THE GOP'S STOOGE-LIKE CULTURE OF DECEPTION

Over a year ago I wrote an op-ed piece describing what Republicans believed were the causes behind the 2008 market collapse. I wrote how the GOP members of the Financial Crisis Inquiry Commission (FCIC) issued a "primer" that deliberately left out the words "Wall Street," "deregulation," "shadow banking," and "interconnection."

I then asked "can you imagine getting handed a welfare fraud case then deciding not to use the words 'welfare' or 'fraud' during the investigation"? This kind of thinking is a blueprint for disaster ...

What we learned from the GOP sponsored report is that republican FCIC commission members - which included Bakersfield's own Bill Thomas - are more interested in establishing a political narrative than finding the truth. Their report went out of its way to blame the government for the reckless gambling and greed pursued by private investors and Wall Street.

Simply put, the Republican report on the 2008 market collapse was a stooge-like hack job that was deliberately designed to mislead and confuse the public.

And the GOP members of the FCIC were more than happy to drive America into it's little cul-de-sac of ignorance.

Well, brace yourselves. We have it's functional equivalent; only this time it deals with the health care legislation passed by the Obama administration. And it involves another GOP attempt to deliberately confuse the issue.

In this case a Mr. Charles Blahous was appointed to serve as one of the Republican trustees of the Medicare and Social Security programs. As a board member of Medicare Mr. Blahous recently issued a report that said President Obama's health care program would cost more money than the CBO originally estimated. His report was published through the Mercatus Center (yes, another conservative Koch-funded center). Blahous claimed:

President Obama’s landmark health-care initiative, long touted as a means to control costs, will actually add more than $340 billion to the nation’s budget. 

Stop the presses ... heady stuff, don't you think? Think again.

Blahous achieves his smoke & mirrors report by using a simple accounting trick. Without getting into the details (it's quite confusing) the logic is akin to you leaving a job that pays $25,000 a year to go to college, then having your neighbor ignore the new better paying job you have lined up to say, "Look at how much money you lost out on by going to school ... going to college actually cost your money. You're a loser for throwing all that money away."

Yeah, the story is a bit more complicated, but the logic is really that silly.

But it doesn't matter. Blahous' report made the papers, which included the Washington Post. Mission accomplished. Time for a toast ...

At the end of the day, we all need to recognize that many policymakers on the right have had serious trouble with math, the truth, simple facts, understanding budgets, and even following the law. It's almost as if the laws of logic and math don't apply in their universe.

Then again, what do you expect from a political party that actually produced a budget with no numbers ...




- Mark

UPDATE: I received a comment on the health care claims of the Obama administration. In a few words, the commentator cites a conservative blog to make the claim that the Obama administration is double-counting. This explains why their savings projections over the long haul look so strong. Ergo, everyone deceives, including Obama. Two wrongs make a right (wrong?), so nobody wins. Yay. Obama lies.

However, there's a problem. The double counting argument is an old one and has been debunked on numerous occastions.

Perhaps the best way to explain how the math is done, and why someone might think they can make a double counting charge is that they don't understand that "when a baseball player hits a home run: it adds to his team's score and also improves his batting average. Neither situation involves double-counting."

Put another way, there's no sea legs to the double counting whale of a story used by the GOP and conservative pundits. It only has a shelf life because conservative blogs, the far right noise machine, and the GOP need ammo - true or false - to make sure President Obama is a failure and liar in the eyes of their audience and constituents.

Anyways, I'm not publishing the comment from the writer because the guy who wrote is actually a nice guy, and friend from another life. But here's my response to him.

... I could post your comments, but it has several problems. First, the CBO report you cite is from a 2009 conservative blog post. It's primary message says that a CBO memo, which is cited by the Chamber of Commerce, does not buy into President Obama's accounting methods. If you go to the link [on the blog you cite] the Chamber post is no longer available. Not good. But this isn't the real issue. One of the problems with relying on these blogs is that they don't tell you that what you're stating about the accounting is not - and has not been - unusual. Dems and Republicans have used these accounting methods for years, which the CBO has signed off on, and confirms. If you had a CBO report saying otherwise this would make a difference. Instead, you cite a blog that cites another blog, which no longer has the link to the 2009 Chamber of Commerce post (and link) it cites. If you want me to post your comments anyways, I'll do so.

WHY WALL STREET IS TO BLAME

So I'm sitting in the barber's chair and getting my hair cut this morning. The talk turns to what's happening in the markets, and who's to blame. The standard Fox News meme emerged: "It's the fault of everyone who couldn't afford to buy a home."

My, my, where to begin ...

Why Wall Street Is At Fault ...
Let's start with this. The money had to come from somewhere. Fox News and their Republican friends may get political mileage pointing at irresponsible borrowers and Fannie Mae as the problem. But the real issue lies with people in the private sector who were creating and insuring shady mortgage contracts, as I've posted on here and here.

On this front, Wall Street knew what they were doing. Their models told them they would make money on their activities, so they pushed for more mortgages. Ability to pay wasn't really an issue. Creating marketable securities that they could bet on was.

Irresponsible borrowers? No doubt there was a problem. But we have to ask ourselves, Why was Wall Street and their financial mandarins so eager to lend to "irresponsible" borrowers?

The simple answer is that Wall Street's market players were becoming irresponsible lenders. They became irresponsible lenders because they had created a sweet ponzi mortgage scheme, built around a fraudulent insurance system.

In the first part of the scheme, as Nomi Prins outlined, between 2002 and 2008 about $1.4 trillion in subprime mortgages were issued. Out of these mortgages Wall Street created ("derived") about $14 trillion in securitized bets. In part because the underlying contracts were subprime mortgages, Wall Street needed insurance for their bets.

I'm over simplifying, but the second part of the scheme worked something like this.

* I tell you I will provide insurance for your mortgage backed securities.
* You must pay me premiums for my insurance.
* If the market collapses, "tough goat cookies ... we won't pay" (this wasn't actually said).

An illusory sense of security (insurance) plus record profits (for Wall Street) made for a euphoric market mood. So more mortgage contracts were sought, written up, and sold off to security slavery. Wall Street created it's own demand. It didn't matter who the mortgage holders were. As long as they could fog a mirror they were going to get a mortgage contract, which was going to be insured (wink, wink) somewhere down the line.

