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

[chiggerbit]

Four more banks failed: Villa Rica, Ga.-based Community Bank of West Georgia and Newman, Ga.-based Neighborhood Community Bank; Irvine, Calif.-based MetroPacific Bank; and small-town Pine City, Minn.-based Horizon Bank bringing the total THIS YEAR to 44, and nine for Georgia.

http://www.marketwatch.com/story/georgi ... ally-to-42

[Ben D]

7 more banks fail as FDIC mulls rules for sales
Thursday July 2, 2009, 8:08 pm EDT

Six Illinois banks and one bank in Texas were shuttered Thursday as government regulators proposed new rules for private equity firms seeking to take over failed banks.

That brought the number of U.S. bank failures this year to 52.

That's more than double the 25 which failed in all of 2008 and the three closed in 2007.

http://finance.yahoo.com/news/7-more-ba ... 4.html?x=0

[chiggerbit]

So that must not include the 6 earlier Illinois failures, right? Twelve would be quite a total for the state of Illinois. Interesting to see that one of them was Lincolnwood. I worked as a mother's helper for a Lincolnwood family as a teen. The head of household was a trader (?) for a company on the Chicago Board of Trade.

http://investmentlinebacker.blogspot.co ... re-of.html

[Ben D]

Yes chigger, here is a the list of 45 banks that have failed up until the 26th June, and doesn't yet include the additional banks that imploded today.

http://www.bankrate.com/finance/savings ... banks.aspx

[freemason9]

Well, the very concept of capitalism was ludicrous to begin with. It is destined to fail . . . as it has, periodically, since its inception.

[chiggerbit]

Wow, Ben, talk about synchronicity. I have "close connections" to three of the towns on that list of banks, and two of the towns are really small.

[seemslikeadream]

Judge Rejects Settlement Over Merrill Bonuses

A Federal District judge on Monday overturned a settlement between the Bank of America and the Securities and Exchange Commission over bonuses paid to Merrill Lynch executives just before the bank took over Merrill last year.

The $33 million settlement “does not comport with the most elementary notions of justice and morality,” wrote Jed S. Rakoff, the judge assigned to the case in federal court in Lower Manhattan.

The ruling forces the S.E.C. to go back to the drawing board. The commission can either renegotiate the settlement or take the case to court. The S.E.C. could also drop the case.

The case involved $3.6 billion in bonuses that were paid by Merrill Lynch late last year, just as that firm was about to be merged with Bank of America. Neither company provided details of the bonuses to their shareholders, who voted on Dec. 5 to approve the merger.

The judge focused much of his criticism on the fact that the fine in the case would be paid by the bank’s shareholders, who were the ones that were supposed to have been injured by the lack of disclosure.

“It is quite something else for the very management that is accused of having lied to its shareholders to determine how much of those victims’ money should be used to make the case against the management go away,” the judge wrote.

Bank of America has argued in its filings with the judge that it did nothing wrong in its disclosures.

The judge also criticized the S.E.C., which has been trying to step up the profile of its investigations unit. The judge quoted Oscar Wilde’s “Lady Windermere’s Fan” in the end of his ruling to say that a cynic is someone “who knows the price of everything and the value of nothing.”

The proposed settlement, the judge continued, “suggests a rather cynical relationship between the parties: the S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth.”

The case before Judge Rakoff is just one of several investigations into the bank’s deal with Merrill. Andrew M. Cuomo, the attorney general of New York, is also investigating the bank’s disclosures of bonuses and of Merrill’s surprise losses late last year. The House Committee on Government Oversight and Reform is also looking into the merger.

[American Dream]

How Free-Market Delusions Destroyed the Economy
By Raj Patel, Picador Press
Posted on November 30, 2009
http://www.alternet.org/story/144151/

The following is an excerpt from Raj Patel's new book, The Value of Nothing (Picador, 2010).

If war is God’s way of teaching Americans geography, recession is His way of teaching everyone a little economics. The great unwinding of the financial sector showed that the smartest mathematical minds on the planet, backed by some of the deepest pockets, had not built a sleek engine of permanent prosperity but a clown car of trades, swaps and double dares that, inevitably, fell to bits. The recession has not come from a deficit of economic knowledge, but from too much of a particular kind, a surfeit of the spirit of capitalism. The dazzle of free markets has blinded us to other ways of seeing the world. As Oscar Wilde wrote over a century ago: "Nowadays people know the price of everything and the value of nothing." Prices have revealed themselves as fickle guides: The 2008 financial collapse came in the same year as crises in food and oil, and yet we seem unable to see or value our world except through the faulty prism of markets.

One thing is clear: The thinking that got us into this mess is unlikely to rescue us. It might come as some consolation to know that even some of the most respected minds have been forced to puzzle over their faulty assumptions. Perhaps the most pained admission of ignorance happened in a crowded room in front of the House Committee on Oversight and Government Reform when, on October 23, 2008, Alan Greenspan described the failure of his worldview.

Greenspan was one of the acknowledged legislators of the world’s economy over the past nineteen years in his role as chairman of the Federal Reserve. A card-carrying member of the free market brigade, he used to sit at the feet of Ayn Rand who, although largely unknown outside the United States, remains influential long after her death in 1982. Her 1957 book Atlas Shrugged, in which heroic business moguls fight the scourge of government officials and union organizers, has once again scaled the bestseller lists. Regarding altruism as “moral cannibalism," Rand was the cheerleader for an extreme free market libertarian school of thought, which she called “Objectivism."

Drawn into her circle by this heady philosophy, Greenspan earned himself the nickname “the Undertaker" for his jolly demeanor and dress sense. When Greenspan chose a career in government, it was rather like a hippie joining the marines, a lapse that his former friends could never forgive. Despite this, Greenspan remained largely faithful to Rand's philosophy, continuing to believe that egoism would lead to the best of all possible worlds, and that any form of restraint would result in disaster.

At the end of 2008, Greenspan was summoned to the U.S. Congress to testify about the financial crisis. His tenure at the Fed had been long and lauded, and Congress wanted to know what had gone wrong. As he began to read his testimony, Greenspan looked exhausted, his skin jowly and sagging, as if the vigor that once kept him taut had all been spent. But he came out swinging. In the first round, he took aim at the information he’d been working with. If only the input had been right, the economic models would have worked, and the predictions would have been better. In his words, a Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivatives markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria.

Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment.

This is a garbage-in-garbage-out argument: The model worked just fine, but the assumptions about risk and data, based only on the good times past, were faulty and so the output was correspondingly wrong. Greenspan’s nemesis on the panel, Henry Waxman, pushed him to a deeper conclusion, in this remarkable exchange:

Waxman: The question I have for you is, you had an ideology, you had a belief that free, competitive -- and this is your statement -- “I do have an ideology. My judgment is that free, competitive markets are by far the unrivalled way to organize economies. We have tried regulation, none meaningfully worked.” That was your quote. You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. And now our whole economy is paying the price. Do you feel that your ideology pushed you to make decisions that you wish you had not made?

Greenspan: Well, remember, though, what an ideology is. It’s a conceptual framework with [sic] the way people deal with reality. Everyone has one. You have to. To exist, you need an ideology. The question is, whether it is accurate or not. What I am saying to you is, yes, I found the flaw, I don’t know how significant or permanent it is, but I have been very distressed by that fact.

Waxman: You found a flaw?

Greenspan: I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

Waxman: In other words, you found that your view of the world, your ideology, was not right, it was not working.

Greenspan: Precisely. That is precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

The flaw, to be clear, wasn’t a minor one of shoddy data. Nor was it the bigger Black Swan problem that writers like Nassim Taleb discuss, a problem of failing to account for highly unlikely events that, should they happen, involve catastrophic consequences. Greenspan’s flaw was more fundamental still. It warped his view about how the world was organized, about the sociology of the market. And Greenspan is not alone. Larry Summers, the president’s senior economic advisor, has had to come to terms with a similar error -- his view that the market was inherently self-stabilizing has been "dealt a fatal blow." Hank Paulson, Bush’s Treasury Secretary, has shrugged his shoulders with similar resignation. Even Jim Cramer from CNBC’s "Mad Money" admitted defeat: "The only guy who really called this right was Karl Marx." One after the other, the celebrants of the free market are finding themselves, to use the language of the market, corrected.

