"End of Wall Street Boom" - Must-read history

[JackRiddler]

From October 2009, posted originally by 23:

http://www.latimes.com/business/la-fi-sec-coo16-2009oct16,0,6370675.story

SEC unit hires ex-Goldman Sachs worker as enforcement COO

The Securities and Exchange Commission hired a 29-year-old former employee in Goldman Sachs Group Inc.'s business intelligence unit as the first chief operating officer in the agency's enforcement division, according to people familiar with the decision.

The new operating chief, Adam Storch, had worked since 2004 in a Goldman unit that reviewed contracts and transactions for signs of fraud.

His new job is to make the SEC's enforcement division more efficient. Reached by phone at the SEC, he declined to comment.

Robert Khuzami, head of the enforcement division, announced the creation of the position in August as part of the unit's biggest overhaul in three decades.

Khuzami is taking steps to add front-line investigators, speed inquiries and create specialized units after the agency was faulted for failures including missing Bernard Madoff's massive Ponzi scheme.

Storch holds degrees in accounting and finance from the State University of New York at Buffalo.

Adam Storch (b. 1980) serves as the current Managing Executive of the Security and Exchange Commission's Division of Enforcement, having been hired on October 16, 2009 by Obama. The position, along with the division, was created as a reaction to the subprime mortgage crisis. He was previously the Vice President in the Business Intelligence Group at Goldman Sachs.[1]

Storch is a Certified Public Accountant in the state of New York and is also a Certified Internal Auditor and a Certified Fraud Examiner.[citation needed] He earned a B.S. degree in business administration, summa cum laude, from the SUNY Buffalo School of Management. He received an MBA from New York University's Stern School of Business. He has worked as an intern for Neuberger Berman and also worked as a senior consultant working on enterprise risk services at Deloitte & Touche.[citation needed]

Today, thanks to MinM for the pick-up:

August 9, 2012, 10:17 am
Goldman Cleared in Mortgage Investigation
By BEN PROTESS

Goldman Sachs disclosed that it was cleared of wrongdoing after an investigation into a $1.3 billion subprime mortgage deal, a surprising victory for the bank.

The Securities and Exchange Commission‘s decision to forgo action is an about-face for the federal regulator. In February, the S.E.C. notified Goldman that it planned to pursue a civil enforcement action over the deal, a package of subprime mortgages in Fremont, Calif., that the bank sold to investors in 2006.

The S.E.C. was examining whether Goldman misled investors into thinking the mortgage securities were a safe bet. At the time, Goldman said it would fight to convince regulators that they were mistaken.

On Monday, the bank learned that it was successful. Goldman was “notified by the S.E.C. staff that the investigation into this offering has been completed,” the bank said in a quarterly filing released on Thursday, “and that the staff does not intend to recommend any enforcement action.”

The announcement is the latest indication that federal investigations into the financial crisis are petering out as the deadline to file cases approaches. While the S.E.C. has brought more than 100 financial crisis-related cases, including a major action against Goldman in 2010, the agency was aiming to take a final crack at punishing Wall Street for its role in the crisis...

http://dealbook.nytimes.com/2012/08/09/ ... &seid=auto

Meet Government Sachs[/quote]



Made man!

[2012 Countdown]

US Banks Told to Make Plans for Preventing Collapse
Published: Friday, 10 Aug 2012 | 9:24 AM ET

U.S. regulators directed five of the country's biggest banks, including Bank of America and Goldman Sachs, to develop plans for staving off collapse if they faced serious problems, emphasizing that the banks could not count on government help.

The two-year-old program, which has been largely secret until now, is in addition to the "living wills" the banks crafted to help regulators dismantle them if they actually do fail. It shows how hard regulators are working to ensure that banks have plans for worst-case scenarios and can act rationally in times of distress.

Officials like Lehman Brothers former Chief Executive Dick Fuld have been criticized for having been too hesitant to take bold steps to solve their banks' problems during the financial crisis.

According to documents obtained by Reuters, the Federal Reserve and the U.S. Office of the Comptroller of the Currency first directed five banks — which also include Citigroup, Morgan Stanley and JPMorgan Chase — to come up with these "recovery plans" in May 2010.

They told banks to consider drastic efforts to prevent failure in times of distress, including selling off businesses, finding other funding sources if regular borrowing markets shut them out, and reducing risk. The plans must be feasible to execute within three to six months, and banks were to "make no assumption of extraordinary support from the public sector," according to the documents.

Spokespeople for the five banks declined to comment. The Federal Reserve also declined to comment.

Recovery plans differ from living wills, also known as "resolution plans," which are required under the 2010 Dodd-Frank financial reform law. Living wills aim to end bailouts of too-big-to-fail banks by showing how they would liquidate themselves without imperiling the financial system.

"Recovery plans are about protecting the crown jewels," said Paul Cantwell, a managing director at consulting firm Alvarez & Marsal. "It's about, 'How do I sell off non-core assets?' The priority is to the shareholders. A resolution plan is about protecting the system, taxpayers and creditors."

The recovery plans are being used as part of regulators' ongoing supervisory process. In Britain, recovery and resolution plans have both been part of the living will requirements for large banks.

Mike Brosnan, senior deputy comptroller for large banks at the OCC, said the regulator continuously evaluates contingency planning at the banks and savings associations it supervises.

"Recovery plans required of the largest banks are helpful in ensuring banks and regulators are prepared to manage periods of severe financial distress or instability affecting the banking sector," he said.

This summer, nine global banks submitted living wills to the Fed and Federal Deposit Insurance Corp, and regulators released the public portion of the documents.

The recovery plans requested in 2010, meanwhile, have received little publicity. The names of the banks required to submit them have not been previously disclosed, and Reuters obtained them only through a Freedom of Information Act request.

The Fed supplied Reuters with the letters requesting plans from banks, but not the banks' actual plans because they were deemed confidential supervisory information. The regulator said it was withholding 5,100 pages of information.

Moving Further From Disaster

Five years after the financial crisis, concerns remain about whether blow-ups at big banks could lead to another round of taxpayer bailouts. Trading losses have cost JPMorgan [JPM 36.82 -0.10 (-0.27%) ] nearly $6 billion so far, and scandals such as the alleged rigging of an international interest rate benchmark have only highlighted the risks lurking inside big banks.

These disasters have damaged banks' reputations, but not their balance sheets. Most are still profitable, and in recent years the five banks have improved their capital bases and liquidity. They also have been subjected to annual Federal Reserve stress tests that measure whether the banks have sufficient capital to weather severe economic scenarios.

Bank of America [BAC 7.7401 0.0201 (+0.26%) ] and Citigroup [C 28.7799 -0.0801 (-0.28%) ], in a sense, have already been executing the kind of moves called for in the recovery plans. Both have been selling off non-core operations and assets to streamline their sprawling businesses, after receiving multiple bailouts during the financial crisis.

Bank of America in June 2011 told Fed officials that it could shed branches in some parts of the country if it needed to raise capital in an emergency, a person familiar with the matter said in January. The proposal was part of a series of options provided to the Fed, including issuing a tracking stock for Bank of America's Merrill Lynch operations.

But just because the bank proposed selling branches does not mean it's a desirable move or highly probable, the person said. In the past year, Bank of America has shown progress in building capital without such actions. Its Tier 1 common capital ratio increased to 11.24 percent of risk-weighted assets as of June 30 from 8.23 percent a year earlier.

Tier 1 refers to a bank's core capital and has been the main focus of regulators in assessing a bank's capital adequacy.

Mentioned in Passing

The banks' chief risk officers, and in the case of Citigroup, Chief Executive Vikram Pandit, received letters in May 2010 instructing them on what to include in the recovery plans. The requests stemmed from January 2010 crisis management meetings held by regulators. The letters sent to the five banks were nearly identical.

Each plan was to address severe financial stress at the firm, as well as "general financial instability." The plans should be capable of being executed ideally within three months, but no longer than six months, the documents said.

The plans should "make appropriate assumptions as to the valuations of assets and off-balance sheet positions," the documents said.

Recovery plans have been mentioned in public before, but only in passing. In testimony to Congress in July 2010, Fed Governor Daniel Tarullo said the "largest internationally active U.S. banking organizations" were working on recovery plans. The initiative stemmed from work led by the Financial Stability Board, a body that coordinates the work of international financial regulators, he said.

In a presentation in March, JPMorgan Chase said it had a recovery plan in place and said it was ordered by regulators. The presentation was organized by Harvard Law School and was closed to the media at the time, but is available online.

-
http://www.cnbc.com/id/48607899

===

JPMorgan Chase Libor Subpoenas Coming From Everybody In The World
Posted: 08/09/2012 10:56 am

Pretty much everybody in the world with subpoena power has hit JPMorgan Chase with requests for information in the Libor-rigging scandal.

The biggest U.S. bank revealed the extent of its involvement in the probe in a filing Thursday morning with the Securities and Exchange Commission, saying regulators in the U.S., U.K., Canada, Switzerland and more had asked it for information:

JPMorgan Chase has received subpoenas and requests for documents and, in some cases, interviews, from the DOJ, CFTC, SEC, European Commission, UK Financial Services Authority, Canadian Competition Bureau, Swiss Competition Commission and other regulatory authorities and banking associations around the world.
That's a whole lot of subpoenas. For the uninitiated, "DOJ, CFTC, SEC" refer to the Justice Department, Commodity Futures Trading Commission and Securities and Exchange Commission. "Libor" stands for "London Interbank Offered Rate," a short-term interest rate that affects borrowing costs for homeowners, companies and borrowers throughout the world, along with about $350 trillion in credit derivatives. Despite its importance, the rate has apparently been manipulated constantly for years, in what may be the biggest financial scandal of all time.

JPMorgan -- which said it was cooperating with the investigations -- has also received requests for information about its involvement in setting Euribor and Tibor, the European and Japanese versions of Libor, respectively.

The bank made a similar disclosure in its previous quarterly filing in May.

JPMorgan has been identified as one of 16 banks in the U.S., the U.K. and Europe under investigation for manipulating Libor. Barclays has already agreed to pay $450 million in fines in the case, admitting its traders pushed Libor higher and lower to either gain advantage in derivatives trades or make the bank look healthier. Other banks will likely soon follow, and regulators are building criminal cases against individual traders and maybe banks, too.

Previously, Bank of America and Citigroup have said that they, too, have gotten subpoenas in the Libor case, though they mentioned fewer regulatory agencies than JPMorgan did.

JPMorgan also said it was the subject of a large and growing number of lawsuits coming out of the Libor mess. State and local governments, for example, are suing banks for keeping Libor too low, hurting the value of interest-rate swaps they bought to protect against rising rates
-
http://www.huffingtonpost.com/2012/08/0 ... 60015.html

[JackRiddler]

From Cathy O'Neil's blog, mathbabe.org.

Actually compiled by rortybomb.org - Unemployment projections vs. official unemployment rate. Not at all a surprising pattern, once one understands what the "science" of economics actually is.



Cute.

[2012 Countdown]

New York Luxury Housing Bubble On Steroids: 15 CPW Flipping Returns 192% In 5 Years
Submitted by Tyler Durden on 08/17/2012

"It's defining a new category in real estate" is how the ultra-luxury apartment business is seen in New York. Goldman's Lloyd Blankfein and his buddies (including Sting) at 15 Central Park West are set to double their money as Bloomberg reports four condos in the Richie-Rich style extravaganza of a building have hit the market at asking prices at an average 192% over what owners paid in 2007 and 2008. The most expensive (a five-bedroom 35th floor pied-a-terre), topping Oaktree's Howard Mark's previous $52.5mm record purchase at 740 Park, is priced at a stunning $95mm. Testing the glass ceiling of a $100mm apartment is nothing though - as just like the rest of the nation's apparent house price recovery 'tight supply is supporting the current spate of eye-popping asking prices' which obviously will mean an influx of 'very expensive' inventory hitting the market in the coming years. For $95mm we wondered exactly what the apartment comes with? Perhaps $90mm of gold bars on the coffee-table? Perhaps Hugh Verrier and his wife Celia sum up the largesse perfectly: "we just thought of it as a living space". Indeed, Hugh, indeed.

As JPM noted today - with regard the broad 'housing recovery':-

The recent rise in home prices are a result of record low housing inventory and improved distressed sales, not an increase in demand;

Net demand (3.2m in June) driven by 3.2% decline in inventory, which has fallen 24% YoY
-
http://www.zerohedge.com/news/new-york- ... 92-5-years

===

In other news...

Economic Outlook Drops To Lowest Of The Year As Inflation Expectations Surge
Submitted by Tyler Durden on 08/17/2012

University of Michigan Consumer Confidence came modestly higher than expected and limped higher off the lowest levels of the year. However, aside from this apparently positive event (accoding to some media pundits), there are two worrying things shifting rapidly. Consumer outlook for the economy (as opposed to current conditions) dropped to their lowest of the year with the largest 3-month drop in 11 months (so much for hope?); and inflation expectations soared by the most in 17 months.

Consumer's outlook for the economy is plunging...

http://www.zerohedge.com/news/economic- ... ions-surge

[JackRiddler]

Journalistic malpractice is unfortunately the norm. That is particularly egregious. Fannie and Freddie alone hold 1.1 million homes in foreclosure and they have been preparing a bulk sales program. They probably will not be selling fewer than 20,000 homes at a time, in packages with each package covering all areas of the country. This will set the model for the other 1.5+ million homes currently in REO, most of them in the hands of large-scale mortgage holders like Citigroup. Meanwhile, 2.8 million additional homeowners are expected to go into foreclosure, inevitably. This has been delayed, partly by the title dispute issue (which may yet flame up despite the MERS settlement, due to state laws and courts), and partly because the banks were very cautious about keeping up a sustainable pace of foreclosures. Too many at once could overwhelm servicer bureaucracy or actually threaten their balance sheets and start the crisis anew. Disgustingly, they were using HAMP as a bait-and-switch to sucker many thousands of homeowners, letting them pay less in the delusion that a modification was coming, before the foreclosure department would call and hammer them for the full amount as delinquent. HAMP never existed as a loan modification program for distressed borrowers. In Geithner's words it existed to "foam the runway" (slow down the pace of disclosures) for the banks to have a safer landing. I'm learning much of this from the book by Neil Barofsky, who was the Special IG for TARP (SIGTARP) and from hanging out with the most fantastic group I wish I had been attending in months past: the banking working group of Occupy Wall Street!



As for New York real estate, it's no longer part of any country. This is not like the 1970s. Very, very, very small place, Manhattan is extremely over-developed with high demand from super, super rich people. Long as there is an international one percent who want to crowd themselves into a few neighborhoods on this single small island, and a local police state to protect them, this may continue.

And as for these bulk sales of foreclosed homes: The new model is for private equity to pick up the houses and turn them into rentals (under terrible rental conditions, such as that renters are responsible for maintenance) and then... are you ready for this? They want to SECURITIZE the revenue flows from the rentals. Why the hell will investors buy it, after the subprime scam disaster? Oh, please, things are different now! We're desperate for higher-yield instruments than these damn 3 percent Treasuries. And naturally there will be media to explain why rentals are much more reliable than subprime mortgage payments! And ratings agencies won't want to damage their reputation again, will they? This time the AAA rating will mean something! ("Fool me twice, shame on me.")

More news!

http://webofdebt.wordpress.com/2012/08/ ... #more-4407

Saving the Post Office: Letter Carriers Consider Bringing Back Banking Services

Posted on August 12, 2012 by Ellen Brown

On July 27, 2012, the National Association of Letter Carriers adopted a resolution at their National Convention in Minneapolis to investigate establishing a postal banking system. The resolution noted that expanding postal services and developing new sources of revenue are important to the effort to save the public Post Office and preserve living-wage jobs; that many countries have a successful history of postal banking, including Germany, France, Italy, Japan, and the United States itself; and that postal banks could serve the 9 million people who don’t have bank accounts and the 21 million who use usurious check cashers, giving low-income people access to a safe banking system. “A USPS bank would offer a ‘public option’ for banking,” concluded the resolution, “providing basic checking and savings – and no complex financial wheeling and dealing.”

The USPS has been declared insolvent, but it is not because it is inefficient (it has been self-funded throughout its history). It is because in 2006, Congress required it to prefund postal retiree health benefits for 75 years into the future, an onerous burden no other public or private company is required to carry. The USPS has evidently been targeted by a plutocratic Congress bent on destroying the most powerful unions and privatizing all public services, including education. Britain’s 150-year-old postal service is also on the privatization chopping block, and its postal workers have also vowed to fight. Adding banking services is an internationally proven way to maintain post office solvency and profitability.

Serving an Underserved Market, Without Going Broke

Many countries operate postal savings systems through their post offices, providing people without access to banks a safe, convenient way to save. Great Britain first offered this arrangement in 1861. It was wildly popular, attracting over 600,000 accounts and £8.2 million in deposits in its first five years. By 1927, there were twelve million accounts—one in four Britons—with £283 million on deposit.

Other postal banks followed. They were popular because they serviced a huge untapped market—the unbanked and underbanked. According to a Discussion Paper of the United Nations Department of Economic and Social Affairs:

The essential characteristic distinguishing postal financial services from the private banking sector is the obligation and capacity of the postal system to serve the entire spectrum of the national population, unlike conventional private banks which allocate their institutional resources to service the sectors of the population they deem most profitable.

Serving the unbanked and underbanked may sound like a losing proposition, but numerous precedents show that postal savings banks serving low-income and rural populations can be quite profitable. (See below.) In many countries, according to the UN Paper, banking revenues are actually crucial to maintaining the profitability of their postal network. Letter delivery generates losses and often requires cross-subsidies from other activities to maintain its network. One effective solution has been to create or expand postal financial services.

Public postal banks are profitable because their market is large and their costs are low: the infrastructure is already built and available, advertising costs are minimal, and government-owned banks do not award their management extravagant bonuses or commissions that drain profits away. Profits return to the government and the people.

Profits return to the government in another way: money that comes out from under mattresses and gets deposited in savings accounts can be used to purchase government bonds. Japan Post Bank, for example, holds 20% of Japan’s national debt. The government has its own captive public lender, servicing the debt at low interest without risking the vagaries of the international bond market. Fully 95% of Japan’s national debt is held domestically in one way or another. That helps explain how Japan can have the worst debt-to-GDP ratio of any major country and still maintain its standing as the world’s largest creditor.

Some Examples of Successful Public Postal Banks

Kiwibank:

New Zealand’s profitable postal bank had a return on equity of 11.7% in the second half of 2011, with net profits almost trebling. It is the only New Zealand bank able to compete with the big four Australian banks that dominate the New Zealand financial sector.

In fact, it was set up for that purpose. By 2001, Australian mega-banks controlled some 80% of New Zealand’s retail banking. Profits went abroad and were maximized by closing less profitable branches, especially in rural areas. The New Zealand government decided to launch a state-owned bank that would compete with the Aussie banks. To keep costs low while still providing services throughout New Zealand, the planning team opened bank branches in post offices.

In an early version of the “move your money” campaign, 500,000 customers transferred their deposits to public postal banks in Kiwibank’s first five years—this in a country of only 4 million people. Kiwibank consistently earns
the nation’s highest customer satisfaction ratings, forcing the Australia-owned banks to improve their service to compete.

