The Market Ticker

Unbelievable.

As those who read this column regularly know I have commented before that I believe Fannie and Freddie are woefully under reserved and potential "short to zero" candidates, simply because of the depth of their capital (or more specifically, the lack thereof) behind their credit book.

Now we get something far more ugly - proof that what I have been told was in fact happening - that Fannie and Freddie were buying "Liar Loans" - is in fact true.

"A federal probe of Countrywide, the nation's largest mortgage lender, is turning up evidence that sales executives at the company deliberately overlooked inflated income figures for many borrowers, people with knowledge of the investigation say.
.....
Both Countrywide and Fannie Mae, the government-sponsored company that bought many of the loans, classify the loans as "prime," meaning low-risk.
....
John Sipes, a former loan officer at Countrywide in Los Angeles, said sales agents loved the loan. "In the good old days, that was the best loan we had at Countrywide," he says. Borrowers were required to sign a form allowing Countrywide to verify their incomes with the Internal Revenue Service, but "they never really checked," he says."

Yeah, right.

Remember now, we were told last spring and summer this was a "Subprime" problem.

Then that there were some "liar loans" but they were not considered "prime" paper, and that the "prime" mortgages that were written over the years were in fact safe - even from "bubble" vintages.

Now, as the FBI digs into the matter, we get down to what appears to be the truth.

Let's lay it out here, assuming that the FBI investigation proves out:

• Countrywide (and presumably other lenders) wrote mortgages to people on "stated" income, allegedly with the right to verify income against tax returns, but in fact they never did.
• These loans were then packaged up and sold to various channels, including the GSEs Fannie and Freddie, contaminating their "prime" credit book with garbage paper that is at high risk of default. These loans were bought by Fannie and Freddie despite both of those firms representing to its investors that they buy only "safe, prime" mortgage paper.
• This was allegedly hidden from investors (In the stock? In the paper? From Fannie?), thereby inducing those investors to purchase things (stock, bonds, mortgages) they would not have otherwise bought.
• Either Countrywide's folks in the corner office were incompetent (unaware) or complicit (worse) - so how is it that Sambol has been given a job by BAC?

Oh, and now that the firm has been gutted Countrywide lacks the ability to "buy back" the defaulted paper, so the buyers - including Fannie and Freddie - are going to wind up eating it.

Is this the only instance of this sort of outrageous behavior and misrepresentation in the system, which now appears to have been promoted and enabled by the very same GSEs that are supposed to "help" Americans buy and own homes?

Care to take a bet on it?

I wouldn't.

Let's leave aside for a moment whether the FBI can dig up enough evidence to bring criminal charges against a wide range of players, including perhaps indicting the firm itself (there has been one broker who apparently drew a 2-year sentence already and triggered the broader look) and focus on what this means generally for the mortgage marketplace.

This is, perhaps, the most damning piece of information we have seen so far, when one takes time to think about it and add it up. Some will refuse to recognize this, but that would be a huge mistake.

See, if Countrywide pulled this sort of thing it has to be assumed that this bad paper was not only originated by them, the "nation's largest lender" but also by many other mortgage lenders, both large and small. It also has to be assumed that this risk was sold off to virtually everyone in the chain, and that huge parts of it remain hidden all over the banking and lending system.

The magnitude of this problem cannot be understated, and there is literally nothing that can be done about it at the present time. These loans will go bad, and when they do, there will be little or no recourse back to the originators, especially if Bank America retains Countrywide as a separate subsidiary and/or "bankrupts" them intentionally once absorbing the pieces it wants to keep.

The losses embedded in the GSEs are impossible to determine up front but the capital reserves these firms hold is minuscule compared to their credit book. Very small amounts of real change in exposure to risk make a big difference to the outcome, and it is essentially impossible for any investor in this paper to know what they're buying, given that it appears Fannie was "clueless" about the deception, whether through carelessness, willful blindness or active deceit by others.

If these investors have a hint of brainpower this article will immediately cause spreads on that paper to blow out, which means conforming loans are going to get more expensive.

Perhaps a LOT more expensive.

If you are an investor in Fannie and Freddie paper, you have to ask yourself today - why would you hold those bonds when you have absolutely no idea what is actually in them? If you are a stockholder, do you want to find out the hard way that these firms have a fraction of the capital base necessary to absorb these credit losses and remain afloat?

I suspect the ultimate answer is that both GSEs wind up being nationalized, bondholders will take significant losses on bonds purchased in the last few years and common stockholders will get zero.

The accounting scandal of a few years ago at both Fannie and Freddie was bad.

This is hundreds of times worse because it threatens not just how the books are added up but what underlies those books! In short, what everyone has assumed was "money good" is increasingly looking like used toilet paper with a very high risk of stinking up the joint before you can dispose of it in the commode.

It is now clear that there is no such thing as a "safe" mortgage bond, even those issued by Fannie and Freddie, because the entire system has been contaminated by channel-stuffing with barrels full of liar loans!

What may be at least equally bad is that Countrywide, when it lost access to the commercial paper market in the middle of last year, tapped the FHLB system hard.

In November Senator Schumer sent a letter to the FHLB expressing "concern" about the volume and concentration of risk that FHLB Atlanta was engaging in with extensions of credit to Countrywide.

