The Market Ticker - Corruption

EXPLOSIVE: Lehman - Where Are The Cops?

nospam@example.com (Karl Denninger) — Thu, 11 Mar 2010 20:40:00 -0500

Sarbanes-Oxley was supposed to prevent crap like this:

From the paper:

Lehman employed off-balance sheet devices, known within Lehman as “Repo 105” and “Repo 108” transactions, to temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days, and to create a materially misleading picture of the firm’s financial condition in late 2007 and 2008.2847

Oh yeah, that's legal? It's not supposed to be!

Lehman regularly increased its use of Repo 105 transactions in the days prior to reporting periods to reduce its publicly reported net leverage and balance sheet.2850 Lehman’s periodic reports did not disclose the cash borrowing from the Repo 105 transaction – i.e., although Lehman had in effect borrowed tens of billions of dollars in these transactions, Lehman did not disclose the known obligation to repay the debt.2851 Lehman used the cash from the Repo 105 transaction to pay down other liabilities, thereby reducing both the total liabilities and the total assets reported on its balance sheet and lowering its leverage ratios.

Isn't that special?

It gets better, as you might expect.

The Examiner concludes that colorable claims of breach of fiduciary duty exist against Richard Fuld, Chris O’Meara, Erin Callan, and Ian Lowitt, and that a colorable claim of professional malpractice exists against ~~Arthur Anderson~~ Ernst & Young.2915 (strikethrough mine, not in the original)

It is stated that Government Regulators (FRBNY and The SEC) had "no knowledge" of these practices. Perhaps true. But this calls into question why we're hearing of this just now, and whether other firms have or are at present doing the same sort of thing.

There also appears to be a colorable claim that Lehman Management was fully-aware of what was going on:

Although interview statements given to the Examiner were inconsistent at times, no reasonable dispute exists that each of Lehman’s Chief Financial Officers from late 2007 to September 2008 possessed some knowledge of and/or involvement with multiple aspects of Lehman’s Repo 105 program, including the existence of firm-wide Repo 105 limits, the volume of Repo 105 activity Lehman engaged in at quarter‐end, and Lehman’s efforts to manage its balance sheet using Repo 105 transactions.

Well that's special.

But we're just getting warmed up.

Remember, The Feral Reserve is supposed to by the "uber-regulator" and the "safety and soundness" manager for the financial system.

They did a great job, right? Well...

For example, when

the Examiner questioned Lehman executives and other witnesses about Lehman’s financial health and reporting, a recurrent theme in their responses was that Lehman gave full and complete financial information to Government agencies, and that the Government never raised significant objections or directed that Lehman take any corrective action.

True? Let's see what the Examiner had to say:

Although various Government agencies had information that raised serious questions about Lehman’s reported liquidity and about the sufficiency of its capital and liquidity to withstand stress scenarios, the agencies generally limited their activities to collecting data and monitoring.

Oh. They looked but didn't act. I see.

Indeed, they looked pretty closely....

After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress‐testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.

So let's see what we got here. They ran two sets of stress tests and the firm failed both. Not satisfied with the results they then designed a third set, which the firm also failed (we can reasonably presume the third had less stringent requirements than the other two!)

Instead of applying any of these three, FRBNY, which was run by one MR. TIMOTHY GEITHNER, NOW OUR TREASURY SECRETARY WHO REPORTED TO ONE BEN BERNANKE, instead took Lehman's word that all was ok and did nothing.

Wait a minute. In the spring of 2009 we were told that all the big banks ran "Stress Tests" of Geithner's design. But Treasury didn't actually run them and didn't actually get and process the data - they told the banks to do so.

Uh, that's exactly what Lehman did, right? And Lehman passed its own "internally computed" stress test but failed all three of the externally-computed ones.

Do you still accept that all these other banks are solvent? What about the facts we do know - such as the inconvenient fact that between them the "big banks" have something like $150 billion of Home Equity lines behind an underwater and delinquent first mortgage, which is, by the way, worth zero yet being carried at or near full value......

Nor did it end there.

The SEC inspection revealed significant problems at Lehman. The SEC found that Lehman’s Price Valuation Group was understaffed; and it found that Lehman’s asset pricing function was overly “process driven.”5761 But the SEC did not release its findings or formally present them to Lehman prior to Lehman’s demise.

So The SEC knew, and they too did nothing.

It's worse. While Geithner is implicated as being "concerned" about Lehman in the paper, the most-troubling part the narrative is here:

The challenge for the Government, and for troubled firms like Lehman, was to reduce risk exposure, and the act of reducing risk by selling assets could result in “collateral damage” by demonstrating weakness and exposing “air” in the marks.5823

Air?

Uh, that's an apparent admission that FRBNY and Tim Geithner specifically knew that the marks that these banks were taking on their assets was materially and intentionally false.

Where have we seen this of late? Oh yeah - in all those banks that have failed of late, with 25-40% discounts to their claimed balance sheet values when the marks are actually reduced to losses to the deposit fund by the FDIC!

So let's see here. We now have:

Geithner, and presumably everyone under him, knew the marks on these assets were fictions months before Lehman failed, yet they intentionally concealed this fact from the market and took no action (nor did the SEC) to disclose this intentional misdirection.
The misdirection and false claims in this regard are almost certainly continuing today, as evidenced by the FDIC seizures literally on an every-week basis.

How about Bernanke? While he maintains (as did Geithner) that primary responsibility lay with the SEC, he also said:

Our concern was about the financial system, and we knew the implications for the greater financial system would be catastrophic, and it was.”

What does all this say about the stability of things now?

Yeah, I know, everyone's "too big to fail."

But what if the truth is that they're "too big to bail", for instance, if one of the "big four" was to get in trouble today due to a recognition in the marketplace that not only is this what blew up Bear Stearns and Lehman Brothers, but that the same chicanery with "asset values" is continuing even today, and as such one cannot be reasonably certain that liquidity provided today will be repaid tomorrow?

Why is it that if the implications would be catastrophic (and they were), both the SEC and FRBNY knew that Lehman had insufficient liquidity long before the collapse (and they did) neither the SEC, The Federal Reserve or FRBNY did a damn thing to blow the whistle on this crap and put a stop to it?

This report sets out a damning case against the pseudo-government and government actors, who it is alleged were well-aware of critical weaknesses in Lehman's risk controls and liquidity months before it collapsed, yet none of them did a damn thing about it until days before the bankruptcy filing.

Why should any of the clown-car riders who clearly knew that this situation existed for literal months before it blew up, yet did nothing, still retain their jobs and, in Geithner's case, obtain a promotion? These people are unqualified for supervisory positions involving anything more complicated than handing out towels in the men's room.

The key question facing the nation this evening is not, however, the past. It is the future. We have over 100 literal instances in which banks have been seized by the FDIC since Lehman blew up in which their balance sheet "asset values" have been shown by the FDIC's own DIF loss projections to be abject fictions, yet none of these institutions have been flagged to investors or the public, no indictments or civil complaints have been brought by the SEC or Department of Justice, and they have remained operating for months with these bogus values exhibited for bank examiners and regulators to see.

IF - and I stress IF - these fictions are also present in our large banking institutions, and there is NO REASON TO BELIEVE THEY ARE NOT, it is simply a matter of time before one or more of them detonates in a similar if not identical fashion. Since these firms are all much larger than Lehman and neither the FDIC or Treasury has a spare $500 billion laying around for the potential payout to depositors that might be necessary in such an instance, we cannot reasonably assume that the risk of financial Armageddon has in fact passed until we know for a fact that all fictional balance sheets are excised and all off-sheet exposures accounted for.

ADMISSION By FDIC: Massive Balance Sheet FRAUD

nospam@example.com (Karl Denninger) — Mon, 08 Mar 2010 13:02:00 -0500

Remember this Ticker from a few days ago?

I am constantly amused by those people who claim there is some vast "conspiracy" in this country when it comes to banks, balance sheets, and fraudulent lending and accounting.

There is no conspiracy.

It is, in fact, "in your face" fraud.

Well, one of the people on the forum emailed The FDIC to ask about what I had alleged. This was their response:

That’s the value the bank had them on their books on their year-end financials, but the true value is much less. It is similar to someone in Las Vegas saying that their house is worth $300,000 because that’s what they paid for it three years ago, but the reality is, if they had to sell it in today’s market, they’d only get $250,000 for it. The FDIC has to sell assets in today’s market.

--db

Or tomorrow's market.

The simple fact of the matter is that there it is, right in front of you.

A raw admission that the banks are carrying these loans at dramatically above their actual value.

Yes, this means that essentially all balance sheets must now be considered fraudulent, and thus the valuations assigned by the market to them are also fraudulent.

Extending this to the stock market as a whole you now have a market that is intentionally overvalued as a direct and proximate consequence of fraud, permitted and endorsed by the government, of somewhere between 25-40%.

Now you know why the market rallied off the SPX 666 lows to where it is now. 1139 (where we are now) * .60 (a 40% haircut) = 683.40, or awfully close to that 666 bottom.

Of course this "valuation" expressed in the market can only be maintained for as long as the fraud is. If the ability to maintain that fraud is lost for any reason then values will instantly collapse back to reflect reality.

Still sleeping well with your investments?

Heh, I Tawt I Taw A Jumpsuit!

nospam@example.com (Karl Denninger) — Fri, 05 Mar 2010 14:37:00 -0500

I did, I did tee a jumpsuit!

TUSCALOOSA, Ala.—Former Birmingham Mayor Larry Langford was sentenced Friday to 15 years in federal prison for taking some $235,000 in bribes in return for lucrative bond work.

But investment banker Bill Blount pleaded guilty to making the payments, and lobbyist Al LaPierre admitted being the middleman. Mr. Blount, the former state Democratic Party chairman, last week was sentenced to more than four years in prison. Mr. LaPierre, the former executive director of the state Democratic Party, got four years. Mr. Blount also was ordered to pay $1 million to the government, and LaPierre $470,000.

Wait a second....

How come Blount and LaPierre only got four years?

And how much did these guys - and these banks - get?

Mr. Langford was accused of telling major Wall Street banks J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp. and the now-bankrupt Lehman Brothers to include Blount's investment banking firm if they wanted to handle the county's bond work.

They just got sued, right?

Yep.

Just a "cost of doing business"?

Kinda like Pfizer and the Federal Reserve Board of NY?

No wonder these banksters keep at this crap - we prosecute and lock up the people they screw around with, but the banks themselves, just like the big drug companies, get fined in tiny amounts that amount to one percent or less of their market cap.

Yeah, that's a deterrent against criminality.

Now Seniors Get To Feel The Bezzle

nospam@example.com (Karl Denninger) — Thu, 04 Mar 2010 07:58:00 -0500

If you remember just a short while ago I reported on what certainly appears to be a very clumsy scam pulled by the BLS in their so-called "inflation" reading published on the 19th of February - where the numbers they presented simply didn't add up, and as a consequence put forward a false CPI, or inflation number.

Curiously, we haven't heard anything from the BLS on this "error".

This, of course, is only an "error" in that it is not the actual means by which the BLS is "supposed" to report "inflation."

But the BLS has twice in the last 30 years revised their methodology, both times with the intent of understating "inflation."

Why? Well, a big part of the reason is that the law says that various benefit programs are supposed to be indexed to inflation. By intentionally understating inflation Senior Citizens and others on various fixed-income entitlement programs funded by government get intentionally screwed.

The Senate yesterday rejected a $250 one-time check to Seniors and others who have been so-screwed for the last two decades:

President Barack Obama has called for Congress to approve the payments to make up for their benefits not increasing this year, but the Senate defeated it 50 to 47.

....

Social Security payments for the elderly and disabled will stay flat this year for the first time since 1975 because they are tied to consumer prices, which decreased amid the worst economic recession in 70 years.

Of course the real problem doesn't lie here. As is usually the case the media won't talk about the fact that the current inflation rate, if measured under the "old" methodology, never went anywhere near zero.

How much does this "count"? Tremendously so. Over a ten year time frame understating inflation by 7% results in your Social Security payments being half of what they would otherwise be. If the understatement is by just 3% you get a 35% underpayment at the end of a ten year period.

Of course what the media reports is the "one time" payment was rejected, but what they don't report is that seniors have been screwed for three decades by intentional book-cooking in the government.

And by the way - no, there is no possibility of the government "fixing this" and paying what the law says they should. The money doesn't exist.

But this scam, along with dozens of others, is how our fabulous government managed to run its Ponzi Scheme for as long as it has - a Ponzi that is now collapsing, irrespective of what you're being told by the vacuous bobbing heads on national television.

If you're a senior and been paying "membership dues" to AARP, you might want to ask them why their much-vaunted "lobbying" and "public education" campaigns haven't focused on this for the previous 20 years - and why they sold you down the river.

Hope you like your kids (and they like you) Seniors, because the government tit is rapidly running dry.

NOW Congress Wants To Investigate? (Greek Swaps)

nospam@example.com (Karl Denninger) — Tue, 02 Mar 2010 13:23:00 -0500

Gee, how come all this didn't happen a year ago - or two?

“News has surfaced that investment banks based in the United States have funded firms that created the financial indexes and other information needed to trade against the possibility of a sovereign default overseas—after selling debt to those countries in a way that kept that debt secret from the public,” Rep. Maloney said. “These reports, if true, are a shocking echo of the financial crisis that faced the U.S. in 2008—whose reverberations are still being felt today, in the worst recession in decades.”

No really?

You mean just like those wonderful "CDOs" that Goldman (and others) created that were in fact fully synthetic instruments and which came into being ONLY because someone wanted to SHORT your house?

Exactly why weren't these instruments banned when traded "in the dark"?

Off-balance sheet? ENRON didn't make clear what happens when people hide things? After all, nobody ever hides good news, right?

Carolyn, it's nice to hear you come out for this sort of hearing.

But this leaves open the question about the raw theft and blatant destruction that the fine "firms" headquartered and operating in New York - right up your back yard - are and have been promulgating, and why it is that there hasn't been any serious attempt to put a stop to it - until now.

Indeed, the same BS games are still going on today. Wells Fargo and Citibank both have well over one trillion dollars off balance sheet in "God knows whats", worth God knows even less, and investors have exactly no knowledge of precisely what sort of trash is in there.

Municipal governments? Jefferson County Alabama anyone? How many more Jefferson County's are there? We know these sorts of "deals" were written literally everywhere, and that in at least one case the underlying bond issue allegedly "protected" was never made, so this deal was nothing other than a raw bet on interest rates - made by a municipal government that was goaded into it by these very same banks.

“It’s like buying fire insurance on your neighbor’s house—you create an incentive to burn down the house.”

