FedUpUSA

Archive for the ‘Bad loans’ Category

A gentleman who has occasionally popped up on the forum unmasked himself the other day and was interviewed in the “mainstream media” — ABC News’ European desk.

ALBERICI: “How certain are you that UniCredit broke the law while you were there?”

JONATHAN SUGARMAN: “A hundred per cent certain and to use the Irish expression, ‘to be sure, to be sure’ that is why I brought in this London based IT company which had a very good reputation in Dublin and the result was pretty horrific because whereas the breach that I’d reported to the regulator was a breach of twenty per cent, whereas the permissible deviation was one per cent, they rang me up one evening soon after they tied into our systems, linked into our systems and said your breach is actually forty per cent”.

ALBERICI: When he raised the alarm with his chief executive, the response was dismissive. It was a systems error. The risk manager was instructed to continue approving the deals. Jonathan Sugarman was in the thick of a reckless banking culture that was on a collision course with disaster.

Everyone says that what is happening now in Italy with their banks, and with Irish Unicredit, was some sort of accident, just as the claim has been made that this was true in America.  But we have plenty of information that either is an admission or strongly suggests that there was nothing accidental about any of these events — that they were nothing more than a willingness by executives to overlook or even intentionally bury bad conduct simply to rob the taxpayer by taking risks they knew they could manage to foist off on everyone when — not if — their institutions blew up.

The worst of this is that it’s still going on!

JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally.

Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS.

As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether.

Got that?  JP Morgan has a market cap of $124 billion while Goldman has a market cap of about $50 billion   Both have less than a trillion of balance sheet size.  Between them they have more than twice their balance sheet in credit exposure and well more than 20 times their market cap in written credit protection.

This is ridiculously dangerous and the obvious question is “how in the hell can you possibly do that?”

The answer is that we learned nothing and have refused to end “too big to fail”: As a consequence these institutions are still playing “heads we win and keep the money, tails the taxpayer loses.”

And lose we have.  We’ve lost jobs, we’ve got the government presenting roughly 10% of the economy in borrowed money and thus creating false demand that does not actually exist in the economy and our Congress continues to chug along trying to argue over whether they will increase spending by $200 or $500 billion a year.  There has been zero reckoning against the facts presented here:

This cannot work over the intermediate or longer term and yet this is what we’re continuing to try to do!

The entire world is caught up in a gigantic Ponzimania but the world’s demand for pretty colored candy-emitting unicorns will not make them appear as unicorns are mythical creatures.

Nobody — simply nobody — is dealing with this in an honest fashion.  Neither side of the aisle will put a stop to it, despite it being factually certain that it will blow up in our faces.  As nations in Europe teeter on the brink of disaster we find that once again our financial institutions have levered up and hidden their exposure — it is just a matter of time before we start hearing “nobody could have seen it coming” again.

We must stop this and start applying handcuffs to these people, not coddling them.

Then there’s Congress and the blatant insider trading that they engage in.  While it has been argued that this is technically legal there’s a new law review paper out that argues the opposite – that this practice is a black-letter criminal and civil violation of the law.  The argument is quite persuasive too — but who’s going to appoint the special prosecutor and start cuffing Congressmen and women (like, for example, Pelosi?)

Oh please.  That will happen only when “Occupy Wall Street”, The Tea Party or both together decide they’re going to “occupy” Washington DC and refuse to leave until the indictments issue.

For those on the right who say that “OWS” is wrong and a bunch of freeloaders while they’re the “rule of law” group: That above paper contains all you need to demand that every member of Congress involved in this practice go straight to prison and that an immediate felony investigation take place right now — and to find a lawful and peaceful means to force the investigation to take place.

Folks, it’s really quite simple: We’re to the point where either we, as a nation, stand up and insist that the raw corruption stop or we will not have an economic recovery, we will not have jobs, and we will not resolve the fact that we have a handful of financial institutions that four years on are still holding our nation (and the rest of the world) and every individual living on the planet hostage.

I see no evidence of a willingness to deal with the facts in DC, in Brussels or anywhere else.  At its most-basic level the underlying financial fact is this: You cannot spend more than you take in over the intermediate and longer term.  The mathematical fact of exponential growth makes attempting to do so impossible.

It is this attempt and the utter refusal to face that fact that has underlay all of the mess that we find ourselves in – both here in the United States and internationally.

There is only one question remaining: Will we cut it out before or after our entire economy collapses?