Is it possible that this could bring ruinous losses to the FHLB system too? Yes, although again, without much more information we simply will not and do not know. But the risk is certainly there, especially if these loans were bought at very low spreads as is common for "prime" paper - when in fact the loans were anything but prime, stuffed chock full of fraudulent misrepresentations.

Hopefully as this all unwinds the fraudsters will get themselves 20 years in the Greybar Motel.

Fannie and Freddie are chartered under Congressional "oversight" to promote "affordable" housing and maintain liquidity in the marketplace.

They have done an amazing job of maintaining "liquidity" but on affordable housing they have in fact done their damndest to screw Americans instead of helping them. They were in fact the chief enablers of the bubble and attempted to profit from it, levering up their "special" position due to Congressional blessing and in fact buying the same sort of trash paper that sunk AHM!

On the "liquidity" front their "efforts" looked good but in fact they were a chief source of the "free money" that led to the bubble in the first place, and thus were a chief driver of the fraudulent, Ponzi-like home-price "appreciation" that took hold in this nation.

These institutions need to be shut down or nationalized as it is clear that they are unable to operate within their charter and will take every opportunity to game the system while screwing Americans wholesale.

Their stockholders should get zero and their executives should be indicted for abusing the public trust. It is clear that these firms promoted and in fact helped create the bubble that now threatens to take millions of Americans' homes.

OFHEO needs to be disbanded for failing in its essential purpose of oversight and regulation.

Why we as a nation continue to tolerate this sort of nonsense and outright theft by organizations that are supposed to be there to "help us" - especially when they operate under explicit Congressional charter with "privileged position" - is beyond me.

There is a serious problem with the "hide the salami" game that these institutions are playing.

You can hide it all you want but eventually it stops cash flowing according to requirements and defaults. At that point you can try to sucker your way through by propping it up, but that only works until your cash runs out. The obvious defensive move is to increase spreads so you have more cash coming in to make up the flow requirements, but that just hammers housing harder, as real rates rise, as rising real rates effectively devalue every home in America.

This can quickly deteriorate into a self-reinforcing spiral, dragging not only housing but ultimately essentially all lending goes down the drain.

There is no way out of this mess other than for those who did the evil things to be forced into the light, prosecuted when necessary, the firms involved put out of business or (in the case of the GSEs) nationalized and punishments levied.

The garbage paper has to be forced into the open and those who have losses are going to have to eat them, no matter how painful.

I realize this is politically unpopular but the alternative is that we will reach a tipping point where confidence in the quality of this debt will be lost, and then the market will do for us what we don't want to happen - that is, a generalized "buyer's strike" will ensue, and that will be the end of that.

Instead, we must take our medicine - now - no matter how bad it tastes.

We are simply out of time and ability to absorb more fraud and destruction of trust in our credit market and banking system.

Congress needs to hear from each and every one of us on a daily basis in some form - whether it be by email, phone, or fax - until these problems are addressed. It is not enough to sit back and wait for the FBI to finish their investigation - there needs to be an all-on assault on the fraudsters and it needs to be made clear that irrespective of who they are, where they work, or how bad it is, the truth must be laid bare on the table now.

Our economy literally hangs in the balance.

I mean, give me a break:

"Federal Deposit Insurance Corp. Chairman Sheila Bair is finalizing a legislative proposal that would allow the Treasury Department to make direct loans for close to one million homeowners in the latest government initiative to stabilize the slumping mortgage market"

Sounds good right? Read on....

"According to the draft, borrowers would still be required to pay their mortgage and the new government loan, but they would not have to make any payments on the Treasury loan for the first five years. During that time, investors in the loans would pay interest to Treasury, and after five years homeowners would begin repaying the Treasury loan at fixed Treasury rates.

For loans to qualify, mortgage investors would "pay Treasury's financing costs and agree to concessions on the underlying mortgage to achieve an affordable payment."
To modify one million loans, the FDIC estimated it would require a $50 billion public debt offering. Treasury would recoup the costs because it would have the first priority to recover funds if homes are sold, refinanced, or if the borrower goes into default."

The last sentence is key.

Is Sheila short every bank and institution that holds mortgage-backed paper?

Because I will be if this passes.

Why?

That last sentence.

This sort of "modification" (no doubt implemented with lots of arm-twisting by government) will instantaneously mark all the mortgage paper outstanding at about 5 cents on the dollar, which is roughly where all the HELOCs and Second Liens are trading now.

Right now first mortgage lenders have priority in a foreclosure. That is, they get all their money first, then if there is anything left the seconds and HELOC guys get to fight over what's left.

This reverses that priority so that Treasury gets all its money back first, then, if there's anything left, the lender gets theirs.

The instantaneous impact of this in the lending market would be an extreme blowout in spreads over Treasuries for all new mortgages, along with an immediate markdown of 20% off principal value on existing paper from where it is now. The blowout in spreads would be an effective monster interest-rate hike, which would immediately "mark to market" the entire housing stock down by the change in affordability (e.g. if it was, say, a 200 bips spread, going from 6-8%, it would hit every home in the nation for about 28% of its value instantaneously. Yes, on top of the damage already done and the normal devaluation to come.)

Since a lot of that paper that would be covered by this (e.g. ALT-A, etc) is underwater at the present time and likely worth 50 cents, this inversion, plus the immediate markdown caused by the spread blowout would leave the "first" lender with paper that would be lucky to fetch a bid of any size.

