FedUpUSA

Archive for April 20th, 2010

 By Damon Vrabel

It describes The Emerging Global Empire or what has come to be called the new world order or new world economic order.  The primary force driving this is the simple math of the bond market, debt-based money.  Please pass this along because it’s critical that more people start learning how this drives the world…governments do not.  

This lesson hopefully paints the strategic picture on what’s happening in the world so we can correctly interpret the endless stories the media pumps out, rather than being stuck in false paradigms, like the left vs. right political paradigm.  Once this strategic perspective is understood, then it’s easy to understand how hundreds of random stories that seem to make no sense in the left vs. right political paradigm actually make a TON of sense.  Stories like these:  a Harvard billionaire taking over Chile, the government’s response to the crash of 2008, increasing govt debt, Goldman Sachs taking over Greece, British banks pressuring Iceland, the US military presence in 75% of all countries, the G2 relationship, JPM Chase destroying municipalities and funding the destruction of Apalachia while its CEO Jamie Dimon gets setup as the next Treasury Secretary to get ready to steal even more from Americans, and many many more.  All of a sudden after lesson 5 the world becomes a lot clearer.  

Then after this lesson, the series will start imagining a different, brighter future than the one illustrated in this lesson.

Damon Vrabel did a radio interview on April 19, 2010, discussing the financial empire system, the fraud of the economics profession, what guys like Robert Rubin and Jamie Dimon really are, debt-based money, how both political parties are hostage to it, and what the implications might be if we don’t fix it.

CLICK HERE TO LISTEN:  

There’s a New AIG Story. I Was an AIG Exec. Here’s the Deal.

Richard (RJ) Eskow - Consultant, Writer, Policy Analyst

It’s looking like the SEC/Goldman Sachs lawsuit could open up a whole new can of worms — one that Tim Geithner and some bank executives aren’t likely to be very happy about. The story’s about AIG and I used to work there so, as much as I like to stay out of the story, a little personal background is in order. We’ll do the story first and then get to the personal stuff.

The story is this: As almost everyone knows by now, the SEC filed a suit against Goldman over a program called Abacus. The suit alleges that Goldman didn’t tell Abacus investors that the bonds they were essentially insuring were being picked by a firm (Paulson) which was betting that they’d fail. Remember that Twilight Zone episode called “To Serve Man,” where the aliens promised to help everybody but were really just getting ready to eat them? In this story the investors are the humans and Goldman’s execs are the aliens.

The slide show Goldman used to pitch Abacus is pretty damning. It starts with so many pages of fine-print “disclaimers” and “risk factors” that it seems like a Viagra ad (“call your doctor if …”). There’s a lot in there about well-respected (but at best gullible) ACA, this firm that Goldman claimed was picking the bonds. About half of the 66 slides sing ACA’s praises, but there’s no mention of Paulson. There are long descriptions of ACA’s capabilities, their “internal” and “external data sources,” and their “defensive trading” designed to “minimize real market value exposure.”

To serve man. “It’s a cookbook!”

Here’s where it gets uncomfortable for Geithner and some executives. Remember all that criticism of the taxpayer-funded AIG bailout, and how under Tim Geithner’s direction (he was running the New York Fed then) AIG paid 100 cents on the dollar to Goldman and other “counterparties” for its debts? It turns out that AIG insured seven Abacus deals, and the debts they were ordered to pay may have included payoffs on some of these deals. It turns out that AIG reportedly wanted to pay 60 cents on the dollar, but Geither’s New York Fed directed them to pay the full amount.

AIG paid $13 billion from its bailout to Goldman at Geithner’s direction. And now, as the Wall Street Journal reports, the SEC “is investigating whether other mortgage deals arranged by some of Wall Street’s biggest firms may have crossed the line into misleading investors.” And, while “It isn’t known what deals the SEC is investigating,” the Journal adds that “among the firms that created mortgage deals that soon went sour were Deutsche Bank AG, UBS AG and Merrill Lynch & Co., now owned by Bank of America Corp.”

Who were some of the other counterparties paid by AIG under Geithner’s direction? Deutsche Bank, UBS, Merrill Lynch, and Bank of America. This is already a big story, and it could get much bigger. None of those firms can be happy today, knowing that they’re being drawn into the firestorm surrounding Goldman Sachs. And Geithner can’t be happy that his handling of AIG is once again in the news. He took a beating for it back then (including from right-leaning Forbes, the self-described “capitalist tool”), and the NY Fed’s eventual defense of its own actions was ineffectual. Among other things, it claimed that the counterparties’ “contractual rights were well-protected.”