A 3,000 to 1 shot, Wall St. took it, collected billions in
bonuses, blew it and you paid for it.

Before 2008, how Too Big to Fail Banks’ hidden
3,000 times leverage rigged the Real Estate market and defrauded EVERY mortgage
borrower and many others…

This article disabuses the notion that “deadbeat borrowers” caused the financial crisis.  And offers an  answer to the question that still lurks in the mind of every American; whether black, white, native American, asian or  Hispanic; whether educated or not; whether English, Spanish, or Mandarin speaking.

Taking a big step back, and looking at it like a business process:  “How could so many Americans ALL have made the same ill-advised mortgage borrowing decisions?”  The answer lies in what did they ALL have in common…

It was all about leverage

What is leverage?

Leverage is a way to control more of something when you can’t pay for it in full.  We do it all the time; when we buy a car – except few of us actually buy the car, we finance it or lease it.  We also do it when we buy a house – except almost no one pays cash for a house, we finance the purchase with a loan; it’s secured by a mortgage on the property.

Example of 5 times leverage:

When we buy a house and put 20% down, we buy a house worth 5 times as much as the down payment.  If we put $100 thousand down we can buy a house worth $500 thousand.  $500 thousand divided by the $100 thousand we put down equals 5 times leverage.

100 times leverage:

By the same calculation ZERO down mortgages were suffice it to say, 100 times leverage, it’s actually more but that’s a discussion for later.   Repeat after me, no money down mortgages equal 100 times
leverage.

(Click for Sharper Image)

Who controlled and approved EVERY leverage decision?

Leverage Approval #1 by:

TBTF Banks (ultimately) approved every one of these loans and bundled thousands of others like them initially into mortgage backed securities (MBS).

Leverage Approval #2 by: [the key, little known fact]

In the past, TBTF Banks used to sell them off (remember that word) to investors like mutual funds, insurance companies and pension plans.  In the 2000’s TBTF banks issued almost $17 Trillion of MBS, but did not sell all of them OFF to 3rd parties.  They held massive amounts of them to turbo-juice their bonus checks in a 2nd set of books (legally) in OFF balance sheet, special purpose entities.  As a refresher Enron did the same type of thing.

In the decades, make that for over 60 years before the 2000’s TBTF banks’ leverage was around 12 times; however when they concealed trillions worth of MBS – their leverage increased to over 30 times.

Remember 5 times leverage?  It was based on how much the house was worth right?

And when TBTF banks add more leverage on top of the borrower’s leverage we don’t just add it – we ______? You guessed it – we multiply it.

3,000 times leverage on house prices:

100 times leverage on the borrowers side times 30 times leverage on the TBTF banks’ side is 3,000 times leverage ON house prices.

Lather, rinse and repeat – 100 times 30 equals 3,000 times leverage.  Lather, rinse and repeat

100 times 30 equals 3,000 times leverage.

Remember what I first told you about leverage?

Leverage lets you (or TBTF bank) control something that you can’t fully pay for.  Well the TBTF
banks’ way of financing them in the Asset Backed Commercial Paper market began to dry up in August 2008, so they couldn’t pay for these assets.   This is the direct cause (but not the root) for the Fed and US Treasury to (have to) step in and pay CASH for them in the bailouts of 2008, and again in 2009, and again in 2010 and yet again 2011 via the Fed’s QE trifecta to the tune of over $20 Trillion dollars.

The interactive portion is about to begin:

Is it any surprise that the assets backing the commercial paper were ________? You may have guessed it – MBS.

Is it any surprise that the Fed created a new category to track ABCP in_______? You would be correct if you guessed 2006; just two swift months after Ben Bernanke was appointed chairman of the Federal Reserve by President Bush.

Is it just a random coincidence that almost $17 Trillion of Mortgage Securities were created by TBTF banks from 2001 to 2008?

What was that word I asked you to remember?

Oh, right it was OFF.

When TBTF banks’ CEOs, executives or prop traders got their year end bonus check did we hear reports that anyone said it was OFF (or that it was too much)?  Nope.

