| Wednesday, August 31, 2011 5:33 PM. Last April, Goldman Sachs settled with the SEC for $500 million over the synthetic collateralized debt obligation (CDO), Abacus. Even then, we predicted the mortgage lawsuits would get worse. We’ve written about the topic several times in these pages, so I will summarize the ordeal today…The SEC alleged Goldman sold investors a CDO without disclosing that hedge fund Paulson & Co. helped design the CDO and was shorting it. Buyers of the Abacus CDO (ACA Financial and German bank IKB) lost nearly $1 billion as mortgages plummeted. A synthetic CDO, by definition, must have someone on the long and short side. It is simply a bet on the direction of a pool of underlying mortgages. The buyers (huge financial institutions) should have known an investor was taking the other side of the bet. The Goldman lawsuit was just the beginning, we argued. Once the investigations moved on to CDOs containing real mortgages, we’d see real damage…wow, it seems clear to me suing Goldman about this issue – a case involving a synthetic CDO that the regulator will probably lose – is simply raising a red herring. Left unexamined is the much larger issue: the extraordinary amount of fraud in mortgage underwriting between 2004 and 2007. – April 21, 2010 S&A Digest. The real fireworks will come in the investigations over CDOs containing bona fide mortgages. These vehicles were completely riddled with fraud and insider dealing. Then, almost half of them were sold to Fannie and Freddie, now owned by Uncle Sam. When you defraud the sovereign, watch out. We think the fines are going to get a lot bigger… and we’d be surprised if Morgan Stanley survives. Interestingly, we also think the amount of fraud in the mortgage security industry means it’s unlikely the insurance on these bonds will remain in force. And that means the $30 billion or so of implied losses mortgage insurer MBIA faces may never be paid out. That’s a big number for a stock with a current market value of only $1.35 billion and assets of $25 billion. – July 16, 2010 S&A Digest |
In June, Bank of America announced it would pay $8.5 billion to settle claims from investors who lost money on mortgage-backed securities they bought before the crash. A group of investors (including giants like Black Rock, PIMCO, and MetLife) alleged mortgages they purchased from Countrywide (which Bank of America bought in 2008 for $4 billion) were filled with loans that didn’t meet the stated quality standards. The investors also alleged Countrywide didn’t keep accurate records of the loans.
Yesterday was the last day to file objections to the Bank of America settlement. And there’s a long list of objectors. Goldman Sachs said the settlement lacks enough information to prove all “similarly situated” investors were treated equally. The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, are also objecting to the settlement… as are dozens of other mortgage investors.
Why the objections? We don’t know for certain… But we’d guess the objectors also took huge write downs on mortgages they purchased from Countrywide. And they want a higher recovery.
This week, U.S. Bancorp, a trustee for a $1.75 billion Countrywide mortgage pool, separately sued Bank of America to make it buy back the mortgages. AIG, the insurer, is also suing Bank of America for $10 billion in a separate case involving mortgage-backed securities.
Bank of America has huge potential liabilities with these outstanding lawsuits. And the bank doesn’t make any money… It lost $3.2 billion over the past three years. It’s had negative net income for the past two years. That’s why it’s scrambling to raise capital. The bank took $5 billion from Warren Buffett. It sold half its stake in China Construction Bank for around $8 billion.
Today, news arose that Bank of America will sell its correspondent mortgage business (through which it purchases loans from smaller lenders, sells them, then continues servicing them). Bank of America decided to exit the business about six weeks ago. The business employs more than 1,000 people. And it was responsible for 47% of Bank of America’s mortgage originations in the first quarter of 2011. It is a huge retreat,” said Guy Cecala, publisher of the trade journal Inside Mortgage Finance. “Exiting correspondent altogether will reduce their volume significantly.”Europe in Limbo as Asian Fear Rises: The Leong Side of the Market, by George Leong, B. Comm. http://www.profitconfidential.com/gurus/ September, 2011The situation in Europe continues to focus on the debt and growth, along with the funding. And, until it calms down in Europe, markets will likely remain shaky on this side of the Atlantic. There is talk that Greece may need to leave the European Union due to its failure to satisfy financial targets set in place as a condition for receiving emergency capital from its European neighbors. I thought this could be a possibility given that I did not believe that the stronger nations of Germany and France would want to continue to fund the poor countries. The reality is that growth in both Germany and France has suffered with the focus squarely on saving the PIGS (Portugal, Ireland, Greece, and Spain). In my global economic analysis, this trend cannot continue much longer or Europe will falter and fall into a deeper or new recession. The problem is that ousting Greece would not be viewed as a positive signal to the rest of the world, as it could signal a domino effect that could lead to other countries also leaving, which is not what you want to see. The European Central Bank (ECB) maintained its benchmark lending rates at 1.50% at the Thursday meeting. But the situation is cloudy in the eurozone, after the ECB cut its gross domestic product (GDP) growth forecast. Of course, this is not a surprise given the recent downgrades in Europe. Morgan Stanley cut its global GDP forecasts for 2011 and 2012 and added that the U.S. and the eurozone were “dangerously close to a recession.” The Money Masters: Behind the Global Debt Crisis – by Adrian Salbuchi. New Dawn Magazine No. 128 (September-October 2011). In fact, if we look at matters in their proper perspective, we will see that most national economies are pretty much intact, in spite of having been badly bruised by the financial collapse. It is Finance that is in the midst of a massive global collapse, as this Model of “Ponzi” Finance has grown into a sort of malignant “cancerous tumour” that has now “metastasised,” threatening to kill the whole economy and social body politic, in just about every country in the world, and certainly in the industrialised countries. The above comparison of today’s financial system with a malignant tumour is more than a mere metaphor. If we look at the figures, we will immediately be able to see signs of this financial “metastasis.” For example, The New York Times in their 22 September 2008 edition explains that the main trigger of the financial collapse that had exploded just one week earlier on 15 September was, as we all know, mismanagement and lack of supervision over the “Derivatives” market. The Times then went on to explain that twenty years earlier, in 1988, there was no derivatives market; by 2002 however, Derivatives had grown into a global 102 trillion Dollar market (that’s 50% more than the Gross Domestic Product of all the countries in the world, the US, EU, Japan and BRICS nations included), and by September 2008, Derivatives had ballooned into a global 531 trillion Dollar market. That’s eight times the GDP of the entire planet! “Financial Metastasis” at its very worst. Since then, some have estimated this Derivatives global market figure to be in the region of One-Quadrillion Dollars… Naturally, when that collapse began, the caretaker governments in the US, European Union and elsewhere, immediately sprang into action and implemented “Operation Bail-out” of all the mega-banks, insurance companies, stock exchanges and speculation markets, and their respective operators, controllers and “friends.” Thus, trillions upon trillions of Dollars, Euros and Pounds were given to Goldman Sachs, Citicorp, Morgan Stanley, AIG, HSBC and other “too big to fail” financial institutions… which is newspeak for “too powerful to fail”, because they hold politicians, political parties and governments in their steel grip. All of this was paid with taxpayer dollars or, even worse, with uncontrolled and irresponsible issuance of Public Money bank notes and treasury bonds, especially by the Federal Reserve Bank which has, in practice, technically hyper-inflated the US Dollar: “Quantitative Easing” they call it, which is Newspeak for hyperinflation. So far, however, like the proverbial Naked Emperor, nobody dares to state this openly. At least not until some “uncontrolled” event triggers or unmasks what should by now be obvious to all: Emperor Dollar is totally and completely naked.7 When that happens, we will then see bloody social and civil wars throughout the world and not just in Greece and Argentina. By then, however, and as always happens, the powerful bankster clique and their well-paid financial and media operators, will be watching the whole hellish spectacle perched in the safety and comfort of their plush boardrooms atop the skyscrapers of New York, London, Frankfurt, Buenos Aires and Sao Paulo… By Jack Barnes, Global Macro Trends Specialist, Money Morning , October 10, 2011: Frankfurt-based Deutsche Bank AG (NYSE: DB) is about to be critically wounded by the European banking crisis. So it’s time to sell Deutsche Bank AG (**), before the region’s financial system falls apart. Europe’s Coming Capital Crunch Many European banks don’t have enough money to survive a Greek default. They hold huge amounts of their home sovereign’s debt, as well as debt of their troubled Eurozone neighbors. Any write-down of those holdings will slam their balance sheets.
These banks were already overleveraged when the financial crisis started in 2007, and they have relied on outside sources like the United States to maintain core capital ratios.
In the 2008 crash, the European banks turned to the U.S. Federal Reserve for trillions of dollars of liquidity injections. They also used sources like U.S. money market funds for short-term loans – commercial paper that matures in less than 270 days – to cover capital loaned out at longer maturities. In May 2011, U.S. money market funds had an average 40% of holdings in European commercial bank paper.
But then U.S. banks, afraid of the unfolding European sovereign debt drama, let these short-term loans mature. This brought the capital back home and took an estimated $350 billion in liquidity out of the European banking system. October 12, 2011. By Keith Fitz-Gerald, Chief Investment Strategist, Money Morning. Do you want to know the real reason banks aren’t lending and the PIIGS have control of the barnyard in Europe? It’s because risk in the $600 trillion derivatives market isn’t evening out. To the contrary, it’s growing increasingly concentrated among a select few banks, especially here in the United States. In 2009, five banks held 80% of derivatives in America. Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller. The four banks in question: JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS). Derivatives played a crucial role in bringing down the global economy, so you would think that the world’s top policymakers would have reined these things in by now – but they haven’t. Instead of attacking the problem, regulators have let it spiral out of control, and the result is a $600 trillion time bomb called the derivatives market. Think I’m exaggerating? The notional value of the world’s derivatives actually is estimated at more than $600 trillion. Notional value, of course, is the total value of a leveraged position’s assets. This distinction is necessary because when you’re talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30, or, in extreme cases, 100 times greater than investments that could be funded only in cash instruments. The world’s gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. So there is literally not enough money on the planet to backstop the banks trading these things if they run into trouble. Short-term borrowing costs would skyrocket and liquidity would evaporate. That would cause a ricochet across the Atlantic as the institutions themselves then panic and try to recover their own capital by withdrawing liquidity by any means possible. And that’s why banks are hoarding cash instead of lending it. The major banks know there is no way they can collateralize the potential daisy chain failure that Greece represents. So they’re doing everything they can to stockpile cash and keep their trading under wraps and away from public scrutiny. What really scares me, though, is that the banks think this is an acceptable risk because the odds of a default are allegedly smaller than one in 10,000. But haven’t we heard that before? Although American banks have limited their exposure to Greece, they have loaned hundreds of billions of dollars to European banks and European governments that may not be capable of paying them back. According to the Bank of International Settlements, U.S. banks have loaned only $60.5 billion to banks in Greece, Ireland, Portugal, Spain and Italy – the countries most at risk of default. But they’ve lent $275.8 billion to French and German banks. And undoubtedly bet trillions on the same debt. There are three key takeaways here: There is not enough capital on hand to cover the possible losses associated with the default of a single counterparty – JPMorgan Chase & Co. (NYSE: JPM), BNP Paribas SA (PINK: BNPQY) or the National Bank of Greece (NYSE ADR: NBG) for example – let alone multiple failures. That means banks with large derivatives exposure have to risk even more money to generate the incremental returns needed to cover the bets they’ve already made. And the fact that Wall Street believes it has the risks under control practically guarantees that it doesn’t. October 14, 2011. By Shah Gilani, Capital Waves Strategist, Money Morning. I’ve already expressed my desire to embrace the Occupy Wall Street movement. I said last week that I would join in whole-heartedly if I knew exactly what the protesters were trying to achieve. But I don’t know – and I’m not convinced they do, either. Still, that doesn’t mean we should dismiss them entirely. After all, there are millions of Americans who sense there’s something terribly wrong with our capitalist system, but they can’t pinpoint exactly what it is either. But I can. Bad actors have done bad things to good institutions and our capitalist system. Today, I’m going to let you in on who three of those bad actors are. You see, part of the problem is that when we think of the “bad guys” on Wall Street, or in Washington for that matter, we don’t often think of specific people. We talk about “them” as faceless men we might imagine sitting in luxurious high-rises chewing on cigars and laughing as they rake in millions, or even billions of dollars on the backs of hardworking Americans. I intend to fix that. I want to shed light on the faces of the people who are gaming the system and lay out before you the tools they’re using to get away with it. So, I’m going to start today with three of the biggest perpetrators of the mess we’re in. The Three Bears. There are hundreds of bad actors on Wall Street, but three in particular tell the inside story of how appallingly corrupt our country has become. They are: Robert Rubin, who spent 26 years at Goldman Sachs Group Inc. (NYSE: GS), before becoming Treasury Secretary in the Clinton administration. Lawrence Summers, who came out of the World Bank and was Deputy Secretary of the Treasury under his pal Rubin before becoming Treasury Secretary himself in 1999. And Phil Gramm, once a practicing economist who served as a Republican Senator for Texas from 1985 to 2002. These are the men who – with help of then-Federal Reserve Chairman Alan Greenspan – interfered with the Commodities and Futures Trading Commission (CFTC), an important regulatory body, to squash any regulation of derivatives. And now the notoriously murky derivatives market, which was hugely responsible for the 2008 financial crisis, has grown into a $600 trillion trouble spot for the economy. This group of very influential and powerful men made sure there was no oversight of derivatives products and markets. None. While that was an incredible gift to Wall Street’s biggest banks and hedge funds, the Three Bears (I call them that because their actions drove us into the systemic economic bear market from which we’re still struggling to emerge) weren’t nearly done. The Beginning of the End. in April 6, 1998 Citicorp and Travelers Group announced that they would merge into a single company. But there was a problem. At the time, such a merger would have violated the Glass Steagall Act. If you’re not familiar with it, the Glass Steagall Act is – or rather was – a piece of Depression-era legislation that established the Federal Deposit Insurance Corp. (FDIC) and mandated the separation of commercial banks, investment banks, and insurance companies. It incorporated other practical and prudent regulations enacted to safeguard investors and the public , as well. But , lessons learned from the Depression were eventually forgotten – or maybe more precisely, steamrolled by a sweeping deregulatory movement that took root in 1980. On the day of the announced combination, Traveler’s chairman, Sandy Weill, addressed impediments to the merger in the New York Times, noting that current law would allow the new Citigroup Inc. (NYSE: C) time to divest itself of assets in order to comply with Glass-Steagall. However, ominously he added: “We are hopeful that over time the legislation will change.” Just one year later, it did. The same powerful group of influence-peddling government insiders overturned Glass-Steagall in November 1999, so the illegal merger didn’t have to be reversed. The law that obliterated the prudent separation of FDIC-backed commercial banks and swing-for-the-fences investment banks became known as the Gramm-Leach-Bliley Act. This act is what paved the way for giant, financial super firms that are so intertwined in the financial markets they’re now all considered “too-big-to-fail.” In Eerie Epilogue. So what happened to our three players? Were they penalized or held accountable for the undermining of our economy and the implosion of markets? No. They were rewarded. Robert Rubin went to work for the new Citigroup as a senior advisor of the firm. Rubin made $126 million in cash and stock during his eight years of service, while the bank leveraged itself up by using depositor money. It had to be bailed out in 2008. Lawrence Summers reportedly took some $20 million from D.E. Shaw & Co., a giant hedge fund that dabbles in derivatives, for a two-year stint doing something nobody at the firm could confirm. And Phil Gramm, the venerable Texas senator, upon retiring from that powerful position, immediately became vice chairman of the investment bank division of UBS AG (NYSE: UBS). Yes, UBS – the same Swiss bank that in 2008 had to be backstopped by the Swiss National Bank when its overleveraged and derivatives-laden balance sheet imploded. The same bank that later paid $780 million to settle criminal charges over its conspiracy to defraud the Internal Revenue Service (IRS) and federal government of legitimately owed taxes. These are the kinds of things that are taking place every day thanks to Wall Street’s influence over our executive and legislative branches of government. And you better believe that average Americans and the Occupy Wall Street protestors can sense that, and they know they should be angry. They just can’t put their finger on why. I can because I’m a Wall Street guy who spent 30 years working within the system. I studied economics and started my career as a trader on the floor of the Chicago Board of Options Exchange (CBOE). I ran the futures and options division of a giant international money-center bank. I’ve done everything from trading bonds and mortgage-backed securities to running my own hedge funds. And I have hundreds of stories full of corruption and greed – just like this one. Not everyone on Wall Street is a bad actor. Most of the professionals working in the capital markets across America are good and honest people. But, there are kingpins and kingmakers whose greed is so disgusting they will sink America for their own fistful of dollars. It’s time we had better insights into what’s really going on and time to indict some of these bad actors. Editor’s Note: Money Morning Capital Waves Strategist and retired hedge-fund manager Shah Gilani became a national icon in 2008, as he dissected the shady workings of Wall Street, uncovering how the greed of a few brought down the economy of our entire country. He’s since launched a new publication called Wall Street Insights & Indictments. His goal simply is to show you what’s really going on in the markets, so you can “know the story” and make some money. October 13, 2011. THE CLINK. Hedge-Fund Boss Gets 11 Years. Former hedge-fund tycoon Raj Rajaratnam has been sentenced to 11 years in prison and fined $10 million for insider trading, the longest-ever such sentence. Rajaratnam, the founder of Galleon Group, got tips from a network of insiders in Goldman Sachs, Google, Intel, and other companies. Prosecutors say he made $72 million from insider trading, while Rajaratnam’s lawyers say it was only $7.4 million. The Economist says good riddance to the “know-it-all” billionaire—and praises a new boon for regulators looking to crack down on trading abuses. By Bob Van Voris, Patricia Hurtado and David Glovin – Oct 12, 2011 11:00 PM CT, Thu Oct 13 04:00:00 GMT 2011: Galleon Group LLC’s Raj Rajaratnam Peter Foley/Bloomberg. Raj Rajaratnam, co-founder of Galleon Group LLC. Raj Rajaratnam, co-founder of Galleon Group LLC. Photographer: Peter Foley/Bloomberg Oct. 13 (Bloomberg) — Douglas Burns, a formal federal prosecutor, talks about Galleon Group LLC co-founder Raj Rajaratnam’s sentencing today for masterminding the biggest hedge-fund insider trading scheme in U.S. history. Burns speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg) Oct. 13 (Bloomberg) — Galleon Group LLC’s Raj Rajaratnam will be sentenced today for masterminding the biggest hedge-fund insider trading scheme in U.S. history, facing a federal judge who has broad discretion in setting his punishment. Sarah Eisen reports on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg). Galleon Group LLC’s Raj Rajaratnam will be sentenced today for masterminding the biggest hedge-fundinsider trading scheme in U.S. history, facing a federal judge who has broad discretion in setting his punishment. U.S. District Judge Richard Holwell in Manhattan presided over the jury trial in which Rajaratnam was convicted of 14 counts of securities fraud and conspiracy. He will consult federal sentencing guidelines and his own “gut feeling,” one legal expert said. Read it at Bloomberg. These Three Men Represent Everything That’s Wrong with Wall Street byShah Gilani I’ve already expressed my desire to embrace the Occupy Wall Street movement. I said last week that I would join in whole-heartedly if I knew exactly what the protesters were trying to achieve. But I don’t know – and I’m not convinced they do, either. Still, that doesn’t mean we should dismiss them entirely. After all, there are millions of Americans who sense there’s something terribly wrong with our capitalist system, but they can’t pinpoint exactly what it is either. But I can. Bad actors have done bad things to good institutions and our capitalist system. Today, I’m going to let you in on who three of those bad actors are. You see, part of the problem is that when we think of the “bad guys” on Wall Street, or in Washington for that matter, we don’t often think of specific people. We talk about “them” as faceless men we might imagine sitting in luxurious high-rises chewing on cigars and laughing as they rake in millions, or even billions of dollars on the backs of hardworking Americans. I intend to fix that. I want to shed light on the faces of the people who are gaming the system and lay out before you the tools they’re using to get away with it. So, I’m going to start today with three of the biggest perpetrators of the mess we’re in. The Three Bears.There are hundreds of bad actors on Wall Street, but three in particular tell the inside story of how appallingly corrupt our country has become. They are: Robert Rubin, who spent 26 years at Goldman Sachs Group Inc. (NYSE: GS), before becoming Treasury Secretary in the Clinton administration. Lawrence Summers, who came out of the World Bank and was Deputy Secretary of the Treasury under his pal Rubin before becoming Treasury Secretary himself in 1999. And Phil Gramm, once a practicing economist who served as a Republican Senator for Texas from 1985 to 2002. These are the men who – with help of then-Federal Reserve Chairman Alan Greenspan – interfered with the Commodities and Futures Trading Commission (CFTC), an important regulatory body, to squash any regulation of derivatives.And now the notoriously murky derivatives market, which was hugely responsible for the 2008 financial crisis, has grown into a $600 trillion trouble spot for the economy.This group of very influential and powerful men made sure there was no oversight of derivatives products and markets. None. While that was an incredible gift to Wall Street’s biggest banks and hedge funds, the Three Bears (I call them that because their actions drove us into the systemic economic bear market from which we’re still struggling to emerge) weren’t nearly done. The Beginning of the End On April 6, 1998 Citicorp and Travelers Group announced that they would merge into a single company. But there was a problem. At the time, such a merger would have violated the Glass Steagall Act. If you’re not familiar with it, the Glass Steagall Act is – or rather was – a piece of Depression-era legislation that established the Federal Deposit Insurance Corp. (FDIC) and mandated the separation of commercial banks, investment banks, and insurance companies. It incorporated other practical and prudent regulations enacted to safeguard investors and the public , as well. But, lessons learned from the Depression were eventually forgotten – or maybe more precisely, steamrolled by a sweeping deregulatory movement that took root in 1980. On the day of the announced combination, Traveler’s chairman, Sandy Weill, addressed impediments to the merger in the New York Times, noting that current law would allow the new Citigroup Inc. (NYSE: C) time to divest itself of assets in order to comply with Glass-Steagall. However, ominously he added: “We are hopeful that over time the legislation will change.”Just one year later, it did.The same powerful group of influence-peddling government insiders overturned Glass-Steagall in November 1999, so the illegal merger didn’t have to be reversed. The law that obliterated the prudent separation of FDIC-backed commercial banks and swing-for-the-fences investment banks became known as the Gramm-Leach-Bliley Act. This act is what paved the way for giant, financial super firms that are so intertwined in the financial markets they’re now all considered “too-big-to-fail.” An Eerie Epilogue So what happened to our three players? Were they penalized or held accountable for the undermining of our economy and the implosion of markets? No. They were rewarded. Robert Rubin went to work for the new Citigroup as a senior advisor of the firm. Rubin made $126 million in cash and stock during his eight years of service, while the bank leveraged itself up by using depositor money. It had to be bailed out in 2008. Lawrence Summers reportedly took some $20 million from D.E. Shaw & Co., a giant hedge fund that dabbles in derivatives, for a two-year stint doing something nobody at the firm could confirm. And Phil Gramm, the venerable Texas senator, upon retiring from that powerful position, immediately became vice chairman of the investment bank division of UBS AG (NYSE: UBS). Yes, UBS – the same Swiss bank that in 2008 had to be backstopped by the Swiss National Bank when its overleveraged and derivatives-laden balance sheet imploded. The same bank that later paid $780 million to settle criminal charges over its conspiracy to defraud the Internal Revenue Service (IRS) and federal government of legitimately owed taxes. These are the kinds of things that are taking place every day thanks to Wall Street’s influence over our executive and legislative branches of government. And you better believe that average Americans and the Occupy Wall Street protestors can sense that, and they know they should be angry. They just can’t put their finger on why. I can because I’m a Wall Street guy who spent 30 years working within the system. I studied economics and started my career as a trader on the floor of the Chicago Board of Options Exchange (CBOE). I ran the