China’s Postal Savings Bureau:

With the assistance of the People’s Bank of China, China’s Postal Savings Bureau was re-established in 1986 after a 34-year lapse. As in New Zealand, savings deposits flooded in, growing at over 50% annually in the first half of the 1990s and over 24% in the second half. By 1998, postal savings accounted for 47% of China Post’s operating revenues; and 80% of China’s post offices provided postal savings services. The Postal Savings Bureau has served as a vital link in mobilizing income and profits from the private sector, providing credit for local development. In 2007, the Postal Savings Bank of China was set up from the Postal Savings Bureau as a state-owned limited company that provides postal banking services.

Japan Post Bank:

By 2007, Japan Post was the largest holder of personal savings in the world, boasting combined assets for its savings bank and insurance arms of more than ¥380 trillion ($3.2 trillion). It was also the largest employer in Japan. As in China, Japan Post recaptures and mobilizes income from the private sector, funding the government at low interest rates and protecting the nation’s debt from speculative raids.

Switzerland’s Swiss Post:

Postal financial services are by far the most profitable activity of Swiss Post, which suffers heavy losses from its parcel delivery and only marginal profits from letter delivery operations.

India’s Post Office Savings Bank (POSB):

POSB is India’s largest banking institution and its oldest, having been established in the latter half of the 19th century following the success of the postal savings system in England. Operated by the government of India, it provides small savings banking and financial services. The Department of Posts is now seeking to expand these services by creating a full-fledged bank that would offer full lending and investing services.

Russia’s PochtaBank:

Russia, too, is seeking to expand its post office services. The head of the highly successful state-owned Sberbank has stepped down to take on the task of revitalizing the Russian post office and create a post office bank. PochtaBank will operate in the Russian Post’s 40,000 local post offices. The post office will function as a banking institution and compete on equal footing not only with private banks but with Sberbank itself.

Brazil’s ECT:

Brazil instituted a postal banking system in 2002 on a public/private model, with the national postal service (ECT) forming a partnership with the nation’s largest private bank (Bradesco) to provide financial services at post offices. The current partnership is with Bank of Brazil. ECT (also known as Correios) is one of the largest state-owned companies in Latin America, with an international service network reaching more than 220 countries worldwide.

The U.S. Postal Savings System:

The now-defunct U.S. Postal Savings System was also quite successful in its day. It was set up in 1911 to get money out of hiding, attract the savings of immigrants, provide safe depositories for people who had lost confidence in private banks, and furnish depositories with longer hours that were convenient for working people. The minimum deposit was $1 and the maximum was $2,500. The postal system paid two percent interest on deposits annually. It issued U.S. Postal Savings Bonds that paid annual interest, as well as Postal Savings Certificates and domestic money orders. Postal savings peaked in 1947 at almost $3.4 billion.

The U.S. Postal Savings System was shut down in 1967, not because it was inefficient but because it became unnecessary after its profitability became apparent. Private banks then captured the market, raising their interest rates and offering the same governmental guarantees that the postal savings system had.

Time to Revive the U.S. Postal Savings System?

Today, the market of the underbanked has grown again, including about one in four U.S. households according to a 2009 FDIC survey. Without access to conventional financial services, people turn to an alternative banking market of bill pay, prepaid debit cards and check cashing services, and payday loans. They pay excessive fees for basic financial services and are susceptible to high-cost predatory lenders. On average, a payday borrower pays back $800 for a $300 loan, with $500 going just toward interest. Low-income adults in the U.S spend over 5 billion dollars paying off fees and debt associated with predatory loans annually.

Another underserviced market is the rural population. In May 2012, a move to shutter 3,700 low-revenue post offices was halted only by months of dissent from rural states and their lawmakers. Banking services are also more limited for farmers following the 2008 financial crisis. With shrinking resources for obtaining credit, farmers are finding it increasingly difficult to stay in their homes.

It is clear that there is a market for postal banking. Countries such as Russia and India are exploring full-fledged lending services through their post offices; but if lending to the underbanked seems too risky, a U.S. postal bank could follow the lead of Japan Post and use the credit generated from its deposits to buy safe and liquid government bonds. That could still make the bank a win-win-win, providing income for the post office, safe and inexpensive depository and checking services for the underbanked, and a reliable source of public funding for the government.


Ellen Brown is an attorney and president of the Public Banking Institute, http://PublicBankingInstitute.org. In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://WebofDebt.com and http://EllenBrown.com.

[JackRiddler]

Here's more on the "Rental Society" I was talking about in the last post. I've recently had the pleasure of meeting Yves Smith!

http://www.nakedcapitalism.com/2012/08/ ... ciety.html

Tuesday, August 21, 2012
Our Coming Rentcropper Society

We are in the midst of a sea change in terms of the relationship of ordinary Americans to the housing market. Policymakers are not only in denial as to its magnitude, but are actively enabling courses of action that are likely to prove destructive.

One of the accidental and fortunate discoveries of the 1930s was that a long-dated mortgage, meaning 15 to 30 years, was a good fit with working conditions of that era. The Home Owners Loan Corporation refinanced borrowers who were delinquent and in danger of losing their homes from short maturity mortgages to 20 to 25 year ones, considerably lowering borrower payments. This was considered a radical experiment at the time, and was expected to lose $1 billion, a very large sum in those days. When its operations ceased, it had shown a profit. One of the big reasons was the stability of employment. Job tenures were much longer than now; in fact, being fired was rare, and usually a result of business failure or distress, not management whim or need to meet quarterly earnings targets. And with the exception of some very large corporations that liked transferring managers (IBM stood for “I’ve been moved”), families were more likely to remain in the same house over the husband’s working life.

Much of this equation has been turned on its head. A college degree is now an entry requirement for many jobs. 94% of recent graduates borrowed to finance their education and the average debt level across all student debtors is over $23,000. And the fact that student debt cannot be discharged in bankruptcy means that young people are less likely to buy a house than in the past, and will take longer to accumulate enough savings to do so. On top of that, the uncertainty of employment makes buying a house a much dodgier proposition than in the past. One of the paradigmatic stories of our day is how people in their 40s and 50s who lose a job either can’t find work at all, and join the ranks of the long-term unemployed, or take a large cut in pay. If they haven’t paid off their mortgage, that loss of income often leads to foreclosure. Ever shortening job tenures increases the odds of an abrupt, permanent fall in pay. And as Elizabeth Warren described in The Two Income Trap, two earner families are more vulnerable economically than the old working dad, stay at home model.

Given this sea change in the stability of middle class income, it seems obvious that home ownership will not be attainable for many workers. Moreover, some may recognize that even if they can afford to buy, that the risk/return tradeoff may still make rental more attractive for them.

In some respects, this transition is already underway. Homeownership is now at its lowest level in 15 years. And some societies have much higher levels of renting than the US, most notably Germany.

But there is a second major shift underway, which is a planned transfer of large number of homes into the hands of private equity landlords. Fannie and Freddie are now piloting programs for bulk sales of foreclosed home. Historically, they’ve sold them individually or in geographically dispersed packages, but since February, Fannie has been experimenting with selling homes in large volumes in Phoenix, Atlanta, Chicago, Florida, Los Angeles and Las Vegas. There are also reports of investors making significant buys in Florida. Bank of America is also experimenting with bulk sales. It’s likely that once the Fannie and Freddie programs are up and running, the servicers will copy their template with private label loans.

While the bulk sales programs allows not for profits and government bodies to participate, the main target is private equity investors. And the expectation is that fortunes will be made. As one prospective buyer said, “If the government is selling, I want to be on the other side of that trade.” Major PE firms are raising multi-billion dollar funds dedicated to this opportunity.

There are several grounds for concern. One is that there is no model for large-scale, absentee landlords of single family homes. In the past, institutional investment in residential rental has been in multifamily properties, often apartment buildings. And these almost without exception had property management in place at the time of acquisition or was in dense urban areas where it was easy to find experienced management firms. And even in locales where those services are available, PE firms have too often proven to be bad landlords by design.

Consider New York City, which provide considerable protections for tenants (both in rent regulated and market price units) that cannot be waived in a rental agreement (although sneaky landlords are known to try to persuade tenants otherwise). One would think that would make it plenty uninviting for private equity investors, since they have high return targets. But in fact the PE crowd has made acquisitions, and as of 2008 owned 6% of the rent regulated apartments in the city. Their plan was not simply to wait for normal turnover to allow them to increase rents to market rate but to help nature along. As Gretchen Morgenson wrote:

As regulatory filings and promotional materials show, the companies expect to generate higher returns quickly by increasing rents after existing tenants vacate their units. Their success depends upon far higher vacancy rates than are typical in rent-regulated apartments in New York.

Some residents and tenant advocates say that they began seeing what they consider a pattern of harassment of low-income tenants this year and suspect that it is a result of the new owners’ business models. Tenants have been sued repeatedly for unpaid rent that has already been received by the landlords; they have been sent false notices of rent bills, lease terminations and nonrenewals; and they have been accused of illegal sublets.

The highest profile example was Stuyvesant Town, a $5.4 billion acquisition by Blackrock and Tishman Speyer that filed for bankruptcy in 2010. This anodyne section of a New York Times story gives a sense of the level of landlord misbehavior:

Ultimately, Tishman Speyer, like many similar buyers, was unable to convert rent-regulated apartments to market-rate rents as quickly as it had anticipated. Rents fell as the recession deepened, and then last fall the state’s highest court ruled that the owners had improperly deregulated and raised rents on about 4,400 of the apartments while getting special tax breaks from the city.

The 15-story red-brick buildings are in good shape, tenants say, but they noted that the maintenance and security staffs had been cut. And the owners may owe $200 million in rent overcharges to thousands of tenants as a result of the court ruling.

Similarly, in 2010, the Village Voice listed two private equity firms, Vantage and Cronos Capital, among the ten worst landlords.

One name often bandied about as a prospective bulk sales buyer is Fortress. Tenants beware. The model for Fortress appears to be the Gagfah. Some cash-strapped German cities were privatizing housing, and Fortress-controlled Gagfah bought 45,000 rental units from Dresden. Gagfah agreed to give existing tenants the right of first refusal on any sale. It was also criticized in local media for neglecting repairs. Gagfah was sued for €1 billion by Dresden and settled for €40 million

What can we expect from our new suburban absentee landlords? First is they don’t seem to appreciate how operationally intensive property management is. Second is that they plan to make tenants responsible for maintaining properties. Yes, you read this correctly; we’ve heard this from various sources. Having both owned and rented, one of the nice things about renting is that when Shit Happens, like a leak, reasonably well run buildings are on top of it pronto. By contrast, what does “renting” mean if you as tenant are responsible for some, potentially a lot, of what would seem to be the owner’s responsibility?

A comment from a PE investor in a recent post breezily presents their assumptions:

In many markets, the maintenance obligations fall to the tenant. Grab a sample set of local real estate board form leases and you’ll find this to be the case. Moreover, while these same form leases do place the burden of capital repairs on the landlord’s side (as is the case with multi-family properties), this is an identifiable risk that can be assessed just as it would be by a skilled operator acquiring larger-scale multi-family properties. Falling trees are non-discriminatory – they will crush the roof of a single-family home and a two or three story garden-style apartment building with equal vigor. The previous run of the “for sale” cycle has created legions of well-qualified providers of ownership related services, from inspectors to repair specialists, many of whom are thrilled to raise the tenor of their operations by contracting locally and regionally on a bulk basis with professional owners. At the risk of introducing cliche, don’t overlook how frictionless the management oversight of this type of service effort has become in this age of pervasive connectivity.

First, the “well qualified providers of ownership services” are the companies services now hire to manage real estate they’ve foreclosed on. I’m sure readers will elaborate in comments, but there is considerable evidence that their competence level is low: homes that have not been secured properly and were stripped for copper and appliances (even in upscale neighborhoods), death because children fell in pools that weren’t drained; squatting; and more mundane problems like overgrown lawns. And what is this “pervasive connectivity” about? So you can text rather than call an emergency service?

So what is the line between “capital repairs” and “maintenance”? The subtext is that the PE crowd intends to take as narrow a view of what constitutes required repairs as possible; the reports of PE landlords from hell and underinvestment in Stuy Town would tend to confirm that. Reader Doug Terpstra also begged to differ with the remark quoted above (boldface his):

….your current “frictionless management” can become gooey very quickly when the blood-flow from stones turns into a trickle and the current rent bubble land-rush pops and inevitably follows RE values on a time-delayed graph.

Also, your perception of being able to put all maintenance responsibility on plantation tenants only goes so far. Beyond neglect, a whole lot can go wrong in a hurry from a disgruntled or distressed tenant. And even in regressive red states like Arizona, there’s a lot of legal wiggle room for a put-upon tenant who might decide to get uppity:

“The landlord and tenant of a single family residence may agree in writing, supported by adequate
consideration, that the tenant perform the landlord’s duties specified in subsection A, paragraphs 5 and 6 of this section, and also specified repairs, maintenance tasks, alterations and remodeling, but only if the transaction is entered into in good faith, not for the purpose of evading the obligations of the landlord and the work is not necessary to cure noncompliance with subsection A, paragraphs 1 and 2 of this section.” (Subsection A, BTW, is quite comprehensive and affords tenants considerable leverage, including damages for untimely compliance)

Now readers might wonder: wouldn’t it be in the best interest of these landlords to do at least an adequate job of taking care of the properties? After all, don’t they intend to sell the houses, preferably as soon as they seem some price appreciation? Don’t be so sure. First, one possible acquirer is the current tenant; you might see financed sales or rent to own structures. And prospective owners would presumably buck the efforts to dump maintenance on them less than those who weren’t potential buyers. Second, the mortgage industry has long been keen to securitize rentals, and these bulk sales programs would give them enough properties to move this scheme forward. Imagine the fees! And imagine how well this will work from the perspective of tenants. As with mortgages, you’d presumably have a servicer who’d handle taking and accounting for the rental payments and lease renewals as well as handling whatever in the way of repairs and maintenance they deigned to provide. Given how accountable and responsive servicers have been, I shudder to think how these securitization servicers would perform.

So as we indicated, there is good reason to expect that the new PE landlords will undermaintain the properties they buy. That in turn has implications for the neighboring properties. At a minimum, you can expect to see more turnover in those homes (tenants less inclined to renew leases) and/or bad landlords getting a name (in this world of pervasive connectivity, it will be much easier to find that sort of thing out). Thus it is in the interest of homeowners to push for tougher rental standards to help protect property values and encourage long-term stable tenancy (something you see in places like New York where tenants have solid legal protections).

This program is troubling not just on its own, but also as another manifestation of the falling status of the American middle class. As Matt Stoller wrote:

Debt is not just a credit instrument, it is an instrument of political and economic control.

It’s actually baked into our culture. The phrase ‘the man’, as in ‘fight the man’, referred originally to creditors. ‘The man’ in the 19th century stood for ‘furnishing man’, the merchant that sold 19th century sharecroppers and Southern farmers their supplies for the year, usually on credit. Farmers, often illiterate and certainly unable to understand the arrangements into which they were entering, were charged interest rates of 80-100 percent a year, with a lien places on their crops. When approaching a furnishing agent, who could grant them credit for seeds, equipment, even food itself, a farmer would meekly look down nervously as his debts were marked down in a notebook. At the end of a year, due to deflation and usury, farmers usually owed more than they started the year owing. Their land was often forfeit, and eventually most of them became tenant farmers…

[W]e are in the midst of creating a second sharecropper society..Today, the debts do not involve liens against crops. People in modern America carry student loans, credit card debt, and mortgages…Young people and what only cynics might call ‘homeowners’ have no choice but to jump on the treadmill of debt, as debtcroppers. The goal is not to have them pay off their debts, but to owe forever. Whatever a debtcropper owes, a wealthy creditor owns. And as a bonus, the heavier the debt burden of American citizenry, the less able we are able to organize and claim our democratic rights as citizens. Debtcroppers don’t start companies and innovate, they don’t take chances, and they don’t claim their political rights.

The one plus ordinary Americans have in the coming rental conversion is that this is a battle that can be fought on a local level, where major financial players seldom bother buying political favors and can easily misjudge who the key players are. Stronger rental rights, which would discourage absentee rentiers from bidding up properties, would also work to the advantage of local landlords who have been the traditional owners of residential rental properties. This is a battle that can be won, provided homeowners get word soon enough that a quiet battle for their communities is about to be joined.

[JackRiddler]

More this morning from Yves Smith on the emergence of rental property securitization, and the initially aversive reaction from the ratings agencies. I seriously wonder how they're going to sell this scam to investors after the great burn of the mortgage securities bubble. Thing is, where else are they going to go in this situation, with the political side of the financial industry having blocked all of the possible real solutions (debt forgiveness, modified mortgage terms, etc.)?

http://www.nakedcapitalism.com/2012/08/ ... ntals.html

Monday, August 27, 2012
New Real Estate Train Wreck Coming: Securitized Rentals

No matter how bad things get, it turns out they can always get worse. Wall Street is about to foist a new “innovation” on investors that even the ratings agencies won’t touch.

Greedy, reckless, and just plain lazy mortgage originators, servicers, and trustee took what was actually a not unreasonable idea, that of mortgage securitizations, and turned it into a loss-bomb. Remember, that movie did not have to end badly. First, participants in the private label mortgage securitization market did for the most part comply with the requirements of their contracts for the first decade plus of that product’s existence. It was their wanton disregard for their own products which have led to the chain of title mess and difficulties in foreclosing that still plagues that market. Second, securitization markets that developed later than the US market (most notably, in of all places Russia and Eastern Europe) and featured some improvements on the US template have not seen the abuses of borrowers and investors suffered here and got through the global downturn reasonably well. However, the sell side has completely refused to implement the sort of reforms necessary to make the product safe for investors. So the US mortgage is and is likely to remain on government life support for the next decade.

So what have the “innovators” decided to do? Foist an even worse product on hapless investors. Remember, mortgage securitizations in concept are a decent idea and with proper protections, fees, and incentives, can be a useful and attractive product. Securitizing rental income streams for a large number of single family homes is a completely different proposition. The concept is clearly still being fleshed out, since a story on it in Reuters was unclear as to whether the “bonds” would also be entitled to the proceeds of the eventual sale of the house. I imagine that the private equity investors who are targeting this market are pushing for that, since fobbing off the problem of the home sale to the securitized vehicle is tantamount to a full cashout. They’d get initial tenants in, no matter how good or bad, and effectively flip the house to the securitization.

The newly-found convervatism of the ratings agencies may (stress only may) put a damper on this market. The ratings agencies are not willing to rate the initial deals, and want to see some history before they hazard a rating. Even then, some regard this product as sufficiently risky so as not to merit high ratings even if it were to become established. From Reuters:

Over the past three months, Fitch, S&P, DBRS and Morningstar have each published initial assessments of the potential risks of the new asset class. But no agency has yet published official criteria for the product.

Fitch said that such transactions are unlikely to merit a rating above Single A — and even that would require sufficient historical rental-payment data or a solid record from the property’s operator/manager.

