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

[JackRiddler]

.

Two interesting signals from San Diego and Ohio - the latter is a very positive start.

http://www3.signonsandiego.com/stories/ ... ndex=59981

Huge home in foreclosure doesn't muster one bidder
By Diane Bell (Contact) Union-Tribune Columnist

2:00 a.m. February 28, 2009


It's a bad sign when a new home that cost more than $10 million to build fails to attract even a single bidder at a foreclosure auction.

Yet that's what happened Feb. 13 when Chevy Chase Bank put a 15-bedroom, 17-bathroom Encinitas property on the block with an opening bid of $2.275 million. The 16,330 square-foot home, which has a library, yoga room, swimming pool, fountains, lush landscaping and much more, is described by local foreclosure experts as the county's current largest home foreclosure.

Vivienda Estate, built between 2004 and 2006 on Fortuna Ranch Road in Olivenhain, was the dream of Suzy Brown, who originally partnered with the Deepak Chopra organization and 60 investors to create a spiritual healing drug rehab center on par with Promises in Malibu. Neighbors fought against the project, however, dubbing her property “the monster house.”

She searched unsuccessfully for other uses. Brown eventually defaulted on her mortgage payments a year ago but still maintains and lives in the home with several tenants. She says she knows of buyers willing to pay well over the auction price who have been unsuccessful in getting the bank to act on their offers.

James Dunn, a Southern California asset manager for the Washington, D.C.-area bank, says the Vivienda Estate is now being analyzed by a real estate broker and will be put on the market – probably some time next month.

Meanwhile, Brown, who designed a sophisticated computer-controlled “brain” that operates the estate's heating, lighting, air conditioning, audio-visual systems and security, says the home's value will plummet if she is evicted and takes furnishings with her.

“I've shown the property to several prospective buyers, and no one wants it empty,” she says. “It takes the life, breath and soul out of it.”

Despite having lost a fortune on the project, she is trying to keep a positive attitude and remains willing to work with the bank and with new buyers.

Brown says she originally was devastated by the demise of the project she had so lovingly nurtured. As time passed, however, the monetary loss became far less important and she forged friendships and underwent a personal spiritual transformation that she says has made her a better person.

http://blog.cleveland.com/metro/2009/02 ... _on_1.html

Jury returns guilty verdict on all counts against appraiser in mortgage
Posted by Michael Sangiacomo/Plain Dealer Reporter February 28, 2009 08:19AM

CLEVELAND - In what officials are hailing as an important step in the battle against mortgage fraud, a Cuyahoga County jury Friday afternoon found an appraiser in a mortgage fraud case guilty of all nine counts of mortgage fraud offense.

This was the prosecutor's office's first case to go to trial against an appraiser. Appraisers have been charged in other cases but have entered pleas.

"Successfully prosecuting an appraiser for fraudulently inflating the value of a home is an important step in our fight against mortgage fraud," said Prosecutor Bill Mason. "The jury rejected this appraiser's bogus defense--that appraisals of homes are primarily based on opinion. This sends a strong message that all parties in these mortgage fraud scams
will be prosecuted for their crimes."

After an eight day trial, which began Feb. 18, the jury found appraiser, Lavon Ivy, her father, John Ivy, who did rehab work on the house and their rehab company, PTOT Enterprises, along with a mortgage broker, Phillip Stevens, and his company, M & S Investments, collectively guilty of all 23 of the mortgage fraud offenses pertaining to a house at 25349 Tyron Road in Oakwood Village, near Bedford, Ohio.

Lavon Ivy was found guilty of theft by deception, securing a writing by deception, forgery, communications fraud, receiving stolen property and falsification. She faces a maximum prison sentence of 26 1/2 years.

John Ivy was found guilty of forgery and receiving stolen property, and he faces a maximum prison sentence of 4 1/2 years.

Mortgage broker, Phillip Stevens, was found guilty of theft by deception, securing a writing by deception and falsification, and he faces a maximum prison sentence of 10 1/2 years.

Sentencing is scheduled for March 26. in Judge Hollie Gallagher's courtroom.

Appraiser Ivy, 38, of Orange Village, was the key defendant in this mortgage fraud scam that started with seven other defendants, said Ryan Miday, spokesman for Mason.

"She acted as an appraiser and deal maker, and she fraudulently submitted an inflated
appraisal of the property," Miday said in a statement. "An expert testified for the prosecutor's
office that Ivy's appraisal of $165,000 was inflated by at least $30,000, that she failed to disclose known violations, and that she failed to disclose that she and her father and their rehab company got money at closing to repair the house."

In her deal making role, Ivy was also found guilty of deceiving the lender to make a $132,000 loan by submitting false documents, including a bogus $165,000 purchase agreement, which was needed in order to match the bogus appraisal to obtain a larger loan for the buyer. The actual purchase price was $90,000 with the buyer to fix all of the housing violations.

Also, Lavon Ivy and her father, John Ivy, 70, of Orange Village, deceived Kenneth Oneal, 51, of Warrensville Heights. At the loan closing, they diverted money that was to be used to rehab this Oakwood house from O'Neal to themselves. Although a victim of this deception,
Oneal falsified his loan application when he relied on Lavon Ivy to take care of the financing documents.

As a result, he accepted a plea because he signed a false application that contained an inflated income amount and an inflated bank balance of $42,000 to ca $42,000 down payment.

The mortgage broker, Phillip Stevens, 52, of Akron, and his company, M & S Investment, fraudulently processed the loan.

After Oneal signed the purchase agreement, he contacted Lavon Ivy, a licensed mortgage broker as well as a licensed appraiser, to close the deal. Lavon fraudulently substituted Oneal's $90,000 purchase agreement for one with a purchase price of $165,000 to enable her to get a larger loan, a $132,000 loan from New Century Mortgage Company in Columbus,
which is now out of business.

In addition, she acted as the appraiser and submitted a false property appraisal, as well as assisted in submitting a false loan application and a fraudulent down payment
scheme.

Oneal and the seller, Eugene Jones, 42, of Highland Hills, signed a closing document stating that he paid $42,000 to cover the difference between the false $165,000 purchase agreement and the $132,000 loan.

But, this payment was never made because Lavon Ivy and Stevens, the mortgage broker, deceived the lender into believing the fake $42,000 down payment was made, when it was not. Like Oneal, Jones accepted a plea because of this falsification.

Both Oneal and Jones testified against the defendants.

Finally, Lavon arranged for her father's repair contracting company, PTOT Enterprise, of Pepper Pike, to receive $25,581.48 for rehab work on Oneal's house that was never completed. Oneal has not been able to move into his house because existing code violations, which were supposed to be fixed by PTOT, were never rectified. Oneal contacted Beachwood
Police Department, and a detective uncovered this series of scams during his investigation. The house fell into in foreclosure and Oneal lost the house.

.

[JackRiddler]

http://money.cnn.com/2009/02/27/news/co ... 2009022707

Feds step deeper into Citi bailout

Shift of preferred shares to common stock increases embattled bank's capital base. Stock down by nearly a third in volatile trading.

By Chris Isidore, CNNMoney.com senior writer
Last Updated: February 27, 2009: 5:13 PM ET

AMERICA'S MONEY CRISIS
Regulators shutter 2 more banks
Mortgage deductions: Wealthy on the losing end
Louisiana bank is first to return TARP funds
GE slashes dividend by two-thirds
In one town, recession helps bridge cultural rift
Banks hit the treadmill

More Videos
Obama's budget: The fine print

NEW YORK (CNNMoney.com) -- The U.S. government waded deeper into the bailout of one of the nation's largest banks Friday when it announced a deal that will give it control over as much as 36% of Citigroup's common stock.

Citigroup shares plunged about a third in midday trading on the news.

The deal will convert preferred shares that the Treasury Department already holds in Citigroup for common shares, a shift that is designed to improve the embattled bank's capital base, which in turn will hopefully allow it to increase its lending.

The U.S. government has already given Citigroup $45 billion in capital, for which it received preferred shares and warrants in the company.

The new deal Friday did not give the bank any additional taxpayer dollars. But the government is taking on a greater risk by assuming more volatile common shares. The market price is well below the $3.25 per-share conversion price the government is paying.

Taxpayers will also lose roughly $2 billion in dividends, because the preferred shares they are giving up paid 8% dividends. Citi suspended its common stock dividend as part of the agreement.

The Treasury is trying to prop-up one of the nation's largest banks as a key part of its efforts of fixing the battered banking system.

For Citigroup, the conversion is important because it increases the bank's tangible common equity, making an improvement in the bank's troubled balance sheet.
Terms of the deal

In the deal, Treasury will convert up to $25 billion of preferred shares, matching dollars that Citigroup is able to bring in from other investors, such as sovereign wealth funds.

It will virtually force those other preferred share investors to convert to common shares by eliminating most preferred dividends as well, although the government will continue to get an 8% dividend on the $20 billion in preferred shares it is not converting.