(At the time no one really knew or cared whether the insurer had the money to pay out claims. There were three reasons for this. First, Wall Street's market models said everything was OK. Second, the insured mortgage contracts were labeled as "derivative" contracts which, at the time, were largely unregulated. Finally, everyone was making lots of money).

Ben Bernanke Feeds the Fire
It was like handing the car keys to a teenager, and then being assured that everything will be fine by their loser friends, who are all carrying bottles of booze out the door as they wave good bye.

And why not? Ben Bernanke (the trusty father of the "loser friends" in this scenario) was confident that "market fundamentals were strong" and that bank regulators were doing the right thing. And, besides, national housing prices don't fall, right? Here's Bernanke making these claims before the market collapsed ...




A Ponzi Insurance Scheme + the sage (albeit, wrong) words of Fed Chair Ben Bernanke  =  a sense of market security.

This market chemistry was so soothing that Wall Street and the financial titans of America actively went out and looked for more home mortgages to issue, bundle up (CDOs), and then insure (CDSs) right up to when the market collapsed. Bonuses, sweet fees, and juicy commissions made this a win-win for everyone involved, but especially Wall Street.

"Don't Blame Me ..." Wall Street's Lack of Accountability
At the end of the day, as I pointed out here, when people stopped paying their debts and mortgages - which once gave value to the market securities that Wall Street created - what should have happened is that those who insured the securities should have paid up. Instead, they blamed irresponsible borrowers for ruining their ponzi-scheme.

Let me be clear here. When people stopped paying the debts and mortgages that made security contracts worth something, the people and institutions who provided the insurance for these contracts should have paid up.

But they didn't have to. The American taxpayer did, and will continue to do so long into the future.

MORAL OF THE STORY: Don't count your chickens before they hatch.

MORAL OF THE STORY, II: But especially don't blame Main Street for your own stupidity and greed when you create and feed a mortgage and insurance ponzi-scheme that produces profits for you but undermines the integrity of the market.

- Mark

Addendum: Congress held hearings on Fannie Mae and Freddie Mac today. It was covered by C-SPAN. As expected there were Republicans who wanted to direct blame away from Wall Street. So they tried to blame Fannie Mae and Freddie Mac for the market collapse because of how they backed reckless borrowers. Fortunately, Congressman Brad Miller (D-NC) was there to set the record straight.

He reminded Republican committee members that they once praised subprime lending as the type of innovative lending that comes from deregulated or "unfettered" markets, and because of how it contributed to a spike in home ownership. Among the points Congressman Miller brought up included:

1. When Republicans criticized Fannie Mae and Freddie Mac after 2003, they were essentially using the talking points of Fannie and Freddie's unregulated private insurer competitors (AIG, Goldman Sachs, Lehman Bros., Merrill Lynch, etc), who had financial axes to grind.

2. The private insurers were "running rings" around Fannie and Freddie in lending to and insuring affordable - or "subprime" - housing mortgages (which the data makes clear).

3. The Bush administration pressured Fannie and Freddie to purchase and insure the toxic assets of the private insurers (which constitutes a market subsidy).

There's more, but you get the point. While Wall Street is to blame, Congress had a helping hand in making the mess worse than it should have been. Miller's comments, and the complaining that led to Miller's comments, begin at 1:42 and 15 seconds here.

SCARE THE BEJESUS OUT OF WHITE AMERICA ... THE GOP'S SOUTHERN STRATEGY, 2.0

Salon.com's Glenn Greenwald has an interesting article detailing how the economic insecurities caused by the market meltdown have been supercharged by racial and ethnic tensions stirred up by the far right. This isn't the first time this has happened.

For those of you not old enough to remember, Richard Nixon's 1968 presidential campaign targeted Southern whites by getting them to think about the political and social mayhem (cultural upheaval) that would follow because of the new found rights women and people of color were going to exercise. Scaring the bejesus out of white America, especially in the south, became know as the republican's Southern strategy.

Today's GOP strategy is very similar, but new and improved. Let's call it Southern Strategy, 2.0. Here's how it works according to Greenwald ...

... Virtually every Fox News/right-wing-talk-radio controversy relies on scaring economically anxious white Americans into ignoring the prime cause of their economic insecurity -- plundering by Wall Street bankers, abetted by the government they own -- and focusing instead on some manufactured menace from powerless racial and ethnic minorities:

* Black people preventing them from voting (New Black Panthers), stealing their elections (ACORN), and treating them unequally (Shirley Sherrod and Eric Holder's Justice Department);

* Muslims who want to conquer their country and celebrate over their Christian corpses (the Triumphalist Ground Zero Mosque);

* Invading, marauding Latino armies coming to steal their property and rape their women while their Marxist allies in Government (led by a black Muslim President) disarm the white victims.

* Matt Taibbi, in lamenting the takeover of the GOP by the most riled-up of these factions -- the Tea Partiers -- recounts just some of the lowlights here.

What's not to be afraid of? Angry blacks, invading Latinos, sneaky Muslims, and an unresponsive government ... and don't forget all the horny homosexuals who want to destroy our way of life.

At the end of the day scaring white America about the coming boogeyman - when the real boogeyman is right in front of us - is an old political tactic. But the real crime this time is that it didn't have to happen this time. More specifically, what's happening today is a direct result of the Obama administration's decision to embrace and save Wall Street precisely at a time when America's rage over Wall Street's greed and incompetence was genuine, and demanded action. Glenn Greenwald reminds us ...

... That crisis presented a huge opportunity for Obama and the Democrats to bring about real change in Washington -- the central promise of his campaign -- by capitalizing on (and becoming the voice of) populist anger and using it to wrestle away control from Wall Street and other financial and corporate elites who control Washington. Had they done so, they would have been champions of populist rage rather than its prime targets. But, as John Judis argues in his excellent New Republic piece, they completely squandered that opportunity. Rather than emphatically stand up to the bankers and other oligarchical thieves, they coddled and served them, and thus became the face of the elite interests oppressing ordinary Americans rather than their foes. How can an administration represented by Tim Geithner and Larry Summers -- and which specializes in an endless stream of secret deals with corporate lobbyists and sustains itself with Wall Street funding -- possibly maintain any pretense of populist support or changing how Washington works? It can't.

