FedUpUSA

Archive for January, 2011

Well, it’s out.

The “long-awaited” FCIC report has been published, and counts 662 pages.

Our task was first to determine what happened and how it happened so that we could understand why it happened. Here we present our conclusions.

And here the FCIC fails.  But we’ll get to that.

• We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public.

No.  The financial crisis was avoidable, but it was not about the ignoring of warnings by captains of finance.  One does not sell “protection” in the form of a credit default swap (CDS) without any capital behind it by accident.  That is done with intent – the intent to collect a premium and never pay.

The buyer of such a CDS has one of two purposes.  He either intends to conceal a loss that he would otherwise have to mark on his books, or he intends to hold up the taxpayer at a later date when the seller cannot pay.  His action is not undertaken due to ”inattention” either.

Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs.

The crisis was not only mathematically certain to occur it was foreseen and known to be occurring by the very firms that nearly collapsed.  This is now a matter of public record in the form of testimony under oath by Citibank’s former Chief Underwriter.  Lehman’s insolvency was known by Citibank and others weeks before it occurred, as has been disclosed by the bankruptcy investigation.  Both industry and government regulators intentionally concealed these facts from the public.  It is no longer speculation that “they knew”, it is now a documented fact.

The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not.

The Federal Reserve, by its own publications, knew that the economy was adding 10, 20, even 30% of GDP in debt on a annual basis.  This is not “unsustainable”, it is fraud and an abuse of the currency power granted by The Constitution to Congress.

But Congress knew this too.  This publication is not secret.  Congress has the power – then and now – to put a stop to it.  But Congress decided not to.  Not then, not now.

This crisis was not a couple of years in the making.  The roots of it go back to the 1980s, when Continental Illinois was bailed out.  At that time the FDIC did an unlawful thing – it decided to bail out bondholders, which it has no statutory authority to do.  The deposit insurance fund exists to bail out depositors.  But having exceeded its authority and gotten away with it, the standard was set for The FDIC to make sure that no large institution would be allowed to actually lead to loss by its bondholders. 

The record of our examination is replete with evidence of other failures: financial institutions made, bought, and sold mortgage securities they never examined, did not care to examine, or knew to be defective;

Those are not failures, they’re fraudulent activities.  The institutions that made, bought and sold those securities represented to buyers and writers of swaps against them that they had specific qualities. 

They LIED, as is now being shown and documented in the myriad lawsuits, along with FCIC testimony.

They took on enormous exposures in acquiring and supporting subprime lenders and creating, packaging, repackaging, and selling trillions of dollars in mortgage-related securities, including synthetic financial products. Like Icarus, they never feared flying ever closer to the sun.

Unsecured lending beyond your capital is a naked short on the currency.  Since no bank has the authority to issue currency, such an action is an act of counterfeiting.

Writing a swap you have no ability to pay on, as happened at AIG, is the writing of paper worth nothing in exchange for money.  If the party you sell it to actually expects to collect, you defrauded him. If he does not really intend to collect and used the paper he bought at under-market rates as a ruse, he defrauded whoever is relying on his assertion that his position is protected.  Either way, someone committed a crime. 

Where are the cops?

Our examination revealed stunning instances of governance breakdowns and irresponsibility. You will read, among other things, about AIG senior management’s ignorance of the terms and risks of the company’s $79 billion derivatives exposure to mortgage-related securities;

Who cares what their exposure was?  The real scandal is that they had $79 billion in exposure with effectively zero capital behind that position.  That is, they sold $79 billion in exposure with no ability to pay.  Yes, the government was complicit in allowing this by exempting these transactions from insurance regulations through the CFMA.  But that doesn’t change the essential element of the deception – if the buyer knew the swaps were worthless, he committed fraud.  If he didn’t know they were worthless and truly believed AIG had the capital to pay when it did not, then AIG committed fraud. 

You cannot sell something you have no ability to deliver and not have someone who committed fraud somewhere in that transaction.

Either the transaction was a sham or the buyer was scammed.  Pick one.

In the years leading up to the crisis, too many financial institutions, as well as too many households, borrowed to the hilt, leaving them vulnerable to financial distress or ruin if the value of their investments declined even modestly.

So when are we going to force this bad debt out of the system?

Oh that’s never, right?  There’s nothing – literally nothing – in this report that demand that occur.

The reason is that doing so bankrupts all the institutions that were responsible.  Yet without defaulting this debt and clearing it there is no way to get out of the crisis, only to pile more fraud upon the existing fraud.

Housing values have fallen by $7 trillion, if you believe the reported numbers from various sources.  How much does the Z1 claim housing mortgage debt has fallen by, systemically?  $504 billion.

Where’s the other $6.5 trillion? 