It's only insurance Carolyn if the person who wrote the policy can pay and the buyer has an insurable interest.

If the seller can't pay because they don't have the money or the buyer doesn't have an insurable interest, it's either a garden-variety scam or an inducement to commit financial arson. When the latter is done "off exchange" where the trades are not made public and accessible then the incentives for someone to run around with a can of gasoline become nearly insurmountable.

Perhaps the fine Congresswoman can explain why is it that nobody's in jail for this yet - and why our government still allows this BS to continue.

Bombshell In AIG 10Q: "Capital Relief"

nospam@example.com (Karl Denninger) — Fri, 26 Feb 2010 15:39:00 -0500

Now that I've had to time to read the entire AIG 10Q there's a nasty ditty in here that in my opinion goes materially beyond the "going concern" language. It's here:

A deterioration in the credit markets may cause AIG to recognize unrealized market valuation losses in AIGFP's regulatory capital super senior credit default swap portfolio in future periods which could have a material adverse effect on AIG's consolidated financial condition or consolidated results of operations. Moreover, depending on how the extension of the Basel I capital floors is implemented, the period of time that AIGFP remains at risk for such deterioration could be significantly longer than anticipated by AIGFP.

A total of $150.0 billion in net notional amount of the super senior credit default swap (CDS) portfolio of AIGFP as of December 31, 2009, represented derivatives written for financial institutions, principally in Europe, which AIG understands to have been originally written primarily for the purpose of providing regulatory capital relief rather than for arbitrage purposes. The net fair value of the net derivative asset for these CDS transactions was $116 million at December 31, 2009.

So AIG "understands" that $150 billion of credit-default swaps were written by AIGFP to European Institutions (no note by the way as to exactly what's in there - or who owns them) for the explicit purpose of getting around capital requirements - either by banking regulators or (possibly worse) EU sovereign regulations.

When did they come to "understand" this? Did they write these swaps originally knowing that their essential purpose was to evade capital requirements, or was this a "recent" revelation of some sort?

Indeed, the section goes on to say:

In addition, although AIGFP receives periodic reports on the underlying asset pools, virtually all of the regulatory capital CDS transactions contain confidentiality restrictions that preclude AIGFP's public disclosure of information relating to the underlying referenced assets.

Isn't that nice? So AIG insists that we trust them, and in addition, that everyone else trust them, as to the precise composition of these "assets", their performance, and who is on the other side of the transaction.

Oh, it gets better. The weighted average maturity of these transactions is 1.35 years, we can't tell what's left in there, and we also can't know who's on the other side of the transaction, but what we are told is that the essential financial purpose of these transactions was to evade regulatory capital requirements.

Net notional? Oh, that's nice. Since the claimed underlying "net derivative asset" is essentially nil against this "notional", one wonders what the real risk is on the table here in terms of the firm. Seeing as it's in the "risks" section of the 10Q, it has to be material to results, right?

Why do I smell sulfur?

Oh AIG, What Is That Up Your Sleeve?

nospam@example.com (Karl Denninger) — Tue, 23 Feb 2010 08:36:00 -0500

Heh, Bloomberg is blowing a whistle!

A potentially more important development slipped by with less notice, Bloomberg Markets reports in its April issue. Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.

Yeah. But that 62.1 billion is just part of the problem. See, we seem to be into these clowns for $180 billion. How come, if there was "just" $62 billion in bad paper out there?

“It’s almost too uncanny,” Calacci says. “If these banks had insight into the underlying loans because they had relationships with banks, originators or servicers, that’s at the least unethical.”

The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured -- more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.

I don't think there's anything uncanny about it. Look, this wasn't so simple as "someone placed a bet." That goes on every day, and there's nothing wrong with it.

No, this has more nefarious overtones.

They met with bankers at Bear Stearns, Deutsche Bank, Goldman Sachs, and other firms to ask if they would create securities—packages of mortgages called collateralized debt obligations, or CDOs—that Paulson & Co. could wager against.

The investment banks would sell the CDOs to clients who believed the value of the mortgages would hold up. Mr. Paulson would buy CDS insurance on the CDO mortgage investments—a bet that they would fall in value. This way, Mr. Paulson could wager against $1 billion or so of mortgage debt in one fell swoop.

At Bear Stearns, however, Scott Eichel, a senior trader, and others met with Mr. Paulson and later turned him down. Mr. Eichel said he felt it would look improper for his firm. "On the one hand, we'd be selling the deals" to investors, without telling them that a bearish hedge fund was the impetus for the transaction, Mr. Eichel told a colleague; on the other hand, Bear Stearns would be helping Mr. Paulson wager against the deals.

Some investors later would argue that Mr. Paulson's actions indirectly led to the creation of additional dangerous CDO investments, resulting in billions of dollars of additional losses for those who owned the CDO slices.

Please go read "The Audacity of Synthetics" again, which I wrote a couple of weeks ago. The problem with these things is simple - they existed only because someone wanted to make a bet that the person who bought them would lose all their money!

As I have repeatedly said I don't give a damn what people bet on or what they want to do in the markets. We have a huge casino here on Wall Street and always have, and trying to make that "go away" is a waste of time. It won't.

No, the problem is lack of disclosure and the "I'm just the bookkeeper" defense, which is the essence of the investment (and commercial) bank perspective.

Speaking of the latter, how's that work out for the bookie's "accountant" when the FBI comes in and raids a wire room that's running ponies or whatever? Not so good, right?

So how come the "bookkeepers" are still operating in this case?

Now there's something to think about.

CPI Number Reported INTENTIONALLY INCORRECT?

nospam@example.com (Karl Denninger) — Sat, 20 Feb 2010 13:04:00 -0500

Remember the market's "cheering" of the "-0.1%" CPI-U reading (core) yesterday?

There's a problem - it was wrong.

Look at the highlighted numbers. Let's multiply them up.

(5.966 x 0) + (.769 x -2.1) + (25.206 x -0.1) + (.347 x 0.4) / 32.288 = -0.12%, or -0.1%.

But it was reported as -0.5% in the line directly above (inverted tone.)

Oops.

I didn't re-run the weightings for the entire series but a quick "eyeball" of the table shows that this should result in a CORE reading of 0.1% (positive), not the negative number reported.

Will the BLS admit to this error? Who the hell knows, but if you have a calculator, you can verify that yet another game to "boost" the market was run, with desire effect - a roughly 1/2% spike in the S&P 500 futures right on the BOGUS data release.

Since this table is undoubtedly computed (indeed, if I was to dump the raw data into EXCEL I could have a spreadsheet do this literally in a fraction of a second) it calls into question whether this was an accident or an intentional distortion of the data at the BLS.

It also leads to a few other questions, none of which are very comfortable to consider, but all of which, unfortunately and in light of this report, we must.

For example, is the BLS simply publishing whatever the government wants it to, and then making up the numbers inside the report to hit that target? Even a simple high-school cheat knows that you must "fix" the constituent numbers that go into a cheated result in order to not get (easily) caught; in a world where people don't add things with calculators but instead have computers sum up columns and do the math it is essentially impossible that this sort of "mistake" is an error.

Rather, it is virtually certain that this "reported" value was in fact intentionally false, and the persons doing so were too clumsy to "fix" the evidence behind it so that it would "add up."

We now officially live in a world where intentionally-incorrect data is published by our government for the specific intention of misleading the markets.

PS: This will, of course, be used to screw Social Security recipients out of their lawfully-mandated cost-of-living increases. Count on that. Oh, and don't ask about the money you already got screwed out of from other similar "errors" that neither I or anyone else caught because they weren't so clumsy as to fail to cover it up.

Now The Game's Afoot (Greece and Goldman)

nospam@example.com (Karl Denninger) — Mon, 15 Feb 2010 19:55:00 -0500

This is amusing....

Greece turned to Goldman Sachs Group Inc. in 2002, just after adopting the euro, to get $1 billion in funding through a swap on $10 billion of debt, Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time, said in an interview last week. Eurostat, the EU’s statistics office, was aware of the plan, he said. Risk Magazine also reported on the swap in July 2003.

“Eurostat was not until recently aware of this alleged currency swap transaction made by Greece,” spokesman Johan Wullt said by e-mail yesterday.

Bloomberg goes on to opine about whether the EU's statistics office knew about the swaps and their purpose at the time of origination.

This is not the correct question, in my opinion, to be asking.

The question to be asking is what was the essential purpose of transactions in question?

It appears that:

EU regulators pressed Greece yesterday to disclose details of currency swaps after an inquiry by the country’s finance ministry uncovered a series of agreements with banks that it may have used to conceal mounting debt.

Now that is a problem.

If the essence of the transaction was to deceive Brussels, then everyone involved needs to face sanction for this.

Better yet - did Greece lie its way into the EU? If so would anyone care to tell the class for extra credit what fraud in the inducement means to a contractual agreement? (hint: odds on Greece being expelled anyone?)

Simon Johnson of MIT raises an even more provocative possibility: That the EU may ban Goldman from dealing in EU government debt markets altogether!

Instead, Goldman will probably be blacklisted from working with eurozone governments for the foreseeable future; as was the case with Salomon Brothers 20 years ago, Goldman may be on its way to be banned from some government securities markets altogether. If it is to be allowed back into this arena, it will have to address the inherent conflicts of interest between advising a government on how to put (deceptive levels of) lipstick on a pig and cajoling investors into buying livestock at inflated prices.

And the US government, at the highest levels, has to ask a fundamental question: For how long does it wish to be intimately associated with Goldman Sachs and this kind of destabilizing action? What is the priority here - a sustainable recovery and a viable financial system, or one particular set of investment bankers?

The latter question is easier to answer: For as long as our so-called "regulators" and "Congressfolk" are willing to allow pension funds and others to be royally screwed blind through hinky derivatives transactions, there will be no effective anything coming out of Washington.

The Goldman revolving door between Washington DC and Wall Street is alive and well, and until we the people demand that it be slammed closed and bricked over forever, along with those who perpetrated these games investigated and, where appropriate, prosecuted, you will see no effective change coming from Washington DC.

As a consequence a viable and true economic recovery is not going to happen because we lack the leadership in either major political party to utilize a few thousand pair of handcuffs and instead excuse and even reward the sort of game-playing that I have been writing about for the last three years.

Indeed, that's all "the so-called stock market" (never mind the economy as a whole and our various forms of government) are running on right now - games, concealment and outright lies.

The truth of this statement is instantly clear when one thinks back to the malignant swaps "deals" made with Jefferson County Alabama along with many other municipal governments. In these cases there were allegations of outright bribery and yet investigation, indictment and prosecution of banking industry executives for public corruption has yet to be seen. Instead "a little fine" has been negotiated and paid, where if you or I screwed some little old lady out of 1/1000th as much money we'd be doing 20 years of hard time right now.

We are no longer a nation of laws - we're a nation of despots and, thus far, we the people are tolerating it.

It is time for every American to reflect on one simple question:

Why do I sit still for this?

How Far Does It Go Before Indictments Issue?

nospam@example.com (Karl Denninger) — Thu, 11 Feb 2010 08:22:00 -0500

"Gee, look over there!" says the mortgage industry.

In a rather-stunning posting on 4closurefraud.com we have a recorded assignment to BOGUS ASSIGNEE FOR INTERVENING ASMTS!

Yes, really.

Foreclosures are being prosecuted and people tossed out of their homes on the basis of a defective assignment?

Gee, who'd-a-thought?

You don't think that the clerks of these counties were recording anything that comes in the door, in proper form or not, simply to generate the fee income, do you?

Sharon Bock, County Clerk and Comptroller, were you SLEEPING when you accepted and recorded this document in PALM BEACH COUNTY or WERE YOU COMPLICIT IN A SCHEME TO RECORD BOGUS AND PERHAPS EVEN FRAUDULENT DOCUMENTS OF ASSIGNMENT OF PROPERTIES IN YOUR COUNTY?

WHERE THE HELL ARE THE DAMN COPS?

Bernanke And Paulson Are Free?

nospam@example.com (Karl Denninger) — Sun, 07 Feb 2010 18:08:00 -0500

Lewis' "legal team" (maybe Ken Lewis himself) has apparently said:

"If this thing goes to trial you can expect both Paulson and Bernanke to be on the witness list." If he's going down, he's bringing them down, too.

Please?

Paulson and Bernanke in the dock? That's worth a Youtube. Or a dozen Youtubes, especially if they get fitted for orange jumpsuits.

And let me be clear: I believe they should be. Arm-twisting is one thing, but I suspect there's more than enough dirt to fit these guys (and probably Geithner too) for an "orange blossom special."

If this is Cuomo's strategy - charge Lewis and roll him to get to people higher up - it works for me, irrespective of whether it happens by Lewis rolling over or whether we do it the old-fashioned way - Lewis subpoenas them as hostile witnesses.

Either way I'll take it, and if that's what we have to do to find some justice in this whole sordid mess all I can say is "it's about damn time."

"A Good Start" - Cuomo Charges BAC

nospam@example.com (Karl Denninger) — Thu, 04 Feb 2010 12:27:00 -0500

Well well well... I SEE A COP!

The attorney general’s accusations, detailed in a 90-page complaint, focus on two decisions that bank executives made in December 2008, as Merrill Lynch suffered growing losses. The complaint was filed under the Martin Act, a New York state law that gives the attorney general broad latitude to pursue financial wrongdoing.

“Throughout this episode, the conduct of Bank of America, through its top management, wasmotivated by self-interest, greed, hubris, and a palpable sense that the normal rules of fair play did not apply to them,” Mr. Cuomo said. “Bank of America’s management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth.”

Well Mr. Cuomo, you could say that about all the big boyz in your district and state. How about all those "RMBS" and "CDOs" and "CDO^s" and other similar instruments that were comprised of residential mortgages with no disclosure that The FBI, HUD and private credit analysts had been warning for YEARS about rampant fraud in the underlying loans?

I applaud this as a first step but until and unless this is expanded to include all those securities created with bought-and-paid-for ratings - and zero disclosure of facts either known or "should have been known if you bothered to look" to investors this will remain only "a good start."

C'mon Mr. Cuomo, make us all proud and go after the root of The Bezzle.

Derivative Fraud? Where Are OUR Cops?

nospam@example.com (Karl Denninger) — Thu, 04 Feb 2010 09:26:00 -0500

Amazing, when you consider the implications....

Feb. 3 (Bloomberg) -- Italy’s financial police are seizing 73.3 million euros ($102 million) of assets from Bank of America Corp. and a unit of Dexia SA as part of a probe into an alleged derivatives fraud in the region of Apulia.

Police are investigating losses on derivatives linked to the sale of 870 million euros of bonds sold by the regional government in 2003 and 2004, according to an e-mail from the prosecutor’s office in Bari today. The banks misled the municipality, located in the heel of Italy, on the economic advantages of the transaction and concealed their fees, the prosecutor said.

