Army Of Avarice Plunders America Into Calamity That Did Not Have To Happen

December 3, 2009

Every legit competitive sport has rules of conduct governing how the game is to be played, all conceived to maintain the fairness, honesty and integrity of the process.  Umpires, referees, linesmen, field judges and alike don’t hesitate to impose sanctions the moment they spot an infraction.  Break a rule, you’re penalized, benched, fined, out of the game, out of the sport, maybe even for good.  Congress and the media repeatedly tell us the American public would tolerate no less, even though the overwhelming majority of sports fans have nothing more than a mere rooting interest in the outcome; no “skin” as it were, in the game– except gamblers, who have all the more reason to want it to be on the level, unless they’ve already fixed it.

How bizarre then, that on Wall Street, repository of the hopes, dreams and what’s left of the hard earned cash and retirement savings of American investors, the most basic of rules enacted to protect the fairness, honesty and integrity of the process are routinely ignored and dishonored.

Like it’s predecessor, the Obama administration has thus far assiduously avoided examination, pursuit or punishment of those most responsible for plunging us and the rest of the world into a financial calamity that did not have to happen— and from which many believe we will never recover.

In fact, in the name of “avoiding” financial Armageddon, they’ve bent over backwards to provide cash and cover for, if not actively participate in, a thoroughly corrupt status quo that selectively eschews the rule of law to enable manipulation of a broad range of markets that hugely profit the most greedy and lawless among us– to the permanent detriment of everybody else.  That might not be the intention at the very top, but the scoreboard still reads: Wall Street 10, Public minus 10 plus interest, payable forever.

A seminal element of the enormous problems we face today is little known or understood by the general public and most investors: the government’s abject failure, via the Securities and Exchange Commission, the agency charged with protecting investors and the integrity of the markets, to enforce the most basic, rudimentary business axiom: that when a buyer pays, the seller must deliver that which was sold– (obliquely: he who sells what isn’t his’n, must make good or go to prison).

Congress passed the Securities Exchange Acts of 1933 and `34 to restore greatly diminished public confidence in our capital markets and mandated the SEC: “having due regard for the public interest, the protection of investors, and the safeguarding of securities, to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of transactions in securities.”

But incredibly, the SEC has done just the opposite by empowering the Wall Street owned and operated black box Depository Trust and Clearing Corporation to create a Three card Monte style, bait and switch, non-settlement, non-delivery of securities system that facilitates the unlimited sale of securities that the seller is never required by anybody to actually deliver, so that the transaction is never properly “settled.”  Known as naked short selling or failure to deliver, the scam has the same effect as counterfeiting because by definition and design, it dilutes the actual value of real shares by  overpowering the natural laws of supply and demand.

The government’s long toleration of this fraud at the very core of the system has enabled Wall Street banks, broker-dealers and hedge funds running all kinds of hot, dirty and foreign money along with their own, to reap huge, often tax free profits, by selling and never delivering unlimited quantities of phantom stock, options, bonds, and even US Treasuries, with total impunity.  Over the years, the practice has destroyed countless companies and crushed the hopes and dreams of millions of investors worldwide.  Yet the SEC, self-proclaimed as “the investors first line of defense against securities fraud” and “the pre-eminent gold standard of enforcement of securities laws,” has not brought a single enforcement action to stop it or punish the perpetrators.  Is it any wonder the bad guys have come to feel invulnerable?

Even more incredible (and more profitable for Wall Street insiders), the “Stock Borrow Program” of the Depository Trust’s National Securities Clearing Corporation (NSCC) subsidiary allows the exact same parcel of shares to be loaned and reloaned over and over again to create an ever-metastasizing cancer of freely tradable “security entitlements.”  These illusions of ownership overhang the market (just like naked shorted shares) artificially depressing share prices,  They are not backed by an equal number of duly authorized certificates, and lack the full bundle of ownership rights a buyer thinks they are getting with their purchase (ie. voting rights, having dividends taxed at preferential rates, etc.).   Most investors looking at their monthly statements have no idea they may not reflect actual shares bought, received and held in their account, but only IOUs from their trusty brokers, who consistently violate the duty of fair dealing owed their clients by failing to insist on delivery of shares they were paid a commission to purchase for them.  That’s because to keep the scam going, the SEC-approved system quietly provides incentives for them not to.

For at least the past dozen years, evidence of gross conflicts of interest, fraud and derelictions of duty and principle up and down the political/financial food chain, have been abundant, but ignored.  We are now living with the consequences.  Deregulation and non-enforcement of statutes, rules and regulations designed to provide a measure of integrity, fairness and stability to banking and the capital markets (ie. limits on leverage, usury laws, separation of commercial from investment banking), and basic investor protections like those mentioned above, have been systematically ditched. Honest accounting standards that used to prohibit cooking the books, offshore special purpose vehicles, and performing auditing services while simultaneously giving tax avoidance advice were simply bought off.  Time was, assets had to be marked to their actual fair market value (“mark to market”)  instead of numbers totally contrived to enable insolvent banks to illude otherwise.

