Sunday, August 26, 2012

The Illogic of CoreLogic

Even Einstein couldn't figure it out

The Illogic of CoreLogic

It doesn’t make sense. Why would a troubled company whose main business is supposed to be advising others on whether or not to buy or sell mortgages, why would such a company itself go into the business of buying and selling mortgages when it itself was apparently a high risk company that those in the mortgage field should be wary of?  Core-Logic, in other words, was in a Catch-22 situation. If CoreLogic was doing its job properly it would  have warned itself that  CoreLogic was a risky company to be doing business with.  

First American, CoreLogic’s predecessor  had a troubled history. That may be why it rebranded itself with the awkward name of one of the companies it had acquired, CoreLogic. Two prominent officers of First American helped give the corporation a bad name. The septuagenarian director of First American, D. Van Skilling, was rumored to no longer have his Midas touch, and after CoreLogic lost $66.5 million in 2011, the second consecutive year of red ink, there was a board shakeup and Van Skilling announced his retirement. Then the chief financial officer of First American/CoreLogic, Anthony “Buddy” Piszel, resigned under a cloud in February, 2011, after it became known that he was under investigation for possible wrongdoing when he had been chief financial officer of Freddie Mac, the controversial quasi-governmental agency that had been accused, at least by Republicans, of helping bring about the so-called Great Recession. It did not help Piszel’s reputation, or First American/CoreLogic’s either, when his replacement at Freddie Mac committed suicide. The liberal online tabloid, the Huffington Post, reported that Piszel, while at Freddie Mac, instead of behaving like a Certified Public Accountant, had been living it up in a luxurious Maryland shore home, of which it provided a provocative  photo spread, not of nude women but of old money country club opulence. What  is expected above all of CFO’s, many of whom are glorified Certified Public Accountants, is financial probity, not profligacy. But Piszel proved to be a Jet-Setter in CPA clothing. “Some of the fancy toys on the property,” the Huffington Post pointed out, “include a $230,000 38-foot Fountain Sportfish Cruiser, ironically named ‘A Better Decision,’ powered by three fuel-sucking outboard engines, two high-end Jet Skis, a house Jeep and a few horses.” But the stock market crash that precipitated the Great Recession turned Piszel into a pretzel financially and  put his palatial coastal pad into the hands of a real estate agent. The asking price was just under $5 million.

Instead of improving its image, First American’s rebranding of itself as CoreLogic made it only worse. One handicapper estimated online that CoreLogic had almost a four-in-ten chance of going bankrupt in the next two years, offering the following colorful chart to illustrate its precarious predicament.

One of the problems at CoreLogic, the same handicapper explained, was  the ratio of assets to debts, as the following chart illustrates:

       Since the housing market has improved slightly in the last two quarters, so presumably has CoreLogic’s financial position, but it is not out of the woods yet, far from it, as the graph below, taken from the company’s most recent annual report makes clear, but only if you focus on the CoreLogic line, 
which shows that $100.00 invested in 2006 would have been worth only $60.00 at the end of 2011, a 40% loss. Highfields Capital, of  Boston, was CoreLogic’s unhappy, second biggest shareholder. Since Highfields was an $11 billion dollar company, it would have  invested closer to $10,000,000 than $100.00, and stood to lose not $40.00, but closer to $4,000,000.

            All these charts and figures may not have anything to do with the price of tea in China, but they probably have a lot to do with the price of mortgages in Portsmouth, where homeowners carry more CoreLogic mortgages than with all the other mortgage companies combined, by a roughly eight to one ratio, including such mortgage giants as  Bank of America and Wells Fargo. If First American is still in the mortgage business, you would not know it by Portsmouth, where it’s CoreLogic, CoreLogic, CoreLogic. It seems  illogical to me that  CoreLogic, a relatively small, financially troubled, faraway supposedly information-based company, the Portsmouth-focused branch of which is located in that odd little town of Westlake, Texas, carries the most mortgages in Portsmouth. The who, the why, and the how of it all is a mystery I will delve further into in my next post on the subject. 

Tuesday, August 21, 2012

Portsmouth, Ohio, and Westlake, Texas

[Portsmouth] politicians, like Jesse James, have been holding up tax payers,
especially homeowners, for a long time.