By giving Wall Street what they wanted (and more) on a silver platter - while doing little to avenge the economic slap in the face to America's middle class - the Obama administration created the environment for it's base to become discontent, and for the political opposition to get riled up. We shouldn't be surprised that Fox News, Rush Limbaugh, and Glenn Beck have donned hi-tech hoods and are running around like demented characters is a South Park segment.

They were handed an opportunity, and they took it.

America wanted blood after 2008. Instead Wall Street got richer, while Main Street got poorer - and then got stuck with the tab. No reckoning. No justice. No vengeance. It's really that simple.

- Mark

WE'RE SCREWED, II ... THE HOUSING MARKET VERSION

Remember this graph from Chicago mortgage broker Michael David White?

It shows us (red line) that housing values have fallen. But what's also true is that the amount of debt (blue line) tied to those homes have not collapsed, even with write-offs and renegotiations. There are a number of reasons for this. Among those include not enough homeowners qualifying for renegotiations and the fact that the biggest banks haven't had to mark down failing mortgage loans. This means our nation's financial institutions are carrying bad loans but they haven't been forced to mark them down to their actual market value.

And why should they?

When the market meltdown started in 2008 President Bush and Congress gave Wall Street and the banking industry a magnificent "deregulation" gift when they said financial institutions wouldn't have to mark down their toxic financial assets (and the instruments that they spawned). In essence they regulated market prices out of the market (by suspending mark-to-market accounting methods) and said to the banks, "You can attach any value you want to your toxic assets ... but don't worry, consumers and homeowners still have to abide by their contracts. If they don't, go ahead and attach fees and/or foreclose. Be happy."

Then we have President Obama's gift to Wall Street. His $75 billion Home Affordable Modification Program (HAMP) has turned into a significant market subsidy for the banks and Wall Street. This Huffington Post piece by Shahien Nasirpipour and Arthur Delaney helps explain why.

Here a few key points about HAMP:

* REJECTIONS DOMINATE: Of the 1.2 million distressed homeowners who entered HAMP (through June) more than 529,000 have been kicked out (though 389,000 have benefitted from permanent modifications).

* FINANCIAL INSTITUTIONS FIRST: Banks are using a "Net Present Value" test. This allows financial institutions to determine whether a loan modification will make "investors"  more money than a foreclosure. Put another way, even after dumping trillions of taxpayer funded bailout dollars on to Wall Stree, the needs of banks and investors dominate a $75 billion program that was designed for homeowners.

* UNICORN MATH: Extending a loan modification process to distressed homeowners has only served to allow banks to carry bad loans on their books at full value, delaying loss recognition.

* HOMEOWNER FORECLOSURES, BUT NO PENALTIES FOR BANK NON-COMPLIANCE: Companies like Countrywide - the beneficiary of billions in taxpayer funded loans and guarantees - have told applicants that they aren't participating in HAMP. Foreclosures continue. Yet, the Treasury Department has yet to fine a single servicer for noncompliance with HAMP.

* BLOATED FINANCES: Delays have allowed banks to tack on tens of thousands of dollars in additional interest and other fees, which they use to inflate the value of the mortgage contracts they hold.

There's more, but you get the point.

While many market analysts will tell you that HAMP has helped achieve stability for the housing market, it has done little to nothing for the majority of distressed homeowners who've applied to the program. Worse, it shows that in spite of creating trillion dollar loans, transfers, and other guarantees for Wall Street - in the process, creating the biggest bailout in human history - individual homeowners were never supposed to be the primary beneficiaries. The biggest financial institutions on Wall Street were the targeted group.

But wait. It gets better (or is that worse?). Mortgage broker Michael David White explains why our housing problems pale in comparison to what's going on around the world. As bloated as our housing bubble economy got, it's not as bad as other parts of the western world ...

In a few words, many of the key western countries (except Germany and Japan) are looking down the barrel of gun when it comes to housing. Greece may have been the first salvo in a much wider market mess facing Europe, and the world.

Stay tuned. Things will be getting worse.

- Mark

AGAIN, IT'S NOT FANNIE OR FREDDIE'S FAULT ...

I've posted on this before, but since the far right lunatics like to demonstrate their ignorance by telling lies about the issue (yes, it's a lie if you know the truth and purposely ignore it), I'm posting the information again.

Again, Fannie Mae and Freddie Mac DID NOT cause the market meltdown. Click here to see the data.

Then go out and share the news with your clueless and ignorant friends. Not that it will help ... 

The Kool-Aid drinkers, after all, are self-medicated zombies.

- Mark

THIS IS WHY WALL STREET LIES ... AND WHY WE'RE SCREWED (again)

"The American Republic will endure until the day Congress

discovers that it can bribe the public with the public's money."

- Alexis de Tocqueville, in Democracy in America

Wall Street's biggest financial institutions deliberately lie and distort for one reason. Because it pays.

Today Bloomberg is reporting that Citibank left billions of dollars in toxic assets off of it's books, which helped mislead investors and regulators. Doing so allowed Citigroup - which received about $45 billion in taxpayer bailout funds - to continue selling their wares as if they were solid assets. They were not. They now have to pay a $75 million fine for misleading investors.

Count me a unimpressed by the punishment. To understand why let's play "What would you do?"

Let's say you need to dump sell billions of dollars in toxic assets on unsuspecting buyers (in this case pension funds, foreign institutions, etc.). This will help you earn billions over the long term. This will also net you and your other partners in crime hundreds of millions in bonuses (often done creatively to avoid public scrutiny). The only down side is that you have pay a $75 million as a penalty, if you get caught. What would you do?

Think hard about this one ...

I know, it's a tough one ... Do the right (and legal) thing, and tell everyone what you have is crap. Or "mistate" assets and let people buy the crap you have. Hmmm. What to do, what to do?

Well, on Wall Street, where ethics and morality get lost in some kind of giant Black Hole of corporate stupidity and greed, the answer is to deceive and mislead. Big time.