Basic principles of insurance law which require an insurable interest (ownership or risk of commensurate loss) in that which you insure (especially regarding someone else’s life or property), were legislatively trashed to enable rapacious, ethically bereft speculator banks and hedge funds to erect a new and extremely lucrative swindle using a kind of debt insurance product they called credit default swaps (CDS); so named, because by their rightful name, bond insurance, they would violate every state’s insurance laws and be void as against public policy without ownership of the underlying bonds—which was certainly not in the predators game plan.  Parlaying never having to actually buy or own the underlying bonds along with the ability to broadly manipulate and malign their market price downward, made 40-1 leveraged CDS bets almost sure winners; outcomes dictated from the sidelines by greedy gamblers with little or no risk of commensurate loss.  And they’re still at it today, unregulated, and operating in almost total secrecy; a Quadrillion Dollar Derivatives Death-Star that may well some day implode all.

Getting away with so many fraud-based practices for so long has emboldened the wrongdoers to almost obsessively believe they can get away with anything.  Years of successfully bilking the public without fear of being caught or punished has imbued them with the kind of blinding arrogance that boldly shoves 3 pages at Congress and says with a straight face: Give us the dough ($700 billion)– ours to do with as we will, free from liability or accountability—or else. And now they’re being rewarded for it with the biggest profits and bonuses ever.  Why?

Why were all the safeguards so intentionally set in place in 1933 and 1934 abandoned?  Because those empowered to make and enforce our laws— sworn to be good stewards of the public interest— allowed themselves to be seduced and inducted to serve private interests, not the least of which their own, courtesy of campaign contributions, lobbyist largess, lucrative job prospects, and other co-optive emoluments known anywhere else in the world as bribes. When will we learn that it’s not about politics, ideology or principle?  It’s about the money!  But drop me a line the next time you hear any corporate or mainstream media pro daring to talk or write about it in those terms.  Somehow, as obvious and pernicious a role as it plays in our political process, discussing venal motive is off limits, part of the pretense that our elected officials actually represent the best interests of the people who voted for them (as distinguished from those who bankroll them).

The Wall Street banksters, of course, are not the only corrosive anti-social force at work here.  Other divisions of the corporate kleptocracy Army of Avarice that dictate our national policy and exploit our national wealth (big oil, insurance, agra, pharma, health care, telecom, and defense) also spend generously to keep feasting at the public trough.  It’s just that Wall Street’s misdeeds (even to the dismay of their co-predators) have brought us to the edge of a full-scale long term national/international disaster.

So one has to wonder whether the announcement of a new federal Financial Fraud Enforcement Task Force to combat financial crime is to be taken any more seriously than Peking University economics students took Treasury Secretary Geithner’s assurance that “Chinese assets [invested in US dollars] are very safe.”  Their raucous laughter came from knowing what more and more of the world now knows– that assets invested in US dollars are not so safe at all.

Of course, TBTB do not want any of that nonsense getting around.  They definitely don’t want people knowing the true magnitude of our financial problems, or that many savvy, independent economists, financial experts and market observers believe America is not only broke– but in great peril as a nation if we continue on the present course.  As they watch the steadily sinking value of the dollar, they foresee a time not too distant when real joblessness will be 30% or more; when the value of your house will drop another 30%, same as your pension or 401k; a time when governments are taking in far less than needed to cover Social Security, Medicare, Medicaid, education, transportation, police and yes, even national defense, requiring drastic cuts in all government services, federal and state, along with markedly increased taxes of all kinds, in a climate of rising interest rates, energy and commodity prices, and alas, civil unrest.  In order to pay our creditors $700 billion plus in annual interest on a $12 trillion and counting national debt, they see Americans being required to turn in a portion of what’s left of their retirement plans in exchange for long-term, low yield US government bonds.  In short, they see us being screwed blue, now and later, condemned to a steadily deteriorating standard of living that for most, will turn the American Dream into a nightmare.

Our leaders don’t want us to know that today’s crisis was the inevitable result of massive unchecked fraud by mortgage lenders, auditors, investment banks, ratings agencies, securitizers, regulators and insurance companies like AIG, which wrote credit default swaps both they and the purchasers knew there were far too insufficient reserves to cover—and that could only be paid off by a taxpayer funded bailout.

They don’t want us to know that the so-called stress tests the banks underwent last Fall were an exercise in wink, wink, nod-nod misrepresentation; or about the bloated valuations of hundreds of billions in toxic assets the privately owned Federal Reserve continues to unlawfully purchase from their too big to fail bankster buddies.  The banks were supposed to loan the proceeds out to ease the alleged credit impasse and help stimulate the economy.  Instead, what they haven’t used to artificially inflate the equities market or invest abroad, they’ve mostly redeposited with the FED, who then, fairy godmother-like, has gifted them back risk-free 3% interest in a round-trip razzle dazzle that seamlessly and shamelessly transfers even more taxpayer dollars into bankers’ bonus-bloated pockets.