futures and options division of a giant international money-center bank. I’ve done everything from trading bonds and mortgage-backed securities to running my own hedge funds. And I have hundreds of stories full of corruption and greed – just like this one. Not everyone on Wall Street is a bad actor. Most of the professionals working in the capital markets across America are good and honest people. But, there are kingpins and kingmakers whose greed is so disgusting they will sink America for their own fistful of dollars. It’s time we had better insights into what’s really going on and time to indict some of these bad actors. By Shah Gilani.Oct 14, 2011. EU Finance Summit Awash in Crises. Oct 26, 2011 12:46 PM EDT. Europe’s leaders finally admit that something must be done with the continent’s banks. Europe’s dirty secret is that its banks have long been even more of a mess than America’s—they were among the biggest investors in America’s toxic subprime assets, and then went big time into the now-toxic bonds of over-indebted states; hence the 62 percent plunge in the Euro Stoxx Financials Index since March, compared with minus-21 percent for the Dow Jones financials. France, which probably has the shakiest banks of any major European economy, to this day has refused to force them to recapitalize and shrink. The plan, as leaked to the Financial Times today, involves a $140 billion bank bailout (though the IMF and others estimate recapitalization needs to be much higher). But it’s a weak plan, full of vague “shoulds” and “oughts” that will likely leave too many loopholes for the banks and their investors to evade forced recapitalization and the absolutely necessary debt-to-equity swaps. The way the bailouts are set up now, they could allow France and others to pass the cost of bank bailouts to Europe’s taxpayers, potentially making the debt crisis worse. Third, in order to prevent contagion to other over-indebted countries, such as Italy and Spain, outlines are emerging for a plan to issue “bond insurance.” Here’s how it works: a bailout fund, possibly leveraged to as high as 2 trillion euros, would cover the first 20 percent or so of any losses by investors on bonds issued by individual European countries. That plan, first put forward by German financial-sector lobbyists, could end up expensive for taxpayers. Bond insurance makes sense, but the cheaper—and more effective—alternative would be not to cover any first loss on any bond, but provide only a kind of catastrophic risk insurance for the worst defaults. That would put a floor on potential losses—and raise bond prices—at a far lower risk to Europe’s taxpayers, says Achim Dübel, a German bond-market expert who developed the plan. Fourth, European leaders are trying to show they’re a little more serious about cutting deficits and lowering their debts. Germany and France are leaning on Italy, whose $2.5 trillion national debt is the world’s third highest after America’s and Japan’s, and whose government bonds are stable only because the ECB is massively buying them. After Greece, Italy is another poster child for what’s wrong with the European Union. The moment the ECB started intervening in the markets to support Italian bonds, Prime Minister Silvio Berlusconi backed off on a set of planned reforms that would have started to get Italy’s debt under control. It’s an open secret that Berlin would prefer Berlusconi out and a new government in power to push through a backlog of economic reforms that would allow Italy to regain the confidence of investors. Perhaps taking the hint, Berlusconi today started talking about early elections. Italy illustrates perfectly the deeper crisis, which the current plans don’t solve. Many of Europe’s semi-socialist governments simply do not know how to roll back spending, and have been even less eager to pass the kinds of market-opening economic reforms that would raise growth and make it easier to pay back debt. France, which together with its wobbly banks is the elephant in the room of the euro crisis, has never passed a serious reform to its pensions, civil service, or employment laws in the last 60 years. Greece, despite the crisis, has barely even begun to privatize or start collecting back taxes. The problem is that once any comprehensive bailout deal is signed, power will shift back to the debtors, as Europe has no mechanism to force a Sarkozy or Berlusconi to reform. The paradox, therefore, is that without the pressure of the current crisis, the much deeper crisis will continue to fester. (Stefan Theil is Newsweek’s Berlin bureau chief and covers European politics, business, and economics. He has reported from more than 20 countries and written for Foreign Policy, the Financial Times, The New Republic, Frankfurter Allgemeine Zeitung, and Die Welt.) For inquiries, please contact The Daily Beast at firstname.lastname@example.org. Without warning, Lloyd’s – the world’s oldest insurance market – announced that it has withdrawn its money from European banks. The reason? According to Lloyd’s, the banks are in danger of failing as Europe’s debt crisis continues to intensify. The company’s Finance Director, Luke Savage, put it simply: “If you’re worried the government itself might be at risk, then you’re certainly worried the banks could be taken down with them.” Which European governments is Lloyd’s talking about? They’re not saying. But it IS interesting to note that Lloyd’s didn’t just withdraw its money from Greek banks; it withdrew its money from banks all over Europe! One thing you can be sure of, though: When the world’s oldest insurance company…A firm that for 323 years has made its living by accurately calculating the odds of future disasters…When that company suddenly takes its money and runs, it’s a MASSIVE red flag for investors – a clear sign that the beginning of the end is near! Lloyd’s has every reason to worry. In addition to the government debt crisis that’s threatening to destroy European banks, a huge credit crisis is spreading across the continent, as well. Spanish and Italian banks are rejecting massive numbers of loans and charging customers more as the sovereign debt crisis continues to drive their own borrowing cost higher. Any way you look at it, this shrinking of European credit markets is the worst kind of downward spiral: The government debt crisis is making it harder and more expensive for banks to borrow money; the banks are passing those higher costs along to borrowers. Corporations have to pay more to borrow; their cost of doing business is rising. Consumers can’t or won’t borrow at higher rates, so corporate earnings plunge. As corporate earnings evaporate, the taxes they pay also plummet. Falling tax revenue cause the government’s deficits to explode higher, driving the banks’ cost of borrowing even higher. And so, the death spiral continues… My urgent online video
will show you what to do right now… If you think Europe’s woes aren’t going to spill over onto our shores – THINK AGAIN! In fact, we believe that the United States is about to get slammed. In some key aspects the U.S. is now in WORSE shape than Brazil, Russia, Greece or Spain have ever been. Consider the high-risk gambles that super-investor Warren Buffett calls “financial weapons of mass destruction.” I’m talking about special kinds of investments called “derivatives.” They were a major cause of the real estate and debt crisis that nearly wiped out all of our largest banks in 2008 — along with the entire U.S. economy. Russia’s banks never exposed themselves to large amounts of these financial time bombs. Neither did Brazil’s banks. And you’d think that, after the 2008 meltdown, U.S. banks would have learned their lesson. But you’d be wrong. According to the Comptroller of the Currency, a division of the U.S. Treasury Department — U.S. banks held $176 trillion in derivatives at the height of the debt crisis in 2008. Today, U.S. banks hold $244 trillion in derivatives — nearly 40% more. That fact alone places the U.S. in greater danger than many other countries, past or present. U.S. debt and obligations are now OVER $120 TRILLION! America is also in great danger for another big reason. Washington is now sitting on the largest pile of debt in the history of civilization: About $14.5 trillion and counting. They are the men and women who directly advised presidents of both major parties, including President Obama, and all of them have since departed from their office. They recently wrote that that the next debt crisis could, and I quote “Dwarf 2008!” That’s an absolutely shocking assertion: In 2008, Wall Street came within a hair of a massive, devastating meltdown. Virtually ALL of our largest banks were pushed to the brink of failure. The entire country was only a few hours away from a fatal collapse. Now, these ten former White House advisors are warning that this next debt crisis could dwarf the last one. Why? What could cause that? They say it’s precisely the monumental event I just told you about: The fact that one day foreigners may simply stop lending more of their money to the United States. And these ten former presidential advisers are not the only ones ringing the alarm bells. Senator Mark Warner says, “We’re approaching financial Armageddon.” Senator Joe Manchin calls this crisis “A fiscal Titanic.” Admiral Mike Mullen, the chairman of the Joint Chiefs of Staff, is warning that this crisis is “the biggest threat to our national security.” Economist Robert Samuelson warns that this crisis has the power to trigger “An economic and political death spiral.” Democrat Erskine Bowles, who headed up the president’s deficit commission, warns that this crisis is “like a cancer; it’s truly going to destroy the country from within.” Senator Mike Crapo says it is “a threat to not just our way of life, but to our national survival.” It has the power to “ … guarantee that this nation becomes a second-rate power with less opportunity and less freedom.” And David Walker — the former U.S. Comptroller General and director of the Government Accountability Office says: “The bottom line is: We’re not Greece. But we could end up with the same problems!” And mind you, these men are not extremists. They have nothing to gain by trying to scare you. They are merely following the facts to their logical conclusion. That’s what I’ve done in this report. The warnings I’ve given you are based on nothing more — and nothing less — than economic reality and historical fact. My research team and I have simply crunched the numbers and let the chips fall where they may — just like we did when we issued “D” ratings on nearly every big bank and savings and loans that subsequently failed. Just like we did when we gave a “C” rating to the United States. We have no political axe to grind. We are not beholden to Republicans, Democrats, or any other political party. Nor do we owe allegiance to Wall Street or any of the thousands of banks, companies and countries that we rate. In fact, most of them would probably prefer that we just kept our mouths shut. One giant company even threatened my life by saying “Weiss had better shut up or get a body guard.” But to quote Harry Truman, “I never give them hell. I just tell the truth and they think it’s hell.” Our loyalty is with the people — consumers, savers, investors and everyday citizens. Martin D. Weiss, Ph.d. Publisher, Safe Money Investor Service; 15430 Endeavour Drive Jupiter, FL 33478, 800-236-0407, 561-625-6685 (Fax). November 4, 2011. By Shah Gilani, Capital Waves Strategist, Money Morning Did you hear the story about MF Global? No, not the headlines about its bankruptcy – the real story. If you haven’t heard it yet, it goes something like this. MF Global became a primary dealer only eight months ago. “Primary dealer” is an elite status. It means the firm is one of only 22 government bond dealers that trades directly with the Federal Reserve’s New York trading desk. Only, the Federal Reserve doesn’t regulate or oversee MF Global, the Commodities Futures Trading Commission (CFTC) does – or rather is supposed to. But, even more incongruously, the CFTC isn’t the first overseer of MF Global . It ceded that responsibility to the CME Group Inc. (Nasdaq: CME), which owns and operates the largest futures exchanges in the United States. The designated self-regulatory organization for more than 50 futures brokers, CME was supposed to be the cop on the beat. However, t he not-so-funny thing about the relationship between MF Global and the CME Group is that MF Global recently boasted on its Website that it “was the top broker by volume at CME’s metals and energy exchanges in New York and in the top three at its Chicago exchanges.” So, is it any wonder that the CME just last week audited MF Global’s segregated customer funds and found them to be in compliance?These are the same supposedly segregated funds which the CME is now saying may have been tampered with. According to the CME: “It now appears that [MF Global] made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection insofar as MF Global did not disclose or report such transfers to the CFTC or CME until early morning on Monday October 31, 2011.” How much money are we talking about? About $633 million – or 11.6% out of a segregated fund requirement of about $5.4 billion. Do you see what I’m driving at? So the real story is, the Federal Reserve, which doesn’t regulate MF Global but regulates all banks in the United States, lets a futures commission merchant with investment bank wannabe desires become an insider in its dealings. Meanwhile, a private for-profit enterprise that runs the self-regulatory apparatus that oversees its own customers steps in for a federal agency that’s supposed to be in charge of commodities, futures and derivatives markets. And that’s only the tip of the iceberg. Let me jump on the Securities and Exchange Commission (SEC) next, because you aren’t going to believe this, either. Subterfuge at the SEC It’s come to light recently that the SEC has been blatantly violating federal law for decades. Since at least 1992 through 2010, the SEC has destroyed more than 9,000 documents that by law were supposed to be saved and turned over to the National Archives and Records Administration and kept for 25 years. The documents were records of enforcement cases where, after preliminary inquires, it was decided not to pursue full-blown investigations. When the SEC has information – an anonymous tip or insights from a whistleblower, for instance – that could lead to an investigation, the subjects are pursued as “matters under inquiry,” or MUIs. A couple of examples of MUIs that went nowhere include: The several tips the agency received that Bernie Madoff was running a Ponzi scheme; the anonymous tip on Ernst and Young letterhead that said Lehman Bros. Holdings Inc. (PINK: LEHMQ) was cooking its books; or the MUIs on insider trading, fraud, and market manipulation at Goldman Sachs Group Inc. (NYSE: GS), Bank of America Corp. (NYSE: BAC), American International Group Inc. (NYSE: AIG), and SAC Capital Advisors, to name a few others. But since none of these MUIs morphed into full-blown investigations, the SEC decided to destroy all records pertaining to these inquiries rather than hand them over to the National Archives, as federal law requires. When confronted with the unauthorized disposal of federal records, thanks to a couple of steadfast and honest lawyers in the enforcement branch of the SEC, the agency said it was “not aware of any specific instances of the destruction of records.” What’s shocking and sickening is that even while addressing the Archives’ inquiry into the missing documents, the SEC somehow forgot to disclose to the keeper of federal records its policy to “destroy all such documents” when no further action is warranted. Too bad for the SEC an internal investigation by SEC Inspector General H. David Kotz brought to light the agency’s directive to destroy certain MUIs, along with the discovery of MUIs on old hard drives that somebody accidentally forgot to erase and destroy. Why wouldn’t the SEC keep records of enforcement activities? Why would they destroy critical data and information that could be used in the future to pursue cases that re-surfaced and could lead to bone-crushing conspiracy or racketeering charges, if not even the simple garden variety securities law violations? With any luck, we just might find out. The SEC could and should face criminal charges for breaking federal law. There’s a powerful push by a quiet group of angry journalists to get to the bottom of this, and I’m one of them. So, expect to hear more about this as we press on for the truth. In the meantime, it’s high time we take a good look at regulators and not just regulations to see where the cracks are in the prudential governance of markets, financial institutions, and most importantly, individuals who are responsible for decisions that break the law or grossly impact markets and our economy. After all, it’s not just regulations we need to worry about – it’s the regulators too. [Editor’s Note: Money Morning Capital Waves Strategist and retired hedge-fund manager Shah Gilani became a national icon in 2008, as he dissected the shady workings of Wall Street, uncovering how the greed of a few brought down the economy of our entire country. He’s since launched a new publication called Wall Street Insights & Indictments. His goal simply is to show you what’s really going on in the markets, so you can “know the story” and make some money. And the best part is, it’s absolutely free. Just sign up by clicking here. You’ll also receive Gilani’s latest report: “5 Ways to Trade the Coming EU Collapse – And Make a Killing”.] By NASSIM NICHOLAS TALEB: Published: November 7, 2011 I HAVE a solution for the problem of bankers who take risks that threaten the general public: Eliminate bonuses. More than three years since the global financial crisis started, financial institutions are still blowing themselves up. The latest, MF Global, filed for bankruptcy protection last week after its chief executive, Jon S. Corzine, made risky investments in European bonds. So far, lenders and shareholders have been paying the price, not taxpayers. But it is only a matter of time before private risk-taking leads to another giant bailout like the ones the United States was forced to provide in 2008. The promise of “no more bailouts,” enshrined in last year’s Wall Street reform law, is just that — a promise. The financiers (and their lawyers) will always stay one step ahead of the regulators. No one really knows what will happen the next time a giant bank goes bust because of its misunderstanding of risk. Instead, it’s time for a fundamental reform: Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed should not get a bonus, ever. In fact, all pay at systemically important financial institutions — big banks, but also some insurance companies and even huge hedge funds — should be strictly regulated. Critics like the Occupy Wall Street demonstrators decry the bonus system for its lack of fairness and its contribution to widening inequality. But the greater problem is that it provides an incentive to take risks. The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accumulate in the financial system and become a catalyst for disaster. This violates the fundamental rules of capitalism; Adam Smith himself was wary of the effect of limiting liability, a bedrock principle of the modern corporation Bonuses are particularly dangerous because they invite bankers to game the system by hiding the risks of rare and hard-to-predict but consequential blow-ups, which I have called “black swan” events. The meltdown in the United States subprime mortgage market, which set off the global financial crisis, is only the latest example of such disasters. Consider that we trust military and homeland security personnel with our lives, yet we don’t give them lavish bonuses. They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail. For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust. The question of talent is a red herring: Having worked with both groups, I can tell you that military and security people are not only more careful about safety, but also have far greater technical skill, than bankers. The ancients were fully aware of this upside-without-downside asymmetry, and they built simple rules in response. Nearly 4,000 years ago, Hammurabi’s code specified this: “If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.”No such pain faces bailed-out, bonus-taking bankers. The period from 2000 to 2008 saw a very large accumulation of hidden exposures in the financial system. And yet the year 2010 brought the largest bank compensation in history. It has become clear that merely “clawing back” past bonuses after the fact is not enough. Supervision, regulation and other forms of monitoring are necessary, but insufficient — consider that the Federal Reserve insisted, as late as 2007, that the rapidly escalating subprime mortgage crisis was likely to be “contained.” What would banking look like if bonuses were eliminated? It would not be too different from what it was like when I was a bank intern in the 1980s, before the wave of deregulation that culminated in the 1999 repeal of the Glass-Steagall Act, the Depression-era law that had separated investment and commercial banking. Before then, bankers and lenders were boring “lifers.” Banking was bland and predictable; the chairman’s income was less than that of today’s junior trader. Investment banks, which paid bonuses and weren’t allowed to lend, were partnerships with skin in the game, not gamblers playing with other people’s money. Hedge funds, which are loosely regulated, could take on some of the risks that banks would shed under my proposal. While we tend to hear about the successful ones, the great majority fail and their failures rarely make the front page. The principal-agent problem they have isn’t a problem for taxpayers: Typically their investors manage the governance of hedge funds by ensuring that the manager is hurt more than any of his investors in the event of a blowup. I believe that “less is more” — simple heuristics are necessary for complex problems. So instead of thousands of pages of regulation, we should enforce a basic principle: Bonuses and bailouts should never mix. Nassim Nicholas Taleb, a professor of risk engineering at New York University Polytechnic Institute, is the author of “The Black Swan: The Impact of the Highly Improbable.” He is a hedge fund investor and a former Wall Street trader. October 14, 2011 By Shah Gilani, Capital Waves Strategist, Money Morning. I’ve already expressed my desire to embrace the Occupy Wall Street movement. I said last week that I would join in whole-heartedly if I knew exactly what the protesters were trying to achieve. But I don’t know – and I’m not convinced they do, either. Still, that doesn’t mean we should dismiss them entirely. After all, there are millions of Americans who sense there’s something terribly wrong with our capitalist system, but they can’t pinpoint exactly what it is either. But I can. Bad actors have done bad things to good institutions and our capitalist system. Today, I’m going to let you in on who three of those bad actors are. You see, part of the problem is that when we think of the “bad guys” on Wall Street, or in Washington for that matter, we don’t often think of specific people. We talk about “them” as faceless men we might imagine sitting in luxurious high-rises chewing on cigars and laughing as they rake in millions, or even billions of dollars on the backs of hardworking Americans. I intend to fix that. I want to shed light on the faces of the people who are gaming the system and lay out before you the tools they’re using to get away with it. So, I’m going to start today with three of the biggest perpetrators of the mess we’re in. The Three Bears There are hundreds of bad actors on Wall Street, but three in particular tell the inside story of how appallingly corrupt our country has become. They are: Robert Rubin, who spent 26 years at Goldman Sachs Group Inc. (NYSE: GS), before becoming Treasury Secretary in the Clinton administration. Lawrence Summers, who came out of the World Bank and was Deputy Secretary of the Treasury under his pal Rubin before becoming Treasury Secretary himself in 1999. And Phil Gramm, once a practicing economist who served as a Republican Senator for Texas from 1985 to 2002. These are the men who – with help of then-Federal Reserve Chairman Alan Greenspan – interfered with the Commodities and Futures Trading Commission (CFTC), an important regulatory body, to squash any regulation of derivatives.
And now the notoriously murky derivatives market, which was hugely responsible for the 2008 financial crisis, has grown into a $600 trillion trouble spot for the economy.
This group of very influential and powerful men made sure there was no oversight of derivatives products and markets. None.
While that was an incredible gift to Wall Street’s biggest banks and hedge funds, the Three Bears (I call them that because their actions drove us into the systemic economic bear market from which we’re still struggling to emerge) weren’t nearly done. The Beginning of the End On April 6, 1998 Citicorp and Travelers Group announced that they would merge into a single company.
But there was a problem.
At the time, such a merger would have violated the Glass Steagall Act. If you’re not familiar with it, the Glass Steagall Act is – or rather was – a piece of Depression-era legislation that established the Federal Deposit Insurance Corp. (FDIC) and mandated the separation of commercial banks, investment banks, and insurance companies. It incorporated other practical and prudent regulations enacted to safeguard investors and the public , as well.
But , lessons learned from the Depression were eventually forgotten – or maybe more precisely, steamrolled by a sweeping deregulatory movement that took root in 1980.
On the day of the announced combination, Traveler’s chairman, Sandy Weill, addressed impediments to the merger in the New York Times, noting that current law would allow the new Citigroup Inc. (NYSE: C) time to divest itself of assets in order to comply with Glass-Steagall.
However, ominously he added: “We are hopeful that over time the legislation will change.”
Just one year later, it did.
The same powerful group of influence-peddling government insiders overturned Glass-Steagall in November 1999, so the illegal merger didn’t have to be reversed. The law that obliterated the prudent separation of FDIC-backed commercial banks and swing-for-the-fences investment banks became known as the Gramm-Leach-Bliley Act.
This act is what paved the way for giant, financial super firms that are so intertwined in the financial markets they’re now all considered “too-big-to-fail.” An Eerie Epilogue So what happened to our three players? Were they penalized or held accountable for the undermining of our economy and the implosion of markets? No. They were rewarded.
Robert Rubin went to work for the new Citigroup as a senior advisor of the firm. Rubin made $126 million in cash and stock during his eight years of service, while the bank leveraged itself up by using depositor money. It had to be bailed out in 2008.
Lawrence Summers reportedly took some $20 million from D.E. Shaw & Co., a giant hedge fund that dabbles in derivatives, for a two-year stint doing something nobody at the firm could confirm.
And Phil Gramm, the venerable Texas senator, upon retiring from that powerful position, immediately became vice chairman of the investment bank division of UBS AG (NYSE: UBS).
Yes, UBS – the same Swiss bank that in 2008 had to be backstopped by the Swiss National Bank when its overleveraged and derivatives-laden balance sheet imploded. The same bank that later paid $780 million to settle criminal charges over its conspiracy to defraud the Internal Revenue Service (IRS) and federal government of legitimately owed taxes.
These are the kinds of things that are taking place every day thanks to Wall Street’s influence over our executive and legislative branches of government. And you better believe that average Americans and the Occupy Wall Street protestors can sense that, and they know they should be angry. They just can’t put their finger on why.
I can because I’m a Wall Street guy who spent 30 years working within the system. I studied economics and started my career as a trader on the floor of the Chicago Board of Options Exchange (CBOE). I ran the futures and options division of a giant international money-center bank.
I’ve done everything from trading bonds and mortgage-backed securities to running my own hedge funds. And I have hundreds of stories full of corruption and greed – just like this one.
Not everyone on Wall Street is a bad actor. Most of the professionals working in the capital markets across America are good and honest people. But, there are kingpins and kingmakers whose greed is so disgusting they will sink America for their own fistful of dollars.