Sure, some of it was “equity” that is now gone.  But not all of it.  The rest – most of it - is unbacked credit and constitutes a continuing naked short on the currency of The United States.  It also constitutes massive systemic risk, in that should it be forced into the open (and it will eventually be so-forced by the market) it exceeds the total capitalization of the ten largest financial institutions in the United States by several times over.

The crisis is not over and the leverage has not come out.  At all.

The fraud that led to this has not been exposed and referred for prosecution.  At all.

The FCIC not only failed to do what it was charged to do, it did so with intent.  The word “fraud” is peppered through the report, appearing dozens of times.  Yet nowhere do we see recommendations for prosecution.

Fraud is a crime.

We cannot resolve what’s broken in the economy without forcing the bad and un-payable debt into the open.  I’m well-aware that doing so will cause a major sell-off in the markets and reduction in GDP.

But this outcome cannot be avoided.  We can only choose to take the damage now, or have it continue to compound.

If there is one thing that the one-time GAO audit of the Fed disclosed, is how woefully insufficient the extremely superficial data discovery was. Another thing uncovered was just how needed this disclosure was: it provided extended material into how the Fed subsidizes banks (both domestic and international) on an ongoing basis, not to mention substantial number crunching for the blogosphere. Either way, if Bernanke was hoping that the Frank-Dodd bill would take care of the Fed opacity, pardon, transparency issue in perpetuity, he may be disappointed: Ron’s son, Rand, has just announced he is introducing legislation to, well, Audit The Fed, precisely along the lines of what his father did previously and generated massive support from everyone in Congress. Once again Ben Bernanke is about to become a major thorn on the side of the political puppetry.

WASHINGTON, D.C. – Today, Senator Rand Paul introduced legislation allowing for a full audit of the Federal Reserve. This legislation is a Senate version of similar legislation long-championed by and introduced this session in the House of Representatives by his father, Congressman Ron Paul of Texas. Co-sponsoring the “Federal Reserve Transparency Act of 2011” (S. 202), are Senators Jim DeMint of South Carolina and David Vitter of Louisiana.

“We must take a critical look at the Fed’s monetary policy decisions, discount window operations, and a host of other things, with a real audit – and not just pay lip-service to the idea of an audit,” Sen. Paul said today. “At a time when we’re seeing great volatility in small Euro-zone economies like Greece, Portugal, and Ireland, it is more crucial than ever that we have real transparency at our own central bank.“

The bill will eliminate the current audit restrictions placed on the Government Accountability Office (GAO) and mandate a complete audit of the Federal Reserve to be completed by a firm deadline, finally delivering answers to the American people about how their money is being spent by Washington.

ZeroHedge

Oh we’ve got a gem of an article this morning, in of all places, The New York Times. 

The commission’s report finds fault with two Fed chairmen: Alan Greenspan, right, a skeptic of regulation who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but then played a crucial role in the response to it.

The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.

Well, that’s certainly a statement of the obvious….but it gets better.

The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence.

While I don’t necessarily disagree with the premise, the idea that this was merely a result of deregulation is ridiculous.  It was a failure to apply existing laws to blatant criminality…..you know, like FRAUD.  There have been laws on our books regarding fraud and criminal behavior (like stealing) since this country was founded, yet not a single law has been applied during this crisis but to one individual, Bernie Madoff.  Bet he’s wondering, ‘Why me?’ about now.

Like Mr. Bernanke, Mr. Bush’s Treasury secretary, Henry M. Paulson Jr., predicted in 2007 — wrongly, it turned out — that the subprime collapse would be contained, the report notes.

Democrats also come under fire. The decision in 2000 to shield the exotic financial instruments known as over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s term, is called “a key turning point in the march toward the financial crisis.”

Timothy F. Geithner, who was president of the Federal Reserve Bank of New York during the crisis and is now the Treasury secretary, was not unscathed; the report finds that the New York Fed missed signs of trouble at Citigroup and Lehman, though it did not have the main responsibility for overseeing them.

Former and current officials named in the report, as well as financial institutions, declined Tuesday to comment before the report was released.

The report could reignite debate over the influence of Wall Street; it says regulators “lacked the political will” to scrutinize and hold accountable the institutions they were supposed to oversee. The financial industry spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with it made more than $1 billion in campaign contributions.

Color me surprised that they all declined to comment…..not.   I don’t think it is likely that Henry Paulson ‘got it wrong’ – not when he was at the helm of Goldman Sachs when these little ‘financial weapons of mass destruction’ were developed.  He was also there when Goldman Sachs (the only firm to do so), bet against the very clients they sold these ‘investments’ to!   No chance in hell he didn’t understand what was going on.   To argue he and Ben Bernanke were ‘mistaken’ would be to argue that they didn’t understand what the banks and lenders were doing.  Pull the other one.  No, this was a case of blatant and willful lying to the American people.   Matter of fact, I would argue it was absolutely essential that Henry Paulson be appointed Treasury Secretary in order for the massive cover-up to occur and to work the way it did.  The myriad of the lies told by Paulson, Bernanke, Geithner and others have been documented meticulously here on FedUpUSA and can still be found linked in the right-hand column.

