Friday, December 31, 2010

brain washed by lenders and the government revised

 Revision of post from several months ago. 

Americans Have Been Brainwashed by the Government and Financial Institutions.
This is one more story that reveals the manipulation of the financial system by Wall Street and Washington.  It also highlights the failure of the government to protect the rights of individuals from white collar crime.
Monthly changes in the currency component of t...Image via WikipediaThe banks and the federal government were very wise in there implementation of the onerous psychological strategy used to “lock” in place the moral burden onto American citizens that says under no circumstance is one to walk away from their debt obligation on a mortgage. The collusion of banks, government and the media tirelessly worked to place the fear of shame and chastisement on to any homeowner who dare consider strategic default or otherwise.

We could argue that this was in the best interest of the country but really it was just in the best interest of the banks and money lenders. Although, the system worked rather well as long as the federal and state governments were able to keep a handle on the rate of inflation.
If the money supply was kept at a reasonable level the economy would have its normal ups and downs but there would be no unreasonable appreciation or depreciation in real estate prices. The exception would be the few boom and bust areas that have had extreme pricing fluctuations over the years. The best examples would be California, Florida and the Texas gulf coast that was up and down with the boom and bust of the oil exploration.
As long as we had a federal reserve that was not overly influenced by the banking system itself, it was likely that this method of economic stabilization could go on indefinitely. It would serve as a future method of taking pressure off of the “social security black box” as well as calming American’s fears of the devastation of another “great depression”. People were convinced to work hard, buy a home, pay 3 to 4 times what it was worth in interest and then recover about ½ of what they paid overall when they sold their home upon retirement.
The Banks were getting fat and the government was getting a reasonable calm and non-revolutionary population that was content with these terms. People came to believe that paying your mortgage was an honor and a privilege. Defaulting on a mortgage, unless you were in extreme distress was extremely taboo.

Over time paying down a mortgage looks reasonably good if you stayed in your home for 10 or 15 years. The ability to pay the same as you would for rent while having the boost of pride people felt as “homeowners” seemed to make this a workable arrangement even though the banks benefited far greater in terms of return than did individual owners. A map of the 12 districts of the United States...Image via Wikipedia

The banks used this manipulation to continually lower their capital requirements as both the banks and the government came to rely and the “moral and ethical” home owner. Over time, many people came to believe that increase or at least the stability in the real estate market was a normal part of the capitalist system. However, all the misleading information and manipulation lead to a false sense of security, undue pressure on families in times of crisis and extreme tolerance of risk that was taken by allowing banks to become under capitalized.

Slowly but surely the big banks and the Wall Street elite came to realize that this stable and consistent market could lead to some ridiculous wealth if it could be exploited. It would just take a few of the right players to get into office at the right time. We began to see the creation of the “greatest real estate depression” in history as we moved into the 21st century.

The banks count on people moving every 7 years. They amortize mortgages so the first seven years is nearly all interest. This is just another example of how our capitalist system has changed into pseudo capitalism. The pseudo capitalism leaves the little guy out in the cold because of the tremendous influence the bankers have on policy always leads to more favorable policy for the banks.

A number of factors would eventually lead to repeated mistakes by the Federal Reserve that would drastically increase the money supply. Interest rates were kept far too low for far too long as growth and expansion of the economy became the North Star guiding fed policy.

Organization of the Federal Reserve SystemImage via WikipediaAfter we suffered the tragic events of September 11, 2001 our reliance on excessively low interest rates strengthened. It was more circumstance than deviance that prodded the reserve chairman to opt to keep interest rates at “hot” levels. As patriots many of us could argue little with this strategy that was one way of boosting “morale” of the country. It was as if we made a pact with the devil at times of vulnerability. Politics has over taken common sense at the Federal Reserve and within a few years the “nuclear” housing race was in full effect.

I was extremely puzzled by the flow of money into the economy at such low interest rates. My opinion in discussions with friends was that the government had painted themselves into a corner with such low rates. It was promoting the unsustainable rise in home values. Wages and income were not keeping pace with the extremely quick rise in real estate cost.

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Secondary market. (factors influencing the secondary mortgage market) (column): An article from: Mortgage Banking

Thursday, December 30, 2010

The fox guarding the hen house?

I give my opinion after this quote. 

This was taken from The End of Cheap Money
"Economists have pointed to various causes for ultra low interest rates, which are a function of the supply of money (from savings) and the demand for money (from investment in productive assets). Fed Chairman Ben Bernanke suggested in 2005 that a "global saving glut" led by the likes of China was funneling excessive savings into the United States -- which helped inflate the housing bubble by keeping long-term interest rates low. "

Why would we believe Uncle Ben now? He was also spewing rhetoric about the mortgage melt down being contained in sub prime and alt a loans. He was way off the mark and his willingness to make this sort of commentary cost millions of Americans their life savings.

How about thinking about the reality of the money flow and that the low interest rates create a cycle of growth. Interest is the creation of new money. It can take the place of the fed dropping money from helos and it increases available money. Finance drives the capitalist system and our pseudo "free" market capitalism will whither without it.
 Year-on-year percent changes in the United Sta...Image via Wikipedia
 Increasing interest rates will bring the economy to a halt very quickly. We have made the decision to live and die with consumer spending. We really have little choice now because the obsession with growth will not allow companies to manufacture items in the US when they can have it done in china for 1/10 of the price.

Encouraging people to save will not increase the money supply enough to drive the economy. The tiny bit of interest banks are paying for savings accounts will do nothing to increase money supply or consumer spending. If the economy must learn to live with higher interest rates and tighter credit there will have to be massive deflation of all products.
Money-supplyImage via Wikipedia 
Lumber is the perfect example. If housing prices are to be in the proper price range to allow affordability at much higher interest rates, prices of all housing material will have to come down drastically. It is hard to get something like this to happen. It is just like shutting the barn door after the horses are out.