A Comparison of Portsmouth, Ohio, and Westlake, Texas

This is a tale of two cities, Portsmouth, Ohio, and Westlake, Texas. In most respects the two seem to have  nothing in common, but as I will show in a later posting, there is an important but somewhat puzzling link between Westlake and Portsmouth.
Among the things Portsmouth and Westlake don’t have in common is age. Incorporated in 1815, Portsmouth is almost two hundred years old. When Westlake was incorporated in the late 1950s, Portsmouth was already a hundred and sixty years old. Another thing they don’t have in common is population. The population of Portsmouth, though it has been shrinking for about a half century, is just over 20,000, which is twenty times larger than Westlake’s 1,000. But don’t judge a city’s vitality by the number of residents. Many Portsmouthers are old (like me), unemployed, and unemployable. A  number of them are on welfare. Westlake by contrast is known for the number of its residents who are millionaires.  In 2011, Forbes Magazine concluded that Westlake, with a median annual household income of $250,000, was the richest community in America. The estimated per capita income in Westlake is $125,000. The median household in 2009 was about $251,000.

Portsmouth, on the other hand, is one of the poorest cities in Ohio. The estimated per capita income in Portsmouth in 2009 was $17,089. In the last five years the median price of houses sold in Portsmouth, where the real estate market, like the local economy, has been sluggish for about a half century,  was about $60,000. In Westlake the median price of houses is just over $1,000,000. The unemployment rate in Portsmouth is currently at about 12%. The unemployment rate in Westlake is 6.3. (Before the Great Recession  hit in 2009, unemployment in Westlake was only 4.3.) In 2009,  33% of Portsmouth’s population lived below the poverty level. You would have trouble finding anyone in Westlake below the poverty level.

    The top employers in Westlake are financial services, with Fidelity Investments, the international financial conglomerate (headquartered in Boston) being the number one, and CoreLogic (aka First American) the number two employer. Westlake has no industry to speak of and is proud of it, boasting of its rural character, “an oasis with rolling hills, grazing longhorns, and soaring red-tailed hawks,” an oasis interspersed with “vibrant corporate campuses,” according to its official website. Westlake’s motto is “A premier knowledge-based community.” In keeping with that motto, corporations have campuses. There is the TD Auto (formerly Chrysler Financial Services) Campus; Fidelity Investment Campus; Solana Corporate Campus. The First American and CoreLogic “campus” is located on Campus Circle. This is academia with an acquisitive twist, because it’s all about money. Most employees in Westlake work with their heads rather than their hands, and their heads are good with figures.

Comparative Crime Rate Indexes for Westlake and Portsmouth

If there were a category for illegal drug use, and Oxycontin in particular,
 Portsmouth would be off the charts.

A comparative study of the 2010 crime rates of Westlake and Portsmouth are startling. You are eight times more likely to be the victim of a crime in Portsmouth than in Westlake, and you are sixteen more times likely to have your home or automobile broken into; five times more likely to be raped; and nine times more likely to be murdered in Portsmouth than Westlake. The burglary rate in Portsmouth as long time residents know is much higher than statistics indicate, because many burglaries go unreported, some victims feeling it’s a waste of time, because the police force—at least under chief Charles Horner—hardly seemed interested. If there were a category for illegal drug use, and Oxycontin in particular, Portsmouth would be off the charts.There was a mix-up in online national news when it  was reported that a suspicious character with a weapon arrived at a movie theater in Westlake a half hour early and sat in the back where he was suspected of positioning himself as if at a shooting gallery. It was assumed it was Westlake, Texas, perhaps because Glenn Beck had put the town in the news, but it turned out the town in question was Westlake, Ohio, just outside of Cleveland.

      As if Portsmouth’s crime statistics were not bad enough, an algorithm used by measures another kind of crime: hate crime. According to, hate crime in Portsmouth is twenty-two times the national average.

Crime Doesnt Pay in Westlake

Statistics indicate the crime rate in Westlake, Texas, is negligible. The chief law breakers in Westlake appear to be drivers. Westlake collects more traffic fines per capita than any other town in Texas. Portsmouth might help resolve some of its financial problems if, like Westlake, it cracked down on not just drug but also vehicular traffickers, of which it has plenty, including several on the city council. The streets of Portsmouth are more like the Wild West than the streets of Laredo. Concerned not about drivers but Occupy Wall Street radicals, Fox talk show host Glenn Beck sold his mansion in New Canaan, in the country club section of Connecticut, and moved his family to Westlake, where for $20,000 a month he rented a $4 million dollar mansion in a remote, gated, golf course development. He plans eventually to build a gated mansion of his own. If avoiding crime is his highest priority, he couldn’t have done better than Westlake or worse than Portsmouth, where the politicians, like Jesse James, have been holding up tax payers, especially homeowners, for a long time. By contrast,  Westlake’s local sales tax is only 1% and it was not until 2010 that it introduced its first property tax.