Moody’s issued its first report on the subject on Thursday, but said that since it had not seen a formal proposal yet, it was too early to tell exactly what rating it would assign a transaction. However, it noted that even extra credit enhancement would not mitigate a lack of historical rental-payment data, and therefore some transactions might not merit top grades.

“We would like to see the specific underwriting criteria that the operator is using to choose these tenants,” Kruti Muni, a Moody’s analyst, told IFR.

“Obviously the operators would rely on income information, the existence of security deposits, history of utility payments, etc. The diversity of the geography of the pools of homes is significant as well.”

Moody’s also said that before assigning a rating, it would need to know detailed information about the operator, and would conduct a review of the operator’s performance, its experience and its ability to perform its role in the transaction, which includes determining tenant default rates and re-leasing periods.

As Dave Dayen notes:

It’s simply incredible that, even with so many variables involved, Fitch would give these deals something even as high as single-A. You need data on default rates, vacancy periods, the impact of local economic forces on rentals, the various property managers and operators who would be handling the rental units in the deal, etc., etc…

There’s just no reason to believe that hedge funds and PE firms with no history of being landlords will be able to ensure a steady stream of revenue out of this. Moreover, one economic shock could blow up this market as easily as the housing bubble popped. We already know that the US economy is due to take a step back in 2013 at best, if not a full-blown recession as a result of the fiscal cliff. Add that into the mix with 9% unemployment or above (the expected range in the event of a recession), and suddenly hundreds of thousands if not millions of Americans fall behind on their rent. The securities start to sour. And this could become a full-blown financial crisis just like in 2007-2008.

To amplify Dayen’s concerns, this looks like an effort to fob risk off onto yield-despterate investors. Rental markets are tight now, precisely due to how many homes are behind held in REO inventories or have had the homeoweners leave, yet the servicer had not actually had the trust take title to the home. But those former owners need housing, so we have a real estate version of musical chairs, with families looking for rentals before the forecloses homes have been converted to rentals. Once the conversion process is further along, it isn’t hard to imagine that rent rates will be lower in many markets and vacancy periods will be longer. Similarly, some homeowners lost their houses due to financial stress. Some of them may not even be able to make their rent payments reliably. We saw how in the 2006-2007 period, mortgage were securitized even when the borrower had defaulted in the first three months. It isn’t hard to imagine that we will see equally weak tenant rental streams sold into these securitizations.

The other looming horrorshow is, if you think mortgage servicers were unresponsive, consider how bad rental securitization servicers are likely to be. Their incentives will be to delay in responding to tenant problems in the hope that the tenant will spend the time and money required. And God only knows what happens if they apply payments incorrectly, a not-infrequent problem. One difference here is that mismanaged rentals pose a threat to the home value of the neighbors, and here, the local community does have some recourse, in that it can impose minimum rental standards, which would provide tenants with some recourse. If some communities were to go that route, it might lead to enough uncertainty regarding rental costs and income so as to deter the ratings agencies from ever assigning ratigns, which would presumably limit the size of this product considerably.

As with mortgages, the impulse of the financial community is to find even more ways to skim fees off the top of income streams and leave investors holding the bag. And if investors are dumb enough to be fooled again, after the disaster of mortgage securitizations, they will have gotten what they deserve.

Topics: Banking industry, Credit markets, Private equity, Real estate, Ridiculously obvious scams

Email This Post Posted by Yves Smith at 12:27 am

Good comment:

Mark P. says:
August 27, 2012 at 3:44 am

It’s a stunningly simple strategy that could be effective. I mean, consider the problems –

What’s to be done when things are getting down to where there’s almost nothing left that hasn’t been been looted once already?

How does one blow just one more bubble, however pitiful?

And how, just incidentally, while seeking short-term profit for oneself, does one make everything far worse long-term for large communities of other people and extend the RE collapse even as far, maybe, as 2025?

This is how.

[1] The hedge funds and PE companies buy up REO properties in large numbers at firesale prices with the assistance of the administration. With the assistance of the servicers/banks that are keeping large amounts of foreclosure inventory off the market, they charge excessively high rents.

[2] Effectively, they create a bubble in rental income streams that they can securitize and dangle in front of yield-desperate investors. They take the investors’ money and run.

[3] Because it’s short term. Slumlord-style management practices — since nobody wants to invest in those properties’ upkeep and, as C says above, elected representatives and regulators are as likely here as with the banking and original RE boondoggles to fail to do their jobs — will mean that the properties deteriorate, so that people stop paying and do further deliberate damage as payback. Neighbors see their home values deteriorate. Whole communities sink further down.

Well done, Wall Street.

[JackRiddler]

New thread ongoing, thanks to Byrne, and discovery of blog by Golem XIV.

A word about banks and the laundering of drug money...
viewtopic.php?f=8&t=35353&p=475870#p475870

Embedded links at source

A word about banks and the laundering of drug money
By Golem XIV on August 18, 2012 in latest

When we hear of a bank caught money laundering there is a tendency, gently encouraged I think, by the banks and the media, to think of it as we would if we heard of someone in our street having been caught fencing stolen goods. We would think – ‘Ah, so there is the crook among us’, and by unspoken extension assume that since he’s the crook the rest of us aren’t. Not unreasonable when dealing with people, but entirely misplaced when thinking of banks.

That might seem a rather sweeping generalization but it isn’t. The drugs business is huge and mostly in our countries. The drug producing nations are relatively minor players in the financial side of the drug business. Most of the drug money is made , moved and stored/banked/invested outside the producing countries but inside ours.

Latest official figures estimate,

In the 2005 World Drugs Report the UNODC put the value [of the global drug trade] at US$13bn at production level, $94bn at wholesale level and US$332bn based upon retail prices.

The critical thing to note here is not the figures, large as they are, but the careful break down of the trade into production, wholesale and retail. There is the tendency in the news and newspapers to talk just about ‘the drug trade’. This piece of laziness is useful because it conjures up pictures of Mexican murders and Colombian jungles. Rather than what it should conjure up, images of smart bankers in London and New York.

Let’s look at the breakdown more carefully. Production is the third world part of the trade. It is also the smallest by far. It is the total money involved in making the stuff, paying the farmers and processors as well as those who begin the shipment towards the export centres and, of course those who have to be paid off to make sure the war on drugs is never won. Only a part of that $13 billion is actual profit. But it is still13 billion which is far to big to stuff under any mattress. So we can be sure that the bulk of those billions is banked.

That means in the producing nations there must be businesses willing to accept the drug money (Casinos are a favourite) , a network of businesses and all those professionals like accountants who work in them, who run cellophane and cardboard supplier companies, who own trucks and boat rental companies and a whole range of front import/export companies. Whenever I go to Lima I laugh at the sheer brazenness of streets where for every casino there is a bank just across from it.

Like any commodity, once the drugs make their way to the export centres they move from Production to Wholesale. At some point a wholesaler, who has deep pockets, the ability to store and move the product and contacts in retail, gets involved. Of course this may be part of the same business empire that also produces the stuff. many businesses are vertically integrated. But it is worth still making the distinction, not only because different people and services come in to play but also because a different set of financial institutions must be called upon.

Once the drugs move countries local banks are of no use. now we need international banks who can transfer money across the world and into banks in other nations. Needless to say these banks tend to be big banks – our banks. So to give an example, cocaine produced in Peru will first use local banks. They will be banks with local branches such as Banco de Crédito del Perú and BBVA Continental. Some of you may read that last name and be thinking, ‘That’s not a local bank that’s a Spanish bank’. I know, I know, bear with me. We’ll come back to them soon.

Once we get to the export centre we have new expenses and business to conduct. We need to charter planes and boats. Remember at this point we’re not yet importing in to the retail network inside the US and Europe. We are transferring the drugs from the producer nation into the wholesale transport routes. For Peruvian cocaine much of this now goes through Brazil and Venezuela and then over to Africa’s West coast. That coast from Mauritania down to Togo, is a perfect drug route because it is close to S.America, thus smaller planes can make the crossing, has little coastal policing and is by and large and area where the three currencies of dollars, drugs and violence and all accepted as payment. As The Globe and Mail reported earlier this year,

An investigation by the United Nations drug-control agency has estimated that up to 2,200 pounds of cocaine is flown into Guinea-Bissau every night, and more arrives by sea. About 50 drug lords from Colombia are based in Guinea-Bissau, controlling the cocaine trade and bribing the military and politicians to protect it, the UN investigation found.

Across the region, an estimated 50 tons of cocaine is transported through West Africa every year, mostly from Colombia and Venezuela, destined for the lucrative street trade in Europe.

The report continued,

Another key drug route is northern Mali,…The smugglers in Mali transport huge quantities of drugs through the Sahara desert and eventually to Mediterranean ports, where they are shipped to Europe.

The most dramatic sign of the Sahara smuggling route was the discovery of a burned-out wreck of a Boeing 727 jet airplane in a remote corner of northern Mali in 2009.

According to UN officials, the Boeing carried a cargo of cocaine and other illegal goods from Venezuela. Its crew landed it on a makeshift runway in Mali’s desert, and then unloaded as much as 10 tonnes of cocaine. After the plane was emptied, the traffickers apparently set it on fire, either because it was damaged or because it wasn’t needed any more.

That is wholesale, drug style. It requires big money, which in turn requires big banks. You cannot rent or buy a jet with cash. You have to have a business which deals with such things as permits, maintenance and fuel companies. That business, if it doesn’t even have an office, will need a bank account.

When you are in Lima and your client in is Guinea-Bissau you don’t exchange paper bags of greasy cash. You arrange bank transfers. Which means a smart, well educated man in an air conditioned office has to know that somehow, in Guinea-Bissau there is someone who needs to pay someone is Lima or Venezuela many millions of dollars or Euros. What does he think? A large rental of deck chairs in a holiday resort? I don’t think so.

That banker will then be asked to move that money from Guinea-Bissau to some where else. Probably to some other bank.

So who are the banks of Africa’s west coast? Well Portugal has a big presence in Angola. The President, his friends and his daughter own and run most of the banking sector as I wrote about in The Eurofiscal Corruption Contest – The Portuguese Entry. France too has a certain presence in the Francophone countries. A more recent and interesting player is Ecobank. Now, it is not the done thing to ever point a finger at Ecobank because it is the only pan African bank run by Africans and as such is seen as a shining example of Africans asserting their independence and struggling to give Africa what it deserves, its own financial muscle. And I agree with all of that in principle. But a bank run by Africans is no more nor less likely to be targeted by criminals, and to harbour its own criminals than a western bank.

EcoBank operates in 30 nations in Africa with a very heavy presence on the West coast from Mali to Togo. But it is not all African. Its largest shareholder, holding nearly 19% of the bank, is a financial vehicle registered, I think in South Africa, created and run by Renaissance Direct Investment. Renaissance Direct Investment is part of the Renaissance Group which is a Russian company, which prides itself on being a leading, if not the leading investment company in Africa, but which is run, half and half, by Russians and White Westerners. Not that being white or a westerner is a crime. But nevertheless Renaissance, a Russian investment bank, owns 19% of EcoBank. Again not a crime.

Ecobank is a major presence in all the countries where one of the largest source of cash is Drug money. And that money must be banked somewhere. It is NOT put in bags and cash and transported to Europe. It is banked where the drugs land. And remember the wholesale slice of the global drug trade is estimated at $94 Billion a large slice of which flows through Ecobank’s patch.

So, for the lawyers who may be reading, let me be very clear I am not accusing Ecobank of any wrong-doing at all. I am merely noting that a vast amount of drug money is around in the nations where Ecobank among others (such as the Angolan/Portuguese banks) operate. It could be that despite doing business in a river of dirty money not one single cent of it passes into Ecobank. This would be much the same argument put to me many years ago when I visited the City Police anti-money laundering division in the City of London who told me with absolutely straight faces that despite London being the centre of international banking, not a single penny of laundered or drug money entered the City banks. I kid you not that is what they said to me. I asked them if they thought I was on day release from a special needs school. They did not laugh.

Now when we left the drugs, they were in Guinea-Bissau and the money was banked in whatever banks were on hand with large enough operations to be able to handle the amounts. The drugs are now put on lorries and moved north across the Sahara. The money needs to be moved through shell companies and either invested in lucrative African developments, or shifted to some more ‘respectable’ financial centre where more investment opportunities are on offer.

The drugs will now head to the coast of the Med. One popular route is up to the Spanish enclaves of Ceuta and Mellilo which I wrote about in Money Laundering and Drugs in Romania and Spain. These enclaves are small, cause all sorts of immigration troubles for Spain, make a mockery of the Spanish government’s righteous indignation over Gibraltar, but are held on to tenaciously. Why? Well a clue might be that they are stuffed with branches of Spain’s major banks all offering funds transfer and private banking services in a place where nearly all the actual residents are dirt poor. Sowhose money are the banks banking? Who in Ceuta or Mellio has so much spare cash that they have money that needs ‘transferring’? Aand who feels the need for ‘private wealth management services’? I don’t know, but the bankers in those places, in those ‘respectable banks’, do. They speak to the mystery people who have all the cash that needs banking, meet them, shake their hands and bank their money, knowing what that money is. And their colleagues across in Europe accept it in turn and mix it safely in to the world of European banking and finance.

In a liquidity crisis a cash business is the kind you want to attract to your bank. And drugs are the largest cash business in the world.

BBVA and Santander are the big Spanish banks and BBVA has appeared already in this story, back in Lima. Funny that. While Santander and BBVA also have large operations in …Mexico. No drug connection there I can think of. Except, of course, that both Citi and Wachovia laundered very large amounts of drug money in Mexico. How could I forget. See also Money Laundering and the Moral World of Bankers. And then of course there is HSBC.

Now we are on the subject of properly Western banks lets move finally to retail. The retail end of the global drug trade is by far the largest, at an estimated $332 billion. Billion with a B. Now given that no one pays for their drugs on their Visa card, most if not all of this is cash. As the money moves up the chain the piles of cash become too large, and what the drug business want ot do with its money, is too ‘legit;’ for cash to be an option. So ALL of it has to be banked one way or another. Trunks of cash are not exported from the UK back to Lima. Nor is there a river of cash flowing from America to Colombia or Mexico. Some? yes. Much? No. The rest get’s washed in London and New York. And the people who do it are criminals.

They are also very wealthy, very arrogant, and they have friends in government , the police and the judiciary.

Up and down the UK cash businesses are guilty, every day of accepting drug money in to their cash earnings, banked as their own profits and then ‘paid’ back to the drug pushers minus a percentage. Up and down the country banks accept large cash deposits from pizza shops which are doing unbelievably good business. No one asks. Where there are slot machines or casinos there is money laundering. Where there is gambling and betting there is money laundering. Accountants launder. Lawyers launder. All of them? Of course not. Enough of them to suggest an endemic culture of criminality in those professions? I belive so and so do others (Take a look at variousn publicatoins by Prof. Prem Sikka).

A report published by the Home Office in 2006 estimated the UK drugs market to be worth £4.645bn in 2003/4. Most of that £4.6 billion had to have been banked. Not just in one year, but that amount EVERY year. Year after year. That bit does not get talked about so much. £4.6 Billion a year is more than a rogue teller or two. When we get to retail in the West we are NOT just talking about banking a fist full of tenners from a dirty looking user/pusher. We are talking about the people the pushers work for, the people they in turn work for and the businesses that they ‘work for’ or own, which then use that money for ‘legit’ investments, such as buying luxury property in London.

When it was found that Citi had been laundering Mexican drug money, it also revealed how the brother of the then President Salinas, had a private banking agreement with Citi. When the shit hit the fan that banker, Amy Elliot, told her colleagues,

…this goes in the very, very top of the corporation, this was known…on the very top. We are little pawns in this whole thing”

What did Citi do for Salinas? According to the official US government report into the ‘affair’,

Mr. Salinas was able to transfer $90 million to $100 million between 1992 and 1994 by using a private banking relationship formed by Citibank New York in 1992.

The funds were transferred through Citibank Mexico and Citibank New York to private banking investment accounts in Citibank London and Citibank Switzerland. Beginning in mid-1992, Citibank actions assisted Mr. Salinas with these transfers and effectively disguised the funds’ source and destination, thus breaking the funds’ paper trail. Citibank.

More specifically Citi,

• set up an offshore private investment company named Trocca, to hold Mr. Salinas’s assets, through Cititrust (Cayman)9 and investment accounts in Citibank London and Citibank Switzerland;

• waived bank references for Mr. Salinas and did not prepare a financial profile on him or request a waiver for the profile, as required by then Citibank know your customer policy;

• facilitated Mrs. Salinas’s use of another name to initiate fund transfers in Mexico; and

• had funds wired from Citibank Mexico to a Citibank New Yorkconcentration account—a business account that commingles funds from various sources—before forwarding them to Trocca’s offshore Citibank investment accounts.

Know your customer, anti money-laundering requirements? Don’t make me laugh.

These are the sorts of things the Spanish Banks and the Portuguese banks and Ecobank would do for any clients of theirs that needed money laundered. Have they? I have no idea. Wachovia did. Citi did. HSBC did.

The reality is that drugs are a massive banking business. And it is also a fact that the bulk of that business is done in the industrial nations in their banks, NOT in the drug producing nations. The Drugs business is mostly a western business. It’s a banking busness. Not unlike global mining where the mines are in the third world but the mining companies are listed and work in London.

A recent study on the Colombian drug trade reported in The Guardian found

…that 2.6% of the total street value of cocaine produced remains within the country, while a staggering 97.4% of profits are reaped by criminal syndicates, and laundered by banks, in first-world consuming countries.

If that study is anywhere near accurate then the fact is the drug business is our business. We, the rich West, use it, we finance it, we provide the laundering services for it, and we then use the money it generates to feed the financial system. That money keeps our banks going, especially in ‘hard times. That money is what is used by the financial industry to speculate with, to buy up sovereign assets with, to speculate on food with. That money helps create their bonuses and pays off our politicians in ‘soft donations’ and ‘access to decision makers’.

The drug money laundering business is a staple and important part of global banking. Money laundering is one of the things bankers do well. They should, they practice every day. It is not a one off rogue teller or rogue ofice. It is not something the bank does once and never again. Amex did it many times. HSBC has a history. You only have to go back to the murkey and bloody AGIP affair to find the same names and the same widespread conspiracy to commit financial and legal crimes. Dig deep enough and you’ll find the names of politicians, senior ones and find yourself meeting some of the people who make sure the truth of such matters does not come out and whose job it is to protect the guilty and do their dirty work.

Drug money, criminal at the start, is criminal and dirty no matter how many times it is laundered. The bankers know this better than anyone. Yet they do it every day, every week, every year and every decade in every major financial centre and everyone knows it.

taxmic quoted...

So I think the big banks are hoarding and waiting. Each hopes not to fall first. Those who do fall will be pciked clean by those still standing. This is what the bail out money is being used for.

I don’t think the banks will lend in to the real economy because they calculate that such a socially useful strategy gives low returns to them. Should they ‘defect’ from this generous strategy and chose instead the selfish strategy of ‘hoard and wait’ then they could make not just a large return but an epic one. They could emerge as owners of everything people will need in order to rebuild their lives. Water, power, rail, hospitals, you name it.