We have lost the main ingredient to American prosperity. Our government let the people down by allowing the financial companies to manipulate the system to their benefit. Instead of looking out for our interests, the government has decided the smart thing to do was to get in bed with the CEO's of all the companies that drove the economy into the ground. Now the deck is stacked in favor of a few and supported by the White House.

The reason we had growth in jobs and an increase in money supply was because of the housing industry. This industry created jobs for millions of people, it generated the need for mortgages which created interest that increases money supply and leads to easier access to funds which allows more people to pay more interest. The housing collapse had nothing to do with people that couldn't afford homes. It had everything to do with the fraud and manipulations by those in charge of the system. This was all done with a wink and a nod to the government. Individual Consumer Loans at All Commercial Ba...Image via Wikipedia

The government has become one with the financial system and they seem hell bent on doing nothing for those people who deserve the help. If we keep seeing the behavior of the banks being allowed regardless of the damage they do we will not recovery from this major recession. The housing industry was the driving so many industries that they can not be replaced. The government knew it was important for more people to buy homes because it was the only thing giving them a return on their money and a tax break. They blindly went along with anything that drove the industry higher but they failed to see the abuse and fraud going on with mortgage backed securities. They didn't see the obvious or they didn't want to see it because the money from lobbyist and campaign contributions easily converts politicians to elitists.  Politicians have developed their own sense of entitlement and it has become the norm in Washington.
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Wednesday, December 29, 2010

Depression may be the reality of the economy regardless of the spin

Washington's Blog has a great article regarding the fragile nature of the economy and the effort to fool the voting public into believing we are not experiencing a great depression. 

Washington makes case that we are in a depression at Washington's Blog

In addition, the percentage of Americans who owned houses during the 1930s was much lower than today, which means that a larger portion of the public is being hurt from falling home prices today as compared to the Great Depression.

Meredith Whitney, Nouriel Roubini (and here), Zillow, Case-Shiller and even S&P have been calling a double dip in housing.

States and Cities In Worst Shape Since the Great Depression
States and cities are in dire financial straits, and many may default in 201
California is issuing IOUs for only the second time since the Great Depression
Things haven't been this bad for state and local governments since the 30s.
Loan Loss Rate Higher than During the Great Depression

As I mentioned in a recent blog, Economy still in deep, we are not out of the woods yet.  The economy is not anywhere near recovery as we have heard.  There is no way to burn off all the "toxic" debt in the economy quickly.  The administration wasted over 2 years slow dancing with the banks.  The banks have been giving unlimited supply of cash at virtually zero percent interest.  They are able to buy bonds or make quick use of this free money to increase their profits. 

Does it make any sense for the banks to be making record profits with all the losses yet to be marked on their books? 

I don't think these excessive profits benefit any one (other than the banks) because they have just left the country in the dust.  USA to the rescue for the "almighty" too big to fail banks as they pull off the greatest heist with in  memory. The banks that are likely insolvent are being allowed to operate and make billions in profits making no accounting for the huge foreclosure losses.   
Washington has put together an excellent article that can be viewed in full here

Washington's Blog with another great story

Underneath the Happy Talk, Is This As Bad as the Great Depression?
From Washington's Blog December 29, 2010

The following experts have - at some point during the last 2 years - said that the economic crisis could be worse than the Great Depression:

• Fed Chairman Ben Bernanke

• Former Fed Chairman Alan Greenspan (and see this and this)

• Former Fed Chairman Paul Volcker

• Economics scholar and former Federal Reserve Governor Frederic Mishkin

• The head of the Bank of England Mervyn King

• Nobel prize winning economist Joseph Stiglitz

• Nobel prize winning economist Paul Krugman

• Former Goldman Sachs chairman John Whitehead

• Economics professors Barry Eichengreen and and Kevin H. O'Rourke (updated here)

• Investment advisor, risk expert and "Black Swan" author Nassim Nicholas Taleb

• Well-known PhD economist Marc Faber

• Morgan Stanley’s UK equity strategist Graham Secker

• Former chief credit officer at Fannie Mae Edward J. Pinto

• Billionaire investor George Soros

• Senior British minister Ed Balls

How could that possibly be, when the stock market has largely recovered? (Let's forget for a moment that the stock market rallied after 1929, but then crashed in a double dip).

To find out, we'll look at a couple comparisons to get an idea of what is going on in the rest of the economy. And then we'll compare the government's efforts in the 1930s to today.

Housing Crisis Rivals Great Depression

As I noted last month, the current real estate slump rivals the Great Depression:

Zillow's Stan Humphries said:

The length and depth of the current housing recession is rivaling the Great Depression’s real estate downturn, and, with encouraging signs fading, will easily eclipse it in the coming months.

During the Great Depression, home prices fell 25.9 percent in five years. The U.S. housing market is now down around 25 percent from its peak in 2006.

As housing price expert Robert Shiller pointed out in September 2008:

Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s [i.e. over a 10-year period]. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around.

As I wrote in December 2008:

In the greatest financial crash of all time - the crash of the 1340s in Italy .... real estate prices fell by 50 percent by 1349 in Florence when boom became bust.

How does that compare to 2001-2007? The price of Southern California homes is already down 41% [that was before the first-time homebuyer credit, Hamp and other governmental programs temporarily boosted prices]. Southern California hasn't fallen as fast as some other areas, and we're nowhere near the bottom of the market.

Moreover, the bubble was not confined to the U.S. There was a worldwide bubble in real estate.