It’s time we had better insights into what’s really going on and time to indict some of these bad actors. [Editor’s Note: Money Morning Capital Waves Strategist and retired hedge-fund manager Shah Gilani became a national icon in 2008, as he dissected the shady workings of Wall Street, uncovering how the greed of a few brought down the economy of our entire country. He’s since launched a new publication called Wall Street Insights & Indictments. His goal simply is to show you what’s really going on in the markets, so you can “know the story” and make some money. And the best part is, it’s absolutely free. Just sign up by clicking here. You’ll also receive Gilani’s latest report: “5 Ways to Trade the Coming EU Collapse – And Make a Killing”.] A Bilderberg Leader Mario Monti Takes Over Italy in ‘Coup’ by Alex Newman ; THE New American -2011-11-16 . November 23, 2011. By Dr. Kent Moors, Global Energy Strategist, Money Morning: I am in Frankfurt, Germany right now attending three days of meetings, and I must say they’re shaping up to be quite interesting. The focus is on structuring a new financial and organizational approach to developing Polish shale gas. A successful outcome would have an impact on both continental energy sources and the ongoing European debt crisis. And the stakes have become even higher in the past several weeks. In focus this week are the rising energy needs across Europe and what securing considerably greater sources of domestic natural gas will mean to the debt crisis. Meanwhile, we have to consider the potential for some North American companies to generate significant profits by meeting these growing energy demands. As I noted during my last advisory trip to Poland, Warsaw has decided to fast- track its shale gas development. With reserves now estimated to be much higher than initially thought, the country has the opportunity to become self-sufficient and to start exporting gas to other European countries and elsewhere as early as a decade from now. That would have a serious impact on the energy balance in Europe as a whole. With the prospects of additional domestically produced energy, the balance of payments will be improved, and with it the debt picture. Now reinvigorating the Polish picture is not going to do this on its own. Here is where it gets very interesting. What takes place in Poland will expand elsewhere into Western Europe. There are shale gas reserves in Germany, Hungary, Austria, France, the Baltic countries, Sweden, and even the U.K. Political opposition has suspended activities in France, and the Greens in Germany have given notice that they intend to target shale gas operations after their successes in phasing out the country’s nuclear power stations. Poland, however, has no significant opposition to drilling. At least, not at the moment. But as I advised the government in September, that situation is likely to change as the number of wells increases. In order to combat any opposition, the country is going to need to access to drilling technologies developed in the Western Hemisphere, technologies that address the primary concerns about hyrdofracking and horizontal drilling. The North American Advantage. The eight- to 10-year head start North America has had on the rest of the world means there have been significant technological and operational developments in the U.S. and Canada to meet a number of the environmental and logistical problems related to hy drofracking and horizontal drilling. It’s these two advances that have ushered in this whole new world of energy in the United States. Now eight to 10 years may not sound like a huge advantage…Three Measures of Success: Three primary issues are on the table this week. First, companies need to be established in both Poland and more broadly in Europe to coordinate the required field exploration, preparation, drilling, water usage, drilling, processing, environmental protection, supply and support dynamics, gas storage, pipeline networks, terminals, compressor stations, and a range of other matters from training personnel to protecting the transparency necessary in a democratic environment. Second, companies need to have access to funding in ways that will prevent Poland (and other European countries as well) from being dependent upon outside finance. This must be a European Union (EU)-based financing scheme to parallel European-controlled field development and drilling programs. Third, the Polish-then-broader-Europe requirements include immediate access to North America’s “generationally leading” technology. It is at this point that an attitude I have held with companies for years will become operational. The development of shale gas reserves elsewhere in the world will comprise one of the most profitable applications of technology, know-how and experience ever seen. Structural Requirements Ahead. Let me be very clear on this score. U.S. and Canadian companies are set to make significant returns from the Polish experiment – both in Poland itself, and as the applications there move across borders into neighboring states. But this will have to remain a Polish (or German or Austrian or Hungarian) initiative translated into in an EU-wide opportunity. The trick is to structure this as a win-win creation of joint ventures, limited liability companies, holding strategies, and other approaches. Outside companies coming into pan-European major plays like this cannot succeed merely by setting up European-based subsidiaries. This must be a European company in which an American or Canadian company has a vested, but not controlling, interest. The advantage to the European market is access to technology and expertise. The advantage to the outside company is a very lucrative potential revenue flow and an expansion of such work moving forward. November 30, 2011: By David Zeiler, Associate Editor, Money Morning ; With credit drying up across Europe we may finally see the Eurozone experience its “Lehman moment” – a replay investment banking collapse that triggered the 2008 financial crisis. Indeed, European banks are having a harder time getting money – part of the fallout from the Eurozone debt crisis – and the resulting credit crunch could freeze business activity, cause bank runs and plunge Europe into a deep recession that would badly damage the global economy. “The Continent is headed towards deflation if there’s not enough money circulating throughout their financing and banking systems,” said Money Morning Capital Waves Strategist Shah Gilani. “This all becomes self-fulfilling at some point. It’s a very dangerous situation, not just for Europe, but for the whole world.” A global financial crisis would derail the struggling U.S. recovery and pinch the profits of many multinational corporations. Fresh data this week from the European Central Bank (ECB) showed the M3 Eurozone money supply actually shrank in October by 0.6%, its steepest drop since January 2009 – the height of the Lehman Brothers crisis. A shrinking money supply is one of the early warning signals that credit availability is drying up, making it difficult or impossible for banks, businesses, and consumers to obtain loans. “This is very worrying,” Tim Congdon from International Monetary Research told The Telegraph. “What it shows is that the implosion of the banking system on the periphery is now outweighing any growth left in the core. We are seeing the destruction of money and it is a clear warning of serious trouble over the next six months.” Signs of capital draining from European banks abound. The bank bond market is already frozen. European banks in the third quarter were only able to sell bonds worth 15% of what they sold in the same period in the previous two years, according to Citigroup Inc. (NYSE: C). In the past six months, U.S. money market funds have withdrawn 42% of their money from European banks. And loans to French banks have fallen 69% since the end of May, according to Fitch Ratings. Even retail customers have started to pull their money out. “We are starting to witness signs that corporates are withdrawing deposits from banks in Spain, Italy, France and Belgium,” an analyst at Citigroup wrote in a recent report. “This is a worrying development.” How It Happened. The current credit crunch has its roots in the Eurozone debt crisis; the big European banks such as BNP Paribas SA, Commerzbank (PINK: CRZBY) and Societe Generale SA (PINK: SCGLY) hold much of the debt from Portugal, Italy, Ireland, Greece and Spain (PIIGS) that has forced a series of bailouts and fiscal emergencies. But the billions of euros worth of PIIGS government bonds were considered part of the banks’ assets; it could be used as collateral to serve the banks’ various activities. When the Eurozone debt crisis struck, faith in the value of the PIIGS bonds plummeted, which made it almost impossible to use as collateral. “The discounting of sovereign debt meant that there was less money in the European banking system,” writes John Carney, senior editor of CNBC. “If a one million euro bond previously held as a money-equivalent is now worth just 600,000 euros, the holder has lost 400,000 euros. Multiply that across the banking system, and you have millions of euros of money-equivalents simply vanishing.” Carney said the situation is similar to the impact of the decline in value in the United States of mortgage-backed securities back in 2008. The Bernanke Remedy. However, during the 2008 financial crisis, the U.S. Federal Reserve stepped in to prop up the banks as well as the mortgage market by infusing them with cash. Although the Fed’s European equivalent, the ECB, has continued to buy up PIIGS government bonds in a partially successful attempt to restrain rising bond yields, it has resisted taking action on the scale of the Fed. “This is what happened in the United States in 1930-33,” said Money Morning Global Investing Strategist Martin Hutchinson. “It also happened to a very limited extent in 2008-09. In a real crisis, the interbank lending market seizes up, which collapses even broad money supply. It is the one situation in which the [U.S. Fed Chairman Ben] Bernanke remedy – print the stuff like a madman – works.” But even then, Hutchinson said, the ECB should avoid PIIGS bonds in favor of bonds from more financially stable nations such as Germany, France, Finland and the Netherlands. In fact, the European banks have begged the ECB to do more, particularly more aggressive buying of government bonds. As it is, the big banks are dependent on the ECB; just two weeks ago they took out out $333 billion worth of one-week loans – the largest amount since April 2009. But more drastic action from the ECB appears unlikely, with opposition coming from within the central bank as well as from a German government fearful of triggering inflation. The best that is expected near-term is a December interest rate cut, which won’t do nearly enough. Money Morning‘s Gilani is pessimistic the ECB even has the power to fix the deeper issues, or whether stronger ECB intervention could do anything to prevent the Eurozone’s looming “Lehman moment.” “The ECB doesn’t have the authority to print enough money to ameliorate the situation,” Gilani said. “Buying bonds is a Band-Aid. The real structural problems facing Europe are going to require wholesale lifestyle changes that won’t get done in a year or two. ECB meddling will only serve to extend the problem while they pretend things will sort themselves out.” November 30, 2011. By Shah Gilani, Capital Waves Strategist, Money Morning: The average American has no idea how protected the big banks in this country really are. For the most part we don’t even blink when we are lied to publicly by their CEOs. Maybe that’s because the biggest bank in the world, the U.S. Federal Reserve, which happens to be a creation of and 100% beholden to the banks that it is a master shill for, also lies to us and covers up Wall Street’s misdeeds. How else can you explain the Federal Reserve’s practice of secretly feeding billions of dollars to big banks, and then looking the other way while those same banks lie to the public about their strength so they can raise desperately needed equity and borrow in the debt markets? Why else would the Fed prop up Bear Stearns long enough for JPMorgan Chase & Co. (NYSE: JPM) to buy it, and then prop up JPMorgan? Why else would the Fed prop up Merrill Lynch for the benefit of Bank of America Corp. (NYSE: BAC), and then prop up Bank of America as Merrill dragged it down. And why else would the Fed prop up Wachovia just so it could be taken over by Wells Fargo & Co. (NYSE: WFC) – yet another bank that would come to need even more help? Power and Ponzi Schemes: The pat answer from the Fed is that propping up failed banks long enough to be taken over by “healthy” institutions is better for the system than letting them fail. On the surface that’s true, but it’s what’s under the surface that’s destroying America’s free market foundation. Here’s what’s come as a result of the Fed’s actions: The “Super-Six” – JPMorgan, Bank of America, Citigroup Inc. (NYSE: C), Wells Fargo, Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) – which held $6.8 trillion, or about half the industry’s assets in 2006, had increased their holdings by 39% to $9.5 trillion as of September 2011. So what’s really going on is that the country’s biggest banks, which weren’t healthy when their CEOs lied to us (as they still do), have gotten even bigger. With size comes power – the power to pay lobbyists, the power to pay for legislators, and the power to change regulations. These banks don’t always get what they want exactly when they want it, but they do eventually get what they need to make money hand over fist. The whole thing reminds me of a Ponzi scheme. The Federal Reserve might as well be Bernie Madoff and the banks “feeder funds” in this nationalized scheme to perpetuate the channeling of depositor money into banks and investor money into bank stocks and debt securities. For the chain to be broken the Federal Reserve is going to have to be overhauled – seriously overhauled – and big banks are going to have to be broken up, once and for all. The Truth Comes Out. .How deep is the scheme to keep banks growing and their power expanding? The numbers speak for themselves.
The Fed did everything it could to hide its books from public view, but Bloomberg LP sued the central bank, and in so doing, forced the Fed to comply with the Freedom of Information Act.
Thank you, Bloomberg, this nation owes you a debt of gratitude.
What was revealed were little items – things like the Fed having actually shelled out some $7.77 trillion to prop up both domestic and foreign banks, even though some either didn’t need the money or should never have gotten it in the first place.
Why would banks or corporations take money they didn’t need? Because it was essentially free – well not exactly free, since they had to pay about 1% interest in some cases and one-tenth of one percent in other cases.
Still, you can make good money borrowing practically for free and investing that money in anything interest bearing. That includes the toxic assets on many borrowers’ books that they didn’t have to sell because they got financing to keep them on their books. Oh, and that’s still happening, a lot.
You see, part of the big lie was that it would take $700 billion of Troubled Asset Relief Program (TARP) money to aid our stricken banks. Of course, that was front money, or money that the public could see. What the public couldn’t see was how bad things really were, because it couldn’t see how much taxpayer money the Fed was shelling out.
Nor could Treasury officials see it, nor could legislators writing new bank regulatory rules to ensure this wouldn’t happen again.
But it will happen again. It’s just a matter of time. Fixing the Fed for Good There is only one solution to our banking problems, which are the root of our economic problems.
The Fed needs to have only one mandate, which is price stability. It should be an open, audited, and transparent apparatus serving the public – not banks.
And, as far as banks go, the more the merrier. Break up all the too-big-to-fail institutions. No bank should be able to hold more than 5% of the whole industry’s assets, and if that gives any one bank too much power, cut the number later on.
It’s time we woke up to the lies we’re being told by the Fed and the banks. It’s time to break the chains that enslave us as a free-market nation. December 2, 2011 Money Morning staff reports The Eurozone debt crisis has replaced the U.S. financial crisis as the disaster du jour. But make no mistake: U.S. taxpayers will be paying the tab for the U.S. crisis for years.
That’s evidently not true of the banking sector, however, whose massive financial-crisis windfall is just now coming to light.
In its January issue, Bloomberg Markets magazine reveals that – at the March 9, 2009 nadir of the financial crisis – the U.S. Federal Reserve had committed $7.77 trillion to rescuing the American financial system. That total was more than half the value of all that was produced in the U.S. economy for that entire year.
While this was going on however, it was a deep, dark secret. The Fed never let on, for instance, that American banks were in such deep trouble that they required a combined $1.2 trillion on Dec. 8, 2008 – “their neediest day,” Bloomberg said.
But here’s the best part: Many of the biggest banks have ended up doing great as a result of the central bank’s largesse.
Here’s why: Because these “emergency” Fed loans gave banks access to ultra-low (well-below-market) interest rates between August 2007 and April 2010, banks worldwide were able to earn an estimated $13 billion.
Dean Baker, co-director of the Center for Economic and Policy Research in Washington, told Bloomberg that banks seemed to have it both ways.
Banks “were either in bad shape or taking advantage of the Fed giving them a good deal,” he said. “The former contradicts their public statements. The latter – getting loans at below-market rates during a financial crisis – is quite a gift.”
Shah Gilani, a financial-crisis expert and Money Morning columnist who edits the free Wall Street Insights & Indictments newsletter, put it more simply: “The average American has no idea how protected the big banks in this country really are. Maybe that’s because the biggest bank in the world is the U.S. Federal Reserve. And it happens to be a creation of – and 100% beholden to – the banks that it is a master shill for. It also lies to us and covers up Wall Street’s misdeeds.”
What follows is a “power ranking” of the 20 banks that saw their outstanding loans peak at more than $25 billion – and some insight on how this Fed lending enabled Wall Street to profit, even as Main Street suffered. 1. Morgan Stanley (NYSE: MS)
Borrowing at the Peak (Date): $107 billion, Sept. 29, 2008.
With worldwide financial markets in a meltdown mode, Morgan’s apex of loans from U.S. Federal Reserve offerings came just two weeks after Lehman Brothers, its erstwhile competitor, had filed for the biggest corporate bankruptcy in U.S. history (more on that in a moment).
2. Citigroup Inc. (NYSE: C)
Borrowing at the Peak (Date): $99.5 billion, Jan. 20, 2009.
Talk about being money hungry. The first installment of money from the better-known Troubled Asset Relief Program (TARP) wasn’t nearly enough to stop Citi’s bleeding – which is why, in January 2009, Citi required a second infusion of bailout money. No surprise here … that’s also when Citi’s Fed-facilities borrowing reached its apex.
3. Bank of America Corp. (NYSE: BAC)
Borrowing at the Peak (Date): $91.4 billion, Feb. 26, 2009.
Like Citi, Bank of America was a TARP double-dipper. It also snapped up two companies – Merrill Lynch and Countrywide Financial Corp. – that, too, were borrowing billions from the U.S. central bank.
4. Royal Bank of Scotland Group PLC (NYSE ADR: RBS)
Borrowing at the Peak (Date): $84.5 billion, Oct. 10, 2008.
At No. 4, the highest-ranking foreign bank on this list, RBS also got a hefty bit of support from its native United Kingdom government.
5. State Street Bank (NYSE: STT)
Borrowing at the Peak (Date): $77.8 billion, Oct. 1, 2008.
The old business adage tells us to cut out the middleman. But not State Street. In fact, Bloomberg News reports that State Street initially served as a middleman, tapping into the central bank’s liquidity facilities to help money-market funds meet soaring redemption demands (collecting a fee for its trouble, of course) – but finally turned to the Fed for help, too.
6. UBS AG (NYSE: UBS)
Borrowing at the Peak (Date): $77.2 billion, Nov. 28, 2008.
A double-dipper of sorts, too, European banking heavyweight UBS achieved this distinction by getting help from the Fed and also receiving a substantive aid package from the Swiss government.
7. Goldman Sachs Group Inc. (NYSE: GS)
Borrowing at the Peak (Date): $69 billion, Dec. 31, 2008.
Goldman Sachs execs may not have been celebrating on New Year’s Eve, when its Fed loans hit their apex. That was also the close of the month that saw Goldman report its first quarterly loss since its 1999 IPO.
8. JPMorgan Chase & Co. (NYSE: JPM)
Borrowing at the Peak (Date): $68.6 billion, Oct. 1, 2008.
Like BofA, JPMorgan used the crisis as a cover for a shopping spree. And like BofA, JPMorgan snapped up two other substantive central bank borrowers – Bear Stearns (which it had rescued a bit before this) and Washington Mutual (acquired after a Federal Deposit Insurance Corp. (FDIC) seizure in September 2008).
9. Deutsche Bank AG (NYSE: DB)
Borrowing at the Peak (Date): $66 billion, Nov. 6, 2008.
It may have been Germany’s biggest bank, but it was one of the U.S. central bank’s biggest debtors: During the 439 days it held Fed liquidity money, Deutsche Bank maintained one of the largest average daily balances at $12.5 billion, according to Bloomberg News.
10. Barclays PLC (NYSE ADR: BCS)
Borrowing at the Peak (Date): $64.9 billion, Dec. 4, 2008.
Borrowing by the London-based Barclays topped out only a couple of months after a failed first attempt to buy out Lehman Brothers. No matter. That led to a killer deal that enabled Barclays to snap up some of the failed U.S. brokerage firm’s sweetest assets.
11. Merrill Lynch
Borrowing at the Peak (Date): $62.1 billion, Sept. 26, 2008.
By the time Merrill Lynch maxed out its central-bank borrowing, the “bullish-on-America” broker had given the nod to a buyout deal from Bank of America. Just a couple months later, the double-whammy of a gargantuan fourth-quarter loss coupled with the revelation of 11th-hour bonus payments to top execs ended the regime of then-CEO John Thain.
12. Credit Suisse Group (NYSE ADR: CS)
Borrowing at the Peak (Date): $60.8 billion, Aug. 27, 2008.
Another example of U.S. taxpayer money at work as this Swiss bank got a big boost from central-bank bucks. As Forbes magazine most delicately stated: “Swiss bank … was helped out by U.S. dollars. Credit Suisse had a sizable average daily balance of $13.3 billion – for the 386 days it was in hock to the Fed.”
13. Dexia SA
Borrowing at the Peak (Date): $58.5 billion, Dec. 31, 2008.
Another foreign bank that required U.S. rescue, this French-Belgium-Luxembourg bank didn’t seem to learn its lesson: Dexia is once again under pressure – this time over its exposure to the European financial crisis.
14. Wachovia Corp.
Borrowing at the Peak (Date): $50 billion, Oct. 9, 2008.
By the time Wachovia’s central-bank borrowing hit its apex, it was the rope in a takeover tug of war that pitted Citi against Wells Fargo. Wells ultimately prevailed, and snapped up Wachovia.
15. Lehman Brothers Holdings (PINK: LEHMQ)
Borrowing at the Peak (Date): $46 billion, Sept. 15, 2008.
Lehman’s borrowing peaked on the same day that it filed for the biggest corporate bankruptcy in U.S. history. The company, with more than $690 billion in assets, “became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets,” Manhattan Bankruptcy Judge James Peck said after a seven-hour bankruptcy hearing that was held exactly one week later.
16. Wells Fargo & Co. (NYSE: WFC)
Borrowing at the Peak (Date): $45 billion Feb. 26, 2009.
Not surprisingly, Wells Fargo’s borrowing apex was reached a couple of months after the already referenced buyout of Wachovia. Because it had to absorb the trashed assets of a stumbling Wachovia, Wells Fargo had to take a big hit to its earnings for the final quarter of that year.
17. Bear Stearns
Borrowing at the Peak (Date): $30 billion, March 28, 2008.
The Fed couldn’t do enough for a Bear Stearns: Not only did the central bank lend money from its still-new liquidity program, it also helped broker the sale to JPMorgan at a bargain price. All the Fed had to do was assume $29 billion in lousy mortgage-backed assets in a facility dubbed “Maiden Lane” (because of the street that runs beside the New York Federal Reserve in Manhattan).
18. BNP Paribas SA
Borrowing at the Peak (Date): $29.3 billion, April 18, 2008.
Yet another foreign bank – this one France’s largest – BNP Paribas was in hock to the U.S. central bank for two years – a relationship that started in December 2007. And like Dexia, another foreign bank that required central bank rescue, BNP also failed to learn its lesson: Data from Barclay’s Capital says BNP has the largest exposure to Greek debt of any French bank.
19. Hypo Real Estate Bank International AG
Borrowing at the Peak (Date): $28.7 billion, Nov. 4, 2008.
Bloomberg News reports show that this German commercial lender was yet another “double-dipper:” It tapped into U.S. Fed loans through the New York-based unit of a banking subsidiary. Hypo also reaped billions in guarantees and emergency credit from its home government.
20. Fortis Bank
Borrowing at the Peak (Date): $26.3 billion, Feb. 26, 2009.
Until it was broken into pieces, nationalized and pieces of it sold to … of all institutions … BNP Paribas, the banking arm of Fortis also snagged billions from the governments of Belgium and Luxembourg. [Editor’s Note: If you’re fed up with the rampant corruption, double-dealing, and protection of Wall Street by Washington (at the expense of the taxpayers on America’s Main Street, then you need to read Shah Gilani’s Wall Street Insights & Indictments newsletter. As a retired hedge-fund manager, Gilani is a former Wall Street insider who knows where all the bodies are buried. December 5, 2011. By Keith Fitz-Gerald, Chief Investment Strategist, Money Morning One of the biggest problems with Wall Street’s malfeasance is how the ruling elite view legal settlements – as little more than an acceptable cost of doing business.
Well, no more.
Thanks to Judge Jed Rakoff we may see some real regulatory action leading to good old-fashioned investigations, perp walks, and even jail for the guilty.
I’m not talking just about the Bernie Madoffs or the Raj Rajaratnams either. I’m talking about potentially CEOs and even entire corporate boards.
Judge Rakoff recently rendered a 15-page decision rejecting the U.S. Securities and Exchange Commission’s (SEC) $285 million settlement with Citigroup Inc. (NYSE: C) over toxic mortgages, calling it “neither reasonable, nor fair, nor adequate, nor in the public interest.”
This is important because settlements like these have been a farce for years – little more than the financial equivalent of a parking ticket and having about as much impact.
In fact, in a world where banking secrecy is paramount and investment firms like Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC) and others rule the roost, they’re little more than obfuscations of the truth.
The investigations into these banks are toothless or highly secretive at best. Rarely does the public see anything even remotely resembling full disclosure.
Instead we’re supposed to be placated by headlines insinuating that the SEC, the National Futures Association (NFA) and more than 20 other regulatory agencies are looking out for our best interests.
Who are they kidding? A Drop in the Bucket Remember the $550 million fine Goldman was forced to pay for its role in toxic credit default swaps (CDOs)? At the time it was the largest ever levied.
SEC officials couldn’t stumble over themselves fast enough nor get enough sound bites. I recall lots of PR shots with earnest-looking people evidently proud of themselves for having made Goldman pony up at the time.
And the mainstream press loved it. But there was one tiny problem.
The firm booked $13.3 billion that year. Paying off the SEC in a settlement that neither admitted nor denied wrongdoing was an acceptable cost of doing business that amounted to a mere 4% of revenue.
The proposed Citi settlement was much the same. It would have required Citi to give up $160 million of alleged ill-gotten profits, $30 million of interest, and a $95 million kicker for negligence.
Bear in mind, Citi reported full-year net income of $10.6 billion on revenue of $60.5 billion in 2010 which means that, like the Goldman fine, the settlement is a drop in the bucket at a mere 1.50% of net income. I think Judge Rakoff’s ruling has been a long time coming. And I love the fact that he specifically called out the Citi settlement as too lenient – especially when it also potentially allows Citi to skate on reimbursing investors for the $700 million the firm lost as part of its toxic mortgage trading.
You may not realize this, but private investors cannot bring securities claims based on negligence. In my mind, they should be able to, but for now this is the way the law stands.
The way I see it, Rakoff’s decision finally gets at the core of what caused the financial crisis: toothless regulators beholden to the very powerful elite they were supposed to keep in check.
I am all too glad to see him show the public the first glimpse of backbone we’ve seen yet.
Washington, are you watching and listening? Sitting on the Bench, Swinging for the Fences Judge Rakoff noted in his ruling that there is an “overriding public interest in knowing the truth.” Yes, there is. And as Judge Rakoff put it, the SEC’s core duty is to “see that the truth emerges.” In the event that it doesn’t as part of the settlement process, “courts must not, in the name of deference of convenience, grant judicial enforcement, to the agency’s contrivances.”
I did some checking and I learned that this is not the first time Rakoff has stuck it to the SEC.
Apparently, he’s the one who made headlines when he initially rejected the BofA settlement related to that bank’s shotgun takeover of Merrill Lynch & Co., a fact I’d forgotten.
At the time, Rakoff rejected the SEC’s $33 million BofA settlement on the grounds that it punished shareholders. The SEC then came back with a much more realistic $150 million agreement.
Some think Rakoff has gone too far. They worry that judges have no business interfering in agreements ostensibly reached by private parties.
But I disagree. I believe the SEC is the public.
And the public has the right to know about any case where the transparency of the financial markets (or lack thereof) has so impacted the markets as to destroy the wealth of millions of hard working people and bring the global markets to the edge of oblivion.
Frankly, I’d love to shake Judge Rakoff’s hand.
I hope what he’s done encourages judges to finally stand up for the body of law they supposedly represent and the public that it’s intended to protect. December 16, 2011. By Keith Fitz-Gerald, Chief Investment Strategist, Money Morning On Wednesday, Fitch Ratings Inc. downYgraded its credit ratings on five of Europe’s biggest banks, and while that decision made headlines, it’s not the most important story to come out of Europe this week.
The real story, which the mainstream media is neglecting, is that there are signs of an underground run on Europe’s banks.
Almost nobody’s talking about it, but there are indications money is already moving out of the European Union (EU) faster than rats abandoning a sinking ship.
Not through the front door, mind you. There are no lines, no distraught customers and no teller windows being boarded up – not yet, anyway.
For now the run is through the back door, and there are four things that make me think so: Italy’s planned ban on cash transactions over 1,000 euros, or about $1,300. French, Spanish, and Italian banks have run out of collateral and are now pledging real assets. Swiss officials are preparing for the end of the euro with capital control measures. Europe’s CEOs are actively preparing for the end of the euro despite governmental reassurances. Signs of a Run Let’s start with Italy and Prime Minister Mario Monti‘s plans to restrict cash transactions over 1,000 euros (down from the current limit of 2,500 euros, or about $3,200).
Ostensibly the move is about reducing tax evasion by prohibiting the movement of large sums of cash outside the official transactional system, but I think it speaks to something far more sinister – namely that the Italian government knows things are going to get far worse than they’re publicly admitting.
Consider: Cash is a stored value mechanism. There’s not a lot of it because at any given point in time, most of it is on deposit with banks in any country. That’s as true in Italy as it is here in the United States when real interest rates are positive during “healthy” times.
But when real interest rates turn negative, people are likely to withdraw cash and stuff it quite literally under mattresses or in coffee tins. (Real interest rates are the official lending interest rates as adjusted for inflation.)
In such an environment, holding cash in a bank becomes nothing more than an imputed tax and a disincentive for deposits. It’s also a significant thorn in the side of central bankers who want to control their country’s money supply, because cash can operate outside the system and, specifically, logjam reform efforts.
The reason is really pretty simple. If you have negative real interest rates, and cash transactions are largely restricted or removed altogether, then the only way to effectively use cash is to withdraw it and spend it… immediately.
In other words, by limiting cash transactions to 1,000 euros or less, Italy is putting into place a punitive financial control fully intended to keep money moving in a system lest it become worthless or worse – hoarded and worthless.
Now let’s move on to banks. Banking Breakdown Many investors have never thought about it before, but there are really only three sources of funding for a bank: Money that’s effectively “lent” to the bank by customers placing their assets on deposit; Short-term money market funds; And long-term bonds or securitized products based on long-term paper sold to bond investors. Together, the three funding sources are like the legs on a stool – lose any one of them and the stool will topple over because it is no longer balanced. Cut the legs down and the stool collapses – that’s what is happening now. Individuals, pension funds and institutions alike are withdrawing funds from Italian, Spanish and French banks. Money has long since left Greece, Ireland, and Portugal.
Thing is, though, it’s not just European money that’s fleeing. Various reports from The Economist, Bloomberg, CNBC and others suggest that American financials may have pulled more than 40% of their funds from all European banks and nearly two-thirds of their total deposits away from French banks. This is drying up short-term lending capacity and driving up interbank lending costs.
At the same time, money managers the world over are selling their European bonds. This is driving prices lower and yields higher to the point where the cost of debt is now prohibitive (bond prices and yields move in opposite directions). As a result, new bank bond issuance may be down as much as 85% over the past two years, which further hobbles cash hungry European banks.
Finally, facing a near total loss of short-term financing alternatives and having run out of short-term liquidity needed to operate, a number of EU banks are reportedly having to pledge real assets as collateral for badly needed loans.
Normally, banks would use loans, leases or receivables to accomplish the same thing. The fact that they’re now having to throw in real estate, their own property, and other assets into the mix signals extreme levels of financial stress that are far worse than what’s been disclosed publicly. Bracing for the Inevitable Swiss Finance Minister Eveline Widmer-Schlumpf noted to the Swiss Parliament that she’s got a working group examining capital controls and negative interest rates as a means of preventing an economy-crushing Swiss franc appreciation when the euro fails. That’s not if the euro fails, but when the Euro fails.
This is an especially dire sign because capital control measures like those the Swiss officials are considering are inevitably the end of any failed monetary system.
European CEOs and their companies are taking matters into their own hands by actively preparing for the destruction of the euro.