Check this out.

Earlier this month Goldman Sachs agreed to pay $550 million to settle charges that it sold "made-to-fail" assets in 2007. They did so without disclosing that they knew the company (Paulson & Co.) that helped create the asset did so with the idea that it would fail. In fact, they bet on it. They actually went out and purchased insurance on the made-to-fail assets, which netted them huge profits. Nice.

Then, in February, Bank of America said it would pay $150 million for failing to tell shareholders about anticipated losses, and the $5.8 billion in bonuses that was set aside, which were part of the Merrill Lynch purchase. Shall we score another one for doing the right thing, and corporate transparency?

(Note: While BofA paid $33 billion for Merrill Lynch - which was loaded up with toxic assets - Bank of America was given more than $100 billion in taxpayer bailout aid and other guarantees to help it stave off more than $118 billion in losses, and possible bankruptcy. This is the essence of corporate welfare.)

Anyways, back to my original question: What would you do if you could secure money that's virtually "penalty free" by deliberately lying? I know. It's a tough one. Think hard, again ...

The moral of this story is that it's business as usual in America. And that's a bad thing.

Not much to say here except that we're screwed, again.

- Mark

ANOTHER SIGN THAT WE'RE SCREWED ...

Robert Smith at nakedcapitalism.com points us to a rather strange development in the rating world. They're afraid to take responsibility for doing do their job.

It turns out that the new financial regulation legislation that's about to land on President Obama's desk has a new liability clause. It says investors can sue ratings agencies "for a knowing or reckless failure to conduct a reasonable investigation" of the market instruments that they grade.

In a few words, a ratings agency does research on bonds and other market securities (like ABSs, CDOs, etc.) to determine whether they're risky or solid investments. If they're solid investments they will get a Triple A rating. Market players like AAA ratings because it makes it easier to sell their products (bonds, securities, etc.). Undeserved favorable ratings are what allowed America's financial institutions to sell securities that were backed by toxic mortgages.

Under the proposed legislation the ratings agencies who blew it big time before the 2008 market collapse -  because they handed out AAA ratings on virtually anything the financial institutions threw out there - are now subject to “expert liability” claims if they jump into bed with their Wall Street patrons, again. They don't like it.

Here's my question. At what point does the concept of taking responsibility for doing your job return to the Wall Street? Diligence, integrity, and honesty should not be a one way street, traveled on only by the American taxpayer.

Seriously, the proposed legislation only mandates that companies in the ratings world - who make millions of dollars for being "experts" - not "knowingly" or "recklessly" do a poor job. It doesn't prevent them from doing a poor job. It just says don't do a poor job on purpose ... no more regulatory subsidies. Pretty simple if you ask me.

At the end of the day, if Wall Street's ratings agency can't find a degree of security, or a loophole, in a weak performance bar that says don't let us catch you becoming incompetent, or negligent, on purpose we're screwed.

- Mark

FINANCIAL TERRORISTS, PREPARING THE NEXT FINANCIAL 9/11?

Wow. Check this out. Banks around the world will have to roll over (refinance) debt amounts between $5 trillion and $15 trillion over the next two years. That's a chunk of change. The primary problem is that banks could find it harder and harder to find the money to roll over debt as asset prices continue to slide downward. The banks will need some real magic. This is where friends from my youth, Rocky & Bullwinkle, come in.



The real trick comes in the form of some real regulatory stupidity (courtesy of the Financial Accounting Standards Board, or FASB) that allows America’s financial institutions to revalue the price of their toxic assets. I’ll leave it to market sociopaths to explain "the market" rationale, which you can find here. The end result is to create a world where Alice in Wonderland math governs our market environment, but how it works is really pretty simple.

Regulating Market Prices Out of the Market
Imagine you own a home before 2008. You likely watched a slow bleed process as it's market price tumbled over the past two years. Your $500,000 home is now worth $250,000 (or something like that). Because you have powerful neighbors who don't want to see their homes lose value if you walk away and leave an empty house (called a strategic default) they get the banks to legally allow you to reinflate the value of your home on their books.

The best part of getting another shot at reassessing the value of your home is that you can maintain previous debt levels, or borrow against the home, as if little happened to your houses market price. To be sure, it's really not that simple. But the concept applies (I've written in greater detail about the process here, here, and here). The end result, though, is that we effectively regulate market prices right out of the market. Same hat trick, different result.



The problem with this regulatory maneuver is that this is not being done for your home. You don't get to use the regulatory tools that the banks have access to. Like handicap parking it’s only available to a certain class of banks. In this case it's (FASB, Statement 157) only available to the incompetent sociopaths who run America’s biggest financial institutions.

Taking the Market Prices Out of the Market
By allowing America's financial institutions to re-price their toxic assets two things happen. Both will help solve our bankster's trillion dollar problem above.

ASSETS ROLLED OVER/GAME CONTINUES: It allows banks and governments, who had to rollover loans in 2009, to pretend the assets they underwrote are worth more than they actually are.

FINANCIAL AND LEGAL BAILOUT: It shields private equity firms in our shadow banking system (private investors) who “invested“ in toxic assets. They escape culpability and investor lawsuits. 

On one level this explains why the recovery we're experiencing is superficial, at best. First we got $1.5 trillion in bailout money from the Bush and Obama administrations to save our nation's financial institutions and their incredibly self-absorbed executives. Then we got trillions more for America’s financial institutions in the form of government guarantees and credits.

And, just like that, our nation’s financial institutions are able to go to the Federal Reserve and Treasury Department and say, "Let us use these repriced (toxic) assets as collateral for a new loan. You can go ahead and keep the asset if I stop paying (wink, wink)."

Flush with bailout cash, new credits, new guarantees, and government approved unicorn methods to revalue their assets, and it should come as no surprise that America's financial institutions have continued to live in a make believe world drenched in irresponsibility and never ending

How Banksters Will Stick Us With the Bill
In 2008 only 2.7% of BofA’s failing loans were backstopped by the American taxpayer. In 2009 that number jumped 20.5%! Take a look at the numbers. But wait, it gets worse. These bad assets - which the Federal Reserve and the financial industry like to call "legacy assets" - are being dumped on the American taxpayer. This is how it's being done.

