The 5 Dumbest Things on Wall Street: Aug. 20

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5. The Federal Mortgage Program -- Almost as Successful as the Titanic!

Homeowners drowning under the weight of high mortgage rates and a plunging economy are finding that their rescuer has arrived in a leaky boat without a life ring -- or even a pair of arm floaties. And the lifeline the government did manage to throw out was, apparently, too knotted and twisted for homeowners to untangle.

Indeed, the Obama administration's $275 billion "Making Home Affordable" program was billed as having the potential to reach up to 9 million troubled homeowners, according to initial estimates. Instead -- according to a weeklong series in The Street this week -- paperwork delays, confusion over eligibility requirements and the hesitance of banks to participate has left millions out in the cold.

President Obama unveiled the "Making Home Affordable" program in February 2009 as a solution to a mortgage crisis that had clearly spiraled out of control. The most recent report on the program, from June, found it to be falling far short of its stated goals.

According to the report, just 24% of borrowers eligible for a federal mortgage-modification program have received permanent mortgage modifications. And while 1.6 million homeowners were eligible as of the last report, more than half a million had abandoned the program, seeking other solutions or falling victim to the housing market's collapse. Others have been excluded because properties are vacant, or because owners earn too much money, don't owe enough money or haven't seen home values plunge far enough.

Adding injury to insult, since the program's inception, nearly 6 million homes have received foreclosure filings, according to RealtyTrac -- despite a foreclosure-moratorium that predated the program and lasted through March.

Fewer than 390,000 homeowners are now in permanent mortgage modifications through the Home Affordable Modification Program. Meanwhile, nearly 530,000 participants have canceled mortgage modifications.

Let's put it all another way: Roughly 24% of all borrowers eligible for the mortgage modification have received mortgage modification; by comparison, in 1912, almost 32% of the passengers aboard the Titanic when it struck an iceberg in were saved. There must be a metaphor in there somewhere -- something involving "underwater mortgages" and "sinking ships" and "perfect storms," perhaps?

4. Smartphones ... Dumb Pricing

The arrival of Research In Motion's BlackBerry Torch once again raises a significant question for the buyers of smartphones: Is it really worth saving up, rushing out and waiting in line for a new phone that's just been launched? These days, those that do so face a high probability of feeling ripped off shortly thereafter.

iPhone owners have felt this way before, watching the price of their iPhone plummet like a penny stock as Apple launched the next generation version before the previous generation version even had a chance to go out of style.

More recently, customers who paid $199.99 at an AT&T store (AT&T is Torch's exclusive carrier) for Research In Motion's new touch-screen BlackBerry Torch with a slide-out keyboard and two-year contract -- launched on Aug. 12 -- may have been surprised, if not appalled, to find out about the much cheaper $99.99 Torch that Amazon has been offering.

Currently, Best Buy and RadioShack sell the Torch for $199.99, while Wal-Mart offers the phone for $179.99 with a two-year contract.

If there's anything for consumers to learn from all this, it's that they might want to hold off on buying a new phone until they've done some proper investigative research. It's not like those Blackberries are going stale.

And if there's anything for the smartphone providers to learn, it's this: Keep proving that the price points on your products are random and fleeting, and you might soon discover that your consumers will stop paying a premium for the privilege of feeling fleeced.

3. Government Skims the Surface on the BP Oil Spill

The federal government took its first crack at post-oil spill policing of the oil and gas industry this week. The report managed to highlight just how messed up the Minerals Management Service process for approving new deepwater wells has been, and how ridiculous were the statements from BP about preparedness for an oil spill that received the blessing of the federal government.

Still, in redressing the wrongs of the oil and gas industry and Minerals Management Service -- now nicely rebranded as the Bureau of Ocean Energy Management (and you thought rebranding was just for tobacco companies and private defense contractors) -- the Obama administration oil spill review left much to be desired when it came to more adult concepts like taking ownership and responsibility.

The report's authors seemingly went out of their way to assure readers that nothing less than "robust" discussions were taking place, well, everywhere. The authors refer to the generic environmental assessment completed in 2000 for all deepwater drilling as having featured discussion about potential oil spills that was "robust." Going further, the "robust" discussion in 2000 led the MMS to conclude that "more detailed investigation was needed."

Fast forward to footnote 107 in the oil spill review document and what has the robust discussion lead to?

Of five major studies completed between 2002 and 2008 that conducted more detailed investigation, the Obama administration oil spill review notes that the deepwater environmental impact statement and environmental assessment specific to the BP lease sale did not incorporate any of the subsequent studies for which the robust discussion in 2000 sounded a trumpet call.

The Obama administration oil spill review document provides a wealth of detail on MMS processes and recommendations for best practices. Still, it refuses to take the extra step of calling a messed up regulatory agency a messed up regulatory agency.