Friday's move could very well be the first of similar actions taken by the federal government going forward. The Treasury Department said in its rescue plan, unveiled this week, that any major bank that comes up short in the so-called "stress tests" now being conducted will be required to raise more capital, and that may be accomplished by converting the preferred shares that Treasury now holds in each of the institutions.

The $20 billion of preferred shares Treasury will have left in Citi could also be converted if Treasury determines more assistance is needed, although company officials argued Friday this move puts it in the strongest capital and tangible common equity position among major banks.

But the move will reduce the stake that existing shareholders hold in the bank to as little as 26%. New common share investors, including other current preferred shareholders now expected to convert their shares to common, will own the remaining stake -- which could be as much as 38%.

Shares of Citigroup, a component of the Dow Jones industrial average, have plunged about 90% in the past year even before Friday's slide. Still, the bank hopes that the move will eventually help rebuild its battered share price.

In a call with investors, Citi Chief Executive Vikram Pandit said the decision was difficult because of what it would do to current investors, but that the bank had little choice.

"In the end, our business is about confidence," he said. "We wanted to take definitive steps to put all capital issues aside."

Analysts questioned Pandit as to who would be calling shots at the bank going forward.

"Will Citigroup be run for the shareholders, or is Citigroup going to be run for public policy goals or some other purpose?" asked Michael Mayo of Deutsche Bank.

Pandit insisted that Citi management would continue to be in charge -- not the government or regulators -- and that decisions would be made to maximize profits and shareholder return, rather than public policy agenda.

"For those people who have a concern about nationalization, this should put those concerns to rest," Pandit said. "We're going to run Citi for the shareholders."

Many industry observers have argued that a 36% government stake is the equivalent of nationalizing Citigroup.

"This begs the question of nationalization," said Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, at a hearing this week, as discussions of this kind of government stock swap swirled around both Wall Street and Washington. "If you had 40% working control, you wouldn't own it, but you'd own working control."

Ned Kelly, head of global banking for Citigroup, disputed that view in an interview Friday after the announcement.

"The term of nationalization covers a multitude of sins," he said. "But the common equity has not been wiped out. There is no change in management. There are no operational restrictions."

Under the deal, a majority of Citigroup's independent directors will be replaced. Pandit and Chairman Richard Parsons will retain their positions.

Pandit tried to ensure investors that the deal is being structured in a way that allows it to retain its current stakes in foreign banks, such as Grupo Financiero Banamex, the No. 2 bank in Mexico. Some countries, such as Mexico, prohibit ownership of banks by companies controlled by foreign governments.

The Federal Deposit Insurance Corp. considers a bank to be critically undercapitalized if the tangible equity-to-asset ratio is 2% or less. Citi's ratio hovers around 1.5% now. Citigroup said it believed that ratio will rise to more than 4% as as result of Friday's moves.

Citi said in its statement that the agreement could increase the tangible common equity of the company from the fourth-quarter level of $29.7 billion to as much as $81 billion.

At the same time, Citigroup (C, Fortune 500) announced a pretax $9.6 billion charge in the recently completed fourth quarter, resulting in a roughly 50% increase in its 2008 loss.

The charge was to write down the value of the goodwill carried on its balance sheet for some key business units. It came to $8.7 billion on an after-tax basis. The company said that will result in a full-year loss of $27.7 billion, up from the previously reported $18.7 billion.

Corporate goodwill is the value of a company operation carried on balance sheet beyond what can be attributed to its strict financial operations, placing a value on such intangible items as the company's name, reputation and its customer relations.

The charge will not result in any cash drain for the company or reduce its tangible common equity. It is an accounting procedure that wipes out the goodwill of Citigroup's consumer banking operations in North America, Latin America and other key overseas markets.

When Citi announced its fourth-quarter results last month, it said it was continuing to review its goodwill to determine whether an impairment had occurred.

Citi's Kelly said the charge announced Friday is simply an accounting procedure required by the sharp loss in market value of the company's stock, not by damage to its brand caused by the drumbeat of bad news over the last year.

"We do not think it's been permanently damaged. We still have a very strong brand globally," he said. "Clearly when you're in the spotlight, there's going to be some negative impact. But it's had no economic impact."
First Published: February 27, 2009: 7:11 AM ET

Brand is such a great replacement for any chance of solvency on your balance sheets!

Meanwhile, another interesting sign:

http://money.cnn.com/2009/02/27/news/co ... /index.htm

Louisiana bank is first to return TARP funds

Iberiabank Corp., which received $90 million in December, says recent changes to the program would leave it disadvantaged if it kept the money.

By Kenneth Musante, CNNMoney.com staff writer
Last Updated: February 27, 2009: 6:33 PM ET


NEW YORK (CNNMoney.com) -- Iberiabank Corp. became the first bank to pull out of the government's bailout program Friday, saying it would be returning the $90 million it received from the government in early December under the Troubled Asset Relief Program.

The Lafayette, La., bank said it will buy back the 90,000 class A shares held by the Treasury, plus a pro-rated dividend accrual of $575,000. That will make Iberiabank the first institution to return TARP funds, according to a Treasury spokesman.

TARP has helped provide stability to the banking system overall but recent changes would put IBERIA (IBKC) at a disadvantage, said Daryl Byrd, the bank's chief executive.

"We believe recent actions, interpretations, and commentary regarding various aspects of the program places our company at an unacceptable competitive disadvantage," said Byrd in a statement.

Due to highly publicized losses at larger institutions such as Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500), Congress has tightened restrictions on recipients of TARP funding, noted Andy Stapp, senior analyst with investment research firm B. Riley & Co.

"A lot of these small-cap banks remain profitable, and it just doesn't make much sense for the government to try to dictate the way they should operate their business," said Stapp, adding "I think you'll see more banks returning TARP money."

Earlier this week several congressmen, including Sen. John Kerry, D-Mass., expressed outrage at Chicago-based Northern Trust (NTRS, Fortune 500), a relatively unscathed bank which received $1.6 billion through the TARP program in November, for throwing a lavish party for clients at a golf tournament.

"Absolutely, some banks regret taking TARP. The enormous amount of mistrust the government has created in banks is something we've never seen," Chris Kelly, head of capital markets at law firm Jones Day, told CNNMoney.com when discussing Northern Trust earlier this week.

Since TARP was enacted in October, 442 regional institutions in 48 states and Puerto Rico have received nearly $200 billion.
First Published: February 27, 2009: 3:16 PM ET

.

[JackRiddler]

http://uk.reuters.com/article/businessN ... Q720090228

Looks very big to me - on the heels of Clinton's pitch to buy Treasuries last week, here comes Buffett to say they're a lousy investment due to the historic low interest rates. (So far all the war/stimulus/bailout trillion-dollar deficits have at least been at 1% or less!)

And he joins the ranks of the inflationists.

!!!

Buffett says U.S. Treasury bubble one for the ages
Sat Feb 28, 2009 9:31pm GMT


By Jonathan Stempel

NEW YORK (Reuters) - Warren Buffett, whose Berkshire Hathaway Inc (BRKa.N) (BRKb.N) sits on $25.54 billion (17.8 billion pounds) of cash, said worried investors are making a costly mistake by buying up U.S. Treasuries that yield almost nothing.

In his widely read annual letter to Berkshire shareholders, the man many consider the world's most revered investor said investors are engulfed by a "paralyzing fear" stemming from the credit crisis and falling housing and stock prices. Treasury prices have benefited as investors flocked to the perceived safety of the "triple-A" rated debt.

But Buffett said that with the U.S. Federal Reserve and Treasury Department going "all in" to jump-start an economy shrinking at the fastest pace since 1982, "once-unthinkable dosages" of stimulus will likely spur an "onslaught" of inflation, an enemy of fixed-income investors.

"The investment world has gone from underpricing risk to overpricing it," Buffett wrote. "Cash is earning close to nothing and will surely find its purchasing power eroded over time."

"When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s," he went on. "But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

DISMAY OVER MORTGAGE PRACTICES

Investors' flight to quality followed years of excessive borrowing, especially in housing, and Buffett used his letter to make plain his dismay with a variety of mortgage lenders.

He said many ignored Lending 101 by not checking customers' ability to pay off home loans, or foisting "teaser" rates that reset to higher unaffordable levels.

In contrast, Buffett said, Berkshire's manufactured housing unit Clayton Homes had a 3.6 percent foreclosure rate at year end on loans it made, up from 2.9 percent in 2006, though more than one in three borrowers had "subprime" credit scores. The unit was profitable in 2008, earning $206 million before taxes, though earnings fell 61 percent, Berkshire said.

"The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability," Buffett wrote. "Home purchases should involve an honest-to-God down payment of at least 10 percent and monthly payments that can be comfortably handled by the borrower's income. That income should be carefully verified."

INVESTMENT YAWNS

Omaha, Nebraska-based Berkshire reduced its cash stake from $44.33 billion a year earlier largely by investing in preferred, convertible and fixed-income securities yielding 10 percent or more, and issued by familiar companies including General Electric Co (GE.N) and Goldman Sachs Group Inc (GS.N).