In order to put America's toxic, or legacy, assets on life-support (while putting more money into the banking system) we created something called a Term Asset-Backed Securities Loan Facility (TALF). In real simple terms TALFs are government-backed loans. They can be accessed by those who hold financial crap, or non-performing securities. To better understand the concept let's use our home example from above.

If TALFs were available to America's home owners they would be able to use their homes to get a loan from the bank, even if they're upside down on the loan. Unfortunately, TALF loans are only made available to America's largest and most powerful financial players through the Federal Reserve of New York (and, no, President Obama's Making Home Affordable Program doesn't even come close to TALF).

Here's the real good part.

The big financial players don't need to put up any good collateral for the loans they get. They can use their poorly performing toxic assets as collateral. Best of all, they can revalue these assets upward, courtesy of the federal government. If the collateral doesn't pay off you and I are stuck with the bill.

How much will this add up to? We don't know just yet. But we do know that the Federal Reserve has made at least $1 trillion available for these TALF products, and another $1.45 trillion for non-performing assets in the housing market.

Put another way, don’t worry about the banks. They’ll get their money to rollover their loans. The American taxpayer, however, will be stuck with the toxic assets and the affects of an austerity program that’s just beginning to take shape.
 
- Mark

UNFORTUNATELY, WALL STREET STILL KNOWS BEST

Apart from being the type of financial reform that only the comics at Monty Python could appreciate, the new financial reform bill does almost nothing with regards to change the structural conditions that led to the 2008 market collapse. John R. Talbott, author of The Coming Crash in the Housing Market (2003) has a detailed master list of what makes the financial reform bill largely toothless.

But the real sin that I see in the financial reform legislation is not what it leaves out, but in it's premise. Fundamentally it's guided by a corrupted and failed ideology where the God's of Wall Street can say one thing ("When we're in trouble you need to bail us out") and then say another to Main Street ("When you're in trouble you can eat crack").

While our market ideology is supposed to be guided by the principle that if you work hard you will get ahead - which is the moral justification of capitalism - it's been turned on its head by Wall Street's new guiding lights of favorable legislation and unnecessary tax cuts. While the first corrupts the ideology, the latter deprives the state of the funds it needs to function.

Worse, after experiencing a catastrophic market collapse caused by 30 years of following Wall Street's "No tax, No Government" approach to public policy our political mandarins continue to believe that we need to appease the God's of Wall Street, as if they just did our nation a favor. What they don't understand is that the Wall Street's market players today are little more than rats on a sinking ship.

The failure to extend unemployment benefits, and the rather weak financial reform bill in front of Congress now, makes it clear that Congress is prepared to appease the Wall Street Gods. What they conveniently ignore is that unemployment benefits are needed because of what Wall Street did, and should not be determined by the sense that Wall Street will be offended by another $33 billion in debt (especially since we could pay for the benefits by retroactively taxing Wall Street's undeserved bonuses).

What our national leadership doesn't seem to understand is that as long as Wall Street is able to live by one set of rules, while Main Street is supposed to live by another, their concern over a few billion dollars in additional debt, and focusing on a set of weak "structural reforms" is akin to rearranging deck chairs on the Titanic. Want some evidence? Check out these two charts.

When compared to other economic downturns in the post-war era job losses have never been as steep as they are now.

Worse, the period of unemployment has almost doubled during this recession compared to other periods. It's one thing to be unemployed, but to be unemployed with no prospects on the horizon can be downright depressing.

The problem is that while Wall Street and their patrons have secured favorable legislation that's allowed them to change the rules of the game in their favor ("Bailouts & taxcuts for us, austerity & no job security for you ..."). This has created a situation where, as Les Lepold points out, there's "too much wealth in the hands of the few and too much power and wealth controlled by Wall Street".

While the new financial reform bill does little to limit this power and wealth, our too-big-to-fail banks, as Lepold points out, "are still with us--and cockier than ever." He adds:

Very few commentators or policy officials have the nerve to call for restoring taxes on the super-rich to the levels they paid from the 1930s through the 1970s. (Back then, their tax rate was up to 91%. Now they pay as little as 15% because they can claim their booty as "capital gains.") The 10 leading hedge fund managers each "earn" an average of $900,000 an hour (not a typo). Public officials and pundits should be calling such wildly excessive incomes a disgrace to democracy--especially given that without taxpayer bailouts the financial elites would have earned nothing at all. Instead we are told to admire the robbery as if it were a sign of entrepreneurial genius.

And, sure enough, we continue to admire the robbery. Think about it. How else could a group of people who caused our economic meltdown turn the tables and then be rewarded financially (bonuses & bailouts), legally (waivers), and with a politically opportunistic movement (Tea Party anyone?) that does their bidding? That Wall Street continues to have so much political influence after making a mess of things should be a national embarrassment.

At the end of the day, Wall Street and their political muscle in Congress continue to perpetuate the lie that we live in a free market economy. We don't (read The Myth of the Market). The reality is that Wall Street has become a voracious gambling den governed by favorable legislation and an irresponsible and clueless plutocracy.

Still, in the eyes of Congress, Wall Street continues to know best. Let's be blunt. As long as we continue to believe all we need to do is tinker on the margins of Wall Street's world, reform or no reform, we're in deep trouble.

- Mark

FINANCIAL REFORM: DRAFTED BY MONTY PYTHON, EMBRACED BY HOMER SIMPSON?

Let's say you have an alcoholic in your circle. At first they were fun to have at parties. Then they started going to extremes, every day. The blackouts and passing out begin. It gets ugly. They finally do something really stupid, but not "illegal" in the eyes of the law. They say they're open to participating in a recovery program. Do you applaud the alcoholic's recovery program because they switch to beer and wine, and then pass out only once or twice a month?

Well, apparently, this is what passes for a successful 12 step program if we look closely at the financial reform bill being considered in Congress now. In one of the better reviews of the financial reform legislation pending before Congress, this post from Richard Smith at nakedcapitalism.com offers one of the most incisive and quick reads on the tone of the reform bill.