Not if they lied, they weren’t. Nobody has a “well-protected right” to enforce contracts made under false pretenses. It looks now as if the New York Fed didn’t try hard enough.

It’s not as if people weren’t objecting at the time. Eliot Spitzer was all over the issue. Former AIG CEO Hank Greenberg, who had been forced out by Spitzer, wrote that “the federal government is using AIG as a conduit to pump massive sums to the counterparties of AIG’s credit default swaps.” Spitzer, along with William Black and Frank Portnoy, had a very reasonable request: Release AIG’s emails from that period so we can get to the bottom of the situation. That’s a good idea today, too – no matter who it might make uncomfortable.

Now AIG is considering a lawsuit to get some of that money back from Goldman. Two members of Congress want to collect the money, too. Good idea. If it embarrasses some people in high places, there’s a solution for that too: They can push for aggressive derivatives reform, which is something Geithner’s reportedly been resisting up to now. None of us can change our past actions, but we can all vow to do better in the future.

——————————————–
I can’t write about AIG without disclosing the fact that I used to be an executive there. Not that I’ve been hiding it — I’ve mentioned it in interviews and elsewhere — but I didn’t cover the last AIG crisis so I never had to address the conflict of interest issue directly. Now I do, so here’s the deal:

I worked for a health care company that was acquired by AIG, and wound up staying there for about seven years. I was well-liked at AIG, and I liked working there. I wasn’t involved with financial products. I worked in risk management and property/casualty, focusing on workers’ compensation and health issues. Then I became President of an AIG subsidiary and joint venture that did international health projects and some investment work. I never worked directly for Hank Greenberg, although I had several meetings with him and was the target of his well-known interrogative wrath at least once.

I was still working on Wall Street, though not at AIG, when “quants” became trendy and financial products really began taking off. (We had an all-Wall Street rock and roll band in those days. I still wonder what became of the keyboard player from Merrill Lynch.) Regarding financial products: Some of us thought we saw thunderclouds forming, but everyone told us that these guys knew what they were doing. It turned out there were thunderclouds.

There’s a lot more to the story than that, but for now I’ll just say that my opinion of AIG is this: It was a good company when I worked there. Many people found the aggressive culture hard to handle, but I didn’t. (God knows what that says about me.) It had some real flaws – it was notoriously slow to pay claims, for example. Still, I had many friends there, some of whom caught undeserved flack for what the financial products people did. AIG contained many different companies, but it appears that the 200 employees of the financial products group operated by a completely different set of rules.

The insurance and risk management operations were essentially sound and well-run, and from everything I know they still are. Nobody got rich from bonuses — certainly not me. And the sooner those sound businesses can get out from under the wreckage wrought by the financial products group and its enablers, the better off everybody will be — including the American taxpayer.

Richard (RJ) Eskow, a consultant and writer, is a Senior Fellow with the Campaign for America’s Future. This post was produced as part of the Curbing Wall Street project. Richard blogs at:

No Middle Class Health Tax
A Night Light

Goldman’s “Interlocking” Relationships

Posted by Karl Denninger

The Future of U.S. Housing – Projections of Household Formation, Loan Modification Data, 500,000 Option ARMs Still Active, and a Decade of Stagnation.

Posted by mybudget360

Take what you knew about projecting housing for the last fifty years and throw it out the window.  The big problem with using models post-World War II is that they base growth on a baby boomer population that was the largest affluent middle class cohort known to the world.  That model is now disappearing.  Some point back to the Great Depression but forget to mention that life expectancies in the first half of the 1900s weren’t that fantastic.  So you had a population that was constantly churning and emptying out homes that many had paid down.  Yet after World War II the Levittown model of housing took hold with suburban life being the driving force of future home building.  When linked up to cheap oil and 30 year fixed mortgages this seemed to be a good balance for entry into the middle class.  Those days are seemingly no longer here.

This isn’t to say that our best days are behind us.  But if you base excellence on massive consumption, you will be hard pressed to adapt in the new world.  For example, today our birth rate is near replacement levels:

One of the biggest pushes to buy a home was based on the “household formation” stages.  But many Americans are now delaying this stage.  Part of it has to do with shifting values but another cause is more practical.  People don’t want to start a family in a horrible economy:

“(WaPo) That same survey found that women with low incomes were particularly likely to report postponing having a child. Nine percent of those earning less than $25,000 annually postponed having a child, while only 2 percent of those earning more than $75,000 did so.