Still, Buffett has said he would be comfortable taking Berkshire's cash stake down to $10 billion.

"It is curious how dismissive he is about cash, and yet Berkshire has a large cash position," said Bill Bergman, a senior equity analyst at Morningstar Inc. "The Berkshire enterprise is attractive in part because of the large cash positions. So maybe Buffett's prescriptions for the rest of us don't apply as generally to Berkshire."

Indeed, Buffett said that to fund new investments, he sold parts of some equity holdings he wanted to keep -- among them, oil company ConocoPhillips (COP.N), drug company Johnson & Johnson (JNJ.N) and consumer products company Procter & Gamble Co (PG.N).

Buffett said he "will not trade even a night's sleep for the chance of extra profits," and wanted Berkshire to have more than ample cash.

He also cautioned Treasury investors not to feel "smug" when they see commentators endorsing their investments.

"Beware the investment activity that produces applause," Buffett wrote, "the great moves are usually greeted by yawns."

(Editing by Mohammad Zargham)


© Thomson Reuters 2009 All rights reserved.

[jingofever]

Rick Santelli’s Planted Rant ? Playboy has the goods.

[JackRiddler]

.

Thanks, jingofever!

http://www.ritholtz.com/blog/2009/02/ri ... faux-rant/

Rick Santelli’s Planted Rant ?

By Barry Ritholtz - February 28th, 2009, 5:47PM

I was interviewed by several journalists last week about Rick Santelli’s Rant — my exact quote was it had a “Faux” feel to it. (I haven’t seen it in print yet)

What was so odd about this was that Santelli is usually on the ball; we usually agree more often than we disagree. He’s been repsosible for some of the best moments on Squawk Box.

But his rant somehow felt wrong. After we’ve pissed through over $7 trillion dollars in Federal bailouts to banks, brokers, automakers, insurers, etc., this was a pittance, the least offensive of all the vast sums of wasted money spent on “losers” to use Santelli’s phrase. It seemed like a whole lot of noise over “just” $75 billion, or 1% of the rest of the total ne’er-do-well bailout monies.

It turns out that there may be more to the story then originally met the eye, according to (yes, really) Playboy magazine.

Excerpt:

“How did a minor-league TV figure, whose contract with CNBC is due this summer, get so quickly launched into a nationwide rightwing blog sensation? Why were there so many sites and organizations online and live within minutes or hours after his rant, leading to a nationwide protest just a week after his rant?

What hasn’t been reported until now is evidence linking Santelli’s “tea party” rant with some very familiar names in the Republican rightwing machine, from PR operatives who specialize in imitation-grassroots PR campaigns (called “astroturfing”) to bigwig politicians and notorious billionaire funders. As veteran Russia reporters, both of us spent years watching the Kremlin use fake grassroots movements to influence and control the political landscape. To us, the uncanny speed and direction the movement took and the players involved in promoting it had a strangely forced quality to it. If it seemed scripted, that’s because it was.

What we discovered is that Santelli’s “rant” was not at all spontaneous as his alleged fans claim, but rather it was a carefully-planned trigger for the anti-Obama campaign. In PR terms, his February 19th call for a “Chicago Tea Party” was the launch event of a carefully organized and sophisticated PR campaign, one in which Santelli served as a frontman, using the CNBC airwaves for publicity, for the some of the craziest and sleaziest rightwing oligarch clans this country has ever produced. Namely, the Koch family, the multibilllionaire owners of the largest private corporation in America, and funders of scores of rightwing thinktanks and advocacy groups, from the Cato Institute and Reason Magazine to FreedomWorks. The scion of the Koch family, Fred Koch, was a co-founder of the notorious extremist-rightwing John Birch Society.”

What is Playboy’s evidence of this?

“Within hours of Santelli’s rant, a website called ChicagoTeaParty.com sprang to life. Essentially inactive until that day, it now featured a YouTube video of Santelli’s “tea party” rant and billed itself as the official home of the Chicago Tea Party. The domain was registered in August, 2008 by Zack Christenson, a dweeby Twitter Republican and producer for a popular Chicago rightwing radio host Milt Rosenberg—a familiar name to Obama campaign people. Last August, Rosenberg, who looks like Martin Short’s Irving Cohen character, caused an outcry when he interviewed Stanley Kurtz, the conservative writer who first “exposed” a personal link between Obama and former Weather Undergound leader Bill Ayers. As a result of Rosenberg’s radio interview, the Ayers story was given a major push through the Republican media echo chamber, culminating in Sarah Palin’s accusation that Obama was “palling around with terrorists.” That Rosenberg’s producer owns the “chicagoteaparty.com” site is already weird—but what’s even stranger is that he first bought the domain last August, right around the time of Rosenburg’s launch of the “Obama is a terrorist” campaign. It’s as if they held this “Chicago tea party” campaign in reserve, like a sleeper-site. Which is exactly what it was.

This looks like more than a coincidence. This is now a very serious charge.

I have no insight as to whether this is true or not — but it certainly deserves a serious response from both Santelli and CNBC. If its false, then they should say so, and demand an apology from Playboy.

But if any of it is true, well then, Santelli may have to fall on his sword, and CNBC may owe the public an apology.

I am VERY curious if there is any truth to this.

>

Previously:
Santelli vs Cramer (January 2008)
http://www.ritholtz.com/blog/2008/01/sa ... vs-cramer/

Rick Santelli Strikes Again (September 2008)
http://www.ritholtz.com/blog/2008/09/ri ... kes-again/

Source:
Backstabber: Is Rick Santelli High On Koch?
Mark Ames and Yasha Levine
Playboy, 02.27.09 1:40 PM CST
http://www.playboy.com/blog/2009/02/backstabber.html


From the February 19 edition of CNBC’s Squawk Box:

REBECCA QUICK (co-anchor): We want to get to our task force right now. Rick Santelli and Jason Roney of Sharmac Capital are standing by at the CME Group in Chicago, and Rick, have you been listening to this conversation?

SANTELLI: Listening to it? I’ve been just glued to it because Mr. Ross has nailed it. You know, the government is promoting bad behavior. Because we certainly don’t want to put stimulus forth and give people a whopping $8 or $10 in their check and think that they ought to save it, and in terms of modifications — I’ll tell you what, I have an idea.

You know, the new administration’s big on computers and technology. How about this, president and new administration? Why don’t you put up a website to have people vote on the Internet as a referendum to see if we really want to subsidize the losers’ mortgages; or would we like to at least buy cars and buy houses in foreclosure and give them to people that might have a chance to actually prosper down the road, and reward people that could carry the water instead of drink the water?

JOE KERNEN (co-anchor): Hey, Rick, did –

TRADER: That’s a novel idea.

KERNEN: Hey, Rick, did you — oh, boy. They’re like putty — they’re like putty in your hands. Did you hear –

SANTELLI: No they’re not, Joe. They’re not like putty in our hands. This is America. How many of you people want to pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills? Raise their hand.

President Obama, are you listening?

TRADER: How about we all stop paying our mortgage? It’s a moral hazard.

KERNEN: This is like mob rule here. I’m getting scared. I’m glad I’m — I’m glad I’m –

CARL QUINTANILLA (co-anchor): Get some bricks and bats –

SANTELLI: Don’t get scared, Joe. They’re already scaring you. You know, Cuba used to have mansions and a relatively decent economy. They moved from the individual to collective. Now, they’re driving ‘54 Chevys, maybe the last great car to come out of Detroit.

KERNEN: They’re driving them on water, too, which is a little strange to watch –

SANTELLI: There you go.

KERNEN: Hey, Rick, how about the notion that — Wilbur pointed out you can go down to 2 percent on the mortgage –

SANTELLI: You could go down to minus-2 percent. They can’t afford the house.

KERNEN: — and still have 40 percent — and still have 40 percent not be able to do it. So why are they in the house? Why are we trying to keep them in the house?

SANTELLI: I know Mr. Summers is a great economist, but boy, I’d love the answer to that one.

QUICK: Wow.

KERNEN: Jason –

QUICK: [unintelligible] you get people fired up.

KERNEN: Jason, you wanna –

SANTELLI: We’re thinking of having a Chicago tea party in July. All you capitalists that want to show up to Lake Michigan, I’m gonna start organizing.

QUICK: What are you dumping in — what are you dumping in this time? Housing? Cars?

SANTELLI: We’re going to be dumping in some derivative securities. What do you think about that?

QUINTANILLA: Mayor Daley is marshalling the police right now.

KERNEN: Rabble-rouser.

QUINTANILLA: The National Guard.

KERNEN: Jason, are you nearby? Can you hear the cheering over –

RONEY: I am, but I don’t have the gallery directly behind me, so it’s going to be tough to follow that act for sure.

KERNEN: Yeah, exactly. You agree?

RONEY: I’ll have to run down to the pit. Well, clearly, we’re going to debate the moral issues of what government is and is not doing for some years to come. I mean — it’s apparent, even for traders it’s — the market gaps up and down a significant amount each day just on what one government may or may not do. We’re up 10 points or so on the S&P on the idea that core Europe may have some bank stability plans, so — the traders market, the uncertainty of the market will continue until we get through this process of weekly government plans.