The extent of Greenspan's admission has passed most of us by. If you trawl the oped pages of the financial press, you'll find plenty of analysis that fits Greenspan's first gambit, with pundits offering stories about how risk was incorrectly priced (which it was), how the lack of regulation allowed the panic to feed back into the financial system (which it has), how the incentive structures rewarded traders who were able to push financial risk far into the future (which they did) and how free market ideologues removed the sorts of circuit-breaking policies that might today have helped (and they did that too). But these are all it-could-have-been-fixed-if-we'd-planned-better responses. I am not sure that we're able to comprehend what Greenspan's admission might really mean for us. It would be too big a shock to have the fundamentals of policy in both government and the economy proved wrong, and to have nothing with which to replace them.

It's as if one day, you were to wake up and find yourself transformed into a cockroach. This is the premise of Franz Kafka's novella Metamorphosis. In the first sentence, a young salesman named Gregor Samsa wakes up, after a night of bad dreams, to find that he has turned into an enormous bug. Gregor Samsa's response is revealing, telling us a little bit more about ourselves than we'd like. For what does Samsa do when he discovers he's a bug? He doesn't scuttle from his room screaming, or ponder how this happened, or what his transformation means, and what he might become tomorrow. His response is essentially this: "Poor me! How am I going to keep my job?" Which is almost exactly how we've reacted to this economic crisis. While no one has yet woken up in the body of a bug, we have all found ourselves in a world turned upside down, where everything we were told was to our advantage has turned out to be its opposite. Greenspan's "flaw" has profound repercussions -- to understand it fully would mean a complete reappraisal of the way we conduct our lives. We would need not only a new way of mooring our expectations of our society and our economy, one based on richer assumptions about human nature, but also a different ideology governing the exchange of goods and services.

Prices do some heavy ideological lifting in Greenspan's world. They provide a way to see and know the collective wants and resources of our small planet. This is Friedrich Hayek's economic philosophy, in which prices are the tendrils through which wants and needs are communicated. Science fiction fans will already be familiar with what this looks like. In "The Matrix," liberated humans (and the programs who hunt them) can see the world in its raw form, as a digital rain of symbols and signs. This is the science fiction that governs economic fact. Data pelting down monitors is what the masters of the universe on the global financial exchanges stare at, their eyes darting from screen to screen, trying to see through the world and profit from it. In "The Matrix," the signs were a simulation of the real world, hiding more than they revealed. The trouble is that this unreliable digital ticker tape has now become a central prop in the drama of modern commerce.

Consider the fate of Volkswagen, which at the end of October 2008 managed briefly to become the world's most valuable corporation without having to sell a single vehicle. With the economy still in free fall, traders on stock market floors were taking a dim view of Volkswagen. They looked at their screens and concluded that, just like every other auto manufacturer, Volkswagen was heading for tough times. Imagine you're a trader who feels in your bones that the stock price can only fall. One way to cash your hunch in is to sell Volkswagen stock today, and buy it back when the price falls. Since you don't walk around with Volkswagen stock falling out of your pockets, you'll turn to someone who does, like an institutional investor. You borrow their stock, for a price, and promise to return all of it very soon. The institutional investor is happy because they make money from lending out the stock, which they will get back in one piece. You're happy because you can sell this stock, wait for the price to fall, buy it back and, with the profit, not only pay back the institutional investor, but make the next installment on your yacht in Monaco. This practice is called "shorting."

The trouble was that Volkswagen's rival, Porsche, had started quietly buying Volkswagen stock, aiming to secure 75 percent of the company. When the scale of Porsche's buying spree came to light, it became rapidly clear that there was little of the company left to trade. With Porsche sucking up all the shares, the price for Volkswagen didn't drop. Traders were selling borrowed stock to Porsche, and when Porsche announced its intentions to hold the stock, traders panicked. This led to a "short squeeze," a flocking of investors looking to cover the ill-conceived bets that they'd paid for with stock that they didn't own. They'd wagered that Volkswagen's price, like that of any other car company in a recession, would fall. When it became clear that even if Volkswagen wasn't doing well in the car market, its share price was nonetheless defying gravity, the speculators rushed to buy before the price went any higher.

Their combined purchases drove the price of shares up further. So high did the price rise that Volkswagen entered the DAX 30 index of the largest corporations on the German bourse. This triggered another buying spree, driven not by stock market gamblers, but by their polar opposites -- conservative institutional investors. Pension funds, for instance, invest with an eye to long-term returns; they prefer a slow and certain accumulation of wealth rather than risky bets. One way that they keep their portfolio on an even keel is to buy shares in nothing but blue chip corporations, ones that are guaranteed to be least susceptible to the shocks that stocks are heir to, ones that are in the top, say, thirty corporations traded in the open market. When Volkswagen joined the ranks of the DAX 30, a flock of institutional investors automatically wanted in. So they bought Volkswagen shares at what ever price they could find them. The result? The price per share went from 200 to 1,000 in a week--an increase in company value of 300 billion (244 billion; $386 billion). It made Volkswagen, briefly, bigger than ExxonMobil (with a book value of a mere $343 billion). And for this, the company didn't raise a finger.

In the end, the rules on the DAX were changed, the price settled down and, in 2009, Volkswagen bought Porsche. It is easy enough to tell this story as one where institutional investors got caught with their pants down, where there was imperfect information about the size of the market, where the rules of different short-run and long-run games tangled. But look more closely. Underwriting this version of the story is a conceptual structure that lies beneath every story of excess and crash. The very notion of a bubble relies on the premise that when the bubble pops, things return to a normal state, a situation of price reflecting value more accurately. This is the story told after every boom and bust, from the South Sea Bubble of 1720 to the housing catastrophe of 2008. There's a widely shared opinion that normality will ultimately return to the world economy--but it's a consensus view that rests on a story where bubbles are exceptions to the standard (and successful) procedures of market valuation. If those procedures themselves were flawed, as Greenspan suggests, then our faith in a gentle return to earth is misplaced, for there is and never has been any solid ground beneath our feet.

There is a discrepancy between the price of something and its value, one that economists cannot fix, because it's a problem inherent to the very idea of profit-driven prices. This gap is something about which we've got an uneasy and uncomfortable intuition. The uncertainty about prices is what makes the MasterCard ads amusing. You know how it goes -- green fees: $240; lessons: $50; golf club: $110; having fun: priceless. The deeper joke, though, is this: The price of something doesn't measure its value at all. This prickly intuition has become entertainment. An alien from another planet would find it strange that one of the most popular TV shows in dozens of countries is one that trades on the confusion around what something's worth: "The Price Is Right." In the show, the audience is presented with various consumer durables, and asked to guess the retail price of each. Crucially, you don't win by correctly guessing how useful something is or how much it costs to make -- prices are poor guides to use and true costs of production. You win by developing an intuitive sense of what corporations believe you're willing to pay.

In the world of fund management, the systematic confusion surrounding what something is worth has made some people very rich. Traders' salaries are linked to the returns above expected rates for the risk they take on, the so-called alpha that they contribute to the returns. Think of a bet on a coin flip, with odds of two to one. I bet $1 that I will hit heads, and every time I do, I get $2. In the long run, I'd expect a dollar bet with those odds to return a dollar because I'll come up heads about half the time. But if I'm returning $1.50 on the bet, I'm making magic happen. This magic gets turned back into coins that I get to keep, through bonuses and increased salary. This is a tough trick to pull off because there are only a handful of ways to create added value in fund management -- I can pick undervalued stocks that outperform expectations, I can nurture innovations that change the rules of the game, or I can create new bespoke assets that institutional investors might like.

So we would expect alpha to be rare, and it is, but driven by the desire to cash in, there were many who created fake alpha through bets that appeared to produce consistently good returns despite having a small built-in chance of catastrophic loss. If the expected value of this loss were factored in, the alpha would disappear. But the risks were ignored and bonuses flowed. The frat boys who ran the economy, and profited from its poor regulation, made billions. They were paid today for outcomes that they predicted would happen in the future, using a "mark to model" accounting practice that essentially allowed them to book today what they projected they'd earn tomorrow. This practice was justified on the grounds that "markets know best."

That markets should know best is a relatively recent article of faith, and it took a great deal of ideological and political work to make it part of governments' conventional wisdom. The idea that markets are smart found its apotheosis in the Efficient Markets Hypothesis, an idea first formulated by Eugene Fama, a Ph.D. student in the University of Chicago Business School in the 1960s. In the ideological foundations it provided for financiers, it was a mighty force -- think of it as Atlas Shrugged, but with more equations.

