FedUpUSA

Archive for April 13th, 2010

Gee, It Took The Senate THREE YEARS? (WaMu)

Posted by Karl Denninger

In a pair of articles that outline exactly how outrageously corrupt our government’s so-called “regulators” really are, The WSJ points to the Senate investigation on Washington Mutual:

WASHINGTON–Officials at the failed banking operations of Washington Mutual Inc. securitized substantial volumes of risky, fraudulent loans in the run-up to the financial meltdown despite repeated internal warning signs, according to a Senate probe.

Got that?  Not just dangerous loans, fraudulent loans.

The subcommittee has obtained documents showing that “at a critical point Washington Mutual included loans in its securities because they were likely to suffer a high rate of default, and they failed to disclose that to the buyers,” Sen. Levin said. “They also allowed loans that had been identified as fraudulent to be sold to buyers, again without alerting buyers when the fraud was discovered.”

Got that again?  The bank intentionally included defective loans in securities it sold to investors.

What started my publication of The Market Ticker was my own investigation of Washington Mutual and other lenders after the Asian “blip” in 2007.  On April 18th, 2007 I wrote the following:

This is the same sort of crap that sunk Lucent and Enron – booking “income” that is not in fact spendable, as it has an impairment associated with it (the LTV is INCREASED by this negative amortization) AND it is not CASH!
 
There is a legitimate argument to be made for booking this as a net increase in the bank’s assets, offset with a loss reserve due to the increase in LTV on the property (this is the most likely part of the principle to be unrecoverable in the event of a default.) In effect this is a capital asset that is drawn down in value over some period of time – up to 30 years for most mortgages.

But now the bank has elected to pay 55 cents of dividend, yet the single largest contributor to their “86 cents of net income” this last quarter was in fact capitalized interest that cannot be spent!

Washington Mutual made these loans because the negative amortization allowed them to book “earnings” that did not and never would actually occur. 

That was the essence of what was going on and it was why they didn’t give a damn whether the loans performed or not – until they blew (and even beyond, if they didn’t foreclose!) they were booking “earnings” that in fact were bogus.

It was and is all about legalized scams that our government has repeatedly refused to put a stop to.  In the 1990s we had hundreds of companies releasing “pro forma” earnings that bore no reasonable relationship to actual operating results, using EBIDTA for their numbers when “B, I, D, T and A” were, added together, double their reported “earnings” and in fact the firm was burning cash like a Weimar Republic family trying to keep warm.  This of course was destined to and did detonate in a chain-reaction set of failures from 2000-2003 that we called “The Tech Crash.”

Supposedly Sarbanes-Oxley put a stop to this crap after ENRON, which was the mother and father of all hinky accounting deals.  Well, unless you also count Winstar, Lucent and MCI, all three of which were doing similar “creative” things with their books.  The first and last were deferring the recognition of build-out costs for their networks through what amounted to Option ARM loans on the hardware they needed!  When they couldn’t pay and blew up Lucent was nearly bankrupted as a consequence (particularly by their relationship with Winstar.)

How bad was the fraud problem?  The WSJ says:

Some of the worst problems occurred in high-volume loan offices in the California cities of Montebello and Downey. A year-long internal investigation found fraud rates of 58% and 83% in those offices. The results were reported to the bank’s head of home loans.

Not only was nothing done then by the bank, but nothing was done by the regulators.  The government did and still does willfully and intentionally look the other way, and not one indictment has issued among any of these banksters.

Let’s remember folks that without the “free credit” games the housing bubble would have never inflated.  Without the “free money” hairdressers couldn’t buy $500,000 houses.  But The Obama Administration is hellbent and determined to continue the “free money” meme with bailouts and handouts to everyone to buy cars, houses, and sate the Obama’s gonna pay my mortgage! crowd.

Geithner is crowing about the government’s “success” once again:

America is close to turning the page on this economic crisis. While far too many Americans are still out of work and face deep economic hardship, we have now reported three quarters of positive growth and the beginnings of job creation.

Liar.

In fact, I’ll go further: You rat bastard. 

Why?  Because Geithner acknowledges what happened:

The true cost of this crisis, however, will always be measured by the millions of lost jobs, the trillions in lost savings and the thousands of failed businesses. No future generation should have to pay such a price.

These lost jobs, lost savings and thousands of failed businesses were not an accident, they were not “unforeseeable” and they were not “unavoidable” or “part of a business cycle.”

Read the above again: Six to eight out of ten loans made out of that WaMu office were fraudulent.

Fraud is supposed to result in criminal charges and prison time. 

Yet no indictments have issued, none of these banksters have gone to prison, and not only have the people responsible not been prosecuted they’ve gotten rich off their scams and kept the damn money that they stole!

That is welcome news. The best way to protect American families who take out a mortgage or a car loan or who save to put their kids through college is through an independent, accountable agency that can set and enforce clear rules of the road across the financial marketplace.