They don’t want us to know that most big banks, if their assets were marked to current fair market value, and government handouts removed, would in fact, be insolvent; that Fannie, Freddie, the FDIC, and the all important Pension Benefit Guaranty Corporation (PBGC), insuring the pensions of some 34 million private sector workers and retirees, are also insolvent—as are most pension funds across America.

They don’t want the public to see the future too clearly because they fear the truth would be too much for us to handle, and cause panic they are unready to cope with, along with deep resentment at the government for allowing things to get so bad (let alone for their failing to curtail wrongdoing after it’s been brought to their attention).  So they distract, dissemble and offer promises of reform, saying: Hey, It’s okay. We dodged the bullet.  Things will be difficult, but in the end, we’ll come shining through because were America, and we can do anything!

Except pay the bill.  The fact of the matter, the undeniable, irrefutable arithmetic is that we are not going to be able to pay the bill as it comes due and keep the country reasonably free from soaring misery and discontent.

US Senator Byron Dorgan speaks of “modern-day bank robbers” deploying “anything goes” capitalism in a system they’ve rigged so they “always win” by wielding “unfair advantage over average consumers and taxpayers”— with “no accountability.”   Americans “watching selfishness prevail over the public interest” he says, is not only “injuring the economy” but “undermining the public’s trust in government.“ (where many of the Teabaggers are coming from).

For those who follow the subject closely, selfishness is PC for plain old stealing.  But then Wall Street has long considered Main Street “the dumb money.” theirs, almost by right, and certainly by tradition, for the taking.  Not surprisingly, they created a culture of corruption that’s proven itself bad to the bone.  What other industry has literally dozens of words and phrases characterizing unethical, illicit conduct?  (Backdating, Channel stuffing, Cherry picking, Churning, Cookie jar reserves, Cooking the books, Dummy accounts, Earnings management, Flipping, Fomenting, Free-riding, Front running, Insider trading, Late trading, Lulling, Market timing, Marking the close, Matching orders, Naked options, Naked short selling, Off balance sheet, Painting the tape, Ponzi scheme, Puffing, Pump and dump, Pyramid scheme, Round-tripping, Scalping, Selling away, Short and distort, Spinning, Spring loading, Tipping, Touting, Trading ahead, etc., etc., etc.)  God’s work, indeed.

Instead of facing reality now, telling the people the truth about what’s occurred, demanding accountability, enforcing the laws made to protect you and me, and taking steps to prevent wrongdoers from continuing to profit from their misdeeds (a classic principle of jurisprudence), our government, aided by a thoroughly captured, moribund mainstream media that’s forgotten how to speak truth to power, keeps trying to shove the dirt under the rug.  Extend and pretend.  They say one thing and do another, hide the truth, avoid transparency, and engage in even more lies and deceit.  Do they not understand that the false expectations they are perpetuating will only evoke greater outrage as people more and more realize they have been played for suckers and left to founder in despair?  And that none of this would have happened if the people in charge had upheld their oaths and acted to insure that “liberty and justice for all were more than just words.

Cataclysm- Unless Washington Stops The Crooks Now!

March 5, 2009

The below commentary by Karl Denninger, winner of Accuracy In Media’s 2009 Reed Irvine Award for Grassroots Journalism, is a harrowing prediction of the cataclysm that lies imminently ahead for America, unless our government takes immediate steps to stop Wall Street/ international gangsta banker speculator manipulator terrorists from further shorting, distorting, counterfeiting, defrauding and looting our country (and the rest of the world) to death.   

Denninger’s views on the underlying causes of our financial calamity (massive government-enabled-complicit lying, cheating and stealing) have long been unequivocally forewarned by numerous others, most notably at and but consistently deprecated, dismissed and/or altogether ignored by both government and our sadly misnomered “free” press and media.

As Denniger say: “it all goes back to Washington DC being unwilling  to lock up the crooks”– to which I’ll add, or to simply enforce the banking and securities laws and regulations already on the books, that were specifically enacted to prevent exactly the kind of criminal activities that have brought us today to the brink of utter disaster.

If the public only knew how grossly they have been systematically betrayed, misled, lied to and stolen from (and one day they surely will)–     the identities of all those who looked the other way (or worse) and helped bring about the destruction of their jobs, pensions and hopes for a decent future– what do you suppose their reaction would/will be?    

The truth is out there– and rather easy to discern for anyone interested.  Are  you?   


