FedUpUSA

Yes, that’s sarcasm:

The mortgage firms are looking at every loan more than 90 days past due and “asking us basically to give them all the documentation to show that it was properly underwritten,” JPMorgan’s Scharf said. “We then go through a process with them that takes a period of time, and literally it’s every loan, loan-by-loan, and have the discussion on whether or not we actually should buy the loan back.”

That’s exactly what I said would happen more than two years ago.

EVERY LOAN.

If there was appraisal fraud OR

If there was income fraud OR

If there was DTI fraud OR

If the automated underwriting was gamed OR

If there was asset fraud

THEN the bank gets rammed with a repurchase demand on the bad paper – paper that is 90 days+ and, in essentially every case, dramatically underwater.

The “dream” that this will result in “only” $7 billion in losses (30% of the repurchased amount) is a fantasy.

The most common include inflated appraisals or falsely stated incomes in the loan applications, said Larry Platt, a Washington-based partner at law firm K&L Gates LLP who specializes in mortgage-purchase agreements. The government agencies hire their own reviewers who go back and compare the appraisals with prices from historical home sales, he said.

Ding ding ding ding ding ding.

The truly ugly news isn’t found in these mortgages.  It is found in the second lines – HELOCs and “Silent Seconds” – that are behind these agency mortgages.  Those are worth zero once the first defaults, and when the repurchase demand is perfected the auditors are going to force these loans to be recorded at their likely recovery value – which is zero.

There are literal hundreds of billions of dollars worth of that trash on all of the big banks balance sheets, and all of it is being carried under assumptions that nearly every one of those loans is “money good.”  80% of the dollar value of these HELOCs and Seconds are in the bubble areas and of those virtually all are behind an underwater first.

The assumption that these loans are “money good” is blatantly and intentionally false.  It is a fiction that our regulators, examiners and auditors have foisted upon the public, and if you rely on it, you will get burned.

Oh, JP Morgan’s net income for all of 2009?  $11.7 billion.

They recorded $1.6 billion last year for this “expense”, and I’m willing to bet that it’s double that or more for the coming year, not to mention the impairment or outright write-off of the seconds.

That would be roughly 20% of their net earnings – not exactly an immaterial amount of money.

PS: $21 billion is tiny compared to the tsunami headed these folks’ direction.  In the end every piece of this bad paper is going to head back to the securitizers and originators.  All of it – and the seconds behind that paper are all going to wind up marked to zero, because they are subordinate to an underwater first.  It is simply a matter of time before the people who hold these RMBS and the more complex securities structured on top of them decide to come after the banks and, to the extent that they can prove malfeasance or misfeasance, these banks will eat it.

SnowJob: Revising the Non-Farm Payrolls Report

It appears as though the concerns expressed by the Administration about the snow storms and their impact on lost employment was overdone, if not misplaced. The market is pleasantly surprised with this -36,000 jobs number, since the expectations had been calibrated lower so effectively.

In fairness to the Obama Administration, they are only doing what Bush II, Clinton, and Bush I* had been doing right along with almost every statistic that they have issued. It’s called ‘perception management.’ Greece used one method of accounting management in shaping the numbers, and the US uses its own approach to what is essentially a similar problem.

“Propaganda proceeds by psychological manipulations, character modifications, and the creation of stereotypes useful when the time comes.
The two great routes that propaganda takes are the conditioned reflex and the myth.” Jacques Ellul

In addition to the ‘better-than-expected’ jobs loss announced today for February, the Bureau of Labor Statistics also went back and adjusted the employment numbers from April-July 2009.

“With the release of February data on March 5, 2010, BLS has corrected April-July 2009 establishment survey estimates for all employees and women employees for the federal government series. The changes result from corrections to initial counts for Census temporary and intermittent workers for Census 2010.”

This adjustment itself was not so great, certainly not as significant as the benchmark revision done in January for the 12+ months preceding.

I thought it would be an interesting exercise to compare the views of the US employment Seasonally Adjusted “headline numbers” presented by the BLS in December 2009, and the current view that they are showing as the true number today after the two recent sets of revisions.

The net result of the revisions is that jobs were added to the beginning and the end of what will be defined as ‘the recession.’

This serves to now make the slump look steeper and more severe, and the recovery to be a little sharper, with plenty of jobs leftover to create a ‘flat impression’ in 2010 at worst.

In short, jobs were removed from almost every month in the revision during the slump, and shoved into the beginning and into the end.

That looks like a nice picture of a recovery, doesn’t it? See, the February 2009 stimulus program and the strategy of massive bank bailouts have worked.

I have seen corporate managers who have come into a new position and inherited a mess jigger the numbers in a similar way. You make the slump look as bad as possible, and shove the excess profits or revenue into the beginning and the end of the problem, to make your efforts look as heroically effective as is possible.

Perhaps this is all just the way things turned out, in revising the numbers so as to make them the most accurate.

Or perhaps the US economy and its monetary system are an increasingly untenable Ponzi scheme, the mother of frauds.