QUINTANILLA: You know, Rick, one of our producers says if Roland Burris steps down, man, Senator Santelli, the junior senator from Illinois. It’s a possibility. I’m just saying –

SANTELLI: Do you think I want to take a shower every hour? The last place I’m ever gonna live or work is D.C.

KERNEN: Have you raised any money for Blago?

SANTELLI: No, but I think that somebody’s gonna have to start raising money for us.

QUICK: Hey, Rick? Can you do that one more time, just get the mob behind you again? I love –

QUINATILLA: Have the camera pull way out.

QUICK: Yeah, pull way out. Everybody listen to Rick Santelli.

KERNEN: You can’t — I don’t think — you can’t just do it at will, can you, Rick? I mean, you have to say something.

QUICK: Yeah, do it at will. Let’s see.

SANTELLI: Listen, all’s I know is, is that there’s only about 5 percent of the floor population here right now, and I talk loud enough they can all hear me. So if you want to ask ‘em anything, let me know. These guys are pretty straightforward, and my guess is, a pretty good statistical cross-section of America, the silent majority.

QUICK: Not-so-silent majority today. So Rick, are they opposed to the housing thing, to the stimulus package, to everything out there?

SANTELLI: You know, they’re pretty much of the notion that you can’t buy your way into prosperity, and if the multiplier that all of these Washington economists are selling us is over 1, then we never have to worry about the economy again. The government should spend a trillion dollars an hour because we’ll get 1.5 trillion back.

QUICK: Wilbur?

WILBUR ROSS (chairman, W.L. Ross & Co.): Rick, I congratulate you on your new incarnation as a revolutionary leader.

SANTELLI: Somebody needs one. I’ll tell you what, if you read our Founding Fathers, people like Benjamin Franklin and Jefferson, what we’re doing in this country now is making them roll over in their graves.


65 Responses to “Rick Santelli’s Planted Rant ?”

ottovbvs Says:
February 28th, 2009 at 6:04 pm
If there’s any truth in it, then it’s definitely sword time….it wouldn’t surprise me.

TrickStyle Says:
February 28th, 2009 at 6:11 pm
Rick was a Swift Boat Veteran for justice wasn’t he?
This is trashy stuff.

.

[JackRiddler]

[JackRiddler]

.

And now the next AIG round coming Monday. If anyone else is still in this thread, hope you don't mind the pile-on, the end-game stories just keep coming.

http://www.nytimes.com/2009/02/28/busin ... wanted=all

Talking Business
[AIG] Propping Up a House of Cards

By JOE NOCERA
Published: February 27, 2009

Next week, perhaps as early as Monday, the American International Group is going to report the largest quarterly loss in history. Rumors suggest it will be around $60 billion, which will affirm, yet again, A.I.G.’s sorry status as the most crippled of all the nation’s wounded financial institutions. The recent quarterly losses suffered by Merrill Lynch and Citigroup — “only” $15.4 billion and $8.3 billion, respectively — pale by comparison.

At the same time A.I.G. reveals its loss, the federal government is also likely to announce — yet again! — a new plan to save A.I.G., the third since September. So far the government has thrown $150 billion at the company, in loans, investments and equity injections, to keep it afloat. It has softened the terms it set for the original $85 billion loan it made back in September. To ease the pressure even more, the Federal Reserve actually runs a facility that buys toxic assets that A.I.G. had insured. A.I.G. effectively has been nationalized, with the government owning a hair under 80 percent of the stock. Not that it’s worth very much; A.I.G. shares closed Friday at 42 cents.

Donn Vickrey, who runs the independent research firm Gradient Analytics, predicts that A.I.G. is going to cost taxpayers at least $100 billion more before it finally stabilizes, by which time the company will almost surely have been broken into pieces, with the government owning large chunks of it. A quarter of a trillion dollars, if it comes to that, is an astounding amount of money to hand over to one company to prevent it from going bust. Yet the government feels it has no choice: because of A.I.G.’s dubious business practices during the housing bubble it pretty much has the world’s financial system by the throat.

If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.

I don’t doubt this bit of conventional wisdom; after the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk? But that doesn’t mean we should feel resigned about what is happening at A.I.G. In fact, we should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin.

“They were the worst of them all,” said Frank Partnoy, a law professor at the University of San Diego and a derivatives expert. Mr. Vickrey of Gradient Analytics said, “It was extreme hubris, fueled by greed.” Other firms used many of the same shady techniques as A.I.G., but none did them on such a broad scale and with such utter recklessness. And yet — and this is the part that should make your blood boil — the company is being kept alive precisely because it behaved so badly.

•

When you start asking around about how A.I.G. made money during the housing bubble, you hear the same two phrases again and again: “regulatory arbitrage” and “ratings arbitrage.” The word “arbitrage” usually means taking advantage of a price differential between two securities — a bond and stock of the same company, for instance — that are related in some way. When the word is used to describe A.I.G.’s actions, however, it means something entirely different. It means taking advantage of a loophole in the rules. A less polite but perhaps more accurate term would be “scam.”

As a huge multinational insurance company, with a storied history and a reputation for being extremely well run, A.I.G. had one of the most precious prizes in all of business: an AAA rating, held by no more than a dozen or so companies in the United States. That meant ratings agencies believed its chance of defaulting was just about zero. It also meant it could borrow more cheaply than other companies with lower ratings.

To be sure, most of A.I.G. operated the way it always had, like a normal, regulated insurance company. (Its insurance divisions remain profitable today.) But one division, its “financial practices” unit in London, was filled with go-go financial wizards who devised new and clever ways of taking advantage of Wall Street’s insatiable appetite for mortgage-backed securities. Unlike many of the Wall Street investment banks, A.I.G. didn’t specialize in pooling subprime mortgages into securities. Instead, it sold credit-default swaps.

These exotic instruments acted as a form of insurance for the securities. In effect, A.I.G. was saying if, by some remote chance (ha!) those mortgage-backed securities suffered losses, the company would be on the hook for the losses. And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, suddenly they had AAA ratings too. That was the ratings arbitrage. “It was a way to exploit the triple A rating,” said Robert J. Arvanitis, a former A.I.G. executive who has since become a leading A.I.G. critic.

Why would Wall Street and the banks go for this? Because it shifted the risk of default from themselves to A.I.G., and the AAA rating made the securities much easier to market. What was in it for A.I.G.? Lucrative fees, naturally. But it also saw the fees as risk-free money; surely it would never have to actually pay up. Like everyone else on Wall Street, A.I.G. operated on the belief that the underlying assets — housing — could only go up in price.

That foolhardy belief, in turn, led A.I.G. to commit several other stupid mistakes. When a company insures against, say, floods or earthquakes, it has to put money in reserve in case a flood happens. That’s why, as a rule, insurance companies are usually overcapitalized, with low debt ratios. But because credit-default swaps were not regulated, and were not even categorized as a traditional insurance product, A.I.G. didn’t have to put anything aside for losses. And it didn’t. Its leverage was more akin to an investment bank than an insurance company. So when housing prices started falling, and losses started piling up, it had no way to pay them off. Not understanding the real risk, the company grievously mispriced it.

Second, in many of its derivative contracts, A.I.G. included a provision that has since come back to haunt it. It agreed to something called “collateral triggers,” meaning that if certain events took place, like a ratings downgrade for either A.I.G. or the securities it was insuring, it would have to put up collateral against those securities. Again, the reasons it agreed to the collateral triggers was pure greed: it could get higher fees by including them. And again, it assumed that the triggers would never actually kick in and the provisions were therefore meaningless. Those collateral triggers have since cost A.I.G. many, many billions of dollars. Or, rather, they’ve cost American taxpayers billions.

The regulatory arbitrage was even seamier. A huge part of the company’s credit-default swap business was devised, quite simply, to allow banks to make their balance sheets look safer than they really were. Under a misguided set of international rules that took hold toward the end of the 1990s, banks were allowed use their own internal risk measurements to set their capital requirements. The less risky the assets, obviously, the lower the regulatory capital requirement.

Now it gets really crazy...

How did banks get their risk measures low? It certainly wasn’t by owning less risky assets. Instead, they simply bought A.I.G.’s credit-default swaps. The swaps meant that the risk of loss was transferred to A.I.G., and the collateral triggers made the bank portfolios look absolutely risk-free. Which meant minimal capital requirements, which the banks all wanted so they could increase their leverage and buy yet more “risk-free” assets. This practice became especially rampant in Europe. That lack of capital is one of the reasons the European banks have been in such trouble since the crisis began.

•

At its peak, the A.I.G. credit-default business had a “notional value” of $450 billion, and as recently as September, it was still over $300 billion. (Notional value is the amount A.I.G. would owe if every one of its bets went to zero.) And unlike most Wall Street firms, it didn’t hedge its credit-default swaps; it bore the risk, which is what insurance companies do.

