FedUpUSA

Archive for the ‘Too Big To Fail’ Category

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)

Millions of Americans are about to get stabbed in the back by their banks.  Bank of America, JPMorgan Chase, Wells Fargo, Citibank and several other large banks are either already implementing outrageous new bank fees or are currently testing them.  So are these ridiculous new bank fees going to be enough to get millions of Americans to finally boycott the big banks?  When millions of Americans start paying a $5 fee every month to use their debit cards and when millions of Americans start paying a $20 fee every single month just to have a checking account hopefully that will be enough to wake them up.  These fees are certainly not going to cause an “economic collapse”, but they are incredibly annoying.  The truth is that the big banks are trying to take advantage of us.  It shouldn’t cost $60 a year just to use a debit card.  It shouldn’t cost $240 a year just to have a checking account.  What we need to do is to send an unequivocal message to the big banks: we don’t want your stinking bank fees and we are switching banks.

When I was growing up, I remember how banks would bend over backwards to get your business.  The customer service was generally very good and banks were not gouging us with ridiculous fees.

But now thousands of smaller banks have been gobbled up by the banking giants and things have dramatically changed.  The big banks don’t value us anymore.  They seem to believe that they have a “captive audience” and that they can treat us however they want to.

Well, it is time for us to draw a line in the sand.

We didn’t mind so much that they were paying us next to nothing on our savings accounts.

We didn’t say too much when ATM fees soared into the stratosphere.  For example, the average cost of using an “out of network” ATM in America today is approximately $3.81.

We didn’t even object too much when they started charging us fees for things such as getting paper statements, receiving wire transfers, or closing our accounts.

But now they have really crossed the line.

On October 1st, new federal regulations went into effect that capped what banks can charge merchants for debit card transactions.

The average fee on a debit card transaction used to be about 44 cents.

The new federal regulations cap the fee on merchants at 21 cents.

So will banks be unable to make money under these new regulations?

Well, according to U.S. Senator Dick Durbin, each debit card transaction costs the banks somewhere between 4 and 12 cents.

So a cap of 21 cents is not going to kill the banks.

However, it is going to hurt the profits that they have been making.  The new rules are expected to reduce total bank revenue by a whopping $6.6 billion a year.

Ouch.

So what are the big banks doing about it?

Well, they have decided to recoup that revenue by sticking it to us.

For example, Bank of America recently announced that it is about to start charging a $5 per month debit card fee.

This has sparked a firestorm of criticism.

Even members of Congress are getting involved.

According to ABC News, U.S. Senator Dick Durbin stood on the floor of the U.S. Senate this week holding up a plastic debit card and launched into a tirade about Bank of America….

“Bank of America customers, vote with your feet, get the heck out of that bank,” Durbin said on the Senate floor. “Find yourself a bank or credit union that won’t gouge you for $5 a month and still will give you a debit card that you can use every single day. What Bank of America has done is an outrage.”

But that is not the only outrageous fee that you will be hit with at Bank of America.

If you want to get a basic checking account at Bank of America you will be slapped with a $12 monthly fee unless you maintain an average balance of at least $1,500.

Other large banks are instituting debit card fees as well.

Starting in November, SunTrust will be hitting account holders with a $5 per month debit card fee.

Last February, J.P. Morgan began testing a $3 per month debit card fee in Wisconsin.

Wells Fargo has also been testing a $3 per month debit card fee in certain markets.

But it is not just new debit card fees that are getting people upset.

For example, according to CNN large numbers of Citibank account holders will soon be paying a 15 or 20 dollar monthly fee if they do not maintain very high balances in their accounts….

Starting in December, customers who hold its mid-level Citibank Account will be charged $20 a month if they fail to maintain a minimum balance of $15,000 in their combined accounts. Previously, account holders had to carry a minimum balance of $6,000.

At the same time, customers who have the bank’s EZ Checking account will start being charged $15 a month if they don’t carry a minimum balance of $6,000.

They know that the vast majority of American families cannot afford to keep $6,000 sitting around.

