OUR 2008 MARKET COLLAPSE ... ON A GLOBAL LEVEL

Wall Street fell 2 percent today. Many analysts want to blame it on the bleak jobs report. My friends, it goes beyond that.

For years now - in my classes, in numerous posts, and in private presentations - I have argued that history is whispering in our ear. In a few words I have tried to point to the conditions that have led to economic collapse and political breakdown in the past. Then I explain how these conditions are being recreated today.

Politically and economically a perfect storm is on the horizon.

There are many indicators that I discuss in my book, in my classes, and in my blog posts (which will also appear in my next book). Still, one thing is clear: the hedging, gambling, and artificial markets that have been created on a pile of debt have been made worse by successive bailouts and favorable legislation.

I bring all of this up because of this post from Zero Hedge. It directs us to what the founder of Global Macro Investor, Raoul Pal, has to say about the looming perfect storm. He agrees with what I've been saying for years and it's not pretty.

But unlike other investor windbags trying to scare people into investing with them Pal succinctly outlines what been happening to the global economy and leaves it at that. In a few words he writes that this looming perfect storm will soon become our reality because:

[t]he problem is not Government debt per se. The real problem is that the $70 trillion in G10 debt is the collateral for $700 trillion in derivatives ... Yes, that equates to 1200% of Global GDP and it rests on very, very weak foundations.

Translated what this means is that the combined debt of the largest economies in the world totals about $70 trillion (as a point of reference, in 2012 the entire U.S. economy will produce about $15 trillion in goods and services). The world's financial players have placed about $700 trillion in bets on this debt. Put another way, $700 trillion in global hedging and gambling rests on a pile of debt.

Worse, because that debt is unstable (think Greece, Portugal, Spain, Ireland ... EU ... England ... etc.) it effectively rests on a weak and largely artificial market.

In more practical terms, what happened in the U.S. economy in 2008 is now being done globally. And it's all made possible, in part, because successive bailouts and favorable legislation have anesthetized our political and financial leaders to the market stupidity we've created and engaged in over the past 30 years.

Raoul Pal thinks we have about 6 months left before the house of cards comes tumbling down. Definitely by 2013 he argues. I'm not so sure about the dates.

But rest assured, we're f**ked.

- Mark

WHY JP MORGAN'S BILLION DOLLAR DERIVATIVE DEBACLE MATTERS

A few years back officials from Goldman Sachs and JP Morgan Chase went in front of Congress to defend the practice of  betting trading for and against complex investment products that are also known as derivatives. Their argument was that derivatives allowed them to hedge their trades, which is critical for "risk management." This is what "sophisticated investors" and "smart money" do we were told.

What they were really defending was the practice of trading in artificial markets that produce little - if any - economic value.

Conceptually what Goldman and JP Morgan want everyone to believe is that they were doing little more than what the country farmer does. You know, the guy who hedges his bets when he plants corn just in case the wheat crop doesn't produce. Instead Goldman and Morgan executives sounded like a bunch of hucksters peddling toxic crap from the back of a showman's wagon.

Are they really con men? In my view, yes. In the aggregate their efforts at "risk management" in derivative markets amounts to little more than financial snake oil.

Con men or not it really didn't matter what they said in the hearings because many members of Congress are financial and economic illiterates (don't believe me ... check this out). Many only understand economic concepts if they fit on a bumper sticker.

What Goldman and Morgan executives were really trying to do was defend the practice of selling their clients certain products - some of which were designed to fail - with the idea that they could get another client to bet against it. For JP Morgan and Goldman Sachs it didn't matter who won the bet because they collect fees on both ends.

And they they certainly didn't have to worry about the derivative products once they dumped them on others either. They could always hide behind the market refrain caveat emptor ... you know, buyer beware.

Because many members of Congress are financial illiterates - who do the bidding of Wall Street - the executives of both firms gave testimony and left Washington with only a public slap on the hand. Business as usual would be the result. Bonuses were paid out. Mergers continued.

Not surprisingly, after appearing in front of Congress JP Morgan paid a $153 million fine to the SEC for misleading investors, while Goldman Sachs was caught rigging the game against their clients, and then made big bets with FDIC backed money (though they claim it's their money). But along the way the biggest banks got even bigger ...

And the casino continued.

Why do I bring all of this up (again)? Simple. JP Morgan's recent derivative debacle has them losing 2 ... 5 .... or 8 billion dollars. Nobody knows how much just yet. Even they aren't sure (they claim). JP Morgan would like everyone to believe that it's all an anomaly. They even let go of a few culprits (with the now standard golden parachute for screwing up).

My primary concern is that we have been here before.