The hypothesis states that the price of a financial asset reflects everything that a market knows about its current and future prospects. This is different from saying that the price actually does reflect its future performance -- rather, the price reflects the current state of beliefs about the odds of that performance being good or bad. The price involves a bet. As we now know, the market's eye for odds is dangerously myopic, but the hypothesis explains why economists find the following joke funny:

Q: How many Chicago School economists does it take to change a lightbulb?

A: None. If the lightbulb needed changing, the market would have already done it.

The problem with the Efficient Markets Hypothesis is that it doesn't work. If it were true, then there'd be no incentive to invest in research because the market would, by magic, have beaten you to it. Economists Sanford Grossman and Joseph Stiglitz demonstrated this in 1980, and hundreds of subsequent studies have pointed out quite how unrealistic the hypothesis is, some of the most influential of which were written by Eugene Fama himself. Markets can behave irrationally -- investors can herd behind a stock, pushing its value up in ways entirely unrelated to the stock being traded. Despite ample economic evidence to suggest it was false, the idea of efficient markets ran riot through governments. Alan Greenspan was not the only person to find the hypothesis a convenient untruth.

By pushing regulators to behave as if the hypothesis were true, traders could make their titanic bets. For a while, the money rolled in. In the mid-1990s, the Financial Times felt able to launch a monthly supplement, titled "How to Spend It," to help its more affluent readers unburden themselves. The magic of the past decade's boom also touched the middle class, who were sucked into the bubble through houses that were turned from places of shelter into financial assets, and into grist for the mill of the financial sector. But ordinary homeowners couldn't muster the clout that banks could: Governments enabled the finance sector's binge by promising to be there to pick up the pieces, and they were as good as their word. When the financiers' bets broke the system, the profit that they made from these bad bets remained untouchable: The profit was privatized, but the risk was socialized. Their riches have cost the whole world dear, and yet in 2009 the top hedge fund managers have had their third best year on record. George Soros is, in his own words, "having a very good crisis," and staff at Goldman Sachs can look forward to the largest bonus payouts in the firm's 140-year history.

What this suggests is that the rhetoric of "free markets" camouflages activities that aren't about markets at all. Goldman Sachs employees are doing well because their firm turned some distinctly nonmarket tricks. Rolling Stone journalist Matt Taibbi has recently revealed, with characteristic verve, how Goldman Sachs has bought the U.S. government. In the Obama administration's economic team, Wall Street has a generation of finance-friendly appointees, from Treasury Secretary Tim Geithner, who arranged a historic $29 billion loan to persuade JPMorgan Chase to acquire Bear Stearns during his tenure as chair of the Federal Reserve Bank of New York; to Larry Summers, who earned $5.2 million by working one day a week for a couple of years in a large Wall Street hedge fund. Their new positions in the White House make them the Tarzans of the economic jungle. Wall Street has reason to be pleased. Goldman had invested heavily in AIG, the insurance giant whose financial products division had brought the 90-year-old giant to bankruptcy. With the 2008 AIG rescue, the $13 billion that Goldman invested was repaid at full face value. Investors in Chrysler, by contrast, stand to get 29 cents for every dollar they invested.

Anyone concerned with democracy should be worried that the seam between Wall Street and the government is almost invisible. At the very least, it raises serious reasons to doubt that the institutions that facilitated the crisis can clean up their mess. Nassim Taleb points to the absurdity here: "People who were driving a school bus (blindfolded) and crashed it should never be given a new bus." The problem is that because both our economy and to a larger extent our politicians aren't really subject to democratic control, the bus drivers are always going to be graduates of the same driving school.

Despite the ongoing hijack of government by Wall Street, a word that hasn't been heard in over a generation is being uttered by politicians: "regulation." It's true that Goldman Sachs and others are profiting handsomely from the collapse, but there is nonetheless a growing sense among politicians that the market may have been allowed too free a rein. Naomi Klein's devastating critique The Shock Doctrine demonstrates how disasters were turned into platforms for rabidly free market policies, and it's an analysis that explains the post-World War II era and today's ongoing financial plunder, from California to Wall Street to the City of London, very well. But there is a recognition among the public and some politicians that today's economic crisis is a failure of free market thinking, and not a warrant for more. In response to popular outcry, politicians around the world seem ready to discuss how to regulate and restrain the market. The question is, can they, and, if they can, in whose interests will this regulation work?

From its inception, the free market has spawned discontent, but rare are the moments when that discontent coalesces across society, when a sufficiently large group of people can trace their unhappiness to free market politics, and demand change. The New Deal in the United States and the postwar European welfare states were partly a result of a consortium of social forces pushing for new limits to markets, and a renegotiation of the relationship between individuals and society. What's new about this crisis is that it's pervasively global, and comes at the last moment at which we might prevent a global climate catastrophe.



Excerpted with publisher's permission from "The Value of Nothing" (Picador, 2010) by Raj Patel.

[brainpanhandler]

If ifs and buts were candy and nuts, every day would be christmas.

Foreclose on the Banks

How to Give America Its Best Christmas Ever

By Ted RalL
December 19, 2009 "Information Clearing House" -- NEW YORK - Citibank is suspending foreclosures and evictions for 30 days, until after the holidays.

Mighty white of them.

Who knew bankers could be so amusing? In an interview, Citi mortgage czar Sanjiv Das acknowledged that "moratoriums are not permanent solutions" and said his company was looking for "some long-term fundamental alternatives" to throwing people out of their homes because they've fallen behind on their payments. But he didn't offer a specific example.

Here, allow me. There's one "long-term fundamental alternative" that's righteous, makes sense, and legal: Let's foreclose on the banks. It's time for the U.S. government to show Mr. Das and his buddies down at the country club who is the boss.

Seriously. Yes we can.

But first, let's go back to February 2009. Ah, February: a new president, hope and change in the air. Especially for bankers.

President Obama's TARP program doled out hundreds of billions of federal taxdollars to gangster capitalists like Citibank and Bank of America, which get off on charging $4 for using ATMs and 29.99 percent interest in credit cards.

The big banks were supposed to use TARP cash to buy back "toxic assets" backed by home loans to distressed homeowners, thus loosening the mortgage credit market. In fact, The Los Angeles Times reported a few days ago, "The fund has done little to address that problem directly." Instead, the feds bought bank stock at over-market prices.

In exchange for those bailouts, the banks were expected to free up credit.

They didn't. They haven't. Instead, they gave obscene raises to their already overpaid executives. They remodeled their plush offices. Now their loan officers are sitting on their hands, laughing all the way to their own banks.

There's still money in the U.S. economy. But it's not moving around--and extreme lack of liquidity is the definition of a Depression with no end in sight. As anyone who runs a small business can attest, the same dirtbag bankers who were lending to anyone and everyone two years ago have suddenly become tightwad tight-asses. Consumers with high credit ratings have seen their credit limits slashed. Banks are even refusing to refinance high-interest home loans at today's rates, reasoning that lower property values have reduced the value of their collateral--thus ensuring still more foreclosures in 2010.

Because the Obama Administration didn't pressure them, the banks stonewalled the president's $75 billion loan modification program, which was supposed to reduce payments for the approximately ten million Americans who face foreclosure.

JPMorganChase, for example, blew off or rejected 85 percent of homeowners who asked them for help. That's better than Citibank, which enrolled 100,000 distressed homeowners in the program but only managed to actually modify loans to 270. And it's a lot better than Bank of America, bringing up the rear with a pathetic whopping 98 modifications out of the 160,000 borrowers who signed up as of the end of November.

More lowlights:

∑ One out of seven American homeowners will probably lose their homes by the end of 2010.
∑ Only 4.7 percent of distressed homeowners who enrolled in the modification plan have gotten any help.
∑ Out of Obama's $75 billion program, only $2.3 million has been spent--or 0.03 percent.

Obama's performance on the foreclosure crisis--along with unemployment, the biggest problem America faces--makes Bush's laissez faire approach to Hurricane Katrina look caring and loving in comparison. If ever there were a cause for impeachment, look no further.

No doubt recognizing political peril, Obama is now attempting to jawbone the banks into doing the right thing, even calling banking CEOs "fat cats" on "60 Minutes." Whatever.

"America's banks received extraordinary assistance from American taxpayers to rebuild their industry," Obama said after meeting with banking executives. "Now that they're back on their feet, we expect an extraordinary commitment from them to help rebuild our economy." But there were no teeth in his demand--just a polite pretty-please with a trillion-dollar-plus bailout on top.