Indeed, the Economist magazine wrote in 2005 that the worldwide boom in residential real estate prices in this decade was "the biggest bubble in history". The Economist noted that - at that time - the total value of residential property in developed countries rose by more than $30 trillion, to $70 trillion, over the past five years – an increase equal to the combined GDPs of those nations.

Housing bubbles are now bursting in China, France, Spain, Ireland, the United Kingdom, Eastern Europe, and many other regions.

And the bubble in commercial real estate is also bursting world-wide. See this.

In addition, the percentage of Americans who owned houses during the 1930s was much lower than today, which means that a larger portion of the public is being hurt from falling home prices today as compared to the Great Depression.

Meredith Whitney, Nouriel Roubini (and here), Zillow, Case-Shiller and even S&P have been calling a double dip in housing.

States and Cities In Worst Shape Since the Great Depression

States and cities are in dire financial straits, and many may default in 2011.

California is issuing IOUs for only the second time since the Great Depression.

Things haven't been this bad for state and local governments since the 30s.

Loan Loss Rate Higher than During the Great Depression

In October 2009, I reported:

In May, analyst Mike Mayo predicted that the bank loan loss rate would be higher than during the Great Depression.

In a new report, Moody's has just confirmed (as summarized by Zero Hedge):

The most recent rate of bank charge offs, which hit $45 billion in the past quarter, and have now reached a total of $116 billion, is at 3.4%, which is substantially higher than the 2.25% hit in 1932, before peaking at at 3.4% rate by 1934.

And see this.

Here's a chart summarizing the findings:

(click here for full chart).

Indeed, top economists such as Anna Schwartz, James Galbraith, Nouriel Roubini and others have pointed out that while banks faced a liquidity crisis during the Great Depression, today they are wholly insolvent. See this, this, this and this. Insolvency is much more severe than a shortage of liquidity.

Unemployment at or Near Depression Levels

USA Today reports today:

So many Americans have been jobless for so long that the government is changing how it records long-term unemployment.

Citing what it calls "an unprecedented rise" in long-term unemployment, the federal Bureau of Labor Statistics (BLS), beginning Saturday, will raise from two years to five years the upper limit on how long someone can be listed as having been jobless.


The change is a sign that bureau officials "are afraid that a cap of two years may be 'understating the true average duration' — but they won't know by how much until they raise the upper limit," says Linda Barrington, an economist who directs the Institute for Compensation Studies at Cornell University's School of Industrial and Labor Relations.


"The BLS doesn't make such changes lightly," Barrington says. Stacey Standish, a bureau assistant press officer, says the two-year limit has been used for 33 years.


Although "this feels like something we've not experienced" since the Great Depression, she says, economists need more information to be sure.

The following chart from Calculated Risk shows that this is not a normal spike in unemployment:

As I noted in October:

It is difficult to compare current unemployment with that during the Great Depression. In the Depression, unemployment numbers weren't tracked very consistently, and the U-3 and U-6 statistics we use today weren't used back then. And statistical "adjustments" such as the "birth-death model" are being used today that weren't used in the 1930s.

But let's discuss the facts we do know.

The Wall Street Journal noted in July 2009:

The average length of unemployment is higher than it's been since government began tracking the data in 1948.


The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.

The Christian Science Monitor wrote an article in June entitled, "Length of unemployment reaches Great Depression levels".

60 Minutes - in a must-watch segment - notes that our current situation tops the Great Depression in one respect: never have we had a recession this deep with a recovery this flat. 60 Minutes points out that unemployment has been at 9.5% or above for 14 months:

Pulitzer Prize-winning historian David M. Kennedy notes in Freedom From Fear: The American People in Depression and War, 1929-1945 (Oxford, 1999) that - during Herbert Hoover's presidency, more than 13 million Americans lost their jobs. Of those, 62% found themselves out of work for longer than a year; 44% longer than two years; 24% longer than three years; and 11% longer than four years.

Blytic calculates that the current average duration of unemployment is some 32 weeks, the median duration is around 20 weeks, and there are approximately 6 million people unemployed for 27 weeks or longer.

Moreover, employers are discriminating against job applicants who are currently unemployed, which will almost certainly prolong the duration of joblessness.

As I noted in January 2009:

In 1930, there were 123 million Americans.

At the height of the Depression in 1933, 24.9% of the total work force or 11,385,000 people, were unemployed.

Will unemployment reach 25% during this current crisis?

I don't know. But the number of people unemployed will be higher than during the Depression.

Specifically, there are currently some 300 million Americans, 154.4 million of whom are in the work force.

Unemployment is expected to exceed 10% by many economists, and Obama "has warned that the unemployment rate will explode to at least 10% in 2009".

10 percent of 154 million is 15 million people out of work - more than during the Great Depression.

Given that the broader U-6 measure of unemployment is currently around 17% ( puts the figure at 22%, and some put it even higher), the current numbers are that much worse.

But it is important to look at some details.

For example, official Bureau of Labor Statistics numbers put U-6 above 20% in several states:

• California: 21.9

• Nevada: 21.5

• Michigan 21.6

• Oregon 20.1

In the past year, unemployment has grown the fastest in the mountain West.

And certain races and age groups have gotten hit hard.

According to Congress' Joint Economic Committee:

By February 2010, the U-6 rate for African Americans rose to 24.9 percent.

34.5% of young African American men were unemployed in October 2009.

As the Center for Immigration Studies noted last December:

Unemployment rates for less-educated and younger workers:

• As of the third quarter of 2009, the overall unemployment rate for native-born Americans is 9.5 percent; the U-6 measure shows it as 15.9 percent.

• The unemployment rate for natives with a high school degree or less is 13.1 percent. Their U-6 measure is 21.9 percent.