Now I could take us back to the S&L debacle, the 1987 scare, the LTCM Fed-orchestrated bailout, or even back to 1929 (or any number of other "unforeseen" market failures). But let's not go there. Instead, let's go back even further to see how the "smart money" did things a really long time ago, and then decide whether what we're seeing today is really an anomaly.

The following is drawn from Chapter 4 of my book The Myth of the Free Market:

In A Short History of Financial Euphoria, John Kenneth Galbraith discusses the famous case of “Tulipomania” in Amsterdam at the beginning of the seventeenth century. What started as simple prestige for those who possessed novel tulip bulbs turned into wild speculation over successive price increases throughout 1636.

Specifically, competition over tulips turned into mania, with single bulbs trading for new carriages and homes, or fetching as much as $25-50,000 each. Demand reached such heights the Amsterdam Stock Exchange developed a futures market for the bulb. This market, as well as the dreams of many speculators, would collapse under the weight of its own nonsense and spectacular avarice.

As sellers demanded their tulip contracts be enforced, they were disappointed when their petitions fell on the deaf ears of the courts. Because the market had little to do with the production of actual goods and services, the courts viewed Tulipomania as little more than a gambling operation. As is the case throughout these histories, panic, default, and bankruptcy followed. Galbraith wrote “no one knows for what reason” the speculation and mania ended, but there’s little doubt common sense finally prevailed in a market spun out of control by deluded buyers and sellers.

Now replace "Tulips" in the story with "derivatives" and ask yourself how much has really changed since 1636. With at least a hundred trillion in derivative bets (or more) placed by Americas biggest banks we need to think about what this means for our nation today. Like our Tulip-crazed market players above, many of today's biggest market gamblers are simply interested in extracting wealth from artificial markets.

Oh, look at the pretty flowers ...

Anyways, we need to remember that at the hearings Goldman Sachs' executives sat in front of Congress and brazenly dodged questions as to whether it's their responsibility to "act in the best interest of their clients" (FF to 25:30 in this clip). What this suggests is that simply making money is the dominating mind-set of Wall Street — even if it means deliberately burning clients, or creating the conditions for another market meltdown (which they never see happening).

The focus on wealth extraction instead of wealth creation has been widespread in America for some time now. The following from Chapter 10 of my book helps illustrate the point:

Founded by a group of Wall Street hotshots and leading academics with Nobel prizes on their resumés, Long-Term Capital Management (LTCM) was created in the 1990s to search markets for price anomalies in goods that had shown historical relationships. It didn’t matter, for example, why the price of toothpaste was diverging from the price of tooth brushes; the fact that a price divergence existed was all that traders needed to make a move.

But LTCM was not trading in tooth brushes and toothpaste. They were trading in complex financial instruments that, according to their formulas, had price relationships that rarely diverged. Because the price anomaly in each “product” that they tracked was small, LTCM had to spend big to make money.

After securing hundreds of millions from investors, no doubt impressed with their pedigreed analysts, LTCM still had to borrow big to make their wagers pay off. At its height, LTCM was highly leveraged and owed investors and banks billions of dollars ...

In many ways, LTCM had fallen into the same trap as the purchasers of tulips. The company was comprised of speculators who wanted to make a quick buck. As Martin Mayer put it: "The work done at LTCM, while not illegal or sinful, was totally without redeeming social value. This is not 'investing'; it enables the production of no goods or useful services. It is betting."

LTCM came crashing down in 1998 after Russia defaulted on loans, an event that neither LTCM’s computer models nor it's Nobel laureates in economics anticipated ... The company owed so much money to the banks that the Federal Reserve of New York stepped in and brought the banks to LTCM. The Federal Reserve wanted to make sure that LTCM didn’t suddenly dump their assets to pay the banks.

The Federal Reserve feared that if LTCM was forced to sell its assets they would depress markets by forcing losses on others. The Federal Reserve’s then new chairman, Alan Greenspan, even went so far as to testify that an LTCM “fire sale” could have ended prosperity in our time. The Federal Reserve had to intervene to — in what has become by now a standard refrain — “save the system.”

At the end of the day, if you are betting on the price direction of tulips (the Dutch) ... or betting on the price direction of market anomalies (LTCM) ... or betting on the price direction of derivative products (Wall Street / JP Morgan Chase) one thing is clear. You are not investing (or even hedging). You are gambling.

These guys shouldn't be on Wall Street. They should be on the Vegas strip ... far away from taxpayer funded bailouts.