What’s Dead (Short Answer: All Of It)  3/5/09 by Karl Denninger


Just so you have a short list of what’s at stake if Washington DC doesn’t change policy here and now (which means before the collapse in equities comes, which could start as soon as today, if the indicators I watch have any validity at all.  For what its worth, those indicators are painting a picture of the Apocalypse that I simply can’t believe, and they’re showing it as an imminent event – like perhaps today imminent.)
  • All pension funds, private and public, are done.  If you are receiving one, you won’t be.  If you think you will in the future, you won’t be.  PBGC will fail as well.  Pension funds will be forced to start eating their “seed corn” within the next 12 months and once that begins there is no way to recover.
  • All annuities will be defaulted to the state insurance protection (if any) on them.  The state insurance funds will be bankrupted and unable to be replenished.  Essentially, all annuities are toast.  Expect zero, be ecstatic if you do better.  All insurance companies with material exposure to these obligations will go bankrupt, without exception.  Some of these firms are dangerously close to this happening right here and now; the rest will die within the next 6-12 months.  If you have other insured interests with these firms, be prepared to pay a LOT more with a new company that can’t earn anything off investments, and if you have a claim in process at the time it happens, it won’t get paid.  The probability of you getting “boned” on any transaction with an insurance company is extremely high – I rate this risk in excess of 90%.
  • The FDIC will be unable to cover bank failure obligations.  They will attempt to do more of what they’re doing now (raising insurance rates and doing special assessments) but will fail; the current path has no chance of success.  Congress will backstop them (because they must lest shotguns come out) with disastrous results.  In short, FDIC backstops will take precedence even over Social Security and Medicare.
  • Government debt costs will ramp.  This warning has already been issued and is being ignored by President Obama.    When (not if) it happens debt-based Federal Funding will disappear.  This leads to….
  • Tax receipts are cratering and will continue to.  I expect total tax receipts to fall to under $1 trillion within the next 12 months.  Combined with the impossibility of continued debt issue (rollover will only remain possible at the short duration Treasury has committed to over the last ten years if they cease new issue) a 66% cut in the Federal Budget will become necessary.  This will require a complete repudiation of Social Security, Medicare and Medicaid, a 50% cut in the military budget and a 50% across-the-board cut in all other federal programs.  That will likely get close.
  • Tax-deferred accounts will be seized to fund rollovers of Treasury debt at essentially zero coupon (interest).  If you have a 401k, or what’s left of it, or an IRA, consider it locked up in Treasuries; it’s not yours any more.  Count on this happening – it is essentially a certainty.
  • Any firm with debt outstanding is currently presumed dead as the street presumption is that they have lied in some way.  Expect at least 20% of the S&P 500 to fail within 12 months as a consequence of the complete and total lockup of all credit markets which The Fed will be unable to unlock or backstop.  This will in turn lead to….
  • The unemployed will have 5-10 million in direct layoffs added within the next 12 months.  Collateral damage (suppliers, customers, etc) will add at least another 5-10 million workers to that, perhaps double that many.  U-3 (official unemployment rate) will go beyond 15%, U-6 (broad form) will reach 30%. 
  • Civil unrest will break out before the end of the year.  The Military and Guard will be called up to try to stop it.  They won’t be able to.  Big cities are at risk of becoming a free-fire death zone.  If you live in one, figure out how you can get out and live somewhere else if you detect signs that yours is starting to go “feral”; witness New Orleans after Katrina for how fast, and how bad, it can get.

The good news is that this process will clear The Bezzle out of the system.

The bad news is that you won’t have a job, pension, annuity, Social Security, Medicare, Medicaid and, quite possibly, your life.

It really is that bleak folks, and it all goes back to Washington DC being unwilling to lock up the crooks, putting the market in the role it has always played – that of truth-finder, no matter how destructive that process is.

Only immediate action from Washington DC, taking the market’s place, can stop this, and as I get ready to hit “send” I see the market rolling over again, now down more than 3% and flashing “crash imminent” warnings.  You may be reading this too late for it to matter.

from: from:


Off the wires, no link.“DJ reports GE Capital credit default swaps worsen even as GE released a statement emphasizing its strong cash position. The CDS are most recently quoted at 17.5 points up front, from 16.5 points up front earlier today, according to Phoenix Partners Group. That means investors must pay $1.75 mln up front, plus a $500,000 annual fee, to protect $10 mln of GECC senior bonds against default for five years.”That means the first year cost is $1.75 + $500k, or $2.25 million.That’s 22.5% first year cost to insure $10 million against default!This means that the market is saying that the odds of GE going bankrupt within the next twelve months is greater than one in five, and that assumes zero recovery. 

If the bonds would recover more than 80% in the event of a default then it is implying more than a 100% risk of default, which is obviously impossible.

This is occurring despite GE’s CFO appearing this morning on CNBC making the case quite clearly that there is no risk of default under any materially possible scenario.  In other words, his assertion is that the odds of default are zero.

One of two things must be true:

  1. GE’s CFO is lying and must be indicted for doing so.
  2. This so-called “market segment” (CDS) has become so ridiculously overlevered, unsupervised and able to cause failures that it is now within days or even hours of CAUSING GE to fail – not due to GE’s own internal problems, but due to positive feedback that the CDS market is capable of and is generating on the initiative and as a consequence of the action of participants in that market.

Either way a major change needs to occur right here and now, lest we find ourselves with no pensions, no Social Security, no Medicare, no annuities and no government.



The Underlying Fraud In Banking by Karl Denninger

Ok tinfoilers, this is not what you think it is; I’m sure many of you came here and started to read because you thought I was going to rant about fractional reserves or the lack of “sound money.”

Sorry, no dice.

No, I’m going to talk about the inherent fraud over the last five or so years in the housing (and other lending) markets, and it is NOT where you think it is.

