Health, Myths, Fraud and the Crisis

The Great Theft

“We have tried spending money. We are spending more than we have ever spent before and it does not work… We have never made good on our promises…. I say after 8 years
of the Administration we have just as much unemployment as when we started, and an enormous debt to boot!”
Henry Morgenthau, Secretary of the Treasury during the New Deal, May 1939

I am presenting here a collection of articles to support my view that the US is controlled by a bunch of criminals who transfer as much wealth as possible from the public into their accounts in the Caribbean Islands and elsewhere, just before the US of A are defaulting on their gigantic debts.  Default is inevitable, it is only a matter of how and when. Since corrupt politicians  naturally prefer the default to occur in the next life, the most likely scenario is printing money by the FED and further devaluation of  the USD.  The Federal debt including the current account deficit is growing by almost 6 billion $ a day.  The problem is that every trading partner of the US is more or less doing the same to stay competitive.  The danger is that the devaluation process might get out of control and the FED does create hyperinflation. Fortunately, periods of hyperinflation never lasted very long. I doubt that other countries would follow this road to ruin to the very end and the US$ could crash.

BTW in Zimbabwe they suffered ca. 80% unemployment, while within 12 month the currency completely collapsed.

The Euro zone is not better off and I am sure that as soon as the markets refuse to buy more PIIGS debt, the ECB will be coerced into a bond purchase program comparable to “QE2”.

Very soon the FED will have securities of over $ 3 trillion nominal value on its balance sheet.

Usage of Federal Reserve Credit and Liquidity Facilities

In due time the ECB will follow suite. Greece has already breached its deficit target and a Greek default is likely only a matter of “when”, not “if” at this stage. To suggest that its economy is too small or that its debt obligations are tiny ignores the uncertainty that would prevail as credit default swaps have this nasty way of redistributing those liabilities around the world.

We have to consider that all this freshly printed money is used to bailout banks and banksters.

Irish taxpayers bailout German banks

Prof. Kotlikoff : “Let’s get real, the U.S. is bankrupt.”

Boston University economist Laurence Kotlikoff says U.S. government debt is not $13.5-trillion (U.S.), which is 60 per cent of current gross domestic product, as global investors and American taxpayers think, but rather 14-fold higher: $200-trillion – 840 per cent of current GDP. “The IMF is saying that, to close this fiscal gap [by taxation], would require an immediate and permanent doubling of our personal income taxes, our corporate taxes and all other federal taxes.” Finance & Development, September 2010 – A Hidden Fiscal Crisis

“Closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

“Data from the U.S. Congressional Budget Office (CBO) long-term alternative fiscal scenario confirm the IMF’s findings. Based on the CBO data, closing the fiscal gap requires an annual fiscal adjustment of roughly 12 percent of GDP. This is based on a 3 percent real discount rate. Using a 6 percent real discount rate lowers this figure to about 8 percent of GDP. The comparable figures for Greece are slightly lower than those for the United States, according to unpublished calculations by Stephan Moog, Christian Hagist, and Bernd Raffelheuschen of the University of Freiburg.”

… and the American household, on average, is also over $100,000 “poorer” in terms of net worth from the 2007 bubble high.

From The Huffington Post: Foreclosure fraud is the only thing standing between the banks and Armageddon.

…. The fraudulent CEOs looted with impunity, were left in power, and were granted their fondest wish when Congress, at the behest of the Chamber of Commerce, Chairman Bernanke, and the bankers’ trade associations, successfully extorted the professional Financial Accounting Standards Board (FASB) to turn the accounting rules into a farce. The FASB’s new rules allowed the banks (and the Fed, which has taken over a trillion dollars in toxic mortgages as wholly inadequate collateral) to refuse to recognize hundreds of billions of dollars of losses. This accounting scam produces enormous fictional “income” and “capital” at the banks. The fictional income produces real bonuses to the CEOs that make them even wealthier. The fictional bank capital allows the regulators to evade their statutory duties under the Prompt Corrective Action (PCA) law to close the insolvent and failing banks. …

Foreclose on the Foreclosure Fraudsters, Part 1: Put Bank of America in Receivership

Foreclosure Gate explained by Gonzalo Lira

Nine stories the press is underreporting — fraud, fraud and more fraud

The things I think are critical and badly underreported are: 

1. The astonishing amount of mortgage fraud (literally, millions of cases annually) and how it hyperinflated the bubble and led to the Great Recession.