“Certainly younger folks have the ‘luxury’ of delaying their childbearing in an attempt to hold out for better economic conditions, while older people may feel the press of the biological clock prevents too much of a delay,” said Gretchen Livingston, a senior researcher at Pew.”

This is understandable.  But another more hidden reason has to do with the near religious idea that housing is always a great investment.  You have an entirely new generation of Americans who will never believe the hollow mantra that real estate only goes up.  There have even been articles talking about the new American Dream revolving around renting.  Times and motivations change.

Is There Such a Thing as Too Much Homeownership?

We found out that owning a home should be based on economic fundamentals.  For so long have we lived in this Wall Street bubble machine that people have forgotten what sound lending involved.  People fret about “high interest rates” shattering the housing market but back in the early 1980s people were still buying homes with double-digit mortgage rates.  Why?  Because prices still made sense and people came in with a down payment.  Today, we still have a market artificially being pumped up by the Federal Reserve.  Wall Street would like you to believe that things are so complex that only a Ph.D. can understand what is going on and therefore we warrant complex securities.  Nonsense.  We had over 150,000,000 Americans in 1950 and somehow boring banking and lending seemed to work.  And we certainly didn’t have a financial crisis like the one we just had that was the worst since the Great Depression.  We reached the apex of homeownership in this bubble and are quickly reversing course:

Source:  The Urban Land Institute

69 percent was the absolute upper-bound range.  And keep in mind what it took to get there.  This involved using every toxic mortgage product imaginable and actually creating rampant accepted fraud where people didn’t even verify incomes.  In fact, we had a period where you could structure a housing deal where you received money (i.e., cash back deals, 125% LTV products).  Wall Street knew this was the case and fueled the fire over and over so they could structure deals to keep the casino card game going.  Why?  Every person that wanted a home with good credit and income had one.  The next group was basically anyone that wanted a home irrespective of income and credit.  The birth of subprime, Alt-A, and other junk.  And these toxic products still linger on bank balance sheets even while they announce record profits:

Source:  OCC/OTS

Just look at the amount of active loans.  Nearly 20 percent of active loans fall in the Alt-A and subprime category.  The “other” category also has questionable loans.  So total that up and you have roughly 10 million active mortgages that fall in this risky category.  We have yet to work through this.  Banks keep announcing solid profits and putting on a smile for the public but behind closed doors they are keeping their money tight and are churning profits internally for their corporatocracy.  The last thing they are doing is placing a bet on the American people even though they have taken $13 trillion in bailouts and handouts.

For all the hype regarding loan modifications most are failing only after a few months:

After 9 months nearly half of modified loans re-default.  And this is what you would expect when 17 percent of the population is underemployed.  How are they going to pay their mortgage?  The problem of course stems from the inability to pay at nearly any cost.  That is why we have lost over 1 million households since the recession started.  People are moving in with friends, families, and consolidating households.  This too is another reason why new home formation will be lagging in the next few years.

All you need to do is look at those who have their ear to the ground, home builders:

That minor bump is merely the reflective reaction of cheap money trying to do something.  Yet you can see for yourself above that homebuilders are not optimistic about building to meet new demand.  And why should they?  A large part of the current sales are occurring with existing home sale inventory.  We have plenty of that to last us for years.

The massive concentration of all this debt is put into the hands of a few big banks:

Source:  SIGTARP

The top six banks in the U.S. control 60 percent of all banking wealth.  This in a market where 8,000 banks exist.  But that number is dwindling but only because those banks that are able to fail are doing so:

And this year is quickly outpacing 2009.  So banks are failing yet the too big to fail are turning giant profits even as we have shown, still have the bulk of toxic loans on their books.  At a certain point this has to break and as we saw with the case against Goldman Sachs, even the mere mention of shedding light on banking balance sheets is enough to cause a market tremble.  Why?  Everyone still understands that toxic debt is still alive and well.

What About Short Sales and Option ARMS?

There is this hype regarding short sales and how they’ll be a big factor in today’s market.  I highly doubt that.  Will we see more?  Of course.  But not enough to shift the dynamic of the housing correction.  All this will do is push more inventory out:

37,000 completed short sales in the last reported quarter.  Measure that with 128,000 actual completed foreclosures.  Foreclosures still dominate the market.  Until that foreclosure number settles down, the housing market will be in a complete state of flux.