It is, in fact, in both the accounting treatment and assumptions that were in fact made by both borrowers and lenders – simply put, they are nowhere near the same.

Let’s start with a proposition: A “mortgage” is a loan made against real property with the original intent that the borrower will pay as agreed under an amortization schedule to maturity, interrupted only by significant life events such as relocation, unemployment leading to bankruptcy, divorce or serious medical illness.

With that assumption we can model the performance of a mortgage under all economic conditions, since we can draw upon history to get a fairly good idea of what unemployment rates might be, we know what relocation rates tend to look like, serious uninsured medical illnesses have an actuarial component and the like.

With that modeling in the bag we can then configure up a securitized structure that provides whatever level of protection is desired against these events, and from there yields will flow (more for the riskier sides, of course.)

Now let’s add, however, what was actually sold to people during the last four or five years.

The premise that the “homeowner” was sold had nothing to do with the above concepts.  Instead, that “homeowner” was sold the following by both bank and non-bank mortgage companies:

  1. You do not need to have “skin” in the game; we will loan you 100% of the “current market value” of the house.
  2. You are not presumed to be interested in paying this original note to maturity.  In fact, we fully expect you to come back here in two years or so and refinance the note – at or before when the payments reset.
  3. We know (2) will happen because we’re giving you a “teaser rate” and/or we have negative amortization features in the loan which are subject to caps; both of these events, when (not if) they expire, will cause an immediate and dramatic rise in your required payments.
  4. To make (3) worse, we’re qualifying you on the initial payment amount, not the fully-amortized reset/recast schedule.
  5. And to make (4) even worse, we’re not verifying that you can even make the initial payment; we’re going to take your word for it.

Now dice and slice up loans made under those five principles and try to model the outcome.

Good luck.

See a loan made to someone on the premise that it will be refinanced and for which there is no equity cushion provided by a significant down payment is entirely Dependant on one thing – the market price of the underlying asset must continually increase at a rate that exceeds the negative amortization, if any, plus all costs of the refinance.

The problem isn’t so much the making of these loans – it is the misrepresentation of what they are.  Balloon mortgages, which in fact is what these constitute, have been a part of the lending landscape forever.  They were, in fact, what blew up in the 1930s – they were the “preferred” mortgage in the “Roaring 20s”.

But everyone knows that those loans blew up in the 1930s, and they were prevalent in the Roaring 20s.  That is, anyone with a brain.  Thus, you couldn’t have sold mortgage-backed securities packaged up out of balloon notes without a significant extra yield premium.

So most lenders quite simply lied.

But not all.

Look at Berkshire’s 2008 Letter (just issued, recapping the 2008 performance of Berkshire Hathaway).  There is a very interesting piece in there about the financing performance of Clayton Homes, a Berkshire company that makes “manufactured housing”:

Clayton’s 198,888 borrowers, however, have continued to pay normally throughout the housing crash, handing us no unexpected losses. This is not because these borrowers are unusually creditworthy, a point proved by FICO scores (a standard measure of credit risk). Their median FICO score is 644, compared to a national median of 723, and about 35% are below 620, the segment usually designated “sub-prime.” Many disastrous pools of mortgages on conventional homes are populated by borrowers with far better credit, as measured by FICO scores.

Yet at yearend, our delinquency rate on loans we have originated was 3.6%, up only modestly from 2.9% in 2006 and 2.9% in 2004. (In addition to our originated loans, we’ve also bought bulk portfolios of various types from other financial institutions.) Clayton’s foreclosures during 2008 were 3.0% of originated loans compared to 3.8% in 2006 and 5.3% in 2004.


Quite simple, really.  Even though Clayton’s customers have crappy credit on average, they were forced to put down a meaningful amount of money from savings, and cannot borrow it somewhere else.  They bought with an amortized payment, not one that will turn into a hydra in a couple of years and choke you – just before consuming you whole.  They did not assume they could refinance and Clayton refused to lend to people on that basis; rather, they assumed that they would pay as agreed, from start to finish, based on current income, not based on some pie-in-the-sky future wish.

As a consequence Clayton’s securitized mortgages have performed reasonably well.  The reason is simple – the company actually promised to its securitized buyers the same thing they sold to its borrowers and was able to model the actual credit risk involved from “life events” – statistical models that actually are valid.

It appears that The Huffington Post has picked up on some of “The Bezzle”; in this article from the 23rd which I had previously missed:

“Whatever happened to the law (Title 12, Sec. 1831o) mandating that banking regulators take “prompt corrective action” to resolve any troubled bank? The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them). The law does not provide that the taxpayers are to bail out troubled banks. Treasury Secretary Paulson and other senior Bush financial regulators flouted the law. (The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) are both bureaus within Treasury.) The Bush administration wanted to cover up the depth of the financial crisis that its policies had caused.”

Yep, but it is not policies that were in play here, it was willful inaction that then “compelled” the disaster-capitalism nonsense.