The best way to protect American families is to prosecute fraudulent conduct and put the scammers in prison where they belong.  These people don’t care about fines, just as Pfizer didn’t – they pled guilty to the same felony twice, treating it as “a cost of doing business” as it was about one percent of their market cap.

The only deterrent available is to start throwing the scammers in prison.  All of them.  We can start with the people at WaMu and Lehman, then go down the list and for each and every firm that cooked its balance sheet, nailing them under SarBox as well.  While we’re at it jail every bank executive involved in crooked derivatives deals with municipal and state governments, starting with Jefferson County in Alabama.

Transparency will lower costs for users of derivatives, such as industrial or agriculture companies, allowing them to more effectively manage their risk. It will enable regulators to more effectively monitor risks of all significant derivatives players and financial institutions, and prevent fraud, manipulation and abuse. And by bringing standardized derivatives into central clearing houses and trading facilities, the Senate bill would reduce the risk that the derivatives market will again threaten the entire financial system.

You’re a liar Geithner. 

Fraud is already against the law.  But just as with “Prompt Corrective Action”, which contains a plethora of “Shalls” and very few “Mays”, along with the black-letter law in The Federal Reserve Act that mandates that The Fed (and its minions) buy only US sovereign-backed instruments, laws are only important if they are enforced.

In each and every one of these so-called “laws”, including the bill in The Senate (and House version) to allegedly reform the financial system, all are lacking the essence of a law: an “or else.”

That is, none contain criminal penalties for violators, including and especially government actors who refuse to follow their strictures and none also contain a private cause of action for the citizens of this nation to allow we, the people, to bring suits and presentments as a means to compel enforcement.

WaMu was demonstrably and inevitably headed to insolvency in 2007, as I pointed out at the time – they were paying dividends out of non-existent cash.  You can’t do that forever without blowing up, no matter how much you start with.  Yet federal regulators refused to step in and put a stop to it.

Over 100 banks have failed thus far.  The FDIC continues to record insane loss rates on the alleged “assets” they are holding, proof positive that these institutions are “cooking their books” and holding so-called “assets” at dramatically above their actual values.  Yet nobody has gone to jail or even been indicted for certifying a balance sheet that is later proved to be dramatically off actual valuations.

Investors lost literal trillions as a consequence of these scams and schemes, but there is nobody sitting in prison right now for running them.  Even when outright bribery is involved, as occurred in Jefferson County, Alabama, the state officials go to prison (as they should) but the bank executives involved in the schemes aren’t even indicted!

The Senate bill is strong. It would create an independent agency to better protect American families across the financial marketplace. It would protect against “too big to fail.” And it would bring the derivatives market out of the dark. As the bill moves to the floor, we will fight any attempt to weaken it. The American people have suffered through too much to enact reform that does too little.

You’re lying and hiding behind more Washington obfuscation, Turbo Timmy.

The laws necessary to put a stop to this crap – by throwing the fraudsters in prison – are already on the books.  You cannot solve a problem like this with more laws when the laws that already exist are not enforced because you have an executive that is in the pocket of the scammers, and thus the Attorney General and his legion of prosecutors refuse to empanel Grand Juries and bring indictments.

America is sick and tired of the scams and schemes Turbo Timmy.  We’re also fully awake, our pocket has been picked, and we’re pissed.

November is coming, and we vote.

If We’re Dismantling Too Big To Fail…

Posted by Karl Denninger

Mish Mailbag: IBM Abandons U.S. Workers

Here is an Email from “Voice in the Dark” about IBM and outsourcing. VID writes …

Hello Mish

I read your blog every day. I do not comment much, but I think the MSM and most blogs are missing out on the greatest story not being told.

Large corporations are abandoning the US. I work for IBM. Here is a snapshot of IBM’s US headcount:

2005 133,789
2006 127,000
2007 121,000
2008 115,000
2009 105,000
2010 98,000 estimate

These are all good paying jobs that can support a family and pay taxes.

Today, 75% of the total headcount is overseas. The overseas revenue is 65%. The company reported record profits last year. IBM decided to stop reporting their US headcount this year.

You know that many companies are moving their resources overseas. China is the new spot to build development centers. These incremental loses are adding up. But the saddest thing is that they are giving away the building blocks for innovation.

I just read a few weeks ago the Applied Material is planning to replace their US research center for a new one in China. That is another example of what is going on.

And no venture capitalist would attempt to build a solar panel factory from scratch in the US. The costs and the EPA will prevent that.

Please tell this story.

Sign me: Just Another Voice in The Dark

Hello “Voice in the Dark”.

I covered the situation with Applied Materials in High Tech Research Moves From U.S. To China

Goodbye Silicon Valley, hello Xi’an China. Applied Materials will do new cutting edge research on solar panels in Xi’an. …

Please see Brain Drain as a followup.

