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5 "Tells" that the Stock Markets Are About to Reverse

Subprime Mortgage Scam Lands US Tax Payer $739 Billion Bailout Bill

Stock-Markets / Credit Crisis 2008 Feb 26, 2008 - 12:54 AM GMT

By: Mike_Whitney

Stock-Markets Best Financial Markets Analysis ArticleThe SEC probe of the securitization of subprime mortgages into collateralized debt obligations (CDOs), announced last summer, has yielded no official enforcement cases....SEC chief, Christopher Cox, along with other top-level administration officials, has cautioned against quick-fire regulatory or enforcement responses to the worsening credit crisis, noting that the market instead should be left to work it out.” Nicholas Rummel, “SEC Drift Said to Prevent Action on Credit Crunch”, Financial Week


That's right. The biggest economic scandal in the last half century, the subprime fiasco, and the “business friendly” stooges at the SEC are still sitting on their hands reciting passages from Milton Friedman instead of dragging crooked banksters off to the hoosegow in leg-irons. Go figure? SEC Chairman, Christopher Cox, has come under withering attack from Senator Christopher Dodd who chairs the Banking Committee and who accuses the SEC of being “asleep at the switch”.

Dodd said the SEC “needs to help restore investor confidence in the markets by more vigorous enforcement, by more comprehensive regulation of credit rating agencies, and increased accountability and transparency of publicly traded companies.” (Financial Week)

“Accountability...transparency” in Bushworld? Nice try, Dodd, but its a losing cause. The Bush administration is not just philosophically opposed to oversight; they've handed over the entire financial system to a cabal of banking scalawags who've turned it into their personal fiefdom. This same cast of fraudsters engineered the subprime swindle and ripped off trillions of dollars from investors around the world. And, don't kid yourself; Bush is proud of the damage he's done by taking a wrecking ball the SEC. For him, it's like a good day at the races. He has no intention of reigning in the crooks or restoring the publics' confidence.

New York Governor Elliot Spitzer has joined Dodd in criticizing the so-called “regulatory agencies” for failing to determine whether any securities laws were broken. In a Washington Post article, Spitzer blasted the SEC's inaction saying that the Bush Administration would be judged by history as a “willing accomplice” to the subprime collapse.

But Spitzer and Dodd are wasting their breath. The culture of corruption from 7 years of Bush misrule has spread like Kudzu to every jag and eddy in Washington. If we were really a nation of laws rather than nincompoops, federal agents would be busy rounding up every investment banker and hedge fund sharpie on Wall Street so they could get to the bottom of the subprime boondoggle. Regulators still haven't even decided whether it was a case of overzealous marketing of dodgy securities or downright fraud. That should be "job one" for the SEC.

The reason all this talk about “regulation” is so important now is that the same banking giants who cooked up the subprime scam have just presented the Bush administration with a $739 billion bailout package they plan to unload on the American taxpayer. According to Sunday's New York Times:

“As losses from bad mortgages and mortgage-backed securities climb past $200 billion, talk among banking executives for an epic government rescue plan is suddenly coming into fashion. A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government — now that it is in trouble. The proposal warns that up to $739 billion in mortgages are at “moderate to high risk” of defaulting over the next five years and that millions of families could lose their homes. To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.”

What Bank of America is proposing is that the US government guarantee the shoddy mortgages that the banks issued to “unemployed shoe-clerks with bad credit” so they could peddle them as Triple A “securities” to unsuspecting investors. Now that subprimes are blowing up at a record pace, the banks need a government bailout before their balance sheets are reduced to cinders.

But what does the poor taxpayer get out of the deal besides soaring inflation, bulging fiscal deficits, and the “warm and fuzzy” feeling that he's helped some tasseled-shoed charlatan keep his  larder in the Hamptons full of Dom Perignon and crab cakes?

The reason we're in this mess is because financial innovation and deregulation have driven the markets off a cliff. And that started with the bankers. Financial innovation has nothing to do with the efficient deployment of capital for productive activity. No way. In fact, it is the exact opposite. The financial innovations of the last decade have primarily focused on transforming the liabilities of dubious mortgage applicants into complex debt-instruments which are enhanced with massive amounts of leverage and exotically-named derivatives. The investments banks and brokerage houses fought hard to establish the present system which they call “structured finance”.