- Mark

ADDENDUM: With the biggest recipients of taxpayer bailout money controlling over 90 percent of the $135 to $592 Trillion derivative market (yes, that's $592 Trillion) we need to ask more questions about the conditions that created the financial holes at JP Morgan Chase, led to the collapse of MF Global Financial, and other slow drip market "aberrations" coming out of Wall Street. This is especially the case when you consider that the global derivatives market - which takes its cue from the United States - has grown to about $1.14 quadrillion (that's 15 zeroes)

With the total U.S economy producing about $15 trillion in goods and services in 2011 this should be cause for concern.

IS UNCLE SAM "MOM ENOUGH"?

I missed this from Mother's Day (via Barry Ritholtz). It's Wall Street, still breastfeeding from Uncle Sam ...

And, yes, it's a play on this ...

- Mark

WALL STREET'S DOING IT AGAIN (PART I)

Once upon a time there was a big problem on Wall Street. But it wasn't 1929. It was 1968. And the problem would persist until 1970. More than 40 years ago broker-dealers who over saw individual investment portfolios decided that it would be a good idea to use the assets in client accounts as collateral for their personal business deals. So, for example, if you had $500,000 invested with a Wall Street firm they would use your assets (mostly securities) as collateral for their own investment purposes.

The idea was that they would put up your assets as collateral, take out a loan, invest that money, make a quick killing, and then return the asset before anyone knew what happened. Shear brilliance, wouldn't you say?

Anyways, in part because of the increased number of trades being made at the time major market players - but especially the broker-dealers - found it difficult to keep track of all the transactions (it was before computers and automation dominated the day). No one really knew who had what. This was OK by many broker-dealers because they really didn't really want their clients (or the Feds) to know what they were up to (proprietary information, you know).

Because market players weren't offering up their own assets as collateral they made big bets. Needles to say, they were also  reckless. As the brilliant schemes of broker-dealers began to collapse, a large number of their client's assets (i.e. securities) were seized and sold. After the dust settled it was discovered that big chunks of customer accounts - many of whose assets were stuffed with fully paid securities - had disappeared.

Wow. As Yogi Berra might have said, it could be déjà vu all over again.

Banks who had granted loans to broker-dealers had cashed in the collateral. Clients lost millions. Many Wall Street firms who had either participated or winked and nodded at the activities crashed too.

In fact, more than a dozen New York Stock Exchange firms failed (many because their "back offices" couldn't keep up). Losses exceeded $100 million. To stop the bleeding of public confidence swift action was taken to prop up the securities industry. Funds were pooled from industry survivors to help compensate clients who had been cheated. But this was just the beginning.

To protect the public Congress enacted the Securities Investment Protection Act (SIPA) in 1970 which, generally speaking, is the cornerstone of Rule 15c3-3 for the Securities Exchange Commission (SEC).

Among the changes that Rule 15c3-3 did was:

* Segregate Accounts: SIPA mandated that fully paid off securities in a customer's account be kept separate from client assets that have been used as collateral, or that have not been fully paid off (i.e. purchased on margin).
* Reserve Requirement / Net Capital Rule: SIPA mandated that accounts have enough liquid assets on hand. This meant implementing a requirement that broker-dealers had to tabulate how much a client's portfolio was worth in the market, and then limited how much could be borrowed against those assets (about 8-15 times the total value; this is the "net capital" rule).
* Securities Investor Protection Corporation (SIPC): SIPC is a federally mandated, member-funded, corporation that protects securities investors if their broker-dealer cheats them or goes under. In many ways, SIPC is an insurance program for holders of securities.

Well, guess what? Because of deregulation (especially with reference to reserve requirements in 2004), much of what SIPA was supposed to do is now being undermined. To be sure, SIPA is still there. But the spirit of the law is being turned into a cruel joke.

It's somewhat complex, which is why I won't continue the discussion here in this post. But there should be no doubt that what's happening helps explain why we're in for another 2008-style market collapse. I hope to have this post up by the middle of next week, if not sooner.

Stay tuned.

- Mark

HUNTSMAN: BIG BANKS ARE THE PROBLEM

This one slipped in under my radar screen. I found it in the Fox News.com opinion section, so can you blame me? But then again, even a blind squirrel finds a nut now and then ...

Anyways, this column from GOP presidential candidate John Huntsman is a good read. He makes the point that Wall Street's biggest banks are the real threat to our economy. It's generally well written, and demonstrates why he won't be the Republican candidate in 2012 ... he's simply too practical. He also wants to break up the big banks.

Oh well, at least we know that there's hope for the party in the future.

- Mark

OBAMA SET TO CONFRONT GOP STONEWALLING IN 2012?