For Smith there's little doubt that the primary problem centers around our "shadow" banking system, where consumers have been able to find virtually unregulated credit from private investors (for home loans, for example). This shadow banking system has grown so large that it's $16 trillion asset base is now larger than our "normal" commercial banking sector's (not quite $13 trillion), and is the essence of what Kevin Phillips called the "financialization" of the American economy.

One of the key issues according to Richard Smith centers around what the shadow banking system counts as assets, and how they should be counted and regulated. Should "holdings in other banks’ debt" count? What about "capital arbitrage"? The financial sector wants looser rules on asset oversight and regulation. After all, the more assets they can list, the more money they can lend. As you can imagine, the legislation in front of Congress now has become so diluted with lobbyist driven "reform" that Richard Smith writes: 

So where does that leave us with our shadow banking reforms? Well, we have a modest tweak to bank capital requirements, of unknown efficacy (Collins) and a bunch of new committees, mostly in the Fed. The mountain has laboured, and brought forth a mouse.

To be sure, there's much to be said about financial legislation being the deepest banking reform we've seen in generations. This much is true. But the flip side of that coin is that we've done nothing but deregulate over the past 30+ years (even the S&L debacle was an asset protecting bailout).

An alcoholic switching to wine and beer, and then passing out only a few times a month, isn't saying much. Neither is financial reform that has become so diluted and open to manipulation that it "seems to have been drafted by the Monty Python crew" in Congress.

I've written about the proposed legislation often, so I won't add anything else to Smith's points. But read the post. Even though it may appear a bit jargon-filled for some, it's a good one.

- Mark

THE CASINO LIVES ... ON WALL STREET

Former AIG executive, and market analyst, R.J. Eskow takes a look at the Justice Department's decision not to hand out indictments against AIG and writes, "Hundreds of millions of victims, smoking guns in every room, and not a perp to be found anywhere." He finishes his piece with this ...

But a once-thriving company is dead. We've paid hundreds of billions of dollars directly, and trillions of dollars indirectly. 15 million people are out of work. The bookies in the Wall Street casino are still placing bets, secure in the knowledge we'll cover their debts. As they said about Nicky in Casino, they "had a good system: When they won, they collected. When they lost, they told the bookies to go f**k themselves."

Eskow's comments on AIG, and what's wrong with our stinking system, can be found here. For those of you looking for details on the AIG mess and our casino economy I encourage you to read the entire piece.

- Mark

NASCAR & SPEED RACER HELP EXPLAIN HOW FINANCIAL REFORM FALLS SHORT

It's no secret that NASCAR got it's start back in the days of prohibition. Illegal moonshiners and whiskey runners, trying to outrun the law, would find ways to make their cars faster than those of the local police. And they did. Today's NASCARs are marvels in mechanical engineering.

While the cars have gotten faster, the vehicles used on the NASCAR circuit aren't allowed on our public streets for a reason. They're too damn fast, and they aren't up to code (though they can withstand a crash better than the average car). In fact, laws on the books prohibit you and I from tampering with our cars in ways that would make them too big or too fast for public roadways because of the temptations and affiliated dangers that come with having access to all that speed and power.

It doesn't matter if you are a professional racer, over time even the best can crash and burn. Worse, they will take even good drivers out with them.

When you do get car that can outrun the police speeding laws, the highway patrol, the flow of traffic, etc. all work to keep you in check. Put another way, as much as Americans love NASCAR and going fast, we all understand that you can't have people running around driving like NASCAR drivers in suped up automobiles. Even Germany's famous autobahn has 'coercion' and other rules that are enforced by the autobahn police.

This is what makes the current financial reform legislation so frustrating. We know that having "too big to fail" (TBTF) financial firms isn't good for the nation. We saw this in 2008. We saw variants of this in 1987 and in 1929. Yet the current financial reform bill being discussed in Congress does little to nothing to rein in the stupidity and greed we saw before 2008 by the TBTF banks. Indeed, private bank analysts are even suggesting that the financial reform bill won't have any teeth at the end of the day.

It's as if, after causing a series of epic crashes on our nation's highways, we said ...

... "No problem, let's allow the NASCARs, the muscle cars, and other Speed Racer wannabes out on the public road ways. They're good 'ol boys anyways. Nothing's going to happen. We can trust them, this time."

Then we have the fact that the financial reform bill does little to nothing to stop the big banks from trading in highly speculative derivative products, with taxpayer backed (FDIC) money. In a few words, banks can continue using your money deposits - which are government insured - to make market bets that only the banks profit from. If the market tanks, and the banks go under again (and they will), it's you and me the FDIC who has to come in and save the TBTF banks, again (under the guise of insuring your money, of course).

And, No, the provision in the finance reform law that says banks will be liquidated and the executives will be fired if they go belly up (again) is no real safeguard. There were already provisions for this to happen. We didn't use the law in 2008 because ___________________ (fill in blank). What makes us think we'll use it the next time? Because we learned our lesson after 2008? Give me a break.

The financial reform bill currently making it's way through Congress essentially tells all the financial Speed Racer wannabes, "Don't worry. If you crash, or make other people crash, we'll pick up the tab through our 'Speed Racer Wannabe' insurance program" (otherwise known as FDIC).

Look, at the end of the day, if you want to supercharge a car and race it you can always go to a local speedway on the weekend, or beome a professional and join the circuit. The point is, you're the one on the hook for your need for speed. Similarly, if you want to claim to be a super capitalist because you make supercharged market bets you're supposed to use your own damn money. And then you're supposed make market bets in a way that affects only you when your bets don't pay off.

Is this really hard to understand?

- Mark

LET IT RAYNE(S)

In "The State of Financial Engineering" market consultant Sylvain Raynes takes a strong swipe at business schools in general, and the professors of finance in specific. He follows this up with "The Hollow Men of Financial Engineering", where he offers no apologies for the egos he offended in the first article. Both are good reads and if you like sardonic wit, like I do, you will no doubt agree that both articles offer insights that we can all learn from.

For example, here's what Raynes has to say about the "sleazily transparent, anti-intellectual" techniques taught at universities that offer Masters degree programs in quantitative finance, or financial engineering (FE):

What is obvious and regrettable is that no effort is ever made to teach numerical analysis as a proper and rigorous discipline. Instead, students literally learn numerical recipes and are no more equipped to handle reality than someone equipped with a driver’s license when their car breaks down.