The broccoli of the housing dinner plate, option ARMs is still alive and well.  It is still sitting there, waiting to be eaten after the steak is devoured.  Most of the over 536,000 option ARMs are in housing battered states like California and Florida.  Maybe this is why national attention has fallen by the wayside for this topic but these states should care because it is another shoe to drop.  And the data on these loans gets worse and worse:

34 percent of option ARMs are non-performing.  This is astronomical given that most won’t hit their recast periods until 2010 and 2012.  The data gets worse as time goes along.  There is little reason to believe that these will turn out to be good deals.  You’ll notice above how the number has quickly fallen.  Part of this is because of foreclosures but another reason involves banks shifting these loans into “other” categories like interest only loans but that doesn’t make them any better.  It buys more time.

Where Next?

Mortgages rates will rise and this seems to be an obvious reality that few even factor in:

Current rates are absurdly low because of the Federal Reserve monetizing debt.  They recently completed buying up $1.25 trillion in mortgage backed securities.  Why did they have to buy? Because no one else would buy this debt at this artificially low rate.  Even as early as 2000 the 30 year mortgage rate was close to 8.5 percent.  With current rates near 5 percent, people fail to understand how big a move back to 8.5 percent would be (the 40 year historical average is 9 percent).

How big is this difference?  For a $300,000 mortgage it works out like this:

@ 5% PI          =          $1,610

@8.5% PI        =          $2,306 (a 43 percent increase)

With household budgets running tight, this is a massive jump.  Current rates are unsustainable and by definition something that is unsustainable will change.

Next, you have many baby boomers remaining put because they have now had to reevaluate retirement options.  This was thought to be a new boom for vacation resort areas where many new condos went up.  Yet that vision isn’t coming to pass.  Right now, the market seems to be pushing sales by one person losing their home and another one picking that home up for a price that was unthinkable just a few years ago.  Yet all that does is churn current inventory.  No new home building and move up buying is stagnant.

The trend is rather clear.  Housing is in for a long and hard struggle.  Things are being held together with a thin string right now.  With so many balls in the air, it is hard to envision what breaks the current back of the system.  Wall Street hasn’t had any serious reform so there is no reason to believe that things are now somehow better.  In fact, the too big to fail have now gotten even bigger.  They are earning profits from merely stock market voodoo.  The real economy is still languishing and current home data tells us that story in vivid color.

Goldman Sachs: A Pattern of Organized Criminal Behaviour?

Chris Whalen provides some excellent commentary on the Goldman Sachs fraud inquiry by the SEC at the beginning of his weekly newsletter, The Institutional Risk Analyst.

In addition to the information he provides about other deals, including those that specifically targeted AIG, he puts an interesting twist on this. He intimates that at times the Hedge Funds were acting in concert with the Big Banks as off-balance-sheet accomplices in crafting these complex frauds. And the Paulson – Goldman scandal may only be one of a type, and not perhaps the best or most flagrant example.

A reaction from many is that this is just the tip of the iceberg, a single point in a much larger picture of calculated fraud involving many more deals and significantly more money up to and including the bailout of AIG.

It is not enough to throw a few token fines on some selective deals, and then dismiss them as outliers, and then suggest we ‘move on’ to reform the market. The spin will be that what Goldman did was ‘legal’ but immoral. And for many today, morality is simply a matter of taste. And Paulson will be served up as the fall guy. It will take a serious investigation to uncover all the facts, and make the case stick. And the SEC is not competent to do this, for a variety of reasons.

And the reforms that the Congress will create as a result of this, at the least the ones permitted by Jamie and Lloyd, will quickly be circumvented with new fraudulent devices and it will quickly be business as usual. Its hard to say that the business has never stopped, even now. The Big Banks continue to manipulate markets and abuse derivatives as instruments of financial fraud.

The absolute worst place to conduct a serious investigation will be in front of the Congress is a show trial, designed to give some of the Senators and Representatives an opportunity to create sound bytes of anger, to be played in commercials for their re-election, and then at then end of the day, continue to collect fat campaign contributions, and then do nothing.

It does not require Republican permission for President Obama to direct the FBI and the Justice Department to begin a serious inquiry with an eye to RICO violations in what may be one of the largest financial frauds in history, dwarfing the Madoff Ponzi scheme in terms of value and number of victims.