Two Drivers For Outsourcing

Outsourcing jobs has been going on quite some time. Let’s address why.

For starters, global wage arbitrage is one huge factor in play.

Unfortunately, wage equalization and standard of living adjustments between industrialized countries and emerging markets will be a long painful process for Western society.

On that score, there is little that can be done except reduce wages and benefits in the public sector and stop wasting money being the world’s policeman. We simply can no longer afford it. Besides, neither of those things ever made any sense anyway.

US Tax policy is another reason for outsourcing, and that can easily be addressed, at least in theory.

US corporate tax policy allows deferment of profits overseas, but profits in the US have a tax rate of 35%. This policy literally begs corporations to move profits and jobs, overseas.

Obama Seeks To End Corporate Tax Breaks

Please consider Obama Seeks End of Corporate Tax Break to Raise $190 Billion

In 2004, U.S.-based multinational corporations paid about $16 billion in U.S. taxes while earning about $700 billion offshore, an effective tax rate of about 2.3 percent, according to the administration statement. The top marginal tax rate for U.S. companies is 35 percent; drug companies such as Amgen Inc. and technology companies such as Microsoft are among companies that make the biggest use of tax-deferral benefits.

The rules were originally designed to reduce paperwork for companies and the IRS by allowing companies to classify entities within their corporate structure in the most tax-efficient manner without inviting a tax challenge.

Unintended Consequence

Clinton administration officials realized they also had made it easy for multinationals to create entities whose only purpose was to shift profits into low-tax countries and out of reach of the tax authorities, according to a January Government Accountability Office report that found 83 of the 100 biggest companies had subsidiaries in tax havens.

Once the assets were in the haven, the U.S. parent company borrowed from the subsidiary. The interest payments were deductible in the U.S. and tax-free in the haven, the GAO said. The nonpartisan congressional Joint Committee on Taxation recommended in 2005 that the rules be repealed.

GE, for example, has deferred tax on a cumulative $75 billion over the last decade, according to filings. Palo Alto, California-based Hewlett-Packard Co. has deferred U.S. tax on $12.9 billion since 2005, while Microsoft has accumulated $7.5 billion that has never been taxed by the U.S. Even American International Group Inc., bailed out by the U.S. in 2008, deferred $3.9 billion in taxes on its foreign earnings in the same year.

Shifting Gains To Low Tax Countries

At a ratio of 35% to 2%, any company in its right mind would seek to shift losses to the US and profits (as well as jobs) overseas. By shifting profits overseas, while keeping the losses at home, GE actually ended up with a huge tax credit.

Forbes discussed this situation recently in What The Top U.S. Companies Pay In Taxes

As you work on your taxes this month, here’s something to raise your hackles: Some of the world’s biggest, most profitable corporations enjoy a far lower tax rate than you do–that is, if they pay taxes at all.

The most egregious example is General Electric (GE). Last year the conglomerate generated $10.3 billion in pretax income, but ended up owing nothing to Uncle Sam. In fact, it recorded a tax benefit of $1.1 billion.

How did this happen? It’s complicated. GE’s tax return is the largest the IRS deals with each year–some 24,000 pages if printed out. Inside you’ll find that GE in effect consists of two divisions: General Electric Capital and everything else. The everything else–maker of engines, power plants, TV shows and the like–would have paid a 22% tax rate if it was a standalone company.

It’s GE Capital that keeps the overall tax bill so low. Over the last two years, GE Capital has displayed an uncanny ability to lose lots of money in the U.S. …

It only makes sense that multinationals “put costs in high-tax countries and profits in low-tax countries,” says Scott Hodge, president of the Tax Foundation. Those low-tax countries are almost anywhere but the U.S. “When you add in state taxes, the U.S. has the highest tax burden among industrialized countries,” says Hodge. In contrast, China’s rate is just 25%; Ireland’s is 12.5%.

Corporations are getting smarter, not just about doing more business in low-tax countries, but in moving their more valuable assets there as well. That means setting up overseas subsidiaries, then transferring to them ownership of long-lived, often intangible but highly profitable assets, like patents and software.

Who Is Hurt By US Corporate Tax Policy?

Unlike IBM and GE, small businesses do not have the luxury of hiring an army of lawyers to figure out how to avoid taxes.

The solution is lower but equal taxes across the board, not higher taxes as President Obama is clamoring for. If one insists on a skew, it would be far better from a jobs standpoint to defer taxes in the US than overseas.

My own personal preference would be to slash the corporate tax rate to 10% or lower, preferably zero.

This would level the playing field between small and large corporations. It would also eliminate the need for a whole army of lawyers and lobbyists whose only function is to game the system.

Finally, elimination of corporate taxes would spur job creation at small businesses, right here in the US, where we desperately need Jobs. To top it off, money would flow to the US, in dollars, instead of overseas in some other currency.

President Obama’s solution is ass backwards.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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