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2. Payday loans putting more banks at risk

It's hard to believe that Bernard Madoff has been in prison for five years. After all the books and magazine articles that have been written, one would think that there's nothing left to tell in this sordid story. But the New York Post has proven that assumption wrong. It reports that "when they weren't figuratively screwing investors, the folks at Madoff Securities were literally screwing each other, bombshell court documents revealed yesterday.

"Ponzi fiend Bernie Madoff was personally enmeshed in a workplace 'love triangle' and presided over a sexual cesspool where key staffers ripped off victims and each other's clothes with equal abandon, according to the shocking Manhattan federal court filing.

"The behavior at Club Bernie was so inflammatory, that it's the feds who are asking that jurors be barred from hearing details when Madoff's former secretary and four other staffers face trial in the record $64 billion rip-off."

So exactly who was involved? The documents apparently did not name names. "The feds did say that the 'various' employees involved include "all but one of the defendants, several government witnesses and Bernard Madoff himself."

Staffers "were at various times in romantic and/or sexual relationships with one another" over the course of the multi-decade fraud, according to the papers. The Post goes so far as to note the two employees who were most likely to have been involved in a tryst with the master criminal.

This may crop up again, as five defendants have this week pleaded not guilty to fraud charges. A trial would be quite interesting, serving to keep the Madoff scandal alive for even longer.

For more:
- here's the article
- here's a Daily News article

Read more about: Bernard Madoff
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By Jim Kim

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3. Ackman faces more bad news as returns dwindle

Is a payday loan crackdown coming?

It seems that way in the wake of the news that New York Attorney General has charged such an operator, Western Sky Financial and its affiliates, with various violations of usury laws. The operator contends that it has connections to American Indian tribes, which effectively immunize them from state laws.

But Eric Schneiderman was not dissuaded from filing his suit and attempting to shut the lender down. The AG argues that Western Sky and its affiliates have made at least 17,970 costly loans since 2010, racking up massive amounts in interest and fees. Schneiderman says that this business "preys upon New York consumers facing financial hardships with limited options."

To be sure, this could be the beginning of something. Payday lenders and their online lending cousins have been in the cross hairs in many states and in Washington. While we expect these sorts of loans from small, somewhat shady operators, the really big news as of late has been that big legitimate banks have been moving in as well, eyeing much-needed fee revenue. Banks such as Wells Fargo, U.S. Bancorp, Regions Bank, Fifth Third Bank, Guaranty Bank and Bank of Oklahoma have also moved into this niche under the banner of "direct deposit loans" or "advance loans."

No less than JPMorgan has been shamed into making some changes to give customers more power over payday lenders and their ability automatically debit accounts. Bank of America would be wise to ponder such changes as well.

In fact, now would be a good time for all legitimate banks to rethink their offerings. True, the fee potential is strong, but so is the potential for enforcement action at the federal and state level. The pressure will mount quickly. The potential for reputational harm is palpable as well. Three community groups are pressing Regions to exit what they call a "dirty business," for example. And Congress is taking a look at the impact on senior citizens.

Bank boards need to take a close look at these operations and make some tough decisions.

For more:
- here's some background

Read more about: Payday Loans, Online Lenders
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By Jim Kim

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4. Every MBS tells a thousand stories

One could argue that William Ackman, founder of Pershing Square Capital Management, needs a victory right now.

The non-victories unfortunately have been piling up and taking a toll. The fund had a horrible July, declining more than 2 percent, though it is still up about 4 percent on the year. That's hardly a standout performance at a time when equity-oriented hedge funds have been on fire, just like the Standard & Poor's 500.

The latest bit of bad news comes from his long-running battle to effect a turnaround at JCPenney. Pershing Square, which owns about 18 percent of the embattled retailer, "has been embroiled in a public battle with the retailer after he aired his concerns about the course of the company and the performance of its top management," notes Reuters.

Ackman demanded the ouster of Chairman Thomas Engibous and the replacement of interim Chief Executive Myron Ullman. But he was unable to push those changes through the board, leaving him apparently with no choice but to resign. It remains to be seen what Ackman will do with his large stake. He may lose the appetite to hold onto it. He just might decide to short it.

That would represent yet another massive short position, to go along with his Herbalife position, which has not been faring well. His battle to tank the company has put him at odds with several other big names, including Carl Icahn (his archnemesis), Dan Loeb, and even George Soros, who is long the stock.

The New York Post recently reported that Ackman filed a complaint with regulators against Soros' family fund, alleging the firm "broke insider-trading rules by tipping hedge funds about its purchases of shares in Herbalife."

Soros is now in the process of redeeming his less than $250 million in Ackman's fund.

For more:
- here's the article

Read more about: William Ackman
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By Jim Kim

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5. Probes of warehousing operations heat up

The New York Times does us all a favor by offering an article that connects the still-lingering residential MBS meltdown with the Main Street economics. The issues that exploded in headlines over the years concentrated on the mechanics of deals and whether there was adequate disclosure, as more of these deals blew up. But these products were built with mortgages of everyday folk. And their stories have often been swept up and forgotten amid the macro legal and financial issues.

The Times tells the "story of one of those bonds, GSAMP Trust 2007 NC1."

The name is "gobbledygook." But the pros will tell you that "GS" stands for Goldman Sachs. As for the "NC," it stands for New Century, which will ring a bell with many. It was among the most aggressive subprime lenders at the peak of the housing frenzy, but that obviously couldn't last. The firm was quickly discredited---and delisted from the NYSE as early as 2007.

But it made a lot of loans at the height of its business, and in the eyes of many customers, it was a god send, enabling the America Dream. Every loan that became part of the MBS has a rich back story. Some loans imploded. Some were modified. Some are still hanging on.

And guess who owns it? Would it shock you to learn that it's now the government that owns it. Fannie Mae was an investor, and when it imploded, the government assumed ownership of its assets.

For more:
- here's the article

Read more about: mortgage backed securities, MBS
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By Jim Kim

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