Quote of the day, March 10, 2009: Private equity company Blackstone Group LP CEO Stephen Schwarzman said that up to 45 percent of the world’s wealth has been destroyed by the global credit crisis.

“Between 40 and 45 percent of the world’s wealth has been destroyed in little less than a year and a half,” Schwarzman told an audience at the Japan Society. “This is absolutely unprecedented in our lifetime.”

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“It’s not reassuring,” said Kenneth Scott, a professor of law and business at Stanford Law School and former general counsel of the Federal Savings and Loan Insurance Corp. “There are more losses to be realized, but the question is the extent to which they are already reflected in values that banks are recording on their books.” Scott said it is unclear whether Bank of America should have disclosed more, though “as long as you don’t say anything that’s incorrect,” it is often acceptable to wait on disclosing deterioration.

This certainly is a quotable quote, and we will add it to that section of the blog. Although Scott was speaking to the issues at Bank of America the logic stands up relative to any bank with issues.

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Normally if you or I buy more than we can pay for we wake up to the fact that we are broke. Not so with Citigroup. As taxpayers we gave Citigroup $20 billion in November 2007, and guaranteed $300 billion in loans on Citi’s books. You and I also gave Citigroup $25 billion from the Troubled Asset Relief Program – the TARP program. If you or I invested like that we would be broke. Citigroup cannot show where they helped a lot of homeowners, but did anger the industry when they agreed to let judges modify loans.

The fear is that one financial institution – Citigroup – might require most of the second half ($350 billion) of TARP assistance. “It is hard to escape the conclusion that Citi is going to consume all of the TARP money and then some as the credit cycle troughs,” Christopher Whalen, a managing director at Institutional Risk Analytics and a former staffer at the Federal Reserve Bank of New York said in a research note Tuesday.

Citigroup tried to buy Wachovia Bank with our money, but Wells fargo prevailed. The New York bank has reported four straight quarters of losses totaling $20.2 billion through September 2008 and is expected to post yet another loss when it releases fourth-quarter results on Jan. 22. In another round of brain surgery, Morgan Stanley is likely to pay Citigroup between $2 billion and $3 billion for a 51 percent stake in the brokerage Smith Barney, a person close to the negotiations said.

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On July 19, 2007 Lehman Brothers rejected suggestions that they are exposed to subprime problems. Many companies made statements in the summer of 2007, in part because their shock and disbelief caused those companies to say just about anything. Remember Countrywide in July 2007? But we had a problem with Lehman Brothers rejection of exposure to subprime as soon as soon as they said it. Lehman Brothers always loved subprime and companies like Household International. How could they possibly NOT be exposed to subprime, as their 2007 statement suggested?

“Between 1998 and 2000, Lehman Brothers recognized the profit potential in backing predatory lending. Investment Dealers Digest reported that Lehman had risen from third place in 1998 to become the top underwriter of residential asset-backed securities, with a total of more than $12 billion in issues in 2000. Lehman worked closely with First Alliance and Conseco Finance, and formed a relationship with Household International.” (props to Household – HSBC Watch for this.)

Some analysts say Lehman provided the financing for risky lending many years ago. Some of the companies backed by Lehman Brothers came under fire for predatory lending. How can we believe what Lehman Brothers is telling us today? Why should we believe it? Lehman Brothers net loss for the three months to the end of August 2008 is estimated by the firm at $3.9 billion (USD) – after a gross mark-to-market loss of $7.8 billion on all those unfortunate investments in residential mortgages and commercial real estate.

Let’s look at a Lehman Brothers statement from August 18, 2007. Lehman Brothers denied market rumors that it is going to take a writedown related to subprime exposure. “The rumors regarding subprime exposure are totally unfounded,” a Lehman spokeswoman said. Just four days later Lehman Brothers said: “Lehman Brothers Holdings on Wednesday said it is shutting down subprime mortgage unit BNC Mortgage Corp., affecting the jobs of 1,200 employees in 23 cities and resulting in a $25 million charge.”

Who is kidding who (or whom)? If I can see the problem as a simple analyst, certainly Lehman’s attempt to raise billions of dollars in vital new capital from Korea Development Bank failed because KDB can see the problem too. Besides, the Koreans have already been burnt by Lone Star and HSBC via Household International.

Robert Peston, the BBC’s business editor, said Lehman Brothers has run into a brick wall. We say Lehman Brothers is like the proverbial dog where the tail is wagging. The problem is that Lehman Brothers possibly bit themselves in the ass on this one. It took years, but sometimes what comes around goes around, or vice versa. We will file this article in our “Quotable quotes” section because some of Lehman’s quotes will come back to haunt them.

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“Nobody had models for that,” said David E. Zimmer, then one of the executives at People’s Choice, a subprime lender based in Irvine. “Nobody had predicted people going into default in their first three mortgage payments.” Wake up Dave – it is called How to sell your house to the bank with a new loan – and the idea is to get refinanced while intentionally planning to never make a payment. No models for that? Back in 2001 through 2003 my wife and I bought foreclosures, often commenting on how fast some homes went into foreclosure. We joked about people who sold their house to the bank. If the neighborhood was going downhill just sell your house to the bank. White flight? If you can’t sell then do a cash-out refi to start your new life elsewhere, and never make a payment.