This is what the banks are waiting for. And our politicians are giving them our money so they can.

[JackRiddler]

Maintaining the pretense that this thread is the Monthly Diary of the American Dreamfolly (or at least a scrapbook that will allow some 90-year-old me to check it all in one thread, as if) let's assimilate some new interest-laden stuff:

First, as posted by my, ahem, good friend slimmouse, here:
viewtopic.php?f=8&t=35453

The Pacific free trade deal that's anything but free

The draft TPP deal may grant new patent privileges and restrict net freedom, but it's secret – unless you're a multinational CEO




"Free trade" is a sacred mantra in Washington. If anything is labeled as being "free trade", then everyone in the Washington establishment is required to bow down and support it. Otherwise, they are excommunicated from the list of respectable people and exiled to the land of protectionist Neanderthals.

This is essential background to understanding what is going on with the Trans-Pacific Partnership Agreement (TPP), a pact that the United States is negotiating with Australia, Canada, Japan and eight other countries in the Pacific region. The agreement is packaged as a "free trade" agreement. This label will force all of the respectable types in Washington to support it.

In reality, the deal has almost nothing to do with trade: actual trade barriers between these countries are already very low. The TPP is an effort to use the holy grail of free trade to impose conditions and override domestic laws in a way that would be almost impossible if the proposed measures had to go through the normal legislative process. The expectation is that by lining up powerful corporate interests, the governments will be able to ram this new "free trade" pact through legislatures on a take-it-or-leave-it basis.

As with all these multilateral agreements, the intention is to spread its reach through time. That means that anything the original parties to the TPP accept is likely to be imposed later on other countries in the region, and quite likely, on the rest of the world.

At this point, it's not really possible to discuss the merits of the TPP since the governments are keeping the proposed text a secret from the public. Only the negotiators themselves and a select group of corporate partners have access to the actual document. The top executives at General Electric, Goldman Sachs, and Pfizer probably all have drafts of the relevant sections of the TPP. However, the members of the relevant congressional committees have not yet been told what is being negotiated.

A few items that have been leaked give us some insight as to the direction of this pact. One major focus is will be stronger protection for intellectual property. In the case of recorded music and movies, we might see provisions similar to those that were in the Stop Online Privacy Act (Sopa). This would make internet intermediaries like Google, Facebook and, indeed, anyone with a website into a copyright cop.

Since these measures were hugely unpopular, Sopa could probably never pass as a standalone piece of legislation. But tied into a larger pact and blessed with "free trade" holy water, the entertainment industry may be able to get what it wants.

The pharmaceutical industry is also likely to be a big gainer from this pact. It has decided that the stronger patent rules that it inserted in the 1995 WTO agreement don't go far enough. It wants stronger and longer patent protection and also increased use of "data exclusivity". This is a government-granted monopoly, often as long as 14 years, that prohibits generic competitors from entering a market based on another company's test results that show a drug to be safe and effective.

Note that stronger copyright and patent protection, along with data exclusivity, is the opposite of free trade. They involve increased government intervention in the market; they restrict competition and lead to higher prices for consumers.

In fact, the costs associated with copyright and patent protection dwarf the costs associated with the tariffs or quotas that usually concern free traders. While the latter rarely raise the price of a product by more than 20-30%, patent protection for prescription drugs can allow drugs to sell for hundreds, or even thousands, of dollars per prescription when they would sell for $5-10 as a generic in a free market. Patent protection increases what patients pay for drugs in the United States by close to $270bn a year (1.8% of GDP). In addition to making drugs unaffordable to people who need them, the economic costs implied by this market distortion are enormous.

There are many other provisions in this pact that are likely to be similarly controversial. The rules it creates would override domestic laws on the environment, workplace safety, and investment. Of course, it's not really possible to talk about the details because there are no publicly available drafts.

In principle, the TPP is exactly the sort of issue that should feature prominently in the fall elections. Voters should have a chance to decide if they want to vote for candidates who support raising the price of drugs for people in the United States and the rest of the world, or making us all into unpaid copyright cops. But there is no text and no discussion in the campaigns – and that is exactly how the corporations who stand to gain want it.

There is one way to spoil their fun. Just Foreign Policy is offering a reward, now up to $21,100, to WikiLeaks if it publishes a draft copy of the pact. People could add to the reward fund, or if in a position to do so, make a copy of the draft agreement available to the world.

Our political leaders will say that they are worried about the TPP text getting in the hands of terrorists, but we know the truth: they are afraid of a public debate. So if the free market works, we will get to see the draft of the agreement.

Link http://www.guardian.co.uk/commentisfree ... trade-deal

http://www.avaaz.org/en/stop_the_corpor ... ab&v=17867

Jeff posted, here:
viewtopic.php?f=8&t=35449

We Are Now One Year Away From Global Riots, Complex Systems Theorists Say

12 Sep
By Brian Merchant / Motherboard

What’s the number one reason we riot? The plausible, justifiable motivations of trampled-upon humanfolk to fight back are many—poverty, oppression, disenfranchisement, etc—but the big one is more primal than any of the above. It’s hunger, plain and simple. If there’s a single factor that reliably sparks social unrest, it’s food becoming too scarce or too expensive. So argues a group of complex systems theorists in Cambridge, and it makes sense.

In a 2011 paper, researchers at the Complex Systems Institute unveiled a model that accurately explained why the waves of unrest that swept the world in 2008 and 2011 crashed when they did. The number one determinant was soaring food prices. Their model identified a precise threshold for global food prices that, if breached, would lead to worldwide unrest.

The MIT Technology Review explains how CSI’s model works: “The evidence comes from two sources. The first is data gathered by the United Nations that plots the price of food against time, the so-called food price index of the Food and Agriculture Organisation of the UN. The second is the date of riots around the world, whatever their cause.” Plot the data, and it looks like this:



Pretty simple. Black dots are the food prices, red lines are the riots. In other words, whenever the UN’s food price index, which measures the monthly change in the price of a basket of food commodities, climbs above 210, the conditions ripen for social unrest around the world. CSI doesn’t claim that any breach of 210 immediately leads to riots, obviously; just that the probability that riots will erupt grows much greater. For billions of people around the world, food comprises up to 80% of routine expenses (for rich-world people like you and I, it’s like 15%). When prices jump, people can’t afford anything else; or even food itself. And if you can’t eat—or worse, your family can’t eat—you fight.

But how accurate is the model? An anecdote the researchers outline in the report offers us an idea. They write that “on December 13, 2010, we submitted a government report analyzing the repercussions of the global financial crises, and directly identifying the risk of social unrest and political instability due to food prices.” Four days later, Mohamed Bouazizi set himself on fire as an act of protest in Tunisia. And we all know what happened after that.

...

And it’s only going to get worse and worse and worse. Because of climate change-exacerbated disasters like these, “the average price of staple foods such as maize could more than double in the next 20 years compared with 2010 trend prices,” a new report from Oxfam reveals. That report details how the poor will be even more vulnerable to climate change-induced food price shocks than previously thought. After all, we’ve “loaded the climate dice,” as NASA’s James Hansen likes to say, and the chances of such disasters rolling out are greater than ever.

This all goes to say that as long as climate change continues to advance—it seems that nothing can stop that now—and we maintain a global food system perennially subject to volatile price spikes and exploitation from speculators, without reform, our world will be an increasingly restive one. Hunger is coming, and so are the riots.

http://earthfirstnews.wordpress.com/201 ... rists-say/

(Is the idea that people riot when they're starving really all that complex?)

And of course the new AIG thread from Wom-Rex (W-Rex? Womb-Rex?), in which my own first post reveals that I hadn't really followed this topic since the NY Fed's Great CDS Giveaway of 2008, and in which some really fucking interesting insights are then given on the current market situation by Mr. WR among others:
viewtopic.php?f=8&t=35439

Am I wrong About AIG?

Today's round of news on the "profit" generated by AIG offloading has me baffled. I'd like to think I've got a grip on the naked cynicism at work here, but I'm also keenly aware my track record for Being Wrong is, quantitatively, my greatest life achievement thus far.

1) How can anything involved with AIG be considered "profitable" when Maiden Lane II & III are still toxic disaster zones?

2) Is it just me, or is claiming "Taxpayers Profit from AIG" just utter horseshit? Or will US Treasury be cutting checks in 2013?

3) Why does Andrew Ross Sorkin cheerfully lay out the fraud and fakery behind something like the Facebook IPO, yet when the same players are selling off shares of AIG, he's treating it like a clear-cut free-market triumph that only the most partisan Tea Party loyalist could refuse to see? link in question

4) Am I mistaken, or are most of the counterparties "buying" this AIG stock just other zombie banks expanding their market cap entirely with funds they were given by US taxpayers in the first place? If so, isn't than Enron type "profits" ?

In response to http://projects.propublica.org/bailout/entities/8-aig

Well, Mr. WRex, your Pro Publica link relates:

"On January 11, 2011, AIG, the Treasury and Federal Reserve executed a plan to extricate AIG from government support. AIG paid off the Fed's loans. To extricate the Fed from its investment in two AIG subsidiaries, the plan called for AIG to draw down approximately $20 billion more from the Treasury (for a total investment of $68 billion). AIG used that money to buy the stakes in the subsidiaries, which it then immediately transferred to Treasury. The plan also called for the Treasury to convert its other investments in AIG into AIG common stock - bringing its holdings to 92.1 percent of the company. To recoup the $68 billion, the plan called for Treasury to sell off its stake in the AIG subsidiaries and its AIG common stock over time. The "Events" notes to the left show Treasury's remaining equity stake in AIG as it sells off those shares. The Federal Reserve ultimately realized a profit of about $17.7 billion from its role in AIG's bailout."

But I do not believe a $17.7B profit for the Federal Reserve is necessarily a profit to our taxpayers. (I'm rather ignorant about high finance and unsure of the actual nature of the Fed. Reserve/Treasury's relationship)

Worth noting, from the above "a plan" link:

"Citigroup, Deutsche Bank Securities Inc., Goldman, Sachs & Co., and J.P. Morgan Securities LLC have been retained as joint global coordinators. BofA Merrill Lynch, Barclays Capital Inc., Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, UBS Securities LLC, Wells Fargo Securities, LLC and Credit Suisse Securities (USA) have been retained as joint bookrunners for the offering. Greenhill & Co. continues to serve as Treasury’s financial agent with respect to the management and disposition of Treasury’s investment in AIG."

However, Citi's gonna make a killing on Abu Dhabi's deal:

Thursday, Sep 6, 2012 1:45 PM UTC

Did Citigroup defraud billions from Abu Dhabi?
The U.S. ally learns firsthand how Wall Street does business. An investigative report into the company's dealings

By Pam Martens, Alternet

Wikileaks, the U.S. Embassy in Abu Dhabi sent a communication to the U.S. Secretary of State and U.S. Treasury on December 22, 2009, alerting them to the fact that the investment arm of a U.S. ally, Abu Dhabi, believed it had been defrauded of $4 billion by Citigroup (Wall Street’s serial miscreant and recent ward of the taxpayer). The cable relayed that William Brown, legal advisor to the Abu Dhabi investment arm, “unequivocally stated that Citi ‘lied’ and must be held accountable.”

Three years later, Abu Dhabi has likely figured out that in the U.S., gangsters have guns but banksters are far more dangerous – they have ivy league educated lawyers. One group of lawyers writes the prospectuses that defraud investors; another group writes the contracts that bar these cases from ever seeing sunshine in a public courtroom; and the third group provides skillful white color criminal defense, including a speed dial to their pals in Washington, ensuring that justice will be as elusive as a Wall Street CEO clad in orange.

A three month search of records, that have not yet been sealed or redacted, show that Abu Dhabi landed in the same plundered status as public pension funds and small time investors in Citigroup, while a very special Group of Six reaped a windfall.

It all started with a handshake from a former U.S. Treasury Secretary. On Monday, November 26, 2007, four days after Thanksgiving, Robert Rubin was standing in one of the most spectacular waterfront buildings in the Middle East – the headquarters of the Abu Dhabi Investment Authority. With two finger-like wings, the gleaming building showcases an atrium soaring 40 stories into the sky.

Rubin, a former Co-Chairman of Goldman Sachs, whose lavish pay at Citigroup since leaving Treasury in 1999 had reached $120 million for eight years of non-management work, had more than architecture on his mind that day. He had reluctantly agreed to serve as interim Chairman of Citigroup after the company had earlier that month forced out its Chairman and CEO, Chuck Prince, following spectacular losses and a sinking share price. Rubin was on a critical mission to secure a $7.5 billion lifeline for Citigroup.

The deal had been reviewed the prior week by the Abu Dhabi Investment Authority’s Strategic Investments Team, headed by Sanjeev Doshi, a graduate of the University of Pennsylvania. Due to fog, the Abu Dhabi team could not fly to New York on November 20, and opted instead for a video conference to quiz the heads of Citigroup’s businesses on November 21. Robert Rubin was now on hand to shake hands with the Managing Director of the Abu Dhabi Investment Authority, Sheikh Ahmed Bin Zayed Al Nahyan, and close the deal.

The Abu Dhabi Investment Authority, universally known as ADIA, is a sovereign wealth fund that invests the kingdom’s surplus cash. It came through on its end, wiring $7.5 billion into a Citigroup bank account a few days later.

Citigroup is a publicly traded company, whose shares in 2007 were held in the largest public pension funds in America and in mutual funds held in rank and file employees’ 401(k) plans across the country. This $7.5 billion investment from ADIA was going to convert in a little over two years into approximately 235 million publicly traded common shares of Citigroup stock, diluting all other shareholders. Despite these facts which called for maximum transparency, Citigroup entered into multiple secret contracts involving this investment, including a November 24, 2007 Confidentiality Agreement and a November 26, 2007 Investment Agreement with ADIA.

All of the details of those secret agreements have not come to light, but what has emerged is that a core part of the agreements involved the fact that ADIA, like Citigroup’s own workers, would have no access to the public courts of the United States in the event of a dispute. All claims, including claims of securities fraud, would be forced into an arbitration system where Wall Street lawyers, whose firms had client relationships with Citigroup, would end up serving as judge and jury. An additional, mind-numbing requirement, was that ADIA would not be allowed to hedge its $7.5 billion investment, despite the fact that Citigroup had just reported massive losses, lost its Chairman and CEO, and was under regulatory scrutiny for off-balance sheet debt held in the Cayman Islands in Structured Investment Vehicles.

According to the portion of ADIA’s documents that are public in Federal Court, ADIA says it was induced into investing the $7.5 billion through representations by Citigroup that “it would not bring certain Structured Investment Vehicles (SIVs) onto its balance sheet, or raise significant additional capital after ADIA’s investment…Citigroup then promptly did exactly the opposite of what it had said. On December 13, merely ten days after obtaining ADIA’s critical investment, Citigroup announced that it would bring the SIVs onto its balance sheet. Within the next month, Citigroup wrote off $18.1 billion in subprime losses, and raised a further $20 billion in capital…All of these actions flatly contradicted what Citigroup had just told ADIA, diluted ADIA’s investment in Citigroup, drove down Citigroup’s stock price, and harmed ADIA.”

When the $7.5 billion investment was announced on November 26, 2007, business media was given the bare bone details by Citigroup, making it sound like a very simple deal. Citigroup’s press release explained where the $7.5 billion was going this way: “Each Equity Unit is mandatorily convertible into Citi shares at prices ranging from $31.83 to $37.24 per share. The Equity Units convert to Citi common shares on dates ranging from March 15, 2010, to September 15, 2011, subject to adjustment. Each Equity Unit will pay a fixed annual payment rate of 11%, payable quarterly.”

In reality, the deal was a Byzantine entanglement that took 38,000 words in an SEC filing and involved a forward purchase contract, four trusts held by the Bank of New York, junior debt, the ability to suspend the 11 percent interest payments, and multiple secret side contracts that now reside under seal in the U.S. District Court for the Southern District of New York.

On January 15, 2008, less than two months after allegedly promising ADIA it would not raise additional capital, Citigroup announced it had arranged a $12.5 billion investment of convertible preferred securities that could convert into common stock. The deal included two billionaire investors. The reason this would outrage ADIA (and all other shareholders) is that a company’s earnings are spread over a given amount of common shares. Those earnings impact the share price as well as whether there will be funds to pay or increase dividends; the more shares outstanding, the more dilution of earnings to existing shareholders.

Matt Miller and Vipal Monga, writing for The Deal, reported the breakdown of that $12.5 billion investment as follows: Government of Singapore Investment Corporation (GIC) led with $6.88 billion; the Kuwait Investment Authority (KIA) kicked in $3 billion; Capital Group of Companies, owner of the popular American Funds, invested $1.75 billion; Saudi Prince Alwaleed bin Talal bin Abdul Aziz al Saud, who had previously bailed out Citibank (predecessor to Citigroup) in the early 90s, added $450 million; the New Jersey Division of Investment put in $400 million; and former Citigroup chief Sandy Weill tossed in $20 million.

Both Prince Alwaleed and Sandy Weill are billionaires; Weill having made his fortune receiving obscene pay at Citigroup as its Chairman and CEO. In just one year, 2000, Weill cashed in $196.2 million in stock options and received a bonus of $18.4 million. His total take in just a five year period: $785 million. Weill is also the man most responsible for the repeal of the depression era Glass-Steagall Act, forcing Congress to bulldoze the legislation by illegally merging his Travelers Group with Citicorp in 1998, a combination of insurance, stock brokerage and insured deposit banking not allowed at the time under either Glass-Steagall or the Bank Holding Company Act of 1956. As Treasury Secretary, Rubin helped muscle through the repeal of Glass-Steagall and then took his high paid post at Citigroup shortly thereafter.

Weill stepped down as CEO in 2003 and as Chairman in 2006. But he continued to serve as an Advisor to Citigroup. According to a Fortune magazine interview, Weill was meeting with Prince Alwaleed in Riyadh, Saudi Arabia, in mid November 2007, just weeks before ADIA signed its deal. Whether Weill was attempting to raise additional capital is unknown. What is known is that Weill got in, for a very tiny stake, on what turned out to be the investment coup of the decade – a coup that left small investors, along with ADIA, suffering massive losses.

After the January 15, 2008 investment of $12.5 billion by the Group of Six, things got worse at Citigroup, with losses spiraling out of control. On October 28, 2008, the U.S. government’s Troubled Asset Relief Program (TARP) extended capital assistance to 9 banks, with Citigroup receiving $25 billion.

But by the week of November 17, Citigroup was in full blown meltdown, with its stock losing 60 percent in five trading sessions. The stock closed the week at $3.77. The company’s market value had gone from $250 billion in 2006 to $20.5 billion by the close on Friday, November 21, 2008. That was $4.5 billion less than the U.S. government had invested less than a month before. At that point, the U.S. government could have bought the entire firm for $20.5 billion or at the very least received a majority stake, kicked out the derelict management, and ensured taxpayers safe passage on Wall Street’s Titanic.

Instead, according to the official report from the Special Inspector General for TARP, here’s what happened next. On the morning of Thursday, November 20, 2008, Treasury Secretary Hank Paulson and New York Fed President Timothy Geithner held a conference call with Fed Chairman Ben Bernanke, FDIC Chair Sheila Bair, and Comptroller of the Currency John Dugan (a former bank lobbyist) to discuss Citigroup.

