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Archive for the ‘FCIC’ Category

Rewriting history to suit one’s own view of how you wish it was seems to be a national sport.

Three years ago this week, the financial system came unhinged. In rapid-fire succession, one major financial institution after another crumpled as years of recklessness on Wall Street and regulatory neglect in Washington took their toll. Before it was over, the federal government had committed trillions of dollars to bail out the nation’s largest banks and the economy was in tatters, with gnawing questions remaining about what went wrong and who was responsible.

Actually, that’s not correct.  The federal government didn’t have to bail out the nation’s largest banks.  We need a banking system to clear payments.  We don’t need the specific banks that committed the acts in question.

The unraveling had dire consequences. Twenty-four million Americans are unemployed or unable to find full-time work, with wages as a share of gross domestic product at the lowest level since the 1930s. Meanwhile, the banks barely skipped a beat, with compensation at publicly traded Wall Street firms reaching a record $135 billion in 2010.

The demand represented by the 30-year old credit bubble was not real.  Therefore, neither were the jobs.  Both were a chimera of actual prosperity. That’s an unfortunate fact that your commission did not examine, but should have.

To date, we have seen few criminal prosecutions and too many civil enforcement cases settled for pennies on the dollar with no admission of wrongdoing. Yet, buttressed by the investigations of the Financial Crisis Inquiry Commission, the Senate Permanent Subcommittee on Investigations, and various enforcement agencies, there is now a rising tide of legal actions seeking redress from banks that acted improperly. Some of the cases are beginning to lap up onto Wall Street’s doorstep.

Really?  Exactly how many criminal referrals did the FCIC make Phil?  I think that number is “zero”, despite at least one very-pointed admission, under oath, that a large bank was selling loans knowing they did not meet their published criteria. 

What’s the word for that activity again Phil?

It’s critical that the banks not be given an unlimited pass for past transgressions – to ensure that the truth of what happened to our country is revealed and justice is not short-circuited by financial power.

Again, Phil, exactly how many criminal referrals did the FCIC make?

Oh, and would you compare and contrast that against the body that investigated the S&L crisis, where Bill Black was one of the prominent individuals leading that charge, and explain why his body managed to put forward thousands of referrals and garnered somewhere in the neighborhood of 1,000 felony convictions.

The American people thank you in advance for your (cough) candor.

The Financial Crisis Inquiry Commission came out with its report—and two dissents!

Wanna cop a feel?

Lots to read! Lots of bullshit to wade through! Lots of finger pointing! Lots of skewed analysis that justify a political agenda!

Whoo-hoo!

Actually, cynical glee is the only emotion that keeps major depression at bay: The FCIC was set up in May of 2009, with the goal of getting to the root causes of the Global Financial Crisis, and find what policies and which actors were responsible for the melt-down. In a very real sense, the FCIC was supposed to be the modern day version of the Pecora Commission—

—but it wasn’t. Not by a country mile.

The bipartisan Commission members cleaved along party lines: The six members of the Democratic majority wrote the report, the four Republican minority members wrote two separate dissents.

The official report of the Commission—the one written by the six Democrats—starts by saying that the financial meltdown of 2008 was avoidable—which is trivially true: Every man-made event is “avoidable”.

Then the report squarely blames the Federal Reserve for abdicating its regulatory responsibility—which is very true: The Fed under Greenspan made it practically a point of honor to leave all the financial markets alone, and let them “innovate” as they saw fit, without vetting whether the “innovations”—like credit default swaps, mortgage bonds, and so on—were dangerous or not. Warren Buffett famously called default swaps the “financial weapons of mass destruction”—before the crisis. So Greenspan should have known better.

Then the Commission report goes after the banksters—which is also accurate, as their greed and recklessness certainly contributed to the crisis. Certainly their mismanagement of risk—not to mention their completely opaque balance sheets—created the conditions for crisis.

As to the government, the only criticism leveled by the Commission report is after the fact: The “inconsistent response [of the Federal government] added to the uncertainty and panic of the markets”. This, of course, is a reference to the Bush administration’s salvaging of Bear Stearns, yet then letting Lehman Brothers—a much larger, more important firm—sink.

The sense that comes off the report from the Democratic majority is that the Federal government did nothing wrong—except when it was being run by Republicans, such as the Federal Reserve, and the Treasury during the Hank Paulson/George W. Bush administration. Then, of course, they fucked up royally.

So although the Commission report highlights true causes of the financial crisis, one cannot take it seriously: It is so politically skewed—and so unwilling to look at long term, Great Society, New Deal government policies that directly led to systemic problems in the financial markets—that it torpedoes its own credibility. 

The three dissenters portentously claim they have identified “Ten Essential Causes of the Financial Crisis”: But what they actually do is simply enumerate a series of symptoms of the crisis. As anyone knows, symptoms aren’t causes.

Their number one “Essential Cause” is that “Starting in the late 1990’s, China, other large developing countries, and the big oil-producing nations built up large capital surpluses. They loaned these savings to the United States and Europe, causing interest rates to fall.”