You couldn't do something more damaging to the mortgage and housing market than this.

Seriously.

Call Congress (again) and (politely) suggest that Ms. Bair grow a brain.

Oh, and while you're at it, add that Congress needs to stop this sort of stupidity. Time to get on the phone. Again.

(Want it in video format? Go to http://www.tickerforum.org/cgi-ticker/akcs-www?post=42539

PS: Some people already have. With direct action. This, my friends, is what its all about.

If you think the mortgage mess is over, you're sadly mistaken.

If you're operating under the premise that the losses have been (mostly) recognized and we are now going to see "write ups" somewhere down the road, you're more than wrong.

You're delusional.

Truth is that the real damage hasn't even begun.

That damage is going to come from.... drum roll...... fraud.

Here's fruition of a prediction I made back last April:

"As mortgages included in some supposedly investment-grade securities hit default rates over 80%, bond insurers are looking for signs of fraud in individual loans and even entire packages of mortgages they have insured.

Chances are they will find lots of it, some experts say, which could lead bond insurers to demand that issuers repurchase the loans. This would transfer the pressure to hard-pressed issuers, including investment banks and loan originators, to make good on the bad loans."

Bang.

Let's talk for a minute about how big of an issue this is.

In 2006 and 07, as the housing bubble was starting to burst, tremendous market share "gains" were made in the ALT-A space. "ALT-A" are loans where income was undocumented (so-called "liars loans") or otherwise contained "tricky" features such as "Pay Option" mortgages.

These "ALT-A" loans constituted huge percentages of production - hundreds of billions of dollars - in 2006 and 2007. And every study done on them thus far on the production during those years has shown that half of these mortgages - or more - contain significant overstatement of income.

That is, fraud.

As noted in my article from April 2007 each and every one of these mortgages is subject to being "put back" on the originator. These loans will flow backward just as they flowed forward originally, continuing upward until they find a "home."

Where's the "home"? When the firm that originated or securitized the loan is found.

What if the originator is out of business? Then the investment or commercial bank that securitized that debt is going to wind up stuck with it, because there is no way they will win an argument in court claiming that they had no ability (or obligation) to detect this fraud, when the products were designed to enable it, and it required only marginal investigation for them to be able to detect it (such as pulling the borrower's tax returns.)

Let this sink in folks - HALF of all ALT-A production from 2005-2007 is subject to being "put back" on the issuer, and current recovery on defaulted mortgages is about 50%.

This means that the actual "expected damage" in money (that is, loss) terms is roughly 25% of all ALT-A production from the years 2005-2007.

If the equity markets were half-rational every single investment and commercial bank that had securitized mortgages (that would be basically all of them) in the ALT-A space would be getting hammered - right now - down to single digits.

Every one of these firms is on the hook for tens if not hundreds of billions of dollars worth of these mortgages, and the ones they will end up "eating" are the ones that are non-performing - not only are they the ones that contained fraud but they're also the ones that will prove to be uncollectable!

Case-Schiller is continuing to show deterioration in home prices, down 12.7% .vs. -10.6% last month. All 20 metro areas showed price declines, with only one managing to remain positive on an annual basis. Home prices continue to deteriorate (and will for some time to come); no surprise here for anyone with half a brain, but the "market crooners" will almost certainly continue to "call a bottom." Yeah, ok. Wake me up when we see three consecutive months of positive prints.

One of 112 households has received a default notice, and one in 194 received one in the first quarter of 2008, according to RealtyTrack. RealtyTrack now says that they expect foreclosure notices to peak in the 3rd or 4th quarter of this year (of course NODs lead actual foreclosures by four to six months, so the economic damage will continue for a long time beyond that peak.)

Countrywide (NYSE: CFC) reported a monstrous loss this morning. Now remember, Mozillo told us all in the third quarter that they would be posting earnings starting in 4Q. Guess what - he was not only wrong, he was WAY wrong - two quarters running. Yet BAC says they're "committed" to the merger? Huh?

Here's another prediction - BAC is intending to use CFC as a "dumping ground" for its toxic waste, will keep the firm as a wholly-owned sub so it is legally distinct, will dump their trash in there and then BK the "subsidiary" with some swansong about how things were suddenly "worse than anticipated", keeping the servicing platform.

Oh, and since I believe this is their intent that would make the entire transaction and subsequent bankruptcy fraudulent, but they won't get tagged for it, because once again, fraud, if you're a bank or other financial institution, is not an offense any more in the United States.

Aloha Airlines which shut down its passenger service recently just shut down its highly-profitable freight service, which many had predicted would survive. This has not been widely reported at all, but it will have severe and immediate negative effect on Hawaii. The reason? GMAC cut off their financing. Yet more "credit crunch" comes and whacks a business upside the head. No credit, no operating funds. GMAC, of course, has its own problems caused by handing out far too many "fog the mirror" loans to both homeowners and car buyers. Oops.