The next day, Friday, November 21, 2008, the New York Fed convened a conference call with Citigroup officials. During this conversation, the Fed reported that it became clear that liquidity pressures had reached crisis proportions (think Lehman Brothers). According to the report, the New York Fed “requested that Citigroup submit a proposal for additional Government assistance, without specifying the details of what Citigroup should include in the proposal.”

Late on Sunday evening, November 23, 2008, after four days of what the Fed and Treasury refer to as “Citi Weekend,” the monster funding package was announced. The government was going to guarantee a toxic asset pool at Citigroup up to $306 billion (later reduced to $301 billion). In addition, the government would provide another lump sum of $20 billion in capital. According to the Special Inspector General of TARP, he could find no “documentation of the decision-making process behind the $20 billion capital injection.”

In total, including TARP and other government lending programs, Citigroup received $45 billion in capital, $301 billion in asset guarantees, and $2.513 trillion in loans from the Federal Reserve between December 1, 2007 through July 21, 2010, according to the Government Accountability Office.

The stunner came on March 18, 2009. Citigroup announced that the Group of Six was going to be allowed to exchange their convertible preferred stock for 3.846 billion shares of common stock, massively diluting the value of ADIA’s shares and all other common shareholders. ADIA’s investment of $7.5 billion was 60 percent of the $12.5 billion the Group of Six had put up, but theGroup of Six was receiving 16 times more shares than ADIA.

It had the appearance of a shove-down. Not only were common shareholders taking a financial beating, but as Citigroup quietly noted in its SEC filing, they were not even being allowed to vote on the exchange offer. Citigroup applied for and received a waiver on the voting action from the New York Stock Exchange.

The math on this is as follows: When the deal with the Group of Six was announced on January 15, 2008, Citigroup closed the trading day at $26.94. When the new deal with the Group of Six was announced on March 18, 2009, the stock closed at $3.08 – a decline of 88.6 percent from January 15, 2008. But this Group of Six, unlike public pension funds, 401(k) accounts, IRAs, long-term small shareholders, did not take an 88.6 percent haircut. They were exchanged at only 5 percent less than their original investment. Here’s the math: 3.846 billion shares at $3.08 = $11,845,680,000 versus original investment of $12.5 billion = 5.2 percent.

To put the trade in even clearer perspective, there is one document that slipped through the seal-o-matic machine. Sandy Weill has a family trust and that’s the account in which he made the January 2008 deal. Because it’s a nonprofit, it has to file an IRS 990 tax return. That document is publicly available. Here’s how Weill made out on the deal: he invested $21,226,848. Between September 2009 through December 1, 2009, he sold out his position for a profit of $6,226,847. That’s a 29 percent profit in less than two years.

Today, Citigroup might look like it has recovered to a price in the double digits. Don’t be fooled. Last year, the company did a 1 for 10 reverse stock split. For every 10 shares that an investor previously owned, they now had just one. That allowed the stock price to increase by 10 to 1, making it appear to the unwary as if the company had made significant progress. In reality, long-term shareholders have lost over 90 percent of their value in Citigroup since 2007.

Requests to the U.S. Treasury office for an explanation as to why this lopsided deal was allowed to take place while the government was a major owner, were met with silence, despite being initially promised a response.

When Abu Dhabi was making its deliberations as to whether or not to invest in Citigroup, the SEC knew that Citigroup was not coming clean on its dangerous exposures to subprime debt. Kevin Vaughn, an SEC branch chief, had written to Citigroup on October 23, 2007 to put the firm on notice: “We note your response to our prior comment 2 in our letter dated July 3, 2007 in which you state that you did not disclose the amount of mortgage backed securities and residual interests collateralized by non-prime mortgages held by U.S. Consumer due to immateriality. From your disclosures in your Forms 8-K filed on October 15, 2007 and October 1, 2007, it appears that you do have a material exposure to non-prime instruments as these instruments caused you to record a $1.56 billion loss in the third quarter.”

Vaughn was grilling the firm about many other issues with its balance sheet but it is impossible to know exactly how much misstating was going on at Citigroup because the SEC has adopted the position that Citigroup can request, and receive, redaction of the material that it does not want to make public. Pages 23 through 36 of this document have been totally redacted – with the words “Confidential Treatment Requested by Citigroup,” – while much of the rest of the information requested by Vaughn earlier in the document is also redacted.

Situations such as this explain why the average investor has no confidence in Wall Street. Citigroup is a publicly traded company. It was engaging in fraudulent reporting. But we, the investing public, can’t know the details because Citigroup doesn’t want us to and its regulator, the SEC, doesn’t have a problem with that.

The balance sheet misstatements led to more redactions and sealed documents when a whistleblower from inside the SEC wrote an anonymous letter to the Inspector General of the SEC saying that the Enforcement Director, Robert Khuzami, backed off fraud charges against Citigroup executives because he got calls from his former lawyer pals who had been hired by Citigroup. The Inspector General hung out the dirty linen but did not make a finding of wrongdoing on the part of Khuzami.

The SEC settled the case of misreporting for a pittance compared to other Wall Street fines despite a finding that Citigroup was telling the public it had $13 billion in subprime exposure when it actually had in excess of $50 billion.

Tomorrow, in Part II, we’ll look at the kangaroo court Abu Dhabi Investment Authority entered in the U.S. in May 2011– a country that dares to boast “Equal Justice Under Law” on the front entrance to its highest court. Instead of a randomly appointed judge and a jury of one’s peers that have been voir dired to weed out conflicts of interest, ADIA’s claims were tried in a secret arbitration proceeding where two members of the three-member arbitration panel worked for law firms where Citigroup was a client. One arbitrator had even previously served as counsel to Citigroup.

Adding to those seemingly insurmountable headwinds, Sheikh Ahmed Bin Zayed Al Nahyan, Managing Director of ADIA, would not be able to give first hand testimony to the tribunal as to what Robert Rubin and other Citigroup executives had promised him. In the same month, March 2010, that ADIA was to make its first payment to buy Citigroup common stock at a price almost 10 times where it was trading, the Sheikh crashed to his death in a glider and wasn’t found for four days.

http://www.salon.com/2012/09/06/did_citigroup_defraud_billions_from_abu_dhabi/

For perspective, see this nearly 3 year old WSJ article:

December 3, 2009, 12:28 p.m. ET
Abu Dhabi's Citigroup Investment Turns Costly

By MARSHALL ECKBLAD

NEW YORK—Abu Dhabi Investment Authority is set to pay its first bill of misery to Citigroup Inc.

Because of an investment deal struck two years ago, early in the financial crisis, the United Arab Emirates' sovereign fund will soon start purchasing $7.5 billion in Citigroup shares at $31.83 apiece, even though the New York bank's stock closed at $4.10.

The value of Abu Dhabi's investment will ultimately be shaped by the price of Citigroup's stock come March. But it seems very likely that "one of the world's...most sophisticated equity investors," as Citi crowed of Abu Dhabi when it inked the complex deal, will soon overpay for the stock of a bank that has fallen into the arms of the U.S. government.

The news is the latest setback for the United Arab Emirates. Last week, Dubai World, a government-owned company, sought a standstill on debt payments, a move that shocked world markets.

The terms of the Citigroup deal looked lucrative for Abu Dhabi back in November 2007, when it raced to Citi's rescue as the New York bank crumbled under soaring investment losses tied to the depressed U.S. mortgage and housing markets. Abu Dhabi wrote a check for $7.5 billion in exchange for an 11% annual dividend.

The bad news for Abu Dhabi is it only demanded such dividend payments for a little more than two years—until March 15, 2010. Afterwards, Abu Dhabi would in essence exchange its original investment in four installments for Citigroup common stock, which was then worth nearly $31.

To pull off that exchange, Citigroup on Wednesday announced a coming public bond offer that will pay a much smaller yield of slightly more than 6%. The proceeds will go to Abu Dhabi, which is required to use the cash in March for its expensive purchase of Citigroup stock.

Abu Dhabi, by agreeing ahead of time to exchange cash for stock at a price of $31.83, figured to make money under the assumption that Citigroup's shares would rise modestly over more than 27 months. "This investment reflects our confidence in Citi's potential to build shareholder value," Sheikh Ahmed Bin Zayed Al Nahyan, Abu Dhabi's managing director, said at the time.

But now it is Citi, not Abu Dhabi, that is seeing prospects for a winning deal. If Citi's stock price holds steady through March, the beleaguered New York bank will basically be able to raise new capital by selling stock at more than seven times its market price. The deal will also boost Citi's Tier 1 common equity and tangible common equity by $1.875 billion, according to Wednesday's statement.

As harsh as the deal's terms now seem for Abu Dhabi, they perhaps could have been worse. In early 2008, after Citigroup raised $12.5 billion, it reduced Abu Dhabi's conversion price to $31.83.

If the current deal holds, as expected, it will mark a rare win for Citigroup, which has been mauled by the financial crisis. The bank turned to the Treasury twice for infusions of capital, which ultimately left the U.S. government owning 34% of the bank. For a time in March, its stock traded below $1 a share.

Via: http://seekingalpha.com/article/540181- ... job-on-aig

An April piece, but a lot of good meat in terms of my OP.

Let’s address the “stealth bailout” gibberish. Treasury has made several statements on the tax situation including the following not mentioned above:

The Treasury earlier this month said the tax provision “originally was intended to prevent trafficking in tax losses” by private companies, and didn’t apply to companies in which the government ended up owning a majority stake as a result of a bailout. At one point, the Treasury owned more than 90% of AIG; it has since fallen to about 70% and the government plans to sell the rest of its stake over time to recoup roughly $37 billion in federal aid.

“It would have been counterproductive–and perhaps irresponsible–to undermine the stability of those same institutions, at the height of the financial crisis, by imposing a tax code provision that was never intended to apply in this context,” the Treasury said. The federal government “is not a taxpayer and has no interest in sheltering taxable income."

What is lost on Warren, Farzad et all is the concept of ownership. A stock certificate is a share of ownership in a company. When Treasury made the ruling in 2009, it in all reality owned AIG. In essence, what these folks are saying is that they wanted (and continue to want) AIG and by its near complete ownership stake the US Treasury, to then (and now) pay taxes to itself. To what point? To delay the exit from AIG longer? To further weaken the business and perhaps in the end force a loss on taxpayers? Think about the logic. They want AIG, now 70% owned by Treasury, to pay around $1B in taxes (estimating 30% of the approximately $3.7B profit excluding tax benefit). So then those funds come out of the profits and available cash that is being used to pay back the Treasury so they can then be paid to Treasury in the form of taxes. Brilliant!

...

The real joke of it is that AIG is using the money they are “saving” from not paying taxes to the US government, to buy shares from and to pay back….the US government. The worst part is everyone here knows that. Warren is just playing politics in her run for office; sad but true.

Re: Barofsky ==>

Let’s also not forget Barofsky was saying in ’10 that taxpayers were likely to lose $40B on the AIG bailout. Maybe the longer we can confuse the issue of the actual gain/loss the government will see the less wrong he will have looked in the past? I don’t know...

What I find even more odd is no one here is talking about the ML portfolios that the Fed is liquidating at a very healthy profit. William Dudley said just regarding the sale of part of ML III, “I am pleased with the level of interest and the results of this process, especially with the strength of the winning bid, which represents good value for the public and significantly exceeds the original price ML III paid for these assets…

Then again, bear in mind the bigger picture that's driving the interest behind toxic shit like Maiden Lane: nobody in equity is making any money, and that's the real "New Normal" -- the entire free market system shitting a brick at once.

Golem XVI hit on this just last week:
http://www.golemxiv.co.uk/2012/09/who-t ... -out-loud/

This morning a German government bond auction for €5 billion in 10 year bonds, failed. In normal times that would be pretty epic. They priced up their bonds, took them to market and no one was interested. They offered €5 billion’s worth and got bidders for only €3.61 billion. The German Government had to buy the rest.

So it seems that ‘super safe in times of volatility’ is just not the logic being used. The real logic is, I think, that low interest rates held down for so long now, to ‘save’ the banks from a swift death by insolvency, are instead killing them slowly, and everybody else with them. It’s not volatility that is killing the markets it’s not getting any return. So the only answer is to find something risky and buy it.

As always, Sorkin embraces cognitivie dissonance -- he gets it, just very selectively -- here he is laying out the same case as Golem:
http://dealbook.nytimes.com/2012/08/06/ ... computers/

Let’s stop with the excuses.

You’ve no doubt been reading a lot about a “crisis of confidence” on Wall Street in recent days after software problems at a big trading firm sent the stock market, briefly, into a tizzy.

Everyone is hyperventilating at the errant trades at the Knight Capital Group — suggesting, in the words of Arthur Levitt, that these malfunctions “have scared the hell out of investors.” The problems at the firm were immediately lumped together with Facebook’s glitch-filled initial public offering, the flash crash of 2010 and the rescinded public offering of BATS Global Markets, among others.

...

Let me offer a more straightforward explanation of why investors have left the stock market: it has been a losing proposition. An entire generation of investors hasn’t made a buck.

“The cult of equity is dying,” Bill Gross, the founder of Pimco, wrote in his monthly letter last week.

Here's a link to that Bill Gross letter, btw: http://pimco.com/EN/insights/pages/cult-figures.aspx

Here are most of the major transactions and asset divestitures by AIG since their trip to the toilet:

Oct. 2010 - AIG prices sale of shares in its subsidiary AIA for $20.5 billion in an initial public offering.



http://www.treasury.gov/connect/blog/Pa ... llion.aspx



In April 2009 it was announced that AIG was selling the 21st Century Insurance subsidiary to Farmers Insurance Group for $1.9 billion.[77] The sale included AIG Hawaii.



http://en.wikipedia.org/wiki/American_I ... _of_assets



Pacific Century Group had agreed to pay $500 million for a part of American International Group's asset management business, and that they also expected to pay an additional $200 million to AIG in carried interest and other payments



Ibid.



In June 2009, AIG sold down its majority ownership of reinsurer Transatlantic Re.

{Probably about 1.5 B]

Ibid.



Pacific Century Group had agreed to pay $500 million for a part of American International Group's asset management business, and that they also expected to pay an additional $200 million to AIG in carried interest and other payments linked to future performance of the business.



Ibid.



AIG agreed on March 8, 2010, to sell its American Life Insurance Co. unit (ALICO) to MetLife Inc. for $15.5 billion in cash and stock by November 1, 2010.



Ibid.



On September 30, 2010, AIG announced an agreement to sell two of its life insurance companies in Japan, AIG Star and AIG Edison, to Prudential Financial for $4.2 billion in cash and $600 million in the assumption of third party debt to help repay some of the money owed to the U.S. government.[86]

On November 1, 2010, AIG announced it had raised $36.71 billion from the sale of ALICO and an initial public offering for AIA (which included Philamlife). The company will use the proceeds Federal Reserve Bank of New York credit facility and make payments on other interests owned by the government.[87]

AIG announced September 6, 2012, it was selling part of its stake, up to $2 billion dollars, in Asian insurer AIA Group Ltd. and plans to pay off more of its loans from the US government. The insurer's board also approved the repurchase of up to $5 billion dollars of shares of its common stock from the US government.[88]



Ibid, ibid, ibid.



In a February 28, 2012 press release, the New York Fed announced that the remaining securities in ML II were sold, and will result in full repayment of the $19.5 billion loan extended by the New York Fed to ML II and generate a net gain for the benefit of the public of approximately $2.8 billion, including $580 million in accrued interest on the loan



http://en.wikipedia.org/wiki/Maiden_Lane_Transactions



ML III LLC borrowed $24.3 billion from the New York Fed, which, together with an equity contribution of $5.0 billion provided by AIG (equity interest), was used to purchase a portfolio of U.S. dollar denominated collateralized debt obligations (CDOs) from certain counterparties of AIGFP.



http://www.newyorkfed.org/markets/maidenlane.html



The US Federal Reserve said it had sold the last of its investment in insurer AIG, turning a $17.7 billion profit for the public from its 2008 bailout.



http://news.yahoo.com/fed-nets-17-7-bn- ... 13230.html

This conservatively adds up to around 150B, and doesn't include a whole spate of various sales under 1B. Now on to the stock sales:

September 2012 – Treasury sold 554 million shares at $32.50 [$18,005,000,000]

August 2012 – Treasury sold 164 million shares at $30.50 [$5,002,000,000]

May 2012 – Treasury sold 188.5 million shares at $30.50 [$5,749,250,000]

March 2012 – Treasury sold 207 million shares at $29 each [$6,003,000,000]

May 2011 – Treasury sold 200 million shares at $29 each [$5,800,000,000]





http://blogs.wsj.com/deals/2012/09/11/a ... ince-2011/

Adding those up, I get $40,559,250,000

So the baldest accounting I can come to is a total figure of about $190B, not counting a whole bunch of crappy little sales around or under one billion which are referenced in the wiki article. And we now have a company with a market cap of ~40B, no longer too big to fail. Well done. Profit!

.

I hadn't followed all that, so I should reassess. Here's an argument that AIG was the model "bailout" insofar as there was management decapitation & reorganization by the government.

Is it not true that all these AIG toxic assets are now on Fed and government books, and as far I see aren't being accounted in the bailout success arithmetic.

http://www.theatlantic.com/business/arc ... st/262281/

The Profitable Bailout?: Inside the Real Costs of the Saving AIG and Wall St.
By James Kwak

Sep 12 2012, 12:25 PM ET Comment


The government should be proud of its amazing rescue of AIG. But even this "good" bailout came at a steep price.

Reuters


This week, the Treasury Department sold another large slug of AIG shares that it bought in the dark days of 2008-2009, bringing government ownership below 50 percent for the first time since the financial crisis. The deal was priced at $32.50 per share, above the $28.73 break-even price as determined by Treasury, lending support to claims by government officials that the bailouts (a) made money and (b) were a good idea. The most emphatic cheerleading came from Andrew Ross Sorkin, who declared victory for the government and quoted a White House official saying of longtime critic Neil Barofsky, "Some people just don't like movies with happy endings."

If only things were so simple.

First, there's the little question of Treasury's arithmetic. More importantly, AIG was in many ways the "good" bailout, where shareholders were almost wiped out, the CEO was unceremoniously dumped, and taxpayers got most of the upside. In contrast, it was the government's treatment of the biggest banks that was the travesty.

On the arithmetic: Treasury calculates a breakeven price of $28.73 for the federal government's entire investment in AIG, including the emergency $85 billion line of credit extended by the Federal Reserve on September 16, 2008 and another $38 billion transaction the next month. But what happened next is that in November 2008 Treasury used TARP money to buy $40 billion in Series D preferred shares, giving AIG cash to pay down its credit line; in March 2009 Treasury used another $30 billion in TARP money to buy Series F preferred shares (while converting the Series D shares into Series E shares on more favorable terms to AIG), and also bought a big chunk of convertible preferred shares. (The details, as I could piece them together at the time, are here.)