Remember that we've had a few of these here, right? Jefferson County Alabama anyone? They're not alone either, as I've pointed out repeatedly.

Once is an accident - or a rogue employee. Twice is a curious event. A pattern of conduct is racketeering.

Which do we have here? I don't know, but the refusal of our "regulators" to take this issue seriously, and they have refused, while foreign regulators are seizing assets is rather telling.

Then there's the FSA over in Britain, who recently put their foot down: Either stop cheating on bonus and tax rules or lose your banking license.

I have long written about The Bezzle in the financial system and that we must get it out of the system if we are to have something approaching real, verifiable and sustainable economic growth.

So far we have seen no interest in that from the regulators in this country, probably because they're well-aware that this would mean revoking some banking licenses and putting a lot of very well-connected people out of "business."

Where does it end in this country folks? There's more than enough evidence that "a river (of corruption) runs through it" - "it", of course, being our economic and banking system. Look at the update this morning out of "Biggovernment" related to the story I discussed yesterday with the AIG "takeunder" by The NY Fed:

The FRBNY wanted more than just a standard debt deal; it wanted absolute control and ownership of AIG. But, it was illegal for the FRBNY to hold equity and the Treasury Dept. did not yet have the legislative authority, later granted under EESA, to do so. But this didn’t stop then-President Geithner or his general counsel Thomas Baxter. They crafted the AIG Trust to accomplish the same goal. But the Trust was transparently invalid and illegal for two fundamental reasons: One, the FED maintained absolute control over the Trust’s existence, its terms, and the Trustees through Section 1.03 of the Trust Agreement. This, as we explain in our Response papers attached, invalidates the trust; yet the government continues to speak about this as an “independent” Trust.

That's a raw allegation of unlawful conduct, coming from a bar-admitted attorney.

WHERE ARE THE DAMN COPS AND WHY AM I HEARING HANDCUFFS CLANK SHUT IN THE UK AND EUROPE GENERALLY, WHILE HERE ALL THE COPS ARE IN THE DONUT SHOP SWILLING THEIR COFFEE?

Do I have respect for Barofsky? Yes. He has been like a breath of fresh air looking into these matters since he was appointed, despite what appears to be intentional and strong interference from Treasury and others.

But Barofsky is not enough and a few show trials to appease the proletariat won't solve the problem. The issues are structural and must be fixed, not papered over nor will offering up a few sacrificial lambs resolve a thing. Indeed such appeasement simply adds more instability to an already dangerous situation.

We have 50 State Attorney Generals and we allegedly have a federal Attorney General as well. There are more than enough cops to investigate the edifices and artifices that have been put forward by the so-called "financial system" in the name of "innovation" that, I believe, have in fact been nothing more than sophisticated equity and wealth-stripping schemes.

The housing market implosion laid bare upon the table The Bezzle, since there was simply not enough "slop" left in the system to hide it any more. As the layers of the onion have been peeled back we have found more and more instances where "products" were not structured for any reasonable economic benefit of the person or entity that was supposedly "helped", but rather as a means of stripping off funds through concealment of material facts either intentionally or through impenetrable complexity. So-called "CDOs" and "CDO^2s" were sold with thousands of pages of documentation "behind" them - a literal impossibility to read and understand before the "investor" plopped down his or her money. When these blew up it became apparent that the so-called "credit quality" contained in these securities not only didn't exist in the present it never existed - yet those little letters "AAA" were relied upon as representing credit quality equivalent to that of the United States Federal Government.

It's all BS folks and that we do not currently have literal dozens of Grand Juries empaneled to investigate and hand up indictments against the "titans of financial industry" on downward is an outrage.

We will not see true economic progress or recovery until we rid the system of the parasitic vampires that are literally draining the blood from our economic system. While some degree of embezzlement and fraud is always present in an economy when you reach the point that so-called "lending" has turned into a Ponzi-style circus with everyone looking for a greater sucker to offload their latest piece of trash upon at a profit (for them) you've also reached the stage where that nation's economy becomes subject to outright collapse.

We stared into that abyss in 2008 and early 2009, but rather than learn from it, revoking the business and banking licenses of the worst offenders, breaking up the monolithic businesses that threatened to blow up the world unless their demands for (even more) money were met, banning the opaque products and jailing the principals we have instead coddled them and saddled our children and grandchildren with the costs of bailing out the (proper and appropriate) detonation of these bogus transactions.

We have fixed exactly nothing that led to the implosion. Instead we erected a wall around the burning building claiming that the building inside the wall is not really on fire and then piled up barrels of nitroglycerine around the outside! Unless we get off our duffs and address the actual underlying cause of the mess - the rampant and outrageous scams throughout corporate America we will have not just another collapse as we witnessed in 2008 but a worse one, and it will come sooner rather than later.

Choose America.

EXPLOSIVE: AIG Bailout Flat-Out Illegal?

nospam@example.com (Karl Denninger) — Wed, 03 Feb 2010 10:01:00 -0500

Biggovernment has presented an explosive story related to AIG and The NY Fed in which the claim is made that the trust agreement that established AIG's "grab" by The NY Fed was in fact outright unlawful:

This afternoon on Secure Freedom Radio we announced a breaking news story concerning the Administration’s ongoing cover-up of AIG financial wrong-doing. In an interview with David Yerushalmi, senior litigator on the Murray v. Geithner et al lawsuit, we expose possible fraud, money-laundering and criminal activity.

Money laundering?!

I looked at the source document folks - and while most of it looks ok, there's one little line in the trust agreement that might be the problem referred to - specifically, here:

Section 1.03. Trust is Irrevocable. This Trust Agreement and the Trust shall be irrevocable and, except as provided in Section 5.01 hereof, unamendable except that the Board of Governors may terminate or amend its authorization pursuant to Section 13(3) of the Federal Reserve Act, thereby revoking or amending the Trust in accordance with Federal law, provided, however, that a Trustee’s rights to resign as a trustee hereunder and to compensation and indemnification with respect to acts or omissions occurring prior to any such revocation or amendment may not be modified without the written consent of that Trustee.

A trust of this sort, to be lawful, has to be irrevocable - you can't reserve the ability to modify it later. The NY Fed knew they didn't have the authority to take equity - thus, these "trust" agreements.

I'll note for the peanut gallery that I'm not an attorney, but I do have a reasonable understanding of the requirements for an irrevocable trust of this general sort to be valid. A phone call with the plaintiff's attorney, David Yerushalmi this morning confirmed that this indeed was the primary problem. Mr. Yerushalmi went on to assert that this establishes a prima-facie violation of the money laundering statute - an extremely serious allegation as that law, if violated, carries very heavy criminal penalties.

There is also apparently a second issue in that the beneficiary is named as The US Treasury, which is, effectively, a bank account and not a "person or entity." That's a potential problem too although I can see the counter-claim being made that "The Treasury" is in fact The institution of The Treasury, not the account called "The US Treasury."

This is an explosive allegation - if the trust is defective then it is as if it never existed, and the entirety of the AIG bailout and everything related to it may be criminally unlawful. In addition the shareholders of AIG may have effectively had their equity interest improperly stripped!

A call to AIG's corporate offices for comment was redirected to a media contact person by email (they apparently don't take phone calls) and an inquiry to that office was not immediately returned.

Stay tuned -this has the potential to get rather interesting, as the admissions related to this agreement, if I read the transcript accurately, were revealed in a deposition - that is, with the folks doing the talking under oath.

Yes Bankers Will Cheat (STILL) - Compensation

nospam@example.com (Karl Denninger) — Sun, 31 Jan 2010 21:12:31 -0500

You just knew they wouldn't play by the rules, right?

Investment bankers in the U.S. have begun using equity derivatives to convert restricted shares paid as bonuses into cash, side-stepping new guidelines on remuneration which were designed to prevent bankers cashing out for at least three years, according to a headhunter.

The bankers are using over-the-counter equity derivatives strategies such as call options, put options and collars to monetise their shares now, albeit at a discount to what they would receive if they waited for the restrictions to lift.

The purpose of these rules was to insure that the banksters were actually promoting sustainable operation of the business instead of looting people, which could detonate the company's share price before they could cash out.

So instead they're taking a sizable haircut.

What does this tell you about the "sustainability" of their practices?

And why over-the-counter derivatives? They're bilateral and thus there is no exchange record of what they've done.

Time to break up these banks right damn now folks. Break 'em all up, shut 'em down, stop this crap right now.

Oh, and if you're in the markets? That's the clearest indication I've ever seen that the very people inside know that it's all going to blow up.

Again.

Before they could otherwise cash their bonuses out.

Ignore the actions of those on the inside at your peril.

This Is What SHOULD Be Happening (FHLB Suit)

nospam@example.com (Karl Denninger) — Thu, 28 Jan 2010 14:33:00 -0500

This is exactly what I have advocated for the last two years:

Morgan Stanley, UBS and Barclays were among banks sued by Federal Home Loan Bank of Seattle, which seeks to recoup more than $2 billion it paid for certificates backed by faulty mortgages.

The banks made misleading statements about the asset-backed securities and the credit quality of the mortgage loans that backed them when they sold them to Federal Home Loan, according to six complaints filed in state court in Seattle last month and transferred to federal court starting Jan. 22.

The banks also made misleading or "untrue" statements about underwriting guidelines of mortgage-loan originators who were "failing frequently, and increasingly frequently, to follow quality-assurance practices intended to detect and prevent fraud," according to the complaints.

Gee, you mean that the banks said the credit quality of buyers was "X" but never verified any of it, performed no quality control, and in fact that was a lie?

No, really? You mean starting in 2004 the FBI said this?

"It has the potential to be an epidemic," said Swecker, who heads the Criminal Division at FBI headquarters in Washington. "We think we can prevent a problem that could have as much impact as the S&L crisis", he said.

In fact it was worse than the S&L crisis eh?

Nor is anyone paying attention to this in 2007 - when I was writing about it. Or the file review done by HUD? Or the article in 2008 about First Federal? Oh heck, just read the handful of tickers that "hud & study & overstated" in the search box finds!

If you want to know why we had a housing bubble, crash, and our economy went in the dump you will find the answer right there.

If you want to know why we will not recover you need only realize that we have not removed the bad debt from the system. We have not forced those who committed these acts to eat them. We have instead bailed them out and transferred this bad debt around, in some cases to the government.

Justice says that these bad actors should be sued to Mars and for those individuals involved they should go to prison. All of them.

But to fix the economy we must default the bad debt and get it out of the system - whether we jail people or not.

Until we do that we are simply trying to reinflate a popped bubble.

Kudos to the Federal Home Loan Bank of Seattle.

To the rest of those who got screwed: Stand up and join these guys. Yes, this means you Fannie and Freddie, along with all the private parties, pension funds and others that bought the garbage.

AIG, Paulson and Geithner

nospam@example.com (Karl Denninger) — Wed, 27 Jan 2010 15:16:00 -0500

These hearings are simply amazing.

First, Tim Geithner. Timmy made a lot of noise about "total meltdown" risk (and indeed even referenced the possible loss of civil order!) but the question that was not asked is this: Who stoked that fear in Congress? That would be Bernanke and Paulson, right? They in fact told Congress "either hand over $700 billion for buying troubled assets or tanks will be in the streets."

But then - on top of that - they didn't do what they said they needed the money for and there were no tanks!

So we're stuck with a handful of facts, none of which are in dispute:

Congress was told that either $700 billion be handed out immediately or civil order would be lost. They were told this by Bernanke and Paulson and believed it.
Congress took the action Paulson and Bernanke demanded but then did not spend the money as they said they would, and yet the "or else" did not happen.
Yet neither Paulson or Geithner will take responsibility for the precise actions taken during what they, along with Bernanke, claimed was literally an "end of the world" event!

Paulson gets the cake though - he admitted (under oath!) that The Fed just blatantly printed the money to rescue AIG and the banks (!!!)

So let's see - it wasn't his decision, it wasn't Timmy's decision, and yet at the very same time the entire world was about to come to an end unless the Congress immediately handed over $700 billion of taxpayer money?

Oh, and let's keep going. Paulson got skewered with what I pointed out in August of last year - that is, that he knew full well he wasn't going to buy any "toxic assets" prior to the final vote being taken in The House but notified nobody in Congress of this fact.

Then Mr. Baxter's turn comes and he says that Geithner signed off on paying AIG counterparties at par.

Didn't Timmy claim he had no part in the negotiations with AIG and the determination of what to pay? I thought he did..... maybe I misheard, but I seem to remember that he has continually maintained that he had no part in the decision process and in fact recused himself......

Oh wait - here it is!

I had no role in making decisions regarding what to disclose about the specific financial terms of Maiden Lane II and Maiden Lane III, and payments to AIGs counterparties.

Uhhhhhhh Turbotax Timmy? How do you explain that?

NUCLEAR: Did Goldman Offer To Tear Up AIG CDS?

nospam@example.com (Karl Denninger) — Mon, 25 Jan 2010 22:51:00 -0500

Oh oh.

Remember, Blankfein testified in front of the FCIC at 10:12 AM on 1/13 that he never got a request to take less than 100 cents on the dollar for AIG credit default swap contracts.

Well then what's this that Zerohedge dug up?

As everybody knows, AIG got a huge government bailout in September 2008 to help make payments on derivatives contracts with banks, including Goldman. Yet in the previous month, Goldman approached AIG about "tearing up" its contracts, according to a November 2008 analysis by BlackRock, then an adviser to the New York Fed.

WHAT?

Oh yeah. Here's the link to the Zerohedge article, and the paper in question is right here:

Thanks and noted on the tear up stand down.

We should get back with Goldman. I will talk with Bill.

Date: 10/31/2008 6:57 PM.

Which followed:

Also, I spoke to Manzari this morning. He asked me to stand down on tearing up / unwinding CDS trades on the CDO portfolio.

That appears to be a smoking gun in that it documents that there was an active negotiation on "tearing up" - that is, unwinding CDS trades at less than 100 cents on the dollar and that negotiation was intentionally terminated.

Will we next be entertained by a discussion of what the word "is" means, or can we take the above at its obvious face value - that GOLDMAN ITSELF APPEARS TO HAVE OFFERED TO TEAR UP THE CDS ON AIG'S PORTFOLIO!

If there indeed was such an offer - as is all but stated here - and if indeed there was an order given to "stand down" on such negotiations then those persons responsible must be summoned to the dock and compelled to provide testimony, as it appears that one or more individuals who have already stated that no such negotiation was possible may have committed perjury, never mind dispensing more than $10 billion of taxpayer money to Goldman Sachs unnecessarily - at best.