It’s not as if this was some Enron-esque secret, either. Everybody knew the capital requirements were being gamed, including the regulators. Indeed, A.I.G. openly labeled that part of the business as “regulatory capital.” That is how they, and their customers, thought of it.

There’s more, believe it or not. A.I.G. sold something called 2a-7 puts, which allowed money market funds to invest in risky bonds even though they are supposed to be holding only the safest commercial paper. How could they do this? A.I.G. agreed to buy back the bonds if they went bad. (Incredibly, the Securities and Exchange Commission went along with this.)

Not so incredible at this point, of course.

A.I.G. had a securities lending program, in which it would lend securities to investors, like short-sellers, in return for cash collateral. What did it do with the money it received? Incredibly, it bought mortgage-backed securities. When the firms wanted their collateral back, it had sunk in value, thanks to A.I.G.’s foolish investment strategy. The practice has cost A.I.G. — oops, I mean American taxpayers — billions.

Here’s what is most infuriating: Here we are now, fully aware of how these scams worked. Yet for all practical purposes, the government has to keep them going. Indeed, that may be the single most important reason it can’t let A.I.G. fail. If the company defaulted, hundreds of billions of dollars’ worth of credit-default swaps would “blow up,” and all those European banks whose toxic assets are supposedly insured by A.I.G. would suddenly be sitting on immense losses. Their already shaky capital structures would be destroyed. A.I.G. helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing. It would be funny if it weren’t so awful.

I asked Mr. Arvanitis, the former A.I.G. executive, if the company viewed what it had done during the bubble as a form of gaming the system. “Oh no,” he said, “they never thought of it as abuse. They thought of themselves as satisfying their customers.”

That’s either a remarkable example of the power of rationalization, or they were lying to themselves, figuring that when the house of cards finally fell, somebody else would have to clean it up.

That would be us, the taxpayers.


A version of this article appeared in print on February 28, 2009, on page B1 of the New York edition.

SLAD found this structure of AIG somewhere, must be from Sept. 2008 based on the caption.



.

[JackRiddler]

http://www.nytimes.com/aponline/2009/03 ... it.html?hp

EU Insists Eastern Europe Doesn't Want Bailout

By THE ASSOCIATED PRESS
Published: March 1, 2009

Filed at 12:49 p.m. ET

BRUSSELS (AP) -- German Chancellor Angela Merkel and other EU leaders flatly rejected a new multibillion euro (dollar) bailout for eastern Europe on Sunday, suggesting that additional aid be given to struggling nations only on a case-by-case basis.

That stance came even as Hungarian Prime Minister Ferenc Gyurcsany warned that the global credit crunch was creating a widening economic chasm in the 27-nation bloc.

Pointing out that the credit crunch was hitting eastern members hardest, Gyurcsany had called for an EU fund of up to euro190 billion ($241 billion) to help restore trust and solvency in those nations.

''We should not allow that a new Iron Curtain should be set up and divide Europe,'' Gyurcsany told reporters.

His plan was quickly shot down by Germany and others, balking at the costs involved. Germany had been under rising pressure to take the lead in rescuing eastern EU members, but Merkel insisted that a one-size-fits-all bailout was unwise.

''Saying that the situation is the same for all central and eastern European states, I don't see that,'' said Merkel, adding ''you cannot compare'' the dire situation in Hungary with that of other countries.

EU Commission President Jose Manuel Barroso said eastern European countries were already getting billions in emergency rescue funds from the EU, the World Bank and other financial institutions and did not need a sweeping new bailout plan.

He said the EU has worked with others to provide some euro25 billion to countries in need.

Czech Prime Minister Mirek Topolanek, who chaired Sunday's talks said however, the EU would not leave any nation ''in the lurch.''

EU nations agreed that governments should make sure that bailouts for banks or car makers should not be protectionist or hurt the economies of other members in the bloc.

Some leaders also called on the bloc to consider making it easier for EU nations to join the euro currency, which has so far proved a stable financial anchor in turbulent markets.

French President Nicolas Sarkozy said EU could look at reviewing stringent entry criteria for joining the now 16-nation euro-zone. Polish officials and other eastern EU countries have suggested the EU should consider fast-tracking applicants to join the euro.

[JackRiddler]

.

http://www.chicagotribune.com/news/nati ... 5392.story

Detroit's outlook falls along with home prices
Motor City on the brink of bankruptcy, but still 15 people want to be mayor
By Tim Jones | Tribune correspondent
January 29, 2009

DETROIT — It may be tough to get financing for a new car these days, but in Detroit you can buy a house with a credit card.

The median price of a home sold in Detroit in December was $7,500, according to Realcomp, a listing service.

Not $75,000. Remove a zero—it's seven thousand five hundred dollars, substantially less than the lowest-price car on the new-car market.

Among the many dispiriting numbers that bleakly depict the decrepitude of this onetime industrial behemoth, the steep slide of housing values helps define the daunting challenge to anyone who wants to lead this shrinking, poverty-pocked city of about 800,000 people.

"We're always fighting ourselves out of a hole," said Wayne County Sheriff Warren Evans.

Despite the depth of the hole, Evans is running for mayor. In fact, he is one of 15 people who have raised their hands to be mayor of Detroit and fill the remaining months in office of the former mayor who now wears a green jumpsuit and resides in Evans' spartan house of justice, the Wayne County Jail.

Detroit has long been the snide remark and punch line to derogatory urban humor, and the conviction last fall of two-term Mayor Kwame Kilpatrick for lying about an extramarital affair with his chief of staff reinforced suspicions that Detroit is beyond help, let alone self-governance. But as the domestic auto industry, the city's principal private-sector employer and founding corporate father, seeks a financial bailout from Washington, formerly whispered remarks about the prospect of the nation's 11th-largest city being the first major American city to go bankrupt are now publicly discussed.

If the Obama administration is looking for a city to test new ideas for chronic urban problems, it can look to Detroit, a northern New Orleans without the French Quarter. While bedrock poverty in the Crescent City was violently laid bare by Hurricane Katrina in 2005, Detroit has been quietly slipping into social and economic crisis for 40 years. One-third of the population lives in poverty, and almost 50 percent of children are in poverty, according to data from the Detroit-Area Community Indicators System. Median household income has dropped 24 percent since 2000, according to the Census Bureau.

New York bond-rating houses this month lowered the city's bond rating to junk status, a lowly assessment shared by New Orleans and few others.

Whereupon their offices were raided and executives placed under arrest without bail for their many years of crimes of terror against nations and municipalities in the service of globalist-capitalist ideology, and their pivotal role in abetting the US financial sector (conventionally known as "Wall Street") in defrauding investors and taxpayers out of literally trillions of dollars.

I wish. But seriously, why are these proven serial killers still on the loose, when everyone knows exactly that they, more than anyone other than perhaps Fed, Treasury and SEC, were the ground-zero perpetrators of the credit crisis?

On a positive note, Detroit's homicide rate dropped 14 percent last year. That prompted mayoral candidate Stanley Christmas to tell the Detroit News recently, "I don't mean to be sarcastic, but there just isn't anyone left to kill."

Detroit voters will choose two candidates in a Feb. 24 primary who will face off in May. In the meantime, the city faces a projected budget deficit of at least $300 million, with no clear view on how to erase it. "If we don't get it right, we could be headed for a state takeover or receivership," warned Dave Bing, a mayoral candidate best known for draining jump shots for the Detroit Pistons back in the 1960s and '70s. At 64, Bing, a successful businessman, is running as the candidate of integrity in a city that, under Kilpatrick, had little.

Mayor Ken Cockrel Jr., who assumed the mayor's office by virtue of his being president of the City Council, promised he is "not going to let [receivership] happen."

Detroit, which has lost half its population in the past 50 years, is deceptively large, covering 139 square miles. Manhattan, San Francisco and Boston could, as a group, fit inside the city's boundaries. There is no major grocery chain in the city, and only two movie theaters. Much of the neighborhood economy revolves around rib joints, hot dog stands and liquor stores. The candidates travel around this sprawling city, some invoking the nostalgic era of Big Three dominance and vowing that Detroit can be great again.

Groups of them attend nearly unworkable faux debate forums about how they will solve the city's troubles, with responses to last no more than 60 seconds. Given the complexity of problems that defy sound-bite answers, their proposed solutions range from the predictable to the wacky:

More cops on the street.

Make high school graduation mandatory.

Grow your own food.

Bulldoze large stretches of the city and turn them into wind farms.

Procreate like there's no tomorrow.

Kilpatrick's election in 2001 lured Henry Hassan back to Detroit from Minnesota. Hassan, who opened a restaurant on the city's northwest side, said he was quickly disillusioned.

"You remember the riots in '67?" Hassan said, referring to the cataclysmic five days that left 43 dead and more than 2,000 buildings burned down. "It's a little worse than that right now. ... We need somebody to come in and care for the city more than they care for themselves."

The problem is more than a $300 million budget shortfall, said John Mogk, a professor at Wayne State University Law School.

"A thousand people are leaving the city every month," Mogk said, "and the city does not have the financial resources and the economic base to solve its own problems."

