credit and "financial innovation" are a deadly-combo. They've
knocked the banking system for a loop, clogged the credit markets
with billions of dollars of subprime sludge, and left the real
estate market sprawling on the canvas. Still - even though US$2
trillion of capitalization has been wiped-out from falling home
prices; and even though the financial system is in a terminal
state of paralysis - no one has been held accountable.
In fact, not one trader, mortgage lender, rating's-agency official,
fund manager, or investment banker has been indicted or charged
with criminal wrongdoing.
The system operates without rules or guard rails. It's the Wild
is so thoroughly marinated in corruption, that every trace of
regulatory-oversight has been removed. The Securities and Exchange
Commission (SEC) is little more than a public relations sham loaded
with business-friendly sycophants who try to sustain the public's
confidence while kow-towing to their corporate paymasters. It's
a complete hoax. Last week, the Chairman of the SEC, Christopher
Cox, gave a speech at the Ronald Reagan Building. He said:
launched an initiative in this area to investigate possible fraud
or breaches of fiduciary duty involving collateralized debt obligations.
Among the issues confronting us this year will be determining
whether bank holding companies and securities firms made proper
disclosure in their filings and public statements of what they
knew about their CDO portfolios and their valuations.
"We'll determine whether brokers carefully followed suitability
requirements when they sold complex debt-related derivatives that
shortly afterward went bad. And in this area, as elsewhere, we'll
be investigating whether unscrupulous insiders used non-public
information to bail out of these securities or to sell them short,
in violation of the securities laws."
subprime fiasco may turn out to be the biggest heist of
the century. Trillions of dollars were raked in on complex
investments that (apparently) everyone in the industry knew
were worthless. This is fraud on an industrial-scale.
So, after six years of sitting on the sidelines watching the fat-cat
investment banks and hedge funds sell dodgy securities (comprising
mortgages from unemployed thrift-store workers with bad credit),
Cox has finally decided to "to investigate possible fraud or breaches
of fiduciary duty."
What a joke.
Trillions of dollars have been lost, the financial system is reeling,
and the nation is headed into recession. We want scalps - not
Did Cox know
that the CDOs, the MBSs, the ABCP and the rest of the alphabet
soup of "structured investments" were unalloyed garbage?
Yes, of course,
he did. Everyone knew. But they were making so much money selling
snake oil to credulous investors they couldn't help themselves.
They went ape. Two week's ago TV investment guru, Jim Cramer,
even admitted that he and his business buddies used to call the
investors who bought these sketchy "debt pools" "morons" and Bozos".
That says it all, doesn't it?
expect us to believe that he and his Keystone Cops at the SEC
didn't know what was going on?
video clip from the Daily Show with Jon Stewart with CNN's personal
finance editor, Gerri Willis. Willis explains in simple terms
how the subprime fiasco evolved. She acknowledges that the loans
were made to "people who really couldn't afford to pay them off"
and that when "Wall Street saw how successful they were, they
decided to sell them as investments all around the world". Good
thinking, eh? She even admits that the sellers knew that the investments
were rotten but duped their customers by saying "Trust us". Unfortunately,
the naive investors found out later that "they were sold swampland
in Texas". (Watch the whole video here.)
was the investment bankers who created this mess with their
operation. They're the one's who should be cleaning it up.
They don't need a bail out; they need to go to jail.
is a great summary of a how millions of investors were ripped
off in broad daylight by crafty junk-bond salesmen while the SEC
looked the other way. It may turn out to be the biggest heist
of the century. Trillions of dollars were raked in on complex
investments that (apparently) everyone in the industry knew were
worthless. This is fraud on an industrial-scale.
just the beginning. The same gaggle of investment sharpies who
cooked up the subprime swindle are putting the final touches on
a plan to off-load hundreds of billions of dollars of mortgage-backed
slop onto the American taxpayer. If they succeed, the country's
biggest GSE's - Fannie Mae and Freddie Mac - will be crushed by
the expanded debt-load and probably go belly-up within the year.
