As home values continue to plummet and foreclosures continue to rise, the speculation on the proposed acquisition of Countrywide Home Loans, the largest and most troubled mortgage lender in the US, by Bank of America, the largest commercial bank in the US, has gotten to be a lot like the speculation on what Brad and Angelina are up to these days, and whether or not Brittany Spears in going to get her kids back or shave her head again.

After balking a few weeks back at assuming all of Countrywide’s bad debt (which would basically render the deal no deal at all), Bank of America recently came out and confirmed that yes, Houston, all signs are still ‘go’ at this point. The deal is set to close by the end of September. A lot could happen by the end of September. The way things are going, I’m kind of scared about what’s coming up this week: September? Will we have a September? Promise? Somebody promise me we will have a September and I’ll feel a lot better no matter what Bank of America does or does not do.

On the face of it, BOA’s planned acquisition of Countrywide makes instant sense and also seems completely insane. It makes instant sense because once the smoke clears and the housing market reemerges, Bank of America will be poised to suck in most of the money and most of the business, and then go on to sell all those new customers its other financial products like credit cards, deposit accounts, investments, car loans, and so forth and so on.

If Countrywide was the giant of the mortgage industry, Bank of America, by consuming Countrywide, will have the potential to become the Monster that ATE the Giant of the mortgage industry, once things are back on track. BOA will make Godzilla look like a punk kid.

Bank of America will be Megagodzilla.

The acquisition is completely insane because right now, not only is Countrywide hemorrhaging money from every financial pore, it is also the target of so many lawsuits: federal lawsuits, regulatory lawsuits, lawsuits initiated by its own stockholders, and who knows what else; that it can’t keep track of the trouble it is in any better than it kept track of its paperwork and underwriting and mortgage documents that got it into trouble in the first place.

Besides, BOA ALREADY makes Godzilla look like a punk kid. Bank of America already is Megagodzilla.

BOA will be paying $4 billion for the crippled lender Countrywide, a fire sale price to say the least, and maybe not a bargain at that. Lots of people want to see the deal happen because they think BOA’s sizable assets will shore up the tanking mortgage industry and keep people in their homes. I’d say this is a questionable assumption, especially that second bit. But say it does go that way and the day is saved: At what price has the day been saved? I think its a valid question, and one that isn’t being asked enough if at all.

It strikes me that the steadily increasing trend toward mergers and acquisitions in the financial industry can be arguably blamed for much of the unsteadiness (to put it kindly) in that same industry. When banks or lending institutions get that big, the emphasis comes to be more and more on quick and dirty profit, the money floats to the top tier of movers and shakers, and damn the existing customers.

The pressure on sales people at all levels in banking and lending is so enormous right now that they are practically told to break rules in order to generate profit, then blamed and fired if they get caught breaking rules they were pressured to break. So on the one hand, here’s your required one hour of training in banking and lending regulation along with all the 200 things you must never on pain of death do, and on the other hand, get out there and do all 200 and then some or you’re fired.

Meanwhile, frustrated customers waste hours on 1-800 customer service phone trees only to reach someone who knows nothing, has no authority to fix anything, and wants to shoot him or herself but can’t because that person knows the family would get charged for the headset post mortem.

I recently received this reply while asking about customer retention in a meeting, “Look, we don’t care about the customers we already have. We want new money and that’s all we want. If you can’t sell an existing customer something new then get them off the phone and move on. If you help one of them, then they’re all going to expect it.”

This was in response to me raising a concern about several customers who had pulled about a quarter of a million dollars each and gone to another bank due to poor service and uncaring attitudes.

Bank of America and Countrywide can get married if they want to–It’s a free country after all; freer every day in fact in terms of regulatory oversight; much freer than it has been since the early days of the laissez-faire capitalism and first industrial barrons like the Vanderbilts and the Carnegies.

Besides, when did the possibility of consequences ever stop anybody from getting married?

I personally would like to see a hard correction followed by a return to smaller commercial banks, much tighter mortgage lending regulations, and a sense that people matter more than profit margins.

Yeah, that’ll happen.

Is anybody dizzy yet? Maybe a better question is, is anybody not dizzy?