Small business is getting hammered by commodity price inflation. Big business can hedge fuel costs, but small businesses have no chance - they get creamed immediately under these conditions. Next prediction - mass bankruptcies and simple business shutdowns will start to hit within the next 2-3 months in the small business sector. At this point it is unavoidable, irrespective of any actions taken to try to "fix" the commodity mess. The damage has been done and cash flow has become too impaired, especially for those firms that are dependant on transportation (e.g. small businesses that have to operate trucks to haul materials around)

Consumer confidence ain't good - down again to 62.3% from 65.9% in March. Present situation index fell 10 points from March to April. The expectations over the next three to six months aren't doing well either. Why? Simple - food and gas prices. Expectations, by the way, dropped before "present situation" originally and did not bounce at all, indicating that in the next three to six months we're not going to see improvement in the economy.

Nice box you put yourself in Ben. Did you listen to OPEC? Every 1% you cost the dollar with your foolish "liquidity now!" tamping down of the EFF results in a $4 rise in the price of oil. And oh by the way, they have the oil and we want some.

Never mind the global food problem you sparked. See, all that liquidity you threw around, all the 23A Exemptions you handed out, and the willful turning of your head to fraud and bubble economics has now blown a huge bubble in foodstocks. Your "banker buddes" and their Hedgies piled into commodities, driving up the cost of food - a bubble that is even worse than housing, in that starving to death certainly trumps being broke when it comes to "actual harm."

This has led directly to food riots and will, if we're not careful, result in famine and millions of deaths. Its one thing to talk about "stealth costs" and financial rape of the middle class, but now you're being tagged as the proximate cause of actual starvation.

Still think you did the right thing Ben?

Oh boy.

The NY Times has published a bombshell that should, if markets are rational, cause both a huge selloff (due to allegations of extortion) and lead directly to Congressional and FBI investigations and, if the allegations true, indictments.

Indictments?

Yes.

"And the banks pay only if Moody’s delivers the desired rating. Tom McGuire, the Jesuit theologian who ran Moody’s through the mid-'90s, says this arrangement is unhealthy. If Moody’s and a client bank don’t see eye to eye, the bank can either tweak the numbers or try its luck with a competitor like S.&P., a process known as 'ratings shopping.' "

Read that a couple of times.

They don't pay if they don't get the desired rating?

This isn't from some observer or random commentator - its from the former head of the firm!

There is no rating going on at all; these organizations are "captive" to the banks and act as the banks wish, or they're out of business. This is exactly the same "business model" that appraisers found themselves operating with during the housing bubble, where they'd get an order for an appraisal and then if they didn't hit the "desired number" the Realtor who ordered it would refuse to pay them.

If this isn't a near-textbook definition of fraud I don't know what is.

This charade has gone beyond ridiculous. It is one thing to go shopping at your competitor for the next deal if you don't like the outcome, but to refuse to pay for services performed if you don't get the desired outcome?

Independent ratings agencies? Claims of "ethics" that all of the agencies put on their web pages and disseminate to the public? Who are these people trying to fool and more importantly, why are lawmakers and law enforcement allowing this to continue?

I guess I should not be surprised at the lack of prosecution. After all independent appraisers sent in a petition with 10,000 signatures on it in 2001 to Congress and it was ignored, pointing out the same "business practices" in the property appraisal industry.

The obvious next question is where are the lawsuits? The losses thus far are in the hundreds of billions - and not all of those losses have been taken by banks. The NSRSOs (Moody, etc) claim "free speech" but that doesn't extend to false claims of ethical conduct and lack of bias!

I'm not quite certain what that is I see laying on the carpet, but it looks kinda like a gun and it sure as hell is smoking!

S&P lowered CDO assumptions (again); if you're one of the KoolAid drinkers who think that "its all over and there will be write ups" then you need to read this:

"The affected CDOs are at least 40 percent invested in certain U.S. residential mortgage bonds created since Sept. 30, 2005, or pieces of CDOs with such holdings, New York-based S&P said in a statement today. The most-senior bonds from the CDOs originally rated AAA should recover 60 percent of principal owed, while securities rated A or lower will get nothing, S&P said.
....
Investors should recover 35 percent of principal after defaults on securities from the CDOs junior to their so-called super-senior classes but also originally rated AAA, S&P said. Originally rated AA classes should recover 5 percent, it said."

Write-ups eh? AAA super-senior will get 60 cents on the dollar, AAAs will get 35 cents, AAs will get a nickel on the dollar and anything under it will get zero.

Got it?

Zero.

Oh, and I think its fair to assume that you'll lose your entire coupon stream up to the point that the zero happens too.

This was all originally "AAA" rated debt, now returning somewhere between 35 and 60 cents, and none of this stuff has been marked to zero - or for that matter, to 35 cents - on bank balance sheets.

Nor will it be until The Fed and Congress stop allowing the blatant fraud in our banking system to continue.

Our capital markets have become one gigantic scam. The SEC won't investigate, the FBI won't prosecute and both political parties claim to be "concerned" about the impact this has had on Americans, but neither will get off their duffs and start insisting that existing law be enforced.

Every day I am treated to a new disclosure on the utter depravity of these people on Wall Street, Congress and The Federal Reserve who have taken truly extraordinary steps to rob every American, up and down Main Street.

And we wonder why the market "goes up" when the economic news "goes down"? I'm not surprised at all. Wall Street has become convinced that so long as a greater bagholder can be found, no matter what has to be done to make it happen, legal or not, nothing evil can occur in the markets. Therefore, there is no risk. We thus must buy, because prices will rise since we'll never be held to account for our lies, fraud and rape of the American public.

Meanwhile Main Street is consigned to deal with reality.