So Republicans are up in arms over the recess appointment of former Ohio Attorney General, Richard Cordray, to be our nation's top consumer protection agent. In the FYI category, the Constitution authorizes presidential recess appointees to serve until the end of the year, and don't require Senate confirmation. Cordray will head the Consumer Financial Protection Bureau (CFPB).

The GOP is also upset that President Obama made recess appointments at the National Labor Relations Board. I say, So what ... Who cares? Apart from the fact that the GOP has been deliberately stonewalling President Obama's agenda, President Obama is no where near making the number of recess appointments per year that his predecessors have.

President Obama's hand was forced because Republicans made it clear that unless the CFPB were gutted, and turned into a paper tiger, they would never support anyone who was nominated to head the CFPB, regardless of party.

Simply put, the GOP doesn't like the idea of the CFPB — or anyone else — protecting the interests of ordinary taxpaying consumers. To be sure, they have no problem with Republicans in Congress protecting and subsidizing the interests of Wall Street and the big banks.





They just don't want anyone sticking up for the American taxpayers who underwrite the trillions in corporate bailouts. Go figure.

Anyways, the real problem Republicans have with Mr. Cordray - as the Raw Story's Linette Lopez points out - is that Cordray doesn’t just go after Wall Street Institutions. He goes after individual executives as well. Here are a couple of examples:

* In 2009, representing several state public pension funds, he reached a settlement with Hank Greenberg and other AIG execs that blew the SECs settlement out of the water. Cordray got $115 million, the SEC got a mere $15 million.

* The following year he settled another suit against AIG itself (also for Ohio) for $750 million. Some reports said the insurance company would actually be paying out $1 billion.

* And then there was the Bank of America Merrill Lynch merger. Cordray sued on behalf of Ohio pensions on the grounds that BofA concealed billions of dollars of Merrill Lynch losses from their clients before the merger. The case settled for $475 million.

Long story short? Cordray seems to understand the many and different ways Wall Street has screwed (or tried to screw) the American taxpayer. And he wants to hold them accountable.

Imagine that ...

- Mark

WEALTH EXTRACTION 101

Remember this? (full view here; thanks Seven)

This chart explains who owns the title to one home in America. It was put together by a securities analyst who wanted to know who held the title to his home. It took him one year to figure this out. Here's the incredible part. It's the day job of this analyst to figure this stuff out on a daily basis.

Yeah, I know. Property rights in America shouldn't be this difficult. What a mess.

Anyways, I wrote about this and the legal maze that makes our financial and real estate markets such a mess earlier (here and here). Specifically I wrote that the very notion of property rights in America may be in trouble because of how Wall Street wanted access to income streams (to create securities), but didn't want to actually produce anything for the money. So they found a way to dump the actual title (plus the administrative and legal responsibility) of a home on to an obscure mega corporate entity called Mortgage Electronic Registration Systems (MERs). Then - in a demonstration of wealth extraction at its finest - they siphoned off the house payments into another legal maze (of securities) that benefited a few Wall Street market players.

And just like that, a small group of market players were able to make claims on millions of mortgage payments (through various "security" instruments) without having any responsibility for filing, registering, and tracking who owned the note on the house. (If you're looking for a metaphor it's kind of like handing the car keys, your wallet, and a keg of beer to your unemployed cousin and telling him to have fun.)

This is where it gets real good.

Rather than deal with homeowners after the mortgage bubble collapsed - and after their mortgage payment-security scheme went bust - Wall Street and other big market players said: "We can't negotiate with homeowners because we don't have the title to the home (MERs does). And besides, the loans have already been sold several times over ... oops."

Then, while threatening that system collapse was imminent if they didn't get bailed out, Wall Street and America's biggest financial players got the federal government to provide them with trillions in taxpayer backed guarantees. Why should big banks and Wall Street have to negotiate with homeowners (and learn from market justice) when Uncle Sam can foot the bill for their greed and arrogance?

Trillions of dollars in bailout money are now being used to purify and prop up an entire industry, while filling financial holes created when the income stream (i.e. mortgage payments) behind Wall Street's (pyramid) security schemes dried up.

Again, wealth extraction at its finest (if you're wondering why Wall Street isn't in jail, me too).

Anyways, I'm writing about all of this (again) because of how this Harper's Magazine article on MERs (hat tip to Barry Ritholtz) explains how Wall Street can make claims on money without actually producing anything of value. It also helps us all understand how our nation's biggest market players have undermined our nation's market integrity, while making a mockery of property rights in America.

If you care about the Constitution (hello, Tea Party) and the future of our nation this is one of the areas where you should be directing your attention.

- Mark

BORROWING $1 TRILLION IN ONE DAY ... WHY IT MATTERS (and where the hell is the Tea Party on this?)