But that's Obama's choice. If he wanted, he could foreclose on the banks--and personally give millions of desperate homeowners the best Christmas ever.

Here's how.

True, the Treasury Department didn't receive any written assurances from the banks that they would start lending again when they collected their bailout loot back in February. But as Obama recalled in the above quote, it was widely understood at the time that the federal government expected looser credit markets in exchange for the bailout. There were thousands of reports in the media to this effect, hundreds of statements by government officials, and--no doubt--dozens of discussions between government and bank lawyers to this effect. No one was confused. Everyone got it at the time.

Obviously Obama should have gotten it in writing. But the bailout-for-credit quid pro quo was a widely witnessed oral contract. And oral contracts are just as legally binding as written ones.

The classic example of an oral contract is two roommates who agree to share an apartment. The lease may be in the name of one person, but the non-leaseholder may not skip out on the rent. But the stakes can be bigger. Pennzoil made a handshake deal--no contract--to buy Getty Oil in 1984 but then reneged in favor of another suitor, Texaco. Pennzoil sued and won $11.1 billion in damages.

The United States government could, and should, sue Citibank, Bank of America, JPMorganChase and other defaulting miscreants for breach of contract. With one out of seven Americans having been foreclosed upon by one of these institutions, it would be difficult to imagine any jury finding them not guilty. Mercy, after all, wasn't something these banks showed their victims.

Since damages would likely exceed the defendants' ability to pay, the U.S. could then seize the banks. The newly nationalized banks, owned by we the people, could reduce or cancel outstanding mortgages to the unemployed, sick and other worthies. They could increase credit lines and start making loans again--you know, do what they promised to do. It wouldn't necessarily get us out of the Depression. But it would be a beginning.

Foreclose on the banks! It's fair. It's smart. And it's long overdue.

Ted Rall is the author, with Pablo G. Callejo, of the new graphic memoir "The Year of Loving Dangerously." www.tedrall.com
DISTRIBUTED BY Universal Uclick/TED RALL

COPYRIGHT 2009 TED RALL

http://www.informationclearinghouse.inf ... e24228.htm

[chiggerbit]

Here ya go, bph, 7 new ones closed down yesterday. Of course they weren't among the "too big to fail" variety.

http://www.huffingtonpost.com/2009/12/1 ... 98071.html

FDIC Shuts Down Seven More Banks

[brainpanhandler]

Here ya go, bph, 7 new ones closed down yesterday. Of course they weren't among the "too big to fail" variety.

http://www.huffingtonpost.com/2009/12/1 ... 98071.html

FDIC Shuts Down Seven More Banks

Treasury Secretary Timothy Geithner said extending the rescue program also will help homeowners struggling to avoid losing homes to foreclosure and small businesses having trouble getting loans.

Liar, liar, pants on fire.

My bank supposedly did not take any tarp funds. When I asked an officer at my bank about it she got very furtive and spoke very quietly, almost a whisper, and told me that they had not taken any tarp funds. I think she was telling me the truth, but of course I can't really know and it's possible she doesn't really know.

[beeline]

Link

SEC accuses Goldman Sachs of civil fraud


By MARCY GORDON, AP Business Writer Marcy Gordon, Ap Business Writer – 3 mins ago
WASHINGTON – The government has accused Goldman Sachs & Co. of defrauding investors by failing to disclose conflicts of interest in subprime investments it sold as the housing market was collapsing.

The Securities and Exchange Commission said in a civil complaint Friday that Goldman failed to disclose that one of its clients helped create — and then bet against — subprime mortgage securities that Goldman sold to other investors.

Two European banks that bought the mortgage securities lost nearly $1 billion, the SEC said. The agency is seeking to recoup profits reaped on the deal

Goldman Sachs denied the allegations. In a statement, it called the SEC's charges "completely unfounded in law and fact" and said it will contest them.

The charges come as lawmakers seek to crack down on Wall Street practices that helped cause the financial crisis. Among proposals Congress is weighing are tougher rules for complex investments like those involved in the alleged Goldman fraud.

The Goldman client implicated in the fraud is one of the world's largest hedge funds, Paulson & Co. The SEC said it paid Goldman roughly $15 million in 2007 to put together an investment offering that was tied to mortgage-related securities the hedge fund viewed as likely to decline in value.

Separately, Paulson took out a form of insurance that allowed it to make a huge profit when those securities became nearly worthless.

Goldman Sachs shares fell more than 13 percent after the SEC announcement, which also caused shares of other financial companies to sink. The Dow Jones industrial average fell more than 147 points in midday trading.

The civil lawsuit filed by the SEC in federal court in Manhattan was the government's most significant legal action related to the mortgage meltdown that ignited the financial crisis and helped plunge the country into recession. The SEC's enforcement chief said the agency is investigating a broad range of practices related to the crisis.

The agency also charged a Goldman vice president, Fabrice Tourre, 31, who it said was principally responsible for devising the deal and marketing the securities. The SEC said he now is executive director of Goldman Sachs International in London.

Tourre, the SEC said, boasted to a friend that he was able to put such deals together as the mortgage market was unraveling in early 2007.

In an email to a friend, he described himself as "the fabulous Fabstanding in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!"

The SEC is seeking unspecified fines and restitution from Goldman Sachs and Tourre.

Asked why the SEC did not also pursue a case against Paulson, Enforcement Director Robert Khuzami said: "It was Goldman that made the representations to investors. Paulson did not."

Paulson & Co. is run by John Paulson, who reaped billions by betting against subprime mortgage securities. He is not related to former Treasury Secretary Henry Paulson.

Goldman told investors that a third party, ACA Management LLC, had selected the pools of subprime mortgages it used to create what are known as synthetic collateralized debt obligations. But, the SEC alleges, Goldman misled investors by failing to disclose that Paulson & Co. also played a role in selecting the mortgage pools and stood to profit from their decline in value.

"Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party," Khuzami said in a statement.

The SEC charges come after Goldman Sachs denied last week it bet against clients by selling them mortgage-backed securities while reducing its own exposure to them.

In an annual letter to shareholders, Goldman said it began reducing its exposure to the U.S. mortgage market in late 2006. It said it did so by selling mortgage investments or buying credit default swaps. The swaps are a form of insurance that pays out if the value of the underlying asset declines.

Those hedges, also known as short positions, served Goldman well. As the housing market began cratering and losses piled up for other big banks, Goldman suffered less damage. That led to criticism that the bank benefited at the expense of clients who bought mortgage-backed securities that became toxic. Goldman denied that.

"Our short positions were not a 'bet against our clients,'" Goldman said in the letter. "Rather, they served to offset our long positions. Our goal was, and is, to be in a position to make markets for our clients while managing our risk within prescribed limits."

In the letter, Goldman also rejected claims that it profited from the mortgage market meltdown.

[JackRiddler]

Oi, more than a year!

No chance of being organized - I'll just start dumping stuff I've read that was interesting.

I refuse to be cynical - yet - about the SEC's suit against Goldman Sachs. Nothing involving charges against them can be mere kabuki - they have a powderkeg of criminal liabilities. The case they've picked is exemplary: intentionally devising a CDO fund built to fail, selling it to suckers after getting it rated, and then betting against it. Anyone feeling the pressure on the John Paulson matter can start flipping and revealing other stuff. As it is, the charges also implicate the ratings agencies, and there are investors with 11 billion in losses - meaning big players - who are really angry about it.

http://www.nytimes.com/2010/04/17/busin ... nted=print

April 16, 2010

U.S. Accuses Goldman Sachs of Fraud in Mortgage Deal

By LOUISE STORY and GRETCHEN MORGENSON

Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.

The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.

In a statement, Goldman called the S.E.C. accusations “completely unfounded in law and fact” and said the firm would “vigorously contest them and defend the firm and its reputation.”

The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.

As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.

According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.

Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against — the ones he believed were most likely to lose value — and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.

But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson, who is not named in the suit, as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.

“The product was new and complex, but the deception and conflicts are old and simple,” Robert Khuzami, the director of the S.E.C.’s division of enforcement, said in a statement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

The complaint heralds the return of a more aggressive S.E.C. The case may help the agency recover from some initial mishaps, and signals that the agency is tracing the mortgage pipeline all the way from the companies like Countrywide that originated home loans to the raucous trading floors that dominate Wall Street’s profit machine.