Some, like German machinery maker GEA Group AG (PINK: GEAGY) are limiting the maximum funds on deposit with any single bank. Others, like Grupo Gowex, are moving cash and deposits to Germany away from Spanish banks (and Grupo Gowex is a Spanish company based in Madrid, so this is especially telling). BMW plans to cut production by 30% while also tapping into central bank reserves. According to Chief Financial Officer Friedrich Eichiner, the company is already reducing its leasing portfolio to cope with the potential decrease in car values that would impact its borrowing capacity.
As for what all this means for our money, that’s pretty clear – think SAFETY FIRST. The return of your capital is far more important than the return on your capital at the moment.
Here’s what I suggest. Buy dollars – I know they’re a bad long-term bet, but short-term, they’re the best looking horse in the global glue factory as long as the euro is under pressure. Stick with what you have in place now and manage risk with trailing stops. Confine new stock purchases to high-growth, low-debt emerging markets rather than low-growth, high-debt developed markets. Short gold and oil in the short-term. Both are priced in dollars, which means both will fall as the dollar rises in conjunction with panic in the EU. Purchase inverse funds that track the broader markets. If the euro fails, it will tank the broader markets. Then, once it becomes clear that the world will live on, the markets will disconnect from Europe and begin to rise again in earnest. Run the other way if people tell you that banks are a great investment. They are speculative at best given the number of skeletons still in the closet. Euro Crisis: Britain’s Financial Arsonist Returns to the Scene of the Crime. By Finian Cunningham. URL of this article: www.globalresearch.ca/index.php?context=va&aid=28204. Global Research, December 14, 2011. The incendiary finance capitalism unleashed by Britain 25 years ago is at the heart of Europe’s raging debt woes. You either have to admire British Prime Minister David Cameron’s brass neck, or wince at his arrogant stupidity. The smart money is probably on the latter option. For here you had the British leader heading to the European Union summit convened last week to “salvage” the EU from its the terminal debt crisis – a crisis that is threatening the survival of the Euro single currency, the political future of the European Union and may even be sounding the death knell for the faltering capitalist world economy. Yet, given the stakes involved, all Cameron wanted to do was exploit the crisis in order to claw further concessions for the City of London’s stock exchange. Such self-serving opportunism was rebuffed by his German and French counterparts, whereupon Cameron stomped his feet and declared that Britain would exercise its veto over EU plans for tighter fiscal controls on member states. The British veto may now hamper the EU’s ability to assuage the financial markets, which are daily extracting pounds of flesh with exorbitant rates of borrowing on government bonds. Not that the leaders of the other 26 EU states are acting as noble knights in shining armour, vying to protect their populaces from further economic suffering. The revised EU treaty they have in mind will only deepen that suffering by expanding austerity and cutbacks for the majority of people across Europe. The fiscal and economic policies of member states will henceforth be dictated by the European Central Bank and the International Monetary Fund. That is, national sovereignty supposedly serving the people, according to their votes, is to be replaced by the rule of unelected bankers and technocrats. In a very real way, the debt crisis of Europe is serving to usher in a dictatorship of finance capitalism. As Paul Craig Roberts noted recently on Global Research with regard to the EU – “the banks have taken over” . Ironically, it is German Chancellor Angela Merkel and her French collaborator, Prime Minister Nicolas Sarkozy, who are foremost in marching mainland Europe into the arms of this dictatorship. However, Cameron’s one-man crusade at the EU summit was no act of Churchillian defiance to defend the rights of the people in the face of financial fascism. Britain under this present Conservative leader has been bludgeoned with one of the most draconian austerity budgets inflicted anywhere across Europe, wielded without mercy against workers and aimed deliberately at placating first and foremost the finance markets. Indeed, Cameron’s government is one of the main advocates of deeper social spending cuts for the rest of Europe. So the notion that the British leader was in some way making a fight-them-on-the-beaches kind-of stand towards other European leaders/quislings of finance capital is risible. And what is even more risible is that the sole objective of Cameron and his foreign secretary William Hague was to secure concessions for the City of London. Many people in Europe have good reason to believe that it is the City of London and its brand of finance capitalism that has created and provoked the debt crisis in the first place. It was Cameron’s much-admired predecessor Margaret Thatcher who oversaw the systematic deregulation of the London Stock Exchange, starting in 1986 with what became known as the “Big Bang” – the wholesale removal of controls on financial transactions. From then on, the British economy went from one based on manufacture and production to one hallmarked by financial speculation. London became the money capital of the world, outflanking New York. The financialisation of other economies would follow the British slash-and-burn economic path, as the new culture of predatory financiers and investors used speculative profiteering to gut manufacturing bases. The deregulation of financial markets was a showpiece policy of subsequent British governments, whether Conservative or Labour. It spawned a plethora of “financial innovations” such as hostile takeovers, downsizing, short selling and derivative trading, whereby money and debt were recycled and multiplied fictitiously – with inevitable catastrophic consequences. This of course is the ineluctable, historic dynamic of late capitalism. The system tends to mount up massive poverty and thereby becomes incapable of producing goods and services because the conventional profit system becomes exhausted. That is why late capitalism has more and more turned into a form of debt-ridden financial arson in order to recklessly eke out the last reserves of profit. In previous centuries, it was England that innovated industrial capitalism. At the end of the 20th Century it was the British (and their Anglo-American culprits) who have the dubious honour of unleashing finance capitalism on the rest of the world. The new brand of capitalism can be traced directly to the collapse of banks and institutions, such as Barings, Lehman Brothers and Long-Term Capital Management, and to the collapse of pension funds and property assets dragging millions of people into debt. And now this particular British innovation of incendiary capitalism can be traced to the collapse of entire countries. The spectacle of bankrupt David Cameron swaggering over to Europe to ask equally bankrupt European governments for more deregulatory concessions for the City of London is about as stupefying as an arsonist returning to the scene of the crime – and asking for more gasoline. Finian Cunningham is Global Research’s Middle East and East Africa correspondent. email@example.com. November 25, 2011. By Kerri Shannon, Associate Editor, Money Morning. While most Americans will have to pinch pennies to come up with extra cash this holiday season, our leaders in Congress won’t have much to worry about. Despite failing to deliver on a number of promises and assignments, like developing a debt-reduction plan, members of the House of Representatives and the Senate will still receive their annual salary of $174,000. Plus, many will make millions more through investment gains. If you are surprised to discover that 58% of our congressional leaders have the investment savvy to turn a six-figure salary into millions, don’t feel bad.
You see, there’s more to that story: Our friends in Washington aren’t competing on a level playing field .
According to a Nov. 13 CBS News “60 Minutes” report, our elected leaders in Congress may be using information gained from their “insider” positions to make highly profitable trades in the stock market.
If you or I used “inside” information to profit in the U.S stock market, we could expect a visit from the Securities and Exchange Commission (SEC) and the U.S. Justice Department. And those “visits” would only represent the start of our troubles.
The same would be true for a corporate executive, a member of the executive branch , or even a federal judge. In every case, the use of inside information would be considered a punishable criminal act.
But, it’s a completely different story for Congress, where those same laws simply don’t apply. For those elected leaders in Congress, this form of insider trading may well be unethical. But it’s also completely legal.
Congressional leaders, even though privy to non-public information, are not considered corporate insiders, and so can trade on such insights and escape penalty. Congressional staffers and lobbyists also are exempt.
Just look at U.S. Rep. Spencer Bachus, R-AL, chairman of the House Financial Services Committee. According to a Nov. 13 “60 Minutes” report, Rep. Bachus attended closed-door briefings in September 2008 with then-Treasury Secretary Henry Paulson and U.S. Federal Reserve Chairman Ben S. Bernanke. Congressional leaders in those meetings were warned that a “global financial meltdown” was about to occur.
The very next day, Bachus bought stock options that allowed him to profit if and when the economy tanked. A financial disclosure showed that he turned a profit trading General Electric Co. (NYSE: GE) during the financial crisis.
Or look at Rep. John Boehner, R-OH, one of the members of Congress who bought health insurance stocks during the 2009 healthcare debate. Rep. Boehner fought against a government-funded insurance plan that would compete with publicly traded companies in the private sector. And those private-sector insurers saw their share prices escalate after the provision died in Congress – and after Rep. Boehner had already purchased the related stocks.
Former Rep. Dennis Hastert, R-IL, made $2 million from selling land he owned after receiving a federal earmark to build a parkway near his property. Former Sen. Judd Gregg, R-NH, helped get $70 million in funds to go toward redeveloping a U.S. Air Force base in which he and his brother had a commercial interest. And Rep. Nancy Pelosi, D-CA, bought shares of the 2008 Visa Inc. (NYSE: V) initial public offering (IPO) – while legislation affecting credit card companies was debated in the House. That’s just a taste of the legal insider trading going on by our elected representatives. “This is yet another prime example of how Congress passes laws that apply to us as citizens, but exempts themselves,” Money Morning reader Scott S. wrote to us. “No wonder why many of them spend hundreds of thousands to get elected to a position that pays less than $200,000; the benefits far outweigh the salary… all at the expense of the people they were elected to represent.” A $6.3 Billion Bet Gone Bad. By Louis Basenese, Chief Investment Strategist. In yesterday’s column, I took the time to explain Wall Street’s newest accounting trick – re-hypothecation.
Today, I want to share how it led to the loss of $1.2 billion in customer funds and the ultimate demise of MF Global (Other OTC: MFGLQ.PK). And more importantly, what we should take away from this unfortunate situation…
Greed is Good?
MF Global’s problems didn’t start with re-hypothecation. They started with something much simpler – greed.
The firm wanted to make a bet that eurozone bonds would remain default free. I’ll concede that’s a smart bet, given the formation of the European Financial Stability Facility.
Essentially, MF Global was banking on a European version of “too big too fail” – betting that the indebted eurozone countries were too important to the global economy to let them default.
But a smart bet doesn’t translate into a risk-free bet. And leverage only magnifies risk, which is something MF Global learned the hard way.
You see, MF Global didn’t invest a modest amount in bonds of some of Europe’s most indebted nations (Italy, Spain, Belgium, Portugal and Ireland). It invested $6.3 billion. That’s equal to more than five times the firm’s book value!
Now, you might be asking yourself, how in the world was MF Global able to make such an outsized bet? With off-balance sheet transactions, of course.
(Remember, that’s how Wall Street typically tries concealing its transgressions. Case in point: Enron and special purpose entities.)
In this case, MF Global was specifically using “repurchase and reverse repurchase transactions to maturity” to keep its actions off the balance sheet.
I won’t bog you down with the details of repo-to-maturity trade. Here’s the gist…
MF Global buys a ton of European bonds with high yields maturing in 2012. It then turns around and uses those bonds as collateral to borrow money at very low interest rates.
The way this trade works out is simple…
Until the bonds mature, MF Global earns the spread – the difference between the high interest it receives on the bonds and the low interest rates it pays on the borrowed funds. When the bonds mature, MF Global uses the principal received to pay off its loans. Simple as that.
But it sounds too good to be true, doesn’t it?
Well, it seemed a bit surprising to MF Global’s CEO, Jon Corzine, too. In the firm’s most recent earnings conference call, he said, “The spread between interest earned and the financing cost of the underlying repurchase agreement has often been attractive even as the structure of the transaction themselves essentially eliminates market and financing risk.”
In other words, such risk free trades shouldn’t exist. And ultimately, they don’t.
Can You Say, “Margin Call?”
The big risk inherent in MF Global’s repo-to-maturity trades was liquidity.
At any point, MF Global’s lenders could require more collateral. And that’s exactly what they did, as the debt crisis in Europe became more uncertain.
The only problem? MF Global didn’t have any cash of its own lying around to meet the margin calls. So it pledged its customers’ funds – via re-hypothecation – as additional collateral.
The straw that broke the proverbial camel’s back came from the New York Fed.
Earlier in the year, the New York Fed designated MF Global a primary dealer, allowing it to trade directly with the bank in the buying and selling of United States government debt.
With worries mounting about MF Global’s solvency, the Fed issued a margin call of its own on Friday, October 28. And the jig was up.
MF Global filed for bankruptcy protection on Monday, October 31. Ever since then, we’ve been unearthing the details surrounding the company’s ultimate demise.
Bottom line: Leverage cuts both ways. Wall Street’s elite always seem to forget about this fundamental principle time and again. Perhaps it’s because they’re always investing with other people’s money instead of their own?
Nevertheless, let MF Global’s bankruptcy be yet another reminder that there are no risk-free trades. And that’s why we should relentlessly favor position-sizing over making outsized bets. December 22, 2011. Occupy Wall Street, Consider This My Gift to You… by Shah Gilani. Dear Reade. Out of far left field, I see something coming that I never expected. It’s more like the coming together of pieces of a puzzle that have eluded us for too long. By the way, Occupy Wall Street, if you’re listening, and I hope you are, and you’re still floundering (which I know you are) without a cause that anybody can really wrap their heads around, drop your drums, chants, and wanderings, and make the coming together of this puzzle what you’re protesting. And make what could result what you are demanding. Because, really, this could be the mother lode. The U.S. Securities and Exchange Commission is accusing six former executives of Fannie Mae and Freddie Mac of playing down the risk to investors of their firms’ aggressive fast-forward into subprime mortgages… which caused them to implode spectacularly. Two separate civil suits, filed last Friday, allege that the executives “knowingly misled investors” who owned shares in the companies and were thus deprived of critical information against which meaningful investment decisions are generally made. The two wards, currently under U.S. conservatorship (life support attended by a wet-nurse), were themselves spared being sued, on account of their signing civil non-prosecution agreements and promising to cooperate and not dispute allegations (and also not have to admit nor deny wrongdoing). Yet the SEC is seeking financial penalties, disgorgement, and an order barring guilty parties from serving as officers or directors of any public companies in the future against the implicated executives. The SEC faces an uphill battle based on one word – “subprime.” The problem is, subprime has never been legally defined. You know what it means, I know what it means, everybody knows what it means, without knowing its exact definition. But if there’s no definition of subprime, defense lawyers will counter that it’s not possible to sue based on a standard that has never been defined. How about we compare mortgages to cars and subprime to clunkers. If you’re on my used car lot and I offer you two cars at the same price and don’t tell you one is a clunker, is that fair? You wouldn’t need me to define “clunker.” If I said one was a clunker, you would simply choose the other car; after all, it’s the same price. There is a difference, there’s a big difference. Over on the Fannie and Freddie lots between 2006 and 2007, they were loading up on clunkers and not telling anyone what they were stocking. In fact, they were saying things like, “basically (we) have no subprime exposure” in the single-family realm. They lied. One of the reasons they were loading up on subprime was because Wall Street banks were eating their lunch by buying up subprime loans, packaging them, and selling them to investors hand over fist, and Fannie and Freddie wanted in on that very lucrative business. It’s not that they hadn’t dabbled in subprime before; they had. But as they saw stresses in the marketplace on the better mortgages in their portfolios, they still loaded up on far weaker credits; also known in the business as SUBPRIME. So what’s next? There are going to be a lot of emails and other testimony coming out about who knew what when, and who lied to who to make how much. It’s going to be fun to watch this thing unfold. But the whole point of this piece of the puzzle coming to light is that, to make their bonuses bigger and their options worth more, these executives leveraged their essentially “private” companies knowing that their losses would be “socialized” (paid for by taxpayers) if their bets fell apart. Their lies are no different than the lies told to investors by the big banks during the credit crisis (and most of the time, for that matter). Yes, if the SEC wins their cases, there’s hope that the lying executives of our biggest banks (and, if there is a God, the liars at the Federal Reserve, too) will be brought to justice for misleading not only their investors, and the American public that bailed them out, but also Congress (not that they would ever lie), who crafted legislation to save us from another financial catastrophe without knowing how the banks and the Fed lied to us all. Thanks to Bloomberg LP and Fox News Networks LLC – who sued the Fed to get them to cough up data under the Freedom of Information Act – we know just how much they all lied. We now know the bankers were telling lies to our faces while being propped up by the backdoor boys at the Fed. Heck, most Fed regional bank presidents didn’t know, the Treasury Secretary didn’t know. Nobody but the bankers and the Fed knew that they were lying to us. Again, courtesy of Bloomberg, here’s what they were saying, when they were saying it, and how much money they got from the Fed to keep their doors open on the exact dates that their borrowings peaked: On September 21, 2008, Morgan Stanley CEO John Mack said, “Morgan Stanley is in the strongest possible position.” By September 29, 2008, they had borrowed $107 billion from the Fed and took another $10 billion in TARP money. On January 16, 2009, Citicorp CEO Vikram Pandit said, “We have an irreplaceable franchise.” By January 20, 2009, they had borrowed $99.5 billion from the Fed and took $45 billion in TARP money. On January 22, 2009, Bank of America CEO Kenneth D. Lewis said, “The diversity and strength of our company is allowing us to continue to invest in our business to drive future profit growth.” By February 26, 2009, they had borrowed $91.4 billion from the Fed and took $45 billion in TARP money. On December 16, 2008, Goldman Sachs CEO Lloyd Blankfein said, “Our deep and global client franchise, experienced and talented people and strong balance sheet position our firm well.” By December 31, 2008, they had borrowed $69 billion from the Fed and took $10 billion in TARP money. On February 23, 2009, JPMorgan Chase CEO Jamie Dimon said, “We believe we have a fortress balance sheet.” By February 26, 2009, they had borrowed $48 billion from the Fed and took $25 billion in TARP money. On March 6, 2009, Wells Fargo CEO John Stumpf said, “We couldn’t feel better about the future.” Meanwhile, as of February 26, 2009, they had borrowed $45 billion from the Fed and took $25 billion in TARP money. They are all liars. They should all be prosecuted for misleading their investors, the public, and Congress. It was these very banks that were feeding crap to Fannie and Freddie and at the same time competing with them to grow the whole pie for all their bonuses and stock options. It was a giant scheme – don’t you get it? And because they are such good liars they, the banks, and the Fed will tell us and Congress that we can’t handle the truth and they lied to us to protect us from the reality of how bad things really were. Really? We need to be protected from the truth so we can continually be lied to so they can all make more money? Sure, that’s why total assets held by the country’s above-named biggest banks have risen 39% since 2006. That’s why average banker pay in 2010 was the same as it was in 2007. That’s why banks spent 33% more money lobbying Congress from 2006 through 2010. That’s why Dodd-Frank isn’t completed and never will be. That’s why America has become a sinkhole. And speaking of sinkholes… No, I’m not going to point to that former MF Global leader Jon Corzine, who used to brag that he co-authored Sarbanes-Oxley when he was a U.S. Senator (such an august body!), which hopefully he will be hung by, along with the entire gallery of rogues above who deserve the gallows… no, not him. Time out… In case you Occupy Wall Streeters missed the other pieces of the puzzle, there was the list of lies the bankers foisted on us while being aided and abetted by the lying Fed and how they should all come under the axe of Sarbanes-Oxley, after all, it is still the law of the land. Those are the pieces of the puzzle that need to come together. But, alas, I digress once again; back to Freddie and Fannie. No doubt you knew that Newt Gingrich, former Speaker of the U.S. House of Representatives from 1995 to 1999, a House member since 1979, author of the Contract With America, and the distinguished first House member in history (he will like this, he is an historian, did you know?) to be disciplined (and fined $300,000) for ethics violations. (He actually faced 84 charges during his, did I say “distinguished,” term, and quit before he could be kicked out of that, did I already say “august,” body). When he “quit” he said, “I’m willing to lead, but I’m not willing to preside over cannibals.” Good for him! Because once freed, the august historian was called upon to eat at the august table of Freddie Mac. Of course, he didn’t approach them. He says, “I was approached to offer strategic advice.” Nice work for $1.6 million if you can get it, being an “historian” I mean. And offering The Freddie …”advice on precisely what they didn’t do.” He actually said that. Oh, what they didn’t do, now I get it. The Newton bomb must have been talking about Freddie not raising the fees it charged back in 1995. You probably don’t remember, but back then some actually, really august members of the House wanted Freddie and Fannie to raise their fees to make them more competitive with private mortgage outfits. There was serious concern back then that the Government Sponsored Enterprises were too enterprising and, with their de facto government backing, could raise money cheaper than private outfits and outcompete them in their rather large business space. But Newt-to-the-rescue – the same Newt who said, “I’ve never done a favor for Fannie or Freddie” saw to it that the proposed fees would never see the light of day. Ah, all in a day’s work over at our august Capitol. Is he a liar? I would never accuse anyone of being a liar, you know me… so let me put it nicely… He is a liar. Where was I? A $6.3 Billion Bet Gone Bad. By Louis Basenese, Chief Investment Strategist. In yesterday’s column, I took the time to explain Wall Street’s newest accounting trick – re-hypothecation. Today, I want to share how it led to the loss of $1.2 billion in customer funds and the ultimate demise of MF Global (Other OTC: MFGLQ.PK). And more importantly, what we should take away from this unfortunate situation…Greed is Good? MF Global’s problems didn’t start with re-hypothecation. They started with something much simpler – greed. The firm wanted to make a bet that eurozone bonds would remain default free. I’ll concede that’s a smart bet, given the formation of the European Financial Stability Facility. Essentially, MF Global was banking on a European version of “too big too fail” – betting that the indebted eurozone countries were too important to the global economy to let them default. But a smart bet doesn’t translate into a risk-free bet. And leverage only magnifies risk, which is something MF Global learned the hard way. You see, MF Global didn’t invest a modest amount in bonds of some of Europe’s most indebted nations (Italy, Spain, Belgium, Portugal and Ireland). It invested $6.3 billion. That’s equal to more than five times the firm’s book value! Now, you might be asking yourself, how in the world was MF Global able to make such an outsized bet? With off-balance sheet transactions, of course. (Remember, that’s how Wall Street typically tries concealing its transgressions. Case in point: Enron and special purpose entities.) In this case, MF Global was specifically using “repurchase and reverse repurchase transactions to maturity” to keep its actions off the balance sheet. I won’t bog you down with the details of repo-to-maturity trade. Here’s the gist… MF Global buys a ton of European bonds with high yields maturing in 2012. It then turns around and uses those bonds as collateral to borrow money at very low interest rates. The way this trade works out is simple… Until the bonds mature, MF Global earns the spread – the difference between the high interest it receives on the bonds and the low interest rates it pays on the borrowed funds. When the bonds mature, MF Global uses the principal received to pay off its loans. Simple as that. But it sounds too good to be true, doesn’t it? Well, it seemed a bit surprising to MF Global’s CEO, Jon Corzine, too. In the firm’s most recent earnings conference call, he said, “The spread between interest earned and the financing cost of the underlying repurchase agreement has often been attractive even as the structure of the transaction themselves essentially eliminates market and financing risk.” In other words, such risk free trades shouldn’t exist. And ultimately, they don’t. Can You Say, “Margin Call?” The big risk inherent in MF Global’s repo-to-maturity trades was liquidity. At any point, MF Global’s lenders could require more collateral. And that’s exactly what they did, as the debt crisis in Europe became more uncertain. The only problem? MF Global didn’t have any cash of its own lying around to meet the margin calls. So it pledged its customers’ funds – via re-hypothecation – as additional collateral. The straw that broke the proverbial camel’s back came from the New York Fed. Earlier in the year, the New York Fed designated MF Global a primary dealer, allowing it to trade directly with the bank in the buying and selling of United States government debt. With worries mounting about MF Global’s solvency, the Fed issued a margin call of its own on Friday, October 28. And the jig was up. MF Global filed for bankruptcy protection on Monday, October 31. Ever since then, we’ve been unearthing the details surrounding the company’s ultimate demise. Bottom line: Leverage cuts both ways. Wall Street’s elite always seem to forget about this fundamental principle time and again. Perhaps it’s because they’re always investing with other people’s money instead of their own? Nevertheless, let MF Global’s bankruptcy be yet another reminder that there are no risk-free trades. And that’s why we should relentlessly favor position-sizing over making outsized bets. Monday, January 9, 2012.12:00 a.m… The Wall Street JournalNew York TIMES: Wall Street Prepares to Take Sharp Pay Cut. By LIZ RAPPAPORT And COLIN BARR. A dismal year means Wall Street is about to take a big hit to its wallet. As banks prepare to report fourth-quarter results and make final bonus decisions for 2011, total compensation is likely to be the lowest since 2008, when the financial crisis destroyed some firms and left many survivors on government life support. While still lofty compared to the rest of the U.S., pay for some Wall Street workers will be the lowest in years, at a time when critics have been lashing out at what they deem excessive finance-industry compensation. At Goldman Sachs Group Inc., many of the roughly 400 partners can expect to see their 2011 pay cut at least in half from 2010, according to people familiar with the situation. Pay for some employees in the New York company’s fixed-income trading business will shrink by 60%, with some workers getting no bonus, these people said. Morgan Stanley is expected to shrink bonuses for some investment bankers and traders by 30% to 40% from 2010, said people familiar with the matter. Pay worries have been mounting up and down Wall Street for months amid lower trading revenue, languid deal-making, new regulations and anxiety about the global economy. Other pressures include weak financial-company stock prices and sour public sentiment that culminated in the Occupy Wall Street encampment in New York. J.P. Morgan Chase & Co., one of the biggest banks, is set to report earnings Friday, followed next week by Goldman and other major banking firms. For most of 2011, Wall Street executives offered few specifics about how the lackluster year would affect compensation, especially the large portion that will be paid out as bonuses in the coming weeks. Each quarter the banks set aside a percentage of revenue for benefit costs. Through the first three quarters of 2011, total compensation and benefit costs at 34 publicly traded financial firms tracked by The Wall Street Journal were on pace for a record-high $172 billion. The calculation is based on the companies’ reported results and projections by analysts. But industry observers expect that when all is said and done for the year, many firms will adjust their benefit costs sharply downward, partly to appease shareholders frustrated by soft profits. If the companies apply the same ratio for 2011 as 2010, overall compensation and benefits for last year would be $159 billion for the 34 companies tracked by the Journal, the smallest total since 2008. At Goldman, average compensation per employee would fall 10.7% to $385,000 for 2011 from $431,000 in 2010 if the New York company keeps its payout rate steady in the fourth quarter. In 2007, Goldman employees received an average of $661,000 each, and people throughout the firm are bracing for disappointment. Analysts who follow Goldman expect the securities firm’s revenue to fall 23% for 2011 compared with 2010, according to a survey by FactSet Research Systems Inc. For the typical Goldman partner, pay for 2011, including base salary and bonus, is likely to range from $3 million to $6.5 million, according to people familiar with the matter. In better years, payouts have been at least twice as high, these people said. On Friday, Sanford C. Bernstein analyst Brad Hintz said he expects Goldman to earn just 77 cents a share for the fourth quarter, down from his previous estimate of $3.15 a share. “We do not expect a robust recovery in 2012,” Mr. Hintz wrote. More ominously, executives at some financial firms foresee longer-term changes as a result of economic and regulatory shifts that will limit profitability. “Companies definitely have to realize the party as they know it is over,” said Rose Marie Orens, a senior partner at Compensation Advisory Partners, a New York firm that works with compensation committees at public-company boards. In many cases, pay cuts on Wall Street will come mostly at the top because that is where the largest bonuses are paid. Before the crisis, financial firms competed aggressively to attract and keep up-and-coming talent to groom for the future. As a result of the looming cuts, though, some midlevel employees at investment banks might make more than their managing-director or executive bosses this year, said people familiar with the matter. Wall Street has always reined in pay when times are tough, but competition for star traders and investment bankers discouraged firms from making big overall changes. In the wake of the financial crisis, some firms shrank bonuses and increased base salaries to bend to political pressure. Regulators argued that heavy reliance on bonuses encouraged excessive risk-taking. A broader reckoning is under way now amid widespread cost-cutting. In the second half of 2011, two dozen major global banks and securities firms made plans for a total of 103,000 job cuts. For many Wall Street executives and staff, the new pay structures and cuts in company perks already have hampered their lifestyles. Instead of large cash payouts each year, bankers now are getting more and more of their own companies’ shares. Some cash-strapped employees have sold second homes or gotten loans from their companies to pay bills, said people familiar with the matter. For now, companies are still using larger chunks of their revenue for employee pay. The Journal’s analysis projects that 36% of revenue will go toward compensation and benefits in 2011, up from 33% in 2010. The analysis assumes that the banks, securities firms, asset managers, exchange operators and other companies for the fourth quarter will hold steady the percentage of revenue used for compensation as in the first three quarters. They don’t always do this, however: In each of the past two years, Goldman has reduced its pay ratio in the fourth quarter, holding down compensation and boosting profits. One bright spot this year could be bonuses given out in stock. The stock-price slide that battered most financial firms in 2011, wiping out $295 billion in market capitalization from the 34 companies in the Journal’s analysis, means that stock-based bonuses about to be doled out will be cheap compared with previous years. That could mean a big windfall down the road for employees if financial firms’ stocks climb. —Aaron Lucchetti contributed to this article. Write to Liz Rappaport at firstname.lastname@example.org Fannie Mae CEO to resign By James O’Toole@CNNMoneyJanuary 10, 2012: 6:13 PM ET Fannie Mae CEO Michael Williams. NEW YORK (CNNMoney) — Fannie Mae CEO Michael Williams plans to resign, the government-controlled mortgage giant said Tuesday.
