I apologize for the late report on this (five days is a long time) but I had to get my retching under control lest I wind up buying multiple keyboards.

Are you concerned about growing income inequality in America? Are you resentful of all that wealth concentrated in the 1 percent? I’ve got the perfect solution, a modest proposal that involves just a small adjustment in the Federal Reserve’s easy monetary policy. Best of all, it will mean that none of us have to work for a living anymore.

For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.

So why not let everyone participate?

Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

If you detect sarcasm then your mental acuity is somewhat above that of a field mouse. 

That would mean I should be applauding this woman, who used to be the head of the FDIC, right?

Wrong.

See, there's this law called "Prompt Corrective Action", or more-formally 12 USC Section 1831o.

That law, passed after the S&L scandal, requires banking regulators (including the FDIC) to monitor bank asset quality and capitalization and act long before they become insolvent.

It was passed because during the S&L crisis and in the time leading up to it regulators wantonly and willingly ignored -- in some cases intentionally participating -- in balance sheet frauds that wound up costing the taxpayer a lot of money.

But PCA was wildly ignored both in the years leading up to 2007/08 and all the way through it.

Not only that, but there was at least one instance where a bank regulator allowed a financial institution to backdate deposits so as to appear more solvent than it really was.  (IndyMac)

This would be shocking but what elevates that little incident to a level of outright disgust and corruption is that the very same individual who participated in that scam on the government regulatory side did it previously during the S&L crisis and not only was he not prosecuted he kept his job!

While some defenders will say "but that was OTS!" the fact remains that 12 USC 1831o says:

Each appropriate Federal banking agency and the Corporation {ed: "corporation" = FDIC} (acting in the Corporation’s capacity as the insurer of depository institutions under this chapter) shall carry out the purpose of this section by taking prompt corrective action to resolve the problems of insured depository institutions.

So the FDIC does not and cannot get a pass on this one, as it had both concurrent jurisdiction and responsibility.

Sheila appears in this article to be lambasting liar loans and pick-a-payment mortgages (both of which featured prominently in intentionally misrepresenting the alleged "value" of houses throughout the United States) and since it was done for "profit" by these very banks and other financial institutions this certainly appears to fit the black-letter definition of fraud.  We're not talking small-ball fraud either -- literal trillions of dollars were stolen.

The problem Sheila has is that she wasn't lambasting those liar loans and pick-a-payment mortgages during the latter part of the housing bubble nor was she willing to step in and close those big institutions right up front when the market turned or apply regulatory sanction in her first years as FDIC chair, despite the clear requirements of the law.

For instance in 2007, back on April 18th just after The Market Ticker began publication, I wrote the following:

In March of 2006, Washington Mutual recorded net income of $985 million dollars.  4Q06 they booked $1,058 mln.  This last quarter, they booked $784mln.

But in those three quarters they booked  $194mln, $333mln and $361 million, respectively, in PayOption ARM "Capitalized Interest."  This was booked and recognized as EARNINGS.

Now here's the problem:  In 1Q 06, 194 million out of $985 is 19.7%.  In December, it was 31%.  But this last quarter, it was FORTY SIX PERCENT, more than a DOUBLE over the year ago levels.

And what's worse, not one dime of that "income" can be spent!  It is entirely phantom.

This is the same sort of crap that sunk Lucent and Enron - booking "income" that is not in fact spendable, as it has an impairment associated with it (the LTV is INCREASED by this negative amortization) AND it is not CASH!

There is a legitimate argument to be made for booking this as a net increase in the bank's assets, offset with a loss reserve due to the increase in LTV on the property (this is the most likely part of the principle to be unrecoverable in the event of a default.)  In effect this is a capital asset that is drawn down in value over some period of time - up to 30 years for most mortgages.

But now the bank has elected to pay 55 cents of dividend, yet the single largest contributor to their "86 cents of net income" this last quarter was in fact capitalized interest that cannot be spent!

Got it?  The bank (which did fail, incidentally) was paying out money it didn't have in the form of dividends while suffering from a shrinking value asset base due to the fraudulent lending.  That is, the firm (along with all the others) had participated in and generated a speculative asset bubble with which it then "justified" its capital position, claiming that it had all these loans which were backed up by tangible property that could be liquidated if people could not pay.

The problem is that the claim was bogus -- the alleged "value" was manufactured through fraudulent lending that led to "flips" of houses at ever-increasing prices, backed by fraudulent appraisals of which there was a complaint filed by the Appraisers in the early part of the decade -- more than five years previous!

Not only was the complaint ignored (that appraisers were being effectively forced to "hit numbers" lest they be blackballed and driven from the business) but in addition there was zero enforcement action leveled against financial institutions that were intentionally creating credit out of literal thin air, backed by nothing, through the bogus claim of "value" in these assets that did not exist!

The net effect of this is exactly identical to a counterfeiter blowing stacks of $100 bills out of the ass end of his office copier.  It is identical to a "naked short" in the stock market, where manipulators effectively counterfeit shares of stock that do not exist. 

These were intentional, knowing acts.  These "loans" were made knowing full well that the people taking them could not pay; myriad and sundry promises and representations were made to the borrowers that they'd be able to roll over these loans into new ones when the teaser rates expired, that property would "for the foreseeable future" appreciate at 10% or more a year (thereby allowing serial refinancing, effectively financing one's life on hot air) and more. 

The American people were rubes for going along with this but the finance "professionals" and banksters knew damn well what exponential growth of credit at a 10, 20 or even 30% rate was going to eventually lead to -- the only question was exactly when it would all come crashing down around their ears.

And the regulators?  They not only had to know they didn't care and in some cases actively participated in these schemes!

Were there any honest regulators in Washington DC the day after WaMu reported its first quarter results and declared that dividend the institution would have been closed by those regulators and the portfolio liquidated while the firm still had positive value, with the officers and directors being permanently barred from ever having anything to do with a financial concern again.

But that wasn't done.  Nor was it done at IndyMac.  Nor at GMAC/Rescap.  Nor elsewhere.  This, despite the fact that by the first quarter of 2007 the market had clearly turned in housing and it was known that the asset quality mix in these institutions was toxic and destined to blow up in everyone's face.

It's one thing to take a risk as a private enterprise -- that's within your rights, of course, and some risks lead to big rewards.

But when you effectively scheme and scam to create the illusion of prosperity rather than actual prosperity -- when you lead people to believe they have an ever-lasting font of spendable "wealth" that does not really exist and you do it by effectively counterfeiting the United States dollar you deserve to be in the dock, you deserve to have your assets clawed back and then be tossed into the street in your underwear. If you're one of the executives or regulators who together create this sort of distortion in the market by either willful action or inaction to then pat yourself on the back with this sort of snark is beyond the pale when in any just society where you would be is cooling your heels serving a 99 year no-parole no-pardon prison sentence eating bread crumbs and cockroaches for sustenance.