One might think that Raynes - who was a founding principal of R&R Consulting, a structured credit consultancy firm founded in 2000 - would stop after criticizing the techniques used to teach FE. One would be mistaken. Looking at the major universities that churn out the uncreative number crunchers, Raynes tells us that:

... the Chicago School of Economics recently held a well-attended conference with the stated objective of investigating whether its thinking bore either blame or responsibility for the occurrence of the sub-prime crisis, and if so how much. As expected, the usual suspects reached the foregone conclusion that Chicago School thinking was totally blameless and that, in point of fact, the fault lay entirely with those who had “misunderstood” its groundless theories.

In many ways Raynes is simply stating what others have been pointing out for some time now. If no one is at fault, no one can be blamed for the mess of 2008. This means we will never develop long-term solutions for what ails our markets, and society. Logically, another market collapse is only a matter of time.

I bring up Silvain Raynes because of this piece from Huffington Post. In it we see that academics in the field of finance who were offended by Raynes can rest (a bit) because Raynes shows that he's an equal opportunity critic (FF to 3 minutes; watch the clip here).



No doubt cognizant of the fact that CNBC's Erin Burnett and Jim Cramer both worked for Goldman Sachs, Raynes criticizes Burnett for essentially being a Wall Street lacky because of her tendency to put Goldman Sachs cheerleaders on her show, Street Signs. He then goes after CNBC's Jim Cramer for being a Wall Street shill, and dumming down markets to a level that only an idiot would appreciate.

Whether you like his personal attacks on Cramer or not, one thing is clear. Mr. Raynes knows what he's talking about. Perhaps more importantly, with his attacks on both Wall Street shills Burnett & Cramer and our nation's business schools, Raynes seems to understand the Big Picture, which doesn't come through in the Burnett clip.

With Burnett &  Cramer's Goldman Sachs backgrounds, and their recent Wall Street mistakes and boot-licking history, CNBC needs to invite more people like Raynes to the set. Whether you agree with Raynes's tone or his methods (I like it), there's no doubt that he is both insightful and irreverant (in a healthy way).

Just what the doctor ordered in our troubled financial times.

- Mark

ADDENDUM: Speaking of Goldman Sachs, check out this Daily Show clip ...

MARKET DELUSIONS RUNNING DEEP ... AGAIN

I was directed to this by a friend. Read the link before you go any further. To be sure, I'll synposize the piece as I move along below, but read the piece first. It will help you understand the commentary.

………………

Let me preface what I present below, and in the next few posts, by saying this: The argument by Brian Westbury and Robert Stein looks good. It especially looks good if you want to believe that greed and market stupidity didn't cause the market collapse.

Look, Westbury and Stein (W&S) are cherry picking and distorting issues to explain why we shouldn’t use market prices to price million dollar assets. Their doing it for the benefit of their industry, and to satisfy personal interests. Here’s the irony of their “let’s-not-use-market-prices-to-gauge-the-value-of-assets” mentality. In the run up to the market meltdown market players consistently told us that the prices we were seeing were correct. Prices are indicators of “what the market will bear” we were told.

We didn’t need to worry about how prices got so high because, according to market players like W&S, prices contain all the information we need. Part of the reason why they want us to believe this is because, as long as prices were going up, it allowed them and everyone else in their financial market chain to pay themselves big fees and even bigger bonuses. Markets, after all, are rational.

Then the market collapsed. Oops.

WHY THEY WANT TO SUSPEND MARKET PRICES
After the market collapsed in 2008, and blew all their “markets are rational” nonsense out of the water, market players like W&S wanted special pricing considerations. Specifically, they wanted to re-price the value of security assets that no longer fetched what it used to before the market collapse.

This is important to understand because collapsing prices would have forced many market players to put up collateral, or sell what they had to generate cash. This would have further depressed security market prices. Like nice homes in a crumbling neighborhood, even the good securities would be affected by collapsing prices.

Market players stood to lose millions. Worse, the industry more than likely would have suffered through a series of lawsuits, as investors started asking “What happened to my money?” The legal lessons of Orange County in 1994 still linger.

But W&S don’t want middle class America to focus on their industry losing millions and facing lawsuits. If we did, we would start asking “Why the hell did you lend and borrow so much to gamble on such toxic crap?” Instead, industry analysts concocted Chicken Little-like “the sky is falling” arguments designed to shift attention away from the degree of stupidity inherent in the market at the time. Then they write pieces like this to try and convince you and me that their industry is not to blame for anything. They’re saints.

Put more simply, market players wanted to be able to re-price assets to save their skin. The fact that re-pricing assets would also put money in their pockets, by keeping “assets under management” relatively stable, was just icing on their financial cake.

GETTING THEIR WISH
According to W&S the market for asset-back securities dried and crashed only after November 2007, when the financial industry was forced to use “market” prices, instead of computer models and cash flows, to value their financial instruments. Like the chronic drunk who gets a DUI and then blames it on being pulled over for a broken tail light, W&S are deliberately confusing cause and effect.

According to W&S having to re-price assets - and not shady lending practices, and even shadier models - is what caused the market to collapse. In an attempt to appeal to our inner FDR, W&S even made a point of noting that FDR was able to stabilize markets only because he suspended market prices in 1938.

Ergo, according to industry experts like W&S we needed to suspend using market prices - or what the industry mind-numbingly refers to as “mark-to-market” (MTM) - to value multi-million dollar security assets. And market players got their wish. Last April (2009) market players effectively regulated market prices right out of the market when the Financial Accounting Standards Board (FASB) suspended the MTM price method.

CONCLUDING COMMENTS (for now)
Let’s recap.

1. Market prices are good as long as prices go up, and fees and bonuses are paid on these prices.

2. Market prices are bad when market greed and stupidity is exposed, and market players stand to lose millions and get sued.

3. Regulating market prices out of the market is good because FDR did it, and it saves the financial industry from doing some soul searching.

In a few words, suspending MTM is necessary for the financial industry because it allows them to suspend reality. It’s one of the reasons accountants refer to the practice as “mark-to-make-believe”.