They spent over $100,000 million lobbying congress to remove the legislative firewall which kept investment and commercial banks separate. Those laws, particularly Glass Steagall, made sure that the public was protected from the Ponzi-scams which proliferated just prior to the Great Depression. But, now, 30 years later, the same scams are back with a vengeance. The cult of free market orthodoxy and Reagan-era flim-flam has put us on track for another stock market crash ala 1929. That's why Bank of America and their buddies in the industry have turned to the administration for a way out. Their flagging balance sheets can't take another year of rising foreclosures and dwindling assets. They need Big Brother to cover their debts and rebuild their capital-base. Otherwise its curtains.    

Other versions of the so-called “Rescue Bill” have been floating around Washington for the last three weeks, but they all follow the same basic guidelines. Under one of the plans, 600,000 subprime mortgage-holders, many of whom are already delinquent on their payments or in some stage of foreclosure, would be able to refinance their loans under the Federal Housing Authority (FHA) which would federally guarantee the mortgage in the event of default.

Great idea, eh? So, now the taxpayer is going to have to pay for the people who lied on their applications (and who really can't afford the homes they're in) so the banks can recoup their losses. This plan doesn't make sense.  

Why on earth would the taxpayer want to buy 600,000 subprime mortgages at “current value” when housing prices are falling, inventory is soaring, sales are sagging, foreclosures are at historic highs, and millions of homeowners are expected to simply “walkaway” from their loans?

No thanks. Let the banks go under. They created this mess. Besides, all we're doing is rewarding the people who deliberately destroyed the system. They can fend for themselves. The first order of business should be to restore public confidence; not bail out crooks. “Credibility” matters in a market-based system; especially one that relies so heavily on the hocus-pocus of fractional banking. When trust is lost; the system crashes. End of story. That means it's time to clean house at the SEC. Give everyone a pink slip, two weeks pay and send them home.  Then scour the countryside like Diogenes for a few honest men.  

Second, people in positions of authority have to be held accountable for their crimes. Millions of investors have lost their life savings or retirement in the subprime/securitzation debacle. Someone's got to go to jail. Apologies just don't cut it.  So far, not one CEO has been led off to the Paddy-wagon in handcuffs. It has all been swept under the rug by an administration that has filled every regulatory position in Washington with industry lobbyists, business-friendly tycoons and corporate “yes-men”. The results are just what any sane person would expect; disaster. The financial markets are completely unsupervised; the SEC is just a subsidiary of the multi-national corporations. It has no teeth. If it was really independent; then Cox and his goons would be storming the investment banks with tasers and truncheons. Instead, he spends most his time explaining why he won't enforce the laws and prosecute cases.

And there should be no doubt about who is really responsible for the subprime woes. The investment banks employ some of the country's “best and brightest”. These are sharp guys who have studied at some of our finest colleges and universities. Does anyone really believe that a Harvard MBA---who understands all the fine-points of high-finance--really thought that ignoring all of the standard criteria for prudent lending, and issuing trillions of dollars in loans to applicants who had no job, no collateral, bad credit, and were unable to come up with a few thousand dollars for a down-payment---was a great idea?

Of course not. It was a swindle from the get-go. The reason the banks looked the other way and issued these shaky mortgages was because they didn't really think there was any risk involved. After all, it wasn't their money. They simply repackaged the loans into bonds and sold them off to someone else. No worries. But, does that make them any less guilty?

Consider this: If the banks didn't know that the mortgages were bogus, than why are all the various types of mortgages; including Alt-As, piggybacks, home equity loans, ARMs, prime, and "interest only"---defaulting at the same time? It is not just subprime mortgages that are failing; it runs the gamut.

The reason is obvious; it's because the banks were making windfall profits and didn't want to rock the boat. They knew they were peddling garbage. How could they not know?  The banker's primary task in life is to figure out who can pay him back "with interest".  And they're pretty good at it, too. So why did they start handing out hundreds of billions of dollars to anyone who could fog a mirror? In fact, it got so out-of-hand that (according to The New York State Commission of Investigation) "a homeless woman earning $10 an hour was recently approved for a $470,000 adjustable rate mortgage". In a similar incident, two Hispanic migrant workers in Bakersfield, California, who made roughly $45,000 in combined income, were approved for a mortgage on a home valued at $725,000.

These aren't innocent mistakes. They're part of a broader pattern to fudge the paperwork so unqualified "high-risk" loan applicants would look like J. Paul Getty and secure a mortgage. That way, the banks could continue to rake in lavish origination fees and maximize their profits. 

But then the plan hit a rough patch and the Gravy-train tipped over into the ditch. When the credit storm hit the markets in August, the mortgage securitization went into deep freeze and the easy money from Wall Street dried up. The banks got stuck holding billions of their own bad paper. Now every foreclosure eats into their capital so, they've turned to the government for a handout. Of course, they don't want the public to know what's really going on so they've asked the Bush administration to help them pull the wool over everyone's eyes. According to the New York Times one banking official summed it up like this:

“We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market.”