Now this is interesting…

March 5 (Bloomberg) — Fannie Mae and Freddie Mac bondholders shouldn’t assume the government will make them whole on their investments as Congress retools the companies, House Financial Services Committee Chairman Barney Frank said.

Heh, who’s the biggest individual bondholder?

Mr. Bernanke, the bond market is on line #1!

Frank continues:

A “whole range” of options is being considered for investors in the two government-seized companies, “from paying nothing to a haircut to whatever,” said Frank, whose committee oversees Fannie Mae and Freddie Mac.

Nothing?  You mean zero, zilch, bupkis? 

That would be rich.  After Bernanke stepped in and bought some $200 billion of their debt, to have it “marked to zero” would be the ultimate slap in The Fed’s face for buying that which I have argued is impermissible under the law.

What an elegant solution to a difficult problem - “oops – tear ‘em up jackass – you should have known better than to buy something that you weren’t allowed to and was patently worthless!”

The irony of that outcome would be delicious.  Yes, I know I’m dreaming here – or am I?

“Please don’t think this is federally guaranteed, I don’t think it is, I don’t think it should be, I don’t feel any obligation to bail you out,” Frank said. Congress will “certainly not” extend any new protections to bond and mortgage-security investors beyond what exists, Frank said.

Oh.  You mean that the face of those prospectuses mean what they say?  You mean this is real?

Uh, the market is kinda ignoring that right now, isn’t it? 

Yes, I think it is.

How about this for a clear statement?

“We’re not remaking Fannie and Freddie,” Frank said. “We’re going to start from scratch and do housing finance.”

Go ahead folks, keep buying.  This is spelled “opportunity”, thank you very much.  Now please excuse me while I go put a few chips on “red.”

PS: Why are these stocks still listed again?

So now we have Senator Dodd saying:

“I can’t write regulations, this is way beyond the competency of Congress”

Really Mr. Dodd?

How about “Bankruptcy Reform”?

How about the CARD act, which as you can see from my Ticker yesterday, was instantaneously circumvented by the banks.  Instead of “jacking interest rates” they simply put a CALL feature into their account disclosures, which now means you get raped by having the entire balance on your card due and payable literally on demand.  (As an aside, how hard would it have been to say “no adverse actions” as a consequence of universal default, instead of what  was actually done?  Oh, and did banking lobbying interests recommend the language you did adopt?)

“The business community needs certainty on this issue,” he said. “We ought to leave it to them to make the recommendations.”

Really?  Like the business community “recommended” OptionARMs, automated underwriting, blacklisting appraisers that didn’t participate in outright fraud on property valuations, bankruptcy “reform”, Credit Default Swaps, Synthetic CDOs and more?

Who’s on the other side of the table?  What other voice is there on input into this process?

None.

Now let’s look at results.  I would have no quarrel with a wildly business-friendly environment if it produced prosperity.

But it did not.

It instead produced asset-stripping, fraud, scams of various dimension, a huge housing and credit bubble and threatened the nation, if Hank Paulson is to be believed, not just with economic depression but literal martial law.

If I in concert with others took actions that threatened the destruction of our government by force, and thus gave rise to an argument that martial law would have to be declared, I would (justifiably) be held on charges of seditious conspiracy.  Can someone explain why firms and individuals, acting between themselves in a fashion that leads them to effectively demand a $700 billion bailout lest the tanks roll, fails to meet this definition under the law?

We keep talking about how the government “saved us” from the depths of Hell – literally – with their “extraordinary measures.”  Whether it is Congress, The Administration or The Fed, all are credited with keeping the nation (and perhaps the world) from going over the cliff and straight down into the land of brimstone and sulfur.

But are we actually standing on terra firma, or are we playing Wile-E-Coyote dangling in the air?

Let’s look at the facts.

• We claim to have “decent” growth now, running about 3.5% (expected) for the full year of 2010.  But that growth is false; Government is borrowing and spending an additional 9% of GDP beyond what it was before the disaster began, it has been doing so now for two years, and there is no inclination that it is going to slow down or stop.  Indeed, there is every reason to believe that the government can’t stop, lest the economy instantly implode, as final, true demand simply has not recovered.  It is, in fact, at depression levels – right now.

• We supposedly prevented a monstrous cross-default credit default swap explosion.  Or did we?  Did we get rid of the credit-default swaps?  Have we proved that everyone currently “short” them has the ability to pay?  Can I reasonably expect that if there is a default in some bond issue that the counterparty is good for it?  Nope – none of the above.  In fact we have every reason to believe that the threat of a cross-default explosion is larger today than it was in September of 2008.

• The centroid of this mess is claimed to be housing.  Has housing recovered?  No – yesterday’s existing home sales figures strongly suggest that the recent “tax incentives” have in fact worn off – they no longer do anything to spur sales!  The scary possibility, of course, is that they are effective, which means when they expire later this year sales will utterly collapse.  We’ll find out which is the case here in a few months.

