(Reuters) - America's big international banks may have to restructure and downsize their operations now, unless they can prove they will be easy to dismantle in another financial crisis, said U.S. regulator Sheila Bair.
Uh huh. How about this Sheila?
Why don't you talk about the fact that starting with Continental Illinois the FDIC has bailed out not depositors but bondholders?
You know, that "no disruption" model, despite the FDIC being called The Federal DEPOSIT Insurance Corporation.
Where do you see "bondholder insurance" in there?
I can't find it.
"If they can't show they can be resolved in a bankruptcy-like process... then they should be downsized now," said Bair, chairman of the Federal Deposit Insurance Corp.
"There is no reason in the world why they should get some special treatment backstop that other businesses in this country don't have," Bair said.
NOW you say this?
This isn't a 2008 story folks. It goes back, again, to Continental Illinois.
That's where this idiocy began. It is also, not coincidentally, where the utter stupidity in leverage growth - that is, unsupported (and unsupportable) credit expansion began.
Gee, I wonder why when those who enable the leverage through being bondholders of financial institutions are told by the explicit actions of the US Government that they won't lose their money if the institution does something stupid - or even worse?
Bair is now in the final months of her five-year term heading the FDIC, which she led during the tumult of the financial crisis. Her term ends in June.
Bair said she hopes to have major aspects of new capital requirements and the liquidation regime in place before she departs.
She's not going to do jack and neither will her successor.
That you can take to the bank.
One well known trader, Karl Denninger, recently made this public comment about U.S. trading activity:
Folks, this crap is totally out of hand. And it's now a daily game that's being played by the machines, which are the only things that can react with this sort of speed, and they're guaranteed to screw you, the average investor or trader. Go ahead, keep thinking you can invest. (Emphasis omitted.)
Yes, I sure did.
May I ask why Nanex was not included in these hearings? They seem to have it documented quite well.
This much we now seem to know - at least some folks on The Hill read The Ticker.
At 2:32 p.m., against this backdrop of unusually high volatility and thinning liquidity, a large fundamental trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 E-Mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position.
This is what the SEC considers the "Triggering Event."
Let me point out a few things.
I'm going to start by picking on a random day - yesterday.
Note the closing bar @ 15:00. That's the closing bell from yesterday.
The volume? 71,573 contracts.
Did the market crash - either down or up? No.
In point of fact that's not a particularly large volume. On Fed Release days we often go through a half-hour or more of this sort of volume, and on Option Expirations it's even higher - especially on the close. To blame the initiation of the collapse on this order, which is entirely in line with what Globex handles virtually every day on the close, is asinine.
The execution of this sell program resulted in the largest net change in daily position of any trader in the E-Mini since the beginning of the year (from January 1, 2010 through May 6, 2010).
So what? For every buyer there is a seller and vice-versa. Moreover, the individual positions don't matter in this regard - what matters is the aggregate. Again, Globex handles this sort of transaction volume on the close virtually every day on the closing one-minute bar.
However, on May 6, when markets were already under stress, the Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes.
TWENTY MINUTES? Jesus, you're claiming that a per-minute rate of 1/20th of the operational SINGLE MINUTE closing volume each and every day crashed the market?
Do you really think we're this stupid out here, or have you been smoking not bong hits, but crack?
The Sell Algorithm used by the large trader responded to the increased volume by increasing the rate at which it was feeding the orders into the market, even though orders that it already sent to the market were arguably not yet fully absorbed by fundamental buyers or cross-market arbitrageurs. In fact, especially in times of significant volatility, high trading volume is not necessarily a reliable indicator of market liquidity.
Oh, you mean what I've talked about now for more than two years? Volume is not liquidity.
Gee, someone's figured it out? When are you going to stop trying to SELL the people on the "merits" of high-frequency trading as improved liquidity in the market?
Was that announcement going to come too with this report, or were you hoping that the people would be too stupid to read your report for content and realize that you just repudiated your own argument for allowing this crap in the first place?
Still lacking sufficient demand from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly buy and then resell contracts to each other generating a "hot-potato" volume effect as the same positions were rapidly passed back and forth. Between 2:45:13 and 2:45:27, HFTs traded over 27,000 contracts, which accounted for about 49 percent of the total trading volume, while buying only about 200 additional contracts net.
Exactly - the entire point of HFT is to play "hot potato." When the HFT guys win, they keep the money. When they lose, they crash the market. You put this program in place and you allow it despite knowing that there is no actual LIQUIDITY added to the trading environment by these hyenas.
Approximately 400ms before the eMini sale, the quote traffic rate for all NYSE, NYSE Arca, and Nasdaq stocks surged to saturation levels within 75ms. This is a new and surprising discovery. Previouisly, when we looked at time frames below 1 second, we thought the increase in quote traffic coincided with the heavy sales, but we now know that the surge in quotes preceded the trades by about 400ms. The discovery is surprising, because nearly all the trades in the eMini and ETFs occurred at prevailing bid prices (a liquidity removing event).
Got it? Someone stuffed the quote system before the sales took place. Who did that, why did they do it, and what they know that led them to do it? That wouldn't have been some HFT guys that rammed the exchanges with foreknowledge of the sell order in order to INDUCE a dislocation, would it?
That's a very good question..... but while you ponder it, thanks for the admission on your faux liquidity claims - let me know when you're going to pull the HFT guys' network cords. Oh that would be "never", right?