If crime doesn’t pay in Westlake, servicing Portsmouth’s mortgages does, as I will show in a future posting.

Wednesday, August 15, 2012

Ayn Rand's Dollar Mysticism (1963)

cartoon from

        Now that Mitt Romney has chosen Paul Ryan as his running mate, Ayn Rand (1905-1982), Ryan’s fascistic, rather kooky heroine, is in the news, with Ryan, donning Romney flip-flops,  repudiating his ties to her. She was in the news back in the early 1960s when Barry Goldwater was the Republican candidate for the presidency. Rand was credited with pointing Goldwater and the right-wing of the Republican Party down the libertarian, laissez-faire, anti-government path that it has been tripping down ever since. Nearly a half century ago, in 1963, I published a brief article on Rand in the final issue of a radical magazine that liked to think it was descended from the legendary The Masses. But the times they were a-changing, and William Buckley became the John Reed and the National Review the The Masses of the right. In “Ayn Rand’s Dollar Mysticism,” my point was that though Rand considered herself an atheist, I thought she had made a religion of the so-called Free Market. However much Ryan is now trying to deny it, Rand inspired Free Market Fundamentalists, like himself, who, a half century later, have seized control of the Republican Party in a coup orchestrated by Rupert MurdochWall Street Journal and the National Review.

Sunday, August 12, 2012

Charge-off Chicanery

“The Madame Gu of Portsmouth Politics.” 

Charge-off Chicanery

In a letter dated 16 July, 2012, Charles Barga of the state auditor’s regional office, in  Athens,  notified Portsmouth city auditor Trent Williams that the city’s latest state  audit, for 2011, revealed that the city had  continued to violate statutes  regulating accounting practices.  Barga reminded Williams that “Ohio Revised Code Section 5705.10H states that “monies paid into a fund must be used only for the purposes for which such a fund has been established.” He also pointed  out that in Portsmouth  “monies [are] being paid into funds and subsequently used contrary to their restricted purposes.” Williams has not been obeying those restrictions  for some  time.  Through a procedure that he puzzlingly  calls “charge-offs,” Williams has been making  what Barga calls “unallowable allocations,” that is he has been taking money from one fund illegally to pay the expenses of another.  Why? Apparently  in order to help pay the salaries and raises for  the mayor, the city auditor, the city solicitor,  and other city employees, including the fire and police department employees.   As a result, even during Portsmouth’s chronic periods  of financial shortfalls, the Portsmouth city auditor has used unallowable allocations to  help  pay salaries and provide raises, using funds, that is, “contrary to their restricted purposes.”
Williams calls the transfers he makes “charge-offs.” He considers them  allowable but the state auditor considers at least some of them unallowable. I have looked in vain in many dictionaries to find a definition of charge-off in the sense that  Williams uses that term. What hard copy and online dictionaries do say is that a  charge-off is an uncollectable or bad debt. For example, Wikipedia defines charge-off as “the declaration by a creditor (usually a credit card account) that an amount of debt is unlikely to be collected.”  Merriam-Webster traces this sense of the word as far back as 1892. Why does Williams misuse the word? Instead of calling an unaccountable allocation an unaccountable allocation, he calls it a “charge-off,” perhaps to fool taxpayers. He appears to be  misusing the word to try to cover up his  shady accounting practices. He may have fooled the public, but he has not fooled the state auditor. In the city’s 23 July response to Barga’s 16 July  letter, which has Williams name at the bottom, the word “charge-off”  is used thirteen times, but Barga had not used it even once in his letter to the city. I am assured by a Certified Public Accountant  that “charge-off,” in the sense that Williams uses it, is not a word that is part of the accounting lexicon, except when it refers  to an uncollectable debt. Williams should stop using the word “charge-off”  and say what he apparently means—namely “indirect costs” or what Barga calls  “allocation adjustments.” Indirect costs or allocation adjustments are legal, provided those who resort to them  prove they are warranted, which too often, according to Barga, is not the case in Williams’ bookkeeping. In  Williams’ bookkeeping,  “charge-offs” are the means by which he attempts to get  around the restrictions placed upon the city’s spending practices  by Ohio Revised Code Section 5705.10H.
Crux of the Matter