In the half-hour after the suit was announced, Goldman Sachs’s stock fell by more than 10 percent. It closed at $160.70, down almost 13 percent from the day before. Investors sold off other bank stocks, as well, as rumors swirled about which other firms might become embroiled in the S.E.C.’s investigation.

Goldman issued a second statement after the market closed saying that the firm had lost money on the deal in the S.E.C. case and that it provided investors with extensive disclosure on the deal to investors. The firm said the losses in the deal came from the overall collapse of the mortgage market, not from the way the deal was designed.

In recent months, Goldman has repeatedly defended its actions in the mortgage market, including its own bets against it. In a letter published last week in Goldman’s annual report, the bank rebutted criticism that it had created, and sold to its clients, mortgage-linked securities that it had little confidence in.

“We certainly did not know the future of the residential housing market in the first half of 2007 anymore than we can predict the future of markets today,” Goldman wrote. “We also did not know whether the value of the instruments we sold would increase or decrease.”

The letter continued: “Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a ‘bet against our clients.’ ” Instead, the trades were used to hedge other trading positions, the bank said.

In a statement provided in December to The Times as it prepared the article on the Abacus deals, Goldman said that it had sold the instruments to sophisticated investors and that these securities “were popular with many investors prior to the financial crisis because they gave investors the ability to work with banks to design tailored securities which met their particular criteria, whether it be ratings, leverage or other aspects of the transaction.”

Goldman was one of many Wall Street firms that created complex mortgage securities — known as synthetic collateralized debt obligations — as the housing wave was cresting. At the time, traders like Mr. Paulson, as well as those within Goldman, were looking for ways to short the overheated market.

Such investments consisted of insurance-like policies written on mortgage bonds. If the mortgage market held up and those bonds did well, investors who bought Abacus notes would have made money from the insurance premiums paid by investors like Mr. Paulson, who were negative on housing and had bought insurance on mortgage bonds. Instead, defaults spread and the bonds plunged, generating billion of dollars in losses for Abacus investors and billions in profits for Mr. Paulson.

For months, S.E.C. officials have been examining mortgage bundles like Abacus that were created across Wall Street. The commission has been interviewing people who structured Goldman mortgage deals about Abacus and other, similar instruments. The S.E.C. advised Goldman that it was likely to face a civil suit in the matter, sending the bank what is known as a Wells notice.

The S.E.C. focused on only one Abacus deal in its complaint, but Mr. Khuzami said in a conference call that the commission continues to look at the rest. All told there were $10.9 billion of Abacus investments sold.

Mr. Tourre was one of Goldman’s top workers running the Abacus deal, peddling the investment to investors across Europe. Raised in France, Mr. Tourre moved to the United States in 2000 to earn his master’s in operations at Stanford. The next year, he began working at Goldman, according to his profile in LinkedIn.

He rose to prominence working on the Abacus deals under a trader named Jonathan M. Egol. Now a managing director at Goldman, Mr. Egol is not being named in the S.E.C. suit.

Goldman structured the Abacus deals with a sharp eye on the credit ratings assigned to the mortgage bonds associated with the instrument, the S.E.C. said. In the Abacus deal in the S.E.C. complaint, Mr. Paulson pinpointed those mortgage bonds that he believed carried higher ratings than the underlying loans deserved. Goldman placed insurance on those bonds — called credit-default swaps — inside Abacus, allowing Mr. Paulson to short them while clients on the other side of the trade wagered that they would not fail.

But when Goldman sold shares in Abacus to investors, the bank and Mr. Tourre only disclosed the ratings of those bonds and did not disclose that Mr. Paulson was on the other side, betting those ratings were wrong.

Mr. Tourre at one point complained to an investor who was buying shares in Abacus that he was having trouble persuading Moody’s to give the deal the rating he desired, according to the investor’s notes, which were provided to The Times by a colleague who asked for anonymity because he was not authorized to release them.

In seven of Goldman’s Abacus deals, the bank went to the American International Group for insurance on the bonds. Those deals have led to billions of dollars in losses at A.I.G., which was the subject of an $180 billion taxpayer rescue. The Abacus deal in the S.E.C. complaint was not one of them.

That deal was managed by ACA Management, a part of ACA Capital Holdings, which changed its name in 2008 to Manifold Capital Holdings.

Goldman told investors the mortgage bond portfolio would be “selected by ACA Management,” according to the deal’s marketing documents, which were given to The Times by an Abacus investor.In that flip-book, it says that Goldman may have long or short positions in the bonds. It does not mention Mr. Paulson or say that Goldman was in fact short.

ACA was not named in the case. That firm was led to believe that Mr. Paulson was positive on mortgages, not negative, and so it did not see a problem with his involvement, the S.E.C. said. Mr. Tourre was aware of ACA’s misconception, the S.E.C. said. In February 2007, Mr. Tourre met with both ACA and Mr. Paulson, and he sent an e-mail message to a Goldman colleague acknowledging the awkwardness of the situation. “This is surreal,” Mr. Tourre wrote.

Nine days later, a Goldman colleague wrote Mr. Tourre and said, “The C.D.O. biz is dead. We don’t have a lot of time left.”

The Abacus deals deteriorated rapidly when the housing market hit trouble. For instance, in the Abacus deal in the S.E.C. complaint, 83 percent of the mortgage bonds underlying it were downgraded by rating agencies just six months later, and 99 percent had been downgraded by early 2008, according to the S.E.C.

It takes time for such mortgage investments to pay out for investors who short them, like Mr. Paulson. Each deal is structured differently, but generally, the bonds underlying the investment must deteriorate to a certain point before short-sellers get paid. By the end of 2007, Mr. Paulson’s credit hedge fund was up 590 percent.

Mr. Paulson’s firm, Paulson & Company, is paid a management fee and 20 percent of the annual profits that its funds generate, according to a Paulson investor document from late 2008 titled “Navigating Through the Crisis.”

[JackRiddler]

Recent news of significance... Let's start with three more from NYT (with the same fair-use concept!).

April 11, 2010

Europe Unifies to Assist Greece With Line of Aid

By STEPHEN CASTLE and JACK EWING

BRUSSELS — European leaders provided a long-awaited financial rescue line to Greece on Sunday, offering the country up to $40 billion in aid to meet its giant debt obligations.

Under the plan, Greece would receive loans at about 5 percent interest, significantly lower than the rate of 7.5 percent that the markets were demanding last week, though not as low as Greece had wanted.

Concerns about a potential Greek default had caused anxiety among markets worldwide and raised fears that the euro would be severely undermined if other struggling countries like Spain, Portugal and Italy followed Greece to the financial precipice.

By providing details of the loan package, Europe sought to end the uncertainty it had created through a series a vague reassurances over the last several months. European leaders had engaged in weeks of debate on whether to help Greece and how to do it, and the absence of resolve had prompted investors to demand high rates on loans to the Greek government.

“The solidarity is there,” said Silvio Peruzzo, euro area economist at the Royal Bank of Scotland. “That is the most important message from today.”

Jean-Claude Juncker of Luxembourg, who heads the group of finance ministers from the euro zone members, said at a news conference in Brussels: “It shows there is money behind this.”

In addition to the $40 billion in European Union aid, the government in Athens can expect the International Monetary Fund to offer up to $20 billion in additional funds, probably at an even lower interest rate.

The move Sunday puts the 16 countries that use the euro — known as the euro zone — closer to what would be the first bailout of a member in its history. At the same time, the size of the financial commitment, which was above market expectations, could at least postpone the need for aid by reassuring investors and helping Greece refinance debt that comes due by the end of May.

Beyond its huge debt, Greece has a large deficit and is struggling with high unemployment and significant public unrest over austerity measures it has been forced to impose.

Mr. Peruzzo said he expected the interest rate on Greek bonds to drop sharply when markets opened Monday. The rate of 5 percent “is now the benchmark,” he said. “This is a step of clarification the markets are waiting for.”

The European plan makes the funds available to Athens if it asks for them. Greece has not yet made a formal request. If it does, the heads of government from the euro zone would have to sign off on the package.

A finance ministry spokesman in Germany emphasized that the terms announced Sunday were still part of a contingency plan. As Europe’s biggest economy, it would have to make the biggest contribution to any financial package.

Germany had opposed any plan that could be considered a direct subsidy, concerned that bailing out Greece would encourage profligacy by other countries. But, in the end, the European Union was prompted to act by the spread of anxiety throughout financial markets if Greece’s problems were not resolved.