Barofsky calculates a breakeven price of $43.53 for TARP's investments in AIG, which Sorkin doesn't contest. This is relevant for two reasons. First, it shows that the terms of the November and March restructurings were less good for taxpayers than the terms of the original bailout. Second, if you are trying to evaluate Treasury's decision to use TARP money--which was Barofsky's job, after all, as special inspector general for TARP--$43.53 is the relevant price. If you're evaluating all federal government involvement, then arguably $28.73 is the relevant price.

But only arguably, because if you're evaluating all federal government involvement, you have to evaluate all of it--including all the cheap money that the Federal Reserve used to keep the financial system afloat and protect the value of the assets that AIG unloaded onto the ... Federal Reserve. One consequence has been depressed rates for savers. Because I saved a lot of the money I made in my business career, negative real yields on bonds, money market funds, and savings accounts for the past three-plus years have cost me thousands if not tens of thousands of dollars. That's fine for me personally: I can afford it, and plenty of other people need money more than I do. But that money was part of the cost of shoring up AIG. More generally, you can't separate the accounting cost of the bailouts from the total costs of government policy, as brilliantly explained by Steve Randy Waldman (hat tip Yves Smith, who has additional issues with Sorkin).

The Sorkin/Treasury vs. Barofsky spat, however, obscures the true historical place of the AIG bailout. Many administration critics, including Barofsky and including me, have always said that the Federal Reserve's emergency action on September 16 was the right thing to do, since the alternative was, at minimum, a much more destructive firestorm of panic in the financial markets. And it was done on plausibly reasonable terms. It was more generous than the market would provide (since the market wouldn't lend AIG money on any terms), but it was relatively punitive and as good for taxpayers as could be hoped. The credit line had a high interest rate, the government got 80 percent of the company, and the CEO was forced to resign. It was precisely because of those harsh terms--in particular the effective nationalization of the company--that Treasury can claim to have turned a profit on the deal.

It was what came later that I and others criticized: The use of AIG to bail out investment banks like Goldman Sachs by closing out transactions on unfavorable terms for AIG (and taxpayers); the continued payment of large bonuses to traders at AIG Financial Products; and, most importantly, the kid-glove treatment of Citigroup, Bank of America, and the other megabanks that would have collapsed were it not for government support. Unlike AIG, they were given cash on Christmas-present terms while Treasury took only a minimal amount of equity, meaning that taxpayers had all of the downside and very little upside. The CEOs, who drove their banks over the cliff and into the waiting government safety net, were allowed to keep their jobs.

At the time (early 2009), administration supporters argued that the government couldn't take majority stakes in the big banks. That would be "nationalization," which is a big, scary word that sounds kind of like "socialism." Well, we nationalized AIG, and now the company is getting universal plaudits for its performance during the period it was owned by taxpayers. JPMorgan, by contrast, keeps noticing that more billions of dollars are slipping through its pocket, and Bank of America is struggling to keep its head above water. Above all, these non-nationalized banks are still doing a lousy job extending credit to the real economy, preferring to keep their money in cash.

Tell me again what the problem with nationalization was?

Elvis, since the mid-1940's the Fed has been required to remit profits from securities to the US Treasury, aside from their operating expenses.

Here's more ideas on how that "profit" was made:

FRBNY established and funded Maiden Lane III in late 2008 to purchase mortgage-related securities from the derivatives counterparties of AIG's Financial Products unit. These counterparties had entered into derivatives contracts with AIGFP to protect themselves from losses on the securities that Maiden Lane III later bought. Under the derivatives contracts, they had the right to demand collateral when the market value of the securities fell, as it did in 2007 and 2008. More than $20 billion of the government's initial $85 billion loan to AIG went to make collateral payments under these derivatives contracts.

The government reasoned that cancelling the derivatives by buying the securities at full value was the cheapest way out of AIGFP's troubles. Maiden Lane III paid the counterparties almost $30 billion, $5 billion of which was from AIG and the rest of which was funded directly by FRBNY. In addition, the counterparties got to keep almost $35 billion in collateral that AIG had paid out on related derivatives contracts (much of which came from taxpayer funds). In total, the counterparties got more than $60 billion, which was approximately the face value of the securities.

The $6.6 billion profit calculation was based on the discounted price that Maiden Lane III paid for the securities in late 2008. Maiden Lane III had to pay only half of the purchase price for the securities, because the rest was covered by the collateral payments that AIG - with the help of taxpayers - had already made. The Maiden Lane III transaction and any profits it generated cannot be looked at in isolation; it was part of the larger AIG rescue, which is still ongoing with more than $30 billion in TARP funds still unpaid.

http://www.realclearmarkets.com/article ... 99848.html

And...

The Federal Reserve Bank of New York was able to purchase mortgage backed securities for less than half of their original value. We were told at the time that the Fed's purchase was bound to result in taxpayer losses because the securities were essentially worthless and that the Fed was doing this simply to keep AIG from going bankrupt. All trading in the securities was halted and there was no free market mechanism that could properly value the shares. We were basically left at the whim of the federal government and asked to trust them. I specifically remember hearing that AIG was "dead in the water" and would soon go out of existence. Now it turns out that the Fed essentially robbed AIG of its mortgage backed securities. A couple of years later and the Fed is magnanimously agreeing to sell those securities at an extreme profit. A couple of years later and those "toxic" assets look pretty good to a lot of people. So we have to ask, was the Fed just stupid or were Fed officials lying to us? Either way, all of those associated with the Fed who were involved in the purchase of the mortgage backed securities should be indicted for securities fraud. Executives at publicly traded companies have been indicted, tried and imprisoned for securities fraud with far less evidence than what exists against the Fed. Why is the Department of Justice not filing charges against the Fed? Are they just protecting their own? It sure seems like it to me.

http://madwelshman-unknown.blogspot.com ... ll-in.html

I love the Alice-in-Wonderland logic of that last post to conclude that the Fed ripped off AIG!

And continue with discussion on HFT and the death of the equity markets.

...

[JackRiddler]

Hey, let's have some good news for a change. Remember Birkenfeld, the whistleblower on tax evasion who became the only one in the plot to get a prison sentence (interesting message!). Well, here's a counter message (picked up from 9/12 Democracy Now).

Wednesday, September 12, 2012
Whistleblower Brad Birkenfeld Rewarded Record $104M for Exposing How UBS Helped Rich Evade Taxes

The IRS has announced a record $104 million reward to a whistleblower who exposed the largest tax evasion scheme in U.S. history. Former UBS AG banker Brad Birkenfeld first reported in 2007 that he and his colleagues had encouraged rich Americans to store more than $20 billion in offshore Swiss bank accounts and cheat the IRS. But after coming forward, Birkenfeld was prosecuted and convicted of conspiracy and sentenced to prison. Following Birkenfeld’s release last month, on Tuesday the IRS vindicated his actions with the largest amount ever awarded under its whistleblower program. We’re joined by Stephen Kohn, an attorney for Birkenfeld and executive director of the National Whistleblowers Center. [includes rush transcript]
Filed under Tax Havens, Stephen Kohn

Guest:

Stephen Kohn, co-counsel for UBS whistleblower Brad Birkenfeld and executive director of the National Whistleblowers Center. He’s also the author of The Whistleblower’s Handbook: A Step-by-Step Guide to Doing What’s Right and Protecting Yourself.

Related
Exhaustive Study Finds Global Elite Hiding Up to $32 Trillion in Offshore Accounts
Jul 31, 2012 | Story
Links
National Whistleblowers Center
"$104M PAYDAY FROM IRS! Swiss-bank whistleblower Bradley Birkenfeld gets last laugh after feds hounded him." By Juan Gonzalez. (
"Whistleblower Bradley Birkenfeld: Some U.S. pols kept off-shore accounts with UBS." By Juan Gonzalez. (New York Daily News, Apr
"UBS whistleblower Bradley Birkenfeld deserves statue on Wall Street, not prison sentence." By Juan Gonzalez. (New York Daily Ne
Editor's Picks
Offshore Banking and Tax Havens Have Become Heart of Global Economy
Apr 15, 2011 | Story
Exhaustive Study Finds Global Elite Hiding Up to $32 Trillion in Offshore Accounts
Jul 31, 2012 | Story

Rush Transcript

This transcript is available free of charge. However, donations help us provide closed captioning for the Donate >
deaf and hard of hearing on our TV broadcast. Thank you for your generous contribution.Donate >

Transcript

NERMEEN SHAIKH: We turn now to a major development in the case of a banking whistleblower. Former UBS AG banker Brad Birkenfeld first reported in 2007 that he and his colleagues had encouraged rich Americans to store more than $20 billion in offshore Swiss bank accounts and cheat the IRS. After he came forward, he was convicted of conspiracy and sentenced to prison. Well, he was released from prison in August, and on Tuesday the IRS vindicated his actions with a $104 million award under the IRS whistleblower program.

AMY GOODMAN: UBS ultimately paid $780 million to resolve the investigation, admitted to criminal wrongdoing, and closed the unit where Birkenfeld worked. His disclosure also prompted at least 33,000 Americans to report offshore accounts to the IRS, generating more than $5 billion. The IRS is now investigating at least 11 other banks.

We’re going directly to Washington, D.C., to Stephen Kohn, co-counsel for UBS whistleblower Brad Birkenfeld, also executive director of the National Whistleblowers Center and the author of The Whistleblower’s Handbook: A Step-by-Step Guide to Doing What’s Right and Protecting Yourself. Birkenfeld himself is under home confinement after getting out of jail, not authorized by the Bureau of Prisons to do interviews, now seeking a presidential pardon.

Stephen Kohn, welcome back to Democracy Now! Talk about this unprecedented award to Brad Birkenfeld, who has just gotten out of jail.

STEPHEN KOHN: Well, it’s the largest whistleblower award in history, but it’s—Birkenfeld turned in the largest financial frauds. He turned in 19,000 felons and $20 billion in one unit. But we also know 33,000 people are turning themselves in and that the total amount of U.S. dollars in illegal offshore accounts is over $5 trillion. That’s the estimation from a Senate report. What the IRS did was try to change the dynamic. When the Justice Department prosecuted Bradley Birkenfeld in one of the most absurd and misguided efforts, they took an asset, a person who turned in the keys to the kingdom, the first whistleblower to expose exactly how illegal Swiss banking worked and illegal offshore banking was working across the world, and instead of using him, they persecuted him. The IRS is now turning that around.

The IRS—I think one of the reasons they had to give such a big award is because they need informants. They need other bankers to step forward. And what the Justice Department did had a devastating impact on their whistleblower program. So they’ve turned around, and they’ve given the largest whistleblower award ever. We worked on that for over three years, through the process, trying to make sure he won, because his victory is really a victory against offshore illegal banking, where millionaires and billionaires stash their wealth, where corrupt politicians put in their money, drug dealers. When you’re looking at this illegal offshore banking, it’s really a handmaiden to corruption. So it’s extremely important public policy, public interest, to go to war against these banks. So, this award to Mr. Birkenfeld, in our view, is one of the most important step forwards to try to induce other bankers to step forward and really tackle illegal offshore banking.

NERMEEN SHAIKH: Well, Stephen Kohn, offshore tax havens have recently come under increasing focus because of Republican presidential nominee Mitt Romney’s foreign accounts. Earlier this summer, he defended his foreign investments during an interview with Radio Iowa.

MITT ROMNEY: With regards to any foreign investments, I understand and you understand, of course, that my investments have been held by a blind trust, have been managed by a trustee. I don’t manage them, don’t even know where they are. Those—that trustee follows all U.S. laws. All the taxes are paid, as appropriate. All of them have been reported to the government. There’s nothing hidden there. There’s nothing. If, for instance, you own shares in, let’s say, Renault or in Fiat, you still have to pay taxes, you still have to disclose that in the United States.

NERMEEN SHAIKH: That was Republican presidential nominee Mitt Romney speaking earlier this summer. Stephen Kohn, can you talk about the significance of this case and how it relates to what Mitt Romney said?

STEPHEN KOHN: Well, first, to clarify, we don’t have—this isn’t an anti-Romney campaign, and we don’t have any direct information about candidate Romney. But I want to talk about how the Swiss banking system works, illegal offshore banking works. There’s two ways it happens. First is, you have a direct account sitting in the bank. You’re trading stocks or gaining interest or whatever. And that was the $20 billion program. The second way is they do set up trusts, offshore trusts in which an American invests in the trust. So you give them a million dollars, and the trustee runs the investments. These are often usually illegal, because the trustee gives the American investor a one-step removal from the actual illegal activities and a method to deny involvement. It also gets very hard to track this money, because if you just put a million dollars into a trust that says has $200 million in assets, how do you follow that money, which may go to one or two or three offshore locations?

AMY GOODMAN: We have five seconds.

STEPHEN KOHN: Yeah, Birkenfeld turned all that in. But to say—I just want to emphasize, this is not an anti-Romney thing, but it does call for more investigation.

AMY GOODMAN: Stephen Kohn, we want to thank you for being with us. I want to encourage people to go to our website today at democracynow.org. Juan González has written a piece in the New York Daily News, as he continues to follow this case. Stephen Kohn, co-counsel for UBS whistleblower Brad Birkenfeld, executive director of the National Whistleblowers Center. And that does it for our broadcast.

We are on our Silenced Majority Tour, an election 2012 tour, continues this week. On Thursday, I’ll be at the Philadelphia Free Library; then go to Pittsburgh at McConomy Auditorium at Carnegie Mellon; on Friday at 5:00 p.m. in Cleveland, at 8:00 p.m. at Oberlin College; Kenyon College noon on Saturday. And we’ll be moving on from there.

The original content of this program is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License. Please attribute legal copies of this work to democracynow.org. Some of the work(s) that this program incorporates, however, may be separately licensed. For further information or additional permissions, contact us.

[JackRiddler]

Another big one to assimilate!

Started by slad
viewtopic.php?f=8&t=35434

Growth Is the Problem

Posted on Sep 10, 2012

Illustration by Mr. Fish
By Chris Hedges

The ceaseless expansion of economic exploitation, the engine of global capitalism, has come to an end. The futile and myopic effort to resurrect this expansion—a fallacy embraced by most economists—means that we respond to illusion rather than reality. We invest our efforts into bringing back what is gone forever. This strange twilight moment, in which our experts and systems managers squander resources in attempting to re-create an expanding economic system that is moribund, will inevitably lead to systems collapse. The steady depletion of natural resources, especially fossil fuels, along with the accelerated pace of climate change, will combine with crippling levels of personal and national debt to thrust us into a global depression that will dwarf any in the history of capitalism. And very few of us are prepared.

“Our solution is our problem,” Richard Heinberg, the author of “The End of Growth: Adapting to Our New Economic Reality,” told me when I reached him by phone in California. “Its name is growth. But growth has become uneconomic. We are worse off because of growth. To achieve growth now means mounting debt, more pollution, an accelerated loss of biodiversity and the continued destabilization of the climate. But we are addicted to growth. If there is no growth there are insufficient tax revenues and jobs. If there is no growth existing debt levels become unsustainable. The elites see the current economic crisis as a temporary impediment. They are desperately trying to fix it. But this crisis signals an irreversible change for civilization itself. We cannot prevent it. We can only decide whether we will adapt to it or not.”

Heinberg, a senior fellow at the Post Carbon Institute, argues that we cannot grasp the real state of the global economy by the usual metrics—GDP, unemployment, housing, durable goods, national deficits, personal income and consumer spending—although even these measures point to severe and chronic problems. Rather, he says, we have to examine the structural flaws that sit like time bombs embedded within the economic edifice. U.S. household debt enabled the expansion of consumer spending during the boom years, he says, but consumer debt cannot continue to grow as house prices decline to realistic levels. Toxic assets litter the portfolios of the major banks, presaging another global financial meltdown. The Earth’s natural resources are being exhausted. And climate change, with its extreme weather conditions, is beginning to exact a heavy economic toll on countries, including the United States, through the destruction brought about by droughts, floods, wildfires and loss of crop yields.

Heinberg also highlights what he calls “the highly dysfunctional U.S. political system,” which is paralyzed and hostage to corporate power. It is unable to respond rationally to the crisis or solve “even the most trivial of problems.”

“The government at this point exacerbates nearly every crisis the nation faces,” he said. “Policy decisions do not emerge from deliberations between the public and elected leaders. They arise from unaccountable government agencies and private interest groups. The Republican Party has taken leave of reality. It exists in a hermetically sealed ideasphere where climate change is a hoax and economic problems can be solved by cutting spending and taxes. The Democrats, meanwhile, offer no realistic strategy for coping with the economic unraveling or climate change.”

The collision course is set. It is now only a matter of time and our personal response.
“It could implode in a few weeks, in a few months or maybe in a few years,” Heinberg said, “but unless radical steps are taken to restructure the economy, it will implode. And when it does the financial system will seize up far more dramatically than in 2008. You will go to the bank or the ATM and there will be no money. Food will be scarce and expensive. Unemployment will be rampant. And government services will break down. Living standards will plummet. ‘Austerity’ programs will become more draconian. Economic inequality will widen to create massive gaps between a tiny, oligarchic global elite and the masses. The collapse will also inevitably trigger the kind of instability and unrest, including riots, that we have seen in countries such as Greece. The elites, who understand and deeply fear the possibility of an unraveling, have been pillaging state resources to save their corrupt, insolvent banks, militarize their police forces and rewrite legal codes to criminalize dissent.”

If nations were able to respond rationally to the crisis they could forestall social collapse by reconfiguring their economies away from ceaseless growth and exploitation. It remains possible, at least in the industrialized world, to provide to most citizens the basics—food, water, housing, medical care, employment, education and public safety. This, however, as Heinberg points out, would require a radical reversal of the structures of power. It would necessitate a massive cancellation of debt, along with the slashing of bloated militaries, heavy regulation and restraints placed on the financial sector and high taxes imposed on oligarchic elites and corporations in order to reduce unsustainable levels of inequality. While this economic reconfiguration would not mitigate the effects of climate change and the depletion of natural resources it would create the social stability needed to cope with a new post-growth regime. But Heinberg says he doubts a rational policy is forthcoming. He fears that as deterioration accelerates there will be a greater resolve on the part of the power elite to “cannibalize the resources of society in order to prop up megabanks and military establishments.”

Survival will be determined by localities. Communities will have to create collectives to grow their own food and provide for their security, education, financial systems and self-governance, efforts that Heinberg suspects will “be discouraged and perhaps criminalized by those in authority.” This process of decentralization will, he said, become “the signal economic and social trend of the 21st century.” It will be, in effect, a repudiation of classic economic models such as free enterprise versus the planned economy or Keynesian stimulus versus austerity. The reconfiguration will arise not through ideologies, but through the necessities of survival forced on the poor and former members of the working and middle class who have joined the poor. This will inevitably create conflicts as decentralization weakens the power of the elites and the corporate state.

Joseph Tainter, an archeologist, in his book “The Collapse of Complex Societies” provides a useful blueprint for how such societies unravel. All of history’s major 24 civilizations have collapsed and the patterns are strikingly similar, he writes. The difference this time around is that we will unravel as a planet. Tainter notes that as societies become more complex they inevitably invest greater and greater amounts of diminishing resources in expanding systems of complexity. This proves to be fatal.

