Gabriel Libutti

Luxury real estate vultures A Fortress Investment veteran is now at an auction house that hopes to feed off of distressed estates. (Fortune Magazine) -- When an ex-managing director of hedge fund Fortress teams up with Sotheby's in a real estate venture, you know something funny is going on in the luxury residential market. But that's basically what happened last month when George Graham, formerly of Fortress's Drawbridge Special Opportunities Fund, joined a real estate auction house that works closely with Sotheby's (BID) International Realty and other firms to sell off luxury homes. Graham is CEO of Concierge Auctions, founded in 2006 by a well-connected broker in South Florida. The company is looking to make hay from an uptick in luxury real estate auctions. "There is a pipeline of multimillion-dollar properties that are underwater," says Graham. "In most of these areas the homes aren't selling. There's a multiyear supply." Concierge's pitch to a seller is simple: Your house won't sell on the open market for years. You may not get the price you want with an auction, but it's better to have an exit than to be stuck with the carrying costs on, say, a $20 million home -- or worse, enter foreclosure. (As Concierge's website puts it, "The times have changed. Change with them.") 0:00 /2:31Have a spare $20 million? But the real focus for Concierge is on the other half of the equation: the lenders, who in this segment of the market are increasingly looking for an exit too. Since the costs to the bank when a luxury home goes into foreclosure are so much higher than on a regular home, lenders are open to negotiating short sales, in which the bank accepts less than the amount of the mortgage. With home sales stalled, an auction is the fastest way to a price. "You get market value without dragging out the process," says Graham, who sees a "wave" of high-end mortgages headed for default. Concierge is hoping Graham's relationships with lenders from his years at Fortress (FIG) and, before that, investment bank Salomon Bros., will generate business from banks looking for an out. (Concierge takes a cut of the final sale.) In July the company auctioned off a Boca Raton, Fla., mansion owned by the head of private equity firm Royal Palm Capital Partners. The property was on the market for three years, cut from $24.9 million to $21.9 million. The final price won't be revealed until the deal closes, but it probably won't cover the mortgage, said to be $12.5 million. Either way it's money for the bank -- and Concierge Auctions

Builder confidence up, but tax fears loom An industry group says the nascent recovery in residential real estate could be derailed if a popular credit isn't renewed. NEW YORK (CNNMoney.com) -- An index of home builders' confidence rose in September for the third month in a row, but an industry group said Wednesday the fragile residential real estate market recovery could be cut short if a popular government tax credit isn't extended. The National Association of Home Builders said that its Housing Market Index, which it compiles for Wells Fargo, rose one point last month to 19 -- the highest level since May 2008. The index, which fell to an all-time low of 8 in January, has increased steadily in 2009 as the housing market picked up in many parts of the country. According to NAHB, the rebound in builder confidence is largely due to a temporary tax credit that the government created last year for first-time home buyers. Low mortgage rates and rock-bottom home prices also helped boost confidence, the group says. The credit, which can be as high as $8,000, was established as part of the government's economic recovery act to help stimulate demand and revive the battered housing market. As the market begins to show some sings of life, however, builders are becoming worried that the credit, which is set to expire Nov. 30, will not be renewed. "The window is now basically closed for being able to start a new home that can be completed in time for buyers to take advantage of the tax credit," said Joe Robson, NAHB's chairman and a home builder from Tulsa, Okla, in a statement. "Builders are concerned about what will keep the market moving once the credit is gone." To that end, the index component that measures builders' expectations for sales in the near future fell one point in September to 29, after rising for five months in a row. More than 1.5 million taxpayers are expected to claim the credit, according to an NAHB spokeswoman. Meanwhile, the National Association of Realtors said earlier this month that the credit has already brought 1.2 million new buyers into the market, including 350,000 buyers who would not have purchased a home without the credit. White House press secretary Robert Gibbs said Wednesday that the Obama administration is evaluating how the tax credit has impacted home sales and could recommend that the President extend