Exactly three years ago today, at the height of the market crash, I pointed out on my blog (and my radio program) that the biggest banks in America were granted well over $1 trillion in ultra-low interest rate loans by the Federal Reserve. These loans were granted so the biggest banks would have money to stuff the financial holes that their trillion dollar (derivative) bets had created. They also helped purify toxic crap and kept the banks out of court.

Best of all, the loans were backed by the government American taxpayer.

Thinking how bad things were - and so people could see for themselves - I explained (very slowly) how to find the more than $1 trillion in loans in the Federal Reserve's December 11, 2008 "Flow of Funds Accounts" release.

Things were so bad at the end of 2008 that the banks borrowed $1.2 trillion on December 5, 2008. Let's repeat that ... the banks had to borrow $1.2 trillion on one day.

Worse, much of the collateral the banks put up to secure the loans was either inflated, or simply toxic crap. These toxic instruments are the stuff you and I will get stuck paying for over the next few decades.

Putting it All in Perspective
To put $1.2 trillion in perspective, think about this little nugget: $1.2. trillion is much more than what President Bush spent on the TARP bailout ($750 billion), and far more than what President Obama asked for in the Stimulus Program ($825 billion, of which $275 billion were tax cuts). And it's also far more than the $907 billion we owed as a nation in 1980.

As you can imagine, the Federal Reserve and the big banks fought to keep $1.2 trillion in bailout loans a secret. To do otherwise would have alerted America to how much trouble the banks were really in back in 2008 (they're still in trouble). It was the largest loan-bailout in U.S. history, after all.

Fortunately for America's biggest financial institutions most Americans didn't catch on to what was happening. This includes the vast majority of our incredibly hypocritical "We Just Found Financial Jesus" Tea Party movement. Most them still don't have a clue. Nor do they seem to understand how the banks used more than $1 trillion in low interest loans to profit off of the U.S. taxpayer.

How the Banks Profited ...
Thanks to Bloomberg News we can see exactly who profited from the barely above zero interest loans made to Wall Street's biggest banks. One thing's for sure. It wasn't the American taxpayer. Here's the details.

Simply put, the banks made about $13 billion in taxpayer funded profits (play with the interactive here). How did they do it, you ask? Simple. They borrowed the money at rock bottom interest rates from the Federal Reserve, then "walked down the street" (as it were) to purchase Treasury Bonds from the federal government that paid almost 3% interest. A classic case of robbing Peter (the American taxpayer) to pay Paul (themselves).

But wait, it gets better (or is that 'worser'?).

Flush with cheap taxpayer-backed loans America's bankers began lobbying Washington to stop the movement for more regulations. Their argument? Since they were so healthy - and weren't bankrupt - they didn't need pesky regulations. Regulations and oversight distracted them from making money.

That's right. While America's biggest bankers were on government life support - and had one hand in the taxpayer's pockets - they were also pretending they had done nothing wrong. Ergo, they didn't need to be regulated.

While TARP and taxpayer backed loans enabled banks and Wall Street to dodge bankruptcy, America's biggest banks began turning away and punishing customers who lost their jobs and homes as a result of the 2008 market collapse. Bankrupt citizens facing tough times as a result of the market collapse had to be punished.

Long story short? In spite of collapsing the economy, and asking the American taxpayer to underwrite their market stupidity, the banks demanded market-like discipline be imposed on the American public. It didn't matter that the American taxpayer had helped turn their toxic investments and stupid bets into market gold.

Aren't double standards beautiful?

The Chutzpah Behind the "Self-Esteem" Loans ...
Let's make this real simple. If the banks had not received government loans, or had been forced into bankruptcy or receivership, the lobbying efforts of the banks would have been comical (they still are in my book, but that's another story).

But stuffed with TARP bailout money, and with emergency loans from the Federal Reserve (who created brand new loan "facilities" for troubled banks), America's biggest failed banks were able to escape market justice and pretend things were just fine. Congress played along ... as they continue to do today. But here's the kicker.

In a classic WTF moment, the banks argued that they were simply borrowing from the Fed (again, at least $1.2 trillion in one day) so other banks wouldn't feel "stigmatized" by having to take loans from the Federal Reserve. Huh? Are you kidding me? How clueless are these people? They didn't want other banks to feel shame for making stupid decisions, so banks had to borrow money from the Federal Reserve? Unbelievable.

At the end of the day, the thinking behind our banker bailout programs is akin to the logic behind toddler leagues. You know, the leagues where parents don't keep score so they don't hurt little "Johnny's" feelings. Incredible. Apparently bankers and Wall Street need self-esteem programs too.

Keep this in mind the next time your friend wants to discuss corporations and rugged individualism in America.

