FedUpUSA

Archive for April 29th, 2010

This REALLY Gets Rid Of Too Big To Fail

Posted by Karl Denninger

That’s an understatement.

Of course, it isn’t just this scam, the primary dealers with help from the Federal Reserve and Congress have pulled the same kind of scam with regards to our financial system. Now you might understand why the two Audit the Fed Bills have languished and not come to the floor. The Federal Reserve Sunshine Act S.604 and H.R.1207 The Federal Reserve Transparency Act .  You think the criminals in Washington DC have any interest in letting you see the scam they have allowed?

Criminal Probe Looks Into Goldman Trading

By SUSAN PULLIAM And EVAN PEREZ

Federal prosecutors are conducting a criminal investigation into whether Goldman Sachs Group Inc. or its employees committed securities fraud in connection with its mortgage trading, people familiar with the probe say.

The investigation from the Manhattan U.S. Attorney’s Office, which is at a preliminary stage, stemmed from a referral from the Securities and Exchange Commission, these people say. The SEC recently filed civil securities-fraud charges against the big Wall Street firm and a trader in its mortgage group. Goldman and the trader say they have done nothing wrong and are fighting the civil charges.

Many criminal investigations are launched without the government filing charges. In this instance, prosecutors haven’t determined whether they will bring charges in the case, said the people familiar with the matter.

The criminal probe raises the stakes for Goldman, Wall Street’s most powerful firm. The investigation is centered on different evidence than the SEC’s civil case, the people say. It couldn’t be determined which Goldman deals are being scrutinized in the criminal investigation.

A spokesperson for the Manhattan U.S. Attorney’s office declined to comment. Goldman declined comment.

The development comes amid public calls for more Wall Street accountability for the industry’s role in the financial crisis. Though there are multiple ongoing criminal and civil investigations, no Wall Street executives connected with the meltdown have been convicted of criminal charges. During congressional hearings this week into Goldman’s role in the crisis, legislators grilled Goldman executives for nearly 11 hours.

The SEC and Justice Department often coordinate their actions on investigations. The probe underscores heightened efforts by the Manhattan U.S. Attorney’s office in prosecuting white-collar and Wall Street crime. It is in the midst of pursuing the largest insider-trading case in a generation, charging 21 individuals and negotiating 11 guilty pleas in that matter.

But the Goldman probe presents a significant challenge for the government. Prosecutors last year lost a high-profile fraud case against two former Bear Stearns Cos. executives, in the first major criminal case linked to the financial meltdown.

Prosecutors had accused the Bear Stearns employees of lying to investors in 2007 about the health of two funds that eventually collapsed. The case centered on what the government viewed as incriminating emails indicating the traders knew the mortgage market would fall but didn’t disclose that view to investors.

To bring any criminal charges in the Goldman matter, prosecutors would need to believe they had gathered evidence that showed that the firm or its employees knowingly committed fraud in their mortgage business. Proving such intent to break the law typically is the toughest hurdle for prosecutors to clear.

Another stumbling block: Such financial cases can be highly complex. Few outside of Wall Street understand arcane products such as collateralized debt obligations, the pools of mortgage-related holdings at the heart of the SEC civil case against Goldman.

On April 16, the SEC charged Goldman and an employee, Fabrice Tourre, with securities fraud in a civil suit relating to a mortgage transaction, known as Abacus 2007-AC1, a deal the government said was designed to fail. The SEC alleged that Goldman duped its clients by failing to disclose that hedge fund Paulson & Co. not only helped select the mortgages included in the deal but also bet against the transaction. Both Goldman and Mr. Tourre have denied wrongdoing.

Even the SEC’s case, which is subject to a lesser standard of proof than a criminal case, is viewed as a challenge for regulators. The SEC’s commissioners were split 3-2 along party lines on whether the agency should bring a case.

In battling the SEC charges, Goldman says its investors were sophisticated and knew the underlying securities they were buying. Goldman says it wasn’t required to disclose who provided input into the deal or the views of its clients in the transaction.

The congressional hearing involved numerous other mortgage deals Goldman arranged in 2006 and 2007. Lawmakers criticized Goldman and its executives for allegedly stacking the deck against clients during the market meltdown in 2007.

Some of the emails released by regulators, lawmakers and Goldman suggest a callous attitude among Goldman employees toward the risks involved in some of the Goldman mortgage deals, including one in which a Goldman employee referred to a mortgage transaction the firm sold to investors as a “sh—y” deal.

Over the years, the government has been reluctant to criminally charge financial firms with wrongdoing because the charge itself can cause a business to implode. Some investing clients can’t or won’t trade with a firm facing such a taint.