The crux of the matter, the point in dispute between the state auditor and Williams, is the city’s abuse of “charge-offs.” The city has used funds designated for sewers, water, street maintenance, etc. to pay salaries and benefits of other departmental employees. The result is that now many of those funds are in deficit positions and the infrastructure, for which the funds were supposed to be used,  are falling into disrepair. City water, sewer, and sanitation fees have increased steadily over the years to cover ever increasing salaries and benefits. In 2010,  over $1,000,000  was transferred from the water fund to cover salaries, overtime, and benefits of fire department personnel. Only the salaries and benefits of the water and sewer departments should be paid from the Water and Sewer Funds with a reasonable charge by the General Fund for administrative expenses. The city has used the charge-off methodology to justify the increase in water and sewer fees for years by charging fire department salaries and benefits  to the Water Fund and then passing the cost to the residents in the form of higher water and sewer fees. 
The amount of the charge-offs could not be justified by Williams, other than to say he has always done it that way. The first sentence of the city’s  letter (23 July 2012)  in response to Barga states, “The City of Portsmouth has used a system of payroll ‘charge-offs’  historically for as far back as at least 1993,” or about the time Williams became auditor, although it may be that cooking the books actually began when the notorious Tom Bihl was city  auditor. Regardless of when the illegal practice actually began, precedent is the main argument the city uses to justify these “charge-offs.” Not only in the first sentence, but on  page two of the city’s reply, the claim is made that “The City [in 2011] continued to use the same method [charge-offs] consistent with the past many years . . .” In the third and final page of the city’s letter, the claim is again made that “. . . the City has used a consistent methodology over many years” [emphases added]. In other words, the city has been doing it this way for so long (and getting away with it!) so Williams should be granted  some slack and not be required to change his methods immediately. But doing something wrong, unethical, or illegal for twenty or more  years doesn’t make it right or mean we have to put up with it any longer, does it?

Poisoning the Money Supply

In the New York Times (8 Aug. 2012) there was a report on  the  trial of Madame Gu Kailaithe, the wife of a prominent Chinese Communist official. She was convicted of poisoning a British businessman associate. Because she told the court there were extenuating circumstances—she claimed the British businessman had made threats against her son—she is expected to be spared the death penalty. The son is a student at Harvard’s  John F. Kennedy School of Government, so her claim seems specious. To my way of  thinking,  Trent Williams is the Madame Gu of Portsmouth politics. He is the poisonous auditor of  Portsmouth’s finances. He feels he should be granted a pardon and given more time to rectify any mistakes and balance the books.  Will the state auditor buy his argument? 
   First Ward councilman Kevin Johnson recently circulated an email reminding voters  that the City ended Fiscal Year 2011 with a deficit of $1.4 million, which the state auditor responded to by putting the city on Fiscal Watch. The deficit  projection for FY2012 is even more, $1,418,719. This is just the General Fund and does not include deficits in other funds such as Water and Sewer. At the beginning of 2012, the sewer fund had a $600,000 deficit, so, as usual, crooked politicians  in the Municipal Building city raised our sewer fees 10% to help cover the deficit.
The state auditor can place financially troubled municipalities in three  fiscal categories: Caution, Watch, and Emergency. Portsmouth was in Fiscal Caution last year, and now, even  after the city’s income taxes were increased it has moved on to the next most serious condition—Fiscal Watch. If the state auditor does not buy the convoluted excuses and veiled threat  of financial catastrophe in the city’s letter of 23 July,  Portsmouth may  be declared in Fiscal Emergency. But there could be a silver lining if that happens. If the city is placed in Fiscal Emergency, the State will take  over the finances of the city as it took over the finances of Scioto County, where there reportedly has been financial improvement. If what’s good for the goose is good for the gander, then what’s good for the county should be good for the county seat, Portsmouth.

Confucius Says 

 I have compared Williams to Madame Gu. A saying attributed to Confucius is, “Never seek illicit wealth.” Another could be, “Never resort to charge-off chicanery to hoodwink  taxpayers.”