This of course is bullshit—and bullshit that everyone knows: Interest rates were low starting in 1992 because Easy Al—that is, Fed Chairman Alan Greenspan—kept them low, goosing along the American economy whenever it threatened to slow down. This directly led to “irrational exuberance”, and a series of bubbles during the 1990’s and 2000’s. The only bubble Chinese and foreign money blew was in Treasury bonds. The tech bubble, Internet 1.0 bubble, housing bubble? All the Fed.

The other “Essential Causes”—such as II. (Housing Bubble), III. (Non-Traditional Mortgages), etc.—are clearly results of Easy Al’s easy money policies, while still other “Essential Causes”—such as X. (Financial Crisis Causes Economic Crisis)—are essentially tautologies.

There is no causal framework to Hennessey’s et al. dissent. There is no argument. There is just a series of symptoms tossed off, but no clear idea of what happened—only that it was not caused by private enterprise or the free market. Ultimately, this dissent is full of sound and fury, signifying nothing. (There’s a lot of Shakespeare quoted in these three documents; I don’t want to feel left out.)

The other dissent, written by Peter Wallison, starts off on a promising note (aside from an unfortunate typo on the very fist page): It accurately points to the Federal government policy (via the Department of Housing and Urban Development (HUD)) of fomenting home ownership to as many Americans as possible, regardless of their credit-worthiness, as being a prime culprit in the Crisis. 

Wallison very accurately points to the huge sub-prime and Alt-A loans as being the Achilles’ Heel of the whole mortgage-loan/securitization contraption. He notes—accurately—that these sub-Prime mortgages were the ones that blew up Fannie Mae and Freddie Mac.

But then Wallison veers off into Stupido Territory: He completely dismisses all arguments that anything else caused the Global Financial Crisis. Low interest rates, foreign flows of funds, shadow banking, or lax regulation—according to Wallison, none of them had anything to do whatsoever with the Crisis. Wallison blames it all on the sub-prime/Alt-A borrowing (and presumably the borrowers themselves—and of course, fucking HUD).

In other words, it was all the Gubmint’s fault.

Worst of all, Wallison denies that mortgage securitization had anything to do with the crisis—which is like saying that an iceberg had nothing to do with the sinking of the Titanic. Wallison writes, “But securitization is only a means of financing. If securitization was a cause of the financial crisis, so was lending. Are we then to condemn lending?’—which is exatly what he did before: Wallison rightly condemned loans to mortgage borrowers who were not credit-worthy. Yet securitization? According to Wallison, Not guilty.

Wallison is so blinkered by his pro-business, pro-bank, anti-government stance that he cannot—or will not—connect the dots between Federal government fomenting of mortgage loans, Federal Reserve abdication of its regulatory responsibilities, and rampant, unregulated, foolhardy securitization that eventually ended in tears.

That’s why this whole thing is so depressing: The report and the Wallison dissent accurately identify all the major causes of the Global Financial Crisis. Much like Plato’s blind men, each feeling a different part of an elephant and coming to their own—inaccurate—conclusions. Yet combined, they form an accurate picture. 

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.

Goldman Subpoenaed by FCIC after Sending Billion Pages of “Rubbish” to Panel

The Financial Crisis Inquiry Commission (FCIC) is annoyed at the prospect of wading through billions of pages of “rubbish” that Goldman sent in response to an inquiry.

Here’s the result: Goldman Subpoenaed by FCIC After Panel Says Firm Hindered Probe

Goldman Sachs Group Inc. was subpoenaed by the Financial Crisis Inquiry Commission after panel members said the most profitable firm in Wall Street history engaged in a document “dump” to hinder a probe.

Goldman Sachs sent more than a billion pages of documents, FCIC Vice Chairman Bill Thomas said on a conference call with reporters today.

“We did not ask them to pull up a dump truck to our offices and dump a bunch of rubbish,” said Angelides, 56, who previously served as California’s treasurer. “This has been a very deliberate effort over time to run out the clock.”

Thomas said the panel’s requests to Goldman Sachs go back “several months.” Information the firm turned over didn’t comply with what was asked for and has put FCIC investigators in the position of “searching through the haystack for the needle,” he said.

“We expect them to provide us with the needle,” he said.

Federal prosecutors in New York are also investigating transactions by Goldman Sachs to determine whether to bring charges, people familiar with the matter said April 29. The company hasn’t been accused of criminal misconduct.

Finra Finds “Widespread Use Of High-Speed Algorithmic Trading” Was Likely Cause For Flash Crash

Zerohedge reports Finra Finds “Widespread Use Of High-Speed Algorithmic Trading” Was Likely Cause For Flash Crash

From Reuters: “Regulators probing the mysterious May 6 “flash crash” in the stock market are unlikely to find a single cause, though the widespread use of high-speed algorithmic trading was in general likely behind it, the head of the Financial Industry Regulatory Authority said on Monday. “We won’t stop until we finish the analysis. But I think the answer is there is unlikely to be a single cause,” Finra CEO Rick Ketchum told Reuters on the sidelines of a conference here. “It is much more likely to be a proliferation of algorithmic trading that was all subject to the same triggers and didn’t have the same controls.”

Unfortunately I cannot find any external reference to that quote from Reuters or anywhere else. The only reference I can find trace back to Zero Hedge.

If FINRA has indeed determined that high-speed trading is a problem, and in response kills the practice, it will eat into profits at Goldman.

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