Swiss Banking Secrecy: No Problemo, No License!

nospam@example.com (Karl Denninger) — Fri, 22 Jan 2010 11:54:00 -0500

Bloomberg reports:

Jan. 22 (Bloomberg) -- A UBS AG account holder won a Swiss court ruling that may prevent data from being disclosed to U.S. authorities in at least 25 cases involving suspected tax fraud.

The failure to complete certain U.S. tax forms or declare income isn’t “tax fraud” that requires disclosure under treaties between the two countries, Switzerland’s Federal Administrative Court ruled in a judgment released today. The ruling is the second this month criticizing government decisions to give data to the U.S.

I respect the right of The Swiss to define "tax fraud" however they'd like. I also respect their right to claim that US Citizens can do whatever they want in their nation. That's fine.

BUT - UBS has no right to a banking license in The United States. It does not have a right to ply its wares here, to buy and sell securities in the US markets, to solicit for business here or to enjoy any of the protections that a US business operation enjoys.

Therefore, the correct response for the United States is to immediatel revoke UBS' and all other swiss corporations licenses to operate in The United States.

If US Citizens wish to expatriate funds (in whatever form) to Switzerland and hide them there (and the profits thereupon) to evade taxation, they have the right to do that. Swiss law apparently protects such evasion as a human right.

But US law says that all citizens are required to declare all income no matter where earned, in the US or abroad, and that conspiracy with others in a scheme to avoid doing so is a criminal act.

We, of course, cannot prosecute such acts outside the boundary of The United States.

But we are also under no obligation to permit a firm that has as its stated and actual operational goal the evasion of tax liabilities by citizens of The United States a banking license, as that license is a privilege bestowed upon a corporation or person, not a right.

As such the proper response to this ruling is to immediately revoke the US banking licenses of all Swiss-based banks.

More Kabuki Theater - Executive Compensation

nospam@example.com (Karl Denninger) — Fri, 22 Jan 2010 11:08:00 -0500

We have a hearing today on Compensation in the Financial Industry at 10:00, for which you can find the prepared testimony at this link.

It contains things like this:

Standard compensation arrangements in publicly traded firms have rewarded executives for short-term results even when these results were subsequently reversed. Such arrangements have provided executives with excessive incentives to focus on short-term results. This problem, first highlighted in a book and accompanying articles that Jesse Fried and I published five years ago,2 has become widely recognized in the aftermath of the financial crisis. In financial firms, where risk-taking decisions are especially important, rewards for short-term results provide executives with incentives to improve such results even at the risk of an implosion later on.

Bah.

Nobody wants to talk about the true issue - massive, pernicious and institutionalized fraud among financial firms.

Let me be clear - how much compensation is paid to the employees of a firm is a matter strictly between the owners of that firm and its employees. In a corporate environment this means that the shareholders are, ultimately, the boss when it comes to executive compensation.

We do need reform of shareholder rights. Specifically, we must put in place the right for shareholders to explicitly veto executive pay packages - not as an "advisory" or "non-binding" vote but rather as a legally binding option.

But this would not have prevented the financial crisis in any form or fashion, because when a firm is reporting 20%, 30% or 50% earnings increases for years at a time the people responsible for that in the executive suite will have no problem convincing shareholders to hand over the loot - nor should they!

No, the problem is that the alleged "profits" from which these payments were made never really existed.

There is a generalized problem with accrual accounting that is difficult to resolve - you can "book profits" that never actually materialize, and then you either re-state the financial statements later (or in some cases never!) yet that "booked profit" never actually materializes.

This sort of BS is still going on. For example, Wells Fargo has somewhere in the neighborhood of $2 trillion in off-balance sheet exposures. They claim they don't have to consolidate this (even under FAS 166/167) based on the fact that this is mostly "conforming" mortgages and thus are "money good."

Well, if they're "money good" why not consolidate them? Why not reserve honestly against whatever the actual payment characteristics are of these loans and the securities backed by them? Why not come right out, be honest and let everyone see what's going on?

Likewise in the early part of this mess - spring of 2007 - I outlined that Washington Mutual was paying dividends out of "capitalized interest" - that is, negative amortization that the accounting rules cause you to book as "earnings" - even though you received no actual money yet. Accrual accounting says that when the value of an asset (in this case the principal balance of a mortgage) goes up you get to count that but the fact remains that the actual money does not (yet) exist in your checking account and thus paying dividends out of not-yet-received funds is only safe if there is reason to believe you will receive those funds in reasonably short order. This act should have brought immediate regulatory action down upon the executives of Washington Mutual. It did not and, in the fullness of time the firm failed - exactly as and why I predicted it would.

Likewise when investment banks and others bought "protection" from AIG it allowed them to hold "assets" on their books without regard to their payment performance deterioration because they were allegedly "protected" against a reasonably-foreseeable default (either incipient or in some cases actually in progress!)

The problem wasn't the purchase of the insurance - it was that the entity that sold it had no money to pay the claims and the buyer knew or should have known this because they purchased that protection below the expressed price of the risk in the original transaction. That the price was below the risk-adjusted cost is axiomatic - but for that the yield of such a security plus its protection would have been below the risk-free rate of return and thus it would have been unmarketable!

Again this act should have brought immediate regulatory response, at minimum, of a demand to disregard the so-called "protection" in the computation of balance sheet assets, liabilities and reserves. But it did not - not by the auditors, not by the regulators, and not by The Department of Justice or SEC.

Why not?

Is it really any different to claim that you have made a bunch of money by trading when you really did not (as is the case in Madoff's Ponzi Scheme) or that you have created value as a consequence of your "assets" when in point of fact you are marking the value of those assets where they are only as a consequence of "insurance" you bought from a market participant below the risk-adjusted cost of providing it and both you and he either know (or would if you bothered to look!) that he won't be able to pay if and when it becomes necessary?

Now let's look inside these "securities." Pull the prospectus for any of the securitizations that contain ALT-A loans from the 2005-2007 vintage. Look through it and see if you can find a statement in any of them disclosing that the FBI had warned of massive, pernicious mortgage fraud in 2004 and that in 2006 and 2007 there were both HUD and private credit agency warnings that as few as one in ten borrowers incomes were accurately represented.

You can't. Fannie's prospectuses are readily available from that time frame (here's one such prospectus) and there is no disclosure in their paperwork. I have looked at many private-label RMBS prospectuses as well and have yet to find anything approaching an appropriate disclosure of these known facts.

This is not about "excessive risk taking" or any such thing. It is and always has been about the intentional understatement of risks so as to be able to sell trash to bagholders while claiming it is all "money good."

Look, I can show great "earnings" if I take a dog's used food and put it in a box, then claim the box is full of gold and sell it onward. This charade can and will continue until someone who buys one of these boxes opens it and discovers what's inside, at which point the "market" for such boxes will instantaneously collapse.

This is the gist of the problem folks and until we focus our eye on the ball and bring sanction upon those who sold used dog food as "money good" securities (in all forms) we not only will not address what caused the bubble and meltdown we will have failed to prevent it from happening again in the coming months and years.

We need no new laws or "regulations" - we need only to enforce existing laws against fraudulent conduct up and down the line.

To date there has been zero attention paid to this by regulators, law enforcement including The FBI and Department of Justice, or Congress.

I argue that this blindness is willful and that all the noise and fury over "executive compensation" is nothing other than an intentional act of misdirection designed to distract the citizens of this nation who have been repeatedly screwed blind by these financial shenanigans.

BAIR MUST RESIGN: Conflict Of Interest

nospam@example.com (Karl Denninger) — Thu, 21 Jan 2010 16:13:00 -0500

What the hell is THIS?

Sheila Bair, one of the chief regulators overseeing Bank of America’s federal rescue, took out two mortgages worth more than $1 million from the banking giant last summer during ongoing negotiations about the bank’s bailout and its repayment.

It gets better...

Mortgage documents for that 14-room home include a provision, known as a second-home rider, stating that Bair and her husband must keep the house for their “exclusive use and enjoyment” and may not use it as a rental or timeshare.

Yet the couple has been renting out part of the house since they left for Washington, with Bair listing income from the “rental property” in Amherst as between $15,000 and $50,000 a year on her most recent financial disclosure form as head of the FDIC.

Oh yeah, there's no conflict of interest here cough-friends-of-angelo-cough!

Of course the FDIC retroactively gave her a waiver from its conflict of interest rules - AFTER The Huffington Post started snooping around.

And of course the FDIC's ethics officer says there was nothing wrong with what went on - even though it appears that Bair's use for the property did not qualify for the loan she got, and that the programs that would qualify would and did carry a higher rate.

If, as the FDIC claims, this was an "innocent mistake" then Bair should immediately demand (and accept) a re-price on that paper to conform with her intended and actual use, retroactive to the issue of the loan, and immediately pay all accrued arrears.

We know that won't happen though, right?

More Intentional Media Misdirection (Wall Street)

nospam@example.com (Karl Denninger) — Tue, 19 Jan 2010 09:24:00 -0500

The headline screams:

Feds find little fraud at big Wall Street firms

While the American public and Capitol Hill lawmakers appear to blame wrongdoing on Wall Street as the primary cause of the global financial crisis, federal law enforcement agencies have had little success in finding and prosecuting instances of fraud at the nation's major investment firms.

That's because they're not looking - that is, they're willfully blind.

The article goes on to assert:

"Originating risky mortgages on its own does not violate the federal securities law," Ms. Shapiro said

That's true.

But lying about the quality of what you're selling both violates Federal Securities Law and in addition violates ordinary fraud statutes. When such solicitations are sent over wires (e.g. electronically) or via the mail both wire and mail fraud statutes are violated. If and when two or more people collude to take such an action federal racketeering statutes may be violated as well.

Ms. Shapiro testified that the SEC had reached settlements with six Wall Street dealers to settle charges of fraud in connection with the auction-rate securities. The SEC secured $60 billion through the settlements to provide full refunds for investors in the securities.

But Ms. Shapiro (and Eric Holder of the Department of Justice) didn't and still won't pursue the larger issue, which was the issuance of literal trillions in securitized debt in 2004, 2005, 2006, 2007 and 2008 following FBI and HUD warnings that very high percentages of mortgages contained in these securities were rife with fraud - yet the offering circulars omitted any mention of these findings and warnings.

Indeed, the "auction rate security" issue - and the "pursuit" of Wall Street on these securities - rests on the precise same issue as does the above - that is, the willful and intentional misrepresentation of risks in the offering circulars for these securities in which self-dealing and the understatement of risk associated with same was intentionally omitted from the prospectuses.

The simple fact of the matter is that there's no crime in speculating and being wrong.

But there are multiple crimes committed when one intentionally obscures, either through omission or commission, risks that one knows of and/or has been explicitly warned about.

Henry Boerner, chairman of the Governance and Accountability Institute, said the publics rage against Wall Street is focused not so much on suspected criminal activity as on the unfairness, lack of ethics and irresponsibility of bankers. However, he said, it is the regulators who should be faulted for allowing Wall Street bankers to take risks, shatter the economy and walk away with big bonuses.

"Voters, constituents, investors, employees, borrowers, homeowners, public officials, entrepreneurs — all have been impacted by the risky and at times reckless behavior of the leaders of the nations largest financial services organizations," he said.

Those who choose to accept risk, knowing fully what they're doing, are not now and never have been the issue. Such people deserve what they get - either for good or bad.

Attention has not been but should be focused on the willful and intentional lack of disclosure of known risks. Given the fact that The FBI was warning of an epidemic of fraud in "alternative" mortgage loan products as far back as 2004 and there were multiple investigations and disclosures in both the media and by HUD in 2006 and 2007 there is absolutely no excuse for the lack of full, fair and proper disclosure in the "products" that Wall Street created and sold on in the years 2004, 2005, 2006, and 2007 - without which neither the bubble or collapse would have occurred.

It has been and is my assertion that massive violations of the law were in fact committed during this faux "boom" and the ensuing bust, that the so-called "earnings" reported during that period in fact were not earned, and that buyers of this "debt" were in fact sold securities that, had the actual known characteristics of the loans contained in them been disclosed, were utterly unmarketable.

New Short Sale Fraud Allegations: Second Liens

nospam@example.com (Karl Denninger) — Fri, 15 Jan 2010 13:08:00 -0500

During the bubble we had banks that knew (because the FBI had warned them in 2004, there were stories in the media in 2006, and in 2007 HUD published a study) that virtually ALL stated and reduced-documentation loans were fraudulent.

They wrote 'em and securitized 'em anyway and I have not been able to find ONE prospectus from that period in which the above fact was disclosed to buyers of that securitized debt. Not one.

This was a major contributor to the bubble and subsequent bust. Indeed, without it the "home price appreciation" that occurred could not have, as there were insufficient numbers of people with incomes to support the prices being asked. The bubble would not have happened and neither would have the bust without this active fraudulent activity up and down the line. If the actual character of the loans in these securitized instrument had been disclosed to buyers these securities would have been absolutely unmarketable and the bubble would have instantly stopped inflating.

But we know for a fact that these disclosures were not made, this debt was sold, and literally hundreds of billions of dollars of losses were taken by investors who believed that the loans in these securitized instruments were "good" when they were not. There have been ZERO investigations or prosecutions thus far related to this practice.

Now when stuck homeowners are trying to execute a short sale we have allegations that the banks are illegally trying to get something for their second liens (HELOCs and "silent seconds") which in fact are worth NOTHING in a short sale for less than the outstanding first mortgage balance.

As Diane Olick has reported:

But here's what's not legal and what's apparently happening quite often recently. Since many second lien holders are getting very little, they are now allegedly requesting money on the side from either real estate agents or the buyers in the short sale. When I say "on the side," I mean in cash, off the HUD settlement statements, so the first lien holder doesn't see it.

"They are pretty clear and pretty upfront about the fact that if the first lender knows they are getting paid, the first lender will kill the short sale," says Brandt. "So these second lenders are asking for the payments off the closing documents, off the HUD statement, usually in a cashiers check prior to closing. Once they receive that payment, they will allow the short sale to go through, which according to RESPA laws and the lawyers that we have spoken to on the topic is not legal."

This is blatantly illegal. It is a violation of RESPA, the law that specifies that all compensation that changes hands on a real estate transaction irrespective of form must be disclosed on the HUD-1.

STOP THE DAMN LOOTING AND START PROSECUTING!

A Paper You MUST Read

nospam@example.com (Karl Denninger) — Thu, 14 Jan 2010 08:41:00 -0500

Buried in the smoke and furor yesterday was the second panel in the FCIC testimony - the one CNBC did not provide any meaningful coverage of.

And right up front is the one person's testimony you need to read.