Awhile back I noted here at PFA that the FDIC has this year placed about 70 banks, mostly large regional retail banks (as opposed to investment banks like Bear Stearns) on an ‘endangered’ list. Today the specific large regional bank where I work as a part-time CSR was put on probation by the Federal Office of the Comptroller of the Currency, a scary way of saying that the bank where I work is now under much tighter federal regulatory scrutiny than ever before. This in spite of raising $7 billion in additional capital last month. The last I looked today, our stock was down to $4.91 from a 51 week high of $54.71. I’m no high roller financier, but this strikes me as a bad thing. Even so, I was ready to reassure any and all customers who called with concerns, FDIC brochure in hand.

No one called with concerns.

I think the reason for that is that ordinary people have known for over a year that things in this country are incredibly screwed up economically. It is getting so that news can’t even get bad enough to freak anyone out anymore. Banks on the verge of failure? Yeah, big deal. Oil prices skyrocketing faster than the Space Shuttle? What else is new. Unemployment up to 5.5% In a pig’s eye; doesn’t even count the people who gave up looking months ago. And so on and so forth.

The extent of the damage done by the subprime mortgage crisis is unfortunately still playing out, and sadly, it’s playing out at the same time that global oil supplies are becoming tighter and tighter (some might even say at a time when global oil supplies are running out, but that’s a different post). A severe correction had to occur, with housing prices ridiculously inflated and mortgages being sold on insane terms and underwritten by people who were apparently taking large amounts of LSD.

The government is looking into the possibility that speculation in the commodities markets is helping to drive inflation in oil and food prices, but does anyone really believe that is the root cause of this year’s financial instability? Certainly speculators are moving into commodities now; there certainly isn’t any air left in the real estate bubble, so it is necessary to find other ways to create money out of nothing. I would ask why it has become so necessary to make money out of nothing?

Clearly, it’s because we no longer are making money off of something: cars, electronics, clothes, weapons, things, all going overseas where labor is cheap, costs are low, and regulation has too many syllables so it’s just left out of the language completely.

Personally, I believe that is the problem. The Federal Reserve can’t fix that part of this problem. The Fed can secretly loan money and broker deals, but that is only going to temporarily staunch the most severe bleeding. The root problem US markets are experiencing can only be fixed through the kind of intervention Franklin D. Roosevelt championed after the Great Depression.

There, I said it.

We need to get people back to work, not just send them $300 checks on borrowed money. We need to repair our crumbling infrastructure and we have lots of unemployed people who would be more than willing to do it to feed their families. We need to attract green industry to this country and start to lead the world by example in this area. We could be manufacturing electric cars right now and people would buy them faster than we could pump them out. Are we doing this? No of course not. We’re moving our auto industry overseas and selling them our badly-made, expensive-to-run gasoline powered cars.

The irony of it all for me is that last month I actually sold half a million dollars in bank products, which means if I still have my job at the end of June I’ll actually get some decent commission.

Oh yeah, I’m dizzy. In fact, I’m starting to feel a little nauseous.

How about you?

Poor Microsoft. One minute they’re a towering colossus-cyclops striking terror into all rivals with a take-no-prisoners, get-er-done first and get-er-done cheap strategy that blows everyone else right out of the water. A few anti-trust suits and international wrist-slaps later, and suddenly they’ve got upstart ingrates and whippersnapper smart-alecks like Apple and Google kicking them in the shins and laughing all the way to the bank. And as if that all wasn’t humiliating enough, the next thing you know even Yahoo is telling you to go take a long hike off a short motherboard and stuff your billion dollar offers where the sun don’t shine. Well. Excuse us for dominating.

What’s a mega-corporation to do?

How about teaming with PayPal and creative young tech company Jellyfish to offer cash back on purchases made by using the Microsoft Live Search engine instead of stupid-face Google or ingrate-snotnose Yahoo? Customers love cash back, right? And how about souping up the Live Search shopping function with lots of cool extras similar to tickets, prizes, and other swell stuff nerds can already earn just by using Microsoft’s Live Search Club for Gaming? Announce that, get it in front of the public, and pretty soon people will be saying stuff like, “What’s a google?” And, “Does Apple still produce Beatle Albums? Or did you mean Fiona Apple? My mom has an apple tree. Do you have an apple tree?”

So Microsoft announced the new grand plan. Here is what they had to say about it:

On Wednesday, we will be announcing a major new initiative that our search teams have been driving. We are getting better and better with our core algorithmic search, and at the same time, we are investing to differentiate in vertical experiences and to disrupt the current model. You’ll hear more about our plans Wednesday.