Oh, and by the way, we hate to say we told you so, but please fire Larry Summers now that Bill Clinton has thrown him under the bus, and have him take Rubin’s other protégé, Turbo Timmy, along with him.

My concern is that the American people even now do not understand how serious this crisis is. They are quickly distracted into ridiculous partisan spirit and frivolous diversions. This is the freedom and the welfare of their country that is at risk, and it is time to put aside childish things, and begin the serious work of reforming their financial system, the ownership of their media, and the political campaign process.

Institutional Risk Analyst
Goldman SEC Litigation: The End of OTC?
By Chris Whalen
April 19, 2010

Last Friday’s announcement by the SEC of a civil lawsuit against Goldman Sachs (GS) for securities fraud did not surprise us. Nor were we surprised to see the markets
trade off large on the news, evidence to us that there is a certain lack of conviction in the financials.

Q: How can you have “normalized earnings” in an abnormal industry?

No, what surprised us about the SEC action is that it took as long as it did. Maybe surprised isn’t precisely the right word, but you know what we mean. The inertia in the system seems to dampen reactions to extreme outlier behavior to a far too great a degree. This week in The IRA Advisory Service we discuss the implications of the SEC action and the likely impact on the OTC dealer community in the months and years ahead.

Readers of The IRA will recall back in 2004 when were started to talk about the regulatory focus on complex structured financial products and the perceived reputational risk to the big firms arising from these unregulated, OTC instruments. Big thank you to Chuck Muckenfuss at Gibson Dunn for the heads up. The “advice” issued by all of the regulators (“Interagency Statement on Sound Practices Concerning Complex Structured Finance Activities”) was focused almost entirely on protecting the dealers from reputational risk and not on protecting investors.

The fact of the 2004 notice by the SEC and other regulators illustrates the problem. Regulators clearly knew that a problem existed back then, yet the SEC waited until April of 2010 to actually do something constructive to rebalance the equation, to lean just a bit more in the direction of investors and abit less in favor of the dealers. Keep in mind that it’s not like the games played by GS and the Paulson organization were remotely unique. Just about every OTC dealer worthy of the description has at least one deal comp to this thing of beauty.

On March 31, 2010, Bob Ivry and Jody Shenn at Bloomberg published a very important article on American International Group and its losses from insuring collateralized debt obligations structured by, you guessed it, GS. Entitled “How Lou Lucido Let AIG Lose $35 Billion With Goldman Sachs CDOs,” the article outlines the process whereby AIG was left on the hook for billions in losses on CDOs sold to TCW Group in Los Angeles.

Whereas in the trades with Paulson GS was helping a client create and then sell short a CDO that was being sold to another client, in the case of TCW the GS firm was helping a client buy toxic loans to be contributed to a CDO in the knowledge that doing so would cause losses to a regulated insurer, AIG. The activities of GS to harm AIG make the subsequent payments by AIG to GS, using money from the US Treasury, seem all the more outrageous.

But the other thing that really bothers us about both the TCW transactions and the more recent revelations about GS and the Paulson firm is the fact that the SEC apparently still does not fully understand the symbiotic relationship between the dealer and the hedge fund. In our view, the funds that were involved with these
transactions and many, many more examples in the OTC marketplace, did not have an arm’s length relationship with the dealer. Hedge funds exist at the sufferance of the dealers, who finance and execute and act as custodian for their various strategies and use the funds as short-term storage for inventory.

In the case of Paulson, the information provided by the SEC makes it seem as though Paulson was the party which initiated these transactions and, according to the SEC, paid GS $15 million to arrange and market these CDOs to investors. Paulson was also apparently working as an advisor to GS and collaborating with GS regarding investment strategy. A spokesman for Paulson told The New York Times that all of their dealings with GS and other parties were on “an arm’s length basis.” We believe that reasonable people can differ on this issue. We also suspect that the nature and the extent of the relationship between GS and Paulson will be the subject of extensive legal and political inquiry in the weeks and months ahead.

But for us, the bottom line is that hedge funds often times are merely extensions of the dealers with which they interact. It is often difficult if not impossible to tell where the dealer’s interests end and those of the hedge fund begin, especially when the dealer and the fund seem to be working in concert to create securities that are being sold to third parties. This episode is a terrible mess and, to us at least, illustrates why the OTC markets for securities and derivatives need to be regulated out of existence — or at least into compliance with norms of disclosure and fair dealing that would render such strategies impossible. If the global financial markets have been reduced to nothing more than beggar thy neighbor, then we all have a big problem.