That would be Michael Mayo.

Mr. Mayo hits on the themes that I have been hammering for the last two and a half years, absent some of the pointed allegations of knowing deception (that's otherwise called "fraud".)

Mr. Mayo used to work at The Federal Reserve, and was there during the previous banking crisis. He points out, as has Bill Black, that we learned nothing from the S&L crisis when it came to lessons on control fraud and overextension of risk, and in fact we're doing it again.

He calls out ten failures, and then puts forward three prescriptions. I will not reproduce them here, since I maintain that everyone who reads The Ticker owes it to themselves not to read my summary, but rather to read Mr. Mayo's original work - every word of it.

I will capture a few points however:

It is pointed out that it is difficult to recreate the reality of a balance sheet through analysis if the numbers are not reported on a similar basis. Exactly. I cannot, today, analyze a given bank's balance sheet and tell you whether I believe they are in good health or bad, whether their cash flow is sufficient to service their debt, or the likelihood that their assets will perform. This obfuscation is intentional and in no small part a direct consequence of lobbying by the banks themselves for the ability to provide other than market prices for alleged assets!
Mr. Mayo asserts that there is such a thing as "too big to fail." I argue that if JP Morgan is too big to fail then anti-trust law says they're too big to legally exist, as they continue in business with a de-facto unlawful "put" from the federal government, acquired through what amounts to extortion, that smaller institutions do not enjoy. This is the essence of anti-trust law - that some firms, when they control too much of a market, abuse that position to gain advantage and shut out competition through collusive action. This is what the "government PUT" for "too big to fail" entities comprises and the solution is simple: If you have to be bailed out in any way by the government you are broken up and your entire management team is permanently barred from ever serving as an officer of a public company again. No ifs, ands or buts.
Mr. Mayo also talks about capital and the need to be certain that there is never a question as to whether there is enough. The simplest way to do this is to impose hard leverage limits and require that liquid and/or immediately-convertible capital be present at all times to cover any potential deficiency on carried assets. At the same time all off-balance sheet exposures and naked derivative positions must be absolutely barred. The simplest means to accomplish this is to restore Glass-Steagall, thereby removing the ability of commercial banks to play with levered instruments in the first place, limiting their leverage to their reserve ratio, and reinstate mark-to-market accounting performed nightly. Bingo: We know you have enough capital in each and every case, and if you get close to the line you're forced to divest assets or convert some of your prearranged debt to equity.

Folks, these solutions are not technically difficult. They are politically difficult but the question we need ask ourselves in this country is this:

Are we willing to undergo another crash similar to 2008/2009? WE WILL if we don't stop the insanity, and it will likely come sooner rather than later.

The bad debt on the balance sheets of the banks and others has not been removed, either by payment or default. It is being carried at values that suggest performance will occur even in instances where we know that is very unlikely, such as with second mortgage lines (HELOCs, etc) that are underwater. When, not if, the foreclosures occur on the senior (first) mortgages these lines will be exposed as worthless, triggering another problem.

Nor is the issue confined to second lines. Commercial Real Estate, OptionARMs and allegedly-"prime" loans that in fact were not all are deteriorating in record numbers. These losses have already occurred and are being hidden, but that charade can continue only so long as the cash flow permits.

This is why there are no meaningful numbers of permanent modifications on mortgages nor will there be - the program cannot succeed as for it to do so the losses embedded in these institutions must be admitted to and recognized, and our government refuses to force that to happen.

The current attempt is to re-inflate house prices and thus pretend the crisis has past. But we have destroyed our wage base over the last 18 months, which has simply compounded more losses into what were doomed loans, rather than forcing the defaults out into the open and selling them off at whatever price they would fetch. By doing so we have literally added hundreds of billions of additional dollars in loss to what was already a horrible situation, and that loss has now been accrued and will not be able to be avoided either.

Within a few years time (before 2020) we will face a new problem - boomer retirements will go "over-center" and they will be net sellers of all asset classes to fund their retirements, while entitlement spending will ramp toward the moon. That problem is extremely serious but on the path we are on now we will not get there before what we believe avoided smacks us.

Our choice is to take our medicine now and be able to recover before this tectonic shift occurs with boomer retirements and entitlement spending, or walk straight into that mess in the midst of a decade-long depression.

Oh SEC! What Sort Of BS Game Was This?

nospam@example.com (Karl Denninger) — Thu, 14 Jan 2010 08:38:00 -0500

Gee, honest mistake?

-----Original Message-----
From: CME Globex Control Center
Sent: Wednesday, January 13, 2010 4:54 PM
Subject: ESH0 Event
Importance: High

Between 11:03 and 11:04 CT today, there were a series of transactions in ESH0 in which a market participant appears to have inadvertently traded approximately 200,000 contracts as both buyer and seller. CME maintains trade practice and risk management rules and procedures respecting such matters. In keeping with standard practices and CME's self-regulatory responsibilities, CME is reviewing the circumstances of this event.

As both buyer and seller? Uh.... wait a second. On the same order?

This is the "action" being discussed:

That was roughly 94,000 contracts on a one-minute bar, as you can see, an absolutely massive amount of volume compared to that in the immediate vicinity.

Needless to say that spooked people. My initial thought when I saw it (and I did see the blocks go by on T&S - there were a lot of 1,000 and 2,000 contract orders that filled!) was that they were buy stops just above the overnight range set at about 7:00 AM Central. The "barker" in the pit also characterized it this way - understandable, since that's exactly what it looked like. Of course the pit folks saw it, assumed it was a big buy stop and piled in.

But both the CME email and the volume bar implies that the same "market participant" was both the buyer AND THE SELLER.

Here's the problem, in a nutshell:

There is no way you could come in with 200,000 contracts worth of bid without lifting the entire offer chain and spiking the market 20 handles or more north instantly. Yet that didn't happen, which strongly implies that whoever entered the "buy" also, at the same time, entered a "sell" at the same strike and time, which the email from CME seems to confirm. The fact that the executions came literal milliseconds apart and were in even-lot blocks of 1,000 and 2,000 contracts further implies that this was some sort of manipulative game.

"Mistake" eh?

This entire little episode smells like dead fish. Someone was either "lying in wait" with enough liquidity to soak that up and not generate a price spike, whoever did it was on both sides (and thus GUARANTEED there would be no material price spike) or one of the oddest coincidences I've ever seen in the futures markets - 100,000 contracts magically appearing on both bid and offer from two different people at the same precise instant - magically occurred.

If the intent was to scare the bejeezus out of anyone who would "dare" to short a potentially-failed breakout, they succeeded. Who's going to try to short into someone who has 100,000 contracts that will magically appear opposite your offer at the most-opportune time (for them) and bury you 6 feet under?

Of course this begs the obvious question: Who has the margin capacity to execute a trade like that ($5,625 per contract required for initial margin), or $562,500,000 - yes, $562.5 million) - on each side of the trade? (this assumes the volume I have here is right - if its really 200,000+ contracts, double that.)

Hmmmm....

I'll bet my last nickel neither the CME or SEC will do a damn thing about this, despite the outrageously blatant character and the clear implication of the event. Nor will we see ANY update from the CME or SEC on what did actually happen or who was responsible.

You can take that to the bank.

Charles Biderman of Trimtabs (a very well-respected research outfit) has argued for a while now that the rally for the last several months cannot be explained by buying coming from any of the trackable sources. That is, it's not coming from institutions, it's not coming from households (individual investors), it's not coming from pension funds or hedge funds. He therefore argues, as a matter of exhaustion (who's left?) that it likely is coming directly from The Federal Reserve and/or Treasury via intervention in the equity markets.

Are we all trading in a rigged casino? I have not been a subscriber to these sorts of theories over the years, but when you see activity like I saw today in the futures market without a clear, cogent explanation of what actually happened that also fits the facts you have to wonder.

Eric Holder's Misdirection: He's No Prosecutor

nospam@example.com (Karl Denninger) — Mon, 11 Jan 2010 08:54:00 -0500

You have to laugh at the outright stupidity of this man:

WASHINGTON (Reuters) - U.S. Attorney General Eric Holder said a new inter-agency task force is focussing on halting fraud involving mortgages, securities, economic stimulus programs and government bailouts.

Riiiight.

"To those who see victimization of others as an avenue to wealth, take notice: If you fabricate a financial statement, if you propagate an investment scheme, if you are complicit in an act of financial fraud, you are writing your ticket to jail," Holder said.

Wake me up when the big investment banks are served with a hundred criminal complaints - each. When the ratings agencies are served with a similar number. When Fannie and Freddie's executives are indicted for material misrepresentation of the quality of paper they were buying. When the hundreds of mortgage brokers, real estate agents who pressured appraisers to "hit the number" and homeowners by the literal millions that falsely claimed income they didn't have are all prosecuted.

None of this is going to happen, and Holder knows it.

This is nothing more than Kabuki Theater intended to misdirect and appease the public - a public that is increasingly, and rightly so, calling for heads to roll and sentences to be handed out in what has been the biggest heist of all time.

"Last year, Allen Stanford, Tom Petters and, most recently, Fort Lauderdale attorney Scott Rothstein, who is alleged to have run a $1 billion investment scam, joined Bernie Madoff in becoming headline news and household names," Holder said. "I'm proud that these men along with more than 450 others convicted of corporate and securities fraud in 2009, have been taken out of the game."

Small potatoes Eric, and you know it.

Yeah, Madoff was a $50 billion scam along with dozens more.

But the housing bubble and the scams related to securitization - the sale of worthless securities that were backed with even more worthless credit default swaps was a LITERAL MULTI TRILLION DOLLAR FRAUD.

There is exactly NO prosecutorial effort being put forward to lock those crooks up, yet they were the proximate cause of both the bubble and economic bust.

Yes, Mr. Holder, I'm glad Madoff got nailed, along with the alleged other fraudsters that have been busted.

But you, and the administration before you, have and continue to willfully ignore the biggest scammers and fraud artists in this entire mess.

I'll be impressed when I see you doing perp walks by the hundreds on Broad and Wall Streets - and not before.

The Finger Pointing Continues (GS & AIG)

nospam@example.com (Karl Denninger) — Sat, 09 Jan 2010 13:20:00 -0500

It just never ends, does it?

Jan. 9 (Bloomberg) -- Hank Greenberg, former chief executive officer at American International Group Inc., said Goldman Sachs Group Inc. is responsible for the collapse of the insurer during the economic crisis, the Wall Street Journal reported.

Oh really?

A Goldman spokesman disagrees:

“Mr. Greenberg appears to base his views on news reports rather than facts,” Lucas van Praag, a Goldman spokesman, said in an e-mail to Bloomberg News. “It is interesting that he doesn’t mention the devastating conclusions about AIG reached by the company’s own auditors.”

Well now that's interesting.

How about this: They're both right.

Let's go back to the basic mathematics of lending again, shall we?

We shall start with a basic lending transaction. We'll simplify the terms - it's a 10 year loan to be paid at maturity, thereby exactly matching the characteristics of a 10 year Treasury Bill. We will further presume that a Treasury Bill has an actual zero default risk (perhaps overly optimistic, but you have to benchmark it somehow.)

This deal has a risk of default of 10%, and if it defaults the recovery on the collateral posted will be 80 (that is, 20% of the face value will be lost), both amortized and realized over the entire life of the issue.

It therefore has a risk premium of 10% X 20%, or 2%. (Before people start carping about prepayment that obviously occurs when a loan defaults and is recovered, along with the potential for calling of debt, etc, I've already included this in the above recovery, default and characteristic definitions above - in actual practice the computation is significantly more complex but we're after the fundamental realities of lending - and credit default swaps - here, not the nuances of how bond issues price.)

If the 10 year Treasury Bond has a yield at that moment in time of 4% then this deal must price at no less than 6%, or the person making the loan is a fool. We can therefore assume that a bank with lots of smart Harvard MBA types will discern this risk and will be unwilling to lend at less than the aforementioned 6%.

The person seeking the loan, in a market where many people have money to lend, will be able to negotiate some price for the money that is very close to 6%. In an infinitely efficient market the price will be 6%, with it rising only as inefficiency in the market (constraint on the number of lenders, for example) or worse, outright collusion between lenders to screw the borrower, prevents him from shopping it effectively.

This analysis is overly simplified, for one primary reason - any single loan will either default or not default. That is, probability when applied to a single event is a crappy investment proposition, because if you take the bet and lose on the first trial the loss may cripple you.

But banks make lots of loans, not one loan, and in a basket of these loans of sufficient size the losses will exactly balance the risk premium over the term of the loan. That's what "Risk Premium" IS!

Ok.

So now we take this basket of loans and we "tranche" it. There's a 2% margin to be "absorbed" in here, and the way we do it looks like this - we assign as a matter of contract losses so that the first 2% of the face value is absorbed by the "equity" tranche. If we're wrong about the risk the mezzanine tranche gets the next chunk of loss of face value - say, another 2%. The "Senior" pieces of the issue are protected, and thus until these losses occur they don't lose anything.

This is the "magic" of securitization - it is the shifting of loss so that you create what looks like an alleged "risk free" transaction for the senior tranche components.

But did you really?

Well, no.

See, the blended premium on the deal - that is, the interest rate that can be returned when blended across the entire transaction and all tranches - cannot exceed that 6% above. It in fact has to be less, since the bank that handles doing the securitization will not work for free and neither do the ratings agencies that analyze it. The money to pay everyone in the middle has to come from the cash flow on the deal itself.

So if the equity and mezzanine tranches actually protect the seniors as represented, yet the yield on them fairly represents the risk they are absorbing then the Seniors must yield LESS THAN the Treasury rate! If that happens you won't be able to sell them, since anyone seeking a risk-free "AAA" bond will simply buy a Treasury instead.

If the Seniors yield the same or greater than the Treasury rate then either (1) the subordinate tranches cannot actually provide the protection touted or they are unmarketable as they fail to provide sufficient yield to compensate for the risk being taken.

So far we have established that one of two things must be true:

The buyer of these "securitized" debt instruments is a sucker. He is purchasing something that has a yield that fails to compensate him for the risk he is assuming. The shortfall is in fact the source of the profit that the bank that securitizes the debt and the ratings agency that rates the debt makes!
The seller of these securitized debt instruments is misrepresenting the risk contained in them - that is, they are through some device (whether intentional or not) claiming that the risk is less than is actually present, thereby allowing the deal's blended interest rate to be above the risk-free rate of return plus the risk premium.

It is not possible, mathematically, for there to be any other explanation. Someone is getting rooked in these deals in each and every case - they have to be, whether it is because the buyers are fools or the sellers are committing fraud.

It gets better.