The End ...
This, my friends, is just one reason why it's difficult to take the status quo "happy talk" about profits, falling unemployment, and Wall Street success stories seriously. It's all backstopped with trillion dollar federal loans and taxpayer furnished bailout money.

The happy talk about Wall Street means little for jobless and foreclosed upon Main Street. Monopoly Man's successes mean nothing to Joe Six-Pack. This is especially the case since it's all backstopped with taxpayer money, still overly complex loan structures, lax regulatory oversight, and record debt loads.

So - again - my question is Where's the Tea Party outrage on all of this?

- Mark

WALL STREET'S GET OUT OF JAIL FREE CARD ... "INTENT"

If you ever wanted to know why no one from the financial sector and Wall Street is behind bars look no further than this 60 Minutes piece on mortgage fraud and Countrywide. Simply put, committing fraud isn't enough to get you prosecuted. You have to show that fraud was also intended (can you imagine a criminal defendant saying, "I didn't mean to kill him, he just happened to be in the way of my bullets"?).

Also, in the FYI category, none of this was confined simply to Countrywide either. It was prevalent and encouraged throughout the industry (and by Wall Street), and is indicative of corporate entitlements and protections that you and I don't get.

I've said it before, and I'll say it again, we can fix a lot of this if we understood Bill Black's "control fraud" better, and used RICO statutes to go after our financial institutions as criminal enterprises ...

- Mark

GERMANY'S THE KEY

With a Hat Tip to Barry Ritholtz, here's some really good interactive graphics that provide additional information on Europe's (and our global) debt mess. Enjoy (or get worried).

And keep in mind - as I discussed here - there's a difference between systemic risk (the political stupidity in the U.S.) and financial risk (Greece). How people talk about Europe's debt is important. At the end of the day, Germany's the key ... and pray to God (or whoever you pray to) they're either poitically ambitious or still looking for redemption.

- Mark

THE GOP FIELD ... LIKE BLIND MEN IN A ROOM FULL OF DEAF PEOPLE

Republican presidential candidates are ignoring reality, again.

Ten months ago I wrote that the GOP would - against all the evidence - begin blaming the government for a housing mess that was largely caused by the private sector and Alan Greenspan's policies. I wrote about it again in June. So, what happened last week? GOP presidential hopefuls blamed the real estate mess on "the government."

Like Paul O'Neill's blind man in a room full of deaf people, the GOP field ignored the role "Wall Street," "deregulation," and our "shadow banking" system played in creating the conditions for our housing market to bubble and burst. Nice.

But none of this should come as a surprise. GOP operatives began laying the groundwork for this narrative ... last December. Like last year's GOP operatives, todays Republican presidential hopefuls ignored the following:

* Freddie Mac and Fannie Mae were privately managed (and even became one with Wall Street) during the worst period of the housing bubble and bust.


* The real estate bubble and crash was global. Freddie, Fannie and the Community Reinvestment Act aren't global.


* Our commercial real estate market bubbled and crashed, too. Housing policies concerning Fannie, Freddie and the CRA had nothing to do here.


* Federal Reserve data reported that more than 84 percent of subprime mortgages in 2006 (right before the crash began) were issued by private (shadow) lending institutions. Yeah, that's 84 percent.


* Of these, only one of the top 25 subprime lenders in 2006 was directly subject to the housing laws like the CRA.

For added measure, here's what Federal Reserve Chair Ben Bernanke had to say about the real estate bubble and crash: 

"(M)ore than 30 years and recent analysis of available data, including data on subprime loan performance, runs counter to the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties."

And the GOP's vaunted free market claim? Their record's not good here either. Back in 2003 Republicans began praising subprime lending as the type of innovative lending that comes from deregulated or unfettered markets. Again, they praised subprime lending that led to low quality mortgages.

But this isn't the worst of it.

The real story here is how Republican members of Congress actually used Wall Street talking points to criticize Freddie and Fannie in the lead up to collapse. They did this because it helped AIG, Goldman Sachs, Lehman, Merrill Lynch, etc., muscle in on Freddie and Fannies market share (between 2004 and 2006 Fannie and Freddie went from holding a high of 48 percent of the subprime loans to about 24 percent).

After dumping many of these products on unsuspecting clients, Wall Streets economic mandarins are now dumping many of these toxic ("legacy") assets on the American taxpayer, in exchange for cash payouts.

You won't hear any of this from the GOP list of presidential candidates. Ever.