Yet even the erudite, indeed veritable student of the Great Depression, Chairman of the Federal Reserve, Ben Bernanke in October 2007 was unaware of (just a few days after the stock market peaked at 14,087 as measured by the Dow Jones Industrial Average) what the TBTF Banks were really up to when he entertained the NY Economic Club.  See “One year, One Trillion Dollars; the education of Ben Bernanke 2007 to 2008…” Fiduciary in thought and action: One year, one Trillion dollars; the education of Ben Bernanke from 2007 – 2008…(since there appeared no news report that any of the luminaries of the NY Economic Club questioned Mr Bernanke we assume they all understood and agreed with his distinguishing point.  I only wonder was that before or after they might have cashed a bonus check based on…LEVERAGE.)

Yup and we paid for it then and continue to pay their salaries, benefits like paid vacations, health care (non-taxable) even now – silly us.

The top 12 reasons + one

TBTF banks, before 2008 created a hidden, secret “market” for MBS:

1. As stated above TBTF banks changed from financial intermediaries into speculators via their proprietary (for the house only) trading desks;
2. Hiding (the FDIC used the word “concealed”) trillions of MBS off balance sheet;
3. Allowing their own internal prop traders to value #2  (legal under the SEC’s 2004 Consolidated Supervised Entity (CSE) program) despite the fact few if any, of #2 had EVER seen the light of any “market” trade as one between arms-length parties;
4. Why? To maximize same prop traders’, managers’ and CEOs’ cash bonus checks;
5. All based on the assumption (almost a religious belief) that national median home prices had NEVER gone down – true, as you may recall;
6. BUT the past was under a 60 times house finance, prudently underwritten leverage regime (20% down payments, verified job, income, assets and 12 times bank balance sheet leverage);
7. TBTF Banks’ single handedly created 3,000 times leverage on house prices, the underlying collateral of any MBS, CDO, etc.;
8. 3,000 times leverage is the product of Zero down loans; 100 times leverage for the borrower and 30 or more times TBTF bank on and off balance sheet leverage;
9. Mr Bass testified to the FCIC in January 2010 that TBTF banks’ leverage at the end of 2007 – yes end
   of 2007 (see page 13) shows almost all TBTF Banks were over 30 times, Citigroup at 68 times leverage; meant an adverse swing (in the value of the underlying collateral or obligations) of as little as 1.5% wiped them out completely – insolvent;
10. And we know that leverage worsened in 2008…and we know from Goldman Sach’s 2007 to 2008 collateral call dispute with AIG that MBS valuation marks (not even CDO’s) were south of 90;
11. It’s not about Fannie or Freddie either; they were downstream of information from the TBTF banks – again TBTF banks held trillions of MBS, in secret OFF balance sheet; I’m not saying it was necessarily illegal but it was fraudulent; as it was knowing, willful and intentional fraud upon the other side to the mortgage – the borrowers. And it only went on as long as it did – BECAUSE they were hidden;
12. And we know it’s not about CRA as home ownership peaked in 2004 nor can we blame it on the variant of “homeownership for all” as just a few too many houses were not primary residences but 2nd, 3rd, 4th and 5th homes and condos – each time the loan was approved (ultimately) by TBTF banks;
13. Last, 3,000 times leverage on home prices represents a 50 fold increase over the 60 times historical norm; more importantly shows that TBTF Banks’ violated requirements of their banking charters; i.e. to operate according to “safety and soundness”.

*Except borrowers who falsified their loan apps.

How could EVERY American mortgage borrower ALL have made the same mistake?

1)  Every mortgage loan was (ultimately) approved by?

2)  Every mortgage loan was securitized by?

3)  Massive amounts of securitized loans were held for speculation by?

4) Thousands of off balance sheet and or off shore entities were created by?

5)  Massive amounts of #3 were held off balance sheet by?

6)  The 2004 SEC CSE program was lobbied for by?

7)  Models, not markets were used to value off balance sheet holdings by?

8)  Hundreds of billions of customers’ money market funds  were diverted to affiliated banks known as industrial loan companies by certain?

9)  Massive dollar amounts of leverage were employed by?

10) Massive (greatly increased by hidden leverage) bonus checks were paid by?

11)  Assets held off balance sheet were not timely, fair valued by?

12)  Massive amounts of Fed and US Treasury aid were received by?

13)  LSD used by?

* TBTF Banks on LSD indeed; massive amounts of Leverage, Swaps and Derivatives.

A “Financial Crisis” approved, securitized one loan at time and brought to you by your friendly neighborhood TBTF Bank on LSD; one they prefer to still keep secret…

By the way, there was no need to create vast bodies of new laws except to require all securities and derivatives to trade on open, disclosed markets with independent clearing agents; just like stocks have traded on the NYSE for decades.