Now let's say you put together these packages as a bank and sell off the Senior Tranches. The 10 year Treasury Rate is 4% at the time and the Seniors "price" at 4.5% - 50 basis points "better" than Treasuries. They sell instantly to people who believe they are "risk free" due to the credit enhancement provided by your securitization, exactly as they should (heh, it's a 50 basis point "free lunch", right?)

But now you have a problem. The mezzanine and equity tranches are unmarketable. Why? Because their interest rate isn't high enough to compensate for the actual risk present (and that must be present in order for the credit enhancement to actually work!)

So what do you (or some buyer) do? You buy a credit-default swap to protect against the possible loss in the mezzanine or equity tranche you wish to purchase.

Let's presume that the mezzanine tranche is offered with a 10% yield. The buyers discern that this is insufficient to compensate for risk - that they're being asked to subsidize the (above-market) return you offered to the Senior Tranches (smart cookies they are!) So you find "someone" who will write a CDS against that mezzanine tranche for 500 basis points - that is, 5%. Voila! Now the "blended return" of the two is 5%, which is one full percent (100 basis points) over the "risk free" rate but it is allegedly risk-free! You now can sell all of these mezzanine securities and you do, to people who believe they are getting a full 100 basis points of yield over Treasuries for a risk-free transaction.

But wait a second! We just invented financial perpetual motion, didn't we?

Indeed - and the laws of mathematics say what just happened is impossible.

So how did we pull that off?

Quite simple, really: The guy who wrote the CDS doesn't have the money to pay in the event of default!

So again we have someone who gets rooked.

How did this go on for so long and not blow up instantly?

The entire thing is a Ponzi scheme from top to bottom!

Let's reduce the CDS part to a simple example - I offer to sell auto insurance to everyone in the United States for $100/year, full coverage.

You buy it immediately, on the first day it is offered. You have "insurance" and I have the money. You tell your friends and suddenly I am awash in orders for insurance at 1/10th the going rate. Why it's a miracle, right?

It sure seems like it for a while. You wreck your car the second week you have your policy, and I pay you. That's easy - there's so much money coming in that I can afford to cover the pay-outs initially.

But eventually the rate of new policy sales slow down as the market for suckers saturates. Unfortunately all those existing policies are still in force, and people keep wrecking their cars! Soon I run out of money to pay, and the vast majority of people who bought those policies discover that they were participants in a giant Ponzi scheme - they didn't buy actual insurance, they were participating in a pyramid structure that could only pay claims so long as the new money flowing in came in fast enough to cover all the people who wrecked.

This is the essence of all of the so-called "financial innovation" of the last twenty years. Every bit of it.

It all comes back to the bottom line: a large enough batch of lending transactions that are properly priced for risk cannot yield more than the risk-free rate in actual performance.

It is mathematically impossible.

Further, the more complex the transaction is - that is, the more transformation, slicing and dicing that goes on - the less yield will be realized compared to the actual risk. This is due to the inescapable fact that nobody works for free, and is exactly identical to the laws of thermodynamics which state that for each and every transformation energy takes from how it is generated or stored to it's final means of use some is inevitably lost.

Any violation of these laws of mathematics inherently must involve some element of Ponzi Finance - that is, the subsidization of actual return through the requirement that ever-increasing amounts of "new money" flow into the transaction stream.

This fundamental reality is inescapable. The entirety of the "Internet Bubble" and the "Housing Bubble" rests in this fact, along with all other credit bubbles through time.

PONZI SCHEMES ARE UNLAWFUL IN EACH AND EVERY INSTANCE.

Our Government has sought to cover up, obfuscate and misrepresent to The American People (and indeed to the people of the world) this fundamental fact, and we have not only refused to recognize and dismantle the Ponzi basis of this bubble, we are continuing to try to re-inflate it!

This effort will fail because as a matter of mathematics it must fail, and the sooner we recognize this and hold those responsible to account the sooner our economy can in fact recover.

Aig And Geithner: More Lies?

nospam@example.com (Karl Denninger) — Sat, 09 Jan 2010 12:02:00 -0500

In a letter to Darrell Issa and Edolphus Towns the NY Fed's General Counsel asserted:

“Matters relating to AIG securities law disclosures were not brought to the attention of Mr. Geithner,” Thomas Baxter, general counsel of the New York Fed, said yesterday in a letter to Representative Darrell Issa, a California Republican, and Edolphus Towns, Democrat of New York. “In my judgment as the New York Fed’s chief legal officer, disclosure matters of this nature did not warrant the attention of the president.” Geithner, who helped orchestrate the bailout of AIG when he led the New York Fed, is now Treasury Department secretary.

Oh really?

Financial statements and exhibits - "disclosure matters of this nature" I'd think - don't merit Geithner's attention?

An article over on Seeking Alpha makes the following assertion via documentary evidence:

"Note that there should be no discussion or suggestion that AIG and the NY Fed are asking to structure anything else at this point."

The assertion is made that this is Geithner's own handwriting. NY Fed Officials say he was not involved.

Well, that deserves investigation.

Who's handwriting is on this page?

If it's Geithner's, he's cooked.

But even if it's not Geithner's handwriting the fact remains that as President of the NY Fed at the time he is directly and personally responsible for the actions of the firm.

In addition, however, if it is developed that the NY Fed solicited and participated in a willful and intentional violation of US Securities Laws then someone has a potential 20 year stay with Bubba on their agenda. Specifically, Sarbanes-Oxley added the following to US Code Title 18, Part 1, Chapter 73, S.1519

Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.

So.... who's headed for a stint in the Greybar Motel?

Kucinich et.al.: Prove It (Fannie/Freddie "Outrage")

nospam@example.com (Karl Denninger) — Wed, 30 Dec 2009 14:29:00 -0500

So now Mr. Kucinich comes out with this regarding the Christmas Eve "announcement" from Treasury:

"This cannot be used simply to purchase toxic assets at inflated prices, thus transferring the losses to the U.S. taxpayers and acting as a back door [Troubled Asset Relief Program]," Mr. Kucinich said in a statement released by his office.

Mr. Garrett and Bachus echoed these sentiments.

So sirs, what do you intend to do about it, given that as things stand right now this certain CAN be and WILL BE used to purchase toxic assets at inflated prices and WILL result in the transfer of the losses to the US Taxpayer, acting as, indeed, a back-door "TARP"!

As I said when the "deal" was announced (in the dark of the trading night):

Cost the taxpayer an unlimited amount due to shoddy underwriting and lax (or absent) risk controls and not only do you get bailed out, you also get paid $6 million a year.

Kucinich went on to say:

"I want to determine whether Fannie and Freddie have a cohesive plan to buy up underperforming mortgages that remain on the books of the big banks, at appropriate prices, and undertake a massive reworking of the terms of the mortgages," he said in the statement.

The banks will not sell at an "appropriate price", just as The Fed did not buy at an "appropriate price" with its "support."

The reason is clear: If one actually goes through those MBS and adjusts their value for the so-called "prime" loans that really were not, yet were stuffed into those securitizations, one would be forced to price them at their actual intrinsic value.

THIS WAS EXACTLY WHAT THE BANKSTERS LOBBIED TO STOP LAST SPRING. PREVENTING RECOGNITION OF THE MARKET PRICE - THAT IS, LEGALIZING OUTRIGHT ACCOUNTING FRAUD - WAS THE PRECISE INTENT OF THE SO-CALLED "MARK TO MODEL" DOG AND PONY SHOW LAST YEAR.

I will be impressed when:

"Mark to myth" is reversed and everyone has to carry their paper at its actual market value - including recognition of the detonations that have occurred in so-called "prime" loans that were in fact not prime at all, thereby damaging or even destroying the value in these so-called "MBS".
A special prosecutor is appointed with full subpoena and grand jury power to investigate each and every party involved in stuffing ALT-A and Subprime paper into allegedly "prime" buckets of loans and then foisting them off on investors worldwide, and we start to see indictments of the perpetrators involved in this massive and pernicious fraud.

So far there is ZERO indication that either of these things is going to happen. Indeed, last spring Congress was not only complicit in but actually demanded that FASB permit the accounting fraud to occur in the first instance!

Until I see that - or articles of impeachment aimed at either Timmy or President Obama - this is nothing more than smoke, mirrors and noise.

Raw Allegations Of Fraud? (Fannie/Freddie)

nospam@example.com (Karl Denninger) — Wed, 30 Dec 2009 10:25:00 -0500

Here it comes....

There is more to this ugly situation. New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A.

There's the allegation right there.

Not mine folks - I've told you what I believe about the GSEs over the last two years and change, and have chronicled several other claims of outright fraudulent conduct, including providing links to legal pleadings and other files from periods of time when some of their executives tried to blow the whistle on allegedly-questionable practices.

But now we have The Wall Street Jourmal willing to put into print (albeit on the opinion page) an outright allegation of intentional misrepresentation.

Here's the definition of fraud from one common online resource:

Fraud is generally defined in the law as an intentional misrepresentation of material existing fact made by one person to another with knowledge of its falsity and for the purpose of inducing the other person to act, and upon which the other person relies with resulting injury or damage. Fraud may also be made by an omission or purposeful failure to state material facts, which nondisclosure makes other statements misleading.

You decide.

Are Banks Scamming Fannie?

nospam@example.com (Karl Denninger) — Tue, 29 Dec 2009 11:26:00 -0500

You remember the announcement that Fannie and Freddie would have an "unlimited" credit line from Treasury to cover shortfalls and buy-outs of defaulted loans from MBS, right?

Well then, read this from the forum:

After the Fannie news came out this weekend, a friend called me and his brother works for Chase Mortgage. He told me that Chase is redoing stated income loans and instead of actually appraising the home, they are going back 3 years on the homes valuation in order to get the loan processed. Then they are selling these mortgages to Fannie Mae.

Yes, that's an anecdotal claim, but if true can someone explain to me how this isn't out-and-out fraud?

Is Fannie requiring the actual appraisal with the loan package information they buy, or is the entire "verification" nothing more or less than a checkbox that says "yes, we have an appraisal"?

Toxic waste dumping ground? Maybe.

But one thing is certain - I've not heard of Fannie and Freddie forcing putbacks of loans they purchased from various brokers and originators where there was fraud in the original loan.

Why not?

Why should Fannie and Freddie eat this if in fact the banks breached their reps and warranties in the original tender of the paper?

And since it appears that banks have been tremendously successful in shoveling off garbage paper to Freddie and Fannie while not being held to account for their activity, one has to wonder if this anecdotal report is accurate!

Gee, Who WASN'T Bribed?

nospam@example.com (Karl Denninger) — Mon, 28 Dec 2009 08:44:03 -0500

Now things are heating up:

Just hours after federal agents charged banker Allen Stanford with fleecing investors of $7 billion, the disgraced financier received a message from one of Congress' most powerful members, Pete Sessions.

``I love you and believe in you,'' said the e-mail sent on Feb. 17. ``If you want my ear/voice -- e-mail,'' it said, signed ``Pete.''

Heh, now that's innocent, right?

Let's talk about what's going on here, because this is not limited to a handful of interests - it is in fact widespread and part and parcel of the corruption that has swept our nation.

The "revolving door" game - and the so-called "perks" of being a lawmaker, including the ability to travel to exotic (and expensive) places on the dole of others - has always been an issue.

In the last 20 years it has become completely out of control.

Stanford hosted New York Congressman John Sweeney's wedding dinner at his five-star restaurant in Antigua in 2004 -- toasting the couple for photographers -- and staged a cocktail fundraiser for now-disgraced Ohio congressman Bob Ney at his bayfront Miami office.

Why is this legal at all?

Part of the duty of a Congressperson is what is called "honest service." How can one legitimately make the argument that you are providing that "honest service" when this sort of thing is going on left, right and center, with the clear intent of scuttling bills that would harm you?

Over the years, he took on battles to protect his banking network while fending off regulators.

In 2001, he pressed successfully to kill a bill that would have exposed the flow of millions into his secretive offshore bank in Antigua.

The next year, he helped block legislation that would have drawn more government scrutiny to his bank.

And let's remember, he is accused of basically stealing the money.

Now tell me how different this is from Henry Paulson showing up at the SEC's office to press for, and receive, a removal of leverage limits from the Investment Banks - an act that then allowed big Wall Street firms to package up trash loans into securities, shop ratings to get that coveted "AAA" and then sell them off to unsuspecting rubes - who in turn took huge losses in 2007 and 2008?

I argue there is no difference.

There is a fine line between a "campaign contribution" and a "bribe". The law defines it in one place - an explicit "quid pro quo."

I define it somewhere else: influence, irrespective of how gained, with or without explicit promises to act (or not act as the case may be.)

It began in 2003, when lawmakers including Sessions, Ney, Sweeney, Gregory Meeks, Donald Payne, Max Sandlin and Phil Crane arrived in Antigua on a mission to ``promote relations'' with the Caribbean nation.

The cost of the January trip -- including nights in luxury hotels and two Stanford jets for travel -- came to $39,500, records show.

For four days, they gathered for talks on business in the Caribbean, trading jokes with Prime Minister Lester Bird and touring the island.

In time, the group of lawmakers, which became known as the ``Caribbean Caucus,'' would take 11 more trips -- the costs picked up by the Inter-American Economic Council, a nonprofit funded by Stanford.

Promote relations eh?

Remember my note about "Caribbean Banking Centers" allegedly owning over $200 billion in Treasury instruments?

Where did the money come from to buy those?

Is it drug money? Or is it just under-the-table "grease" (and lots of it) put forward by American interests to literally buy legislation they want, and kill legislation they don't?

Which is more harmful? Some ganja-loving hippie smoking a joint in his living room, or the corruption of our political process to the tune of hundreds of billions of dollars, making the entire legislative process nothing more or less than an extension of corporate board rooms seeking to legitimate that which either disadvantages ordinary people or worse, is outright fraudulent on it's face.

I know what I believe, and so-called "Campaign Finance Reform" was supposed to fix it. It didn't because it failed to force disclosure.

Look, The First Amendment is incompatible with the concept of restricting speech, and money buys speech. So let's cut the unconstitutional nonsense.

It is plenty sufficient to force each and every donation to be fully disclosed in real time, and further, to absolutely ban the expenditure of funds by anyone for these junkets and similar events.

I am already forbidden to give anything of material value to a Congressperson as a natural person. Why is it that we allow non-profits (funded by for-profit firms and individuals!) to pay for these sorts of "junkets"? Whether someone is acting formally "for profit" or not should not be the test!

In any event I have no expectation that we will see meaningful reform in this regard any time soon, as the American Sheeple continue to sit back and allow this sort of nonsense to happen. In the case of Stanford it appears that the result was the theft of billions of dollars, but if you look inside most of the legislation passed over the last 100 years, dating all the way back to Harry Anslinger, who it certainly can be argued obtained his strong "anti-marijuana" stance not from principle or personal belief, but rather as a means of protecting the multi-billion dollar Hearst paper and publishing empire.