Indeed, in the more than two-century history of the U.S. financial markets, no major financial firm has survived criminal charges. Securities firms E.F. Hutton &Co. and Drexel Burnham Lambert Inc. crumbled after being indicted in the 1980s. In 2002 Arthur Andersen LLP went bankrupt after it was convicted of obstruction of justice for its role in covering up an investigation into Enron Corp. The conviction was later overturned by the Supreme Court.

In recent years, some financial firms have agreed to “deferred prosecutions,” in which they agree to a probationary period for which they won’t commit any future wrongdoing.

That’s what Prudential Securities Inc. famously did in 1994 when that securities firm faced criminal charges that it misled investors about the risks and rewards of limited-partnership investments. Prudential agreed to a three-year deferred prosecution, as well as fines and restitution, to end a criminal securities-fraud investigation.

—Susanne Craig contributed to this article.

Write to Susan Pulliam at susan.pulliam@wsj.com and Evan Perez at evan.perez@wsj.com

Examiner Editorial

Review of  The Demise of America by Donald David Durrett

By Karl Denninger

I can’t find a link on Amazon for it; this piece appears to be “freely available” off the author’s web page.

The front of the book – really, the first 165 pages – read like a chronicle of The Ticker, along with a handful of others who “get it” in terms of how we got here as a nation.  Too much debt, pulled-forward demand, an insatiable demand for “me me me mine mine mine goddamnit even if I have to steal it from you!” and the outrageously corrupt government apparatus that has given this cover, concealment and active encouragement, along with the theft, both direct and intergenerational, necessary to support it thus far.

But then I believe Don falls down. 

Don believes in the underlying spiritual good of people, and a Star Trek type of utopia breaking upon the scene in roughly 2015.

Sadly, I do not ascribe to this, and I back my view with 5,000 years of recorded human history.

Spiritual awakening?  I think it’s far more likely we’ll have an awakening all right – of the sort in the Daisy ad.  Canned sunshine is more likely than spiritual sunshine, sad to say. 

Man’s history on this planet is one of hatred, derision, rape, murder and theft.  When Europeans came to America we didn’t just shoot the native that were here (that would at least be a somewhat-fair fight since they could shoot back – even if only originally with bows), oh no, we gave them smallpox-laced blankets – intentionally.  That’s not taught in government schools, but it is nonetheless fact.

The only way I believe we can find that “spiritual awakening” is if we burn some witches first – real witches, of the sort that brewed up the toxic and corrupt stew that has infested our society.  I am speaking specifically of those who have raped, pillaged and destroyed our economic and political landscape.  That sort of “change” doesn’t come with hope, it comes with rage – earned, appropriate and virtuous rage.  When corralled appropriately it channels through the criminal justice system.  When that system makes itself intentionally unavailable perform its duty the outlet is often far less appropriate but no less effective.

The spiritualist doesn’t like this approach, of course, because it is inherently the opposite of the “can’t we all get along” meme.  But the fact of the matter is that we can’t all get along so long as there are subsets of our population that are allowed to act as locusts, eating everything in their path and consuming all those who do not go along with their plans.  Such is what our “financial system” has become, and it has entwined our political system inside of it.

Indeed, the very premise of a “primary dealer network” is inimical to solutions.  These people have managed to guarantee themselves the ability to arbitrage the sale of government debt for their own personal profit, and by doing so have inexorably tied themselves to the government’s hip. 

Do you really think economic and societal collapse will serve as a set of divorce papers? 

I sincerely doubt it.

It is far more likely, in my opinion, that as in the past when the stressors get too large and the people begin to rise (and rise they will when gas goes to $10/gallon if you can find it at all, food distribution is strained or even collapses, and nations around the world are forced to withdraw their “social spending” that they cannot fund) the usual means of solving these problems will present itself: an inexorable grab for resources via force of arms.

I don’t know who will start it, but I do know that 5,000 years of human history says that this is the path that will be taken.

Indeed, the only way I see this sort of future being avoided is if we all collapse at once, so that the command and control hierarchy collapses as well, along with the military power controlled by same across nations. 

I wish there was a good solution to these problems, but as Hypocronance points out that solution would require that a large group of people – probably here in the United States, since we’re pretty much the only nation with both the population and resource necessary to bring such a change to effect – were to rise and demand an end to bailouts, an end to exemptions under the law, and punishment for all previous and future crimes of this sort, no matter who committed them, along with an immediate and permanent re-alignment of the government funding and spending system so that no person was without a tax burden and thus could not vote themselves largesse at the Federal Teat.

That’s about as likely as Jesus showing up tomorrow.