Really? So, on top of everything else, the banks want the Bush administration to organize a public relations campaign that will make the multi-billion bailout look like it was designed to help struggling homeowners instead of crafty bankers. Unbelievable. No doubt Team Bush will do whatever they can to help out.  

Bank of America's proposed $739 billion bailout is just the first of many hyper-inflationary, economy-busting trial-balloons we can expect to see in the near future. The banking system is in terminal distress; collapsing from hundreds of billions in worthless assets, bad bets, and poor decision-making. Their capital impairment problems were all brought on by themselves. And they should be forced to pay the consequences, whatever that may be. They managed to take a simple, revenue-generating activity like mortgage lending, and turn it into a textbook case of grand larceny. It's pathetic.

In their present condition, many of the banks will be back for another handout in a matter of months. Next will be commercial real estate (CRE) which is already slumping and on its way down. Then it'll be the $160 billion in private equity deals and leveraged buyouts (LBOs) which need refinancing. Then it'll be the maxed-out credit cards, and delinquent student loans and defaulting car loans all of which are failing at a faster and faster pace. It is not just the “structured investment” market that's unraveling now; it's the whole speculative paradigm of hyper-inflated assets, toxic bonds, over-priced equities and bizarre-sounding derivatives which are crashing down in one great debt waterfall. The investment banks are at the very center of the problems. They've played it fast and loose from the very beginning and now they've come up snake-eyes. Tough luck. Only they shouldn't count on a $700 billion freebie from Uncle Sam to make up for their own bad judgment.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Steve Moyer
01 Mar 08, 17:17
Bravo, Mike

At this point, Mike Whitney is an every-week must-read. Anyone with any conventional investments and/or real estate needs to be on top of what's going on and act to protect yourself. The pain is still mostly ahead of us.


Chris
20 Sep 08, 17:24
CRIMINAL ACTIVITY IGNORED again and again FRAUD on the taxpayer

The program is controversial. Bank of America says it will help undocumented workers build good credit. But critics say one of the USA's largest financial institutions should not be helping people who violate the country's immigration laws.

"They are clearly crossing the line; they are actually aiding and abetting people who broke the law," says the spokesman for the Federation for American Immigration Reform

Whatever his motivation or other issues, U.S. Ambassador to Mexico Tony Garza (husband of the richest woman in Mexico and yet another George Bush gift to the U.S.) had the right idea when he said that "Reliance on remittances from the U.S. is not a viable economic policy." Note also that the U.S. Federal Reserve is completely corrupt and wants to profit from illegal activity by taking a bite of the remittances market.

BoA is defying federal immigration laws:

1907 Title 8, U.S.C. § 1324(a) Offenses

Title 8, U.S.C. § 1324(a) defines several distinct offenses related to aliens. Subsection 1324(a)(1)(i)-(v) prohibits alien smuggling, domestic transportation of unauthorized aliens, concealing or harboring unauthorized aliens, encouraging or inducing unauthorized aliens to enter the United States, and engaging in a conspiracy or aiding and abetting any of the preceding acts. Subsection 1324(a)(2) prohibits bringing or attempting to bring unauthorized aliens to the United States in any manner whatsoever, even at a designated port of entry. Subsection 1324(a)(3).

Encouraging/Inducing — Subsection 1324(a)(1)(A)(iv) makes it an offense for any person who — encourages or induces an alien to come to, enter, or reside in the United States, knowing or in reckless disregard of the fact that such coming to, entry, or residence is or will be in violation of law.

Conspiracy/Aiding or Abetting — Subsection 1324(a)(1)(A)(v) expressly makes it an offense to engage in a conspiracy to commit or aid or abet the commission of the foregoing offenses.