Evidence? Plenty, including Anslinger's attempt to halt a joint ABA/AMA report on criminalization of drugs - a paper intended to shine the white light of reason on the debate from the perspective of both practitioners of law and medicine.

There are lessons here that are as old as The Republic, if we care to listen. They're not limited to a few examples like Stanford, although those, being the most sensational, do of course draw the press.

Rather they are pervasive and found throughout politics, and if we are to ever disentangle "the vampire squids" that engulf public policy, whether it be in relationship to narcotics (upon which we blow tens of billions of dollars without meaningful effect) or the intoxication garnered by deceptive and outrageous practices in the securities markets we must put a stop to the junket train by treating all equally, ban the provision of "gifts" to lawmakers from any source whatsoever (including junkets and similar entreaties) and force the reporting of all "campaign contributions" in real time, with specificity.

At the same time we should mandate that all lobbying contacts take place either in written form (and be immediately published for consumption by the public) or that they be taped (audio and video) and similarly distributed immediately.

After all, if Congress is "The People's House" and these are allegedly our elected representatives, do we not have a right to know what these mendacious vipers are up to?

I think so.

Do We Have More "Hidden" CDS?

nospam@example.com (Karl Denninger) — Thu, 17 Dec 2009 09:32:00 -0500

Hmmmm... now this story is interesting....

Though the four are not in all the same businesses, they were caught in one of the same traps: They sold mortgage guarantees — in some cases to each other. Now when homeowners default, as they are doing in record numbers, these companies are covering the losses. Essentially, taxpayer money to these companies is being used partly to protect banks and other investors who own the mortgages.

Uh..... is someone writing circular credit-default swaps?

Maybe a few someones?

Maybe we're not getting the full story on the losses?

Like the big banks, these four companies would no doubt prefer to be free of government assistance, which comes with pay and other restrictions on their executives. But they appear at risk of getting onto a debt merry-go-round, where they have to draw new money from the government just to keep up with their existing government debts.

Hand, meet job. Or is it something a bit more dark and sleazy?

Those capital commitments from the Treasury do not capture the full scale of government assistance to the companies. The government has also bought mortgage-backed securities and guaranteed corporate bonds, while the Federal Reserve Bank of New York has made an emergency loan.

Right. In the case of Fannie and Freddie, about one trillion worth of "purchases" by The Fed, which I have argued repeatedly (most recently right here) are illegal.

For its mortgage guarantee unit, A.I.G. used some Treasury money to reinsure $7 billion of obligations through a Vermont subsidiary. The terms call for the unit, United Guaranty of Greensboro, N.C., to pay the claims that it can afford and send the rest to the Vermont affiliate.

Little is known about the Vermont unit because the state does not require that type of company to file annual reports. If the Vermont company needs additional money, it presumably could turn to A.I.G., which can draw more from the Treasury.

Oh, and some of it is off-balance-sheet too.

Why that's just.... lovely.... watch your step!

I'll Hold You Down And....

nospam@example.com (Karl Denninger) — Wed, 09 Dec 2009 13:29:00 -0500

... pour used oil in your mouth.

Well, not literally. But Congress might, if the EPA doesn't cut this crap out:

The Obama administration is warning Congress that if it doesn't move to regulate greenhouse gases, the Environmental Protection Agency will take a "command-and-control" role over the process in a way that could hurt business.

The warning, from a top White House economic official who spoke Tuesday on condition of anonymity, came on the eve of EPA Administrator Lisa Jackson's address to the international conference on climate change in Copenhagen, Denmark.

Oh really?

Did you forget, Lisa, where your operating budget comes from?

That would be Congress.

Guess who can close your agency - in an afternoon?

That would be Congress.

Threatening them - assuming this isn't just more kabuki theater intended to divert public anger from the skull-<censored> that is about to be served upon them - is rather unwise.

Should this not be just another game of misdirection and should Congress (e.g. Sensenbrenner and other reasonable minds on The Capitol - clearly in the minority, but heh, there are a few) decide that your pie hole makes a good used oil receptacle I'll drain my CO2-producing boat engines just to make sure they have plenty to use for this purpose.

I wouldn't want the dirty oil to be in them, you know.....

Phil Jones Climategate: TOAST

nospam@example.com (Karl Denninger) — Tue, 01 Dec 2009 15:07:00 -0500

Now THERE is global warming: TOAST!

The university says Phil Jones will relinquish his position until the completion of an independent review into allegations that he worked to alter the way in which global temperature data was presented.

The allegations were made after more than a decade of correspondence between leading British and U.S. scientists were posted to the Web following the security breach last month.

The problem isn't the emails.

It's the program source code, comments, and data files.

I am willing to stake my reputation on the fact that those files evidence a clear intent to cook the outcome and in fact are filled with comments and "massages" to the data that are, on their face, bald proof of manipulation.

Now let's get the jackasses in the United States that were involved in this scam.

JOHN HOLDEN, PRESIDENT OBAMA'S "SCIENCE CZAR" ANYONE?

Fed "Reduces" AIG Debt?

nospam@example.com (Karl Denninger) — Tue, 01 Dec 2009 12:48:00 -0500

So here's the story....

NEW YORK (CNNMoney.com) -- AIG announced Tuesday that it completed a deal wiping out $25 billion of its debt to taxpayers by selling stakes in two subsidiaries to the Federal Reserve Bank of New York.

The troubled insurer gave the New York Fed preferred shares of two of its international life insurance companies, including $16 billion of American International Assurance Co. and $9 billion of American Life Insurance Co. The deal was originally announced in March.

How were those values arrived at?

I don't recall an auction process, nor a public offering, nor anything else that we can see. There is a claim that there were bids, but what were those bids?

How do we know that The NY Fed didn't intentionally overpay? After all, we know they did intentionally overpay in other cases, such as settling the AIG "CDS" which, in a bankruptcy, were worth exactly bupkis!

Let me guess - this is a "private matter", even though the "loan" was backstopped and made with public - that is, your and my taxpayer - funds, right?

How is this not yet another scam?

They Aren't Really This Stupid, Are They?

nospam@example.com (Karl Denninger) — Sat, 28 Nov 2009 21:31:00 -0500

I've been slack-jawed a couple of times during this debacle of an economic mess, but this has to take the cake:

Here is the real stunner. A senior person at Treasury said to a small group of us that it is now official Treasury policy to extend and pretend on real estate loans. In other words, the policy statement from last week says, if you can make an analysis that says even if the current value is less than the loan, if you can do a spreadsheet that shows if you extend for 3-5 years, and if the economy gets better, and if the loan can be amortized down to where the loan is no longer more than the value, then the lender does not have to take an impairment -write down. Loans are to be modified by rate reductions, deferral of reserves, deferral of amortization or what ever.

Did 'ya read all those "ifs" in there? What if one of the "ifs" doesn't?

It gets better:

Giant make believe. The free market seeking an equilibrium price is no longer economic policy. In short, the working of the free market is suspended. She went on to say it was administration policy that they will create new employment and by doing so they will boost the economy, and so then real estate values will return to old levels. There were 50 of the most senior and smartest real estate people in the room. They ripped her to pieces. It looked like one of the town hall meetings of August, except everyone there was a very senior, polished professional. At one point everyone was calling out or moaning at her. It was clear to all she had been given a few talking points and she was told to stick to them no matter how foolish she looked. The group told her in no uncertain terms this is terrible public policy. They said for jobs to be created you need to lower rents so the cost of occupancy was at a level to encourage more hiring. If the loan is kept at old levels and building values not reduced, then landlords can't reduce rents to where they need to be to make taking space by tenants economically viable. Retailers costs remain higher than they should be making it harder to lower prices to induce sales. So there is a massive make believe going on.

The pros get it (as have I and a few others.) What's more they communicated it.

When I pressed the issue of political interference she said - what do you want us to do, bankrupt all the banks.

That is the choice.

What does this tell you?

A. The problem is going to take much longer to solve than it should,

B. The banks are still very weak, so lending will not return anytime soon,

C. A massive refi problem is getting deferred to 2013-2015.

D. The administration is playing politics with the economy to a degree that is dangerous. There has to be a massive value reset for real estate. We are deferring the inevitable.

Actually, it tells me something else.

What are the odds that all those "ifs" pan out?

Statistically?

Uhhhhh.

What happens when they don't?

The banks all go bankrupt anyway, and the economy has been further trashed by the destruction leveled on employment as a consequence of this policy.

What's even worse is that this jackass Treasury Representative, assuming the conversation reported really happened, told a bunch of professionals that if all of those "ifs" don't pan out the banks are all going to blow up.

What do you think those professionals will be doing when, not if, it becomes apparent that they're right - that the economy is not recovering at a reasonable pace and that the "extend and pretend" game is not only not working but is inhibiting recovery?

And by the way, I'm curious how you all think this is going to work out, given this little ditty (find the source here).....

These pros are going to short the ever-loving hell out of anything that has a ticker symbol as soon as the turn-down is evident!

There is only thing worse than being stupid - it is admitting that you're stupid by putting a bankrupt and unworkable "policy" in front of a bunch of professionals who have the acumen to analyze what you're up to, tell you that you're nuts, and then act on it to profit while grinding the banks and indeed all of America into dust - but you stick to it as "policy", even though those who are smarter than you are have told you point-blank that it won't and in fact can't work.

Thank you Barack and Turbo Timmy - you own it, this is your policy, this is your legacy.......

......and this will be your political obituary.

"Hide The Decline"

nospam@example.com (Karl Denninger) — Thu, 26 Nov 2009 00:39:49 -0500

The FDIC Is Broke

nospam@example.com (Karl Denninger) — Tue, 24 Nov 2009 10:07:00 -0500

Yes, really.

Off the wire this morning:

FDIC Deposit fund had negative $8.2B balance in Q3

That's broke. Bankrupt. Kaput. Gone. Poof. Dead. Rotting. A corpse.

Yes, yes, I know, Treasury has their back. But let's not forget - The FDIC does not have a legal "full faith and credit" guarantee from the US Federal Government and Treasury.

It has a "sense of Congress" resolution, but not a formal, legally-binding guarantee.

I am not, by the way, predicting an actual FDIC failure to pay. Should such an event happen it would be tantamount to a declaration of revolutionary war (by the government about to be deposed!) as if there is one thing that would cause Granny to reach for her shotgun, it would be getting screwed out of her life savings after Sheila Bair and everyone else in our government has trotted out how their money is "fully safe" and that "nobody has ever lost a penny of insured deposits and never will" for more than 20 years, including lots of pronouncements of exactly that mantra over the last year.

Nonetheless this outlines the underlying problem the FDIC has - it has willfully and intentionally ignored the fact that banks have mismarked their "assets" to overstate their values, it has refused to demand that accounting be done on a strict "mark to market" basis by bank examiners, and indeed, it has backed the "extend and pretend" commercial real estate "rollover" provisions of recent months, all of which is manifestly unsound, intentionally misleading, a consequence of willful refusal to enforce 12 USC Ch 16 Sec 1831o ("Prompt Corrective Action"), and has led to enormous losses being absorbed by the Deposit Insurance Fund that should have never happened.

The result?

THE FDIC IS BROKE.

Let's put this in common-man terms:

YOUR SO-CALLED "DEPOSIT INSURANCE" AND THE SEVERAL TRILLION IN CITIZEN BANK DEPOSITS ARE BACKED BY THE SAME AMOUNT OF CAPITAL THAT AIG HAD TO BACK THEIR CREDIT DEFAULT SWAPS: BUPKIS.

Congratulations Sheila - is that your resignation I see in your hand or is that your promotion from Obama - after all, we all know that in Government the more you screw up and screw the taxpayer, the better the job you're offered.

One final question: Is the only thing preventing panic and bank runs the sheer stupidity of The American People?

"Global Warming" SCAM - A Further Look

nospam@example.com (Karl Denninger) — Sat, 21 Nov 2009 12:29:00 -0500

Ok, having spent a fair bit of tme sifting through the files referenced in my original Ticker on this subject, I have some additional observations.

Please note - in my "past life" I ran an ISP, and am a qualified expert in these matters. I write spam filtering software commercially and have since 1995, being the author of the first ISP-centered spam interdiction package. As such when it comes to issues like Internet mail transport I can easily speak to what is supposed to be present - and what is not.

Further, I want to note that my interest in this has absolutely nothing to do with the underlying claim - "Is Man-Made Global Warming Real?" Rather, my interest in this is whether or not the alleged scientific process has been followed - or subverted.

There is one axiom that I believe we can all agree on:

The climate is always in flux - that is, it is always changing. It has done so over the millions of years in the past, and will in the millions of years in the future.

Science is the process by which we take a question and:

Form a hypothesis.
Design an experiment to test that hypothesis.
Perform the experiment and collect the data thus generated.
Analyze the resulting data.
Form a conclusion from the data thus collected.

That's "The Scientific Method."

To the extent that method is corrupted on purpose one does not have science. To the extent that it is corrupted out of necessity (e.g. missing data that one requires, and thus one "guesses") this is accepted provided one discloses one's guess and how it was derived - that is, provided there is no material concealment.

In the "Big Science World" the check and balance on concealment - and outright fraud - is peer review and post-publication duplication. To be able to duplicate the results claimed, however, the algorithms, code, methods and data sets must be made publicly available so that anyone who desires to do so can validate the claimed experimental results.

In the spirit of science, I will note that I fully expect others to try to validate (or dispute) my observations below. As such you can find the original archive at Wikileaks should you decide you would like to do so, and I encourage all other independent investigation.

Now, on to the observations, after spending an evening and morning with the data (and no, I haven't gone through it all yet - there's a hell of a lot here folks.)

There are apparently 1073 emails, each with a sequence number but those numbers are not sequential. That is, there are a lot of sequence numbers missing. However, the dates in the files appear to be ordinal (that is, increasing from earliest to latest) with the last entry being November 12th of this year.

This strongly implies this is a partial data set intercept of email from some point. The same person does not appear as a "to" or "from" in each email (although there is a lot of commonality), which belies the general idea that this was someone's "saved storage" - at least at first blush.

The intercept, wherever it happened, does not appear to have been done at the system or transport level. Specifically, the "Received:" and "Message-ID:" lines that are part of all internet-transported email are missing. This strongly implies that wherever these emails came from, they were saved/stored by one or more user(s) and were not an automated process that was maintaining archival (or forensic) logs.