"Stimulus Package will allow Fannie and Freddie to raise their
loan limits from $417,000 to $729,750.The idea is to keep interest
rates as low as possible on new mortgages in order to revive the
moribund California and New York housing markets. Jumbo loans-mortgages
that are over $417, 000 are nearly impossible to get now that
the market for mortgage-backed securities (MBS) has dried up and
the banks have tightened up their lending standards. Sales in
California have dropped 40 per cent or more for the last four
months. Price declines are in double digits. It is a housing Depression.
no guarantee that the plan will work. After all, Fannie Mae requires
a substantial down payment as well as documentation of earnings
and a good credit record. The whole lending environment has changed
dramatically in the last year. It's gotten a lot tougher and the
pool of potential loan applicants has shrunk considerably. Besides,
how many people are going to plunk down $700,000 for a home in
a falling market? That same MacMansion might dip to $625,000 by
the end of the year. No one wants to take a bath like that.
why should taxpayers have to guarantee a $700,000 loan just so
some brandy-swindling tycoon can get a better deal on his mortgage?
Sean Olender sums it up in an article in the SF Gate:
Congress, junk bond investors will be able to pawn off their bad
debt to Fannie and Freddie, instead of suing the big investment
houses for ripping them off. This shift will certainly doom Fannie
Mae and Freddie Mac, so don't be surprised if we, the taxpayers,
have to bail out poor Fannie and Freddie - to the tune of more
than $1 trillion... Why more than $1 trillion? If Goldman Sachs
is correct in its recent projections that home prices in California
are going to drop 35 to 40 per cent, the state's losses alone
would top $2 trillion, because California has a disproportionate
number of jumbo loans." ("Stimulus Plan a Scam to Benefit the
Rich", Sean Olender)
the foreign banks and investors are finally waking up to
the fact that they were ripped-off and they want their money
back. It's about time. They were defrauded and they deserve
right. It'll cost at least a trillion bucks; and for what? To
lend a hand to the bond-hucksters who misrepresented themselves
so they could pay off their vineyard in Provence? No way. This
is all backwards. It was the investment bankers who created this
mess with their "mortgage-laundering" operation. They're the one's
who should be cleaning it up. They don't need a bail out; they
need to go to jail.
as Olender points out, Fannie is already in financial trouble
and doesn't need more debt.
to popular myth," says Olender, "Fannie holds a lot of subprime
debt, option ARM debt and other dodgy securities. Fannie and Freddie
owned or guaranteed almost 45 per cent of all mortgages in America
last year. BusinessWeek noted in 2007 that Fannie and Freddie
have "moved more prominently into low-documentation loans, which
require little or no proof of the borrower's income."
Fannie has nearly $3 trillion mortgages guaranteed, but only $34
billion in capital reserves. If housing prices slide even 10 per
cent; Fannie's is under-water and will probably have to file for
bankruptcy. So, why take the chance?
share of housing debt taken on by Freddie Mac and Fannie Mae during
the housing slump has put the two government sponsored enterprises
at risk." By "buying up mortages on the secondary market that
the banks are walking away from" Fannie and Freddie "are reducing
risks in the market, but concentrating mortgage risks on themselves.
These risks are beginning to take their toll," said James Lockhart,
director of the Office of Federal Housing Enterprise Oversight
(OFHEO). He spoke Thursday at a Senate Banking committee on regulatory
picture? If Fannie and Freddie take a swan dive the effects will
be felt through the entire financial system for years to come.
the National Association of Realtors (NAR) are jazzed about increasing
the conforming loan limits to $729,000. They're even predicting
that it will boost sales by 300,000 homes. But that's just more
realator-hype. Look: the way we got into this mess was by "artificially
stimulating" the market with low interest credit from the Fed.
We're not going to get out of it by using the same strategy. The
government needs to stop meddling in the markets and let home
prices return to the mean. Then the buyers will reappear. The
stimulus will only prolong an already-painful contraction.
does banker Howard P. Milstein want? He wants to buy back
the subprime debt that was sold to gullible foreign banks
"at a discount" but then record it on the banks' balance
sheets at full value. In
other words, he wants to pay a nickel for the "debt", but
then record it as a dollar to meet his capital requirements.
course, Congress has already rubber-stamped the "stimulus travesty"
and rushed off to the Senate where it will get a slight face-lift
before it's plopped on Bush's desk. Next week, there'll be a signing
ceremony in the Rose Garden, where Bush will be surrounded by
a small army of smiling bankers, nodding approvingly and patting
themselves on the back for sticking it to the American taxpayer
one more time. What a triumph.
