button, the private sector was supposed to work this out: financial firms were supposed to recapitalize, bringing in outside investors to bulk up their capital base. That is, the private sector was supposed to cut off the problem at stage 2.

It now appears that isn’t happening, and public intervention is needed. But in that case, shouldn’t the public intervention also be at stage 2 — that is, shouldn’t it take the form of public injections of capital, in return for a stake in the upside?

Let’s not be railroaded into accepting an enormously expensive plan that doesn’t seem to address the real problem..

Housing Wire
U.S. Taxpayers to Bail Out Foreign Debtholders too?

“Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets,

WaMu Endgame

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Surprise: WaMu is looking for a buyer.  From the New York Times:

Goldman Sachs, which Washington Mutual has hired, started the process several days ago, these people said. Among the potential bidders that Goldman has talked to are Wells Fargo, JPMorgan Chase and HSBC. But no buyers may materialize. That could force the government to place Washington Mutual into conservatorship, like IndyMac, or find a bridge-bank solution, which was extended to thrifts in the new housing regulations.

Citigroup is also considering an offer, but would likely be able to buy Washington Mutual only if it emerged from a receivership, according to a person close to the situation. JPMorgan is maintaining its posture that it will not bid unless it receives government support, according to another person briefed on the matter.

I’m not so sure that any bank is in shape to purchase WaMu in its current form. Perhaps it could be broken up into smaller pieces. Its deposit base is probably worth more than anything else on its books right now.

I’m sad. I can remember walking into Washington Mutual Savings in Downtown Everett on the corner of Colby and Pacific with my dad to open up a passbook savings account.  I’ve had an account there just about my whole life.  My daughter’s school savings accounts are there.  I know many people who work at WaMu.  I worked at WaMu as a bank teller many years ago under a very smart, savvy woman named Margaret Bradley who was a very fine role model for a young woman like me in the early 1980s.  Washington Mutual was “The Friend of the Family.”  I bought that old commercial line and repeated it for years.

I know. It’s just a bank.  I’ll get over it. 

There are many WaMu employees that live and work here in the Seattle area who had much of their retirement investments within WaMu’s stock options.  Whatever the outcome, this can’t bode well for our employment numbers here in the greater Seattle area.  I’m under the FDIC limit and will keep my accounts open, and will not be moving them to a new bank. I’ll be seeing this through with them. 

This makes me wonder if it will be easier for homeowners to get their short sales and loan modifications approved. 

Wall St Journal: TPG Move Opens Doors for WaMu

Bloomberg: WaMu’s Biggest Shareholder Waives Compensation Pact

Calculated Risk: WaMu For Sale

Seattle Times: With Stock Sinking, WaMu Appears Headed for Sale

Seattle PI: WaMu Puts Itself up For Sale

Lehman; Another Investment Bank in Dire Straits

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From the WSJ tonight:

The outlines of plans to determine the fate of Lehman Brothers Holdings Inc. emerged today even as it became increasingly clear that a clean sale of the entire firm to a big bank would be too difficult to execute.  A sense of optimism that a rescue could be arranged today dimmed as a growing sense of gloom descended on Wall Street. Executives from top banks in the U.S. and Europe huddled with federal regulators in an attempt to come up with plans to either buy pieces of Lehman or prepare for an orderly winding down of the firm in a manner that would minimize the collateral damage for the ailing global financial system. After 6 p.m., the formal meeting ended for the day with no resolution

Barclays and Bank of America were named as showing interest in purchasing parts of Lehmnan but neither wants to buy all of Lehman without some form of government help and so far the government has been reluctant to offer any assistance.

There is fear that fire-sale prices of what’s on Lehman’s real estate book could spark a problems for more Wall Street firms as they are forced to admit the street price of their assets.

Here is an actual ad posted on craigslist today, hat tip Dick from the CR comments:

Lehman Brothers (Midtown West)

Reply to: sale-837736866@craigslist.org
Date: 2008-09-12, 10:18AM EDT 

Hey guys — I’m looking to get rid of my investment bank. Nice assets. Slightly beleaguered. Will consider trades. Ask for Richard.

it’s NOT ok to contact this poster with services or other commercial interests

PostingID: 837736866

Sunday and Monday should be interesting. Anyone betting on a emergency rate cut?

Hurricane Fannie Freddie Hits US Taxpayers

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CR covers the FDIC: Federal Banking Agencies React to Takeover of Fannie Mae and Freddie Mac

Yves at Naked Capitalism is pondering the bank fallout:
Bye Bye Banks: Freddie and Fannie Preferred Holders to Take Big Hits?

CR has the Statement by Paulson on Fannie and Freddie

Read what seattlebubble bloggers are saying in the Econ forum

and this from Peter at LA Land
Obama and McCain back Fannie-Freddie bailout; Palin calls them “too big.”

Fact sheets from the US Treasury:
FHFA Director Lockhart Remarks on Housing GSE Actions
Fact Sheet: Treasury Preferred Stock Purchase Agreement
Fact Sheet: Treasury MBS Purchase Program
Fact Sheet: Treasury GSE Credit Facility

Mainstream Media:

Wall Street Journal
US Outlines Fan Fred Takeover

New York Times
US Unveils Takeover of Two Mortgage Giants

Bloomberg
Paulson Engineers US Takeover of Fannie Freddie

Reuters
US Takes Over Fannie Freddie

Conservatorship doesn’t kill preferred stock. Instead, it puts common shareholders first in line to absorb the losses.  Preferred shareholders are second in line to absorb losses.  Under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

From the FDIC website:

The federal banking agencies have been assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two government-sponsored enterprises, a limited number of smaller institutions have holdings that are significant compared to their capital.
The Federal Reserve Board…are prepared to work with these institutions to develop capital-restoration plans pursuant to the capital regulations and the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act.

All institutions are reminded that investments in preferred stock and common stock with readily determinable fair value should be reported as available-for-sale equity security holdings, and that any net unrealized losses on these securities are deducted from regulatory capital.

They’ve also put together a new secured lending credit facility which is available to Fannie Mae, Freddie Mac, and also the Federal Home Loan Banks. (Wait, what? I didn’t know the FHLBs were in need of this.)

Also, the U.S. Treasury has put together a temporary program to buy GSE MBS.

The taxpayers have now become the lender of last resort and the taxpayers have bailed out Fannie and Freddie. 

I’d like to know more about what both presidential candidates think about all this, and I’d like to see film footage of Paulson. If anyone finds some more great links as Hurricane Fan Fred hits the US taxpayers, please post them in the comment section.  Rhonda what do you think this might do for interest rates?