• The unemployment rate for natives with less than a high school education is 20.5 percent. Their U-6 measure is 32.4 percent.

• The unemployment rate for young native-born Americans (18-29) who have only a high school education is 19 percent. Their U-6 measure is 31.2 percent.

• The unemployment rate for native-born blacks with less than a high school education is 28.8 percent. Their U-6 measure is 42.2 percent.

• The unemployment rate for young native-born blacks (18-29) with only a high school education is 27.1 percent. Their U-6 measure is 39.8 percent.

• The unemployment rate for native-born Hispanics with less than a high school education is 23.2 percent. Their U-6 measure is 35.6 percent.

• The unemployment rate for young native-born Hispanics (18-29) with only a high school degree is 20.9 percent. Their U-6 measure is 33.9 percent.

No wonder Chris Tilly - director of the Institute for Research on Labor and Employment at UCLA - says that African-Americans and high school dropouts are experiencing depression-level unemployment.

And as I have previously noted, unemployment for those who earn $150,000 or more is only 3%, while unemployment for the poor is 31%.

The bottom line is that it is difficult to compare current unemployment with what occurred during the Great Depression. In some ways things seem better now. In other ways, they don't.

Factors like where you live, race, income and age greatly effect one's experience of the severity of unemployment in America.

In addition, wages have plummeted for those who are employed. As Pulitzer Prize-winning tax reporter David Cay Johnston notes:

Every 34th wage earner in America in 2008 went all of 2009 without earning a single dollar, new data from the Social Security Administration show. Total wages, median wages, and average wages all declined ....

And see this, this, and this.

Food Stamps Replace Soup Kitchens

1 out of every 7 Americans now rely on food stamps.

While we don't see soup kitchens, it may only be because so many Americans are receiving food stamps.

Indeed, despite the dramatic photographs we've all seen of the 1930s, the 43 million Americans relying on food stamps to get by may actually be much greater than the number who relied on soup kitchens during the Great Depression.

Inequality Worse than During the Great Depression

I recently reported that inequality is worse than it's been since 1917:

Most mainstream economists do not believe there is a causal connection between inequality and severe downturns.

But recent studies by Emmanuel Saez and Thomas Piketty are waking up more and more economists to the possibility that there may be a connection.

Specifically, economics professors Saez (UC Berkeley) and Piketty (Paris School of Economics) show that the percentage of wealth held by the richest 1% of Americans peaked in 1928 and 2007 - right before each crash:

As the Washington Post's Ezra Klein wrote in June:


Krugman says that he used to dismiss talk that inequality contributed to crises, but then we reached Great Depression-era levels of inequality in 2007 and promptly had a crisis, so now he takes it a bit more seriously...

Robert Reich has theorized for some time that there are 3 causal connections between inequality and crashes ....

Reuters wrote an excellent piece on the issue of inequality and crashes (discussing the first three factors) last month:

Economists are only beginning to study the parallels between the 1920s and the most recent decade to try to understand why both periods ended in financial disaster. Their early findings suggest inequality may not directly cause crises, but it can be a contributing factor.


Inequality is actually worse now than it's been since 1917.

The War Isn't Working

Given the above facts, it would seem that the government hasn't been doing much. But the scary thing is that the government has done more than during the Great Depression, but the economy is still stuck a pit.

Specifically, many economists credit World War II with getting us out of the Depression. (I disagree, but that's another story).

This time, we've been at war in both Iraq and Afghanistan far longer than we were in World War II. But our economy is still stuck in a rut.

Moreover, the amount spent in emergency bailouts, loans and subsidies during this financial crisis arguably dwarfs the amount which the government spent during the New Deal.

For example, Casey Research wrote in 2008:

Paulson and Bernanke have embarked on the largest bailout program ever conceived .... a program which so far will cost taxpayers $8.5 trillion.

[The updated, exact number can be disputed. But as shown below, the exact number of trillions of dollars is not that important.]

So how does $8.5 trillion dollars compare with the cost of some of the major conflicts and programs initiated by the US government since its inception? To try and grasp the enormity of this figure, let’s look at some other financial commitments undertaken by our government in the past:

As illustrated above, one can see that in today’s dollar, we have already committed to spending levels that surpass the cumulative cost of all of the major wars and government initiatives since the American Revolution.

Recently, the Congressional Research Service estimated the cost of all of the major wars our country has fought in 2008 dollars. The chart above shows that the entire cost of WWII over four to five years was less than half the current pledges made by Paulson and Bernanke in the last three months!

In spite of years of conflict, the Vietnam and the Iraq wars have each cost less than the bailout package that was approved by Congress in two weeks. The Civil War that devastated our country had a total price tag (for both the Union and Confederacy) of $60.4 billion, while the Revolutionary War was fought for a mere $1.8 billion.

In its fifty or so years of existence, NASA has only managed to spend $885 billion – a figure which got us to the moon and beyond.

The New Deal had a price tag of only $500 billion. The Marshall Plan that enabled the reconstruction of Europe following WWII for $13 billion, comes out to approximately $125 billion in 2008 dollars. The cost of fixing the S&L crisis was $235 billion.

CNBC confirms that the New Deal cost about $500 billion (and the S&L crisis cost around $256 billion) in inflation adjusted dollars.

So even though the government's spending on the "war" on the economic crisis dwarfs the amount spent on the New Deal, our economy is still stuck in the mud.

Given that the government has done so much, but we are still mired in a situation which in many ways is comparable to the Great Depression, it is not a very radical statement to say that the government is doing the wrong things to address the downturn.

I hope that the economy recovers. But the above comparisons are worrisome, indeed.

Note: Happy talk cannot fix the economy. If it could, I would write with a more optimistic spin.