Williams, who took over as president and CEO of the troubled company in 2009, will continue as CEO until Fannie Mae’s board names a successor.
The firm did not provide a specific reason for Williams’ departure; in a statement, Williams said only that he had decided that “the time is right to turn over the reins to a new leader.”
Williams will leave behind a firm still struggling to get its finances in order.
In November, Fannie Mae (FNMA, Fortune 500) reported a net third-quarter loss of $5.1 billion. The loss forced the firm to ask for another $7.8 billion in funding from the Treasury Department, a request that took its bailout total to $112.6 billion.
Federal regulators put Fannie Mae and fellow government-sponsored enterprise Freddie Mac (FMCC, Fortune 500) into conservatorship during the financial meltdown in September 2008. The sister companies now depend on government help to cover losses on the mortgages they own or guarantee.
In October, Freddie Mac CEO Ed Haldeman also announced plans to step down at some point this year.
Williams and Haldeman have faced scrutiny in recent months for their hefty paychecks, granted even as their firms rely on taxpayer support. The targets for their 2011 pay, which will include deferred compensation, are set at about $6 million a piece.
In December, the Securities and Exchange Commission charged six former executives of Fannie Mae and Freddie Mac, including former Fannie CEO Daniel Mudd and former Freddie chief Richard Syron with securities fraud. The SEC alleges that the executives misrepresented the firms’ holdings of high-risk mortgage loans ahead of the financial crisis. Can anyone save Fannie Mae and Freddie Mac? By Paul R. La Monica @lamonicabuzz January 11, 2012: 1:45 PM ET. Former Treasury Secretary Henry Paulson put mortgage agencies Fannie Mae and Freddie Mac into conservatorship in 2008. But little progress has been made since to help them. NEW YORK (CNNMoney) — It has been more than three years since then Treasury Secretary Henry Paulson fired his famous metaphorical bazooka and the federal government seized control of mortgage agencies Fannie Mae and Freddie Mac. Sadly, Fannie and Freddie are still a cause for worry and a source of national embarrassment. Late Tuesday, Fannie Mae said that CEO Mike Williams was stepping down sometime this year. That follows the news late last year that Freddie Mac CEO Ed Haldeman was also planning to leave. Former Fannie CEO Daniel Mudd and former Freddie CEO Richard Syron have each been charged with fraud by the Securities and Exchange Commission. Both agencies, which play key roles in helping to secure financing for homeowners, have continued to rack up sizeable financial losses over the past few years. It is estimated that their bailout will eventually cost taxpayers as much as $124 billion through 2014. Yet, not much has been done to try and change the two companies for the better. There was shockingly little in the way of actual reform for Fannie (FNMA, Fortune 500) and Freddie (FMCC, Fortune 500) in the Dodd-Frank Wall Street Reform Act that became law in 2010. Several members of Congress, including former Senator Chris Dodd and House Rep. Barney Frank, have been accused of conflicts of interest regarding Fannie and Freddie. Lawmakers have repeatedly denied that this played a role in the lack of any major new regulations for Fannie and Freddie. But the biggest problem is that the full government control of Fannie and Freddie makes the agencies convenient legislative tools for members on both sides of the aisle. Turning foreclosures into rentals For example, Congress finally agreed on a temporary extension of the payroll tax cut late last year. But to help finance that, Fannie and Freddie were forced by their overseer, the Federal Housing Finance Authority (FHFA), to raise fees they charge lenders to guarantee new loans. “The problem is that Fannie and Freddie are the cookie jar for Congress. What is going to need to happen is that Fannie and Freddie need to be moved out of conservatorship or this won’t end,” said Anthony Sanders, senior scholar with the Mercatus Center at George Mason University in Fairfax, Va. “Every time you look at the news and see Freddie Mac or Fannie Mae in a headline, you wince about what Congress and FHFA are going to ask them to do next,” Sanders added. Others argue that politicians need to rethink housing policy overall. 0:00 / 03:12 How Fannie Mae spruces up foreclosures It may be heretical for an elected official to suggest that renting is the new American dream. But as long as home ownership is still held up as the pantheon of financial success and a goal for all Americans, expect more of the same from Fannie and Freddie. “Originally, Fannie and Freddie were born out of a sensible goal to create more liquidity in the housing market. But they got co-opted for political reasons,” said Joseph Mason, professor in the department of finance at LSU’s E. J. Ourso College of Business in Baton Rouge. “Nobody in Washington has backed off the populist proposition that everyone should own a home. Until that changes, nothing will change at Fannie Mae and Freddie Mac,” he added. So what’s the solution for Fannie Mae and Freddie Mac? They need to be weaned off the government dole. Instead of having FHFA (foofa!) be their master, the free market should take that job. Fannie and Freddie must go. Here’s how. Yes, I realize that’s asking the same people who helped contribute to the 2008 financial calamity to become more involved again. But that’s still a better alternative than the status quo. “You would hope that over time there is greater private sector participation in the mortgage financing business. It’s not going to happen now given the state of the market, but continuing to use Fannie and Freddie to stimulate housing is not feasible,” said Brian Levitt, economist with OppenheimerFunds in New York. “We have to realize the way things worked before will not work in the future,” Levitt added. Exactly. What incentive is there for a bright, capable CEO to come work for Fannie or Freddie as long as the government is the ultimate boss? To be fair, Fannie Mae and Freddie Mac have cleaned up their balance sheets a bit in the past few years. They have not made the same mistakes in regard to financing bad credit risks as they did during the housing boom. But as long as older loans are a problem, who would want to lead Fannie or Freddie? It’s a thankless job. Both Williams and Haldeman were criticized for their salaries. Who needs that grief? “Fannie and Freddie probably will have a revolving door with CEOs for awhile until something is done on a permanent basis to fix them,” Sanders said. “Legacy loans are killing Fannie and Freddie. It’s an untenable position for executives right now.” But it’s not so untenable for politicians and bureaucrats. That’s the problem. The Political Scene. The Obama Memos. The making of a post-post-partisan Presidency. By Ryan Lizza. January 30, 2012 On a frigid January evening in 2009, a week before his Inauguration, Barack Obama had dinner at the home of George Will, the Washington Post columnist, who had assembled a number of right-leaning journalists to meet the President-elect. Accepting such an invitation was a gesture on Obama’s part that signaled his desire to project an image of himself as a post-ideological politician, a Chicago Democrat eager to forge alliances with conservative Republicans on Capitol Hill. That week, Obama was still working on an Inaugural Address that would call for “an end to the petty grievances and false promises, the recriminations and worn-out dogmas that for far too long have strangled our politics.” Obama sprang coatless from his limousine and headed up the steps of Will’s yellow clapboard house. He was greeted by Will, Michael Barone, David Brooks, Charles Krauthammer, William Kristol, Lawrence Kudlow, Rich Lowry, and Peggy Noonan. They were Reaganites all, yet some had paid tribute to Obama during the campaign. Lowry, who is the editor of the National Review, called Obama “the only presidential candidate from either party about whom there is a palpable excitement.” Krauthammer, an intellectual and ornery voice on Fox News and in the pages of the Washington Post, had written that Obama would be “a president with the political intelligence of a Bill Clinton harnessed to the steely self-discipline of a Vladimir Putin,” who would “bestride the political stage as largely as did Reagan.” And Kristol, the editor of the Weekly Standard and a former aide to Dan Quayle, wrote, “I look forward to Obama’s inauguration with a surprising degree of hope and good cheer.” Over dinner, Obama searched for points of common ground. He noted that he and Kudlow agreed on a business-investment tax cut. “He loves to deal with both sides of the issue,” Kudlow later wrote. “He revels in the back and forth. And he wants to keep the dialogue going with conservatives.” Obama’s view, shared with many people at the time, was that professional pundits were wrong about American politics. It was a myth, he said, that the two political parties were impossibly divided on the big issues confronting America. The gap was surmountable. Compared with some other Western countries, where Communists and far-right parties sit in the same parliament, the gulf between Democrats and Republicans was narrow. Obama’s homily about conciliation reflected an essential component of his temperament and his view of politics. In his mid-twenties, he won the presidency of the Harvard Law Review because he was the only candidate who was trusted by both the conservative and the liberal blocs on the editorial staff. As a state senator in Springfield, when Obama represented Hyde Park-Kenwood, one of the most liberal districts in Illinois, he kept his distance from the most left-wing senators from Chicago and socialized over games of poker and golf with moderate downstate Democrats and Republicans. In 1998, after helping to pass a campaign-finance bill in the Illinois Senate, he boasted in his community paper, the Hyde Park Herald, that “the process was truly bipartisan from the start.” A few years later, Obama ran for the U.S. Senate and criticized “the pundits and the prognosticators” who like to divide the country into red states and blue states. He made a speech against the invasion of Iraq but alarmed some in the distinctly left-wing audience by pointing out that he was not a pacifist, and that he opposed only “dumb wars.” At the 2004 Democratic Convention, in Boston, Obama delivered a retooled version of the stump speech about ideological comity—“There is not a liberal America and a conservative America; there is the United States of America!”—and became a national political star. In 2006, Obama published a mild polemic, “The Audacity of Hope,” which became a blueprint for his 2008 Presidential campaign. He described politics as a system seized by two extremes. “Depending on your tastes, our condition is the natural result of radical conservatism or perverse liberalism,” he wrote. “Tom DeLay or Nancy Pelosi, big oil or greedy trial lawyers, religious zealots or gay activists, Fox News or the New York Times.” He repeated the theme later, while describing the fights between Bill Clinton and the Newt Gingrich-led House, in the nineteen-nineties: “In the back-and-forth between Clinton and Gingrich, and in the elections of 2000 and 2004, I sometimes felt as if I were watching the psychodrama of the Baby Boom generation—a tale rooted in old grudges and revenge plots hatched on a handful of college campuses long ago—played out on the national stage.” Washington, as he saw it, was self-defeatingly partisan. He believed that “any attempt by Democrats to pursue a more sharply partisan and ideological strategy misapprehends the moment we’re in.” If there was a single unifying argument that defined Obamaism from his earliest days in politics to his Presidential campaign, it was the idea of post-partisanship. He was proposing himself as a transformative figure, the man who would spring the lock. In an essay published in The Atlantic, Andrew Sullivan, a self-proclaimed conservative, reflected on Obama’s heady appeal: “Unlike any of the other candidates, he could take America—finally—past the debilitating, self-perpetuating family quarrel of the Baby Boom generation that has long engulfed all of us.” Obama was not exaggerating the toxic battle that has poisoned the culture of Washington. In the past four decades, the two political parties have become more internally homogeneous and ideologically distant. In “The Audacity of Hope,” Obama wrote longingly about American politics in the mid-twentieth century, when both parties had liberal and conservative wings that allowed centrist coalitions to form. Today, almost all liberals are Democrats and almost all conservatives are Republicans. In Washington, the center has virtually vanished. According to the political scientists Keith T. Poole and Howard Rosenthal, who have devised a widely used system to measure the ideology of members of Congress, when Obama took office there was no ideological overlap between the two parties. In the House, the most conservative Democrat, Bobby Bright, of Alabama, was farther to the left than the most liberal Republican, Joseph Cao, of Louisiana. The same was true in the Senate, where the most conservative Democrat, Ben Nelson, of Nebraska, was farther to the left than the most liberal Republican, Olympia Snowe, of Maine. According to Poole and Rosenthal’s data, both the House and the Senate are more polarized today than at any time since the eighteen-nineties. http://www.newyorker.com/reporting/2012/01/30/120130fa_fact_lizza#ixzz1kOxrNpDR America’s Financial Doomsday An historic, world-changing event is about to crush the U.S. economy and stock market. It will destroy the income, savings, investments and retirements of millions of Americans. It will plunge vast numbers of families into the nightmare of poverty … hunger … and homelessness. Only a minority of investors will survive intact. And some will actually build their wealth in the process. In this video, I’m going to reveal some very disturbing facts about America’s economic decline and how it’s now threatening your financial security. These facts are so shocking, that I’ve decided to present them to you in a special format that is absolutely clear and fully documented, starting right now … I’m Martin Weiss, founder of Weiss Research. You may know my company because every day, more than 500,000 people get our financial publications. And hundreds of thousands more have used our Weiss Ratings on banks, insurance companies and stocks to help make prudent financial decisions. You may also know us because we’ve been on TV and in the newspapers a lot lately: We were the first rating agency in the word to tell the truth, the whole truth and nothing BUT the truth about the financial mess the United States government has gotten itself into. But my story
is definitely NOT unique … More recently, this kind of crisis has also struck a very powerful European nation. After its leaders made the same mistake ours are making now, the country’s bonds collapsed in value, interest rates exploded to over 200%. In just six months, its stock market plunged 75%. The common people suffered tremendously: A staggering 60% of the workforce was paid only partially and received their paychecks months after they were due. As the economy collapsed, millions of average citizens fell victim to crime and corruption. The police demanded bribes for traffic violations — both real and imagined. Organized crime syndicates divvied up the country into their own private fiefdoms, profiting from protection rackets, prostitution, smuggling, narcotics-peddling and even murder for hire. The government itself admitted that the criminals owned or controlled about half of the country’s private businesses. A friend of mine said: “Many banks, including some of the largest in the country, shut down. They closed their doors forever. Our savings were wiped out. “All people could do about it was to go to their banks and hammer on locked doors. “Other people demonstrated on the streets. They carried their devalued money in miniature coffins and marched past our central bank.” All this happened in the 1990s — in Russia, formerly one of the most powerful nations on the face of the Earth. Of course, the U.S. is not Russia; we have far stronger democratic institutions. And our economy is far larger than Brazil’s, but when a nation’s larders make the same mistakes Brazil and Russia made, the consequences are invariably going to be similar. The people of Brazil and Russia paid dearly for their leaders’ blunders. Barring a miracle, the American people are also about to pay a very big price. Europe is suffering through
this same kind of crisis
RIGHT NOW! For a sneak preview of the doomsday event about to strike the United States, just look at the catastrophe taking place in Western Europe right now. In Greece, a friend of mine reports: “Everywhere in Greece, home values are plunging. Unemployment is soaring. One in four Greeks, including over 450,000 children, live in poverty. Crime is exploding. “Athens is beginning to look like a ghost town. Everywhere you look, shop windows are boarded up. Of those that are still open, most are running going-out-of-business sales.” Greece is not alone! But Greece is not alone! In Spain, similar stories are being told in Madrid, Barcelona and 50 other cities across the country. Tens of thousands of workers have taken to the streets to protest a problem they thought they’d NEVER see again in their lifetime: Not just 10% official unemployment like we’ve recently seen in the U.S. — but 21% official unemployment! A friend of mine in Madrid says: “You wouldn’t believe what I’m seeing here on the streets of Madrid. Beggars outnumber tourists and protesters outnumber beggars. “In front of Parliament, riot police stand watch to protect lawmakers from angry mobs. All over the country, in Viscaya, Cataluña, Andalucía, we see the same thing.” In Ireland, the government faced immediate default and was forced to impose harsh austerity measures that plunged the country into depression. In London and cities all across England, similar kinds of austerity measures recently triggered the worst riots of modern times. Entire neighborhoods went up in flames. Even large commercial buildings were set on fire, and left in ruins. Worse, this financial and social crisis is threatening to spread to countries like Italy, France and even Germany. Now, you may be thinking, “But we’re different! Nothing like that could ever happen here.” I assure you: The people of Brazil, Russia, Greece, Ireland and Spain never dreamed it could happen there, either! The truth is our own leaders have made the same financial blunders that their leaders made. As my Greek friend says: “You can’t save a nation that’s drowning in debt by throwing more debt at it any more than you could save a drowning man by throwing more water on him.” Look, in every one of these countries, the pattern is clear: First, the government spends everything it has. Next, the government borrows all it can from its people. Then, it borrows still more from foreign countries and banks. Finally … The debts become so onerous and horrendous that they trigger the doomsday event:The U.S. is now in WORSE shape
than Brazil, Russia, Greece or Spain have ever been Consider the high-risk gambles that super-investor Warren Buffett calls “financial weapons of mass destruction.” I’m talking about special kinds of investments called “derivatives.” They were a major cause of the real estate and debt crisis that nearly wiped out all of our largest banks in 2008 — along with the entire U.S. economy. Russia’s banks never exposed themselves to large amounts of these financial time bombs. Neither did Brazil’s banks. And you’d think that, after the 2008 meltdown, U.S. banks would have learned their lesson. But you’d be wrong. According to the Comptroller of the Currency, a division of the U.S. Treasury Department — U.S. banks held $176 trillion in derivatives at the height of the debt crisis in 2008. Today, U.S. banks hold $244 trillion in derivatives — nearly 40% more. That fact alone places the U.S. in greater danger than many other countries, past or present. U.S. debt and obligations
are now OVER $120 TRILLION! America is also in great danger for another big reason. Washington is now sitting on the largest pile of debt in the history of civilization: About $14.5 trillion and counting. Hard to visualize what that much money looks like? Maybe this will help … If you asked your bank to give you a stack of $100 bills worth one million dollars, it would look like this — a neat little pile of money … One billion dollars looks a LOT more impressive. But here’s what one trillion hundred-dollar bills would look like. And this is our current national debt: $14.5 trillion. It’s a positively staggering amount of money. And it doesn’t even begin to include the debts Washington inherited from Freddie Mac and Fannie Mae or all the money Washington owes to seniors for Social security and Medicare, or to veterans and government pensioners. Add that in, and Washington’s total obligations are over $120 trillion. But it’s not just the sheer size of our nation’s debt that’s so frightening. It’s the fact that it’s mushrooming so rapidly — at a speed that’s far greater than anything we’ve ever seen: Washington is now growing the debt by AT LEAST $1 trillion each and every year. Now, at this point, you’re probably thinking: “But surely — our leaders will ultimately do the right thing and STOP bankrupting us — right?” But the reality is that Washington has consistently made the opposite choice. The die was cast in 2008, when the housing bubble burst and giant banks were going bust. At the time, the U.S. government could have simply allowed those who had made the big gambles to suffer the natural consequences of their actions. Instead, Washington bailed out the banks, absorbed those bad debts, and spent trillions of dollars to fight the recession. Washington lies,
the economy dies. At the time, some people thought that was a god idea. But look what happened. In just 12 months between 2007 and 2008, Washington TRIPLED the federal deficit from $161 billion to $459 billion. Of course, our leaders swore on a stack of Bibles that this was a one-time-only event, needed to fight the recession. They lied. Washington tripled the deficit AGAIN … to $1.4 trillion in 2009. Then, again, they solemnly promised that this, too, was temporary — for emergency purposes only. But that was a lie, too. The 2010 deficit was $1.3 trillion. Plus, the deficit for 2011 is the biggest of all: More than $1.5 trillion. And in a double-dip recession, the deficit could surge to $2 trillion dollars. All these dramatic changes and all these lies are what inevitably lead to the doomsday event that is now on the near horizon for America. Still skeptical? Then consider this shocking change … We’ve sold our American birthright
for a mess of porridge. In the past, Washington always borrowed nearly all the money it needed from its own citizens. But in recent years, it has borrowed most of the money from foreigners, especially China, and now it owes foreigners over $4 trillion dollars. That’s over four times MORE than it owed foreigners when the U.S. plunged into recession in the early 2000s. But it still hasn’t been enough. The White House and Congress wanted to spend even more money than Americans and foreign investors would loan us — combined. The Fed declared WAR
on the value of your money! So the Federal Reserve printed hundreds of billions of paper dollars and loaned most of that money to the Treasury, too. How many hundreds of billions of dollars? Let me put it into perspective for you. Remember 1999, when everyone was worried that the Y2K bug would crush our economy? Well, to avert a collapse, the Fed printed $73 billion to keep the banks from collapsing. That’s the first blip on this chart. Now let’s go to 9/11, when the terrorist attacks in New York and Washington paralyzed the economy, the Fed printed another $40 billion. That’s the second blip on the chart. Every time, the Fed cranked up the printing presses, financial experts went ballistic. They said the amounts were so huge; they might diminish the dollar’s value. And sure enough, the value of the dollar did plunge. But that was only a drop in the ocean compared to what the Fed has been doing lately. Since the big debt disaster of 2008 — when the giant Lehman Brothers failed. The Fed has printed more than $1.6 TRILLION dollars. That’s twenty-two times MORE money than the Fed created during Y2K. And it’s FORTY-ONE times more than it printed after 9/11! That’s why the buying power of your money is cratering. That’s why your cost of living is soaring. That’s why butter has jumped 22%, gasoline has soared 35%, and coffee has skyrocketed a mind-boggling 42% — all in a single year! And that’s also why America is headed for the financial doomsday I will soon describe to you. But first … SHOCKER:
You’re only HALF as rich
as you think you are! Look at silver! Since the Federal Reserve began its latest money-printing binge at the height of the debt crisis, the price of silver more than quadrupled. And look at gold; it has more than doubled in price! But all this is only the beginning. In Brazil, Russia, Greece and Ireland what happened next was that revenues and tax collections began to fall. It became impossible for those governments to repay its debts. And here again, the United States is following a similar pattern: Despite the massive amounts of money Washington has thrown at it, the U.S. economy is sinking — and government revenues are falling — AGAIN! The U.S. Bureau of Labor Statistics that long-term unemployment in the United States is now at catastrophic levels. More than 14 million Americans are now out of a job — and every week, hundreds of thousands more get their pink slips. And once someone loses a job, it takes an average of more than 25 weeks — nearly half a year — to find a new one. That’s not just “a little bit” worse than during prior recessions. It’s more than 2.5 times worse than during the big recession in the mid-1970s. And it’s also far worse than during the financial crisis of 2008-2009. Plus, the housing crisis that triggered this great recession in the first place is now growing more severe. Consider the conclusions of Case-Shiller, the real estate industry’s most trusted source of home price information: They report that the median price of a home is down more than 31% and is still plunging. That’s right. The price of existing homes in America has fallen BELOW the lowest level it reached in depths of the Great Recession of 2008-2009! In short, despite the trillions Washington has blown on stimulus and bailouts, we are now staring down the barrel of a huge double-dip recession. That’s especially scary this time around. Because this time, the government isn’t putting money into the economy with more stimulus. The government has no choice but to take money OUT of the economy with budget cuts! And as the economy falls, instead of collecting more from taxes, it collects LESS. The money Washington so desperately needs to pay the interest on its debt simply vanishes. Look, throughout history, we’ve learned that when a nation becomes this deeply indebted and in this much economic trouble, the next step is always the same: In every case, the next step is the monumental event, the far greater calamity that I promised to tell you about. COMING NEXT:
The moment when all hell breaks loose … So what is the ultimate catastrophe that doomed the people of Russia and Brazil to decades of poverty! So what is the ultimate catastrophe that doomed the people of Russia and Brazil to decades of poverty and dependence? What is the next bombshell that’s beginning to explode in Europe, destroying the people’s wealth and threatening to rob them of their personal freedoms? What is the historic, life-changing, world-changing event that is also about to vaporize massive amounts of wealth and potentially threaten our liberties right here in the United States of America? It’s the singular moment in time when the last investor willing to loan money to the government calls it quits. It’s when the government can no longer borrow and simply runs out of money. That’s the moment when all hell breaks loose. No, I’m not talking about what would happen if Congress simply failed to raise the debt limit like it almost did in August of 2011. That was a just a sneak preview of the true big event still dead ahead. I’m talking about, a sudden rejection of U.S. debt by the world’s investors — a creditors’ revolt that suddenly leaves Washington with no choice but to live within its means. Think about that: What would happen right now if our federal government was no longer able to find more willing lenders, no longer able to borrow money? Before you answer though, remember this: Washington has to borrow nearly half of every dollar it spends today. It has to borrow nearly half of every dollar it spends on national defense, and homeland security. It has to borrow nearly half of every dollar it pays in Social Security, Medicare benefits, and unemployment benefits, plus half of what it gives to U.S. veterans, government pensioners, the poor and the disabled. And it has to borrow half of every dollar it spends to repay money it borrowed five years ago … ten years ago … even 30 years ago. What will happen when global investors deny our application for yet another loan? When the Chinese and other foreign lenders say “No more!” to losing their shirts as Washington guts the value of the dollars they earn? When they simply say: “Sorry — but America’s line of credit is CANCELLED. Washington’s loan application is DENIED!” This is not far off. The warning signs are already here … Warning sign #1: According to Beijing officials, China, the world’s largest buyer and holder of U.S. government securities, has suffered a loss of $271.1 billion between 2003 and 2010 as a result of the dollar’s steady depreciation. Warning sign #2: In June of 2011, China’s National Development and Reform Commission announced it could lose another $578.6 billion if it continues to hold these huge loans to the U.S. Will they continue to suffer these losses passively? The answer is … Warning sign #3: Two high officials — Zhou Xiaochuan, the head of China’s central bank and Xia Bin, a member of the monetary policy committee of the central bank — are ready to bolt. Both recently made it clear that they could easily get away with a huge reduction in the amount of U.S. treasuries they own. I repeat:
This is already beginning to happen! Other nations are also shifting their reserves from U.S. Treasuries to gold and silver, plus oil, coal, and other tangible assets. Mexico, Russia and Thailand have recently bought well over 100 tons of gold instead of U.S. treasuries. Even Tanzania is planning to shun the dollar and shift its reserves into gold! Gains of 245% … 369% …
and more are possible! Put simply, that fateful day — when Washington is no longer able to borrow the money it desperately needs is speeding toward us like a runaway freight train. This is why Congressman Ron Paul recently issued this somber warning: “At the present time the Chinese have backed off from what they’re loaning us, interest rates are starting to go up, inflation factors are coming up. “Believe me, that next step is a currency crisis because there will be a rejection of the dollar. The rejection of the dollar is a big, big event.” Congressman Paul is correct. The worst-case scenario … When Washington can no longer borrow money, it will have no choice but to immediately slash spending. And since nearly half of every dollar it spends is borrowed, our leaders will have no choice but to radically reduce, delay or even cancel payments to seniors, veterans, the poor, the disabled and pensioners. Millions who count on government checks will suddenly find themselves on the ropes, struggling to survive. Therefore, with government programs slashed or cancelled … With consumers paralyzed in fear … With the U.S. economy in intensive care … With tax revenues plunging, and … With global investors refusing to lend more money to Uncle Sam … Here is the worst-case scenario — the scenario I fear the most … Hunger and homelessness explode to pandemic levels from coast to coast. The victims take to the streets. Rallies turn into demonstrations … then, into protests … and finally, into riots. With law enforcement severely crippled by the spending cuts, crime skyrockets. With fire departments running at austerity levels, cities burn. With emergency services and hospitals out of money, people die. As we saw in Brazil and Russia, Washington has no choice but to restore order by taking away your personal freedoms. And never forget this final, devastating fact: No bank … no government … no group of nations … is rich enough to save America. Members of Congress:
“A Fiscal Titanic”
“A Death Spiral” Still finding all this hard to believe? Then consider these ten former heads of the Council of Economic Advisors. They are the men and women who directly advised presidents of both major parties, including President Obama, and all of them have since departed from their office. They recently wrote that that the next debt crisis could, and I quote “Dwarf 2008!” That’s an absolutely shocking assertion: In 2008, Wall Street came within a hair of a massive, devastating meltdown. Virtually ALL of our largest banks were pushed to the brink of failure. The entire country was only a few hours away from a fatal collapse. Now, these ten former White House advisors are warning that this next debt crisis could dwarf the last one. Why? What could cause that? They say it’s precisely the doomsday event I just told you about: The fact that one day foreigners may simply stop lending more of their money to the United States. And these ten former presidential advisers are not the only ones ringing the alarm bells. Senator Mark Warner says, “We’re approaching financial Armageddon.” Senator Joe Manchin calls this crisis “A fiscal Titanic.” Admiral Mike Mullen, the chairman of the Joint Chiefs of Staff, is warning that this crisis is “the biggest threat to our national security.” Senator Mike Crapo says it is “a threat to not just our way of life, but to our national survival.” It has the power to “ … guarantee that this nation becomes a second-rate power with less opportunity and less freedom.” And David Walker — the former U.S. Comptroller General and director of the Government Accountability Office says: “The bottom line is: We’re not Greece. But we could end up with the same problems!” And mind you, these men are not extremists. They have nothing to gain by trying to scare you. They are merely following the facts to their logical conclusion. That’s what I’ve done in this report. The warnings I’ve given you are based on nothing more — and nothing less — than economic reality and historical fact. My research team and I have simply crunched the numbers and let the chips fall where they may — just like we did when we issued “D” ratings on nearly every big bank and savings and loans that subsequently failed. Just like we did when we gave a “C” rating to the United States. We have no political axe to grind. We are not beholden to Republicans, Democrats, or any other political party. Nor do we owe allegiance to Wall Street or any of the thousands of banks, companies and countries that we rate. In fact, most of them would probably prefer that we just kept our mouths shut. One giant company even threatened my life by saying “Weiss had better shut up or get a body guard.” But to quote Harry Truman, “I never give them hell. I just tell the truth and they think it’s hell.” Good luck and God bless! Martin D. Weiss, Ph.d.