As house flippers we watched the trend continue. Television shows showed everyone else how easy it was. ‘Flip That House’ and ‘Property Ladder’ were fun to watch. Where did the houses come from Dave, and why were they foreclosured? If investors and small retirees like us could see it, the lenders knew about it. I strongly disagree that “nobody had models for that” as Zimmer said. That is not to say that careless lending only made matters worse. I am saying that a team of PhD’s, as claimed by HSBC Finance and Household International, should be able to see what Zimmer could not see.

Real people know a few things. If you work on a remodel and your tools are stolen right off of your truck, while you are working, that neighborhood might suck. Gang activity and unabated drug dealing will ruin a good neighboorhood. Gunfire at night, or rats running on the fences, are a good sign that a neighborhood sucks. I doubt that PhD’s and Dave Zimmer live there. When appraisers do drive-by appraisals along side gangsters doing drive-by’s – you guessed it – the neighborhood needs help. Either as a scam or a family decision, selling the house to the bank is not unheard of.

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Hillary Rodham Clinton’s campaign manager, Maggie Williams, earned about $200,000 on the board of a Long Island subprime lender that charged prepayment penalties — a practice that Clinton, a critic of the subprime industry, now seeks to eliminate.

Williams, who took over the reins of Clinton’s campaign in early February, served as a director on the board of the Woodbury, N.Y.-based Delta Financial Corp. from April 2000 until the firm declared bankruptcy in December, according to Securities and Exchange Commission records.

Glenn Thrush of the Baltimore Sun revealed the information in this article.

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While Treasury Secretary Henry Paulson was speaking, a federal appeals court shut the door to state enforcement of federally charted banks. Now Paulson wants help from the states. What in the world is going on? Didn’t the court render the states powerless to seek documents and enforce predatory lending laws, while Paulson is asking stes for help after the fact? First we blame poor people, then we take no action at the federal level, and now this? American’s are not that stupid and gullible!

Paulson proposed state and local governments should temporarily be allowed to issue tax-exempt bonds to include money for mortgage refinancings. “Given the local nature of housing markets, state and local solutions can be particularly effective,” the secretary said.

A federal appeals court on Tuesday upheld a lower courts 2005 decision that barred the New York attorney generals office from subpoenaing documents and instituting enforcement actions against national banks as part of an investigation into lending practices. In an order Tuesday, the 2nd Circuit Court of Appeals affirmed a decision that the New York attorney generals office had infringed on the Office of the Comptroller of the Currencys role in supervising national banks under the National Bank Act with a probe into possible racially discriminatory practices in residential lending.

The OCC filed a lawsuit against the attorney generals office in June 2005, saying the investigation infringed on its regulatory role. In the lawsuit, the OCC said the attorney generals office had sought public and nonpublic information about the mortgage lending business of four national banks that operate in New York. The banks included units of HSBC Holding PLC, JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. From 2005 until today the OCC took little regulatory action, if any. The OCC needs to take partial responsibility for letting the subprime crisis spiral out of control.

We are filing this little bit of irony in our “Quotable Quotes” section for the time being.

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Consumer advocate and watchdog organization Household – HSBC Watch published an open letter to HSBC, activist organization Knight-Vinke, and HSBC Chairman Stephen Green. The letter as published today, November 14, 2007. The long but insightful narrative gives some history about the watchdog organization, Household International, and predatory lending. You can read it here. The letter addresses leaders of emerging nations while holding HSBC responsible for management of HSBC Finance, once known as Household International.

An interesting read with undertones of responsiblity for one’s actions, the letter mentions the eviction of 89 year old Madie Wilson, posturing by Household International to counteract bad publicity, and efforts by Household – HSBC Watch.

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Let face it – Americans have no love for debt collectors, don’t like it when mortgage insurance is forced upon them, and we always like to laugh at Paris Hilton. The Radian, MGIC, C-BASS dance is almost as good. MGIC posts a loss, C-BASS was almost worthless, lawsuits began and the crying towel sopped up the mortgage blues. The black eye came when this Paris Hilton-like stupidity caused people to look at these companies. Somewhat anonymous to the average American before that, Americans discovered a link between the three, a link to debt collector Sherman Financial, and much more.

Nobody likes it when there might be a spy in the house. Radian, the mortgage insurer whose sale to rival MGIC Investment Corp. collapsed last month, has dropped almost ten percent as their auditor declined to renew their contract and their new auditor might tell them more bad news. Sorry guys, but suing somebody because they didn’t buy you is not classy. When one plays with fire expect to get laughed at if something blows up.

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This may come as a shocking revelation to many of our readers. The Federal Reserve, and specifically the Federal Reserve Bank of Boston, already had data about subprime mortages. That data did not look good at all. Executives from specific lenders were called to testify before the Senate Committee on Banking, Housing, and Urban Affairs on March 22, 2007. While we might not be able to trust the executive spin this shocking data from the Fed is real:

Research by the Federal Reserve Bank of Boston on the rising tide of foreclosure filings in the state found that subprime loans are a major culprit. While subprime loans make up 12 percent of all mortgages in the state, they accounted for more than two-thirds of foreclosure filings in the third quarter of 2006, the most recent data available . Most delinquencies were high-interest subprime loans with adjustable rates, which increase payments as interest rates rise. Homeowners hit the hardest were in the working-class cities of Brockton, Springfield, Lawrence, Fitchburg, and Lowell, the Fed said. The trend is very disturbing, said Richard Walker, Boston Fed vice president. “We’re monitoring it closely.”

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