it. While the tax credit has helped stabilize the housing market, falling home prices are the real reason why sales have begun to rebound, according to Mike Larson, real estate and interest rate analyst at Weiss Research. "I believe the tax credit is the icing on the cake of this housing market recovery, not the cake itself," Larson said in a research report. Indeed, a government report released earlier this month showed that roughly 315,000 people have claimed the tax credit so far. However, industry analysts point out that those figures reflect a small portion of homebuyers who could ultimately claim it. For buyers interested in taking advantage of the credit, time is of the essence. Because it usually takes around 90 days to close on a house after a contract is signed, buyers have very little time left to act. As of Sept. 16, 78 days remain before the credit ends. In addition to uncertainty about the tax credit, builders are also wary about a "critical lack of credit" for new home construction projects and ongoing problems related to appraisals that NAHB says are sinking one quarter of all new-home sales. "These concerns need to be addressed if we are to embark on a sustained housing recovery that will help bolster economic growth," said NAHB chief economist David Crowe, in a statement

Where are the subprime perp walks? Three years after the housing bubble popped, prosecutors have yet to bring a major case tied to the subprime fiasco. What gives? NEW YORK (Fortune) -- Where are the perp walks for the subprime mortgage executives that dragged us into this mess? Three years after the housing bubble popped, federal prosecutors have yet to bring a case against the executives whose firms took part in some of the worst excesses of the subprime mortgage market. It's not like there's a shortage of abuses to investigate. The landscape is littered with the wreckage of financial institutions that crashed under the weight of bad loans, costing shareholders and taxpayers billions of dollars. "Many" lenders that went bust were cooking their books before they collapsed, according to a 2007 FBI report. Meanwhile, top officers at many mortgage shops were pocketing hefty paychecks and stock sale proceeds. And though it may be early to judge the law enforcement response -- corporate fraud cases can take a long time to assemble, thanks to their complexity and limited enforcement resources -- some observers are nonetheless struck by the lack of high-profile prosecutions. "The perp walk has been remarkably absent during this crisis," said Steven Ramirez, a law professor at Loyola University Chicago, referring to the practice of parading a criminal defendant before the press on the way to court. "I don't think it's because of a lack of criminal activity." Trivial pursuit? Bank reports of mortgage fraud have quadrupled since 2004, according to FBI data. The agency says 80% of mortgage fraud loss cases involve industry insiders, and the cost of the cases it kept track of last year was well in excess of $1 billion. The Justice Department and the FBI have reported some success in bringing some low-level fraudsters to justice. Prosecutors in California last year indicted six people in a scheme to defraud Long Beach Mortgage, a subprime mortgage shop that was part of Washington Mutual, the giant Seattle-based lender that collapsed last year and was acquired by JPMorgan Chase (JPM, Fortune 500). One defendant was sentenced to 15 months in prison and four others entered guilty pleas, Justice said. One participant in the scheme was a Long Beach employee who received $100,000 for making sure the firm funded fraudulent loans, the Justice Department said. But some students of white collar crime are skeptical of the notion that the big subprime lenders were primarily victims of mortgage fraud. Prosecuting low-level cases without holding highers-up accountable risks "trivializing" white collar crime -- and paving the way for the next round of financial shenanigans, said Henry Pontell, a criminology professor at the University of California at Irvine. "We really have learned no lessons from the savings and loan crisis," he said, referring to the wave of bank failures in the 1980s that led to a number of notable fraud convictions. "The most germane one is that fraud plays a central role in these episodes. It acts as an accelerant for financial bubbles." The only major criminal prosecution to come out of the financial crisis so far is a case due to go to trial next month against two former Bear Stearns hedge fund managers who are accused of securities fraud. The biggest civil enforcement action is one the SEC filed in June against Angelo Mozilo, the former CEO of mortgage lender Countrywide. The SEC accused him and two other Countrywide executives of insider trading and securities fraud, contending they misled investors by claiming Countrywide was lending prudently when it was making loans Mozilo