In summation, the NYT article does convey one thing quite clearly:  Our government is comprised of those that run the banking industry and Wall Street, have spent years in the banking industry and/or those who are being directly paid by Wall Street and the banking industry.  Those that control the quantity of money have entirely captured our government.  We have no independent government.  None.  Zip.  Nada.  I believe there is a word for this:  fascism.

When will you wake up America?  Apparently not when you’ve lost your job.  Apparently  not when you’ve gone broke, and apparently not when you’ve lost your home (fraudulently, I might add).  Here it is in black and white:  You have been robbed in broad daylight and you continue to re-elect those directly responsible for doing so.   As long as Americans continue to elect Congressional Representatives with a ‘D’ or an ‘R’ behind their names; those that are ‘professional politicians,’  YOU are contributing to your own demise.  As long as you continue to elect people who are paid by Wall Street, you are not going to change anything.  Just try to find a Representative not owned by Wall Street banks OpenSecrets.  Yes, even now with the 112th Congress.

Are you going to leave this criminal, captured government to your children?  It’s past time to wake up America.  What will it take?

‘Americans can always be counted on to do the right thing, when all other possibilities have been exhausted.’ — Winston Churchill

Could we work on not making this man a liar?

STOP THE LOOTING & START PROSECUTING!

Households face the most dramatic squeeze in living standards since the 1920s, the Governor of the Bank of England warned, as he reacted to the shock disclosure that the economy was shrinking again.

UK Telegraph

Lawsuit alleges the bank took extreme measures to defraud investors, and now JPMorgan may be on the hook

Former Bear Stearns mortgage executives who now run mortgage divisions of Goldman Sachs, Bank of America, and Ally Financial have been accused of cheating and defrauding investors through the mortgage securities they created and sold while at Bear. According to e-mails and internal audits, JPMorgan had known about this fraud since the spring of 2008, but hid it from the public eye through legal maneuvering. Last week a lawsuit filed in 2008 by mortgage insurer Ambac Assurance Corp against Bear Stearns and JPMorgan was unsealed. The lawsuit’s supporting e-mails, going back as far as 2005, highlight Bear traders telling their superiors they were selling investors like Ambac a “sack of shit.”

News of internal whistleblowers coming forward from Bear’s mortgage servicing division, EMC, was first reported by The Atlantic in May of last year. Ex-EMC analysts admitted they were sometimes told to falsify loan-level performance data provided to the ratings agencies who blessed Bear’s billion-dollar deals. But according to depositions and documents in the Ambac lawsuit, Bear’s misdeeds went even deeper. They say senior traders under Tom Marano, who was a Senior Managing Director and Global Head of Mortgages for Bear and is now CEO of Ally’s mortgage operations, were pocketing cash that should have gone to securities holders after Bear had already sold them bonds and moved the loans off its books.

Mike Nierenberg, who ran the adjustable-rate mortgage trading desk at Bear and is now the head of mortgages and securitization for Bank of America, was a key player ensuring the defaulting loans Bear was buying would move off their books right after they bought them, with little concern for the firm’s due diligence standards. He was joined in this scheme by Jeff Verschleiser, his peer and Senior Managing Director on the mortgage and asset-backed securities trading desk and head of whole loan trading. He is now an executive in Goldman Sachs’ mortgage division.

According to the lawsuit, the Bear traders would sell toxic mortgage securities to investors and then sell back the bad loans with early payment defaults to the banks that originated them at a discount. The traders would pocket the refund, and would not pass it on to the mortgage trust, which was where it should have gone to be distributed to the investors who owned the bonds. The Marano-led traders also cut the time allowed for early payment defaults, without telling the bond investors. That way, Bear could quickly securitize defective loans, without leaving enough time for investors to do their own due diligence after the bonds were sold and put-back any bad loans to Bear.

The traders were essentially double-dipping — getting paid twice on the deal. How was this possible? Once the security was sold, they didn’t have a legal claim to get cash back from the bad loans — that claim belonged to bond investors — but they did so anyway and kept the money. Thus, Bear was cheating the investors they promised to have sold a safe product out of their cash. According to former Bear Stearns and EMC traders and analysts who spoke with The Atlantic, Nierenberg and Verschleiser were the decision-makers for the double dipping scheme, and thus, are named as individual defendants in the suit.