2. The fact that these mortgage frauds were overwhelmingly due to consciously fraudulent lending practices in which the CEOs of seemingly legitimate entities used accounting tricks as their “weapon of choice” to report higher profits and get bigger bonuses. (George A. Akerlof and Paul R. Romer got it right in the title to their 1993 article: Looting: The Economic Underworld of Bankruptcy for Profit.)
3. The disgraceful lack of prosecutions which has resulted from regulators virtually ending the practice of making criminal referrals and the pathetic March 2007 “partnership” that the FBI entered into with the Mortgage Bankers Association (the trade association of the “perps”) that led the FBI and the Department of Justice to (implicitly) define out of existence fraud by the lenders (and to conceive of them as the “victim” — which they are, but only of their controlling officers).  Bush administration attorney general Michael Mukasey in June 2008 notoriously refused to create a national task force against mortgage fraud based on his claim that mortgage fraud was analogous to “white collar street crime.”
4. The “echo” epidemics of fraud set off by the primary epidemic of accounting “control fraud“. The fraud designed by CEOs in turn kicked off an epidemic of fraud among loan brokers and appraisers. Reporters should explore the concept of the Gresham’s-style dynamic in which bad ethics were a competitive advantage and drove good ethics out of the marketplace. 

5. The massive foreclosure fraud we are seeing now as another “echo” epidemic. To optimize their accounting control fraud, lenders gutted underwriting. That led to “fraud in the inducement” (vis a vis borrowers), endemic documentation problems, and an extraordinary numbers of defaults. The process required tens of thousands of real estate financing personnel to commit fraud on a daily basis as their core function.  Some of these people are unemployed, but many are in the industry and are presently engaged in loan servicing. Now that their job is to foreclose on properties, there is no reason to expect that they would suddenly become honest, and they haven’t.
6. The ongoing massive cover up of losses on bad assets, particularly by the “too big to fail” institutions, which I call “systemically dangerous institutions” (SDIs). Those institutions, along with Federal Reserve Board Chairman Ben Bernanke and Congress (at the behest of the Chamber of Commerce and with no opposition from the Obama administration) in April 2009 forced the Financial Accounting Standards Board (FASB) to change the rules so that the banks do not have to recognize their losses unless and until they sell the bad assets.  The implications of this cover up are large (and rarely reported). At the very least, it means that Treasury Secretary Timothy Geithner’s propaganda campaign about TARP saving the world at virtually no cost (perhaps even a “profit”) is nonsense — despite its success in influencing the Washington Post and Los Angeles Times. Consider:
A) The repayment of TARP funds does not mean the banks are healthy.  Their asset values are often grossly inflated, which means their net worth is grossly inflated. That means that the claims that we have increased net worth requirements (and that Basel III will further increase net worth requirements) are false.  Net worth requirements have meaning only if the accounting is honest
B) The repayment of TARP funds does mean that the banks are freed from any meaningful restraint on senior officer compensation.  Note that absent the accounting lies the banks would often be reporting losses (and failure to meet required capital requirements, or outright insolvency) and could not pay their senior officers bonuses and would be subject to mandatory closure under the Prompt Corrective Action (PCA) law.
C) No commercial entity would have ever signed the TARP deals on the terms that the U.S. drafted for itself.  The U.S. provided not only fresh money but an unlimited de facto guarantee (along with permitting phony accounting).  If the U.S. had negotiated competently it would have owned virtually all the shares of every TARP recipient (which, of course, was a political impossibility).
D) The accounting lies are stalling the recovery.  Markets cannot clear promptly when one creates an incentive to hold massively overvalued assets for years.
E)  The losses are still there, but the taxpayers are on the hook via Fannie and Freddie and the Fed (which has taken over a trillion dollars in toxic collateral at grossly inflated values).
7. The continued absence of effective regulation. It should be scandalous that Obama left in charge, or even promoted, the anti-regulators who permitted the Great Recession.  The (failed) anti-regulator of Fannie and Freddie, for example, remains FHFA’s acting director.  This is significantly insane as a matter of both economics and politics.  (The administration doesn’t even seem to realize the issue of integrity.)
8. The crises of state and local government and the lack of a rational basis for Republican and Blue Dog opposition to the proposed revenue sharing component of the stimulus bill.  The compounding insanity of the administration failing to fight for its concept and failing to make explicit how badly its removal would harm the recovery, employment, and vital government services. 

9. The insanity of accepting mass, long-term unemployment rather than having the government provide productive jobs for everyone willing to work (as the employer of last resort).
I have nothing to add.
Barry Ritholz : 

Judge: CFTC Corrupt, Wendy Gramm Criminal

Just when you think your ability to get any more disgusted or outraged is finally at its zenith — the point where it is unimaginable to think any worse of Wall Street or its related institutions — along comes a story that outrages you even more.