Great. I think. I mean, I kind of nodded off there for a minute so I’m guessing what they said is in fact a good idea. I figured I’d go check it out myself, so I went to MSN expecting to learn all about it and maybe buy some stuff and make some cash back too (yay!) but guess what? It seems to not quite be there at all… yet. I guess they aren’t done differentiating to invest in those pesky vertical experiences. Yeah, I know how rough that part is, that vertical experience part. Bastard verticals.

Listen, can we talk for a minute? I mean just you, dear reader, and me, smart-mouthed blogger, just the two of us, mano et mano. I just want to ask you one question:

If you were stranded on a desert island with two nerds and one of them was Bill Gates and the other was one of the Google kids who plays video games while hauling down a zillion dollars a year at their awesome corporate playground, who would you trust to get you off the island if you could only pick one guy to get you off? (So to speak.)

Yeah, that’s what I thought. I’d pick the Google guy too, maybe marry him or something, or at least get a job lead as we coasted safely into home territory. Meanwhile, back on the desert island, I’m guessing Bill would still be trying to get past Vista on his handheld. He might also be back there smashing things with coconuts. Hard to say.

Microsoft knows it is in trouble and knows that it’s heavy-handed bullying approach to mergers and acquisitions isn’t likely to help it against forward-thinking Google and Yahoo, neither of which cry many tears over love lost between themselves and Microsoft. The internet is rapidly evolving into a new entity, one in which the lousy operating platforms designed by Microsoft and shoved down the throats of frustrated PC users are right on the verge of becoming obsolete. Already Google is offering its own online business software and services, and innovative companies are appearing faster than baby shrimp at spawning time. Some are reaching maturity before they can be gobbled up.

Competition can be great for customers when competition is spurring innovation, price declines, better service, new jobs, and new money. If Microsoft can keep up, especially if they can keep up by offering cash back on purchases just for using their search engine, that’s great. I’ll be there in a heartbeat.

If they can’t, oh well. Winning at any cost always works for awhile, but most of the time it quits working right about the time the initial idea gets old. At that point, all the bullying in the world won’t do much except confirm your reputation as a big bully.

I’m waiting. As soon as they work out that vertical whatever, I know I’ll get my email and I’ll be off in a flash to buy a case of black currant tea online, and I’ll buy it on Microsoft Live Search and post my cashback reward right here at PFA. Until then, I’m finishing off my hazelnut coffee bought right here in the real world. I’m ready though. I’m an open-minded kind of blogger.

Stay tuned.

No, it isn’t.

Yes, Wall Street has been in a much better mood lately. Stocks have rallied, and amid the doom and gloom some good news has been seized upon and celebrated. Inflation was not as bad in April as expected, though it was in fact pretty bad. The cost of gas is still skyrocketing, but food is pausing ever so slightly to gasp for breath before another steep ascent. Home fuel oil is down a bit, but it is May after all and with diesel at well over $4 a gallon, this cannot last.

More quasi-good news: Mortgage giant Freddie Mac managed to temper its quarterly losses by doing a little accounting magic in order to minimize the effect of huge losses on its bottom line in print. Remarkably, this also cheered Wall Street and sent Freddie Mac stock soaring, even though by all accounts, including its own overly-optimistic ones, Freddie Mac is poised to lose over $7.5 billion due to foreclosures and bad mortgages over the coming two years, and is already in a heap of trouble over its past uses of creative accounting. CEO Richard Syron acknowledges that the lending behemoth needs to raise $5.5 billion in capital ASAP, but sees no real challenge in that and looks forward to future success.

Sure he does.

Toll Brothers, one of the largest homebuilding companies in the US, expects to lose another 30% this year. And foreclosures and personal debts gone bad continue to increase.

Not to be a Killjoy, but a substantial dark cloud is still mushrooming behind the sporadic silver linings Wall Street loves. Yesterday Ben Bernanke, head of the Federal Reserve, said in a speech that while credit markets had stabilized somewhat thanks to emergency measures by the Fed (such as rate cuts and emergency Federal Reserve loans to prevent credit from freezing up completely) the current market situation is still “far from normal.”

Today, Merrill Lynch announced that starting June 1, it will require its financial advisers to rate at least 20% of all stocks as ’sell’ as opposed to the 12% rated that way now. That is a huge step for an investment bank whose symbol is a raging bull, but remarkably, 20% is still an overly optimistic number. When Merrill investigated the performance of stocks in the MSCI world index and the US Standard & Poor’s index, it found that between the years of 1997 and 2007, somewhere around 37% to 40% of its recommended stocks lost money. Did it advise its own clients of this fact? Well, not exactly. But it decided to do it today.