Economy still deep in the woods

We are still deep in the woods with the economy.  We have gone beyond what would be considered normal or even a long recession and unemployment is still near 10%.  The government is still trying to spin the reality into a yarn that says that things are turning around.  They statistics the government using are manipulated to push the agenda of the White House and administration that thinks class room economic theory is similar to the real world, but that is for another story. 

Our economy is relying on unemployment checks and aid for food to keep money circulating.   We have turned over control of the economy to the CEO's that put us in this structured depression.  Hopefully the recent cases that ruled in favor of the plaintiff and against the big banks will be a catalyst for real structural change to the banking system.  Kemp vs Countrywide and the recent Wells Fargo case  could set precedent for action against the too big to fail banks.

It is possible that the only way the government will step up to the plate and demand accountability from the banks is if judges make the effort understand the Pooling Service Agreements for the Residential Mortgage Backed Securities.  They will then easily see how the bankers have torn the economy to shreds through fraud and deception.

Related Stories

Dylan Ratigan making case against the banks on his afternoon show. 

Wells Fargo case

Tuesday, December 28, 2010

Some Things Never Change

This still seems to apply today.  I first published it under the title "What to Expect from Congress" on September 22, 2008.  It does not sound as though anything ever changes in Washington
I just saw the Barney Frank, Nancy Pelosi news conference and was not surprised to hear they are already trying to cover their back sides if whatever they sign into law does not help the economy. It is as if they have no identity. The very people we count on to take responsibility and to look out for us, the American public, are afraid to commit to anything that may just have a chance to help a lot of people survive the credit crunch. I think that I have heard it all and then they come out and say something this childish. The truth of the matter is that we have a congress full of lawyers, many who have never practiced law, lifetime politicians, a few military personal, and no economists. The committees that do deal with finance are not headed by economists or financial brain children. They are usually guided by those with most seniority that lust for the most power. Anything to do with financing in our government is power and the lobbyist spare no expense to influence those with power. I am sure there is no place on earth, except possibly in the palace of the Queen of England, where more shallow deferential platitudes are bantered about as much as Hawaiians say aloha. Our politicians have become power and attention seekers with little expertise in economics or global markets. They want all the accolades of a superstar without having to take any responsibility for their actions. It has become almost comical.

Fools on the Hill/Everything You Need to Know About Politics You Can Learn from the Capitol Steps
A Fool's Paradise: A Story Of Fashionable Life In Washington ..
Heroes, Hacks, and Fools: Memories from the Political Inside

Sunday, December 26, 2010

Reviewing Wharton School Article on lessons from the crisis

Knowledge At Warton Business School published this article recently
The Crisis and the CFO

Morgan Stanley's Newly Named CFO Recalls the Unfolding Crisis, and Sees Progress

"Ruth Porat, whose ascent next month to the role of chief financial officer at Morgan Stanley was announced Tuesday, directed the firm's financial-institutions investment-banking business as the financial crisis unfolded in the fall of 2008. At the 10th annual Wharton Finance Conference recently, she said that a key lesson from the meltdown was that liquidity is critical to financial institutions,  and when it leaves the system, it rushes out like air from a balloon." According to The Wall Street Journal, Porat, 52, worked closely with federal officials as they grappled with the panic. A Morgan Stanley team that she helped run advised the Treasury Department last summer on battered mortgage giants Fannie Mae and Freddie Mac."
-What? A lesson that liquidity is critical to financial institutions? The financial institutions still do not have adequate liquidity to manage their loses. The liquidity needed to keep the banks from imploding could not have been provided by anyone unless the rules of accounting for changed or ignored. The capital from the government was not nearly enough to help the extremely over leveraged banks. This is just another statement that shows you corporate execs will say anything to delude the reality.-

Key Lessons From the Financial Meltdown

key lesson from the meltdown “was that liquidity is critical to financial institutions,

This line was taken from the article in Wharton Knowledge that seems make a case for the obvious.  I think we were well aware of the issues that could occur when banks and brokers are allowed to leverage themselves 9 to 1.

The article goes on further to state that the the stress tests were a major factor in  stabilizing the banking system.  Ruth Porat, soon to be new CFO at Morgan Stanly has the similar line to all the banks and politicians that want to prop up the banks at the expense of the tax payer. Porat seems to think that the financial institutions are solvent with capital reserves adequate enough to cover the increasing defaults and foreclosures. 
Liquidity, Interest Rates and Banking (Financial Institutions and Services)
The more likely truth is that the banks are not solvent and as defaults continue to grow the hold and hope for recovery option no longer applies.  The recent video here on CNBC references the shadow inventory, or inventory yet to come on the market from defaults, to be nearly twice what we are seeing now.  The number of foreclosures this year was 4 million, the claim was made on the network that there it is possible some 7 plus million defaults are yet to hit the books of the banks.  The cost of holding and managing these defaults is astronomical and could pull anyone of the "too big to fail" banks under.

Risk and Liquidity (Clarendon Lectures in Finance)

Saturday, December 25, 2010

Housing haunted by shadow inventory in 2011 Video

There is good information in this video on the state of housing.  Still seems the MSM is blaming Fannie and Freddie and letting the bankers off the hook for their role in the debacle.  Unless we get the root causes of this meltdown out in the open we could struggle for years to get the confidence back that will get the housing market going again.  The shadow inventory of foreclosures could double the current amount of foreclosures the market in the near future.  There is no way for these large amounts of inventory to be absorbed into the market without weighing down home prices.  If the government does hold the banks accountable and push for a legitimate re structuring of mortgage debt the country will end up on the 10 year recovery plan that still may not work. 
The administration sided with the banks and allowed them to use the hold and hope plan so they could avoid taking losses but all this did was prolong the agony for many people who burned through their savings and 401 k funds to try and ride out the recession.  Very few people can ride out a 5 year recession if they have any job instability and others who have seen 50% drops in housing values are doubting a recovery more and more the longer we see stagnate and declining prices. 
There is system debt restructuring that needs to occur for the country to get back on its feet.  The clock is ticking while we are digging deeper and deeper into housing abyss.  It is not a moral hazard issue anymore because everyone stands to lose if we continue down this path. 