But financial market players want the suspension of market prices to come with no responsibilities, and all the benefits of government guarantees. What a bunch of pricks. I’ll explain why over the next few days …

- Mark

WANT TO KNOW WHY BANKS AREN'T LENDING?

This Money Morning article is by far the best piece I have read about the "brokered deposits" and "hot money" pheonomenon that's challenging our banking and economic system. Simply put, the need to find higher yields with FDIC guaranteed deposits (which bank brokers do), coupled with the need of our biggest bank's to pad their books, helps to explain why bank loans to Main Street have collapsed (in spite of trillions in taxpayer dollars being thrown at the banks).

Students who have been in my American Politics class (and paid attention), and those who have followed this blog, will understand immediately the importance of our current brokered deposits situation. Brokered deposits help to explain why I believe we're gearing up for Round Two of our Economic Meltdown.

If you don't read anything else today read this article. And if you're inspired, you should read this piece from Zero Hedge, which explains how Bank of America is covering their losses with U.S. government guarantees.

- Mark

UNDERSTANDING THE ECONOMIC MESS WE'RE IN

If you want to have a better understanding of the dynamics behind the 2008 meltdown, and don't have the time to read all the great books out there, try these FRONTLINE videos.

First up, we have Inside the Meltdown, which describes the lead up to meltdown, and what was happening in Congress during those ugly September through December 2008 days.

Next, we have Breaking the Bank, the story of the forced Bank of America and Merrill Lynch merger.

Finally, we have The Warning, which introduces us to those who saw it coming ... but were ignored.

- Mark

MAIN STREET'S TURN ... TIME FOR "PLAN ORANGE"?

In my book I argue that the economic growth we experienced after Ronald Reagan arrived at the White House was a product of "state-led" initiatives. There were no invisible hands involved.

Spurred by deficit spending, Federal Reserve policies, state subsidies, successive bailouts, and deregulation the laggard American economy of the 1970s was able to stabilize and then take off in the 1980 and 1990s. But it did so on the backs of the American taxpayer and because of favorable legislation.

More specifically, the idea that the "free market" brought America back is a myth. The causes behind the market collapse - which many are just learning about for the first time - are evidence of this. Still, we have free market zombies telling us that, on the road ahead, we need to follow the same path that got us into this mess.

Famed bond trader Bill Gross (of PIMCO) is not one of these zombies.

One of the reasons that Gross is not one of these free market zombies is that he sees the same things about our past that I discussed in my book. He argues that the period of government-sponsored easy money (from low interest rates), managed inflation, and the excessive use of debt to take advantage of deregulation (the "accelerated use of financial leverage" for "increasingly complex financial innovation") may have brought growth. But he also recognizes that this period is now officially over. In its place we are going to see slower growth and the rise of new financial power centers, like Brazil, Russia, India, and China (the so-called BRIC countries).

So where does this leave us?

In market speak Bill Gross likes to discuss how "deleveraging, reregulation and de-globalization" must occur and that we must be prepared for what follows. But we are resisting change. Why? Because, as PIMCO Managing Director Mohamed El-Erian explains, many are inclined to "look back to what we are familiar with, rather than try to define the new paradigm."

In plain English what both Gross and El-Erian are saying is that as we scramble to adapt to and fix this mess there are many others who only want to save themselves, and are standing in the way of real change. Look no further than Wall Street's pay/bonus scale and their lobbying efforts in DC to understand how this works.

From what I can see, selfish and greedy people are winning the day. Or, to paraphrase the kid in Sixth Sense, I see stupid people, and they're walking away with our money.

Still, there is hope. David Einhorn, founder of Greenlight Capital, and one of the earliest users of credit default swaps (a from of insurance) is now calling for a ban on these instruments. He argues, convincingly, that “trying to make safer credit default swaps is like trying to make safer asbestos.”

Others, like the former chairman of the Council of Economic Advisers under President Reagan, Martin Feldstein, call for innovative ways to help stabilize housing prices. His approach includes allowing American homeowners to borrow up 20% of the value of their mortgage at low interest rates from the U.S. Treasury. This would cut out the private sector, which has effectively been gouging American taxpayers through higher credit card rates, while holding back small business and personal loans.

All of this is important because Bill Gross appears to support a plan that resembles what Professor Feldstein is proposing. According to Chicago mortgage broker Michael White, Mr. Gross has signed on to Plan Orange. In a few words Plan Orange would have the American government pay down the mortgage debt of all property owners in the United States, to 80% of the value of their home today. This would make mortgage debt more affordable and help make most deliquent mortgage (now running at a record 13%) current. It would also strengthen the banks who own mortgages and are now worrying about defaults. See the details here.

(In my world I would also call for a forced unwinding of the CDO market, which would help to take care of much of the mess that the CDS market is worried about. But that's another story for another day.)

To be sure, the bill for Plan Orange may be as high as $5 trillion. But consider this. We've already spent and/or guaranteed $20+ trillion in toxic wealth. Worse, we have little to show for it other than "stability" that includes record deficits, 10% unemployment, record bankruptcies, record bank failures, collapsed and falling home prices, decling consumer confidence, and banks that won't lend (if I missed one, I apologize). Put another way, we've raised the Titanic, but have it sailing through the same ice-berg filled waters.

We should also consider the following. We're already on the hook to the banks for about $23 trillion in the form of loans, credits, and numerous other financial guarantees. The banks - or the banksters - will get their money one way or the other. The bonuses will continue (because they're doing such a fine job). Would you rather take a shot at saving family homes and neighborhoods, which just might make additionial trillion dollar guarantees to Wall Street unecessary? Or would you rather sit around waiting for the banks to lend money, in the process suffering through a steady drip of news of how Wall Street has become "liquid" with $20+ trillion of our money? 

I don't know about you, but a self-imposed financial waterboarding - that includes giving Wall Street what they want but leaves Main Street drowing in debt - is not what I'm looking forward to.

Let me repeat. The people on Wall Street already have their money and their guarantees. I think it's time we start thinking about Main Street. Especially since it just might curb the housing free fall, and make much of the incredibly toxic CDS-CDO payoff unnecessary.

- Mark