2 million foreclosures, rocketing oil and food prices, ramping unemployment.

The crush of the American Middle Class.

All intentionally-engineered, and The Middle Class sits idly by and lets it happen, instead of showing up to protest on Wall Street - or in Washington DC.

Wall Street has always been a snakepit, but this is a new low, even for those firms.

I am simply stunned that this has been allowed to continue year after year, although perhaps I shouldn't be, given that the Appraisers tried to stop it in their profession and found deaf ears in Washington DC.

So what, realistically, can Joe Average do about it?

Other than making this the issue in the campaign this year?

But let's face facts here folks - will this become the single-issue matter you vote on in November? Will you call your Congressman or woman every single day or fax him or her every single day until this garbage is stopped and perp walks occur up and down Wall Street?

Forget about The War, Abortion, or whether you hate (or love) George W. Bush.

Forget about the party on your voter registration card.

The key question for you is whether you give a damn about this nation and its economy.

The folks on Wall Street are betting you will get wound up over whether the candidate you're going to vote for is a man, a woman, or black. Whether they are pro or anti-abortion. Whether they will pull our troops from Iraq, keep them there, or send more. Whether they will raise your taxes a bit, some, or a lot.

Fact is all of these candidates are explicitly supporting these firms stealing from you each and every day. All of them. Hillary, Obama, McCain.

Each and every one of them, George Bush, and all of the Congressional Inhabitants currently are sitting back and letting these folks rob you. On purpose.

The proof is right there in front of you in the NY Times.

So which card do you wish to play, Dear Reader?

Is it the "its all Bush's fault" card? Then explain how it is that Chris Dodd, chair of the Banking Committee, won't do anything about the pernicious fraud that has robbed America of $10 trillion in wealth and will result in 2 million foreclosures?

Want to play the "its all The Democrats fault" card? Then explain how it is that Bush hasn't ordered the FBI to go out and arrest all these brokers, lenders, and Realtors who cooked appraisals, not to mention going after the ratings agencies and banks who are intentionally hiding their exploded CDOs?

Hmmm.... you don't like those questions, do you?

Oh, OPEC has put us on notice folks. They've said that for every 1% we allow our dollar to devalue, oil will rise $4 in price.

Got it? Good.

Now guess why the dollar has devalued.

Yep - lack of trust. Fraud. Theft. Scams. Crooked balance sheets.

All of which lead foreign investors to believe that our government might have a problem collecting taxes from the citizens in coming months and years, which of course means we can't make their debt service payments.

That doubt - no matter how small - is enough to drive down our currency.

This is a direct (and unlawful, since it didn't originate in the House of Representatives) tax on every American, but it is especially cruel to the poor and those in the middle class, who have less ability to absorb the impact of $4/gallon gasoline and eggs that double in price in six months' time.

There is no fix for these problems until the cheating, fraud and theft stops.

When you prepare to "vote for a living" (and you know you do and will!) keep this in mind.

Your standard of living is being intentionally destroyed by the charlatans on Wall Street and in Washington DC, with the worst offenders being Ben Bernanke and our Congress.

Both The Fed and Congress could stop this in literally one hour, but they refuse.

In fact, it is rumored that one of Barney Frank's staff members actually likes the idea of direct and indirect house price support, because it will help the value of his home.

Even as it destroys your standard of living.

It is up to you, I, and everyone else to do something about it.

As for "The Market is Cheap" claims, the WSJ's Data Page says otherwise. It shows negative 20% earnings growth. That's right - down 20% annualized.

What sectors are doing well? Basic Materials, Oil and Gas, Health Care and Telecommunications. Who's doing poorly? Utilities, Industrial (barely green), Financial (in the toilet), Consumer Goods (solidly negative) and Consumer Services (in the toilet).

Strong economy? Resilient? Ha!

If you're an exporter, so far, you're doing ok. If your customer base is in the US, you ain't doing well at all, and if your customer base is the consumer or you're in the financial space, you're doing horribly.

And the latter is with all the financial cheating.

How nice would these "earnings" reports be if there was truth in our nation's banks?

Gee, S&P seems to think that essentially everything under "AA" is a zero on those CDOs referenced up above.

How many of those are on the "Level 3" and "Held for Sale" books at our banks?

We can't look, nor are we allowed to know how much of that garbage - worth zero - is at The Fed.

I wonder what Treasury investors think about all this if and when they start to contemplate the implications of a destroyed middle class in America, which of course means destruction of the ability to to collect taxes from that very same middle class.

Taxes that are necessary to pay the coupon payments on that debt, not to mention insure the return of principal.

Something to think about eh?

This edition of The Ticker will be dedicated to the mistruths, half-truths, or, for the less-charitable, lies that we seem to be increasingly tolerant of as Americans when it comes to the most pressing issue of all - our wallets.

Let's start with one Alan Greenspan. He has long claimed that he could "not have forseen" the housing bubble, and there was nothing to do about it anyway once it started to occur.

Oh really? Alan, did you forget your PhD thesis from 1977?

"There is no perpetual motion machine which generates an ever-rising path for the prices of homes."

You could have fooled us Alan.

Oh, never mind that Greenspan has tried like hell to keep that document "hidden."

May I ask why any University would accede to such a request? Are not research papers - including a doctoral thesis - items that should be available to the public? Especially when written by someone in a public position like Mr. Greenspan? I think so.