Chris McConnell AIFA®, Accredited Investment Fiduciary Analyst™ - is an expert on the securities industry and markets with over 28 years experience dealing with accounting, leverage and compensation issues.  He has an economics, accounting and fiduciary background.  McFid, BFD Expert™ since 2003.  To visit his website Fidiciary Forensics.

Author’s Note: 3,000 times leverage is an estimate as not all mortgages were zero down; just several million too many; not to mention “every app was approved” underwriting.  But we do know that 60 times leverage (on house price) was the norm for decades; also called safety and soundness; and we also know that TBTF banks’ leverage, assuming their year end 2007 marks were accurate, when the 2007 to 2008 Goldman AIG dispute timeline triangulated with Mr Blankfein’s 2010 testimony to the FCIC suggests otherwise, are understated – correct understated.  And we know that marks worsened (and caused leverage ratios to increase in 2008).  Again, the pressing need for CASH infusions from the Fed, UST in 2008/9, and kinder, gentler accounting treatment courtesy of the SEC/FASB

Discussion (registration required to post)

Are Americans starting to come together?

The video linked below provides a glimpse of why we are not a free nation, but also, how we can be free if we play our cards right and at least temporarily stop the artificially induced hostilities between Democrat and Republican voters.

Bill Still explains how the international bank cartel controls our government, just as they do the rest of the world. You and I, on either side of the political divide, no longer have a say in any major decisions.

Remember the first “bailout” bill (TARP), which was signed by Obama and Bush simultaneously on national TV?

That signing was symbolic of the signing away of our sovereignty by both parties, which actually had happened long before that, as marked by the creation of the Fed in 1913.

I recall it as if it were yesterday, that when the TARP bailout was being discussed, congress reported receiving a record number of phone calls and almost all of the callers (of both parties!) begged their legislators not to sign the bill that charged the public with the disastrous policies of bankers and rewarded them for doing the wrong thing.

Yet, despite this almost overwhelming political pressure from the now-disenfranchised American people, the majority of legislators went ahead and passed the bill, proving that their loyalties were not to you, but to shadowy powers higher up.

Bill Still provides the most plausible reason for that incredible dissonance between what we wanted and what the Banking Oligarchy wanted. The banks control the nation and the world, and the banks in fact control the Fed, not the other way around.

But as Bill also shows, there is a glimmer of hope on the horizon. The model for that hope is the State bank of North Dakota, the state with the lowest unemployment and the only State owned bank. It’s not a coincidence.

There is a clue: employment depends on a sound financial and monetary policy.

Here is a brief explanation of the North Dakota state banking system and why it is a model for other states:

http://prorev.com/2009/03/how-north-dakotas-banking-system-could.html

And here is a report on the Utah Monetary Declaration, another attempt to break away from slavery to the Fed:

http://beforeitsnews.com/story/1168/277/States_to_Financially_Break_Away_from_Federal_Government—Utah_Monetary_Declaration.html

Finally, let me point out something that is absolutely key:

As I have said before, the Oligarchy (Ruling Class) has been able to successfully manipulate the people by cleverly dividing us into two main camps, each with its own vested interests, created by politicians to divert attention from the wizard behind the curtain.

The Republicans created a paradigm to counter the establishment of bank regulations by falsely stating that the banks were part of the free market system and needed “freedom” to operate. If that were actually true, then they would be right, but it was a big lie. As Reagan discovered when he tried deregulation, the banks are guaranteed to a large extent by the Federal government, so they are in some ways immune to failure. That is, a deregulated bank can destroy itself by issuing bad loans, but the government is there to pick up the pieces – by insuring clients at tax payers’ expense. In the Savings and Loans scandal, Reagan had forgotten that fact. He portrayed banks as free market capitalists when in fact they were part of a Private Public Partnership (PPP). So when banks went kaplooey, we the tax payers paid the bill.

So Republicans hate regulations due to a misperception of banks as carriers of sacred capitalism.

On the other hand, Democrats oppose regulations too because they want banks to finance their socialist schemes and this can be best accomplished by unregulated banks in the hands of ideologues dedicated to wealth redistribution – with the proviso that the ideologue bankers get rich implementing it.

By creating and tending these two narratives, the oligarchs have been able to maintain their grip on our finances and money supply.