himself labeled toxic in an internal email. Mozilo's lawyer called the allegations "demonstrably false." Mad as hell Pontell says proof that fraud was rife at the big subprime mortgage houses resides in the lenders' files. Questions about borrowers' income or assets were answered, in some cases, by taping computer-generated figures to blank, pre-signed documents. "These people were so brazen, they never bothered to take the cut-and-paste documents out of the files," Pontell said. "Arresting those guys is like catching the fish that jump into the boat." But as shameless as the mortgage fraud might have been, connecting back office corruption with the executive suite isn't easy. "The problem is finding the executives' fingerprints on the consumer files," said Peter Henning, a law professor at Wayne State University. "Angelo Mozilo may have set the tone at Countrywide, but there is no way you're going to find his fingerprints on any of those mortgages." 0:00 /3:52Suing a broken bank Countrywide -- now owned by Bank of America (BAC, Fortune 500) -- and some of its former hard-charging subprime competitors are also dealing with a wave of private civil suits. New Century Financial, once the No. 2 subprime mortgage originator, filed for bankruptcy in April 2007 after admitting that its financial statements weren't correct. A judge last year allowed a securities fraud class action against it to proceed after noting "a staggering race-to-the-bottom of loan quality and underwriting standards." Two of the firm's three co-founders made millions selling shares in the year before the firm's collapse. A third co-founder, Brad Morrice, who was CEO when it filed for Chapter 11, made $8.3 million in salary and bonuses between 2003 and 2005, the latest years for which data are available. Morrice is now managing partner at consultancy Cypress Strategy Group. The firm's web site bears the slogan "I'm mad as hell and I'm not going to take it anymore." No stomach Complicating matters for prosecutors are the rising demands on the Justice Department since the Sept. 11 terror attacks. Corporate fraud prosecutions have fallen by two-thirds since then, according to Justice Department data tracked by the Transactional Records Access Clearinghouse at Syracuse University. "There has not been a lot of stomach for bringing big cases," said Ramirez. He said he was surprised that the Obama administration hasn't been more aggressive in prosecuting financial crimes. The Justice Department rejects that critique. A spokesman notes that regulators have successfully prosecuted admitted investment fraudster Bernie Madoff and are pursuing a case against alleged bank swindler Allen Stanford, who was arrested in June. But Pontell notes that unlike the S&L cleanup, which was funded by the passage of the Financial Institutions Reform Recovery and Enforcement Act, this crisis has brought no round of new money for the enforcement agencies from Congress. That means the battle against what he calls the starched white collar criminals is competing for scarce resources with the wars on terror and drugs, among other things. And this battle is taking place while the still powerful banking industry is lobbying to keep regulation and oversight at low ebb. Ramirez said that if Congress doesn't loosen up the purse strings for stronger enforcement, the bill for the next scandal could be even bigger. "People say bringing these cases is expensive," said Ramirez. "But when you have laxity in law enforcement, the costs are off the charts."

No summer fun for America's lobster fishermen Eric Wahlgren Sep 5th 2009 at 10:00AMText SizeAAAFiled under: Economy More In case you haven't heard, there's something of a crisis going on in the coastal waters along America's Eastern Seaboard. No, it's not the Russian sub that spooked U.S. defense officials when it patrolled the area last month. The problem is that a big drop -- 30 percent in some cases -- in lobster prices is pushing many of the fishermen who trap the clawed crustacean toward financial ruin. The Labor Day holiday amounts to a moment of reckoning for the trappers, as it unofficially marks the end of lobster bakes and lobster rolls, at least for a while. "In the mind of the public, the summer is over," says Bill Adler, executive director of the Massachusetts Lobstermen's Association. "The thought of eating lobster sort of dwindles for consumers." Adler says wholesale prices for lobster in the Bay State have fallen from about $4 to $4.25 per pound last year to currently about $3 to $3.25 a pound -- a level not seen in a decade. He says $4 a pound is the break-even point for the fisherman, as they've got to pay for bait, fuel, insurance, dockage fees and other expenses. "With the price right now in the $3-per-pound range, they can't meet their bills." With the next big lobster-eating season not until the end of the year -- "Europe goes wild for lobster for Christmas