What Merrill and other investment banks and brokerage houses are now facing is a huge crisis of confidence on the part of consumers. it seems we have ‘trust’ issues with these guys, and for good reason.

Banks and brokerage houses exert lots of pressure on employees to make big money over short periods of time to pump up their quarterly results. The result has been a delusional pool of salespeople who seem to have no grounding in any kind of reality whatsoever. Why? Are they just insanely happy in an over-medicated way due to their own personal failings and personality quirks? Or is it more the case that, by requiring them to push stocks no one should buy or hold stocks any sane person would sell, the policies of the investment houses themselves have created this mess?

As Michael Douglas shouted in the famous movie Wall Street, “Greed is good!”

I think what we are about to see, slowly but surely, are some splashy announcements of self-regulation by major investment banks and brokerage houses, with Merrill leading the pack as of today. Why? Because if they don’t do this, and do it loudly and with expressions of genuine concern (practice it in the mirror guys, you can do it), then sometime after this coming November they know they will be looking at the ‘R’ word.

I’m not talking about ‘recession’. (That ‘r’ word is so last-week’s-news on Wall Street.)

I’m talking about REGULATION.

AAAAARRRRGH! Run for your lives! The Democrats are coming!

Yesterday the leader of the world’s largest bond fund, Mohamed El-Erian of the global firm Pimco, announced that US policy makers “do not have good policy tools to deal with the destabilizing combination of asset price deflation and goods inflation.” In other words, the Fed can’t save us; something Bernanke knows but doesn’t want to say out loud. El-Erian continued, “This comes at a time when regulators are trying to play catch-up with a financial system that has morphed into something that does not fit neatly into existing frameworks and mindsets.”

No real news there, I mean, of course. You’d have to be in a coma not to notice. But then El-Erian dropped the real bomb,

“The longer the delay out of Washington, D.C., in implementing fiscal measures to stabilize the housing sector, the greater the risk that the higher collateral damage on Main Street will induce a politically driven regulatory over-reaction with unpredictable economic outcomes.”

I think this is absolutely on target. And we aren’t exactly seeing Congress move with lightening speed on this. The current bill designed to allow FHA to refinance homeowners facing foreclosure is facing a Bush veto, but more problematic is the fact that even if passed it would require lenders to voluntarily eat 30% of the bad debt on homes about to be foreclosed.

So far, mortgage lenders have been loathe to do this on their own, preferring instead to go through with the foreclosure, then buy the house back for pennies on the dollar themselves, thereby making their books look better. In other words, more smoke and mirrors. It is unclear how the new bill in Congress, even if it were passed (which it looks like it won’t be) could compel them to do something they’ve refused to do all along.

The truth is, regulation is almost certainly the right response. Will we see it? That depends on quite a few nebulous ‘if’s, ands, and buts’ that will likely not play out until after the next Presidential election.

Will Democrats get a better majority in Congress? They will need it to pass financial industry regulatory measures. Will the economy collapse so badly by then that we have much bigger problems than banking regulation? That could happen too. Will huge financial firms regulate themselves to head off the kind of sledge hammer approach El-Erian fears? Hard to say.

Stay tuned. You will almost certainly not be bored.

The House has approved a plan that will let the Federal Housing Administration take on as much as $300 billion in new mortgages so that people facing foreclosure can refinance. The measure could help as many as 500,000 struggling homeowners by cutting their payments by as much as half. Bush has threatened to veto the bill, which passed in spite of that threat by a majority vote of 266-134, including 39 votes from Republican representatives who come from states with the most severe housing problems.

In a separate bill, the House also approved a plan to send $15 billion to states to buy and fix up foreclosed property.

In spite of the 39 crossover Republican votes, many of the remaining House Republicans are vehemently opposed to the measures. Included in this second bill are two features Bush wants: one feature would overhaul FHA so that the federal mortgage giants Fannie Mae and Freddie Mac would be much more tightly regulated, and the other would provide first time home-buyer tax credits of up to $7500 that would be paid paid over 15 years. The tax credits (as well as the FHA overhaul) are designed to encourage home ownership in a failing market where credit has become impossibly tight and few homes are being sold.