It almost seems like the big banks are trying to eliminate as many small accounts as they can.

In the old days, virtually anyone could get a free checking account, but now all that has changed.

Sadly, the era of the free checking account seems to be ending.  According to a recent survey by bankrate.com, only 45 percent of all checking accounts in the United States that don’t pay interest are still free.  Two years ago that figure was sitting at 76 percent.

All over the nation, monthly fees on checking accounts are absolutely soaring.  In 2010, the average monthly fee on non-interest checking accounts was $2.49.  Today, the average monthly fee on non-interest checking accounts is $4.37.

It is almost as if the banks don’t even care about our money anymore.  They don’t want to give us free checking, they don’t want to send us paper statements, they don’t want us to use tellers and they don’t even want to treat us with common decency.

The truth is that we are the ones that deserve some compensation for all of the lousy service that we have been receiving.  For example, the Bank of America online banking system has been down for five days in a row.

The average American family is barely scraping by right now and cannot afford all of these outrageous fees.  Right now, economic conditions are rapidly deteriorating and millions more Americans are falling into poverty every year.  It is absolutely disgusting that these big banks are trying to drain hundreds of extra dollars a year out of each of us.

Well, perhaps we need to start voting with our feet.  We need to tell the banksters that we don’t want their stinking bank fees and that we are switching banks.

There are lots of credit unions and small community banks that would be more than happy to have us as customers.  Yes, banking with them might not be quite as “convenient”, but the big banks have pushed us way too far this time.

These new bank fees are beyond outrageous.

We cannot allow them to do this to us.

The Economic Collapse

(Click for larger image)

This is how the U.S. banking monopoly was created after more than two decades of unbridled bank mergers endorsed, and in some cases, encouraged the by the OCC, the FDIC, the FTC and the elimination of Glass-Steagall.

h/t The Daily Bail

For those of you critical of the Occupy Wall Street protests: While I admit that the lead has been taken by the left, and their ‘proposed fixes’ are terrible, that doesn’t mean they are not absolutely correct in what they are doing by pointing out the criminality of Wall Street and its capture of our government. Do you LIKE the bailouts that are to this day continuing to destroy our economy and …our country?! These ongoing bailouts are the biggest welfare entitlements the world has ever known – and it has all been YOUR taxpayer money going to Wall Street!

FedUpUSA first started protesting on Wall Street in April 2008 – and we called for an occupation then too! THIS IS WHERE IT ALL STARTED!  The only thing different about our message in this video is that we do not propose more communism to solve what is essentially an already communist government/Wall Street collusion.

What is keeping Tea Party folk, independents and conservatives from joining this and changing the dialogue about remedies? Why are you allowing the message to be ‘socialism is the only alternative to Wall Street fascism?’ Oh, there’s Wall Street fascism alright, but socialism and communism are NOT the answers. The answer is to stop allowing Wall Street, Banks and special corporations to pay Congress to write favorable legislation for them, to the detriment of the rest of us. This is neither capitalism nor a democratic republic form of government. It is CORRUPTION of our system.

Why are YOU letting the message against corruption, crony bailouts, devaluation of our dollar resulting in rampant price inflation, and failure to enforce already existing law upon certain ‘exempt’ entities become co-opted by far-leftist, communist radicals? Probably the same reason many in the Tea Party allowed it to be co-opted by far-right factions screaming against gays. This is and always has been about the shadow banking system (Wall Street) controlling the quantity of money in our economy, and using that money to purchase legislation while keeping politicians in office that will continue to favor Wall Street and the Too-Big-To-Fail Banks, essentially paying our government to look the other way when Wall Street commits criminal acts.