Good Video on shadow housing inventory and prospects for 2011

The Housing Boom and Bust

Housing Boom and Bust: Owner Occupation, Government Regulation and the Credit Crunch

What Happened to Housing? Sorting out the Vocabulary of a Housing Meltdown

Understanding the Vocabulary of Structured Finance and How It Lead to the Housing Crisis. 

The big players involved in structured finance count on the public being uninformed about securitization in order to allow them to take more and more risks.  It is necessary for everyone who has a mortgage or intends to have a mortgage in the future to learn what really happens to your loan payments.  Wall Street has pillaged the mortgage business in order to leverage the steady payments of home owners up to 9 times.  They take huge risks to generate huge returns off of your mortgage.  They count on all of us claiming finance is too difficult to understand.  Once they know they have a free pass from middle American they proceed line their pockets with millions before expecting a tax payer bailout when the system collapses. 

Here are terms from Wikipedia that will begin to demystify what has happened to your home value and how the housing crisis transferred billions of dollars of wealth from unsuspecting home owners. 

From Wikipedia, the free encyclopedia

Securitization is a structured finance process that distributes risk by aggregating debt instruments in a pool, then issues new securities backed by the pool. The term “Securitisation” is derived from the fact that the form of financial instruments used to obtain funds from the investors are securities. As a portfolio risk backed by amortizing cash flows – and unlike general corporate debt – the credit quality of securitized debt is non-stationary due to changes in volatility that are time- and structure-dependent. If the transaction is properly structured and the pool performs as expected, the credit risk of all tranches of structured debt improves; if improperly structured, the affected tranches will experience dramatic credit deterioration and loss.[1] All assets can be securitized so long as they are associated with cash flow. Hence, the securities which are the outcome of Securitisation processes are termed asset-backed securities (ABS). From this perspective, Securitisation could also be defined as a financial process leading to an issue of an ABS.

Securitisation often utilizes a special purpose vehicle (SPV), alternatively known as a special purpose entity (SPE) or special purpose company (SPC), reducing the risk of bankruptcy and thereby obtaining lower interest rates from potential lenders. A credit derivative is also sometimes used to change the credit quality of the underlying portfolio so that it will be acceptable to the final investors. Securitisation has evolved from its tentative beginnings in the late 1970s to a vital funding source with an estimated outstanding of $10.24 trillion in the United States and $2.25 trillion in Europe as of the 2nd quarter of 2008. In 2007, ABS issuance amounted to $3,455 billion in the US and $652 billion in Europe. [2]

From Wikipedia, the free encyclopedia

A mortgage-backed security (MBS) is an asset-backed security or debt obligation that represents a claim on the cash flows from mortgage loans, most commonly on residential property.

First, mortgage loans are purchased from banks, mortgage companies, and other originators. Then, these loans are assembled into pools. This is done by government agencies, government-sponsored enterprises, and private entities, which may guarantee (securitize) them against risk of default associated with these mortgages. Mortgage-backed securities represent claims on the principal and payments on the loans in the pool, through a process known as Securitization. These securities are usually sold as bonds, but financial innovation has created a variety of securities that derive their ultimate value from mortgage pools.

Most MBS’s are issued by the Government National Mortgage Association (Ginnie Mae), a U.S. government agency, or the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), U.S. government-sponsored enterprises. Ginnie Mae, backed by the full faith and credit of the U.S. government, guarantees that investors receive timely payments. Fannie Mae and Freddie Mac also provide certain guarantees and, while not backed by the full faith and credit of the U.S. government, have special authority to borrow from the U.S. Treasury. Some private institutions, such as brokerage firms, banks, and homebuilders, also securitize mortgages, known as “private-label” mortgage securities.

Residential mortgages in the United States have the option to pay more than the required monthly payment (curtailment) or to pay off the loan in its entirety (prepayment). Because curtailment and prepayment affect the remaining loan principal, the monthly cash flow of an MBS is not known in advance, and therefore presents an additional risk to MBS investors.

Commercial mortgage-backed securities (CMBS) are secured by commercial and multifamily properties (such as apartment buildings, retail or office properties, hotels, schools, industrial properties and other commercial sites). The properties of these loans vary, with longer-term loans (5 years or longer) often being at fixed interest rates and having restrictions on prepayment, while shorter-term loans (1–3 years) are usually at variable rates and freely pre-payable.
From Wikipedia, the free encyclopedia

Collateralized debt obligations (CDOs) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets. CDOs securities are split into different risk classes, or tranches, whereby “senior” tranches are considered the safest securities. Interest and principal payments are made in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk.

A few academics, analysts and investors such as Warren Buffett and the IMF‘s former chief economist Raghuram Rajan warned that CDOs, other ABSs and other derivatives spread risk and uncertainty about the value of the underlying assets more widely, rather than reduce risk through diversification. Following the onset of the 2007-2008 credit crunch, this view has gained substantial credibility. Credit rating agencies failed to adequately account for large risks (like a nationwide collapse of housing values) when rating CDOs and other ABSs.