To be sure, progress has been made downtown: two new sports stadiums, a reinvigorated neighborhood around Wayne State and new lofts and casinos. But unlike Pittsburgh, which successfully reinvented itself after the decline of Big Steel, Detroit displays only islands of prosperity amid a dismal landscape. Neighborhoods have suffered, and foreclosures have aggravated the long-festering ill of abandoned homes.

"A lack of vision has held us back," said Nicholas Hood III, another mayoral candidate. "The auto industry was so dominant—too dominant—and we never prodded ourselves and the business community to a more expansive vision."

To the surprise of many in this overwhelmingly black city (82 percent), only 53 percent of registered voters turned out for November's presidential election, which featured the first African-American nominee. It wasn't long ago that a Democrat couldn't carry Michigan without a big turnout in Detroit. As it turned out, Detroit's votes didn't matter in the election.

"Detroit will never be the great industrial center again," said Kevin Boyle, a Detroit native and author of "Arc of Justice: A Saga of Race, Civil Rights and Murder in the Jazz Age."

"What will it look like?" Boyle said. "I don't know."

tmjones@tribune.com

[JackRiddler]

.

Missed this one - from Oct. 2008 - and it explains a lot. Mainly how the NYT and everyone else missed a July 2004 SEC rules change that greatly speeded up the leveraging insanity. It's part of a long NYT series I'd like to go through to see if there's more useful stuff, but I'll try not to burden any remaining readers of this monster thread with cut-pasta of all 17 articles!

http://www.nytimes.com/2008/10/03/busin ... wanted=all

The Reckoning
Agency’s ’04 Rule Let Banks Pile Up New Debt


By STEPHEN LABATON
Published: October 2, 2008

“We have a good deal of comfort about the capital cushions at these firms at the moment.” — Christopher Cox, chairman of the Securities and Exchange Commission, March 11, 2008.


As rumors swirled that Bear Stearns faced imminent collapse in early March, Christopher Cox was told by his staff that Bear Stearns had $17 billion in cash and other assets — more than enough to weather the storm.

Drained of most of its cash three days later, Bear Stearns was forced into a hastily arranged marriage with JPMorgan Chase — backed by a $29 billion taxpayer dowry.

Within six months, other lions of Wall Street would also either disappear or transform themselves to survive the financial maelstrom — Merrill Lynch sold itself to Bank of America, Lehman Brothers filed for bankruptcy protection, and Goldman Sachs and Morgan Stanley converted to commercial banks.

How could Mr. Cox have been so wrong?

Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington.

One commissioner, Harvey J. Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.

“We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.”

Mr. Goldschmid, an authority on securities law from Columbia, was a behind-the-scenes adviser in 2002 to Senator Paul S. Sarbanes when he rewrote the nation’s corporate laws after a wave of accounting scandals. “Do we feel secure if there are these drops in capital we really will have investor protection?” Mr. Goldschmid asked. A senior staff member said the commission would hire the best minds, including people with strong quantitative skills to parse the banks’ balance sheets.

Annette L. Nazareth, the head of market regulation, reassured the commission that under the new rules, the companies for the first time could be restricted by the commission from excessively risky activity. She was later appointed a commissioner and served until January 2008.

“I’m very happy to support it,” said Commissioner Roel C. Campos, a former federal prosecutor and owner of a small radio broadcasting company from Houston, who then deadpanned: “And I keep my fingers crossed for the future.”

The proceeding was sparsely attended. None of the major media outlets, including The New York Times, covered it.

After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.

With that, the five big independent investment firms were unleashed.

In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.

Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.

The 2004 decision for the first time gave the S.E.C. a window on the banks’ increasingly risky investments in mortgage-related securities.

But the agency never took true advantage of that part of the bargain. The supervisory program under Mr. Cox, who arrived at the agency a year later, was a low priority.

The commission assigned seven people to examine the parent companies — which last year controlled financial empires with combined assets of more than $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Mr. Cox more than a year and a half ago.

The few problems the examiners preliminarily uncovered about the riskiness of the firms’ investments and their increased reliance on debt — clear signs of trouble — were all but ignored.

The commission’s division of trading and markets “became aware of numerous potential red flags prior to Bear Stearns’s collapse, regarding its concentration of mortgage securities, high leverage, shortcomings of risk management in mortgage-backed securities and lack of compliance with the spirit of certain” capital standards, said an inspector general’s report issued last Friday. But the division “did not take actions to limit these risk factors.”

Drive to Deregulate

The commission’s decision effectively to outsource its oversight to the firms themselves fit squarely in the broader Washington culture of the last eight years under President Bush.

A similar closeness to industry and laissez-faire philosophy has driven a push for deregulation throughout the government, from the Consumer Product Safety Commission and the Environmental Protection Agency to worker safety and transportation agencies.

“It’s a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs,” said Roderick M. Hills, a Republican who was chairman of the S.E.C. under President Gerald R. Ford. “The problem with such voluntary programs is that, as we’ve seen throughout history, they often don’t work.”

As was the case with other agencies, the commission’s decision was motivated by industry complaints of excessive regulation at a time of growing competition from overseas. The 2004 decision was aimed at easing regulatory burdens that the European Union was about to impose on the foreign operations of United States investment banks.

The Europeans said they would agree not to regulate the foreign subsidiaries of the investment banks on one condition — that the commission regulate the parent companies, along with the brokerage units that the S.E.C. already oversaw.

A 1999 law, however, had left a gap that did not give the commission explicit oversight of the parent companies. To get around that problem, and in exchange for the relaxed capital rules, the banks volunteered to let the commission examine the books of their parent companies and subsidiaries.

The 2004 decision also reflected a faith that Wall Street’s financial interests coincided with Washington’s regulatory interests.

“We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing,” said Professor James D. Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox).

“Letting the firms police themselves made sense to me because I didn’t think the S.E.C. had the staff and wherewithal to impose its own standards and I foolishly thought the market would impose its own self-discipline. We’ve all learned a terrible lesson,” he added.

In letters to the commissioners, senior executives at the five investment banks complained about what they called unnecessary regulation and oversight by both American and European authorities. A lone voice of dissent in the 2004 proceeding came from a software consultant from Valparaiso, Ind., who said the computer models run by the firms — which the regulators would be relying on — could not anticipate moments of severe market turbulence.

“With the stroke of a pen, capital requirements are removed!” the consultant, Leonard D. Bole, wrote to the commission on Jan. 22, 2004. “Has the trading environment changed sufficiently since 1997, when the current requirements were enacted, that the commission is confident that current requirements in examples such as these can be disregarded?”

He said that similar computer standards had failed to protect Long-Term Capital Management, the hedge fund that collapsed in 1998, and could not protect companies from the market plunge of October 1987.

Mr. Bole, who earned a master’s degree in business administration at the University of Chicago, helps write computer programs that financial institutions use to meet capital requirements.

He said in a recent interview that he was never called by anyone from the commission.

“I’m a little guy in the land of giants,” he said. “I thought that the reduction in capital was rather dramatic.”

Policing Wall Street

A once-proud agency with a rich history at the intersection of Washington and Wall Street, the Securities and Exchange Commission was created during the Great Depression as part of the broader effort to restore confidence to battered investors. It was led in its formative years by heavyweight New Dealers, including James Landis and William O. Douglas. When President Franklin D. Roosevelt was asked in 1934 why he appointed Joseph P. Kennedy, a spectacularly successful stock speculator, as the agency’s first chairman, Roosevelt replied: “Set a thief to catch a thief.”

The commission’s most public role in policing Wall Street is its enforcement efforts. But critics say that in recent years it has failed to deter market problems. “It seems to me the enforcement effort in recent years has fallen short of what one Supreme Court justice once called the fear of the shotgun behind the door,” said Arthur Levitt Jr., who was S.E.C. chairman in the Clinton administration. “With this commission, the shotgun too rarely came out from behind the door.”

Christopher Cox had been a close ally of business groups in his 17 years as a House member from one of the most conservative districts in Southern California. Mr. Cox had led the effort to rewrite securities laws to make investor lawsuits harder to file. He also fought against accounting rules that would give less favorable treatment to executive stock options.

Under Mr. Cox, the commission responded to complaints by some businesses by making it more difficult for the enforcement staff to investigate and bring cases against companies. The commission has repeatedly reversed or reduced proposed settlements that companies had tentatively agreed upon. While the number of enforcement cases has risen, the number of cases involving significant players or large amounts of money has declined.

Mr. Cox dismantled a risk management office created by Mr. Donaldson that was assigned to watch for future problems. While other financial regulatory agencies criticized a blueprint by Mr. Paulson, the Treasury secretary, that proposed to reduce their stature — and that of the S.E.C. — Mr. Cox did not challenge the plan, leaving it to three former Democratic and Republican commission chairmen to complain that the blueprint would neuter the agency.

In the process, Mr. Cox has surrounded himself with conservative lawyers, economists and accountants who, before the market turmoil of recent months, had embraced a far more limited vision for the commission than many of his predecessors.