• Do we have reasonable transparency in bank balance sheets?  Nope.  Not only do we know that Wells and Citi have over $1 trillion in off-balance sheet exposures each (and we have absolutely no clue how much either of those exposures is worth “at the market” today) we also know that the Federal Home Loan Bank of Seattle, the poster child for mark-to-model which claimed only about $10 billion of expected “loss” on what was a mark-to-market loss of $300 billion is now suing for the entire $300 billion.  In other words, the “model” folks were wrong, and those such as myself who insisted that we had to mark to the market and that market prices reflected actual loss levels were (and are) right.  If that “ten times worse than we claimed” projection for embedded losses is anything close to typical the entire banking system is still insolvent.

• The states are going broke.  Fast.  California is “firing” 15,000 San Francisco employees, then “re-hiring” some of them but holding down hours.  The Illinois and California university systems are imploding, and major protests are occurring (apparently the students involved failed their middle-school math classes.)  The states have made pension promises they are bound by state constitution (in many cases) to keep, but which mathematically can’t be kept, and some of them result in payouts of $200,000 or more annually with retirement permitted at 55 (for the math-impaired this results in a likely pension of more than $6 million smackers!)  New York and New Jersey have critical state funding shortages.  Sales tax receipts remain in the toilet, despite the repeated claims of “a turnaround in economic activity.”  Public-sector unions, including police, firefighters and teachers have responded to calls for them to take the same sort of 20% or more cuts in pay and benefits that have been widespread throughout the private sector with threats.  We have allowed public sector employees to define for themselves growth in their costs that exceed growth rates in the productive economy.  Mathematically, this cannot continue.

• Treasury yesterday claimed “There is no government guarantee for big financial firms.”  This is a lie.  By definition any bank that can come to the government and say “help us or the economy will suffer critical damage” has such a guarantee, whether Treasury admits it or not.

Now consider this: There is neither the capital or the political will to go through another bailout cycle.  Not now, not any time in the foreseeable future.

IF a sovereign nation starts a chain-reaction default (e.g. Greece, Spain, etc), IF there is a massive fraud discovered at one of the big banks, IF there is a speculative attack on a currency, any of a thousand IFs.

We won’t be able to stop it.

Not The Fed, not The Government, not anyone.

We have been given the ability – a gift really – to pull the fuse on this mess.  To lock up the nuclear financial weapons away from the kids.  To let the adults in the room.

So far, we’ve not only done none of the above, we’ve gone further to concentrate and increase systemic risk.

We cannot withstand another attack.

Everyone wants to talk about health care.  Sorry folks, that’s a misdirection.  A scam.  It is simply a way to try to get more tax revenue – right now – to stave off a possible federal funding crisis.  Treasury knows it, Obama knows it, and Congress knows it.

They won’t tell you, but they know the truth.

We cannot withstand another attack.

We must break up the large financial institutions that caused this mess.  What sort of act is more anti-competitive than going to the government and threatening it with economic armageddon if it does not hand you billions of taxpayer dollars?  Whether it’s a loan or a handout makes no difference – the very issuance of such a threat is a declaration of trust behavior banned under The Sherman Act, among others.  We need no new laws to deal with this situation - we simply can and must enforce the existing ones.

We cannot withstand another attack.

Stiglitz, in a remarkable display of truth, said today that The Federal Reserve System is corrupt.  He’s right, of course.  What other explanation is there for an institution that literally sat back and watched more than $10 trillion in fraudulent credit creation take place – all so a bunch of banksters could make billion-dollar bonuses?  This must change – here and now. 

We cannot withstand another attack.

But we’re gonna suffer one, and soon, if we don’t pull the fuse.

The Credit Default Swap monster has to be caged.  I know I sound like a broken record, but it has to happen.  Now.  Today.  I don’t give a damn if the banks like it or not.  I don’t care if bankrupts all of them.  It has to happen now.

The off-balance-sheet crap has to be exposed and valued, along with everything else, at the market.  Yes, I know it will cause major problems for the banks.  I don’t care.  It has to be happen now.

We have to get control of federal spending.  We cannot spend $1.3 trillion more a year than the government takes in via taxes.  We just can’t.  We’re getting away with it right now because everyone is scared that Greece is about to blow the Euro Zone to pieces.  But once that either happens or the fear recedes, the speculators will point their weapons of financial destruction here.  We have either fixed the problem before then, or we’re next. 

And finally, we must know what The Fed is holding, what they’ve bought, what they’ve monetized, who got paid off and what sort of trash is hidden in the black hole known as their balance sheet.  This means full audits – now and evermore in the future.  No exceptions.

If you remember back when Paulson’s “bazooka” was first discussed I said that the market calls all bets. 

It did. 

Within days.

We’re there again folks, about to witness the market calling our leaders’ bet again, and we are enjoying a respite only because there are other hookers in the room of nations with a worse case of crotch rot than we have.

But that’s not a sign of strength – it is a sign of danger, for our own particular financial STD has not been cured.

We’re running out of time to take the penicillin.