Publisher, Safe Money Investor Service. Safe Money Report
15430 Endeavour Drive
Jupiter, FL 33478
561-625-6685 (Fax) Flashback: Romney Pleased With Geithner, Backed TARP Tuesday, 31 Jan 2012 11:27 AM By Jim Meyers More ways to share… Mixx Stumbled LinkedIn Vine Buzzflash Reddit Delicious Newstrust Technocrati 0 Mitt Romney said three years ago that he was “pleased” with the appointment of Timothy Geithner as Treasury secretary — even after it came to light that Geithner had not paid the taxes he owed.
A newly discovered video of Romney’s appearance on “Fox and Friends” also shows the former Massachusetts governor and current GOP presidential candidate saying he thought the TARP was the “right thing to do” — and calling the $1 trillion stimulus package “necessary.”
President-elect Barack Obama announced on Nov. 24, 2008, the nomination of Geithner, the president of the Federal Reserve of New York, for the Treasury secretary post. Soon thereafter, it disclosed that Geithner had failed to pay $35,000 in self-employment taxes for the years 2001 to 2004, which he termed an honest mistake.
During Romney’s interview with the Fox News Channel, he was asked whether he still thought Geithner was the “right guy” for the job.
“When I heard about his announcement I must admit I was pleased,” Romney responded.
“He’s a person of accomplishment and skill. I think he’s a very bright individual and obviously we’re learning as much as we can about his tax dealings in the past and his level of integrity.
“I think it’s appropriate to really delve into this matter. If they find it was an honest mistake, then I think he should be confirmed. If they find it was deliberate tax evasion, that’s a very different matter. Then a person would not be qualified.
“I certainly hope it turns out just to be an honest mistake.”
Earlier, Romney had expressed support for the Troubled Asset Relief Program (TARP), signed by President George W. Bush in October 2008, which allowed the Treasury Department to buy or insure troubled assets, including bank holdings.
Asked whether he still supported it, Romney said: “TARP was the right thing to do. TARP was designed to keep our financial system from collapsing.
“You have to have a financial system for an economy to run and TARP was designed to keep our financial system from crumbling.”
It was pointed out that TARP had bailed out banks so they could lend money, but instead had largely kept the money or used it to buy other banks.
Romney commented: “The end result was to make sure that we don’t lose our banking system. The first responsibility of a bank is not to make loans. The first responsibility of a bank is to be able to repay the depositors their deposit.
“Banks are being cautions because they’re concerned about whether loans they have already made are going to be repaid, and that’s something we can hardly be highly critical of.”
He also commented on the Obama-supported stimulus package, which eventually would cost more than $1 trillion: “If we’re going to have a stimulus plan, which I think is necessary, it should have as its centerpiece a tax reduction, which creates incentives to grow and add jobs.”
Read more on Newsmax.com: Flashback: Romney Pleased With Geithner, Supported TARP February 2, 2012 Bankers Committed Fraud to Get Bigger Bonuses by Shah Gilani Dear Reader, In case you didn’t catch the article titled “Guilty Pleas Hit the ‘Mark'” in yesterday’s Wall Street Journal, I’m here to make sure you don’t miss it. This is too good. Three former employees of Credit Suisse Group AG (NYSE:CS) were charged with conspiracy to falsify books and records and wire fraud. They were accused of mismarking prices on bonds in their trading books by soliciting trumped-up prices for their withering securities from friends in the business. By posting higher “marks” for their bonds in late 2007, they earned big year-end bonuses. What a shock! What’s not a shock is that, after a bang-up 2007, Credit Suisse had to take a $2.85 billion write-down in the first quarter of 2008. No one knows how much of that loss was attributable to the three co-conspirators, who were fired over their “wrongdoing.” Two of the three accused pleaded guilty. Also not shocking is the reason David Higgs – one who pleaded guilty – gave for his actions. He said he did it “to remain in good favor” with bosses, who determined his bonus, and who profited handsomely themselves from his profitable trading and inventory marks. As for Salmaan Siddiqui, the other trader who pleaded guilty? His attorney Ira Sorkin, the former SEC enforcement chief, said of his client, “What he did was the result of his boss and his boss’ boss directing him to do it.” You know what else is shocking? Everyone was dong this at all the brokerages, investment banks and commercial banks that had trading desks… and only three people have been charged. What’s even more shocking (though not to me) is that the “system” has been engineered over years to allow banks to hold riskier and riskier securities, with more and more leverage, and, in the most egregious affront to sense and safety, be allowed to mark their inventories (including exotic instruments that no one really knew how to price) based on internal “models” and extrapolated scenarios. Whatever that means. Everyone up the chain, from the trader making bets to his boss, his boss’ boss, all the way up to the chairman, eats off the same plate. And you know what they say about where you eat… Marking your trading book within the bounds of what you can get away with isn’t exactly condoned, but neither is it frowned upon – especially at year-end, when bonuses are being calculated. After all, you’ll always have next year to trade out of losses or turn them into winners. It’s about getting paid and how much. But don’t just blame the traders and their bosses. Blame the politicians and the regulators who tore up sound Depression-era banking laws and coddled big banks by “desupervising” them when deregulation didn’t deliver the whole train to the station. Find out where the mortgage-backed securities boom really started, who greased some of the steepest slopes, and why and how everything leads back to bonuses. How Deregulation Ended Honesty in the Banking Sector Here’s what happened, in broad strokes (borrowed from articles I’ve written for MoneyMorning.com). In 1988, the Basel Accord established international risk-based capital requirements for deposit-taking commercial banks. In a byproduct of the calculations of what constituted mortgage-related risk (traditional mortgage loans have long maturities and are illiquid), lenders were expected to set aside substantial reserves; however, “marketable securities” that could theoretically be sold easily would not require much in the way of reserves. To free up reserves for more productive pursuits, banks made a wholesale shift from originating and holding mortgages to packaging them and holding mortgage assets in a securitized form. That lessened asset-quality considerations and ushered in the new era of asset-liquidity considerations. Meanwhile, over at the U.S. Commodities Futures Trading Commission (CFTC), the appointment of free-market disciple Wendy Gramm (wife of then-U.S. Sen. Phil Gramm (R-Tex.)) as chairman would result in her successful 1989 and 1993 exemption of swaps and derivatives from all regulation. These actions would turn out to be consequential in the reign of terror that was to come… In 1993, with her agenda accomplished, Wendy Gramm resigned from her CFTC post to take a seat on the Enron Corp. board as a member of its audit committee. We all know what happened there. (Wait a minute; I did say she was on the audit committee, right?) Of course, Enron’s fraud and implosion became the poster child for deregulation run amok. It ultimately helped spawn Sarbanes-Oxley legislation, which has its own issues, but nonetheless has prevented all kinds of fraud and inappropriate behavior on account of the fact that top executives have to attest to the veracity of, and sign off on, all financial documents and other “stuff.” Now, don’t lose any sleep over the fact that of all the CEOs and CFOs and other muckety-muck multi-multi-millionaire executives that ran and still run the too-big-to-fail banks and the banks and investment banks that did fail or were merged (because they failed but were valuable to banks who wanted to make themselves bigger so they would never be allowed to fail) ever were charged with any crime under Sarbanes-Oxley. Why shouldn’t you worry? Because, silly, there’s a concerted effort to do away with the law. After all, don’t you know, it hampers business from creating jobs, which we desperately need? Hold on. Sorry. I just returned from the bathroom, where I was getting sick. Anyway, the constant flow of money to lobbyists and into legislators’ campaign coffers was paying off for banking interests. The Fed, under Chairman Greenspan, along . With Robert Rubin and Larry Summers, was methodically deconstructing the foundation of the Depression-era Glass-Steagall Act. The final breaching of the wall occurred in 1998, when Citibank was bought by Travelers. The deal married Citibank, a commercial bank, with Travelers’ Solomon, Smith Barney investment bank, and the Travelers insurance business. There was only one problem: The deal was clearly illegal in light of Glass-Steagall and the Bank Holding Company Act of 1956. However, a legal loophole in the 1956 BHC Act gave the new Citicorp a five-year window to change the landscape, or the deal would have to be unwound. Phil Gramm – the fire breathing free-marketer, Texas senator, and then-chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs (and loving husband of Wendy) – rode to the rescue, propelled by a sea of more than $300 million in lobbying and campaign contributions. In 1999, in the ultimate proof that money is power, U.S. President Bill Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization Act, at once doing away with Glass-Steagall and the 1956 BHC Act, and crowning Citigroup Inc. (NYSE:C) as the new “King of the Hill.” From his position of power, Sen. Gramm consistently leveraged his Ph.D. in economics and free-market ideology to espouse the virtues of subprime lending, where he famously once stated: “I look at subprime lending and I see the American Dream in action.” If helping struggling borrowers pursue their homeownership dreams was such a noble cause, it might have been incumbent upon the senator to not block legislation advocating the curtailment of predatory lending practices. Oh well. Let’s not quibble with a Senator. From 1989 through 2002, federal records show that Sen. Gramm was the top recipient of contributions from commercial banks and among the top five recipients of campaign contributions from Wall Street. (See my article “How Subprime Borrowing Fueled the Credit Crisis.”) Since moving on from the Senate in 2002 to mega-universal Swiss banking giant UBS AG (NYSE:UBS), where he serves as an investment banker and lobbyist, Gramm makes no apologies. “The markets have worked better than you might have thought,” he has been quoted as saying. “There is this idea afloat that if you had more regulation you would have fewer mistakes. I don’t see any evidence in our history or anybody else’s to substantiate that.” On April 28, 2004, in a fitting (and perhaps flagrant) final act of eviscerating prudent regulation, the SEC ruled that investment banks could essentially determine their own net capital. The insanity of that allowance is only surpassed by the fact that the SEC allowed the change because it was simultaneously demanding greater scrutiny of the books and records of what were the holding companies of investment banks and all their affiliates. The tragedy is that the SEC never used its new powers to examine the banks. The idea was that Consolidated Supervised Entities (CSEs) could use internal “models” to determine risk and compliance with net capital requirements. In reality, what the investment banks did was essentially re-cast hybrid capital instruments, subordinated debt, deferred tax returns, and securities with no ready market into “healthy” capital assets, against which they reduced reserve requirements for net capital calculations and increased their leverage to as much as 30:1. (Here’s “How Wall Street Manufactures Financial Services Products,” an insider’s look at how greed on Wall Street results in unscrupulous investment instruments.) When the meltdown came, the leverage and concentration of bad assets quickly resulted in the shotgun marriage of insolvent Bear Stearns Cos. to JP Morgan Chase & Co. (NYSE:JPM), the bankruptcy of Lehman Brothers Holding, the sale of Merrill Lynch to Bank of America Corp. (NYSE:BAC), and the rushed acceptance of applications by Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) to convert to bank holding companies so they could feed at the taxpayer bailout trough and feast on the Fed’s new smörgåsbord of liquidity handouts. There are no more CSEs (the SEC announced an end to that program in September). The old investment bank model is dead. The motivation for bankers to undermine and inhibit prudent regulation is inherent in banker compensation incentives. The Journal of Financial Research sums up the problem on compensation by concluding: “Firm characteristics that influence managerial compensation include leverage (as a measure of observable risk) market-to-book ratio of assets, size and shareholder return. Evidence suggests that Bank Holding Companies may be exploiting the deposit insurance mechanism because leverage is a significant factor in their results for incentive-based components of compensation. Our results strongly support the view that fundamental shifts in business activities of Bank Holding Companies have influenced their compensation strategies.” And we wonder if bankers are good people or merely compensation and bonus whores… You do the math. As far as telling you what’s wrong with America – a lot of you wrote in to say you DO want to know – this is part of it. But we can see this part clearly. What we can’t see is how we really got here, where here is, and where we’re going next. You’ll get that on Sunday. Not because I want to ruin your Super Bowl Sunday. But because I hope you pass it along to the friends you’ll gather with later in the day, and before the beer flows and the game starts, maybe you’ll ask yourself and ask your friends… is this really happening? Shah. February 3, 2012 By Shah Gilani, Capital Waves Strategist, Money Morning What may be good news for delinquent credit card holders may also be really bad news for banks.
It turns out the “robo-signing” of foreclosure affidavits is just the tip of the iceberg.
In what one judge called “robo-testimony,” falsely attested-to statements by bank document custodians have been submitted in courts around the country by banks trying to win judgments against delinquent credit card debtors.
Apparently, tens of millions of credit cards issued by banks have not been accompanied by good recordkeeping, either.
Chasing down delinquent borrowers in court requires original credit agreements and accurate payment histories to verify outstanding balances and claims.
As it turns out, banks aren’t providing them – either to the courts or to third-party debt collection companies that buy uncollected debts for pennies on the dollar.
As a result of these shoddy practices, judgments already granted to banks could be overturned and they could be sued by state attorney generals or pursued by the Consumer Financial Protection Bureau.
The same banks could even be potentially charged by the Justice Department under the Racketeer Influenced and Corrupt Organizations (RICO) Statutes for selling dubiously documented accounts to debt collection companies.
While some debtors will take comfort in what they read here, investors in banks may want to question how legal issues and regulatory investigations will impact their stocks. Questionable bank documentation submitted to courts may be the reason JPMorgan Chase & Co. (NYSE: JPM) abruptly abandoned over 1,000 debt collection lawsuits in April 2011.
However, debtors whose pending cases were dismissed aren’t out of the woods yet. All of Chases’ suits were dismissed “without prejudice,” meaning Chase can re-file the cases in the future. A Debt Collector’s Dirty Trick The only relief long-delinquent borrowers have is the statute of limitations imposed by most states on debt collection.
Statutes of limitation, which are typically between two and 15 years, are by themselves no guarantee that debt collection agencies, which buy accounts from banks, won’t try to still collect.
Some debt collection companies entice delinquent borrowers who are beyond their statute of limitation requirements to make payments by offering to reduce the whole amount owed.
Their aim is to get the borrower to make even a single payment. It’s an old trick.
By paying anything on a debt that is past the statute of limitations, the debt is brought back to life again and the statute of limitations clock starts all over from the date of the new payment.
It’s why debtors are browbeaten and enticed to make payments through mailings, harassing calls, and “transfer of balance” offers for new credit cards, which requires old debts to be rolled into the new credit agreement.
The industry term for restarting the clock on old debts is called “re-aging.”
The Federal Trade Commission’s Bureau of Consumer Protection calls it illegal and abusive.
Last month the FTC and the Justice Department settled with one of the country’s biggest debt collection companies in a case with repercussions for the entire debt collection industry.
Asset Acceptance Capital Corp., which the FTC had charged with violations of federal law – including that it “failed to tell debtors they couldn’t be sued” when they tricked them into making payments to “re-age” old debts – was fined $2.5 million without admitting or denying wrongdoing.
I contacted Erik Kardatzke of the Coral Gables, FL, law firm Debt Defense, P.L., a prominent debtor-rights defense attorney who was quoted in a June 2011 Wall Street Journal article about Chase’s dismissed suits, to ask about new pending lawsuits.
“I don’t see any pending suits by JPMorgan Chase or any of the attorneys or law firms that usually work for them,” he said. “I mean, not a single one. This is highly unusual.”
Kardatzke is a former debt collection attorney who became disillusioned with the practices of credit card companies and debt collectors preying on consumers.
“I would see victims of predatory lending who would charge $300 on a credit card, and be sued for $3,000 four years later based upon late charges, over the limit fees and 30% interest. I noticed that there was rarely an attorney defending consumers and decided to fill that need,” he told me.
The FTC, upon fining Asset Acceptance, announced additional enforcement actions are pending.
They are now joined by the Consumer Financial Protection Bureau, which has the authority to go after banks for abusive collection tactics. Another Headache for Bank Stocks All this attention on banks’ credit card collection efforts isn’t going to help their revenues and earnings.
Not only could credit card borrowers stop paying if they don’t believe banks have proper documentation to go after them, but debt collection companies could sue banks for knowingly providing them inadequate or falsified debtor information when they bought uncollected accounts.
The big banks haven’t been able to settle charges over their robo-signing of foreclosure documents, which by some estimates could amount to over $25 billion in fines and consumer remuneration in some form or another.
Now, with charges of illegal robo-testimony being used to win court judgments in credit card collection cases, the banks now face another huge legal battle with potentially enormous bottom line consequences.