Many CDOs are valued on a mark to market basis and thus have experienced substantial write-downs on the balance sheet as their market value has collapsed.
From Wikipedia, the free encyclopedia
A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) goes into default (fails to pay) [1]. Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy, or even just having its credit rating downgraded.
CDS contracts have been compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if one of the events specified in the contract occurs. However, there are a number of differences between CDS and insurance, for example:

■The buyer of a CDS does not need to own the underlying security or other form of credit exposure; in fact the buyer does not even have to suffer a loss from the default event.[2][3][4][5] In contrast, to purchase insurance, the insured is generally expected to have an insurable interest such as owning a debt obligation;

■the seller need not be a regulated entity;

■the seller is not required to maintain any reserves to pay off buyers, although major CDS dealers are subject to bank capital requirements;

■insurers manage risk primarily by setting loss reserves based on the Law of large numbers, while dealers in CDS manage risk primarily by means of offsetting CDS (hedging) with other dealers and transactions in underlying bond markets;

■in the United States CDS contracts are generally subject to mark to market accounting, introducing income statement and balance sheet volatility that would not be present in an insurance contract;

■Hedge Accounting may not be available under US Generally Accepted Accounting Principles (GAAP) unless the requirements of FAS 133 are met. In practice this rarely happens.

While often described as insurance, credit default swaps differ from insurance in many significant ways. The cost of insurance is based on actuarial analysis. CDSs are derivatives whose cost is determined by the Black-Scholes option pricing model.

Insurance contracts require the disclosure of all risks involved. CDSs have no such requirement, and, as we have seen in the recent past, many of the risks are unknown or unknowable. Most significantly, unlike insurance companies, sellers of CDSs are not required to maintain any capital reserves to guarantee payment of claims. In that respect, a CDS is insurance that insures nothing.
Securitized mortgages in commercial real estate signal trouble ahead.: An article from: Real Estate Weekly
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Top 12 list of who is getting a free pass from the MSM inspite of their role in housing meltdown.

Top 12 list of who gets free pass from Main Stream Media:

1. Appraisers

2. Home builders

3. Home builder lending divisions

4. Local municipalities that allowed an increasing number of homes per acre in order to generate more and more revenue to spend, rather than have a higher quality of life with less density.

5.  Hank Paulson

6. Nearly all Economists (except a select few) who repeatedly ignore the reality that perfect information and perfect pricing do not exist anywhere other than a class room.   
  7.  The Creators of the Credit Default Swap in order to "straddle" the real estate backed securities as you can go long or short with stocks. 

8.  All of Wall Street for taking the one thing that was left where the little guy could participate and make a profit, and exploiting it until the housing market vaporized. 

9.  All of the TBTF banks who have devastated the economy by refusing to rid themselves of their toxic assets for nearly three years. 

10. The federal government for its extremely preferential treatment of the finance industry and complete lack of concern for the middle class America. 
                           a.) And their failure to reduce the length of the recession by reigning in the banks and making them use the TARP funds as a way to unload toxic assets in 2008. 
11.  Everyone who thinks we can come close to 5% employment in the country without a strong housing industry.

12.  All the news channels, TV, and print reporters who drank the bank kool aid for 3 years promoting the lie that the housing crisis was contained within sub prime mortgages. 

  ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (Vintage) 

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Friday, December 24, 2010

Links of Interest

Yves Smith of Naked Capitalism Appears on Real News Network

Full Story on Wells Fargo Fraud Case

Fed could have save many smaller banks
The wonders of GDP and Accounting
Foreclosures down in New York since Robo Signing Gate

The Corruption of Acdemic Economics

Blogging Heroes: Interviews with 30 of the World's Top Bloggers
Finance News -
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GE taking major loss on sale to Santander

GE taking major loss on sale to Santander

The assumption of debt still leaves GE on the hook. It will be up to the buyer to get what it can out of these assets and stands profit handsomely if they can restructure the debt at 40% of the original value. As companies like GE unload their mortgage debt there is no reason for a delay in loan modifications. GE was bailed out by the tarp and now getting pennies on the dollar for assets that should have been sold 2 or 3 years ago. The hold and hope fantasy of the major players seems to be coming to an end. Unfortunately it has been at the expense of the overall economy, homeowners and the taxpayer.

The TARP was basically given as a gift with no strings attached after the treasury sold the story that it would allow toxic assets to be purged to allow the financial system to warm again.

The banks and larger institutions like GE, decided to sit on their hands for several years and it put the economy in worse shape that it would have been had these companies been forced to liquidate without federal bailout funds.
“It is a buyer's deal, as the seller remains at risk and the business will cash flow the payment stream and thus, the acquisition According to Don Todrin's Hub Pages. However, when the seller is burned out, ready to walk away, out of money and unable to operate and searching for a way out, this type of loan workouts work very well.”

Community Reinvestment Performance: Making Cra Work for Banks, Communities and Regulators
He further states that this assumption of debt is an empty promise and often results in default.
The Essentials of Risk Management, Chapter 3 - Banks and Their Regulators--The Research Lab for Risk Management?

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Wells Fargo Hammered By District Court Judge in MN

How did Wells Fargo take undue financial risk with investment customers? 

The Star Tribune reported Banks like Wells Fargo lend clients' securities, mostly stocks, to Wall Street brokers who need them temporarily to conduct short sales and other transactions. In exchange, the borrowing brokers hand over cash collateral, which the bank invests, earning small gains for the clients lending out their securities.

But Wells Fargo's investments in asset-backed securities carried risks that led to losses in the credit crisis beginning in 2007. As losses mounted, Wells Fargo made it difficult for some investors to extract themselves from the program, so they sued.

The Judge said he found the testimony of former Wells Fargo Chairman Richard Kovacevich and CEO John Stumpf "to be almost childlike" and that he accepts "that one of the primary functions of subordinates in today's corporate America is to shield their ultimate superiors from accumulating embarrassing information."