Greece had been hoping that the rate offered by the European Union countries would be closer to that of the I.M.F. By setting a higher rate, European leaders appear to be signaling to Greece that it needs to try to resolve its debt crisis on its own, if it can, by continuing to borrow money from the capital markets.

Greece intends to auction a package of treasury bills on Tuesday, and the response should signal whether Sunday’s action has reassured the markets.

The Greek finance minister, George Papaconstantinou, said his country would try to avoid drawing on the European Union and I.M.F. money. “The aim is for us to continue borrowing as normal from the markets, and we believe we will be able to do this now,” he said.

He added: “The Greek government has not asked for the activation of this mechanism despite the fact that it is immediately available.”

The Greek prime minister, George A. Papandreou, described the Brussels agreement as vindication of his government’s efforts to set the country back on its feet. “With today’s decision, the whole of Europe sends a clear message: that no one can play with our common currency, no one can play with our common fate,” he said.

European leaders had already set tough conditions that Greece needed to meet to potentially qualify for the aid. They did not set any new terms Sunday, but reserved the right to toughen their stance upon review. For now, they are apparently persuaded that Mr. Papandreou’s government was serious about sharply cutting government spending and restoring Greece’s ability to compete globally.

Addressing the Greek public, which has been hit by salary cuts and tax increases that are part of Athens’s austerity program, Mr. Papandreou said: “I want all Greeks to be sure of this — our joint efforts are beginning to pay off.”

There is still a remote chance that Greece can escape without resorting to the European aid, said Mr. Peruzzo, the Royal Bank of Scotland economist. More likely, the pledge of aid will postpone the need for Greece to actually take advantage of it for at least several weeks, he said.

The amount the I.M.F. would lend to Greece has yet to be determined, but Olli Rehn, the European monetary affairs commissioner, suggested that euro zone countries might end up providing two-thirds of the final package, with a third coming from the I.M.F. That would mean an I.M.F. contribution of up to 15 billion euros, or $20 billion, and a total package of 45 billion euros.

Mr. Juncker said the potential loan did not violate rules intended to ensure that the economic obligations of one country in the euro zone are not passed on to others.

The loan rates are “nonconcessional,” or close enough to market rates that they do not constitute a bailout, Mr. Juncker said.

All 16 countries within the euro zone will take part in any rescue, making contributions based on the proportion they pay into the European Central Bank’s capital reserves, which are roughly based on the size of their economies.

Even countries facing their own economic difficulties because of the state of their public finances, including Portugal, Ireland and Spain, have agreed to take part in the program.

Germany would shoulder the biggest share of any rescue package and could be asked to contribute more than 6 billion euros. Mr. Juncker told reporters in Brussels that “no member state participating should make a loss” out of the transaction. Contributors to the package would in theory receive their money back, along with the 5 percent interest. Mr. Rehn said he would not take any position on whether the loan arrangements for Greece would provide a template for other crisis interventions in the euro zone, if needed.


Stephen Castle reported from Brussels, and Jack Ewing from Frankfurt. Niki Kitsantonis contributed reporting from Athens.

http://www.nytimes.com/2010/04/11/busin ... nted=print

Interest Rates Have Nowhere to Go but Up

April 10, 2010

By NELSON D. SCHWARTZ

Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

Along with the sell-off in bonds, the Federal Reserve has halted its emergency $1.25 trillion program to buy mortgage debt, placing even more upward pressure on rates.

“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” said Christopher J. Mayer, a professor of finance and economics at Columbia Business School. “It’s a really big risk.”

Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home, according to Mr. Mayer.

The Mortgage Bankers Association expects the rise to continue, with the 30-year mortgage rate going to 5.5 percent by late summer and as high as 6 percent by the end of the year.

Another area in which higher rates are likely to affect consumers is credit card use. And last week, the Federal Reserve reported that the average interest rate on credit cards reached 14.26 percent in February, the highest since 2001. That is up from 12.03 percent when rates bottomed in the fourth quarter of 2008 — a jump that amounts to about $200 a year in additional interest payments for the typical American household.

With losses from credit card defaults rising and with capital to back credit cards harder to come by, issuers are likely to increase rates to 16 or 17 percent by the fall, according to Dennis Moroney, a research director at the TowerGroup, a financial research company.

“The banks don’t have a lot of pricing options,” Mr. Moroney said. “They’re targeting people who carry a balance from month to month.”

Similarly, many car loans have already become significantly more expensive, with rates at auto finance companies rising to 4.72 percent in February from 3.26 percent in December, according to the Federal Reserve.

Washington, too, is expecting to have to pay more to borrow the money it needs for programs. The Office of Management and Budget expects the rate on the benchmark 10-year United States Treasury note to remain close to 3.9 percent for the rest of the year, but then rise to 4.5 percent in 2011 and 5 percent in 2012.

The run-up in rates is quickening as investors steer more of their money away from bonds and as Washington unplugs the economic life support programs that kept rates low through the financial crisis. Mortgage rates and car loans are linked to the yield on long-term bonds.

Besides the inflation fears set off by the strengthening economy, Mr. Gross said he was also wary of Treasury bonds because he feared the burgeoning supply of new debt issued to finance the government’s huge budget deficits would overwhelm demand, driving interest rates higher.

Nine months ago, United States government debt accounted for half of the assets in Mr. Gross’s flagship fund, Pimco Total Return. That has shrunk to 30 percent now — the lowest ever in the fund’s 23-year history — as Mr. Gross has sold American bonds in favor of debt from Europe, particularly Germany, as well as from developing countries like Brazil.

Last week, the yield on the benchmark 10-year Treasury note briefly crossed the psychologically important threshold of 4 percent, as the Treasury auctioned off $82 billion in new debt. That is nearly twice as much as the government paid in the fall of 2008, when investors sought out ultrasafe assets like Treasury securities after the collapse of Lehman Brothers and the beginning of the credit crisis.

Though still very low by historical standards, the rise of bond yields since then is reversing a decline that began in 1981, when 10-year note yields reached nearly 16 percent.

From that peak, steadily dropping interest rates have fed a three-decade lending boom, during which American consumers borrowed more and more but managed to hold down the portion of their income devoted to paying off loans.

Indeed, total household debt is now nine times what it was in 1981 — rising twice as fast as disposable income over the same period — yet the portion of disposable income that goes toward covering that debt has budged only slightly, increasing to 12.6 percent from 10.7 percent.

Household debt has been dropping for the last two years as recession-battered consumers cut back on borrowing, but at $13.5 trillion, it still exceeds disposable income by $2.5 trillion.

The long decline in rates also helped prop up the stock market; lower rates for investments like bonds make stocks more attractive.

That tailwind, which prevented even worse economic pain during the recession, has ceased, according to interviews with economists, analysts and money managers.

“We’ve had almost a 30-year rally,” said David Wyss, chief economist for Standard & Poor’s. “That’s come to an end.”

Just as significant as the bottom-line impact will be the psychological fallout from not being able to buy more while paying less — an unusual state of affairs that made consumer spending the most important measure of economic health.

“We’ve gotten spoiled by the idea that interest rates will stay in the low single-digits forever,” said Jim Caron, an interest rate strategist with Morgan Stanley. “We’ve also had a generation of consumers and investors get used to low rates.”

For young home buyers today considering 30-year mortgages with a rate of just over 5 percent, it might be hard to conceive of a time like October 1981, when mortgage rates peaked at 18.2 percent. That meant monthly payments of $1,523 then compared with $556 now for a $100,000 loan.

No one expects rates to return to anything resembling 1981 levels. Still, for much of Wall Street, the question is not whether rates will go up, but rather by how much.

Some firms, like Morgan Stanley, are predicting that rates could rise by a percentage point and a half by the end of the year. Others, like JPMorgan Chase are forecasting a more modest half-point jump.

But the consensus is clear, according to Terrence M. Belton, global head of fixed-income strategy for J. P. Morgan Securities. “Everyone knows that rates will eventually go higher,” he said.

http://www.nytimes.com/2010/04/14/busin ... nted=print

Lawmakers Regulate Banks, Then Flock to Them
April 13, 2010

By ERIC LICHTBLAU

WASHINGTON — Representative Barney Frank publicly rebuked a former aide this month for taking a job with a big Wall Street firm right after drafting a regulation that could affect the way the firm does business. Mr. Frank described it as an unusual transgression, one that embarrassed others working on the legislation and created at least the appearance of a conflict of interest.