But now it appears both right and left may be waking up. The treachery isn’t so hard to see now that so many are out of work and people see the huge national debt that will never be paid down.

It was a Democrat president, Andrew Jackson, who broke the backs of the banks, after banking oligarch  Nicholas Biddle brazenly threatened to cause a depression, and then did so, showing that the banks would not shrink from deliberately harming the public to get their way – something they have never ceased doing, acting as a shadow government in the so-called Land of the “Free,” and ultimately bringing down the world economy with the cooperation of both political parties in America and of the EU.

Now, ironically, many Americans who really care about the poor and middle class – beyond mere lip service – are aligned with the Tea Party, and their ideas square perfectly with Democrat Andy Jackson’s. Yet thanks to a strong cognitive dissonance syndrome induced by powerful propaganda efforts, Democrat voters have been trained to shun this group. But, equally ironically, many Democrats support the Occupy Wall Street movement, which is based in part on the proposition of freeing the people from the oligarchs (though with the focus, for example, on race instead of the proposition that all Americans are targeted equally by the Ruling Class).

Thus, in their respective ways, both sides seem to have glimpsed a common enemy, and the old taboos against controlling the banks — taboos on the left and differently-motivated ones on the right — are starting to crack.

If the light should ever go on in the minds of We the People of both parties – and there is no reason to assume it can’t, regardless of the propaganda efforts of both sides of Tyranny – then it will be the bankers’ turn to be afraid.

They will have nowhere to hide.

Further reading:

This Financial Mess – Causes and Cures

“The president of the Second Bank, Nicholas Biddle, was quite candid about the power and intention of the bank when he openly threatened to cause a depression if the bank was not re-chartered.”

By Don Hank – Laigles Forum

Wow, what a shock…

The bottom line from the chair of the International Standards Board is that the European banks are fudging their books. This is not the Blogs making this assertion. It’s coming from the highest authority that exists.

That’s supposed to be illegal if you do business here in the US, and many of these institutions do in one form or another.  Some are even primary dealers.

This is NOT just an intrepid blogger or three making this assertion.  It is IFRS, the highest authority there is in this regard.

Even when a model is used to measure fair value, that model must reflect current market conditions (including those as evidenced by observable transaction prices) and it should include appropriate adjustments that market participants would make for credit and liquidity risks. (ed: If there are liquidity risks the mark would be lower to reflect those risks, not higher)  Furthermore, the model must maximise the use of relevant observable inputs (eg market data) and minimise the use of unobservable inputs (eg the company’s own assumptions). A company cannot ignore relevant market data (including observable transaction prices) when it is clear that market participants would use that data in determining the price at which they would be willing to enter into a transaction for the financial asset.

It would therefore not be in accordance with either the requirements in, or the intent of, IAS 39 to measure a loss on government bonds classified as AFS financial assets solely by assessing the present value of the future cash flows arising from a proposed restructure of those bonds. It is hard to imagine that there are buyers willing to buy those bonds at the prices indicated by the valuation models being used. In my view it is therefore difficult to justify that those models would meet the objective of a fair value measurement.

That’s from August, by the same organization – and now it has been repeated, in public.

The DAX was pounded for 2.5% today and our market was down a similar amount.  Banks were the big suffers, with Morgan Stanley being hit particularly hard.

If this game is not stopped by someone – either the participants themselves or regulators – we are headed directly for a repeat of 2008′s meltdown and this time there is little or no government ability to interrupt it as the tactic of allowing firms to lie about valuations – the very tactic that interrupted the crash in early 2009 – has already been used!

The lies must stop NOW.

H/t Bruce Krasting

Well, here’s something that’s gone mostly unnoticed.  From the FDIC:

Acting chairman stresses that the agency’s own planning is just as important as plans submitted by companies.

Seems that the big banks were asked to submit a sort of ‘plan’ for their own demise.

The Federal Deposit Insurance Corp. on Tuesday approved a rule requiring the nation’s largest banks to submit “living wills” to help regulators shut them down in an orderly way if they are seized on the brink of failure.

And now it appears that the FDIC may not be willing to wait much longer.

Personally, I think we’ve waited long enough.  This country can function just fine without the banks that have committed fraud.  You know, the ones for which the majority of our taxpayer money has been providing life support.  Allowing these banks to fail is probably the best thing that can happen….well, besides the officers and board members of these banks being prosecuted and put in jail.  Then we’d be cooking with gas.