MASTERPLAN: "Dump the mortgage-backed junk on Uncle Sam"
should be aware of the massive fraud that is about to be perpetrated
on the nation to save a few shifty bankers from default. The basic
contours of the plan was laid out in an op-ed in the New York
Times last week by Howard P. Milstein, chairman of New York Private
Bank and Trust. Milstein made his pitch for a bailout in an article
titled "Give The Banks Some Credit".
of the American - and indeed the global - economy depends on having
a financial system that is able to extend credit to businesses
and consumers. The losses that have been incurred as a result
of the excesses in subprime mortgage lending will take years to
work their way through the worldwide financial system, as dozens
of banks act to replenish their lost capital... Until the banks
rebuild their capital, they will not have the wherewithal to lend
money and support economic growth. If banks of all sizes could
regain their capital immediately and easily, it would be a tremendous
benefit to the American economy."
government could make this happen by entering into an arrangement
with American banks that hold subprime mortgages, in which homeowners
typically pay a low interest rate for two or three years then
face much higher payments. Here's how it would work: The government
would guarantee the principal of the mortgages for 15 years. And
in exchange the banks would agree to leave their "teaser" interest
rates on those loans in effect for the entire 15 years. This would
instantly give the lending banks new capital."
Wait a minute.
If "the government guarantees the principal of the mortgages"
then there's no risk for the banks. If that's the case then why
should they be paid anything, even the "teaser rates". Investment
is risk and risk is investment - Get used to it. What Comrade
Milstein is requesting is "nationalizing" the banking system to
protect his indolent friends from loss or default. This could
have been written by Chairman Mao.
mortgages would be guaranteed by the Treasury, they would suddenly
be assessed, on bank balance sheets, at their original value -
and a significant amount of the banks' lost capital would be restored.
Plus, the banks would receive, from most of the homeowners with
subprime mortgages, up to 15 years of teaser-rate payments."
tragedy of the stimulus charade is that some variation of
Howard P. Milstein's proposal is sure to be enacted... The
banking establishment and the administration have finally
settled on a "bail out plan" and "We the People"
are going to foot the bill.
So the bank takes NO risk on the investment but - at the same
time - -is allowed to add the full value of the mortgage to its
capital reserves? And, Milstein doesn't even want to reduce the
value of the mortgage to current housing prices. He thinks it
should be recorded at its "original value" so it can beef up the
bank's dwindling capital.
of rubbish is that? Real estate prices have plummeted in the last
year and (and so have subprime "structured investments") the banks
assets should reflect those losses. Tough luck, Milstein. Your
buddies cooked up this scam. Now take your lumps like a man.
the bank capital crisis immediately, this strategy would ensure
that fewer families would lose their homes"...blah, blah, blah.
It would "be good for our economy." Blah, blah, blah.
adds this tidbit:
arrangement, American banks would have an incentive to buy back
the subprime debt now being held by foreign banks and other financial
institutions. American banks could buy the securities at a discount
to face value (reflecting the continued low teaser rates) and
then, thanks to the government guarantee, hold them as capital
assessed at their full value. That, in turn, would allow the other
financial institutions to reinvest in other sectors of our economy."
the foreign banks and investors are finally waking up to the fact
that they were ripped-off and they want their money back. It's
about time. They were defrauded and they deserve restitution.
The first article about the impending tidal wave of subprime litigation
appeared earlier in the week on FOX Business.com "Lawsuits
Begin to Spill Out of Subprime Mess". The subprime boondoggle
will play out in courts for years to come.
to Milstein. What does he want? He wants to buy back the subprime
debt that was sold to gullible foreign banks "at a discount" but
then record it on the banks' balance sheets at full value.
there's a neat trick. In other words, he wants to pay a nickel
for the "debt", but then record it as a dollar to meet his capital
really how bankers think?
Oh - and
by the way - he also wants the American taxpayer to guarantee
the debt in case the nickel loses some of its value. Nice touch,
eh? Milstein adheres to the old adage, "Privatize the profits,
socialize the losses."
Milstein adds that his only interest is his "concern for the health
of the global financial system."
feel the love?
of the stimulus charade is that some variation of Milstein's proposal
is sure to be enacted. Otherwise it wouldn't have shown up in
the NY Times. The Times frequently uses the op-ed page to put
up trial balloons for changes in policy. It's the same here. The
banking establishment and the administration have finally settled
on a "'bail out plan" and "We the People" are going
to foot the bill. Congress is already on board and Bush is just
a swipe-of-the-pen away from another trillion dollar giveaway
to big business. The banks and money-lenders always get their
pound of flesh while the rest of us get screwed. Some things never
and Freddie to collapse within the year.
Mike Whitney is a well respected freelance writer living in Washington
state, interested in politics and economics from a libertarian
perspective. He can be reached at [email protected].
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