Of course now, with some of the contents coming to light, there may be some (belated) understanding of why Alan doesn't want them out in the open where people can see it.

But more to the point, given that the NAR's Lereah pontificated for years about how, indeed, there was such a perpetual-motion machine, and in fact he was the "mouthpiece" for the National Association of Realtors, whose members made a tidy profit flipping all those houses, don't you think that your actual views, as you articulated in 1977, might have been something appropriate to mention? Say, in a speech? Say, during your testimony on The Hill?

Is not the truth that you knew precisely what you and the rest of these monkeys on Wall Street were doing? Is it not true that you knew and were aware that this sort of destructive asset bubble would financially destroy millions of Americans, but you simply didn't care? Just like the blowoff speculative frenzy in the Nasdaq in 1999, you knew full well what would happen the second time around, and that it would be far more destructive to the real economy.

But it was far more important that there wasn't a "real recession" while you were in office, right? You thought you could cheat Kondratieff Winter? With what? Excessively loose monetary policy? So you extended "autumn", but we all know what happens when you put more air into a balloon and it reaches its overpressure failure point, right?

Bernanke seems to be from the same school of selective memory as one Mr. Greenspan. This makes him far more dangerous, however, as one serial-bubble-blower after another into an overly-extended Kondratieff cycle merely sets up the potential for disaster on a scale far worse than the 1930s.

Despite the crooning to the contrary, we do seem to have a roughly 7-year business cycle. It is amusing to watch all these people on television wave their arms and dismiss it - my father, who was a lowly CPA with a Bachelor's Degree - certainly no "educational great shakes" next to Bernanke and Greenspan, imparted that knowledge to me when I was a young boy of no more than ten.

Yet not-so-amusingly, I have in fact seen this very same cycle play out time and time again in my adult life. 1993 to 2000, roughly. 2000 to 2007, roughly.

Indeed, think back even further. 1995 was about when the tech "boom" really took hold. 2001 was when it went bust. Bust-to-bust cycles are about 7 years in duration, give or take a year or two.

Yet do you hear this on CNBC? Of course not. Yet one lowly CPA imparted that knowledge to me when I was not yet in the double digits on this earth.

Hmmmm.

Now for a "double-hmmmm" I could count the number of times I heard discussion of the business and economy cycles when I was in school - from elementary through college - on my fingers and toes - if I was a quadriplegic.

Why is that, when they are one of the fundamental realities of our economic lives?

Entire chapters are spent talking about gravity and Newton's Laws in physics class, polar and covalent bonds in chemistry class, the chlorophyll cycle in biology class and the structure of DNA, yet not one hour of lecture and not one page of a textbook is spent on the business cycle.

Worse, we spend exactly zero time in our educational system dealing with compound growth - whether it be of prices, interest payments or investments. I have, in my years as an adult, spent an hour or so with high school students I've been acquainted with over the years going over this fundamental detail - the fact that one $10 Pizza bought when you're 20 is $662 worth of foregone gains when you turn 65, assuming you had invested that $10 and earned just 10% annually.

To an individual they choke when they realize that Pizza really cost them $600 - not $10.

Not one of the students I've explained this to knew about that principle or how it really works until I showed them using nothing more complicated than a calculator.

Do you really need that Pizza?

Over on Ml-Implode's forums I seem to have ignited somewhat of a flamefest by the broker community when I posted my chart on house price appreciation as referenced in The Ticker from Friday morning. The astounding reality?

How few of those so-called mortgage "professionals" actually understood the foundation of all such ponzi-like projections. So-called professionals who can't be bothered to use a calculator? Exactly what are the qualifications to be a mortgage broker?

We have all sorts of lies coming out of our Investment Banks. Virtually all of them have said with their earnings releases that they did not need more capital. Mr. Thain even went so far as to repeat that during a trip to Asia recently. Yet almost to an individual firm they have then, within a week or two, gone out and raised more capital immediately after saying they didn't need to, on onerous terms that nobody who didn't really need it would have partaken in.

Does CNBC talk about that? Of course not. Does the SEC prosecute these sorts of apparently-false statements, when it is obvious to anyone with more than two firing neurons in their head that they are intended to prop up these firms' stock prices? Of course not.

Last week it was claimed on Bubble TV that Merrill Lynch thought that "things would be ok" in the American Economy. Really? That's not what David Rosenberg, their chief North American economist, had to say in a note to clients:

"'Contrary to popular opinion, the incoming data are, on net, getting worse, not better,' Merrill's Chief North American Economist David Rosenberg said in an April 24 note to clients."

Why wasn't that reported? Oh by the way, I have a copy of that entire report, which was sent to me through a "stealth channel" (see, I'm not a Merrill customer.) Its downright bearish. But if you watched Bubble TV, you heard how Merrill was "bullish" on the markets and the economy.

Huh?

Let me put this in a form that you, Dear Reader, will likely understand - if you're an ordinary investor, and not a Merrill client, what do you hear from "Bubble TV"?

That the economy is somewhat soft but will be fine, according to Merrill, with the implication that its a great time to buy stocks.

But if you're a Merrill customer and get their reports, what do you actually read in their reports?

That the economy stinks like 5-day old fish, and is getting worse, according to the very same Merrill Lynch.