Let’s look at what’s in Title 12 Ch16-Sec1831:

“(3) Critical capital

(A) Agency to specify level
(i) Leverage limit Each appropriate Federal banking agency shall, by regulation, in consultation with the Corporation, specify the ratio of tangible equity to total assets at which an insured depository institution is critically undercapitalized.
(ii) Other relevant capital measures The agency may, by regulation, specify for 1 or more other relevant capital measures, the level at which an insured depository institution is critically undercapitalized.
(B) Leverage limit range
The level specified under subparagraph (A)(i) shall require tangible equity in an amount—
(i) not less than 2 percent of total assets; and
(ii) except as provided in clause (i), not more than 65 percent of the required minimum level of capital under the leverage limit.
(C) FDIC’s concurrence required
The appropriate Federal banking agency shall not, without the concurrence of the Corporation, specify a level under subparagraph (A)(i) lower than that specified by the Corporation for State nonmember insured banks.

And later on in the same law….

(1) Capital distributions restricted
(A) In general
An insured depository institution shall make no capital distribution if, after making the distribution, the institution would be undercapitalized.

(2) Management fees restricted
An insured depository institution shall pay no management fee to any person having control of that institution if, after making the payment, the institution would be undercapitalized.

Got it?

This is really pretty simple – there must be a leverage limit and the OTS, OCC and FDIC must enforce that limit to insure that banks do not fall into being undercapitalized.

Further, no bank may make a capital distribution (pay a dividend) or pay a management bonus if before or after doing so it would be undercapitalized.

Where has this supervision been?

Note that Geithner and President Obama have continued this nonsense, and Geithner is one of the people personally culpable for ignoring the law in the first place.

What will stop this blatant lawlessness?

Certainly not Congress.  Ben Bernanke was before Congress this last week and guess what: Not one question about the law compelling him (and the other regulators) to act before banks become insolvent.

Now President Obama has released his budget which provides for even more bailouts – a potential $750 billion “second round.” 

Yet the law under which we are supposed to operate in this country makes clear that this sort of policy decision is directly contrary to statute; instead, the law by its black letter requires banks to be taken into receivership before they become insolvent.

And oh by the way, the regulators are not allowed (by that law) to ignore off-balance sheet obligations either.  Uh uh – they are required to take action before the insolvency occurs irrespective of how – and they did not.

In fact the banks have self-declared their non-compliance with that statute as noted in The Ticker right here (“Our Tier 1 Ratio Is Strong!”) once again last night!

This “self-declaration of insolvency” in fact goes back to Washington Mutual’s original 1Q 2007 report that set me off and started me writing Tickers back in April of 2007!

We are in fact talking about what amounts to nearly two years of this nonsense to date, and through the fall of 07 into the early part of 08 the MLEC garbage (and friends after it went down in flames) makes clear that regulators, including Treasury and The Fed knew exactly what the state of these firms was and willfully ignored it.

There is not a policy “decision” allowed here guys and dolls – this is black letter statutory language that compels a certain set of actions – statutory language put in place after the last time we were here (the S&L crisis) that was intended to prevent the damage ($150 billion) that was done to our nation the last time!

This time around we’re at $750 billion with another $750 in “placeholders” in the budget – that is, fully ten times as much damage, and yet the black letter law of the land says that this approach is directly contrary to the statute.

This goes back to my speech Thursday night – the underlying reason we have seen a market collapse is not due to economic recession.

Recessions are not “abnormal”; they come about due to the human condition – people are both too ebullient and too fearful.  “Animal spirits” include both reaching for a brass ring and cowering in the corner, contrary to the Wall Street myth that such is only a “positive” thing.

No, we have seen this collapse because “The Bezzle” has reached into literally every corner of our financial system and government and nobody has been held to account.

When the S&L crisis happened only a few people went to jail, even though thousands committed felonies.  When the Internet Bubble blew up only a few went to jail even though it is trivially easy to identify thousands who flatly lied about growth metrics – and that’s just one place they were lying in their annual and quarterly reports. 

As we have continued to tolerate “The Bezzle” it has become clear to people in all financial areas that they can lie and get away with it.  That the odds of being caught, say much less prosecuted, are so trivial that it’s definitely worth the risk.

Would you risk going to a cushy federal prison for five years if you could make $100 million dollars and the odds of getting caught were 1 in 10,000? How about if the odds are the same but the profit is only $100,000?  In both cases many people would and did; home “buyers” overstating incomes are the second case, and sellers of money who intentionally misrepresented what they were selling (up and down the line) fall into the first.  Indeed, the FBI’s own statements on this matter is that if you were engaged in “fraud for housing” (that is, you robbed a bank in order to live in a house) they aren’t interested in coming after you.  It is only the serial fraudsters who were engaged in fraud for pure monetary profit across many transactions that they’re arresting – and then, only if you’re the borrower.

Now contrast that with robbing a bank the “old fashioned” way (with a gun.)  You might get away with $100,000.  But the odds of getting caught are much higher than 1 in 10,000 – in fact, they’re probably at least 1 in 4, and maybe worse.  If you do get caught you’re going to do 20 years in a nasty place where prison rape is considered a sport and what’s worse, if you’re in a state like Florida, you will get a mandatory, no-early-release extra 10 on your sentence if a firearm is involved.