But while the speed of the aide’s switch from government to Wall Street was extraordinary, it reflected reality as Congress takes on an overhaul of the system of regulating financial giants: Wall Street, perhaps more than any other industry, is bolstering its lobbying forces, and turning more and more to former lawmakers and Congressional staff members to lead the fight against stiff rules.

The revolving door is an oft-noticed phenomenon here, but in recent years, the migration from Congress to the financial services firms that are trying to stave off greater federal regulation has become more pronounced.

From anonymous midlevel workers to former House and Senate majority leaders, more than 125 former Congressional aides and lawmakers are now working for financial firms as part of a multibillion-dollar effort to shape, and often scale back, federal regulatory power, data shows. Indeed, some of the biggest players in Washington politics are lobbying now on the regulatory bills that are making their way through Congress.

One former representative, Michael G. Oxley, the Ohio Republican whose name is on one of the most famous pieces of business regulatory legislation, is a senior adviser to the Nasdaq stock market.

The legislation, the Sarbanes-Oxley Act of 2002, imposed tougher accounting measures on firms after scandals at Enron and other companies. Mr. Oxley received $40,000 in the last quarter of 2009 for lobbying to limit the ownership of banks and other competitors in clearinghouses.

Another former Republican representative, Richard H. Baker of Louisiana, served 12 years as chairman of the House banking panel that oversaw capital markets before he left Congress in 2008. He is now president and a registered lobbyist for the Managed Funds Association, which represents the largest trading firms in the trillion-dollar hedge fund industry. The association reported spending $3.7 million last year alone to lobby federal officials on regulations for hedge funds.

An analysis by Public Citizen found that at least 70 former members of Congress were lobbying for Wall Street and the financial services sector last year, including two former Senate majority leaders (Trent Lott and Bob Dole), two former House majority leaders (Richard A. Gephardt and Dick Armey) and a former House speaker (J. Dennis Hastert).

In addition to the lawmakers, data from the Center for Responsive Politics counted 56 former Congressional aides on the Senate or House banking committees who went on to use their expertise to lobby for the financial sector.

Visa had the most former Congressional officials, with 37 lobbyists; it was followed closely by other financial powerhouses like Goldman Sachs, Prudential, Citigroup and the American Bankers Association, according to the analysis from Public Citizen, an advocacy group that has pushed for tougher lobbying restrictions.

The case of Peter S. Roberson, whose hiring by a derivatives clearinghouse drew the ire of Mr. Frank, is the most extreme, and it points to holes in the rules governing lobbying by former aides.

As a senior aide to Mr. Frank on the House financial services committee, Mr. Roberson helped draft legislation last year on regulating the over-the-counter derivatives market, which played a big part in the 2008 market collapse. After leaving his Congressional post in January, he began working as a lobbyist for IntercontinentalExchange, the world’s leading clearinghouse for derivatives.

Mr. Roberson, who was paid $124,416 last year as a senior aide, is banned from contacting or lobbying his former colleagues on the committee. But that will not stop him from lobbying, if he chooses to do so. Indeed, he is opening the Washington lobbying office of the exchange.

He is allowed to contact other committees that will be considering the derivatives part of the legislation, like the agriculture committee, as well as anyone in the Senate, where the debate has now shifted. The House has already approved the legislation written by Mr. Frank.

IntercontinentalExchange, known as ICE, said that Mr. Roberson would not be available for an interview and declined to say who had initiated the job discussions. In a statement, Johnathan Short, general counsel for the company, said, “ICE is aware of and has respectfully followed all requirements under House ethics rules governing contact between members, current and former staff. We hired Peter with a full and complete understanding of existing ethics rules and the chairman’s purview in administering the same.”

In an interview last week, Mr. Frank said that he was incensed when Mr. Roberson informed him several months ago that he was in job discussions with the exchange. “In this case, what made it particularly egregious was that he had been working specifically on legislation that was relevant to the company — he had been working on derivatives,” Mr. Frank said.

Some critics of the legislation maintain that the section of the bill regulating derivatives is now tainted because of the involvement of Mr. Roberson, who had worked as a lobbyist for the Bond Market Association before going to work for the financial services committee in 2007.

Mr. Frank said he was confident that Mr. Roberson had not influenced or softened the final drafting of the rules with an eye toward a future employer — “nobody slips that stuff by us,” he said — but he acknowledged that the situation had driven public skepticism.

“It’s the appearance as much as anything else,” he said. “He may be able to give them some insight into how things were worded, etc.,” he added.

Mr. Frank barred Mr. Roberson from having any contact with his committee for as long as he is chairman — a step that goes beyond the one-year restriction in House rules — and he said that he would also order his staff not to have any job discussions in the future with companies for which they are drafting regulations.

“You should not be allowed to do that, because it could have an influence on you,” he said.

It was the second time in less than two years that Mr. Frank had imposed a restriction that went beyond House rules in dealing with a staff member turned lobbyist. He said he had imposed a two-year restriction on any committee contact with Michael Paese, the former deputy staff director at the committee who left in August 2008 to be a lobbyist and top executive with the Securities Industry and Financial Markets Association.

Lobbyists and several executives at financial firms that employ them, none of whom would agree to be named, said that former members of Congress and staff members were in high demand because they brought invaluable expertise and access on federal matters.

“Hiring a well-connected staffer can run a firm something like $300,000 to $600,000 a year, and for a member of Congress, it’s anywhere from $1 million to $3 million,” said Craig Holman of Public Citizen. “The only businesses that can really afford that are those that are very wealthy, but clearly these companies are getting their money’s worth.”

[JackRiddler]

Mike Whitney with two on next phase of crash:

http://counterpunch.org/whitney04122010.html

An Insolvent System?
Is the Fed Helping the Big Banks to Cook Their Books?

April 12, 2010

By MIKE WHITNEY

On Friday, the Wall Street Journal revealed details of a cover up by the nation’s largest banks that have been engaged in potentially-criminal accounting activities to conceal the amount of debt on their balance sheets. The SEC has been notified of the allegations and has launched a probe to determine whether further action is needed. Among the banks implicated, are Goldman Sachs, JP Morgan, Bank of America, and Citigroup. According to the WSJ:

"Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York. A group of 18 banks....understated the debt levels used to fund securities trades by lowering them an average of 42 per cent at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters." ("Big Banks Mask Risk Levels", Kate Kelly, Tom McGinty, Dan Fitzpatrick, Wall Street Journal)

The article has set off alarm bells on Wall Street because of the similarity between Lehman Bros. "repo 105" transactions and these new signs of obfuscation by other large banks. "Repo 105" is an accounting device that Lehman used to hide $50 billion in debt off its balance sheet in an attempt to mislead investors about the true state of its financial health. The WSJ story suggests that the practice may be more widespread than originally thought. The "repo 105" scandal is further complicated by suspicions that Lehman was assisted in its effort by the Federal Reserve Bank of New York which, at the time, was headed by the present Secretary of the Treasury, Timothy Geithner. Here is a short recap of what transpired between the Geithner's NY Fed and Lehman according to ex-regulator William Black and former NY governor Eliot Spitzer from an article on Huffington Post:

"The FRBNY [i.e., New York Fed] knew that Lehman was engaged in smoke and mirrors designed to overstate its liquidity and, therefore, was unwilling to lend as much money to Lehman. The FRBNY did not, however, inform the SEC, the public, or the Office of Thrift Supervision (which regulated an S&L that Lehman owned) of what should have been viewed by all as ongoing misrepresentations.

The Fed's behavior made it clear that officials didn't believe they needed to do more with this information. The FRBNY remained willing to lend to an institution with misleading accounting and neither remedied the accounting nor notified other regulators who may have had the opportunity to do so...... We now know from Valukas and from former Treasury Secretary Paulson that the Treasury and the Fed knew that Lehman was massively overstating its on-book asset values." (Time for the Truth" William Black and Eliot Spitzer, Huffington Post)

So the question is whether the NY Fed helped other banks conceal important financial information from investors, too. And--if that's the case--then how can the public be confident that the biggest banks in the country are truly solvent?

According to the WSJ: "An official at the Federal Reserve Board noted that the Fed continuously monitors asset levels at the large bank-holding companies, but the financing activities captured in the New York Fed's data fall under the purview of the Securities and Exchange Commission, which regulates brokerage firms."

The Fed's explanation is a tacit denial of its responsibility to regulate or report suspicious accounting practices to the appropriate agencies. The response is not just "buck passing", but also suggests collusion. So far, there's no clear link between the Fed and the shady bookeeping at the banks. But many now believe that -- in the case of Lehman -- the Fed acted as an "enabler", either by serving as a counterparty in repo 105 deals or by looking the other way while the transactions were executed. Either way, the situation demands an independent investigation.