I'm going to continue to read the rest of this piece of vomit, but the bottom line here is that the SEC wants us to believe that after selling us the "virtue" of HFT-provided liquidity, it has, in its own report, destroyed its own argument for allowing these systems to be connected to the exchanges in the first place.
It also does not (other than in a passing mention) point out that there is a disparity of information - that is, that HFTs can (and appear to on a near daily-basis) create and/or profit from disparities in quote flow information - and may actually cause some of that disparity, whether intentionally or otherwise.
There are no real suggestions for fixes contained in this report that I can find.
I'll make a couple:
I'll post more once I've read the rest of this bilge - assuming I don't hurl first.
A picture is emerging is of an industry - from loan officers in local offices in neighborhood strip malls to the financial titans of Wall Street - eager to purge bad mortgages from its books. To speed that process, documents and signatures were forged, notary witnesses were faked and those responsible for checking court filings never read the massive stacks that passed across their desks at a breakneck pace, attorneys and law enforcement officials say.
Oh no, this isn't that simple. In point of fact I believe it is nothing more or less than an attempt to cover up the previous offenses. After all, it's nearly always the coverup that gets you in the real world, not the original offense.
What am I talking about? Well The Washington Post gets close!
But lawyers and law enforcement officials in a handful of states contend that they have found far more serious examples of fraud. These officials argue that the companies filing foreclosure claims often did not have legal standing to kick people out of their homes and used forged paperwork to cover their tracks.
During the housing boom, investment banks and hedge funds constantly packaged and repackaged mortgages into massive securities that could be traded just like stocks. This mechanism, fueled by the tremendous appetite to make money off mortgages among Wall Street investors, ensured there would be enough financing available to offer a mortgage to almost anyone who wanted one.
Except that the loans did not meet the standards put forward to the investors, and the banks knew it.
They sold them anyway.
The common word for intentionally misleading someone about what you're selling them, when you know that if they knew they wouldn't buy, is FRAUD.
If Fernandez's documents were forged, it is unclear who would have done so and for what purpose. Housing experts say in general, fabricated foreclosure documents often indicate that banks and document processors have lost track of the papers that prove who owns a loan.
They didn't lose the paper. They destroyed it. The original paperwork has been intentionally destroyed and the so-called "electronic replacement records" are often either missing as well or incomplete. That makes these "lost note" affidavits frauds upon the court as well.
Well, you figure it out. But while you're thinking about it consider that it's damn hard to prove fraud when "the dog ate the evidence." Or was that the big bonfire you held out behind the warehouse?
Intentional destruction of evidence is usually called something too: Obstruction of justice.
So where is justice folks?
Where is justice for the MBS buyers who got ripped off to the tune of more than a trillion dollars? The banks kept their percentage, even though they knew full well - it has now been documented before the FCIC - that the loans did not meet the requirements put forward to the MBS buyers in the offering circulars?
Where is justice for the homeowner who saw his property tax assessment rise by 200% during the 2000s as a direct consequence of the fraud in this market that allowed "values" to be pumped up to entirely unsupportable levels?
Where is justice for the counties and states who were deceived about the "health" of the housing industry by these practices, and the testimony of people like Ben Bernanke, who had every ability to know about this (that is, if he didn't it was willful blindness on his part) and yet testified under oath before Congress on multiple occasions as to the "general health" of the housing industry?
Where is justice for the homeowner who was given funds to "buy" a house on false pretense, without which his loan would have never funded and thus he wouldn't have been evicted from his home nor had his financial future and credit destroyed?
Why do the banks get a pass on all this, when we now know for a fact that the scenario I put forward in April of 2007 is in fact true - that the banks willfully and intentionally sold loans to MBS buyers that were in direct violation of the representations and warranties in those offering circulars, and we also now know (through court filings) that the original paperwork was intentionally destroyed despite requirements in state law that original "wet ink signatures" and original documents be maintained. That, as well, is also a violation of the offering circulars, as all of them contained representations and warranties that the notes taken were in compliance with state law and in good recordable form.
The scams must stop and those who committed them must be held to account.
I've been pounding on Sheila Bair specifically now for close to three years when it comes to proper and appropriate underwriting standards for mortgages.
"We should all be concerned about the type of exposure that the government is taking on through guaranteeing so many mortgages right now and make sure that we do have some prudent underwriting standards," Federal Deposit Insurance Corp Chairman Sheila Bair suggested in an interview on CNBC"
Really? Did she define prudent standards? Why yes she did.
She suggested tighter standards should include "very robust" income documentation, ability to repay standard loans and a significant down payment.
"Clearly there is a strong correlation between the amount of skin in the game a borrower puts in up front and how that loan performs," Bair said. "Do you put 20 percent down? You're committed to that house. You walk away from that house, you're going to lose a lot of the money that you put in up front."
Gee Sheila, where did that come from?
I have repeatedly said that we need to return to sound and stable mortgage underwriting, and I have also defined that as:
For more than three years I have banged on this drum, with some of the screeds aimed directly at Ms. Bair.
Today, she finally came around.
I suppose one could say "better late than never", but the sad part is that the "late" now means that the US Government is potentially on the hook for a half-trillion or more in losses from inappropriately-backstopped home loans that were not underwritten to those standards.
I wonder if Sheila smells smoke and is trying to find herself a desk to hide under, hoping that nobody will pay attention to her refusal to raise hell about this during her tenure at the FDIC......
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