Several major hurdles face this plan even if the it passes the Senate and Congress then overrides the threatened Bush veto. One is that the individual refinance packages depend on the original lender agreeing to take a loss on the principal owed on the mortgages. While the loss would be a smaller one that the loss the original lender takes in a foreclosure sale, the loss on a refinance would not be backed by reinsurance and would have to be absorbed in total by the original lender. So far, in other independent attempts to assist homeowners facing foreclosure, lending institutions have been notoriously loathe to cooperate, preferring to take the larger loss. As the housing crisis worsens and banks and mortgage companies continue to post huge losses, this may change.

A much bigger problem is the current condition of Fannie Mae and Freddie Mac. The two companies suffered combined losses of more than $9 billion last year on bad mortgages, and are expected to post even larger year-end losses for 2008. The two federal mortgage giants currently have $83 billion in required capital to back their loans, but the mortgages, other debt, and financial obligations of the two currently surpass $5 trillion. With major financial institutions dumping billions in subprime loans as fast as they can, the number of these loans held by Fannie Mae and Freddie Mac is mushrooming even without the new bill.

Insurance companies backing bank mortgages have been going through the same struggles with capital ever since November of 2007. Earlier this year, before the Bear Stearns failure, Wall Street was holding its breath hour by hour to see if any of them would fail or even look like they might fail. If that were to happen, the banking system in the US would have frozen up like inner city plumbing in January, and the country would have had a financial crisis on its hands that made the Great Depression look like the Not Really All That Bad Depression.

What we are witnessing here is essentially a game of musical chairs in which lenders, individual homeowners, and federal and state governments scramble to not be the one left holding the debt as fewer and fewer options for escape remain. A benefit of the house refinance plan is that it would spread the bad debt around a bit while keeping people in their homes: the bank would get stuck with some but not all of it, the government would take over the risky borrowers and write them new more conventional affordable loans, and the borrowers would get to keep their homes, preventing (in theory) any more freefall in housing prices by stabilizing neighborhoods.

On the downside–and it is a really steep slippery downside–in a worst case scenario Fannie Mae and Freddie Mac could go the way of Bear Stearns if the program isn’t managed well and if they don’t raise more capital to back all these risky loans. What does ‘tight regulation mean’? Fannie Mae was the target of a major accounting scandal and the smoke from that has not even cleared yet. Former Fannie Mae Chief Executive Franklin D. Raines and two others have been fined $31.4 million for their roles in cooking the books to (appear to) reach earnings targets between 1998 and 2004 and then pocketing millions of dollars in bonuses for (not really) doing so.

Republicans and some moderate Democrats will make a lot of noise about the slippery slope and moral hazard of rescuing people from their own bad decisions and how this is wrong and how those of us who have made good decisions shouldn’t have to bail them out. The problem is that the situation has gone so far past this issue that it now threatens to sink us all no matter what we do or don’t do.

For one thing, banks, lending institutions, and brokers were often criminally irresponsible in promoting and writing these bad loans during the peak of the housing bubble. Yes, people should make good decisions and not take out horrible loans they can’t pay back. The flip side however is that lenders shouldn’t make horrible loans to people who can’t pay them back. Lenders have a fiduciary responsibility to all their customers to make sound underwriting decisions, and that responsibility has of late flown out the window as pressure on CEOs to make ever-greater profit off of the same tired products grows exponentially year by year.

That is a nice way of saying that during the housing bubble we witnessed an era of unbridled greed which even had realtors shaking their heads at the sheer audacity of it. Laws were broken, money changed hands under tables, people were lied to, widows were bilked: It was ugly. When the bubble burst, all the players started scrambling to find a good safe rock to crawl under, and that is still going on today. What’s more, these irresponsible lending practices mutated into irresponsible highly-leveraged investment practices, many with incomprehensible initials–for example, SIVs—which are actually a form of CDO, which is… oh nevermind. The point is, Wall Street went on a Jedi-mind-trick binge in which they chopped up and repackaged bad debt and then speculated on it in a way that 1) made it impossible to trace who actually owned it, and 2) created money out of thin air.

I’m no economist, but even I know what happens when you create money out of thin air.

Meanwhile, back at the ranch, Bush and Congress were busy sniping at each other and accomplishing little, something they are still pretty good at. So there is plenty of blame to go around. The question now is not whether the American tax payer will get stuck with this mess–of course we will. The question is, how much of it will we get stuck with, and when, and how. A workable plan that sticks us with some of it and at the same time keeps people in their homes so prices can stabilize and equity can actually start to increase seems to me a good start. Will Congress be able to sell it to the financial industry in a way that keeps Fannie Mae and Freddie Mac afloat? Stay tuned.