You don't think that these "Wall Street Folks" would be trying to get you, Joe Sixpack, to buy stocks so their clients (and the brokerages themselves!) can sell their portfolios off to you before it all blows up in your face, do you?

Why that would be dishonest!

Yet did Bubble TV report on that research report? Not a word.

Ben Stein has finally stopped drinking the Kool Aid. I was wondering how long it would take. An article in the NY Times April 27th edition makes it quite clear:

"'The owners, employees and creditors of these institutions are rewarded when they succeed, but it is all of us, the taxpayers, who are left on the hook if they fail. This is called private profits and socialized risk. Heads, I win. Tails you lose. It is a reverse-Robin Hood system.'

And when it all went kaput during the Bear Stearns debacle, the likable chairman of the S.E.C., Christopher Cox, said that the system was fine and needed no immediate repairs. Of course, Henry M. Paulson Jr., the Treasury secretary, is calling for merging the S.E.C. with the easygoing Commodity Futures Trading Commission, in the financial equivalent of setting off a Doomsday Device."

Doomsday Device?

Who did Paulson work for before becoming Secretary of the Treasury again?

I feel compelled to take a detour into the realm of the truly sleazy, which is exactly where Wachovia (NYSE: WB) seems to have landed. The WSJ is reporting that the bank got involved in the "remittance" trade into Mexico, and that drug money laundering is alleged. The word "prosecution" has been mentioned a few times. Hmmm.

But folks, let's cut the crap eh? The "remittance trade" is all about illegality in the first instance. Even when drugs are not involved, illegal immigrants who are dodging tax liabilities, along with the employers who are unlawfully paying them under the table, are breaking the law.

The latter - explicitly profiting from illegal employment - seems to be just fine with the folks at the Justice Department. Its only when drugs are involved that people get upset, even though in terms of economic damage illegal employment is far worse. Those victims are unwilling; the dope heads choose to consume the drugs.

Lest you think this is an isolated incident, that article points out that it is far from it. In the last three years over $100 million in fines and forfeiture have been assessed against four banking institutions in the US, including Bank Atlantic and American Express!

Never mind that this is Round #2 for Wachovia in the last few days, with the first one being a $144 million (!) settlement in a telemarketing case. See, Wachovia apparently let telemarketers and payment processors effectively steal from their customers.

Now there's a bank you can trust!

Don't worry about oil prices say Bubble TV. We'll be just fine. The fact that oil has basically doubled in price in the last year is not a problem for the economy. Yeah, ok - tell that to Joe Sixpack who burns an average of two tanks a week getting to and from work. What was a $50 weekly expense just turned into a $100 one. That's an extra $200 a month out of his pocket. "Stimulus checks" will offset this? For how long? If his wife works the answer is "about a month", and we haven't even tallied up the additions in the food bill yet. Then what?

Never mind that this weekend we have both a strike in Great Britain to deal with, along with another one in Nigeria, both of which have literally shut down production of the affected facilities. It will be interesting to see where oil trades today. Betcha that price won't be "deflating."

I have long argued that we need to exploit our natural resources. All of them. The environmentalists scream from the rafters about this, but how many of them are riding around in 40ft yachts or flying in private jets? Al Gore, for one. Appropriate? You tell me.

This much I do know - Joe Sixpack doesn't have an extra $200 or $400 a month for gas bills. He's trying to get through this by charging up his gasoline on his credit card, with the last vestiges of the final HELOC draw off his deflating house. The banks, alarmed at this trend, are cutting these lines off as fast as they can manage to show some sort of impairment, but they're behind the curve and will get creamed, and it won't take long.

Now let's talk about ABS CDOs. We keep being told that "the worst is behind us." Really?

According to a research note from April 25th out of Wachovia 17% of all CDOs that are open are in default (by volume) - and of 2007-vintage deals, an astounding sixty three percent are in default.

"The worst is behind us"? Have you seen these CDOs written down? Hell no. Nor are you seeing Bubble TV talk about thus (much) although CNBC did mention it the other day. This is a multi-hundred-billion dollar problem, and only the super-senior tranches are protected (by the trustee) when these events of default occur. Everyone else gets "the pipe", and I'm sure you can figure out where.

Over in sunny England it is now reported that the banks that take advantage of their bail-out facilities will be kept secret.

Forever.

Heh Brits - are you going to stand for this, or are you going to decide instead that all banks over there are insolvent and act accordingly?

"Ferocious and unprecedented secrecy means taxpayers will never know the names of the banks that have been supported through the special liquidity scheme, which was unveiled by Bank Governor Mervyn King last week.

Requests under the Freedom of Information Act are to be denied. Details will be kept secret even after 30 years - the period after which all but the most sensitive state documents are released.

Any Bank of England employee leaking the names of institutions involved will face court action for breach of contract."

Nice.

Oh, and don't bother with the size of that issue either, eh?

"The £50bn or more of Treasury bills involved will dwarf the £17.6bn currently in issue, but the authorities are adamant this will not destabilise the Government debt market."

Uh huh.

Let me guess - this is a good time to buy stocks when the government is afraid you might learn that some number of banks - perhaps a very large number - are insolvent?

Do 'ya own longer-term Gilts? That may be one of the stupidest things you can do right now. Just about as dumb as owning longer-term US Treasuries, and for the same reason.