- Mark

THIS IS WHY MORE AMERICANS SHOULD BE IN THE STREETS

Yesterday we had an interesting conversation in class about the global economy and America's debt load. Students wanted to know why we're accumulating so much debt. I explained, apart from reckless policy decisions made under President Bush, that we're lending or committing massive amounts of money - backed by the American taxpayer, mind you - with little or no understanding of where it ends up.

One egregious example was when half a trillion dollars was transferred to Europe's central banks. Federal Reserve Chair Ben Bernanke couldn't track or explain it's final whereabouts. Seriously, even after trying to check his notes, Federal Reserve Chair Ben Bernanke had no clue about the final destination of half a trillion dollars. That's $500,000,000,000. Check it out here.

Look, accounting for a half a trillion dollars shouldn't be that difficult. Back in 2009 half a trillion dollars amounted to approximately one-half of what all of America produced and sold (GDP) in one month ...

Not being able to account for the monetary equivalent of one-half of America's total economic output for a month is akin to you and me not knowing where half our paycheck goes every month. Most people can explain where one-half of their paycheck goes every month.

I know I can. And I can do it without notes too.

But wait. It gets better (or is that worse?). Half a trillion dollars is small potatoes when we consider the trillion dollar transactions that the Federal Reserve couldn't account for back in May of 2009. Actually, it was about $9.7 trillion. But who's counting, right?

Fortunately, for us, there were several independent bean counters who figured out where the money was going. And they have nice interactive graphs that explain where the money went. Here's The Atlantic Monthly with a nice interactive of "The Fed's Cash Machine" ... in May of 2009.

If Bernanke was too busy saving the world during May of 2009 to read the The Atlantic Monthly he could have checked out Bloombergs interactive of the $9.7 trillion that we've encumbered ... back in February of 2009!

So, how many of you have heard Washington's courageous politicians talk about the trillions in future obligations that we've been put on the hook for to save Wall Street? But I'm sure you've heard plenty about taxing the bottom 50% of Americans who pay no income tax, right?

But consider this. The bottom 50% earn or own the equivalent of $1.5 trillion, total. This means we could confiscate everything the bottom 50% earn or own this year - and then turn them into industrial slaves - and we still wouldn't come close to paying what we've paid as a down payment on the 2008 market collapse.

At the end of the day, as I explained in class, we're looking at several problems here.

First, all of the money we've made available to Wall Street and the biggest banks is being used to clean up toxic assets and the failed market bets that created our bubble economy. The result is that many market players now look solvent and successful when, in fact, many should be under indictment.

Also, I have a problem with Federal Reserve officials who often don't know - or claim not to know - who ultimately gets the money we lend or make available. Playing stupid with our money is not a quality we should encourage.

Look, as early as December 2008 I found a trillion dollar hole in the Federal Reserves balance sheets. It didn't take as long as you might think. If I can find a trillion dollar obligation made with taxpayer backed dollars don't you think Federal Reserve officials should be able to explain where it went? Me too.

Next - getting back to Bernanke and that mysterious half a trillion dollars we discussed above - we need to keep in mind that the European Union could collapse under a series of national defaults (hello Greece). This is a problem because we lent the money to the EU, not to individual European nations. If the European Union collapses the EU may never pay back the hundreds of billions they've borrowed. This is a distinct possibility since Europe is essentially using debt to pay off debt, and because the language in the Fed's loan contracts to Europe effectively allows roll overs in perpetuity.

This means that what we've lent to Europe would stay on our books as debt. Nice.

Long story short? We've accumulated trillions in debt obligations that Congress neither signed off on, nor seem overly concerned about. And it's all been done in the name of saving Wall Street and the biggest banks.

Even if most ordinary Americans don't understand the specifics, they intuitively understand the larger implications. This is why they are pissed off at Wall Street. It's really that simple.

- Mark

THIS IS OCCUPY WALL STREET

Former reppresentative Alan Grayson explains Occupy Wall Street in less than a minute ...



Former representative Grayson also makes P.J. O'Rourke look puny and insignificant, as this longer clip from The Raw Story illustrates.

- Mark

KRUGMAN: "PANIC OF THE PUTOCRATS"

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In addition to creating the link, I'm going to post half of Paul Krugman's NY Times' op-ed, "Panic of the Plutocrats." Follow the links to read the entire article. It's excellent.
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Op-Ed Columnist
Panic of the Plutocrats
By PAUL KRUGMAN
Published: October 9, 2011

It remains to be seen whether the Occupy Wall Street protests will change America’s direction. Yet the protests have already elicited a remarkably hysterical reaction from Wall Street, the super-rich in general, and politicians and pundits who reliably serve the interests of the wealthiest hundredth of a percent.

And this reaction tells you something important — namely, that the extremists threatening American values are what F.D.R. called “economic royalists,” not the people camping in Zuccotti Park.