The emails themselves, however, look authentic. That is, the formatting is consistent with character mode operation in many of the messages (Unix) and Windows or MAC format programs in others. The quoting is consistent - and correct for the time period in question. Attachments are missing, again implying that this is someone's "saved copy" and NOT from a system-level stream. The early emails contain a fairly significant number of messages that are consistent with the user being on a character-mode terminal (e.g. ELM, MUTT or similar on a Unix system), including the quoting and line formatting. The message content shift toward "desktop email programs" - that is, appearing to be more and more programs such as Eudora, Thunderbird, Outlook and the like is also apparent as time goes on.

My conclusions on the email data set itself are that this is very likely to be either (1) someone's "private email" storage of things they wanted to save, or (2) it was a working directory of someone who was in the process of putting forward a response to an FOI request or internal inquiry of some sort. The messages are not the entire email stream to or from any specific set of users, but rather are a set selected in some fashion - either by the person saving them as "important" or by someone collating messages for the purpose of responding to some sort of request. The majority of the messages themselves are what appear to be ordinary and reasonable discourse between scientists and researchers with an occasional "revealing glance" at the various defensive (and offensive!) approaches to those who question their premise and conclusions. Wikileaks concurs with the latter assessment.

In short, I see nothing in that data set that implies that the messages have been tampered with, but there is also no reasonable way to prove their provenance as the necessary information to do so (routing and message-id information) is missing. A well-place FOI request should resolve that problem, if anyone is particularly interested in doing so.

The data sets included in the archive are also interesting. Again, a reasonably-detailed look through them shows nothing implying that they have been tampered with, and they include data and computer code (source program code) from a wide variety of time periods. It appears authentic.

Comments within, however, disclose an extraordinary amount of extrapolation and "curve fitting" - that is, fitting data to produce desired results, not the other way around as it should be that appears to have been going on in the process of so-called "analysis." Worse, there are plenty of comments that make clear that the researchers are literally making things up as they go along - much of the data sets are claimed to be incomplete, inaccurate in terms of their time frames .vs. what is claimed in the headers and titles, and containing junk values.

There is some real trouble here, in that if you're not sure what you've got (that is, you're not sure what the data is!) or worse, you're knowingly missing pieces that you need to perform an analysis, what are you "analyzing"?

Worse, there are comments in the files that make clear that there are observations that are outside of what has been published - and worse, some of those observations are ten times outside the alleged "resolution" of claimed results. Uh, that's a major problem, and goes back to what I have repeatedly said about so-called "climate science" for a very long time, specifically (from Musings):

It is, however, entirely possible that we will find that indeed man is responsible for some of the warming that is taking place, but that this contribution is extremely small - say, 5%. That is, if the global temperature is due to rise by 10 degrees F in the next 100 years, we are responsible for only 0.5F of that rise! Thus, were we to completely cut off CO2 emissions, we'd STILL see a 9.5F rise in temperature. Obviously, if this is the case, then the data does not support taking any sort of drastic action at this time.

The problem with the current political-speak coming from these so-called "scientists" is that it contains no real data and no ranges of uncertainty on their alleged measurements.

That's not science folks - its politics - and we must, as a nation and people, refuse to be cowed by bald claims without the presence of facts behind them.

I have long argued that the major problem with so-called "published papers" on global warming is that it is rare to see find measurement uncertainties reported in the alleged findings, and competing studies have cited wildly different values for the same thing (e.g. atmospheric CO2 emitted by man per year.)

I believe we can now deduce why those uncertainties are missing - they are not being carried through the computational process as is required for any scientific calculation and this omission is in fact intentional.

This is, quite literally, first-semester college physics (or chemistry, or any other "hard" science.) If you turn in an answer to the question "How long is that ruler?" that reads "12 inches" you get a zero.

The scientist says "12 inches +/- 0.1 inch", reflecting the limits of his measurement. The carrying through of uncertainties is essential to hard science, as only from that process can one compute the statistical bands of probability that the result reported is actually the result in the real world.

Uncertainties in measurement are additive - that is, if I measure two rulers and each is reported as "12 inches +/- 0.1 inch" then the total length of the two rulers is 24 inches +/- 0.2 inch - because it is possible that both errors were on the same side.

When one performs complex mathematical functions on input data uncertainties must also be carried through the mathematical functions. Without that we know nothing about the quality of the result - it is entirely possible, given data with enough noise in it, to produce what looks like a perfectly valid answer but have it be absolute trash and of no value at all.

The only way to know if that is possible is for all measurements to be reported with their uncertainties attached, and for all uncertainties to be carried through all computational processes.

It is quite clear, from the data sets I have looked at, that this is simply not being done. Instead computations are being "fudged" to fit data to expected previously claimed results and/or data sets simply discarded or modified that do not fit with either previously-published numbers or desired outcomes. Here's just one example from the comments in the files:

ARGH. Just went back to check on synthetic production. Apparently - I have no memory of this at all - we're not doing observed rain days! It's all synthetic from 1990 onwards. So I'm going to need conditionals in the update program to handle that. And separate gridding before 1989. And what TF happens to station counts?

OH F**K THIS. It's Sunday evening, I've worked all weekend, and just when I thought it was done I'm hitting yet another problem that's based on the hopeless state of our databases. There is no uniform data integrity, it's just a catalogue of issues that continues to grow as they're found.

This, by the way, is exactly the (intentional) "error" that was made by the "ratings agencies" and banks when it came to securitized debt that had "less than fully-verified income and assets" as a component. Uncertainties on the reported income and assets were never determined from experimental sampling and carried through the computational process. If they had been then the outcomes that we have actually seen would have been predicted within the range of possible outcomes for this debt. Instead, the issued securities were rated "AAA" because the agencies did not apply an uncertainty to each of the alleged reported numbers. That's what happens when you ignore the scientific method - you put garbage into a computation, you get garbage back out and it is impossible for an outside observer to detect that you did so because you refuse to give him the uncertainties associated with your claimed "measurements"!

Some of the guys working on this stuff appear to be genuinely trying to clean up other people's trash. But trash in produces trash out, and if you can't successfully defend the statistical integrity of the data going into your computational models you have nothing.

This leaves me with one final question: since we have emails now apparently documenting an attempt to "paper over" temperature decreases in recent years, and we also have claims of "lost" data, one wonders - was the data really lost, or was it intentionally deleted or withheld from other researchers who asked for it, as providing it would show that measurement uncertainties were not carried through computationally - and if they were, the claimed results in the so-called "peer reviewed" paper would be impossible to validate?

Without hard proof of whatever answer is propounded to that question we as the people of this planet must insist on a full stop for all purported "climate amelioration" efforts, as there is every possibility that the entirety of this so-called science in fact proves exactly nothing, except that the so-called "researchers" have added much CO2 to the atmosphere producing the electricity required to power their computers!

Extraordinary claims require extraordinary proof, and from the released set of data that proof is, quite simply, not present and accounted for.

Paul/Grayson Amendment Passes In Committee

nospam@example.com (Karl Denninger) — Fri, 20 Nov 2009 08:17:00 -0500

It's about damn time.

Yes, it's a first step - but an important first step, and it happened yesterday. Here's what Representative Grayson said at the time of debate:

Bloomberg wasted no time giving the "loyal opposition" to transparency all the digital ink they desired:

“It’s going to be seen as weakening the independence of monetary policy with consequent negative implications,” Frank told reporters after the vote. “People are going to be worried about the impact on the dollar, on the interest rate.”

Go listen to Mr. Grayson's statement again. Now tell me how The Fed's move to dilute our currency literally by half isn't going to "raise inflation expectations" and "have an impact on the dollar."

Never mind the impact that has already occurred. Is Barney Frank freaking blind? What say you to this, Mr. Frank, considering that all of this dollar damage has occurred since The Fed decided to start monetizing Treasury and MBS debt:

Exactly what sort of "damage" are you worried about Mr. Frank? Is not this enough for you? This damage - a roughly 20% devaluation since March - occurred since The Fed announced its "purchase" programs, specifically the purchase of MBS paper for which it appears to have absolutely no legal authority.

How does an audit - determining if The Fed intentionally overpaid, if the transactions were commercially reasonable, if they were designed to help some people and screw others, if The Fed is hiding losses and if the transactions performed even comport with the law - hurt the dollar and inflation expectations? Have you seen the price of GOLD lately Mr. Frank? The gold traders clearly believe The Fed has every intention of re-creating Weimar Germany!

Justified or not, those are the current "expectations" that secrecy has brought us.

How much worse than Weimar could expectations get Barney? Are you now splitting hairs between Weimar and Zimbabwe?

“Everybody would like to beat up on the Fed and call them the bad guys,” Watt said during debate on the measures. “So if we make this decision on a political basis, I know what the result will be.”

“This committee is called upon to transcend the politics of the moment and do what is in the interest of the country,” Watt said.

Really Mr. Watt?

Are you advocating the "best interest of the country" or are you advocating for the best interest of Bank of America, with their corporate headquarters in your district - a firm that has been the beneficiary of unprecedented Federal Reserve largess along with a healthy dose of arm-twisting?

Let's face the facts here. There are many people (myself included) who believe The Fed is "the bad guy." They have behaved as a dictator, they have in my opinion ignored black-letter law and they have intentionally debased the currency of this nation for the explicit benefit of their bankster buddies while screwing the middle class. The Fed's intentional bubble-blowing and now its "zero interest rate" policy has fostered a dollar carry trade now estimated to be over $500 billion - a carry trade that like all others through history will unwind in an uncontrolled and disastrous manner, trashing our economy and markets.

If all this was an "emergency response" that could not have been avoided I might even overlook it - after all, this has been a time of crisis.

But it was and is not.

No, The Fed is why we're in this mess in the first place! They have been responsible for every asset bubble of the last 20 years - intentionally so. Greenspan's foibles over the last 20 years, and now Bernanke's, have guaranteed a complete "hands off" approach to risk by financial institutions and regulators, with both being comfortable in the knowledge that the Fed both could and would simply print up more "funny money" and shower it from helicopters if anything went wrong.

Indeed, Bernanke was dubbed "Helicopter Ben" years ago for suggesting exactly that response to a monetary crisis - that is, he propounded an intent to intentionally destroy every saver's wealth, with the same effect on the victims - in this case the prudent in this nation - as if they were all subjected to armed robbery.

The Fed has intentionally ignored banks buying hundreds of billions of dollars worth of so-called "hedges" (CDS) from AIG, even though it knew or should have known AIG had no money to pay off on those instruments. It has permitted banks under its direct supervision to create and trade hundreds of trillions of dollars in notional value of derivatives ($605 trillion according to the BIS as of June 2009) traded with zero transparency over the counter - an amount so staggering that if these banks' net exposure is even one percent of their notional value it is sufficient to bankrupt every large banking institution in the country several times over and if it is just two percent the net exposure to loss approximates US GDP!

It looked the other way on purpose while the large banks and other financial institutions put together garbage securitizations chock full of liar loans and other exotic products that the producers knew would never be paid as agreed - securitizations they were so sure would default that they were shorting them while selling them to their "marks", er, "customers."

The Fed sat back and supported, rather than speaking against, Hank Paulson's entreaty to have the leverage limits removed from Investment Banks in 2004 - the very feature that was directly responsible for the failure of Bear Stearns and Lehman Brothers.

The Fed has not only allowed banks to circumvent leverage limits and reserve requirements through the abuse of off-balance-sheet vehicles and sweep accounts, it lobbied for and received from Congress the right to set the required reserve ratio for banks TO ZERO in the EESA/TARP legislation - a change buried in the law that received almost no attention (except by myself and a few other bloggers!)

When the crisis began The Fed responded by loosening leverage limits further through the issue of literally dozens of "23A" exemptions to Fed Regulations - including institutions that later failed. The damage done to the financial system was thus dramatically increased by allowing these firms to increase their exposure when they got in trouble rather than strictly limiting it as regulations allegedly required.

The Fed refused to crack down on predatory mortgage, credit card and consumer lending until literally forced by Congress, which passed the credit card bill over its objections. Until threatened with same, the very same Fed refused to intervene in the practice of automatically "opting in" customers for "overdraft protection" on ATM and point-of-sale charges, going so far as to permit banks to display ATM balances that included uncleared funds so as to encourage customers to generate overdraft charges by deception!

The public is well-justified in viewing The Fed as a "villain" because it is. Whether through active malfeasance or simple idiocy The Fed has been and is directly responsible for the impoverishment of millions of Americans who were punished for their imprudent borrowing while the imprudent lenders, who should have also gone bankrupt, were protected with money extracted by force from the very same people the lenders screwed!

Here's the list of Representatives that voted against stopping the daily violations of America. They voted to allow The Fed to have their way in secret, to debase the dollar and destroy Americans' purchasing power, to double the price of oil and essential energy products, to fund chicanery and even protect those who commit fraud. Worse, they violated their oath of office to uphold and defend The Constitution, which says on this matter:

Section 8. The Congress shall have power to.....

To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;

The Federal Reserve does not have the power of currency debasement (or the lack thereof) - Congress does, and with good reason. Congress is accountable to you, the people.

The Fed is, at present, accountable to nobody.

Each and every one of the Representatives listed below, by voting "NAY" today, has violated his or her oath of office, has committed an act of violence against The Constitution of The United States, is unfit for their office, and must resign:

NAY - Rep. Barney Frank, MA
NAY - Rep. Paul E. Kanjorski, PA
NAY - Rep. Maxine Waters, CA
NAY - Rep. Carolyn B. Maloney, NY
NAY - Rep. Luis V. Gutierrez, IL
NAY - Rep. Nydia M. Velázquez, NY
NAY - Rep. Melvin L. Watt, NC
NAY - Rep. Gary L. Ackerman, NY
NAY - Rep. Gregory W. Meeks, NY
NAY - Rep. Carolyn Maloney, NY
NAY - Rep. Dennis Moore, KS
NAY - Rep. Michael E. Capuano, MA
NAY - Rep. Joe Baca, CA
NAY - Rep. Stephen F. Lynch, MA
NAY - Rep. Brad Miller, NC
NAY - Rep. Al Green, TX
NAY - Rep. Emanuel Cleaver, MO
NAY - Rep. Melissa L. Bean, IL
NAY - Rep. Gwen Moore, WI
NAY - Rep. Keith Ellison, MN
NAY - Rep. Ron Klein, FL
NAY - Rep. Charles Wilson, OH
NAY - Rep. Joe Donnelly, IN
NAY - Rep. Bill Foster, IL
NAY - Rep. Andre Carson, IN
NAY - Rep. Mary Jo Kilroy, OH
NAY - Rep. Jim Himes, CT

Why don't you give 'em a call and tell 'em what you think of 'em.

I'm sure they'd love to hear from you - you can find their phone and fax numbers at http://www.house.gov.