The government is wearing the white gloves in reviewing its own defunct MMS, and focusing on the "robust" future of the BOEM. We expected nothing but legal evasion for Tony Hayward and BP. Perhaps we were foolish to have expected more of the government.

2. Gross Margins: Taxpayers Hold the Bag; Fat Cats Boost Bottom Lines

Bill Gross, the high-profile market sage and manager of the world's biggest bond fund, wants some guarantees -- and he's not above dropping some not-so-subtle threats to do so.

Gross recently made some provocative comments that stand to severely impact the $10 trillion mortgage-backed securities (MBS) market. Apparently, if the government stops standing behind MBS, Gross will stop buying them for his $234 billion PIMCO Total Return Fund.

"Without a government guarantee, as a private investor, I'd require borrowers to put at least 30% down, and most first-time homebuyers can't afford that," Gross told the Financial Times.

At the moment, the housing system is structured such that mortgage lenders operate in an "originate to sell" model. They retain relatively little exposure to the loans they originate. The debt is mostly securitized, chopped up and passed along to the bond market.

A proposal in the financial-reform bill that will force banks to retain just 5% of the mortgages they shove off to investors received a significant amount of pushback and stands to freeze up lending even more. Major lenders like Bank of America , Wells Fargo , JPMorgan Chase and Citigroup have already stopped originating mortgages that aren't backed by the federal government. That's because investors like Gross won't touch the other stuff today.

Therein lies the main problem with the housing-finance system: Taxpayers are left holding the bag when the system goes bust, while investors like Gross are relying upon a government guarantee to boost their bottom lines.

Before issuing his veiled threat via the FT interview, Gross had spoken with another publication, saying he had moved more assets into Treasury bills because of deflation. According to him, "deflation isn't just a topic of intellectual curiosity; it's happening."

That's a curious statement for a market sage to make considering that government statistics show that, at best, it's questionable that deflation is about to happen. The last time prices moved more than half a percentage point over a month's time, on a seasonally adjusted basis, was June 2009, when they rose 0.7%. On an annualized basis, prices have been going up steadily for the past eight months. Taking volatile commodity prices out of the mix paints an even more inflationary picture.

People listen to Gross, they want to know what he thinks, and they want to follow his lead in making investment decisions. But if the financial-reform bill showed anything, it's that power brokers and lobbyists aren't setting the agenda in Washington the way they once did -- even if they still set the agenda in the market and in the press.

1. For-Profit Schools: Profiting at Our Expense

The situation went from bad to worse for the for-profit education sector this week. This first punch came earlier in the month when the when the Governmental Accounting Office (GAO) released the details of an undercover investigation showing questionable recruiting practices from the for-profit sector.

Across the nation, there are about 2,000 for-profit colleges eligible to get federal student aid, and their enrollments have grown far faster than traditional higher-education institutions. The aggregate market capitalization of 14 publicly traded corporations in the for-profit school space was $26 billion as of July 14, according to the U.S. Government Accountability Office.

Their students got more than $4 billion in Pell Grants and more than $20 billion in federal loans last year from the Department of Education. In summary, a $26 billion-plus industry benefits from $24 billion of government largesse and loans each year. And yet, it was only this month that any serious effort was made to determine if this was federal money well spent.

Data prepared for the Department of Education by the non-profit Institute for College Access & Success shows that Corinthian Colleges, Career Education and the Washington Post's Kaplan have schools where fewer than 20% of federal student loans are being repaid. Nationally, for-profit colleges trailed public and private non-profit universities by a wide margin, with only 36% of students repaying loans, versus 54% at public universities and 56% at private non-profit schools.

James Maher, an analyst at ThinkPanmure, said Senate hearings and the GAO undercover report served to compound the revelations about the student loan repayment rates. Even though there seemed to be a sign of relief just a few weeks ago in the for-profit educations sector, "the mood has darkened and the fears have intensified again," Maher said.

Sky-high tuition costs, misrepresentations about salary expectations, the con-artistry used to ensure that students qualify for loans and the shuck-and-jive tactics used to keep them away from financial advisers until after they sign on the dotted line makes the likelihood of default far from surprising.

That's where our wallets get raided. When students don't make payments on their federal loans, the federal government and taxpayers assume nearly all the risk and are left with the costs. Students who default suffer from a poor credit record, which makes it difficult to obtain auto loans, mortgages and credit card.

Now, of course, jolted by the GAO report as well as its own findings, the Department of Education is pledging to hire more investigators and measurably increase the number of investigations related to for-profit schools. Education Secretary Arne Duncan has publicly said "the unethical and potentially illegal practices uncovered" are "unacceptable."

Just as unacceptable? How taxpayers and students have, for so long, been taking a loss ... in the name of a profit.

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