‘Stakes in the Ground’

Last Friday, the commission formally ended the 2004 program, acknowledging that it had failed to anticipate the problems at Bear Stearns and the four other major investment banks.

“The last six months have made it abundantly clear that voluntary regulation does not work,” Mr. Cox said.

The decision to shutter the program came after Mr. Cox was blamed by Senator John McCain, the Republican presidential candidate, for the crisis. Mr. McCain has demanded Mr. Cox’s resignation.

Mr. Cox has said that the 2004 program was flawed from its inception. But former officials as well as the inspector general’s report have suggested that a major reason for its failure was Mr. Cox’s use of it.

“In retrospect, the tragedy is that the 2004 rule making gave us the ability to get information that would have been critical to sensible monitoring, and yet the S.E.C. didn’t oversee well enough,” Mr. Goldschmid said in an interview. He and Mr. Donaldson left the commission in 2005.

Mr. Cox declined requests for an interview. In response to written questions, including whether he or the commission had made any mistakes over the last three years that contributed to the current crisis, he said, “There will be no shortage of retrospective analyses about what happened and what should have happened.” He said that by last March he had concluded that the monitoring program’s “metrics were inadequate.”

He said that because the commission did not have the authority to curtail the heavy borrowing at Bear Stearns and the other firms, he and the commission were powerless to stop it.

“Implementing a purely voluntary program was very difficult because the commission’s regulations shouldn’t be suggestions,” he said. “The fact these companies could withdraw from voluntary supervision at their discretion diminished the mandate of the program and weakened its effectiveness. Experience has shown that the S.E.C. could not bootstrap itself into authority it didn’t have.”

But critics say that the commission could have done more, and that the agency’s effectiveness comes from the tone set at the top by the chairman, or what Mr. Levitt, the longest-serving S.E.C. chairman in history, calls “stakes in the ground.”

“If you go back to the chairmen in recent years, you will see that each spoke about a variety of issues that were important to them,” Mr. Levitt said. “This commission placed very few stakes in the ground.”

Christopher Cox, left, chairman of the Securities and Exchange Commission, and Roel C. Campos at a House hearing in 2007. Mr. Campos was on the commission in 2004 when a decision was made to change the net capital rule for big investment banks.

Audio Slide Show
The Day the S.E.C. Changed the Game

The Reckoning
Loosening the Reins

Articles in this series are exploring the causes of the financial crisis.
Previous Articles in the Series »

Saying Yes, WaMu Built Empire on Shaky Loans
By PETER S. GOODMAN and GRETCHEN MORGENSON
Washington Mutual stands out as a singularly brazen case of lax lending in a financial landscape littered with wreckage.
December 28, 2008businessSeries


Chinese Savings Helped Inflate American Bubble
By MARK LANDLER
China, some economists say, lulled U.S. consumers and leaders into complacency about their spendthrift ways.
December 26, 2008worldSeries


Once Trusted Mortgage Pioneers, Now Scrutinized
By MICHAEL MOSS and GERALDINE FABRIKANT
Herbert and Marion Sandler, long viewed as model citizens of the mortgage industry, have been swept into the debate over who is to blame.
December 25, 2008businessSeries


White House Philosophy Stoked Mortgage Bonfire
By JO BECKER, SHERYL GAY STOLBERG and STEPHEN LABATON
President Bush, who vowed to spread the dream of homeownership, is leaving office amid a downturn rooted in the housing sector he so ardently championed.
December 21, 2008businessSeries


Tax Break May Have Helped Cause Housing Bubble
By VIKAS BAJAJ and DAVID LEONHARDT
A 1997 change that ended the capital gains tax on home sales was a new incentive to plow money into real estate.
December 19, 2008businessSeries


On Wall Street, Bonuses, Not Profits, Were Real
By LOUISE STORY
As regulators sift through the financial rubble, there are questions about the role of lavish bonuses in the debacle.
December 18, 2008businessSeries


A Champion of Wall Street Reaps Benefits
By ERIC LIPTON and RAYMOND HERNANDEZ
In Washington, Senator Charles E. Schumer is beneficiary, advocate and overseer of an industry that is his hometown’s most important business.
December 14, 2008businessSeries


Debt Watchdogs: Tamed or Caught Napping?
By GRETCHEN MORGENSON
Lured by profits during the housing boom, credit-rating agencies overlooked the risk of mortgage debt, critics say.
December 7, 2008businessSeries


Citigroup Saw No Red Flags Even as It Made Bolder Bets
By ERIC DASH and JULIE CRESWELL
Much of the damage inflicted on Citigroup was caused by errant, high-octane trading and lax oversight, critics say.
November 23, 2008businessSeries

Deregulator Looks Back, Unswayed
By ERIC LIPTON and STEPHEN LABATON
Phil Gramm pushed laws that he says unshackled businesses from restraints but critics say contributed to the financial crisis.
November 17, 2008businessSeries

How the Thundering Herd Faltered and Fell
By GRETCHEN MORGENSON
Merrill Lynch couldn’t escape the housing crash as record waves of homeowners defaulted on their mortgages.

November 9, 2008businessSeries
From Midwest to M.T.A., Pain From Global Gamble
By CHARLES DUHIGG and CARTER DOUGHERTY
Wisconsin schools and New York subways are among the players in a financial fiasco that has ricocheted globally.
November 2, 2008businessSeries

Struggling to Keep Up as the Crisis Raced On
By JOE NOCERA and EDMUND L. ANDREWS
In an interview, Treasury Secretary Henry M. Paulson Jr. said Lehman Brothers could not have been rescued.
October 23, 2008businessSeries

Building Flawed American Dreams
By DAVID STREITFELD and GRETCHEN MORGENSON
For years Henry G. Cisneros helped low-income families buy homes, part of a trend with dire consequences.
October 19, 2008businessSeries

Taking Hard New Look at a Greenspan Legacy
By PETER S. GOODMAN
Derivatives have long had a great supporter in the former Federal Reserve Chairman Alan Greenspan.
October 9, 2008businessSeries

Pressured to Take More Risk, Fannie Reached Tipping Point
By CHARLES DUHIGG
A decision, made under pressure from Congress and investors, to steer Fannie Mae into dangerous corners of the mortgage market proved to be disastrous.
October 5, 2008businessSeries

Agency’s ’04 Rule Let Banks Pile Up New Debt
By STEPHEN LABATON
A Securities and Exchange Commission decision helps explain how the financial crisis spun out of control.
October 3, 2008businessSeries

As Credit Crisis Spiraled, Alarm Led to Action
By JOE NOCERA
During a 36-hour period two weeks ago, the fissures opening in the worldwide financial system convinced policy makers that they needed to act quickly.
October 2, 2008businessSeries

Behind Insurer’s Crisis, Blind Eye to a Web of Risk
By GRETCHEN MORGENSON
An exploration of A.I.G.’s demise offers insights into the virally connected financial world that is now imploding.
September 28, 2008businessSeries

[JackRiddler]

.

Monday, 2 March 2009:

- Markets tanking, supposedly for the main part on news of German refusal to bail out Eastern Europe.

- HSBC reports troubles, looking for new line of finance; its trading suspended on HK market as Asian shares plunge; DJIA falls below 7000.

- Another $30 bn to cover AIG's reckless bad bets and basically criminal behavior, quite possibly related to HSBC, AIG credit swaps with Eastern Europe banking dominoes, or all of the above.

- Freddie Mac chair Moffat resigns after 6 months, in advance of anticipated loss announcement this week - that's more out of you, tax livestock!

- AIG, Citi break ups coming; who will end up holding which units and which assets is the game.

TEXT: Joint U.S. Treasury, Fed statement on AIG
Mon Mar 2, 2009 7:16am EST

[-] Text [+]

WASHINGTON (Reuters) - The following is a joint statement issued on Monday the Treasury and the Federal Reserve on American International Group:

The U.S. Treasury Department and the Federal Reserve Board today announced a restructuring of the government's assistance to AIG in order to stabilize this systemically important company in a manner that best protects the US taxpayer. Specifically, the government's restructuring is designed to enhance the company's capital and liquidity in order to facilitate the orderly completion of the company's global divestiture program.

The company continues to face significant challenges, driven by the rapid deterioration in certain financial markets in the last two months of the year and continued turbulence in the markets generally. The additional resources will help stabilize the company, and in doing so help to stabilize the financial system.

As significantly, the restructuring components of the government's assistance begin to separate the major non-core businesses of AIG, as well as strengthen the company's finances. The long-term solution for the company, its customers, the U.S. taxpayer, and the financial system is the orderly restructuring and refocusing of the firm. This will take time and possibly further government support, if markets do not stabilize and improve.

Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high. AIG provides insurance protection to more than 100,000 entities, including small businesses, municipalities, 401(k) plans, and Fortune 500 companies who together employ over 100 million Americans. AIG has over 30 million policyholders in the U.S. and is a major source of retirement insurance for, among others, teachers and non-profit organizations. The company also is a significant counterparty to a number of major financial institutions.