While people do still rob banks with a gun there are far more people who “robbed the bank” using a pen and piece of paper instead during the last five years – some of them “home buyers”, some of them mortgage brokers and some of them bankers both on and off Wall Street.

Now let’s mark this disconnect a bit more.

There is absolutely a price on human life.  Doubt that?  Go visit a hospital.  People with no hope can and do obtain a million dollars or more of free (to them) medical care.  OJ Simpson was sued after he won acquittal for the murder of his ex-wife and ordered to pay money damages, establishing that there is a value on human life, and we can and do reduce that value to dollars in our justice system.

So why is it that we refuse to apply the same standard when it comes to sentences?  Nicole Brown Simpson’s children, Sydney and Justin, were awarded $12.5 million dollars after OJ Simpson lost his civil case.

So we have a “reasonable boundary” for a human life – $12.5 million dollars.  Other verdicts have found larger and smaller amounts, but this makes a nice, public and well-documented figure.

Does this not provide all the evidence you need that should someone manage to steal (in aggregate) through fraud more than $12.5 million dollars that they should get, at minimum, “20 to life” in prison?  That is, a sentence equal to the least stringent for homicide?

How many of these fraudsters would have committed these offenses, and how many would in the future if this was the penalty?  Commit a fraud worth $12.5 million or more, bye-bye.  Oh, and we’ll take the $12.5 million from you (since you stole it) to pay for your imprisonment too!

This – up and down the line – from the intentional lack of prosecution to willful refusal to follow the law to utter stupidity in criminal sanction – is the essence of “The Bezzle” and it is why capital has fled.

It also, however, points out an essential truth about any future recovery in our economy and banking system – it won’t happen until “The Bezzle” is muzzled to a significant degree.

It is too much to expect that we will ever get rid of “The Bezzle” entirely.  That’s simply not going to happen – there will always be cheats, liars and frauds.

However, until those who commit such crimes and blatantly ignore the black letter of the law are held to account on a consistent basis, thereby destroying the belief that this sort of criminal activity is “free of material risk”, there can be no meaningful recovery of economy progress.

We can either demand and obtain this change in policy and attitude now as Americans, or the market will do it for us by continuing to tank and forcing these firms and examples into the open where they are destroyed.  The unfortunate reality, however, is that the latter course – refusing to face this and allowing the inevitable market implosion to do that which we refuse to through law enforcement – will also take down tens of thousands of sound companies who also see their capital base removed while their obligations remain.

Bluntly put – Congress and The Administration must, right here and now, compel these regulators to follow the law or remove them from their positions of power. 

This had to be done two years ago and it still needs to be done. 

There is no way to stop the bleeding in our capital markets – both credit and equity – until this occurs.  It will happen; we are only choosing the means and where we want to confine the risk to.

If we continue down the path we are on now we are risking the meltdown of the United States Federal GovernmentFed President Plosser said the following:

An agreement with the Treasury to switch U.S. government bonds for these less-liquid non-traditional assets on the Fed’s balance sheet would help the central bank focus on conducting traditional monetary policy.

“With Treasuries back on the balance sheet, the Fed will be able to drain reserves in a timely fashion with minimal concerns about disrupting particular credit allocations or the pressures from special interests,” said Plosser, who is not a voting member on the Fed’s policy-setting committee this year.

You got that?  The Fed knows that it is holding a bunch of crap and is threatened by the “value” (or lack thereof.)  If they shove that off onto Treasury then the detonation of over $1 trillion in bad debt will occur on the government’s balance sheet, which will (1) cause a dramatic move upward in Treasury interest rates, (2) translate into all other forms of debt and (3) result in exactly the same collapse that happened in the 1930s – but it will be far worse in degree, since we are far more in debt now than then.

As things stand today I have no confidence whatsoever that The Obama Administration has any intention to act according to law any more than George Bush’s Administration did.

As a consequence until and unless the government’s position and actions change my “base case” economic forecast must remain bearish and over time continue to grow more bearish; without the 2/3rds of all capital that is private in our economy, even with supplanting of that capital from the government (to the extent it is able) I believe we are looking at a potential 30% contraction in GDP from top to bottom and unemployment reaching north of 20% on U-6 (broad form), with the very real possibility of a 20% headline number.

We are headed for an Economic Depression worse than the 1930s at Warp Speed folks, and it is not going to happen because of “fundamentals” or even because “the credit markets froze up.”

No, it is going to happen because both the Bush and Obama administrations are intentionally, with malice aforethought, ignoring the black-letter law of the land for the purpose of covering up their own malfeasance and misfeasance, and neither political party or the American People will get off their fat asses and demand that it be stopped.

Your job, prosperity and wealth are on the line America – right here, right now.

This is not some abstract failure in the market – this is a series of actions that have been taken with the full intention of screwing you, by both Democrats and Republicans, so that a handful of robber barons masquerading as capitalists do not have to face the music for their acts.