Futures magazine had an article last week about the retirement letter that Commodity Futures Trading Commission (CFTC) Administrative Law Judge George Painter sent announcing his retirement.

Commentary : The “Wendy Gramm” that he refers to as the criminal, is the same Wendy Gramm that was rigging things and greasing the skids at the CFTC when Enron was doing their stealing.

She also happens to be wife of Phil Gramm (wonder how she got the job?), former Republican Senator from Texas, (also good friends of fellow Texas hack John Mauldin) who authored legislation called Gramm/Leach/Blighley which undid Glass-Steegal, who also became a high paid banking industry “consultant” (aka scumbag lobbyist) who was knocking down mega-millions from BS, who was rumored to be instrumental in getting the SEC leverage caps lifted from WS banks (which had been 12:1) to become UNLIMITED, who became John McCain’s chief economic adviser, who famously denied that the US was going into recession in 2008 while chided Americans for having a “mental” recession when they were losing their jobs and their savings.

David DeGraw  “The Road Through 2012: Revolution or World War III.”

Nearly $1.7 trillion in securities backed by mortgages not guaranteed by the government were sold to investors during those 18 months, according to Inside Mortgage Finance. Wall Street banks sold much of that. At its peak, the amount of outstanding so-called non-agency mortgage securities reached $2.3 trillion in June 2007, according to data compiled by Bloomberg.

From American :

“Through those subpoenas, the agency could gain access to the loan files for the mortgages that backed the securities it bought and thus establish whether the mortgages were what the issuers represented them to be in securities contracts. According to the Journal, the difficulty of obtaining loan files has been a big obstacle for investors trying to force issuers to repurchase bonds.

“If the FHFA were to decide down the road to initiate litigation, it would still have to have the support of a percentage (usually 25 percent) of its fellow bondholders for each issue. But given what the agency and its Quinn lawyers will be able to see before bringing suit, it probably won’t be too hard to get other investors on the bandwagon.” (….pdf)

Investment banks large and small originated a lot of subprime garbage in the 2005-2007 era. This week PIMCO, Black Rock, Freddie Mac, the New York Fed, and Neuberger Berman Europe, Ltd., an investment manager to a managed-account client, came together and sued Countrywide for not putting back bad mortgages to its parent, Bank of America. This is the first of what will be a series of suits aimed at getting control of the portfolio and peeking into the mortgages. ( Text of lawsuit )

1979 Audio Clip Phil Donahue interviewing MiltonFriedman on GREED

FED Watch : St. Louis Fed President James Bullard has released a new research paper that argues that the Federal Open Market Committee’s extended period language may be increasing the probability of a Japanese-style deflationary outcome in the U.S. within the next several years. In the paper “Seven Faces of ‘The Peril’ he states :

” A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.”

I wonder whether he was actually talking about ” direct ” purchase of Treasury securities…

Souvereign Debt Crisis : David Rosenberg sums it up nicely on 29 May 2010: ….. So let’s get the story correct. We are still in the midst of a credit collapse where there is simply too much debt and debt service globally relative to worldwide income. The fact that we had a year-long respite does not alter this view. It was a respite that was induced by what is now an apparent unsustainable pace of bailout and fiscal stimulus in practically every country on the planet, not just the United States. What has happened was that governments bailed out the banks and massively stimulated the economy but because the revenue cupboard was bare, in part due to the savage effects of the global recession, public sector debt loads exploded at all levels of government, and to varying degrees, in every jurisdiction.
But someone had to buy these government bonds, and who else, but the very same banks that the governments rescued! And, they had a super-steep yield curve to generate profits from this bond-buying activity. Talk about a symbiotic relationship.
Not only that, but because of global bank capital rules, these financial institutions were not compelled to put any new capital into reserve against these government bonds because of their investment-grade status from the ratings agencies, when in fact, very few countries actually deserve the ratings they have when one assesses structural deficit ratios, debt/GDP ratios and interest costs/revenue ratios appropriately. Now, ironically, the governments, having saved the banks, only to then rely on the banks to fund their bloated deficits, are now in a situation where their banks need help again because of the eroding quality of the government debt on these bank balance sheets.

17.06.2010 BNP Paribas projects EURUSD below Parity

Despite this week’s rebound we have revised our EURUSD projections lower once  again. So far, we had expected EURUSD to hit parity in Q1 2011, followed by a gradual rebound of the EUR. Now we are convinced that EURUSD will have to remain weaker for longer and we expect it to drift to 0.97 in Q3 2011.

The actual Euro/USD ex rate at 31.07.2010 was 1,30,  they were forced to swap gold with the BIS to get out of a massice currency crunch. I wonder whether they have closed their money losing bet on the Euro …

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