It is ridiculous for the Chairman and former chairman to say they new nothing of the increased risk to the securities lending program. The judge also said it was clear that Wells knew of the heightened risk and put securities owned by customers at grave risk. He continued by saying that they bank breached its duty of full disclosure once its line managers were taking greater risks with the customers securities. 

It is clear now that the banks have never had the best interest of anyone in mind except their own.  They were happy to put everyone else's money at risk in asset backed securities knowing they would not be taking the loss, still be collected management fees and probably were buying CDS or Credit Default Swaps that would pay the bank in the event of failure to any of the  ABS products. 

If Wells was buying CDS against their own clients it would be a major scandal.  It would not surprise me though because we have seen similar practices done by Goldman Sachs.  It also wouldn't surprise me if the banks all played both sides of the ABS trade.  This could have added to the increased demand for Sub Prime assest backed securities because the banks could make money on the failure of  these securities through their CDS, which would pay them if the Assest Backed Security failed. 

The industry was set up to allow the banks to profit whether their clients had gains or losses.  They perfect market had been created for Wall Street and the Banks by Wall Street and the Banks.  Unfortunately, this is also what led to collapse of  the housing industry. 


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Wednesday, December 22, 2010

Guest Post-Both Liberals and Conservatives Hate Corporate Socialism (Where the Federal Government Favors Giant Corporations at the Expense of the Little Guy)

Click here for more on Bank owned State

Story first published on Washington's Blog December 21, 2010
Both Liberals and Conservatives Hate Corporate Socialism (Where the Federal Government Favors Giant Corporations at the Expense of the Little Guy)

President Obama has "compromised" on everything from financial regulation and healthcare to taxes
Obama claims that all of his "compromising" shows that he's getting things done. After all, politics was long ago defined as "the art of compromise".

On it's face, it makes sense that if both conservatives and liberals hate legislation, it must mean that there was give-and-take, and it ended up somewhere in the middle.

But that isn't necessarily true.

Specifically, as I pointed out last month:

Conservatives tend to view big government with suspicion, and think that government should be held accountable and reined in.
Liberals tend to view big corporations with suspicion, and think that they should be held accountable and reined in.

Okay, stay with me here for a minute ...
Conservatives hate big unfettered government and liberals hate big unchecked corporations, so both hate legislation which encourages the federal government to reward big corporations at the expense of small businesses.
As an example, both liberals and conservatives are angry that the feds are propping up the giant banks - while letting small banks fail by the hundreds - even though that is horrible for the economy and Main Street.
The Dodd-Frank financial legislation wasn't a compromise where things landed somewhere in the middle between liberal and conservatives ideas. Instead, it enshrines big government propping up the big banks ... more ore less permanently.

Many liberals and conservatives look at the government's approach to the financial crisis as socialism for the rich and free market capitalism for the little guy. No wonder both liberals and conservatives hate it.

And it's not just the big banks. Americans are angry that the federal government under both Bush and Obama have handed giant defense contractors like Blackwater and Halliburton no-bid contracts. They are mad that - instead of cracking down on BP - the government has acted like BP's p.r. spokesman-in-chief and sugar daddy.

They are peeved that companies like Monsanto are able to sell genetically modified foods without any disclosure, and that small farmers are getting sued when Monsanto crops drift onto their fields.

They are mad that Obama promised "change" - i.e. standing up to Wall Street and the other powers-that-be - but is just delivering more of the same.

They are furious that there is no separation between government and a handful of favored giant corporations. In other words, Americans are angry that we've gone from capitalism to oligarchy.
So if both liberals and conservatives hate something, it doesn't necessarily mean it's a compromise. It may mean that they feel disenfranchised from a government that is of the powerful and for the powerful.
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Pennsylvania court decision over RMBS fraud

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Federal Home Loan Bank of Pittsburgh Scores Victory in Lawsuit Over Fraudulent Sale of Securities

More information on Sub Prime loans, secruitization, and the housing crisis at SubPrime Shakeout

Quote From SubPrime Shakeout
"In the first substantive decision handed down in any of the five major lawsuits by the Federal Home Loan Banks (FHLB) over RMBS losses, the Hon. Stanton Wettick, Jr. of the Court of Common Pleas of Allegheny County, Pennsylvania dealt a blow to JPMorgan Chase, Countrywide and other securitizers of subprime and Alt-A mortgage loans, while letting the ratings agencies largely off the hook."

Time will tell if the courts will hold the banks accountable.  The country needs to see some penalties levied against those in the mortgage business in order to restore trust in the financial system.  We are seeing continued kid glove treatment of the banks as the current crisis remains an anchor hindering the economic recovery. 

The ratings agencies have gotten  free pass as well as the appraisers and the home builders who had used their own mortgage financing arms to drive prices higher with inaccurate appraisals and by creating scarcity hysteria that was completed fabricated. 
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Tuesday, December 21, 2010

Assange confirms Bank of America is target of bank leak from Washingtons's Blog

Story from Washington's Blog, excellent blog with great content by the way
Assange Confirms that Bank of America Is the Target of Bank Leak

There has been widespread speculation that WikiLeaks would target Bank of America.
This has now been confirmed.
Specifically, Agence Press France is reporting:
Assange also confirmed that WikiLeaks was holding a vast amount of material about Bank of America which it intends to release early next year.
Time will tell whether the Bank of America documents will be a bombshell, or just a bunch of sound and fury signifying nothing.

Julian Assange. Arrest warrant for WikiLeaks boss. Assange could claim Swiss asylum

WikiLeaks documents expose US foreign policy conspiracies. All cables with tags from 1 5000 [DOES NOT CONTAIN TEXT OF CABLES]

WikiLeaks: Removing the 'top secret' seal