How bad can it get?  Have a look at these charts folks over at Calulated Risk.  They’re sobering – and if the lawlessness does not stop we are just getting started.


The Growing Gap Between Reality and the Media


February 26th, 2009 by Mark Mitchell

Following is a very partial list of people who have said abusive short selling must be stopped.

Then Secretary of Treasury Paulson

Former Chairman of SEC Harvey Pitt

Then SEC Chair Christopher Cox

Then Senator Hillary Clinton

Presidential Candidate John McCain

George Soros

The members of the American Chamber of Commerce

Charlie Munger, Vice Chairman Berkshire Hathaway

John Mack, CEO Morgan Stanley

Dick Fuld, then CEO Lehman Brothers

Members of the North American Securities Administrators Association

Robert Shapiro, former Undersecretary of Commerce

Harvey McGrath, former chairman of Man Group, world’s biggest listed hedge fund


Following is a partial list of mainstream media outlets that have yet to deliver a single comprehensive story aboutabusive short selling:

The Wall Street Journal

The New York Times

The Columbia Journalism Review

BusinessWeek Magazine

The Chicago Tribune

The Los Angeles Times

Fortune Magazine

The Washington Post

CNBC Television

CNN Television


This week, Eddie Lampert, the hedge fund manager and Chairman of Sears, became the latest to speak out against the problem. Here’s what he had to say…

“…the level of “naked” short selling of our shares was significant. The activity can be measured by the number of shares sold short as disclosed twice monthly by the NYSE and Nasdaq as well as by the reported number of instances of failure to deliver securities by short sellers to purchasers of Sears Holdings stock….

…the SEC has taken further actions to enforce “naked” short selling rules that had been in place, but not enforced, for a significant period of time. This is an important protection for shareholders and for property rights. The sale of property (shares in a corporation) that a seller does not own and can’t deliver (naked short selling) is an affront to property owners, and a destroyer of confidence and trust. Much of the commentary around short selling ignores this simple fact.

While I understand (and often appreciate) the urge to critically evaluate possible regulation, it is interesting that there has been protest by those on the short side with regard to some of the rules that have been suggested. For example, the reinstatement of the uptick rule, which would require any short sale to occur at or above the last sale price on the stock exchange. Such a rule had been in place for over 70 years (to prevent “bear raids” in which short sellers aggressively sold stock at ever lower levels, undermining confidence) until it was repealed in 2007. It has been suggested that, because stocks are now traded in decimals rather than in 1/8 point increments, such a rule is obsolete or unnecessarily difficult to implement. However, what the opponents fail to point out is that companies who repurchase their own shares are advised to adhere to a rule that forbids those companies from initiating a plus tick when repurchasing shares. Why policymakers would favor an asymmetric application of a rule like this in favor of short sales and against company repurchases is a mystery.

Similarly, the SEC has required short sales of securities to be reported periodically beginning in the second half of 2008. Short sellers have prevailed on the SEC to allow this disclosure to be done privately on the basis of a claimed need to protect their investment strategies. While I respect this privacy right, investors who purchase and own stocks, however, are afforded no such privacy in their holdings. In fact, holders of securities are required to publicly file their holdings on a quarterly basis. Such public disclosures have been known to attract the interest of short sellers when institutional investors and hedge funds have found themselves under performance or redemption pressures. Again, it is a mystery as to why those who are owners of publicly traded companies are required to disclose their holdings while those who sell short those very same securities are permitted to keep their positions private…”

* * * * * * * *






Worldwide Economic Disaster Imminent Unless US Stops CDS Speculators Goldman, Morgan, and Others

January 28, 2009
A very important, well reasoned piece by The Institutional Risk Analyst at:  

suggests worldwide economic/financial disaster is imminent unless and until the US government cuts off CDS speculators like Goldman, Morgan, and others who have tens of trillions in monstrously leveraged negative CDS bets– but no underlying risk interest, so can’t deliver a bond.  The piece doesn’t quite say so, but the monstrous leverage is certainly tantamount to abusive naked shorting of the underlying debt/business– not to mention the self-perpetuating, self-fulfilling power it wields.

It makes several references to insurance industry standards– and argues for CDS protection to be available only to those with an underlying [sic. insurable] interest, (evidenced by being able to deliver the bond, the default of which, you were supposedly hedging with the CDS.)   

The piece refers to a powerful “CDS Mafia”– but refrains from mentioning that these gumbas ran roughshod over long-standing insurance laws by prestidigitating a market innovation that’s allowed them to walk away with billions in profits and destruction wrought–  but which would clearly be against public policy and therefore unenforceable, if called bond “insurance”– instead of a Credit Default Swap. 

a few excerpts:
“commercial banks, insurance companies and commercial companies, [are] all…targets for the CDS Mafia and the unlimited leverage they use as weapons against us all to generate speculative gains.”

 “The Fed and Treasury must immediately force the CDS market onto exchanges and go back to the pre-Delphi bankruptcy model to require physical delivery of the underlying bonds in order for purchasers of protection to collect their insurance payments.”

It’s about time this critical reality got some public “leverage.”