Penalties — The basic statutory maximum penalty for violating 8 U.S.C. § 1324(a)(1)(i) and (v)(I) (alien smuggling and conspiracy) is a fine under title 18, imprisonment for not more than 10 years, or both. With regard to violations of 8 U.S.C. § 1324(a)(1)(ii)-(iv) and (v)(ii), domestic transportation, harboring, encouraging/inducing, or aiding/abetting, the basic statutory maximum term of imprisonment is 5 years, unless the offense was committed for commercial advantage or private financial gain, in which case the maximum term of imprisonment is 10 years. In addition, significant enhanced penalties are provided for in violations of 8 U.S.C. § 1324(a)(1) involving serious bodily injury or placing life in jeopardy. Moreover, if the violation results in the death of any person, the defendant may be punished by death or by imprisonment for any term of years. The basic penalty for a violation of subsection 1324(a)(2) is a fine under title 18, imprisonment for not more than one year, or both, 8 U.S.C. § 1324(a)(2)(A). Enhanced penalties are provided for violations involving bringing in criminal aliens, 8 U.S.C. § 1324(a)(2)(B)(i), offenses done for commercial advantage or private financial gain, 8 U.S.C. § 1324(a)(2)(B)(ii), and violations where the alien is not presented to an immigration officer immediately upon arrival, 8 U.S.C. § 1324(a)(2)(B)(iii). A mandatory minimum three year term of imprisonment applies to first or second violations of § 1324(a)(2)(B)(i) or (B)(ii). Further enhanced punishment is provided for third or subsequent offenses.

Now George Bush, Sr. works for The Carlyle Group. They invest in defense companies, medical laboratories, and the telecommunications industry. The Carlyle Group is one of the government's biggest contractors. George Bush, Sr. and The Carlyle Group stand to make billions of dollars from the War on Terror. On September 11, The Carlyle Group was having a conference at the Ritz Carlton hotel in Washington, DC with members of the Bin Laden family, one of their investors.

"a ruler can ignore the mob and devote himself to the interests of the ruling class, gulling the inert majority who constitute the ruled." He then says, "Borgia references aside, 21st-century American readers of The Prince may feel that they have stumbled on a thinly disguised Bush White House political memo." These pointed words would sting regardless of who uttered them, but coming from Phillips, a former Republican strategist, they have an added piquancy.

In American Dynasty: Aristocracy, Fortune, and the Politics of Deceit in the House of Bush, Phillips traces the rise of the Bush family from investment banking elites to political power brokers, using their Ivy League network, vast wealth, and questionable political maneuvering to obtain the White House and consequently, shake the foundation of constitutional American democracy. Citing the Bush family mainstays of finance, energy (oil), the military industrial complex, and national security and intelligence (the CIA), Phillips uses copious examples to show the dangerous alliance between the Bushes' business interests (huge corporations such as Enron and Haliburton) and the formation of national policy. No other family, Phillips says, that has fulfilled its presidential aspirations has been so involved in the ascendancy of the arms industry and of the 21st-century American imperium--often at the expense of regional and world peace and for their personal gain.

http://3trillion.org/


Chris
20 Sep 08, 17:27
EVIL coverups massive diversion!!!! CRIMINAL ACTIVTY

BRIBERY...HIGH CRIMES and TREASON...by defination...by LAW

"take Congress off the auction block," transparency of a 2-party involvement

Magicians rely for their success on the trick of distraction. We're looking at what they want us to look at, but the real action is elsewhere. Elian Gonzalez, Monica, Michael Jackson, Paris Hilton, Tom Cruise, Jon Benot, Natalie Holloway, American Idol.....there is lot of important news happening almost under the radar screen, a good share of which will impinge on our lives much more than what is happening in the caves and tunnels around Kabul.

Subject: THE FACT’S in Open Secrets speak volumes ... The BRIBE money is going to Congress to keep the dollars in the Defense and Oil

Digg - Gas Prices Manipulated Before the Elections? Is Goldman Sachs manipulating the gasoline futures market to push prices down before the November elections? It sure looks that way.

Gasoline Price Manipulation Before the Elections

U.S. suspicious about gas prices - Oil & energy- msnbc.com Almost half of all Americans believe the November elections have more influence ... 42 percent of Americans say Bush administration manipulated gas prices ...

www.msnbc.msn.com/id/15004503/ - 46k - Cached - Similar pages

Nieman Watchdog > Ask This > The closer the election, the lower ... Q. Did George W. Bush’s buddies in the oil industry contrive to lower gasoline prices to help him (and themselves) in the fall elections? ...

www.niemanwatchdog.org/index.cfm?fuseaction=ask_this.view&askthisid=00234 - 22k - Cached - Similar pages

wcco.com - Good Question: Are Gas Prices Low For Elections? Gas prices in the Twin Cities are around $2.20 per gallon. That's about 70 cents cheaper than last month and even cheaper than this point last year.

wcco.com/goodquestion/Good.Question.gas.2.372435.html - 47k

Suspicion Surrounds Retreat In Gas Prices, Poll Finds ... Gasoline prices are down about 75 cents in two months, ... residents think the plunge in prices is linked to the coming election or other political reasons. ...



25 Oct 08, 19:51
CEO Answers

just do it old school way. A .357 magnum to the ceo of the institution will get him to start giving the public the answers on how it started.


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