“More complex societies are costlier to maintain than simpler ones and require higher support levels per capita,” Tainter writes. The investments required to maintain an overly complex system become too costly, and these investments yield declining returns. The elites, in a desperate effort to maintain their own levels of consumption and preserve the system that empowers them, through repression and austerity measures squeeze the masses harder and harder until the edifice collapses. This collapse leaves behind decentralized, autonomous pockets of human communities.

Heinberg says this is our fate. The quality of our lives will depend on the quality of our communities. If communal structures are strong we will be able to endure. If they are weak we will succumb to the bleakness. It is important that these structures be set in place before the onset of the crisis, he says. This means starting to “know your neighbors.” It means setting up food banks and farmers’ markets. It means establishing a local currency, carpooling, creating clothing exchanges, establishing cooperative housing, growing gardens, raising chickens and buying local. It is the matrix of neighbors, family and friends, Heinberg says, that will provide “our refuge and our opportunity to build anew.”

“The inevitable decline in resources to support societal complexity will generate a centrifugal force,” Heinberg said. “It will break up existing economic and governmental power structures. It will unleash a battle for diminishing resources. This battle will see conflicts erupt between nations and within nations. Localism will soon be our fate. It will also be our strategy for survival. Learning practical skills, becoming more self-sufficient, forming bonds of trust with our neighbors will determine the quality of our lives and the lives of our children.”
To see long excerpts from Richard Heinberg’s “The End of Growth” and Joseph Tainter’s “The Collapse of Complex Societies,” click here and here.

A Global Experiment with Everyone as the Guinea Pigs
Sept. 10, 2012
xraymike79

Without a doubt, climate change is the elephant in the room that no country is dealing with in a manner that reflects its dire consequences for humans and every other living creature on planet Earth. The oceans grow more acidic and warm, eventually to turn into lifeless and hypoxic dead zones. Tropical jungles continue to disappear under bulldozers to make way for monoculture industrial farming. Forests fall to invasions of beetles and burn from epic wildfires in a warming planet. Vast tracts of farmland are desiccated by relentless drought while the government continues its mandate of turning food into fuel for this country’s mammoth population of vehicles. The central banks continue to print money for the hedge funds and casino capitalists to speculate in “THE MARKET”. And the masses, bombarded with infotainment of carnival politics and Hollywood gossip, walk around in an entertained stupor, comforted in the belief that industrial civilization is infallible and exempt from the laws of physics and bankruptcy of an overexploited planet. Like an obsessive compulsive lunatic, growth is still the word that drips from the tongue of every mainstream economist, politician, and captain of industry. Global coal consumption continues its inexorable rise upward, with astronomical consumption predictions heralded for the distant future…



Intelligence, cooperation and foresight are of no use in a system which is intransigent to change. The final, calamitous destination over the cliff and down into the abyss seems clear to a few, but most still hang onto hope and miracles, the beliefs of desperate and delusional men. Scientists are astonished to see changes happening that just a few years ago were predicted only to become reality by the end of this century. A new study says that extreme scenarios are no longer unthinkable:

(continues)

Three More Growth Fallacies
Herman Daly, Center for the Advancement of the Steady State Economy
Sept. 9, 2012

In a previous essay I identified eight fallacies about growth [1]. Well, at the risk of starting a growth industry, here are three more.

1. As natural resources become scarce we can substitute capital for resources and continue to grow. Growth economists assume a high degree of substitutability between factors of production. But if one considers a realistic analytic description of production, as given in Georgescu-Roegen’s fund-flow model, one sees that factors are of two qualitatively different kinds: (1) resource flows that are physically transformed into flows of product and waste and (2) capital and labor funds, the agents or instruments of transformation that are not themselves physically embodied in the product. There are varying degrees of substitution between different resource flows, and between the funds of labor and capital. But the basic relation between resource flow on the one hand, and a capital (or labor) fund on the other, is complementarity. You cannot bake a hundred-pound cake with only one pound of ingredients, no matter how many cooks and ovens you have. Efficient cause (capital) does not substitute for material cause (resources). Material cause and efficient cause are related as complements, and the one in short supply is limiting. Complementarity makes possible the existence of a limiting factor, which cannot exist under substitutability. In yesterday’s empty world the limiting factor was capital; in today’s full world [2] remaining natural resources have become limiting [3].

This fundamental change in the pattern of scarcity has not been incorporated into the thinking of growth economists. Nor have they paid sufficient attention to the fact that capital is itself made from and maintained by natural resource flows. It is hard for a factor to substitute for that from which it is made! And consider yet another oversight. Substitution is reversible — if capital is a good substitute for resources, then resources are a good substitute for capital. But then why, historically, would we ever have accumulated capital in the first place if nature had already given us a good substitute? In sum, the claim that capital is a good substitute for natural resources is absurd.

In reply to these criticisms, growth economists point to modern agriculture, which they consider the prime example of substitution of capital for resources. But modern, mechanized agriculture has simply substituted one set of resource flows for another, and one set of funds for another. It has partially replaced soil, sunlight, rainfall, and manure, with other resources, namely fossil fuels, chemical fertilizers, pesticides, and water pumped from rivers and aquifers. The old resource flows (soil, sunlight, rain, manure) were to a significant degree replaced by new resource flows (fossil fuels, chemicals, irrigation water), not by capital! The old fund factors of labor, draft animals, and hand tools were replaced by new fund factors of tractors, harvesters, etc. In other words new fund factors substituted for old fund factors, and new resource flows substituted for old resource flows. Modern agriculture involves the substitution of capital for labor (both funds), and the substitution of nonrenewable resources for renewable resources (both flows). In energy terms it was largely the substitution of fossil fuels for solar energy, a move with short-term benefits and long-term costs. But there was no substitution of capital funds for resource flows. The case of mechanization of agriculture does not contradict the complementarity of fund and flow factors in production.

2. Space, the high frontier, frees us from the finitude of the earth, and opens unlimited resources for growth. In a secular age where many have lost faith in the spiritual dimension of existence, and where the concept of “man as creature” is eclipsed by that of “man as creator,” it is to be expected that science fiction might be called on to fill the dead void of space with a happy population of “survivors.” The spiritual insights of millennia are replaced by technocratic projections of the “Singularity” in which mankind attains the final goal of (random?) evolution and becomes a new and immortal species, thanks to the salvific power of exponential growth in information processing technology. Moore’s Law promises eternal silicon-based life for the new elect who can stay alive until the Singularity; oblivion for those who die too soon! And this comes from materialists who think that they have outgrown religion!

Of course many technical space accomplishments are real and impressive. But how do they free us from the finitude of the earth and open up unlimited resources for growth? Space accomplishments have been extremely expensive in terms of terrestrial resources, and have yielded few extra-terrestrial resources — useless moon rocks that some fledgling astronaut managed to steal from NASA [4] in a bungled attempt to sell them for their collector’s value, plus some space tourism [5] for a few billionaires to take orbital joyrides. On the positive side of the ledger we can list communications satellites, but they are oriented to earth, and while they can help us use earth’s resources more efficiently, they do not bring in new resources. And apparently some orbits are getting crowded with satellite carcasses.

Robotic space exploration is a lot cheaper than manned space missions, and may (or may not) yield knowledge worth the investment to a society that cannot afford basic necessities and elementary education for many. The opportunity cost of indulging the expensive curiosity of a few is to leave undeveloped the capacities of many. Were it not for the heavy military connection (muted in the official NASA propaganda) we would probably be spending much less on space. Cuts in NASA’s budget have led to the over-hyped reaction by the “space community” in proclaiming a pseudo-religious technical quest to discover “whether or not we are alone in the universe,” as opposed to how to zap other earthlings with laser beams from space. Another major goal is to find a planet suitable for colonization by earthlings. The latter is sometimes justified by the observation that since we are clearly destroying the earth we need a new home — to also destroy?

The numbers — astronomical distances and time scales — effectively rule out dreams of space colonization. But another consideration is equally daunting. If we are unable to control population and production growth on earth, which is our forgiving and natural home, out of which we were created and with which we have evolved and adapted, then what makes us think we can live as aliens within the much tighter and unforgiving discipline of a space colony on a dead rock in a cold vacuum? There we would encounter limits to growth raised to the hundredth power. Sorry for being such a “pessimist!”

3. Without economic growth all progress is at an end. On the contrary, without growth (now actually uneconomic growth [6] if correctly measured), true progress finally will have a chance. As ecological economists have long argued, growth is quantitative physical increase in the matter-energy throughput, the metabolic maintenance flow of the economy beginning with depletion and ending with pollution. Development, in contrast, is qualitative improvement in the capacity of a given throughput to provide for the maintenance and enjoyment of life in community. The main ways to develop are through technical improvement in resource efficiency, and ethical improvement in our wants and priotities.

Development without growth beyond the earth’s carrying capacity is true progress. Growth means larger jaws and a bigger digestive tract for more rapidly converting more resources into more waste, in the service of unexamined and frequently destructive individual wants. Development means better digestion of a non-growing throughput, and more worthy and satisfying goals to which our life energies could be devoted.

--------------------------------------------------------------------------------

Article printed from Center for the Advancement of the Steady State Economy: http://steadystate.org

URL to article: http://steadystate.org/three-more-growth-fallacies/

URLs in this post:

[1] eight fallacies about growth: http://steadystate.org/eight-fallacies-about-growth/

[2] full world: http://steadystate.org/wp-content/uploa ... nomics.pdf

[3] have become limiting: http://steadystate.org/what-is-the-limiting-factor/

[4] steal from NASA: http://gizmodo.com/5242736/how-an-inter ... moon-rocks

[5] space tourism: http://www.guardian.co.uk/theobserver/2 ... obin-mckie

[6] uneconomic growth: http://steadystate.org/two-meanings/

Thank you seemslikeadream, for posting this. Heinberg's book is one of the best books I've read in a long time, a great analysis of how ultimately we have to change the way money works if civilization is to have any chance for survival. I would encourage everyone here to read it.

I recently had someone forward a quote from another author I respect that kind of dovetails with the Hedges article:

"There is a widely under-read book by Matthew Lassiter called The Silent Majority, about the Nixon years and the corresponding rise of suburbia in the so-called New South. In it, he describes the particular political identities of suburbia - which do not map onto older right-left constellations. These identities are taxpayer, homeowner, school parent, consumer. This suburban population (nationwide) is now a majority, and their interests are Narrow along the lines suggested by Lassiter. Consequently, both parties are forced to kowtow to this demographic (mostly white, 'middle class'), because it is a political behemoth. That, more than anything else, is the reason the actual practices of the two parties look more and more alike. They both have to account for this bloc.

"What this demographic is, actually, is the most unsustainable bloc of human beings on the planet (as currently configured). They commute miles and
miles each day, survive in suburban barracks that are energy sinks and carbon nightmares, consume materials as the expression of their collective identity, and rely utterly for their survival on economic-material grids that they are beholden then to defend, even as these practices moves us further down the path to both intermediate consequences and ultimate collapse. Preserving this group, as currently constituted, is objectively stupid and politically inescapable. They are also, as history has shown, potentially very reactionary; now self-justifying and comfortable, in times of trouble seeking some 'strong father' to set things right. It is their approach to obsolescence that makes this demographic so dangerous.

"We oughtn't 'save' the middle class. We ought to be finding a different way for all those people to live that doesn't utterly rely on the continuation of US imperialism. It actually has roots going all the way back to Levittown (see link below), when these Disneyfied planned residential communities first appeared as part of the white flight phenomenon. Without the massive and destructive infrastructure we have to support private automobiles they couldn't have happened, turning cars from luxuries to necessities, and beginning the process we now know as sprawl - destroying untold millions of acres of farm and forest to build the developments and expand the roads and highways necessary to ensure they would flourish. They are, in some respects, similar to cancer in their unchecked growth. No surprise that this 'middle class' is hegemonically white - even as they allow for some honorary whites for diversity. The history is racialized through and through." - Stan Goff

[JackRiddler]

What comment is possible on the following item? It would have been hard for me to imagine, though we make jokes about the return of debtors' prison, and this is another clear step in that direction. Who devises evil like this?

http://www.nytimes.com/2012/09/16/busin ... nted=print

September 15, 2012

In Prosecutors, Debt Collectors Find a Partner

By JESSICA SILVER-GREENBERG


The letters are sent by the thousands to people across the country who have written bad checks, threatening them with jail if they do not pay up.

They bear the seal and signature of the local district attorney’s office. But there is a catch: the letters are from debt-collection companies, which the prosecutors allow to use their letterhead. In return, the companies try to collect not only the unpaid check, but also high fees from debtors for a class on budgeting and financial responsibility, some of which goes back to the district attorneys’ offices.

The practice, which has spread to more than 300 district attorneys’ offices in recent years, shocked Angela Yartz when she was threatened with conviction over a $47.95 check to Walmart. A single mother in San Mateo, Calif., Ms. Yartz said she learned the check had bounced only when she opened a letter in February, signed by the Alameda County district attorney, informing her that unless she paid $280.05 — including $180 for a “financial accountability” class — she could be jailed for up to one year.

“I was so worried driving my kid to and from school that if I failed to signal, they would cart me off to jail,” Ms. Yartz said.

Debt collectors have come under fire for illegally menacing people behind on their bills with threats of jail. What makes this approach unusual is that the ultimatum comes with the imprimatur of law enforcement itself — though it is made before any prosecutor has determined a crime has been committed.

Prosecutors say that the partnerships allow them to focus on more serious crimes, and that the letters are sent only to check writers who ignore merchants’ demands for payment. The district attorneys receive a payment from the firms or a small part of the fees collected.

“The companies are returning thousands of dollars to merchants that is not coming at taxpayer expense,” said Ken Ryken, deputy district attorney with Alameda County.

Consumer lawyers have challenged the debt collectors in courts across the United States, claiming that they lack the authority to threaten prosecution or to ask for fees for classes when no district attorney has reviewed the facts of the cases. The district attorneys are essentially renting out their stationery, the lawyers say, allowing the companies to give the impression that failure to respond could lead to charges, when it rarely does.

“This is guilty until proven innocent,” said Paul Arons, a consumer lawyer in Friday Harbor, Wash., about two hours north of Seattle.

The partnerships have proliferated from Los Angeles to Baltimore to Detroit, according to the National District Attorneys Association, as the stagnant economy leaves city and state officials grappling with budget shortfalls. Lawyers for the check writers estimate that more than 1 million of them are targeted a year. The two main debt collectors — California-based CorrectiveSolutions and BounceBack of Missouri — return millions of dollars each year to retailers including Safeway, Target and Walmart.

While the number of bounced checks has fallen as more shoppers pay with credit or debit cards, Americans still write billions of dollars worth of bad checks each year. In 2009, $127 billion worth of checks were returned, according to the most recent data from the Federal Reserve. That’s down from $182 billion in 2006.

Because the cases are not fully investigated, there is no way of knowing whether the bad checks were the result of innocent mistakes or intentional fraud. The so-called bad check diversion programs start from the position that a crime has been committed.

Before the first partnerships were rolled out in the late 1980s, merchants who received a bad check typically tried to retrieve the money themselves or through a private collection company, with abysmal results. Those merchants who suspected fraud could send along the checks to their local district attorneys.

The influx of bad-check reports overwhelmed district attorneys’ offices, according to Grover C. Trask, a former district attorney in Riverside, Calif., considered the father of such programs. “It was a way to deal with a fairly serious nonviolent crime going on in the business community, but not overburden the court system or the resources of the district attorneys,” Mr. Trask said.

The programs were quickly challenged by consumer lawyers, who took aim primarily at California-based American Corrective Counseling Services. Facing a barrage of class-action lawsuits, the company reorganized through a Chapter 11 bankruptcy in 2009.

Still, its successor, CorrectiveSolutions, which says it has contracts with more than 140 prosecutors, has been dogged by similar legal challenges, including a class-action lawsuit pending in federal court in San Francisco that claims the company “has constructed an elaborate artifice” to terrify borrowers into paying. CorrectiveSolutions, which did not respond to requests for comment, has contested the claims, court filings show.

For the collection companies, the partnerships offer a distinct financial benefit: the “financial accountability” classes. Typically, a small portion of the class fees, which can exceed $150, are passed on to the district attorneys’ offices. Check writers are led to believe that unless they take the courses, they could end up in jail.

A letter signed by the Santa Clara County district attorney, for example, informed Kathy Pepper that the “bad check restitution program” would allow her to avoid “the possibility of further action against the accused by the District Attorney’s Office.”

Petrified, Ms. Pepper agreed to pay $170 for a class and another $25 to reschedule the class last year after accidentally writing a $68 check in the midst of a divorce last year that upended her finances.

What Ms. Pepper did not know was that her bad check was sent directly from the merchant to the debt-collection company, without any prosecutor determining whether she had actually committed a crime.

Under the terms of five contracts between CorrectiveSolutions and district attorneys reviewed by The New York Times, merchants refer checks directly to the company, circumventing the prosecutors’ offices. While the merchants are required, for example, to attempt to contact the check writer, they can send any bad checks to the collection companies if the shopper hasn’t responded, typically within 10 days.

“No one at the district attorney’s office reviews the cases” before the collection company sends out letters, said Priscilla Cruz, an assistant director in the Los Angeles district attorney’s office.

As of July, CorrectiveSolutions had sent out 16,955 letters on behalf of the Los Angeles district attorney, and during that time 635 people attended the program’s classes, county data show. While few people will be prosecuted for not attending the class, there is a possibility of charges, Ms. Cruz said.

While the percentage of targeted check writers taking the classes is low — 4 percent to 7 percent in recent years — the percentage of cases referred for potential prosecution is much lower, about 0.10 percent.

Few bad-check writers are prosecuted, especially for relatively small sums, lawyers say, because it is hard to prove the person meant to defraud the merchant.

Gale Krieg, a vice president at BounceBack, said he has turned down business from prosecutors who won’t agree to at least have all copies of the checks sent to their offices, where prosecutors can determine if a crime has been committed. Mr. Krieg, who said the company has contracts in 38 states, acknowledges the limitations: “Whether they exert oversight isn’t something that we can control.”

Prosecutors point out that people who write bad checks should be held accountable for paying back what they owe.

“I view it as quite a win-win,” said Baltimore County State’s Attorney Scott D. Shellenberger. “You aren’t criminalizing someone who shouldn’t have a criminal record, and you are getting the merchant his money back.” On its Web site, CorrectiveSolutions says that its classes result in low rates of recidivism.

Some officials in district attorneys’ offices have quietly raised concerns that the programs are misleading. A November 2009 county audit of Deschutes County, Ore., titled “District Attorney’s Office-Cash handling over revenues,” wondered whether elements of the program could be “disingenuous.” The prosecutor’s office, which did not return requests for comment, contracts with CorrectiveSolutions to handle its bad checks. Ms. Yartz said she accidentally wrote a check for groceries on her credit union account, rather than her bank checkbook. She had recently moved and was in the process of closing that account.