You do realize that the reason everyone is losing their jobs, homes and our government and most individuals are up to their eyeballs in debt is because the government is funneling all of our money to the Too-Big-To-Fail Banks both here in around the world, yes? Or don’t you understand that THIS is why there has been a $32 TRILLION net worth gain for the TOP 5% in this country, while the rest of us have lost a like amount? If you believe the system that orchestrated THAT is capitalism, I have a bridge to sell you. Stop defending our current system – it hasn’t been capitalism in decades; it is a kleptocracy. And don’t try telling me that ONLY the government is to blame (yes, they are part of this) – but Wall Street is just as guilty because THIS type of thing is NOT the doing of people in government! These are uniquely wall Street ‘innovations’ – the very innovations that have brought our country to its knees with the perverse amount of leverage they have put into the financial system.

The Wall Street and corporate-money capture of our government MUST END. Pick your enemies wisely but join the battle that is worthy and if need be, change the dialogue – Just like Dylan Ratigan is talking about in the video below.

Now listen to what Dylan Ratigan has to say:

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.

The World's Largest Banks Beg For Bailout From Congress 2008

This week’s wild actions on Wall Street should serve as a stark reminder that few investors have any clue as to what is really going on beneath the surface of America’s troubled economy. But this week did bring startling clarity on at least one front. In its August policy statement the Federal Reserve took the highly unusual step of putting a specific time frame for the continuation of its near zero interest rate policy.

Moving past the previously uncertain pronouncements that they would “keep interest rates low for an extended period,” the Fed now tells us that rates will not budge from rock bottom for at least two years. Although the markets rallied on the news (at least for a few minutes) in reality the policy will inflict untold harm on the U.S. economy. The move was so dangerous and misguided that three members of the Fed’s Open Market Committee actually voted against it. This level of dissent within the Fed hasn’t been seen for years.

Many economists have short-sightedly concluded that ultra low interest rates are a sure fire way to spur economic growth. The easier and cheaper it is to borrow, they argue, the more likely business and consumers are to spend. And because spending spurs growth, in their calculation, low rates are always good. But, as is typical, they have it backwards.

I believe that ultra-low interest rates are among the biggest impediments currently preventing genuine economic growth in the US economy. By committing to keep them near zero for the next two years, the Fed has actually lengthened the time Americans will now have to wait before a real recovery begins. Low rates are the root cause of the misallocation of resources that define the modern American economy. As a direct result, Americans borrow, consume, and speculate too much, while we save, produce, and invest too little.

It may come as a shock to some, but just like everything else in a free market, interest rate levels are best determined by the freely interacting forces of supply and demand. In the case of interest rates, the determinative factors should be the supply of savings available to lend and the demand for money by people and business who want to borrow. Many of the beneficial elements of market determined rates are explained in my book How an Economy Grows and Why it Crashes. But allowing the government to determine interest rates as a matter of policy creates a number of distortions.

It was bad enough that the Fed held rates far too low, but at least a fig leaf of uncertainty kept the most brazen speculators in partial paralysis. But by specifically telegraphing policy, the Fed has now given cover to the most parasitic elements of the financial sector to undertake transactions that offer no economic benefit to the nation. Specifically, it will simply encourage banks to borrow money at zero percent from the Fed, and then use significant leverage to buy low yielding treasuries at 2 to 4 percent. The result is a banker’s dream: guaranteed low risk profit. In other words it will encourage banks to lend to the government, which already borrows too much, and not lend to private borrowers, whose activity could actually benefit the economy.

This reckless policy, designed to facilitate government spending and appease Wall Street financiers, will continue to starve Main Street of the capital it needs to make real productivity-enhancing investments. American investment capital will continue to flow abroad, denying local business the means to expand and hire. It also destroys interest rates paid to holders of bank savings deposits which traditionally had been a financial pillar of retirees. In addition, such an inflationary policy drives real wages lower, robbing Americans of their purchasing power. The consequence is a dollar in free-fall, dragging down with it the standard of living of average Americans.

Until interest rates are allowed to rise to appropriate levels, more resources will be misallocated, additional jobs will be lost, government spending and deficits will continue to grow, the dollar will keep falling, consumer prices will keep rising, and the government will keep blaming our problems on external factors beyond its control. As the old adage goes, “insanity is doing the same thing over and over again and expecting different results.”

Peter Schiff for TownHall Finance