Robo-signing is just the beginning for the banks. [Editor’s Note: If you’re fed up with the rampant corruption, double-dealing, and protection of Wall Street by Washington (at the expense of the taxpayers on America’s Main Street), then you need to read Shah Gilani’s Wall Street Insights & Indictments newsletter. As a retired hedge-fund manager, Gilani is a former Wall Street insider Monday, February 06, 2012 What If We’re Beyond Mere Policy Tweaks? The nation’s ills cannot be fixed by thousands of pages of regulation or more policy tweaks. Only a profound cultural transformation can address our problems. The mainstream view uniting the entire political spectrum is that all our financial problems can be fixed by what amounts to top-down, centralized policy tweaks and regulation: for example, tweaking policies to “tax the rich,” limit the size of “too big to fail” financial institutions, regulate credit default swaps, lower the cost of healthcare (a.k.a. sickcare), limit the abuses of student loans to pay for online diploma mills, and on and on and on. But what if the rot is already beyond the reach of more top-down policy tweaks?Consider the recent healthcare legislation: thousands of pages of obtuse regulations that require a veritable army of regulators staffing a sprawling fiefdom with the net result of uncertain savings based on a board somewhere in the labyrinth establishing “best practices” that will magically cut costs in a system that expands by 9% a year, each and every year, a system so bloated with fraud, embezzlement and waste that the total sum squandered is incalculable, but estimated at around 40%, minimum. Does anyone really think that the lack of another centralized Federal fiefdom and thousands of pages of additional regulation is what ails sickcare? Of course not. In effect, we as a society have completely lost the ability to honestly admit a problem exists and that the solution is not to paper it all over with more regulation and insatible, ever-rising debt-based funding, paid for by our children, grandchildren, and their children. Consider the National Security State, busily constructing rectangular mountains of office space to house its vast, unchecked, oversight-free Empire. Does anyone actually know what tens of thousands of highly-paid people are doing in all these sprawling fiefdoms of National Security? And I don’t mean the Pentagon or the NSA–the buildings sprouting all over the tonier bits of D.C. and its suburbia are the metastasizing results of the “green light” given to anything remotely connected to GWOT–the global war on terror, the war that by definition can never be declared won or even ended, the war that always requires more funding lest one “event” slip through the cracks. If nobody in the elected chain of command actually knows where all this “black budget” money is going, what are the odds it’s being spent wisely and prudently?“No meaningful oversight” inevitably leads to abuse of budget and power. If we haven’t learned that, then we are well on the way to financial and political self-destruction. Consider the Glass-Steagall Act, at 37 pages in length, and the 2,319-page monstrosity of corrupted Federal power, the “Dodd-Frank Wall Street Reform and Consumer Protection Act:” (Source) Back in December, Nick Schulz helped put the size of the 2,074-page healthcare bill into some historical context by comparing its length to some previous bills that rank among the most consequential in U.S. history, like the 82-page Social Security Act of 1935 and the 74-page Civil Rights Act of 1964. Now that Congress has passed the “Dodd-Frank Wall Street Reform and Consumer Protection Act,” it might be a good time to compare the 2,319-page financial reform bill (245 pages longer than the healthcare bill) to the previous bills listed below (and see graph) that are considered among the most consequential legislative acts for banking and finance. 1. Federal Reserve Act (1913) – 31 pages. 2. Glass-Steagall Act (1933) – 37 pages. Though few have delved into the ramifications of this monstrous power-grab, it seems that the Executive Branch has grabbed potentially unprecedented powers with little if any oversight by Congress–all in the supremely Orwellian pursuit of “consumer protection.” If a 37-page bill took care of the problem in 1933, why can’t the same 37-page bill be re-instated? Why, indeed. The reason is that the bill impedes the flow of public funds to favored cartels and opportunities for financial looting by these cartels, and so a monster is created that nobody understands and which limits or simply overwhelms oversight by elected officials outside the Imperial Presidency. The entire financial and political infrastructure is corrupt. Perhaps it is time to note that the most thoroughly, venally, pervasively corrupt nations on Earth all have abundant regulations against corruption. Regulations don’t stop or limit corruption, fraud and embezzlement by magic. Sickcare is beyond being “fixed” by thousands of pages of policy tweaks, limitations and regulations. The financial system is beyond being “fixed” by thousands of pages of arcane regulations that only serve to obfuscate the looting and predation while enshrining another vast Federal fiefdom that harvests the national income while accomplishing nothing of substance. Regulation only functions if the culture and the society have a value system and a will to enforce it. The American people have lost those values and the will. Complicity reigns supreme. Instead we support going through the motions of adding layers of bureaucratic bloat, and listening to Soaring Rhetoric (TM) from bloviated politicos who promise us “prosperity,” “recovery” and all the rest without any sacrifice or engagement. Going through the motions never solved anything. 2,000-page regulatory thickets are one thing, and one thing only: purposeful obfuscation via complexity. ( America Is Just Going Through the Motions (November 19, 2010): A profound realization hit me last night: America is just going through the motions now–of reform, of healthcare, of everything. America’s leadership–both its elected and appointed officials, and its “shadow” Financial Power Elite leadership (the corporatocracy of crony Capitalist cartels and rentier/speculative parasites) are just going through the motions of financial reform. And the American public is resigned to just going through the motions of accepting the travesty of a mockery of a sham that is called “reform,” too, even as they understand in their bones that nothing has been fixed and the next financial crisis has already been cooked into their future. One of our few reliable voice of reason in the world of finance, Simon Johnson, has already laid bare how the the next financial crisis and inevitable bailout of the banking parasites will unfold. His article in The New Republic Way Too Big To Fail reveals how the “too big to fail” banks have shredded the wet paper bag of “reform” Congress went through the motions of conjuring up: they are quickly expanding globally, beyond the reach of any mere nation-state’s grasp. Let’s be honest, shall we? There never was any fire for real reform of the financial sector. It was all rote, a foul, stupid play-act, a passionless pantomime of “caring” and fake-“progressiveness” displayed for propaganda purposes. Real reform occurs when the political class of toadies, sycophants, leeches and cowards is forced by a near-universal public outrage to pass simple, powerful legislation and the budgetary resources to enforce that legislation. For example, the landmark environmental laws of the 1970s. Rivers in America used to catch fire before this Federal legislation; now they don’t. There was a true passion and desire in the nation to clean up the industrial pollution that was destroying the nation’s commons. There was no real fire for financial reform in the politico class. All they had to do was wait out the public’s outrage over TARP and then get down to the business of collecting contributions from financial players and their armies of toady-lobbyists. So Washington went through the motions of “reform” and the regulatory agencies went through the motions of “enforcing” existing regulations. But nobody was indicted, no RICO suits filed on behalf of the defrauded, no billion-dollar penalties slapped on those who carted off tens of billions in embezzled, ill-gotten gains, and no perps forced into bankruptcy. In other words, nothing got done except another layer of useless, overpaid bureaucracy was added to the bloated, overstuffed Federal payroll. The exact same dynamic is visible in the “healthcare” (a.k.a. sickcare) “reform.” 2,000 pages of mind-numbing slicing and dicing of the vast flood of national treasure that flows to the sickcare cartels, and nary a single word on the actual health of the American public, which continues to deteriorate on multiple fronts. The “reform” is to add multiple layers of bureaucracy and additional costs on a bloated, out-of-control system in which 50% of the money is already wasted on fraud, needless procedures/meds and paper shuffling. It was all about going through the motions of reforming a system everyone knows is beyond dysfunctional. The painful truth is that we are far beyond the point where policy/legalist regulatory tweaks will actually fix what’s wrong with America. The rot isn’t just financial or political; those are real enough, but they are mere reflections of a profound social, cultural, yes, spiritual rot. This is the great illusion: that our financial and political crises can be resolved with top-down, centralized financial reforms of one ideological flavor or another. It is abundantly clear that our crises extend far beyond a lack of regulation or policy tweaks. We cling to this illusion because it is easy and comforting; the problems can all be solved without any work or sacrifice on our part. Our complicity in the corruption is never mentioned: our votes for kleptocractic politico toadies who promise us that our share of Federal swag will not be sacrificed, our interest payments to the banking cartel/oligarchy, our acceptance of bogus statistics, bogus “reforms” and ceaseless propaganda as legitimate, and lastly, our silence in the face of destructive deficits, lest our share of the swag be cut. This is how once-great Empires end: toothless regulations are passed by bought-and-paid-for legislatures for the purposes of perception management, and a populace addled by constant entertainments and staged combats in the Coliseum listlessly pursues their “right” to bread and circuses of distraction. If this recession strikes you as different from previous downturns, you might be interested in my new book An Unconventional Guide to Investing in Troubled Times (print edition) orKindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One. Jesse’s Café Américain “You have lived longer than I have and perhaps may have formed a different judgment on better grounds; but my observations do not enable me to say I think integrity the characteristic of wealth. In general I believe the decisions of the people, in a body, will be more honest and more disinterested than those of wealthy men.” Thomas Jefferson, August 26, 1776, Letter to Edmund Pendleton Posted byJesseat12:50 AM 06 February 2012 MF Global Collapsed in the Face of a $310 Million Margin Call Made by ‘Undisclosed Party’
The margin call was predicted here about day two as I recall. The question in my mind is the extent that JP Morgan and any of their other bankers and credit line holders played in this.
It will be interesting to see how this case progresses from the Giddens-Freeh bankruptcy team and into the hands of the regulators and Justice Department.
So far (for the past three years) the Obama Administration has been adverse to looking too far into these sorts of cases before throwing a waiver or settlement without admission of any guilt on the table. Bloomberg
MF Global’s $310 Million Margin Call Exceeded Its Market Value
By Matthew Leising
February 06, 2012, 8:33 PM EST
Feb. 7 (Bloomberg) — MF Global Holdings Ltd., the futures broker that filed the eighth-largest bankruptcy in October, faced a $310 million margin call on its final day that exceeded its market value.
Calls for payments tied to bets MF Global made on European sovereign debt increased Oct. 24 and continued through Oct. 31, the day the futures broker formerly run by Jon Corzine filed for bankruptcy protection, according to a report yesterday from James Giddens, a trustee overseeing the brokerage’s liquidation. MF Global had a market value of $198 million on Oct. 28 as it held $6.3 billion in European sovereign-debt trades.
After tracing 840 transactions of $327 billion in the company’s final days, Giddens is still analyzing where some of the $1.2 billion in missing customer money “ended up,” he said in the report. Corzine’s firm failed after credit-rating downgrades, a record quarterly loss and revelations about its $6.3 billion European debt trade unnerved investors. The missing money has sparked Congressional hearings and former customers have said it undermined confidence in the futures industry.
“For three months, our investigative team has worked to understand what happened during the final days of MF Global when cash and related securities movements were not always accurately and promptly recorded due to the chaotic situation and the complexity of the transactions,” Giddens said in a statement.
The trustee didn’t disclose the identity of the counterparties making the margin calls. The trades were cleared through LCH.Clearnet Ltd., according to an MF Global contingency plan drafted before its failure. In the plan, which was designed to address the effects of a credit-rating downgrade on the company’s solvency and liquidity, MF Global questioned whether it should move the debt trades out of LCH.Clearnet.
“How will LCH respond, how much in excess margin will be required, time period, can/will they force us out?” the brokerage questioned in a section of the plan titled “immediate decision making required.” The undated plan indicated the company could move some of the cleared positions to the over- the-counter market, where it could get more favorable terms.
Congress, the Commodity Futures Trading Commission, Securities and Exchange Commission and the Justice Department are investigating events surrounding the collapse of MF Global, including the disappearance of the customer funds… I think it is time now to take a maximally defensive position, which for me at least means hedged gold bullion positions and cash. The bullion hedge is to guard against a liquidation event as opposed to an equity correction.
If volumes stay light the wiseguys can keep lifting this up, burning the shorts. So do not get ahead of this, but keep your powder dry if you trade, and if not, start packing up in advance of a move to higher ground. It sure is taking them a long time to spit this one out, isn’t it? We stole your money, we own the system, and there is nothing you can do about it, you pipsqueaks, so just STFU and take what we choose to give you.
Given the timing and the likely parties involved, these transfers, even when they do not involve the theft of customer funds, with the withholding of third party cash transfers by the intermediaries, done among insiders in the last week of a bankruptcy, have the appearance of a fraudulent conveyance.
Given that quite a bit of this money was undoubtedly held by MF Global’s bankers, who were almost certainly aware of and may have helped to precipitate the bankruptcy, we might even have a criminal conspiracy to defraud the customers and other creditors in addition to the civil actions appropriate in a fair and unbiased bankruptcy proceeding.
There is also some evidence that certain customers were privately warned by the bankers, or perhaps even parties in the company itself, a few weeks in advance, and were able to withdraw their funds from the company before it failed. Some right wing money men come to mind, among others.
This suggestion by the trustee that the MF Global personnel took the customer money unknowingly, ie. by mistake, would be hilarious if it was not being used to describe so malicious and unspeakable lapse in stewardship by the privileged, wealthy people in stealing the livelihoods from farmers and cattle ranchers among others.
What surprises me almost more than anything is that these jokers are willing to risk bringing down the financial system for a measly billion dollars, which is a fraction of what they take in personal bonuses in a good year. Is this some sort of perverse adherence to the Ferengi rules of acquistion? “Once you have their money, never give it back.”
If this stands, then nothing, no assets, held by the Anglo-American financial system are safe. When the next crisis comes, they will take what they want, starting with foreign holdings, working their way up the power and influence pyramid from there. And you can talk to the back of their hand if you don’t like it. Reuters
MF Global shortfall worsened as bankruptcy neared
Mon Feb 6, 2012 2:18pm EST
Feb 6 (Reuters) – The trustee liquidating MF Global Holdings Ltd’s broker-dealer unit said the shortfall in commodity customer accounts began five days before the company’s bankruptcy and grew in the days leading up to the Chapter 11 filing.
James Giddens, the trustee for MF Global Inc, said in a statement that his investigation has revealed that MF Global personnel might not have known of the shortfall at the time. (Anyone in the business must be rolling on the floor laughing at this one. Oops, sorry, we inadvertently took the customer money by mistake, a simple $1.2 billion error, and its too late to give it back to the right persons. But we’re dreadfully sorry for our innocent mistake. – Jesse)
He said he has traced a majority of cash transactions, totaling more than $105 billion, made in the last week prior to MF Global’s bankruptcy on Oct. 31, 2011. Giddens said he is working with third parties to seek more complete information about transfers to “select” parties prior to that bankruptcy.
Giddens also said it is unknown when he will be able to make more distributions to former customers.
Posted byJesseat2:19 PM John Williams: US Unemployment Hits 22.5% in Alternate Estimate
Perhaps this chart will help explain the divergence that Charles Biderman of Trimtabs sees between the official unemployment numbers and the income tax data he has been tracking.
The difference amongst the three measures revolves around the treatment of workers who desire a real full time job, but have to either settle for a part time position and other forms of under-employment that may technically qualify as a ‘job’ but not as a ‘living,’ or who have simply been removed from the government’s official attention span. “The seasonally-adjusted SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers.
The U-3 unemployment rate is the monthly headline number. The U-6 unemployment rate is the Bureau of Labor Statistics’ (BLS) broadest unemployment measure, including short-term discouraged and other marginally-attached workers as well as those forced to work part-time because they cannot find full-time employment.”
Read the rest of John Williams’ Shadowstats here.
My own estimation is that the recovery is flat-lining here and is vulnerable to a double dip which, if it does occur, will be blamed on some exterior factor such as slack European demand, problems in the emerging markets, or China. But it is still too soon to tell from the numbers.
In terms of historical perspective, the great reformer Obama is much more like Herbert Hoover or Nelson Rockefeller than a Franklin Roosevelt. He resembles a moderate Republican despite all the hysterical rhetoric from the far right.
The economy has not been reformed, and most of the problems that caused the collapse in the first place are still operating. As the corporate lobbyists were able to weaken financial reform in Dodd-Frank, so they continue to monopolize the conversation and policy discussions with their money.
I do not see genuine change happening until and unless the human misery increases enough to trigger a reaction, mass protests, or some other serious challenge to the status quo and the apathy of the fortunate. And I have quite a bit of confidence that the one percent will continue to obsessively power forward as the economy dries up until they achieve a pyrrhic victory. Winning.
This applies not only to the US but several other western countries, particularly the UK. It is also true for China which despite the gloss of their miracle economy in the western corporate media remains largely a narrow oligarchy sitting on top of a virtual slave labor camp, with a few showcase exceptions. And the western oligarchs love it. As Bill Gates said, ‘This is my kind of capitalism.’ Posted byJesseat11:22 AM 05 February 2012 SEC Allows Some of America’s Biggest Wall St. Banks To Continually Flout the Law
The NY Times has discovered that the Banks that were rescued by the public have turned into serial fraud offenders. JP Morgan is near the top of their ranks, with Goldman Sachs and Bank of America not far behind. Only Citigroup seems to have fallen out of favor.
This is not news to any of the regular patrons of the Cafe, but it is good to see the mainstream media taking notice. Perhaps they might have a look at the Silver manipulation investigation that the CFTC has been sitting on for over three years. Not to mention the outrageous theft of customer money by MF Global and the Banks.
Obama talks a good game, and presents a moral face through the media, but an examination of his actions and his record shows that his administration serves the monied interests to the detriment of the public interest. In many cases they are merely following the same practices begun in the Clinton Administration and carried on by Bush. It is a bad situation indeed when the ‘reformer’ elected by the people has failed to reform.
He may not be as brazen and open as his Republican opponents in promoting the interests of the Wall Street, perhaps, and certainly is not as favorable to Big Oil, but the corruption of justice for all in American politics seems to have become pervasive over the last fifteen years. NY Times S.E.C. Is Avoiding Tough Sanctions for Large Banks
By Edward Wyatt
February 3, 2012
WASHINGTON — Even as the Securities and Exchange Commission has stepped up its investigations of Wall Street in the last decade, the agency has repeatedly allowed the biggest firms to avoid punishments specifically meant to apply to fraud cases.
By granting exemptions to laws and regulations that act as a deterrent to securities fraud, the S.E.C. has let financial giants like JPMorganChase, Goldman Sachs and Bank of America continue to have advantages reserved for the most dependable companies, making it easier for them to raise money from investors, for example, and to avoid liability from lawsuits if their financial forecasts turn out to be wrong.
An analysis by The New York Times of S.E.C. investigations over the last decade found nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions. Those instances also include waivers permitting firms to underwrite certain stock and bond sales and manage mutual fund portfolios.
JPMorganChase, for example, has settled six fraud cases in the last 13 years, including one with a $228 million settlement last summer, but it has obtained at least 22 waivers, in part by arguing that it has “a strong record of compliance with securities laws.” Bank of America and Merrill Lynch, which merged in 2009, have settled 15 fraud cases and received at least 39 waivers.
Only about a dozen companies — Dell, General Electric and United Rentals among them — have felt the full force of the law after issuing misleading information about their businesses. Citigroup was the only major Wall Street bank among them. In 11 years, it settled six fraud cases and received 25 waivers before it lost most of its privileges in 2010…
Read the rest here. S.E.C. Is Avoiding Tough Sanctions for Large Banks Meredith B. Cross, the S.E.C.’s corporation finance director, says the purpose behind offering waivers to Wall Street firms that had settled fraud or lesser charges is to protect investors. By EDWARD WYATT Published: February 3, 2012 WASHINGTON — Even as the Securities and Exchange Commission has stepped up its investigations of Wall Street in the last decade, the agency has repeatedly allowed the biggest firms to avoid punishments specifically meant to apply to David Ruder, a former S.E.C. chairman. By granting exemptions to laws and regulations that act as a deterrent to securities fraud, the S.E.C. has let financial giants like JPMorganChase, Goldman Sachs and Bank of America continue to have advantages reserved for the most dependable companies, making it easier for them to raise money from investors, for example, and to avoid liability from lawsuits if their financial forecasts turn out to be wrong. An analysis by The New York Times of S.E.C. investigations over the last decade found nearly 350 instances where the agency has given big Wall Street institutions and other financial companies a pass on those or other sanctions. Those instances also include waivers permitting firms to underwrite certain stock and bond sales and manage mutual fund portfolios. JPMorganChase, for example, has settled six fraud cases in the last 13 years, including one with a $228 million settlement last summer, but it has obtained at least 22 waivers, in part by arguing that it has “a strong record of compliance with securities laws.” Bank of America and Merrill Lynch, which merged in 2009, have settled 15 fraud cases and received at least 39 waivers. Only about a dozen companies — Dell, General Electric and United Rentals among them — have felt the full force of the law after issuing misleading information about their businesses. Citigroup was the only major Wall Street bank among them. In 11 years, it settled six fraud cases and received 25 waivers before it lost most of its privileges in 2010. By granting those waivers, the S.E.C. allowed Wall Street firms to have powerful advantages, securities experts and former regulators say. The institutions remained protected under the Private Securities Litigation Reform Act of 1995, which makes it easier to avoid class-action shareholder lawsuits. And the companies continue to use rules that let them instantly raise money publicly, without waiting weeks for government approvals. Without the waivers, the companies could not move as quickly as rivals that had not settled fraud charges to sell stocks or bonds when market conditions were most favorable. Other waivers allowed Wall Street firms that had settled fraud or lesser charges to continue managing mutual funds and to help small, private companies raise money from investors — two types of business from which they otherwise would be excluded. “The ramifications of losing those exemptions are enormous to these firms,” David S. Ruder, a former S.E.C. chairman, said in an interview. Without the waivers, agreeing to settle charges of securities fraud “might have vast repercussions affecting the ability of a firm to continue to stay in business,” he said. S.E.C. officials say that they grant the waivers to keep stock and bond markets open to companies with legitimate capital-raising needs. Ensuring such access is as important to its mission as protecting investors, regulators said. The agency usually revokes the privileges when a case involves false or misleading statements about a company’s own business. It does not do so when the commission has charged a Wall Street firm with lying about, say, a specific mortgage security that it created and is selling to investors, a charge Goldman Sachs settled in 2010. Different parts of the company — corporate officers versus a sales force, for example — are responsible for different types of statements, officials say. “The purpose of taking away this simplified path to capital is to protect investors, not to punish a company,” said Meredith B. Cross, the S.E.C.’s corporation finance director, referring to the fast-track offering privilege. “You’re not seeing the times that waivers aren’t being granted, because the companies don’t ask when they know the answer will be no.” Others, however, argue that the pattern is another example of the government being too soft on Wall Street as it has become a much larger part of the economy in recent decades. President Obama, in his State of the Union address, asked Congress last week for tougher laws that make “the penalties for fraud count.” Federal judges in New York and Wisconsin recently criticized the S.E.C. for its habit of settling cases by allowing companies to promise not to violate the law in the future. The commission has frequently turned the other cheek when the companies again settle similar fraud cases. S.E.C. officials have defended that practice by saying they do not have the resources to take cases to court rather than settle. They recently asked Congress to toughen laws and to raise financial penalties for fraud violations. But the repeated granting of waivers suggests that the agency does in fact have tools it often does not use, critics say. Close to half of the waivers went to repeat offenders — Wall Street firms that had settled previous fraud charges by agreeing never again to violate the very laws that the S.E.C. was now saying that they had broken. Page 2 of 2) Senator Charles E. Grassley, an Iowa Republican who serves on committees that oversee the S.E.C., said he was baffled that the agency had recently asked Congress for more enforcement powers when it had ceded much of the power it already had. “It’s really hard to see why the S.E.C. isn’t using all of its weapons to deter fraud,” he said. “It makes already weak punishment even weaker by waiving the regulations that impose significant consequences on the companies that settle fraud charges. No wonder recidivism is such a problem.” The Times analysis found 11 instances where companies that had settled fraud cases had actually lost the special privilege for fast-track stock or bond offerings, versus 49 times that the S.E.C. granted waivers from the punishment to Wall Street firms since 2005. The analysis counted 91 waivers since 2000 granting immunity from lawsuits, and 204 waivers related to raising money for small companies and managing mutual funds. The S.E.C. does not maintain a central database of how many companies lose special status or are denied waivers. Its records of granted waivers are scattered across several databases on its Web site. JPMorganChase is among the big Wall Street firms that have been granted multiple waivers with nearly every settlement of S.E.C. fraud charges. Last July, it agreed to pay $228 million to settle civil and criminal charges that it cheated cities and towns by rigging bids with other Wall Street firms to invest the money raised by several municipalities for capital projects. JPMorgan received three waivers related to that case for privileges that it otherwise would have lost. But the S.E.C. said the company’s fraudulent actions didn’t involve misleading investors about JPMorgan’s business. “That distinction doesn’t do it for me,” said Richard W. Painter, a corporate law professor at the University of Minnesota and the co-author of a casebook on securities litigation and enforcement. “If a company has trouble telling the truth to investors in one batch of securities it is underwriting, I would not have confidence that it would tell the truth to investors about its own securities.” Despite six securities fraud settlements in 13 years, JPMorgan rarely if ever lost any special privileges. It has been awarded at least 22 waivers since 2003, with most of its S.E.C. settlements generating two or more. In seeking the reprieves, lawyers for JPMorgan stated in letters to the S.E.C. that it should grant a waiver because the company has “a strong record of compliance with the securities laws.” The company declined to comment for this article. Citigroup is one of the rare Wall Street giants that has lost significant privileges recently. In October 2010, the bank paid $75 million to settle charges that it misled investors in 2007 about the size of its holdings of assets backed by subprime mortgages. The company told investors that it had about $13 billion of those risky investments on its balance sheet, when it really had more than $50 billion, according to the S.E.C. Because those accusations involved Citigroup’s statements about its own financial well-being, the company lost for three years the ability to insulate itself from lawsuits over mistaken predictions about its business. It also lost, for the same three years, the exemption for “well-known seasoned issuers,” which allowed it to quickly raise capital in the securities markets. As a result, Citigroup has had to file thousands of pages of new documents with the S.E.C. and wait weeks for the agency’s approvals to make itself eligible to sell stocks, bonds and other securities to the public. Citigroup declined to comment on whether the sanctions have had any effect on its business. Wrangling over waivers is an important part of the negotiations when companies accused of fraud discuss a settlement with the S.E.C., and sometimes it can involve a form of corporate plea bargaining to a lesser charge. In 2009, the S.E.C. was negotiating with Bank of America over charges that it had failed to disclose to shareholders that billions of dollars in bonuses were being paid to Merrill Lynch executives just as Bank of America was bailing out the firm. Because the S.E.C. charges involved fraudulent statements by both Bank of America and Merrill Lynch about their financial status, the merged company was in danger of losing its special privileges for both offerings and forecasts. According to a report by the then-S.E.C. inspector general, H. David Kotz, the waiver issue “was of such importance to B. of A. that the settlement became contingent on B. of A.’s receipt of the waiver.” Bank of America apparently won the argument but would not comment on it. It settled the case by agreeing to a $150 million payment. The S.E.C., however, decided not to charge the bank with fraud, which could have endangered the bank’s special status. Instead, the S.E.C. charged Bank of America with violating disclosure rules for shareholder materials and proxies, and Bank of America kept its privileges. S.E.C. officials said they would not discuss how they arrived at specific settlements and declined to comment on the Citigroup, JP Morgan or Bank of America settlements. Thomas Lee Hazen, a securities law professor at the University of North Carolina at Chapel Hill, said that it is understandable that the S.E.C. might relax some potential sanctions on Wall Street firms — where it appears that lessons have been learned, or when a fine is thought to be sufficient punishment. “The ripple effect of having a sanction that could shut them down or could seriously impede a company’s operations would seriously affect a lot of innocent customers,” he said. “It’s a very fine balance. That’s not to say that the S.E.C. is striking the balance properly. That is in the eye of the beholder.” GOP Seeks ‘Pelosi Provision’ in Insider Trading Bill Wednesday, 08 Feb 2012 02:38 PM By Dan Weil More ways to share… Mixx Stumbled LinkedIn Vine Buzzflash Reddit Delicious Newstrust Technocrati 4 House Republican leaders hope to add a provision to the congressional insider trading bill that would forbid members of Congress from gaining special entrance into initial public offerings (IPOs) of stock. The plank is known as the “Pelosi provision,” a House GOP aide told The Hill.
Pelosi participated in Visa’s 2008 IPO under shady circumstances. While she denied any wrongdoing, a “60 Minutes” report last year cited her and several other members of Congress, suggesting Pelosi and her husband benefited from the Visa IPO at the same time Congress was considering fresh rules for credit card companies.
The “Pelosi Provision” may spark opposition from Democrats. The current legislation has broad support from both sides of the aisle. Pelosi spokesman Drew Hammill declined to comment on the planned provision. “We look forward to reviewing the text of the bill Leader [Eric] Cantor is writing in secret,” he told The Hill.
The Stop Trading on Congressional Knowledge Act, originally offered in the House, has now reached 283 co-sponsors, including 99 Republicans. The Senate overwhelmingly passed its version last week.
Democrats accused Cantor of slowing work on the bill last year, but he has put it at the top of the agenda for 2012.
Read more on Newsmax.com: GOP Seeks ‘Pelosi Provision’ in Insider Trading Bill. Version of this article appeared in print on February 3, 2012, on page A1 of the New York edition with the headline: S.E.C. Is Avoiding Tough Sanctions For Large Banks. Sam Zell: Government Hinders Housing Recovery, Creates Mortgage ‘Moral Hazard’ Thursday, 09 Feb 2012 07:30 AM By Forrest Jones More ways to share… Mixx Stumbled LinkedIn Vine Buzzflash Reddit Delicious Newstrust Technocrati 0 Government intervention in the housing sector is doing more harm than good and is actually hurting recovery instead of helping it, says real estate mogul Sam Zell.