As such I have more modest hopes.

That is, I believe we could demand and enforce that our borders be closed and all illegal aliens be deported.  Yes, they’ll scream.  So what?  We have lots of Americans out of work.  We can solve that problem tomorrow by making clear that nobody who is here illegally will be working in this nation, nor will they receive one dime of public support of any sort.

We could demand the repeal of the 16th Amendment and imposition of The Fair Tax, thereby getting rid of the ability to “vote for money”, as well as, at the same time, turning America into a tax haven for corporations, resulting in millions of high-paying corporate jobs coming to this country.

And we could demand that every bank executive involved in the frauds of the last 20 years go to prison, without exception, and for those federal employees involved in same where we can’t prosecute them we can eject them from their jobs and bar them for life from any public service position – or any public pension or benefit.

Would that prevent the collapse?  Not entirely, but it sure would blunt it.  Our GDP would adjust downward by perhaps 20%, but not for long – it would soon start growing like crazy with the incoming tax haven businesses and the increased capital investment that The Fair Tax would bring.  With the illegals either gone or leaving (lest they be removed by force) Americans would get the newly-created jobs – all of them.  Scratch one unemployment problem.

But for this to happen Americans must rise.  We must call and hold general strikes, and mean it.

We must refuse to yield to promises and political claptrap, becoming united in one purpose – either enact the three points above or we will not work and as such we will not create GDP nor will we pay taxes, and we will not accept promises of action in the future – we instead strike, and remain on strike, until we get results NOW.

Such a movement would be a perfectly legal means of enforcing the people’s will and solving the problems we face as a nation.

Sadly, I have no belief that we, the people, have the will to make it happen.

Heh, Someone Gets It (Buiter)

Posted by Karl Denninger

Hattip Zerohedge:  (The original article is here)

Note the structural deficit number.  This is what happens when you allow this to go on for a decade:

Which in turn leads to this:

That red line is actual private demand expressed as the delta (or change) in GDP.

I don’t have accurate debt and GDP numbers on a contemporary basis for the rest of the nations that Buiter cites, and besides, I focus on the United States anyway.

Buiter posits that The Fed could eventually be “forced” to monetize – that is, try to inflate it away.

This is where Buiter and I part company, because it is impossible to inflate out of a mess like this when you have social spending indexed to inflation – and our entitlement programs all are in one form or another, with the most-ridiculous, Medicare, rising at much higher rates than general inflation.

As such attempting to “inflate out” won’t work – it will instead result in Weimar-style hyperinflation which, as it did in Weimer, will inevitably result in political and economic collapse.

Note that Bernanke has said “we cannot grow out of this“; he has (belatedly, but surprisingly) finally “gotten it.”

It would have been nice if he “got it” three years ago, of course.  It might have altered his view on bailing out people and providing artificial support instead of demanding ab-initio not only the legal ability but the legislative mandate to close all of the so-called “too big to fails” and use the funds we have blown to pay off depositors instead.

Yes, that would have resulted in a Depression being “recognized.” 

But we’re in one now, as the above chart shows conclusively, and we have in fact been in one for two years.  There is no evidence we’re going to get out of it either – the only way that can happen is if private final demand replaces the government borrow-and-spend, and for that to happen deficit spending must decline while GDP continues to advance.

When you’re borrowing from $115 to $333 billion a month and pumping it into the economy – that is, from roughly 9% to 30% of GDP – there’s zero evidence that this can or will occur, and in fact despite all the market and media crooners claiming “it’s getting better” the mathematical facts say exactly the opposite – it is in fact getting worse, as government replacement of private final demand with borrowed money is going up, not down.

That recognition of the math is starting to seep into the consciousness of economic analysts at major international banks is an important signpost. 

The next one will be when recognition of the same math starts to poke through the mainstream media – despite strident claims otherwise from Geithner and others. 

Once that second signpost is reached there will no longer be time or opportunity for government to proactively respond.  The market will, at that point, take final and irrevocable control.

If Obama has any intelligence at all he will fire Summers and Geithner immediately and in doing so stick them with responsibility for refusal to deal with the truth, close or break up the too-big-to-fails (via executive order if he can’t get a bill passed immediately – yes, I know that will raise howls of protest but this truly is a national emergency!) and demand reimposition of Glass-Steagall and mark-to-market – right here, right now, forevermore.

The tough choices are never popular, but mathematics doesn’t care about popularity, and as recognition is now seeping into the “mainstream economists” employed by major multinational financial institutions it is simply a matter of time before they ENFORCE austerity and withdraw their support for the markets if it is not forthcoming.

All I can say is “see, I told you so!”