Bear deal manager Nicolas Smith wrote an e-mail on August 11th, 2006 to Keith Lind, a Managing Director on the trading desk, referring to a particular bond, SACO 2006-8, as “SACK OF SHIT [2006-]8″ and said, “I hope your [sic] making a lot of money off this trade.”

It’s this blatant internal awareness inside the Bear mortgage trading division that the Ambac suits says led Bear to implement an across-the-board strategy to disregard its contractual promises and conceal the defective loans. By JPMorgan taking over Bear, it became the successor of interest in Bear Stearns. As the lawsuit lays out, JPMorgan is responsible for the flagrant accounting fraud started by Bear designed to avoid, and has continued to avoid, recognition of vast off-balance sheet exposure relating to its contractual repurchase agreements. This allowed executives to reap tens of millions of dollars in compensation from a bank that wouldn’t have been able to buy Bear without tax payer assistance.

80% of Loans Went Bad Almost Immediately

In 2007, when Ambac started to realize something was very wrong with its high-rated bonds, it demanded Bear provide loan-level detail and reviewed 695 non-performing loans in its portfolio. Ambac’s audit concluded that 80 percent of the loans showed an early payment default. This meant they should have never have been packed in the bonds Bear sold and were required to be repurchased. Bear refused, and of course had already been pocketing buyback money for itself from the originators. Bear also never told investors that its auditor Price Waterhouse and Coopers submitted an internal review in August 2006 that this repurchase process was not in-line with its due diligence standards and not typical for the industry. By January 2007, a Bear internal audit also reported the firm had collected $1.7 billion in repurchase claims — a 227% increase over the previous year. Yet Marano’s group of traders continued their double-dip payment scheme and kept selling the toxic loans with full awareness of the poor quality of the due diligence.

Jeffrey Verschleiser even said in an e-mail that he knew this was an issue. He wrote to his peer Mike Nierenberg in March 2006, “[we] are wasting way too much money on Bad Due Diligence.” Yet a year later nothing had changed. In March 2007, Verschleiser wrote to Nierenberg again about the same due diligence firm, “[w]e are just burning money hiring them.”

Then in November 2007, Verschleiser wrote to his risk committee that he knew insurers for mortgage securities were going to have big financial problems. He suggested they multiply by ten times the short bet he’d just made against stocks like Ambac. These e-mails show Verschleiser’s trading desk bragging to firm leadership that he made $55 million off shorting insurers’ stock in just three weeks.

Eventually, as Ambac kept demanding a repurchase of the bad loans, Bear acknowledged in late 2007 it would have to buy some back. The lawsuit lists over $600 million in claims with $1.2 billion in damages from the soured mortgage securities it invested in and insured against. But according to the lawsuit, in the spring of 2008, JPMorgan dismissed an outside audit review of the loans’ need to be repurchased and once again refused to pay Ambac. The suit asserts JPMorgan knew a repurchase would result in a huge accounting liability that would put their balance sheet in serious trouble at that time.

Last week, JPMorgan CEO Jamie Dimon said it will take years to get through mortgage litigation risk the bank inherited and had set aside around $9 billion for litigation-related risk. Yet in the bank’s January earnings call, Dimon suggested that the bank may not have to buy back any soured mortgages from private investors and said that the issue is “not that material” for JPMorgan. Still, Ambac recently won a court order in December to add accounting fraud against JPMorgan to its suit, which can double or triple lawsuit awards. So it’s hard to tell whether America’s largest bank is prepared to pay for the sins of Bear. JPMorgan did fight tooth and nail for the Ambac suit not to be made public, however, because the firm argued it could damage the reputations of senior bank executives currently working in the industry. Individuals named as defendants included: Jimmy Cayne, Alan “ACE” Greenberg, Warren Spector, Alan Schwartz, Thomas Marano, Jeffrey Mayer, Mary Haggerty, Baron Silverstein, Jeffrey Verschleiser, and Michael Nierenberg.

Ambac’s lawsuit is led by Eric Haas of Patterson Belknap Webb & Tyler LLP. Depositions show internal Bear executives saying Nierenberg and Verschleiser were responsible for deciding how much risk to take when acquiring loans and for aspects of the securitization process. They reported up to Marano. Testimony shows Marano would have known about the decisions his head traders were making. When asked about these accusations, Nierenberg’s, Marano’s, and Verschleiser’s current employers had no comment. The defendants’ lawyers at Greenberg Traurig LLP failed to respond to calls for comment.

A public hearing is currently scheduled to be held by the New York State assembly regarding whether legal action should be brought against banks for misleading insurers about mortgage related securities. If approved, the New York Attorney General will likely be asked to bring criminal fraud charges against these banks. Now we must wait and see if JPMorgan will settle or go to trial — or if the bank tries to claw back tens of millions of dollars in pay from the former Bear executives.

The Atlantic