AIG operates in over 130 countries with over 400 regulators and the company and its regulated and unregulated subsidiaries are subject to very different resolution frameworks across their broad and diverse operations without an overarching resolution mechanism. Within the options available, the restructuring plan offers a multi-part approach which brings forward the ultimate resolution of the company, has received support from key stakeholders and the rating agencies, and provides the best possible protection for taxpayers in connection with this commitment of resources.

The steps announced today provide tangible evidence of the U.S. government's commitment to the orderly restructuring of AIG over time in the face of continuing market dislocations and economic deterioration. Orderly restructuring is essential to AIG's repayment of the support it has received from U.S. taxpayers and to preserving financial stability. The U.S. government is committed to continuing to work with AIG to maintain its ability to meet its obligations as they come due.

Treasury has stated that public ownership of financial institutions is not a policy goal and, to the extent public ownership is an outcome of Treasury actions, as it has been with AIG, it will work to replace government resources with those from the private sector to create a more focused, restructured and viable economic entity as rapidly as possible. This restructuring is aimed at accelerating this process. Key steps of the restructuring plan include:

Preferred Equity

The U.S. Treasury will exchange its existing $40 billion cumulative perpetual preferred shares for new preferred shares with revised terms that more closely resemble common equity and thus improve the quality of AIG's equity and its financial leverage. The new terms will provide for non-cumulative dividends and limit AIG's ability to redeem the preferred stock except with the proceeds from the issuance of equity capital.

Equity Capital Commitment

The Treasury Department will create a new equity capital facility, which allows AIG to draw down up to $30 billion as needed over time in exchange for non-cumulative preferred stock to the U.S. Treasury. This facility will further strengthen AIG's capital levels and improve its leverage.

Federal Reserve Revolving Credit Facility

The Federal Reserve will take several actions relating to the $60 billion Revolving Credit Facility for AIG established by the Federal Reserve Bank of New York (New York Fed) in September, 2008, to further the goals described above.

Repayment by Preferred Stock Interests

The Revolving Credit Facility will be reduced in exchange for preferred interests in two special purpose vehicles created to hold all of the outstanding common stock of American Life Insurance Company (ALICO) and American International Assurance Company Ltd. (AIA), two life insurance holding company subsidiaries of AIG. AIG will retain control of ALICO and AIA, though the New York Fed will have certain governance rights to protect its interests. The valuation for the New York Fed's preferred stock interests, which may be up to approximately $26 billion, will be a percentage of the fair market value of ALICO and AIA based on valuations acceptable to the New York Fed.

Securitization of Life Insurance Cash Flows

The New York Fed is authorized to make new loans under section 13(3) of the Federal Reserve Act of up to an aggregate amount of approximately $8.5 billion to special purpose vehicles (SPVs) established by domestic life insurance subsidiaries of AIG. The SPVs would repay the loans from the net cash flows they receive from designated blocks of existing life insurance policies held by the parent insurance companies. The proceeds of the New York Fed loans would pay down an equivalent amount of outstanding debt under the Revolving Credit Facility. The amounts lent, the size of the haircuts taken by the New York Fed, and other terms of the loans would be determined based on valuations acceptable to the New York Fed.

Restructuring of Other Terms

After the transactions described above, the total amount available under the Facility will be reduced from $60 billion to no less than $25 billion. In addition, the interest rate on the Facility, which is three-month LIBOR plus 300 basis points, will be modified by removing the existing floor (3.5 percent) on the LIBOR rate. The Facility will continue to be secured by a lien on a substantial portion of AIG's assets, including the businesses AIG plans to retain. The other material terms of the Facility remain unchanged.

Issuance of Preferred Stock

As required by the credit agreement governing the Revolving Credit Facility, AIG has agreed to issue on March 4, 2009, shares of convertible preferred stock representing an approximately 77.9% equity interest in AIG to an independent trust for the sole benefit of the United States Treasury.

AIG must be in compliance with the executive compensation and corporate governance requirements of Section 111 of the Emergency Economic Stabilization Act, including the most stringent limitations on executive compensation as required under the newest amendments to the Emergency Economic Stabilization Act. Additionally, AIG must continue to maintain and enforce newly adopted restrictions put in place by the new management on corporate expenses and lobbying as well as corporate governance requirements.

© Thomson Reuters 2009 All rights reserved

[barracuda]

Denninger's Monday morning post is rather chilling. An excerpt...

The Challenge Before America

Private sources of capital have quite reasonably withdrawn from the marketplace.  They will not return until they can be assured that losses they suffer will result only from their own poor investment decisions and not from willful concealment of losses and even fraud by those in whom they invest nor from changes in the rules imposed by fiat from Washington DC.  These private capital sources also want to see indictments, prosecutions and imprisonment - along with ejection of the parties responsible in both private enterprise and our government.

This is a serious problem for our capital markets and economy generally as without this private capital we are doomed to a massive economic contraction.  Conservatively speaking, assuming our government can actually fund the $9-10 trillion they've promised, which I believe is a pure fantasy (it would represent nearly a tripling of the public float of US Debt!) we would suffer a 30% contraction in GDP over the next 18-24 months.

If they cannot fund those commitments much beyond the $1 trillion already spent, the contraction would be more on the order of 50%.

This would take us back to roughly 1994 levels in GDP terms, looking at constant dollars, a setback of some 15 years.

The damage, however, would be much worse than it appears at first blush, because in conjunction with the expansion in GDP state and local governments, along with government spending, have expanded, expecting that "GDP never goes down" (doesn't that sound familiar to those who believe that "house prices never go down"?)

Were we to contract to a $7 trillion GDP, for example, our current federal budget would reach nearly half of GDP!  This would be impossible to sustain as tax revenues would collapse under such a scenario.

We have exactly one opportunity to stop this, and that opportunity is now. 

Government simply must stop "The Bezzle" [note- he means capital fraud and government malfeasance] in all parts of our economy and capital markets, and must do so right here, right now, today.

If we fail to demand this as Americans or our government fails to implement this across the board then we will suffer a Depression worse than the 1930s.

This is not conjecture.

It is not a prediction, nor drawn from how I "feel".

This is mathematics; it is a fact that we cannot possibly maintain anything close to our current standard of living unless private capital decides to re-enter our marketplace - a decision that government cannot force.

The consequences of an economic Depression of this magnitude are almost too serious to contemplate.  They include unemployment topping 20%, an average annual income decrease for Americans of some 30% (for those who remain employed!), a 70-80% decrease in retirement accounts such as IRAs and 401ks and the decimation of both private and public pensions, resulting in a reduction in benefits of 50% or more.

Should government attempt to "replace" that private capital the result will be a bond market collapse.  This too is inevitable; into an environment of falling tax receipts (down 15% already) foreign governments and investors would have to be insane to continue purchasing US Treasury debt.

THAT event, should it occur, would result in The Federal Government being forced to contract to 1/3rd of its current size almost literally overnight.  The only way to accomplish this would be to entirely eliminate all Social Security, Medicare and Medicaid funding, cut Defense spending by 75%, and cut all remaining discretionary programs by 50%.

Needless to say such an event would be catastrophic for our society - far worse than a "mere" Depression.  In fact, that latter outcome has a very high probability of destabilizing our government and political system entirely. 

Let me be crystal clear: the very real possibility exists that our government could collapse.

The time to play games and fiddle hoping for a turn in the housing market or some other miracle has passed.  Bernanke himself said if the financial system cannot be stabilized our economy will not recover.

He is correct - but our financial system, including both credit and stock markets, cannot stabilize (say much less recover) until and unless private capital re-enters the market.

That simply will not happen until "The Bezzle" is driven out.

We either act now or suffer the consequences - the utter destruction of our middle class, a collapsed stock market with the DOW headed to 3,000 or worse and the S&P 500 headed into the 400 or lower range, unemployment topping 20% and GDP falling by 30% or more, complete destruction of both private and state-run pension systems, and a very real possibility that our nation collapses.

[barracuda]

Definition of Beezle, from Are We Going to Buy the Bezzle?
by Rep. Brad Miller

John Kenneth Galbraith wrote that embezzlement is "the most interesting of crimes" for an economist. Embezzlement is almost always eventually discovered, but for a time results in "a net increase in psychic wealth," when the embezzler "has his gain" and the victim doesn’t miss it. Galbraith called the undiscovered and therefore unfelt loss "the bezzle."

[Fat Lady Singing]

Let me be crystal clear: the very real possibility exists that our government could collapse.

I've been wondering how it is we've managed to limp along this far without that possibility occurring.

Thanks everyone for the articles -- they do help dumb ol' me understand the situation a little better.

[Col. Quisp]

I'm looking at the TV and I see the Dow has dropped 214 points today. It's at 6848 and falling...now 6845....6842......6839....all within a minute

And a small asteroid zoomed in close to earth this morning, one that was only discovered on 2/27.

Oh, mama, can this really be the end?

now it's at 6829....

Some are while the empire burns.

Oh shit. Just saw Gibbs on AIG bailout say "We hope this is the end."

Oooh the irony. Of the Black Iron Prison...