President Barack Obama has proposed expanding government efforts to allow millions of struggling homeowners refinance their mortgages.
The problem with government intervention is that it doesn’t allow the market to correct itself and fully recover, Zell says.
“Rather than let the elements of the business world take care of the problems, we basically stopped the process of creating market clearing,” Zell tells CNBC. “ Had we allowed the market to clear without trying to stop reality…we would have a healthy housing market today.”
One problem facing the housing sector today is that it’s too easy for distressed homeowners to walk away and leave the bank holding the property, Zell says.
“We are the only country in the world where you can borrow money on a house and walk away from it. Everywhere else, all the people in Europe, all the people who borrow money in Brazil, they’re all personally liable for 100 percent of the debt. So by virtue of not being personally liable, we’ve created a giant moral hazard,” Zell says.
That has to change.
“Would I change the policy? Absolutely … I think you have a giant moral hazard that must be eliminated. If you borrow money to buy a house, how you cannot be responsible?”
Experts say Republicans in Congress will kill President Obama’s home refinance proposal anyway due to its increased participation of government in the housing sector.
“The president pretty clearly signaled that [the program] would need some kind of congressional action,” says Brian Gardner, senior vice president of Washington research at Keefe, Bruyette & Woods, according to U.S. News & World Report.
“To the extent that it does, I think it’s D.O.A.” © Moneynews. All rights reserved. President Obama’s 2013 Budget: Five Things You Should Know EBRUARY 14, 2012 BY DAVID ZEILER, Associate Editor, Money Morning U.S. President Barack Obama’s 2013 budget proposal will give Republicans and Democrats plenty to fight about.
The $3.8 trillion budget proposal, submitted to Congress, essentially follows the blueprint President Obama outlined in his State of the Union address.
That means fewer spending cuts and more taxes than Republicans will like.
So if you thought last summer’s wrangling over the raising of the debt ceiling was nasty, watch the rhetorical Armageddon when those battles get re-fought in an election year.
President Obama’s 2013 budget sets much of the agenda for the stormy election season ahead. These points will help you make sense of the chaos. Congress Sets the Budget: The fact is Congress, not the president, ultimately controls the federal purse strings. While much hoopla will accompany President Obama’s 2013 budget, presidential budget proposals often serve more as a political billboard than a framework for how money is collected and spent by the government.
So President Obama’s budget will provide talking points for his 2012 re-election campaign and targets for the Republicans who seek to defeat him.
“Every budget proposal is partly a serious policy document and partly a political statement,”Stan Collender, a former staffer for both the House and Senate Budget Committees, told msnbc.com.
No Budget, No Problem: Not only can Congress reject the president’s budget, it doesn’t even have to vote on it. Congress has little incentive to vote on the budget this year. In addition to Republican opposition, many Democrats in swing districts won’t want to go on record voting for any kind of tax increase.
Last year the Senate rejected President Obama’s 2012 budget by a 97-0 vote.
In fact, Congress has not approved a budget for over 1,000 days, getting by with stopgap spending bills in the interim.
A Taxing Issue: As expected, President Obama’s 2013 budget includes tax increases for the wealthy. That will keep tax issues in the spotlight this year, since Republicans have vowed to oppose tax increases of any kind.
The president included the so-called “Buffett Rule,” which creates a 30% minimum tax for anyone making $1 million or more. It would replace the Alternative Minimum Tax (AMT).
More controversial is the proposal to tax dividends as ordinary income for those making $250,000 and up. Now the top dividends rate is 15%. President Obama would also raise the top rate on taxes on capital gains from 15% to 20%.
Those proposals will help President Obama position himself as a defender of the middle class against the rich, while giving the GOP ammunition to accuse him of “class warfare.” Another Year Older and Deeper in Debt: Although President Obama will say his budget includes $4 trillion in deficit reductions over the next decade, Republicans will tell you that the 2013 budget deficit is $1.33 trillion.
That’s the fourth straight year the president’s budget deficit has exceeded $1 trillion. Expect to hear a lot about it, as the Republicans will waste no opportunity to remind Americans of President Obama’s promise in 2009 to cut the deficit in half.
It also could reignite the debate over the national debt, which is now over $15 trillion and equal to the country’s annual gross domestic product.
Fuzzy Math: You’d think the government would at least be able to keep accurate figures on how much money it spends, but no. It literally depends on whom you ask.
For example, the Office of Management and Budget (OMB) put 2010 spending by the Department of Health and Human Services at $854 billion. The Census Bureau says the figure is $944 billion. Differences in accounting methods account for the whopping $90 billion discrepancy.
And that doesn’t get into all the accounting voodoo in the budget itself, which often relies on unrealistic assumptions.
“To Washington, these are rounding errors,” Pete Sepp, executive director of the Alexandria, Virginia-based National Taxpayers Union, told Bloomberg News. “To the rest of America, this is real money that could help real people with real problems.” http://pro.stansberryresearch.com/1202CHINAPSI/EOILN223/?o=628313&s=632713&u=55292360&l=391971&r=Milo More ways to share… Mixx Stumbled LinkedIn Vine Buzzflash Reddit Delicious Newstrust Tell my politician Technocrati
email@example.com via globalresearch.ccsend.com Obama’s Eligibility…Not One Shred of Authentic Verifiable Evidence By Craig Andresen on March 4, 2012 at 1:22 pm In the wake of Sheriff Joe Arpaio’s press conference regarding his Cold Case Posse’s investigation into Obama’s documents, we are left with some questions. These questions are NOT new questions but they bear asking again and now, since an official law enforcement agency has finally investigated and issued a report, perhaps these questions gain in validity. Yes, many others have raised these questions and rightfully so. The questions began nearly 4 years ago but, for the sake of sticking to the documents in question, we will confine our points to questions raised within the last year. On April 25th 2011, Obama “released” his “official certificate of live birth” in a press conference from the white house briefing room. Nearly immediately, those who knew of such things as computers, graphics, layering and such, called into question the process employed in creating this birth certificate. Not for a minute should their efforts be discounted in questioning the validity of it. Indeed, they set the stage for this official law enforcement investigation and without doubt, they deserve credit for their work. The difference is, while they did indeed know their stuff, they were not affiliated with an official law enforcement investigation and therefore, were ripe for ridicule, ripe for what we now KNOW was UNWARRANTED ridicule. Now, to the questions regarding the long form birth certificate which MUST be asked, AGAIN, because of the OFFICIAL LAW ENFORCEMENT INVESTIGATION, conducted by the office of Sheriff Joe Arpaio in Maricopa County Arizona. 1) If a REAL and AUTHENTIC certificate of live birth exists, showing Barack Obama to have been born in Hawaii on August 4th, 1961, why then produce a forgery? Answer 1) He wasn’t born in Hawaii on August 4th, 1961. Answer 2) He was born in a foreign country. Answer 3) Barack Obama Sr. is not his real father. All of these are possibilities in and of themselves or perhaps a combination of them are true. Whatever the truth might be, one truth is clear; there would be no reason whatsoever to manufacture a forged certificate of live birth if an authentic document exists. 2) Since the document in question IS a forgery, WHO forged it? Answer) Sheriff Arpaio clearly stated neither he nor his Cold Case Posse is accusing Obama himself of creating the forgery but he also made clear, they HAVE identified a “Person of Interest” in the creation of the forgery. 3) Did Obama know that he was presenting a forged certificate of live birth on April 25th, 2011? Answer 1) Yes he did. Answer 2) No, he was duped. To believe he was duped, one would have to believe that Obama believed everything which was on that forged certificate was true. He would have to believe he was indeed born in Hawaii, on August 4th, 1961, that Obama Sr. was his father etc when in fact either some of it or all of it was a lie told to him, we can only suspect, by his mother and his family and throughout the years, no one related to him or no one who was a close family friend who knew the truth ever imparted that truth or alluded to it, to Obama. If Obama DID know the document was forged, he perpetrated a fraud upon the American public from the white house briefing room on April 25th, 2011. 4) When was the forged document created? Answer 1) In 1961 Answer 2) In 2008 Answer 3) In 2011 As the technology employed to create this forgery didn’t exist in 1961, it could not have been forged at that time. Had the forgery been created in 2008 or there about, when Obama decided to run for president, why not release it at THAT time rather than wait more than 2 more years? It seems most likely that the forgery was created shortly before its release in April of 2011 in direct response to Trump’s vow to investigate the matter. Now, let’s look at the other document in question regarding the Arpaio investigation…The Obama Selective Service Registration card. Sheriff Arpaio’s Cold Case Posse was able to confirm, just as they did with the long form birth certificate, that the Selective Service Registration card, with 100% certainty, is a forgery. Here are the questions: 1) Why forge a Selective Service Registration card? Answer 1) The authentic card could not be found. Answer 2) Obama never registered for Selective Service. As other cards can easily be found including cards from those who registered for Selective Service in the same United States Post Office as the forged card indicates Obama registered, it would appear to be HIGHLY improbable that Obama’s card has gone missing. It seems much MORE likely that Obama never registered, as was required by law, for Selective Service. 2) When was the forged Obama Selective Service Card created? Answer 1) In 1980 Answer 2) In 2008 Answer 3) in 2011 Here again, if an authentic Selective Service Registration card was ever filled out by Obama in 1980, it would exist today and no forgery would be needed. It is doubtful that the forgery was created in 2011. Most likely, the forgery was created in 2008 as Obama was approaching the nomination. The Cold Case Posse showed how it was most likely created with the focus being the pica date stamp. Since a 1980 (note the 4-digit year number) did not remain in existence in 2008, a 2008 pica date insert was cut in half and the 08 (note the 2 digit year number) was inverted (turned upside down) to record as 80 (again, note the 2 digit year number) which is not at all in accordance with a real pica date stamp used by the United States Post Office. 3) Who forged the Obama Selective Service Registration card? If, as it seems most likely to be, that the Obama Selective Service card forgery was created in 2008, it would appear most likely that it was created by someone within the DNC. This, if it is indeed the case, would be because in the vetting process, at some point, when it became apparent that Obama would be the nominee, certain documents which should exist relating to him, simply didn’t exist and to cover for these missing documents, i.e., the Selective Service Registration, forgeries were then created. 4) Did Obama know his Selective Service Registration card was forged? Answer 1) No, he was duped Answer 2) Yes he did. Only Obama himself would know for sure whether he ever registered for Selective Service. If he did, an authentic Selective Service Card would be in existence today. If he did not, he would know it and the forged Selective Service Registration card in his name, would be known by him, to be a forgery and as that card has been displayed for years, as his, he would have known for years that a forged Selective Service Registration card was being purported as authentic in his name. Finally, the microfilm issue highlighted in the Sheriff Arpaio press conference. One of the questions investigated by the Cold Case Posse revolved around possible entry into the U.S. by Obama’s mother. Anyone entering the United States, citizen, or foreigner, is required to fill out an official card through INS. It is thought that, sometime within the first week of August 1961, Stanley Ann Dunham may have entered the United States from overseas bringing with her, a baby. Suspiciously missing from the INS records thus far investigated was that very week. Microfilm reel #184 shows only a couple of cards before that reel goes blank. Reel #185 picks up with August 8th, 1961. Missing completely are August 1st, 2nd, 3rd, 4th, 5th, 6th and 7th, 1961. 1) When did that week’s record go missing? 2) Who removed that week’s record? 3) Why is it missing? At this point, we have no idea when that single week’s portion of the INS microfilm record went missing. As to who was responsible, we can only guess it rises to a higher level than the DNC. While it would be relatively simple for the DNC to create forged documents to stand in for nonexistent documents, the INS is a federal bureau and missing records are far different from records which never existed. It seems necessary for someone within the INS to have removed any portion of the INS records. This would mean that someone else would have had to facilitated in the call for that portion of the record to have been removed. Did money change hands in this process? Did someone high up in the government instruct someone at INS to remove that portion of the record? Those are questions which now need to be asked and answered. As to WHY that week’s microfilm record is missing, we can only guess that it showed something which would not be conducive to Obama and his election to the office of president. That portion of the INS record could have shown Stanley Ann Dunham and baby arriving in the United States. While this portion of the microfilm record pertains to entries through or across the pacific, the records pertaining to Atlantic entries has not yet been provided but, considering Stanley Ann Dunham then lived in Hawaii, the Pacific entries would be most important. This of course would indicate that the Barack Obama who was elected to the office of President in 2008, may well have been born on foreign soil and regardless of his father’s citizenship status, is FAR, FAR away from being constitutionally eligible to serve as either the President or Vice President of the United States. Connecting the Dots It must be pointed out that connecting these dots is my doing and was not part of the Sheriff Arpaio press conference nor has it been eluded to by the Cold Case Posse. The dots can indeed be connected given the results made known from the Cold Case Posse because of the Arpaio investigation and to do so, we must go back to the top of this article. The long form birth certificate displayed by Obama on April 25th, 2011, has been shown, via this investigation, to be a forgery. If Obama was born outside the country, which may well be indicated by the missing week’s record of microfilm provided by INS, Obama would be a foreigner. As a foreigner, he would not have filed a Selective Service Registration necessitating the need for a forged Selective Service Registration card to be created and if a foreigner, an authentic certificate of live birth simply would not exist in Hawaii which would then have to be provided, in April of 2011, as a forged document. The idea that Obama is a foreigner is also bolstered by another piece of information garnered by the Cold Case Posse. It was clearly stated that the Posse is in possession of a legal affidavit stating that when introduced to Bill Ayers, Obama was introduced as a FOREIGN STUDENT looking for financial aid about his education. From this, only 2 conclusions can be made. 1) Obama WAS indeed a foreign student which would mean he was NOT a United States citizen.2) Obama was masquerading as a foreign student in which case he was perpetrating a fraud. Given the forged birth certificate, the forged Selective Service Registration, and the weeks’ worth of missing INS microfilm records, and his introduction to Ayers as a foreign student, it becomes more probable in connecting the dots, that Obama was indeed foreign born. Anyone, regardless of party affiliation, who is aware of this information and either dismisses it as bull, ignores it or does not, for any reason, believe a full congressional investigation is warranted is actively assisting in the perpetration of fraud and is, in fact, actively engaged in the dismantling of our Constitution. This includes sitting Members of Congress, the media, the RNC, the DNC and citizens at large. Combine what we have been presented via an official law enforcement agency’s investigation with other evidence acquired via investigations such as the apparent fraud regarding Obama’s Social Security number and the only credible conclusion can be that we have no idea who the man occupying our oval office really is. Any state or private entities pursuing the removal of Obama’s name from 2012 ballots must use this evidence, acquired through the Arpaio Cold Case Posse in their legal challenges. The Inescapable Conclusion Forget the valid arguments regarding Obama being ineligible due to the “Natural Born Citizen” clause contained in the Constitution resulting from his father’s lack of citizenship status. At this point, now more than 3 years into his term… Not one single shred of authentic evidence has been presented to prove Barack Obama is even a United States CITIZEN. We have a forged birth certificate, a forged Selective Service Registration, what by all accounts is a fraudulent Social Security number, missing INS records, sworn legal affidavits indicating he was a foreign student…But not one single verified, authentic document proving Obama to be even a United States citizen. Not one. For those who believe this to be purely partisan, think again. If all that is requires for a liberal to serve as President is a handful of forged and fraudulent documents than so too would a conservative be able to point to forgeries and fraud as “proof” of citizenship. If a foreign citizen, of any political party is allowed to serve either as a Member of congress or as President or Vice President, our republic is finished. If, upon such 100% certainty of forgery as exists with Obama’s birth certificate and Selective Service Registration, as shown by a law enforcement entity and verified by forensic document experts is allowed to be considered nothing but a distraction or not worthy of a full and immediate intensive congressional investigation, as it regards our Constitution, national security and the Presidency, duplicity on the part of the Members of congress in allowing the possibility of a foreign national to serve as President today or in the future will be precedent setting. For additional information please see: http://www.thenationalpatriot.com/obamas-eligibility-not-one-shred-of-authentic-verifiable-evidence/#more-4447 http://en.wikipedia.org/wiki/Society_for_Worldwide_Interbank_Financial_Telecommunication Browse Search QuizzesGamesOn This Day SubscribeLogin Great Recession ARTICLE Introduction & Quick Facts FAST FACTS ADDITIONAL INFO HomePolitics, Law & GovernmentEconomics & Economic Systems Great Recession economics [2007–2009] Alternate titles: global recession Print Cite Share More BY Brian Duignan | View Edit History FAST FACTS Facts & Related Content Date: December 2007 – June 2009 Location: United States Context: mortgage subprime mortgage financial crisis of 2007–08 austerity subprime lending See all facts and data → Great Recession, economic recession that was precipitated in the United States by the financial crisis of 2007–08 and quickly spread to other countries. Beginning in late 2007 and lasting until mid-2009, it was the longest and deepest economic downturn in many countries, including the United States, since the Great Depression (1929–c. 1939). The financial crisis, a severe contraction of liquidity in global financial markets, began in 2007 as a result of the bursting of the U.S. housing bubble. From 2001 successive decreases in the prime rate (the interest rate that banks charge their “prime,” or low-risk, customers) had enabled banks to issue mortgage loans at lower interest rates to millions of customers who normally would not have qualified for them (see subprime mortgage; subprime lending), and the ensuing purchases greatly increased demand for new housing, pushing home prices ever higher. When interest rates finally began to climb in 2005, demand for housing, even among well-qualified borrowers, declined, causing home prices to fall. Partly because of the higher interest rates, most subprime borrowers, the great majority of whom held adjustable-rate mortgages (ARMs), could no longer afford their loan payments. Nor could they save themselves, as they formerly could, by borrowing against the increased value of their homes or by selling their homes at a profit. (Indeed, many borrowers, both prime and subprime, found themselves “underwater,” meaning that they owed more on their mortgage loans than their homes were worth.) As the number of foreclosures increased, banks ceased lending to subprime customers, which further reduced demand and prices. As the subprime mortgage market collapsed, many banks found themselves in serious trouble, because a significant portion of their assets had taken the form of subprime loans or bonds created from subprime loans together with less-risky forms of consumer debt (see mortgage-backed security; MBS). In part because the underlying subprime loans in any given MBS were difficult to track, even for the institution that owned them, banks began to doubt each other’s solvency, leading to an interbank credit freeze, which impaired the ability of any bank to extend credit even to financially healthy customers, including businesses. Accordingly, businesses were forced to reduce their expenses and investments, leading to widespread job losses, which predictably reduced demand for their products, because many of their former customers were now unemployed or underemployed. As the portfolios of even prestigious banks and investment firms were revealed to be largely fictional, based on nearly worthless (“toxic”) assets, many such institutions applied for government bailouts, sought mergers with healthier firms, or declared bankruptcy. Other major businesses whose products were generally sold with consumer loans suffered significant losses. The car companies General Motors and Chrysler, for example, declared bankruptcy in 2009 and were forced to accept partial government ownership through bailout programs. During all of this, consumer confidence in the economy was understandably reduced, leading most Americans to curtail their spending in anticipation of harder times ahead, a trend that dealt another blow to business health. All these factors combined to produce and prolong a deep recession in the United States. From the beginning of the recession in December 2007 to its official end in June 2009, real gross domestic product (GDP)—i.e., GDP as adjusted for inflation or deflation—declined by 4.3 percent, and unemployment increased from 5 percent to 9.5 percent, peaking at 10 percent in October 2009. Skip Ad As millions of people lost their homes, jobs, and savings, the poverty rate in the United States increased, from 12.5 percent in 2007 to more than 15 percent in 2010. In the opinion of some experts, a greater increase in poverty was averted only by federal legislation, the 2009 American Recovery and Reinvestment Act (ARRA), which provided funds to create and preserve jobs and to extend or expand unemployment insurance and other safety net programs, including food stamps. Notwithstanding those measures, during 2007–10 poverty among both children and young adults (those aged 18–24) reached about 22 percent, representing increases of 4 percent and 4.7 percent, respectively. Much wealth was lost as U.S. stock prices—represented by the S&P 500 index—fell by 57 percent between 2007 and 2009 (by 2013 the S&P had recovered that loss, and it soon greatly exceeded its 2007 peak). Altogether, between late 2007 and early 2009, American households lost an estimated $16 trillion in net worth; one quarter of households lost at least 75 percent of their net worth, and more than half lost at least 25 percent. Households headed by younger adults, particularly by persons born in the 1980s, lost the most wealth, measured as a percentage of what had been accumulated by earlier generations in similar age groups. They also took the longest time to recover, and some of them still had not recovered even 10 years after the end of the recession. In 2010 the wealth of the median household headed by a person born in the 1980s was nearly 25 percent below what earlier generations of the same age group had accumulated; the shortfall increased to 41 percent in 2013 and remained at more than 34 percent as late as 2016. Those setbacks led some economists to speak of a “lost generation” of young persons who, because of the Great Recession, would remain poorer than earlier generations for the rest of their lives. Losses of wealth and speed of recovery also varied considerably by socioeconomic class prior to the downturn, with the wealthiest groups suffering the least (in percentage terms) and recovering the soonest. For such reasons, it is generally agreed that the Great Recession worsened inequality of wealth in the United States, which had already been significant. According to one study, during the first two years after the official end of the recession, from 2009 to 2011, the aggregate net worth of the richest 7 percent of households increased by 28 percent while that of the lower 93 percent declined by 4 percent. The richest 7 percent thus increased their share of the nation’s total wealth from 56 percent to 63 percent. Another study found that between 2010 and 2013 the aggregate net worth of the richest 1 percent of Americans increased by 7.8 percent, representing an increase of 1.4 percent in their share of the nation’s total wealth (from 33.9 percent to 35.3 percent). As the financial crisis spread from the United States to other countries, particularly in western Europe (where several major banks had invested heavily in American MBSs), so too did the recession. Most industrialized countries experienced economic slowdowns of varying severity (notable exceptions were China, India, and Indonesia), and many responded with stimulus packages similar to the ARRA. In some countries the recession had serious political repercussions. In Iceland, which was particularly hard-hit by the financial crisis and suffered a severe recession, the government collapsed, and the country’s three largest banks were nationalized. In Latvia, which, along with the other Baltic countries, was also affected by the financial crisis, the country’s GDP shrank by more than 25 percent in 2008–09, and unemployment reached 22 percent during the same period. Meanwhile, Spain, Greece, Ireland, Italy, and Portugal suffered sovereign debt crises that required intervention by the European Union, the European Central Bank, and the International Monetary Fund (IMF) and resulted in the imposition of painful austerity measures. In all the countries affected by the Great Recession, recovery was slow and uneven, and the broader social consequences of the downturn—including, in the United States, lower fertility rates, historically high levels of student debt, and diminished job prospects among young adults—were expected to linger for many years. Brian Duignan Learn More in these related Britannica articles: United States: Tackling the Great Recession, the Party of No, and the emergence of the Tea Party movement …referred to as the “Great Recession” (which officially dated from December 2007 to June 2009 in the United States), included the most dismal two-quarter period for the U.S. economy in more than 60 years: GDP contracted by 8.9 percent in the fourth quarter of 2008 and by 6.7 percent… BY The Editors of Encyclopedia Britannica | View Edit History depression, in economics, a major downturn in the business cycle characterized by sharp and sustained declines in economic activity; high rates of unemployment, poverty, and homelessness; increased rates of personal and business bankruptcy; massive declines in stock markets; and great reductions in international trade and capital movements. A depression may also be defined as a particularly severe and long-lasting form of recession, where the latter is generally understood, relative to a national economy, as a period of at least two consecutive quarters of decline in real (inflation-adjusted) GDP, or gross domestic product. According to the National Bureau of Economic Research, which maintains records of the cyclical peaks and troughs in U.S. economic activity dating to 1854, a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales,” while a depression is “a particularly severe period of economic weakness” that is commonly understood to last from the onset of economic decline to the return of normal economic activity. Although there is no specific definition of depression that all economists accept (and thus no universal agreement about how many depressions the United States has experienced since 1854), economic historians generally agree that the Great Depression that began in 1929 was the worst economic downturn in U.S. history and indeed the worst ever experienced by the Western industrialized world. In the United States, for example, industrial production fell nearly 47 percent, GDP declined by 30 percent, and unemployment reached more than 20 percent in the period between 1929 and 1933. Great Depression: breadline Breadline in New York City’s Bryant Park during the Great Depression. Encyclopedia Britannica, Inc. READ MORE ON THIS TOPIC economic stabilizer: Model of a Keynesian depression Another possible cause of a general depression was suggested by Keynes. It may be approached in a highly simplified way… Various factors are thought to have given rise to the Great Depression, whose primary cause was a dramatic decline in spending, or aggregate demand. They included the U.S. stock market crash of 1929, which had a devastating effect on consumer confidence throughout the country; banking panics, which caused many banks to fail and thereby greatly reduced consumer spending and business investment; the contractionary monetary policy of the Federal Reserve (the central bank of the United States), which also stifled spending and investment and led to deflation; the international gold standard, which served to spread the U.S. downturn to other countries; and protectionist policies in several countries, including the United States, whose cumulative effect was to reduce international trade. Beginning in the 1930s, countries around the world implemented policies designed to prevent another downturn on the scale of the Great Depression and to moderate the worst effects of ordinary recessions. The changes included increased government regulation of the financial and banking industries, the use of expansionary monetary and fiscal policies to stimulate economic growth, and direct government assistance to the poor and unemployed (see also social welfare program). Britannica This article was most recently revised and updated by Brian Duignan, Senior Editor. Learn More in these related Britannica articles: economic stabilizer: Model of a Keynesian depression Another possible cause of a general depression was suggested by Keynes. It may be approached in a highly simplified way by lumping all occupations together into one labor market and all goods and services together into a single commodity market. The aggregative… liberalism: Problems of market economies …that came to be called depressions. Finally, those who owned or managed the means of production had acquired enormous economic power that they used to influence and control government, to manipulate an inchoate electorate, to limit competition, and to obstruct substantive social reform. In short, some of the same forces…