and New Years," Adler says -- lobstermen are getting creative about ways to maintain demand. For example, Adler has been lobbying the Massachusetts Governor and Legislature to declare October 7 "Massachusetts Lobster Day." "It's a chance to get lobster back in peoples' minds in between Labor Day and Christmas," he explains. But so far, the plan to claw back a market for the delicacy in the down period hasn't been successful. "They want money, which we don't have," he says. Historically, lobster has been known as a "celebration" food, to be enjoyed on grand occasions with fine wine and good company. But the global economic meltdown has forced many consumers to curb their spending, especially on non-essentials. The lobster biz has suffered, just as have champagne sales and demand for sparkly jewels at Tiffany & Co. In Maine, the biggest U.S. producer of lobster, with 68 million pounds harvested last year, the fact that consumers aren't ordering up as much lobster has led prices for the hardshell variety to decline to $3.25 per pound in the spring, from a more usual $5 per pound, according to the QSR Magazine, which covers the restaurant industry. "I call it the slow death," Brian McClain, vice president of the Maine Lobstermen's Association tells the publication. Massachusetts, which harvested about 11 million pounds of the bony animal last year, like other states also faces strong competition from Canada, the world's biggest producer, Adler says. But despite the wholesale price declines, Adler says it's unclear whether U.S. consumers are really seeing the benefits when it comes to cheaper lobster on restaurant menus. Instead, he continues to see lobster entrées priced over $20. "A $12.99 lobster dinner would be more reasonable," he says. With supply not a problem, lobster fisherman have thought about campaigning to make the food considered more of an everyday staple rather than something that's more of a splurge. But even though that could shore up demand, the move might mean the fishermen could never raise the price to keep apace with their rising expenses, he says. "You don't want it to become everyday bologna," he says. In one corner of the world at least, Larsen's Fish Market in Menemsha on Martha's Vineyard, lobster sales are brisk. Owner Betty Larsen expects to sell more than 1,800 pounds of the stuff by the end of the Labor Day weekend. "It is supposed to be a great weekend," Larsen says. "It is supposed to be the last hurrah." Unfortunately, that is exactly what lobster fisherman are afraid of.

IRS mining mortgage and UBS data to find tax cheats UBS (UBS) data won't be the only data used to find tax cheats. Thanks to a report by the Treasury Inspector General for Tax Administration (TIGTA), called "Mortgage Interest Data Could Be Used to Pursue More Nonfilers and Underreporters," the IRS plans to start looking at how it can use Form 1098 mortgage interest statements to catch tax dodgers. TIGTA auditors found that many people pay significant levels of mortgage interest, yet they are not filing tax returns or filing returns indicating that their income is not sufficient to cover their mortgage obligations and basic living expenses. The report recommended that the IRS explore the possibility of making greater use of data from mortgage interest statements to pursue tax evaders. "Information reporting is a key component in IRS compliance programs that are designed to detect and pursue noncompliant taxpayers who underreport income, overstate deductions or fail to file tax returns," said TIGTA Inspector General J. Russell George in a statement. "Individuals who fail to file required returns and/or underreport their income create unfair burdens on honest taxpayers and diminish the public's respect for the tax system." In a related story, the IRS decided to shift the audits of wealthy Americans suspected of offshore tax evasion to its elite division that examines businesses. The IRS filed the formal request for data on 4,450 UBS clients with the Swiss as part of the agreement that ended the lawsuit between the IRS and UBS. This is in addition to the 250 names already received after the successful settlement in February with UBS. In fact, Bloomberg reports that the IRS posted internal job listings on Monday seeking auditors to work for a newly created office within its Large and Mid-Size Business division that will monitor what the IRS called the "global high-wealth industry." Clearly the IRS intends to aggressively use the data from UBS to catch bankers and lawyers who've helped wealthy Americans evade taxes, as well as the tax evaders. We've all known for years that many wealthy Americans use sophisticated schemes to avoid taxes. Some of those schemes are legal and some are not. Finally the IRS is starting to find ways to expose those using illegal methods to avoid paying taxes. Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Tax Breaks and Deductions."