To put the WSJ article in context, it helps to review the details of the Lehman case. Here's an excerpt from an article by Eric Dash in the NY Times:

"Newly released report on the collapse of Lehman Brothers ... sheds surprising new light on Lehman’s dealings with the New York Fed. Lehman engaged in a series of transactions with the New York Fed that were similar to the ones that drew criticism from the bankruptcy court examiner who investigated its collapse....

“The report by Mr. Valukas nonetheless raises fresh questions about the role of the New York Fed in supporting Lehman during the frantic months leading up to its collapse. It suggests that Lehman executives believed the Fed would be able to help the bank avert disaster and provide it with a business opportunity...

“Lehman, desperate for financing, seized its chance. It packaged billions of dollars of troubled corporate loans into an investment called Freedom CLO. Then, in a series of transactions, it shifted Freedom back and forth to the New York Fed, in exchange for cash. Those moves helped make Lehman look healthier.

“Essentially, Lehman was able to temporarily warehouse illiquid investments that were worrying its investors at the New York Fed in return for cash. The Fed created this facility immediately after the near collapse of Bear Stearns. Some suspect that other banks engaged in similar maneuvers.” ("Fed Helped Bank Raise Cash Quickly", Eric Dash, New York Times)

So why did "Lehman executives believe the Fed would be able to help the bank avert disaster and provide it with a business opportunity"? Most likely, because that had been standard operating procedure. The Fed was merely acting as it had before. Lehman used the repo market to amplify leverage to maximize profits, (the same as the other banks) and when they couldn't find a counterparty to accept their garbage collateral, the Fed would step in and provide short-term loans and "warehouse" their toxic assets. In essence, the Fed was helping to defraud investors who believed the banks reports were accurate. Here's Yves Smith at Naked Capitalism who sums it up perfectly:

"The NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations...…at a minimum, the NY Fed helped perpetuate a fraud on investors and counterparties. This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large. And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets."

So if the NY Fed had no moral qualms about its "repo 105" dealings with Lehman, than why would hesitate to do the same thing for the other banks? Tyler Durden at Zero Hedge answers the question like this:

"We contend that Repo 105 type book-cooking and quarter end balance sheet window dressing was a prevalent phenomenon among all the banks. The fact that over the past two and a half years this resulted in a differential from the peak quarterly assets of over $65 billion is unbelievable, and the fact that this had slipped through the regulators' fingers is inexcusable.....

“We are confident that armed with this data, the SEC will be able to provide a prompt and logical response to why the primary dealers have such a peculiar pattern in downshifting their assets toward quarter end, and much more relevantly, who the counterparties are that would consistently take the other side of these quarter end window-dressing trades." ("Evidence That Primary Dealers Have Collectively Engaged In Repo 105 And Qtr-End Book Cooking Type Schemes For Years" zero hedge, 4-9-10)

Durden's logic looks good. If Lehman was being aided in its "book cooking" by the NY Fed, then the other banks were probably being helped, as well. It looks like Geithner left his fingerprints everywhere.

If we add these new developments to the fact that the Financial Accounting Standards Board's (FASB) "mark to market" rule has been suspended (allowing banks to arbitrarily assign whatever value they choose to the own illiquid assets) and, the fact that the Federal Reserve still refuses to allow an independent audit of the dodgy collateral it accepted from the banks in exchange for Treasuries and other loans; then it still looks like the banking system is either teetering or insolvent.

And don't expect the Securities and Exchange Commission to get to the bottom of this either. SEC chairman Mary Schapiro is a proven financial industry loyalist who has no intention of upsetting her Wall Street overlords by digging too deep or issuing subpoenas. If she pursues the investigation at all, it will only be to placate the public and to apply liberal amounts of whitewash to the whole matter.

Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com

http://counterpunch.org/whitney04152010.html

A World of Pain Ahead
Housing Crashes Again

April 15, 2010

By MIKE WHITNEY

The brief period of stabilization in housing appears to be over and the next leg-down has begun. Mortgage rates are edging higher, foreclosures are on the rise, and the government programs that supported the sector, are being phased out. The uptick in bank-owned properties (REO) is adding to surplus inventory and pushing down prices. A recently released report from First American CoreLogic shows that "distressed sales accounted for 29 per cent of all sales nationwide." Nearly one-third of all home sales are distressed REOs. Also, according to a report from Clear Capital, "Home prices nationally have dropped 3.9 percent quarter to quarter, the first quarterly drop in nine months. (Thanks to Diana Olick, Realty Check, CNBC) Bottom line: More people are being forced from their homes, the banks are facing bigger losses, and the housing market is on the skids.

The Obama administration's Home Affordable Modification Program (HAMP) has largely been a bust. Of the 3 to 4 million potential modifications, only 170,000 homeowners have successfully converted into a new mortgage. Under the new "principal reduction" plan, borrowers will be able to refinance into a FHA loan if lenders agree to slash the face-value of the mortgage. This puts the government on the hook if the homeowner defaults, which will lead to heftier losses for Uncle Sam. One of the main sticking points with the new program has been second liens, which are the home equity loans that were made using the mortgage as collateral. Falling home prices have made these loans essentially worthless, but the banks have resisted writing them off altogether because hundreds of billions of dollars are at stake. Even so, the four biggest banks have signed on to the new program hoping to stem the surge in foreclosures. Here's an excerpt from an article on Housingwire that shows how desperate the banks are to stop the bleeding:

"Two major banks are expecting major increases in foreclosures, by the end of 2010.

"According to the Irvine Housing blog, Bank of America, which currently forecloses on 7,500 homes every month will see that number rise to 45,000 by December 2010.....

“JPMorgan Chase is forecasting bigger foreclosure numbers in the coming months. According to a presentation at the end of February, JPMorgan expects the amount of real estate owned (REO) properties in its portfolio to reach between 33,000 to 45,000 in Q410. By comparison, in Q409, REO inventories were at 23,100." ("Big Banks Prepare for Major Rise in Foreclosures Ending 2010" Jon Prior, Housingwire.)

Bank of America's 6X increase in projected foreclosures is a real eye-popper. It suggests that housing prices (particularly in California) have quite a bit further to tumble. This will effect everything from private consumption to state revenues. It's a disaster.

Worth noting is that subprime defaults are largely over, and that, the new wave of foreclosures is made up of option ARMs, primes and Alt As. Many of these are high-income individuals who are using "strategic default" as a way to cut their losses and walk away from what has turned out to be a bad business deal. In fact, the data show that well-heeled homeowners are almost twice as likely to default than middle or low income people. So much for moral hazard.

Obama's revised HAMP program could keep as many as one million homeowners out of foreclosure, but, even so, it's just a trickle in the bucket. Foreclosures and short sales will soar into 2011 no matter what the government does. In fact, the torrent has already begun as CNBC's Diana Olick reports on Tuesday:

"Lender Processing Services just put out its "Mortgage Monitor Report," and we have a new record: The nation's foreclosure inventories reached record highs. February's foreclosure rate of 3.31 per cent represented a 51.1 per cent year-over-year increase. The percentage of new problem loans also remains at a five-year high. The total number of non-current first-lien mortgages and REO properties is now more than 7.9 million loans. Furthermore, the percentage of new problem loans is also at its highest level in five years." (CNBC, Diana Olick, Realty Check.)

Whoa. 8 million homeowners are behind on their payments! And, that's not all; mortgage applications dropped 9.6 per cent last week while the Refinance Index (refis) fell 9 per cent in the same period. So, mortgage apps are down even though the Firsttime Homebuyer Tax Credit is still in effect (it ends in two weeks) and, even though this is the "peak season" for home sales.

So, why the sudden spike in foreclosures a full four years into the housing crash?

Because the banks have been withholding supply to keep prices artificially high. There may have been an understanding between the banks and the Fed (a quid pro quo?) to keep inventory low so it looked like Bernanke's $1.25 trillion Quantitative Easing (QE) program was actually stabilizing the market. But now that the banks are stuffed with reserves, there's no need to continue the charade. So the dumping of backlog homes has begun. That will cause inventories to rise and prices to fall. More homeowners will slip into negative equity which will lead to even more foreclosures. It's a vicious circle. If the coming wave of foreclosures is anything close to Bank of America's projections, there's a world of pain ahead.

Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com