Oh, this sort of destabilization is exactly what happened in 1931. Betting your economy for the next 10 years, and a potential repeat of "The Slump" that it won't happen again, are 'ya Mssrs. King and Darling?

Our banking systems "Non-borrowed Reserves" are deeply negative, implying that the banking system in the United States has no reserves at all, essentially gaining all their operating funds from The Fed after having burned through all their ACTUAL reserves!



That graph, by the way, although the latest available from The Fed directly, is out of date - the current number is $90 billion, or more than twice the total amount of required reserves in the banking system.

Banks are supposed to hold reserves in actual money against deposits, you see. That's because there is a chance you might show up and want the money you let them borrow, like your direct-deposited paycheck, and they have to be able to pay you in that event.

The amount required, in aggregate, is $40 billion as of the present time. The total shown "in reserve" is claimed to be $42 billion, again, as of the 23rd of April.

However, the "non-borrowed" amount, that is, the amount of reserves that are represented by actual deposits from customers, is negative $90 billion dollars.

In other words United States banks, instead of having $40 billion worth of deposits from people like you and me on reserve (not loaned out) instead have burned through all of that, then borrowed $90 billion more, in order to meet their reserve "requirements."

$130 billion dollars, in the hole, all-in.

And what did they post as collateral? To a large degree, dodgy mortgage-backed securities and even, in some cases, perhaps CDOs!

That's fantastic isn't it?

Is this talked about on Bubble TV? Oh hell no. Its just a good time to buy financial stocks, never mind the fact that our banks appear to be in as fine a financial condition from this report as is a subprime borrower in California who was handed an eviction notice as his house was foreclosed upon this morning!

When did this foolishness start?

At the same time the "Term Auction Facility" did.

Now you know why the "TAF" was "needed", eh? Gotta pay that light bill, plus those bonuses and dividends, since we lost all of our customer's deposited money gambling on bum mortgages written against a $500,000 house that we gave to a hairdresser making $8/hour at SuperCuts.

Never mind the other borrowings from The Fed to prop up the system. Oh no, let's not talk about the other $30 billion or so through primary (discount window) and PDCF credit. Naw, nothing to see here with the banks $130 billion in the hole .vs. what are supposed to be reserved deposits from customers, move right on along.

Are there any reserves at all? Well, from that table it certainly appears not, eh? Negative $130 billion in aggregate (from "required" level) eh?

Exactly how foolish are Americans, not to mention foreign and domestic Treasury Bond holders on the long end of the curve? Rather foolish, it would seem, or simply walking around with eyes wide shut, and now the Brits appear hellbent and determined on following us down the chute.

Heh wait. That makes two - Bernanke and King - both with the same sort of insanity. Did these gents both eat beef infected with BSE, otherwise known as "Mad Cow"? I wonder if their brains have assumed the consistency of a sponge, or if their intent is simply to hide the dead fishy and hope it doesn't start to stink.

What's that smell?

Didn't something like this happen in 1931? Why I think it did! The trigger then was a gold-standard decouple (in Britain), but wasn't loss of confidence the real problem?

Gee, let's have a look:



I have been warning about this possibility, haven't I?

Don't look at the TNX (you have to turn it upside down, as the TNX is yield, not price) as it puts us pretty much at the end of the "flight to quality" phase.....

Heh Bernanke and King - I hope you realize that once this happens - if it does - there isn't jack you can do about the consequences.

Got tin cup?

There are a few people who are picking up on this, like the guy over at Macro Man who put it quite succinctly - "No Mr. Bond, I expect you to die!"

Then we have people who are trying to maintain their bloated standard of living (and house) by tapping their 401k and IRA money. That's the stupidest thing you can ever do, bar none, because 401k and IRA money is protected in a bankruptcy. If you spend it and then go bust, you're screwed at least twice. Oh, and if you're under 50, don't bank on Social Security being there in its present form either. It won't be.

Yet many people are doing exactly this. What the media should be telling people is that this is outright stupid and financially suicidal - take the hit, go bankrupt if you have to, but do not touch your 401k, 403b or IRA money. Ever.

You won't hear that on Bubble TV. You will read it here on The Ticker though, because The Ticker is about the truth - not "bubblevision."

Not everyone is willing to play in America. A small group of people (the originator being a Tickerforum user) has set up a site called "The Great American Cash Out." As the name implies, it is cataloguing (in aggregate) the amount of money that people have intentionally removed from the banking system (stuffed in the mattress, if you will) so banks can't loan against it as an act of protest.

This is distinct from a "bank run" in that it is a refusal to allow the amount you earn to sit in a bank account and earn near-zero interest and form the base for making loans. In effect it is a declaration of your refusal to lend financial support to the financial book-cooking and games. Instead, you remove your cash from their grasp, thereby denying them gasoline to throw on the credit bonfire. After all, they're not paying you anything for your loan to them in the first place, are they?

I like it, although of course I have no idea if the amounts "reported" are real. Good old-fashioned American pushback.

Perhaps there is hope for this nation yet.

http://financialpetition.org/ - "The White Paper Edition"

PS: Warren - you know, the "Oracle of Omaha" was on CNBC this morning (Monday.) Despite being prodded multiple times to try to put a positive spin on the economy, what he said was exactly the opposite - he expects the recession to be neither short or shallow. Gee, 'ya think? He also noted that the stock market is often irrational in how it reacts to reality. Naw, 'ya think?