Even after Ms. Yartz paid $100.05 in February to cover the bounced check, the returned item fee and an administration fee, she got a letter signed by the Alameda district attorney informing her that her remaining balance was $180 for the class. After consulting with a lawyer, she decided to take her chances rather than pay for a class she could not afford, to avoid being punished for a crime she said she did not commit. Ms. Yartz also questioned the need for a class on budgeting and financial accountability: “If I meant to bounce this check like a criminal, why do I need a class on budgeting?”

[hanshan]

...

JackRiddler:


What comment is possible on the following item? It would have been hard for me to imagine, though we make jokes about the return of debtors' prison, and this is another clear step in that direction. Who devises evil like this?

Rhetorical, Jack...

Apparently, some folks remain unaware The Bill
Of Rights
is no more. Superceded by Patriot II.


The District Attorney (DA), in many jurisdictions in the United States,[b] is the elected or appointed official who represents the government in the prosecution of criminal offenses. The district attorney is the highest officeholder in the legal department of the jurisdiction – generally the county in the U.S. – and supervises a staff of assistant (ADA) or deputy district attorneys. Depending on the system in place, district attorneys may be appointed by the chief executive of the region or elected by the voters of the jurisdiction.
[/b]

from:


http://www.nytimes.com/2012/09/16/busin%20...%20nted=print
September 15, 2012

In Prosecutors, Debt Collectors Find a Partner

By JESSICA SILVER-GREENBERG



Debt collectors have come under fire for illegally menacing people behind on their bills with threats of jail. What makes this approach unusual is that the ultimatum comes with the imprimatur of law enforcement itself — though it is made before any prosecutor has determined a crime has been committed.

Prosecutors say that the partnerships allow them to focus on more serious crimes, and that the letters are sent only to check writers who ignore merchants’ demands for payment. The district attorneys receive a payment from the firms or a small part of the fees collected.

Consumer lawyers have challenged the debt collectors in courts across the United States, claiming that they lack the authority to threaten prosecution or to ask for fees for classes when no district attorney has reviewed the facts of the cases. The district attorneys are essentially renting out their stationery, the lawyers say, allowing the companies to give the impression that failure to respond could lead to charges, when it rarely does.

“This is guilty until proven innocent,” said Paul Arons, a consumer lawyer in Friday Harbor, Wash., about two hours north of Seattle.

snip

...

[JackRiddler]

http://www.nakedcapitalism.com/2012/09/ ... wrong.html

Monday, September 17, 2012

Eugene Linden: In a World of Underpriced Risk, What Could Possibly Go Wrong?

Yves here. While I anticipate readers will enjoy Eugene Linden’s post, I do have a couple of quibbles. Linden comments in passing that the action of the Fed is understandable, if regrettable, given the options. I don’t believe in letting the officialdom off that easy. Japan warned the US early in the crisis not to repeat what was its biggest mistake: coddling the banks rather than forcing them to take losses. An IMF study of 124 banking crises concluded that regulatory forbearance, the term of art for letting impaired banks soldier on, found:

The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred…

And we’ve discussed long form that Obama blew the opportunity to get tough with financial services firms at the beginning of his term and instead threw his lot in with them.

In addition, it isn’t “profligate” to deficit spend when both the business sector and the household sector are net saving. But that raises the question of why more isn’t being done to get capitalists to act like capitalists. Andrew Haldane and Richard Davies have demonstrated that corporations are seeking overly high returns on investment, which leads to widespread underinvestment and also argues for a greater role for government investment given private sector mispricing. Thus the central bank efforts to force investors out the risk curve is partly in response to persistent corporate short-termism and unduly high return targets. But as the saying “you can bring a horse to water but you can’t make it drink” warns us, central bank efforts to lower risk pricing is not guaranteed to produce the behavior they want. Recent history has shown its impact on financial assets is much greater than on the real economy.

By Eugene Linden, a journalist and author of seven books who has written extensively about animal behavior, environmental issues, and markets

On a recent conference call, the strategist of a major international bank (it was an off-the-record call for clients only) laid out the bare bones of what he called the world’s “giant experiment” in debt and interest rates. Never before have so many countries maintained such low base rates for so long; never before in peacetime have so many countries had such huge deficits and debt burdens; never before in U.S. history had long term rates been so low; never before has the U.S. gone so many decades without deflation following inflation. Because we live in these unprecedented times, it’s easy to lose sight just our strange they are… and how dangerous.

Consider just one small piece of this brave new world: What happens when the huge preponderance of the global financial market under prices risk? To add to the list offered by the strategist: Never before has so much debt been referenced to benchmarks that price debt too low for their inherent risks. The distortions of this unique situation have been well-documented – underfunded pensions and impoverished retirees for instance — but reversion to the fair pricing of risk would almost certainly crater the global financial system and governments around the world.

This leaves us in an exquisitely cruel predicament. An underpinning of any sustainable financial system is the proper pricing of risk. If I am going to loan you money, the interest rate I charge will reflect what kind of return I can fairly demand (assuming that the borrower can turn to someone else if I charge too much) given all the different factors that might prevent me from being repaid in full. For any given financial instrument, these factors might include the quality of collateral, inflation expectations, the character of the borrower, and a host of other factors including the political stability of the borrower’s home country. To the degree that I charge too low an interest rate I am subsidizing the borrower, assuming a portion of risk that the borrower is not paying for, and increasing the likelihood that I will not be repaid in full.

That’s where we are right now, with every lender, depositor and investor in the developed world (which includes most of us when we consider pension funds and insurers) blithely assuming much more risk than we are being compensated for. This has allowed, actually encouraged, the entire developed world to pile on debt at levels without precedent. When events force a settling of this world-wide mispricing, we risk the mother of all financial crises. Will it be hyperinflation as governments try to devalue debt burdens, a deflationary spiral and credit freeze as floating rates soar to try and catch up, or all of the above?

Naturally, all of this has been done by design. On the one hand, central banks around the world have for years been pursuing policy rates at or near zero (nicknamed ZIRP or Zero Interest Rate Policy) since 2008 (and long before in the case of Japan), ostensibly to encourage profitable lending in order to restore vigor to economies. Through programs such as Operation Twist in the U.S. and the LTRO (Long Term Refinancing Operation) in Europe, central banks have also sought to supply liquidity and bring down long-term rates. Thus the vast universe of both high yield and investment grade bonds, priced more to their spread from treasuries than for nominal yield, underprices risk to the degree that fed actions underprice the risk in U.S. sovereign debt.

Then, as we discovered this year, LIBOR, an unofficial rate inaugurated in 1986 to reflect the price that the biggest banks pay to borrow from each other, also has been manipulated to understate the risks bank see in lending to their peers. LIBOR is the benchmark for many trillions of dollars in debt and financial instruments (estimates range up to $800 trillion, a truly ridiculous number that underscores what a monster LIBOR has become). Central bankers in the U.K. and the U.S. have known for at least five years that LIBOR was being manipulated to understate what might constitute a true interbank rate. Mervyn King, a governor of the Bank of England, witheringly described LIBOR in 2008 “as the rate at which banks don’t lend to each other.”

The authorities tolerated this manipulation because they feared then, and still do today, that the real interest rate at which banks would actually lend to each other would be so high as to cause a global panic given the impossibly huge amount to debt benchmarked to LIBOR. Between them, ZIRP and LIBOR affect financial instruments that cover most of the credit waterfront. To paraphrase Jim Grant, much of the developed world lives in a world of return free risk.

All this de facto philanthropy by investors has been a windfall some governments – including the U.S. and Japan — allowing them to pile on debt without having to commensurately increase the amount they budget for interest. For banks ZIRP has been a mixed blessing. On the one hand, big banks have access to extremely cheap money, but, on the other, the risks of lending in a debt-burdened and bruised economy often don’t justify the meager nominal returns that can be achieved. Also, the tiny margins at the zero bound mean that the short-term collateralized lending that supports money market funds and much of the shadow banking system can become unprofitable in the blink of an eye. Thus, ultralow rates, historically associated with the risk of inflation, can actually withdraw liquidity from the market, and produce a deflationary spiral.

This is just one of the paradoxes of this strange new world. Another is that even as rates suggest that risk has been banished in the 21st century, the number of governments and corporations deemed risk free by the rating agencies continues to shrink. According to the New York Times, the number of AAA rated corporations in the U.S. has dropped from in the 60s in the 1980s to just four today. The number of Triple A-Rated sovereigns shrinks apace. One reason for the parsimony in handing out AAA ratings today comes from barn-door closing by the rating agencies after the heady days of the housing bubble when any loan had a bright future as part of a AAA-rated financial instrument thanks to the alchemy of securitization. The continuing global hangover from this historic mispricing (and miss-rating) underscores the misery that follows the misunderstanding of risk.

Why then do financial authorities persist in underpricing risk so soon after that near-death experience? Simply put, we can’t do otherwise. ZIRP and a low low LIBOR push the day of reckoning off into the future, and allow governments and investors to retain the faint hope that some yet to be identified engine of growth will save the day. If, however, interest rates were to rise to discount actual risk, debt service would soar to consume tax revenues for the U.S., Japan, and other profligate governments, a flood of insolvencies would ensue, what little mortgage lending that remains would shrink further (pushing home prices down and further impoverishing households that have seen their net worth plummet since 2008), and economic activity would shrivel throughout the developed world.

Central bankers do have one lucky break that gives them breathing room in this ultimately unsustainable situation: inflation remains far over the horizon. All the money printed around the world really isn’t going anywhere (except to buy up the too-cheap debt issued by governments and agencies). It certainly isn’t going to wages – outsourcing has killed that legacy of the bell-bottom era – and there is plenty of slack capacity that needs to be filled before any developed world economy overheats. Nor is it going into consumption — most households are still drowning in debt, which limits their desire to spend, even if people could qualify for additional credit.

So, the Federal Reserve continues to push out the date, currently 2015 and counting, at which they say they will wean the economy from ZIRP, and LIBOR remains surreally below a level at which banks might actually lend to each other. Given the alternative, however, who can blame the financial authorities? The only choice seems to be to hold our breath, and hope that no event or mistake causes the ping pong ball to fall on to the table full of mouse traps that now constitutes the global financial system.

http://www.nakedcapitalism.com/2012/09/ ... ilout.html

Monday, September 17, 2012
Is QE3 Yet Another Stealth Bank Bailout?

It’s difficult to puzzle out what Bernanke thinks he is accomplishing with QE3. The level of bond buying, as various commentators have pointed out, is much lower than in the earlier QE programs. And pulling out bigger guns in the past was not terribly productive. As we wrote in April 2011 in a post titled “Mirabile Dictu! Economists Agree All the Fed Has Done is Goose Financial Markets!“:

You heard it first in the blogopshere. From the New York Times:

The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs….

A study published in February found that interest rates decreased, but only for companies with top credit ratings. “Rates that are highly relevant for households and many corporations — mortgage rates and rates on lower-grade corporate bonds — were largely unaffected by the policy,” wrote Arvind Krishnamurthy and Annette Vissing-Jorgensen, both finance professors at Northwestern University

We’ve argued repeatedly, as have others, that well targeted fiscal stimulus and more private sector debt restructuring were the right medicine. But Obama and his bankster friendly advisors had no stomach for much of either remedy.

For what it’s worth, QE and QE2 have gotten a barrage of criticism. Jim Hamilton looked at the much bigger first round of QE and concluded that it lowered long bond yield by only 17 basis points. Paul Volcker thought making a fuss over the program was silly, since the Fed used to buy bonds as a matter of course. And as Marshall Auerback has pointed out, the idea of a fixed dollar amount of purchases was bizarre. There was no way of knowing what if anything it would accomplish. It would have made more sense for the central bank to set a rate target (say for whatever longer-dated maturity it chose to target) and buy whatever it took to keep that level.

You could argue that the big impact of the QEs was psychological, that it was tangible proof that the Bernanke put was the Greenspan put on steroids.

Back to the current post. Given that previous QEs amped up the stock market, weakened the dollar, lifted commodity prices, and made central bankers in emerging markets mighty unhappy (risk on trades boosted their currencies and sent hot money into their economies, developments they did not like), all on a temporary basis, it’s quite a stretch for Bernanke to depict it as a way to boost employment in the US, unless he has a very bad case of “if the only tool you have is a hammer, every problem looks like a nail” syndrome.

One interpretation is that Bernanke, despite his protests otherwise, is giving the stock market a short term sugar high to assure an Obama reelection. The Republicans have threatened to take hot pokers to the Fed, so Bernanke could rationalize his actions as preserving his institution rather than mere electioneering.

Another is that the central bank is quite cognizant of what it is doing and is deliberately boosting bank profits, perhaps also hoping that the banks will eventually feel robust enough to do more lending. The wee problem is that financial speculation is so much more profitable and much easier to dial up and down quickly.

Even though mortgage backed securities prices rose (as in interest rates fell) sharply after QE3 was announced, mortgage rates remained unchanged:

The average rate on a 30- year fixed mortgage held at 3.55 percent in the week ended Sept. 13, near a record-low of 3.49 reported July 26 in data dating to 1971, according to McLean, Virginia-based Freddie Mac.

The New York Times’ Dealbook on Friday evening took note of the failure of banks to lower borrower interest rates in light of more favorable funding costs:

The federal funds effective rate, one short-term rate that banks use to lend to each other, is at 0.14 percent. That compares with a rate of 3.62 percent in September 2005.

The 10-year Treasury note has a yield of 1.87 percent, down from 4.2 percent in 2005. These are huge declines.

Yet the cost of credit card loans has hardly budged. The Fed’s own data shows that average credit card interest rate was 12.06 percent earlier this year; in 2005, it was 12.45 percent…

But even when fear of default is removed from the equation certain interest rates seem to be stuck too high.

Take mortgages. The federal government agrees to shoulder the cost of defaults in nearly all of the mortgages made today. Banks make mortgages to borrowers, and then take those loans and attach the government guarantee of repayment to them.

After that, they package the loans into bonds, which they then sell to investors. The Fed’s purchases of these bonds have helped their yields fall to 2.2 percent. But the cost of mortgages to borrowers hasn’t fallen anywhere near as much.

The banks are choosing not to reduce mortgage rates further. One reason: By keeping the rates elevated, they are able to earn much larger profits when they sell the mortgages into the bond market. If the level of profits on those sales stayed at recent average levels, borrowers might, for instance, pay $30,000 less in interest payments on a $300,000 mortgage, according to a recent New York Times analysis.

Today, the Financial Times took note of the issue, but added a bit of bank PR: they really, truly want to lend more, but golly gee, they haven’t staffed up:

The Federal Reserve’s attempt to push aid into the heart of the US economy is being blunted by banks struggling to process mortgage applications fast enough, keeping rates on home loans elevated, according to the largest lenders.

“In the very near term [QE3] has virtually no transfer mechanism whatsoever to the customer,” said one executive at a leading lender, who requested anonymity. “Originators are massively backlogged in terms of origination volumes.”
Steven Abrahams, MBS analyst at Deutsche Bank, noted that the yield on mortgage-backed securities fell more than 30 basis points after the Fed announcement.

“Very little of that is likely to make it through immediately to consumers,” he said. “There’s nothing that will force mortgage originators themselves to lower the rates that they’re offering to consumers. Right now they have their hands pretty full in terms of the pipeline and managing paperwork and making loans. These folks are busy. There’s not a bunch of people on long cigarette breaks.”

MBS Guy confirmed our skeptical view:

No one on the planet can be surprised that mortgage rates are very low and refinancing is attractive (few bank executives should be surprised by QE3, plus they’ve all been banging on the table for it for the last few months).

Yet, for some reason, banks don’t have the staffing to originate loans faster, as if they were somehow unprepared for this environment. It’s preposterous.

The only explanation: lenders don’t want to originate any faster.

They want to capture more spread and, perhaps, they want fewer people to lock in at lower rates?

Nonetheless, QU3 will be a huge opportunity for bankers to make a lot more trading revenue and come up with new strategies to leverage and arb the new regulatory environment. The Fed basically confirmed low rates and continuous MBS purchases through 2015 – that provides a lot of opportunity to make money. Lending, however, is an afterthought.

Note that there has not been a peep out of the Fed on the failure of the banks to lower borrower rates to reflect their cheaper funding costs. The central bank has a powerful bully pulpit, and if it were to make noise, you’d see Congresscritters and the media piling on. One wonders if the Fed has even broached the topic privately. I can imagine Jamie Dimon grousing about the loss of profits on float and the flatter yield curve justifying them taking margin wherever they find it, and the Fed unwilling to point out that the banks created the new normal and they need to adjust to it too.

So the Fed looks to be completely on board with this sort of rent-seeking. Perhaps the central bank believes its charges need more in the way of earnings to strengthen their balance sheets, even though history shows they prioritize executive bonuses over building their equity levels. Or maybe Bernanke was being completely truthful when he said QE3 was targeting employment. After all, fatter bank margins will preserve their staffing levels.

[2012 Countdown]

Head Of MF Global Equity Derivatives Trading Launches Hedge Fund
Submitted by Tyler Durden on 09/18/2012 13:03 -0400

Several weeks ago we learned that 2011's vaporizer extraordinaire Jon Corzine is contemplating starting his own hedge fund: presumably one that invests all its capital in Italian 2 year bonds, charges 2 and 20, and then disappears when all LP capital blows up in an AUM supernova. Today, we learn that the stigma freeze associated with all other former MF Global trading whizkids has officially melted, as the former head of equity derivatives of MF Global has just launched a new hedge fund. From Bloomberg: "Daniel Bystrom, former head of equity derivatives trading at MF Global Inc., and Neil Boyarsky plan to start Hawksfield Capital LLC, a New York-based equity volatility hedge fund, by the end of this month. Hawksfield Capital will start with $10 million to $20 million of Bystrom and Boyarsky’s own money, as well as capital from friends and family, Bystrom said in a telephone interview. “The fund will deliver returns that are uncorrelated and often negatively correlated to the returns of the typical hedge- fund strategy,” Bystrom said. “The opportunity set expands dramatically in times of higher volatility, when most other asset classes are not performing well.” Such as the stock of MF Global perhaps?

More:

Boyarsky, 40, has served as executive vice president of Improved Funding Techniques Inc., an actuarial and benefits consulting firm, for 12 years. He will be Hawksfield’s chief executive officer and Bystrom will be chief investment officer.

Bystrom and Boyarsky first discussed starting a hedge fund five years ago. After MF Global filed the eighth-biggest U.S. bankruptcy under Chapter 11 on Oct. 31, Bystrom knew the time was right to act on the plan, he said.

“It was an ongoing dialog and it was something I knew I would always do at some point,” Bystrom said. “When MF did go bankrupt, it presented me with the right opportunity to do it.”

Bystrom said it was “disappointing and frustrating” to be part of an organization brought down by “external forces” separate from his team. MF Global, run at the time by former New Jersey Governor and Goldman Sachs Group Inc. Co-Chairman Jon Corzine, filed for bankruptcy after a wrong-way $6.3 billion trade on its own behalf on bonds of some of Europe’s most indebted nations.

Hawksfield’s prime broker is Goldman Sachs.

Hmm, not JP Morgan?

We have nothing to add to this. We are sad, however, that the Onion has now completely and officially missed its IPO window.

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http://www.zerohedge.com/news/head-mf-g ... hedge-fund