Consider first how Republican politicians have portrayed the modest-sized if growing demonstrations, which have involved some confrontations with the police — confrontations that seem to have involved a lot of police overreaction — but nothing one could call a riot. And there has in fact been nothing so far to match the behavior of Tea Party crowds in the summer of 2009.

Nonetheless, Eric Cantor, the House majority leader, has denounced “mobs” and “the pitting of Americans against Americans.” The G.O.P. presidential candidates have weighed in, with Mitt Romney accusing the protesters of waging “class warfare,” while Herman Cain calls them “anti-American.” My favorite, however, is Senator Rand Paul, who for some reason worries that the protesters will start seizing iPads, because they believe rich people don’t deserve to have them.

Michael Bloomberg, New York’s mayor and a financial-industry titan in his own right, was a bit more moderate, but still accused the protesters of trying to “take the jobs away from people working in this city,” a statement that bears no resemblance to the movement’s actual goals.

And if you were listening to talking heads on CNBC, you learned that the protesters “let their freak flags fly,” and are “aligned with Lenin.”

The way to understand all of this is to realize that it’s part of a broader syndrome, in which wealthy Americans who benefit hugely from a system rigged in their favor react with hysteria to anyone who points out just how rigged the system is.

Last year, you may recall, a number of financial-industry barons went wild over very mild criticism from President Obama. They denounced Mr. Obama as being almost a socialist for endorsing the so-called Volcker rule, which would simply prohibit banks backed by federal guarantees from engaging in risky speculation. And as for their reaction to proposals to close a loophole that lets some of them pay remarkably low taxes — well, Stephen Schwarzman, chairman of the Blackstone Group, compared it to Hitler’s invasion of Poland ....


Read the rest here.
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- Mark

THE WHINE INDUSTRY ...

Kudos to Tom for finding this. The Whine Industry ...

- Mark

A MONKEY WITH DARTS, AND OUR ON-GOING MARKET "CRASHES"

So the market's tanking. Again. Yawn ...

Every time this happens I have fun watching the market analysts. Many like to pretend they know what they're doing when, in fact, they're little more than market cheerleaders, who live in a bubble that they help inflate.

What they ignore is that for the better part of 30 years what's been supercharging the markets - and subsidizing their profits - has been a combination of emergency bailouts, easy money policies (the Greenspan Put), plus favorable legislation and reckless deregulation (which has pretty much made gambling legal on Wall Street).

Then we have the backdoor bailouts, regulatory market props, and other government supported market schemes that pretty much insure that a monkey throwing darts could have made money in the market over the past 30 years. Seriously.

Don't believe me? Check out this story.

A Monkey Throwing Darts

In 1988 the Wall Street Journal began a contest inspired by Princeton Professor Burton Malkiel’s book A Random Walk Down Wall Street. In the book Malkiel suggested that "a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts."

While the WSJ didn't ultimately use real monkeys (liability issues) they did use staff members to throw darts. The contest became such a popular feature in the WSJ that journalists and academics alike wrote about the implications (which you can find here). While rules were established and changed over time the basic guidelines included asking four professional market players to make market picks each month. They would then select one stock that would be followed over the next six months.

The "pro" stock picks competed against four stocks chosen by the Journal's "monkey" staffers, who tossed darts at financial pages pasted on a board. On October 7, 1998 the Journal presented the results of the 100th dartboard contest, with the pros winning 61 of the 100 contests.

There's no doubt that winning 61 out of 100 times is impressive. It would get you into the playoffs in most professional sports. But the fact that throwing darts randomly at financial pages could produce better results than the pros 39 percent of the time says much about market players. Think about it. A team of monkeys wouldn't beat a professional sports team 39 percent of the time, even if they were WSJ monkey staffers.

But wait, it gets better.

The performance of the market pros "sure winner" stocks was compared against simply leaving portfolios alone to ride out the fluctuations of the Dow Jones Industrial Average. It was even less impressive. The pros beat the DJIA only 51 out of 100 contests (though pro returns were slightly better). Put another way, if you simply invested and left your money alone in a portfolio (i.e. passive investing) you - the real investor - would've beaten the pros almost half of the time.

In 2002, the WSJ stopped the contest, but wouldn't say who won. Still, a point was made.

This isn't good, especially when you consider management fees, transaction costs, or taxes assessed on taxable investors.  And all for what? So you can be told the market equivalent of "don't put all your eggs in one basket"? (though, to be fair, there are smart market players who will tell do-it-yourselfers what to look for, or who will admit that they really can't beat the market over an extended period of time).

If you don't want to dump your market expert for monkey staffers with darts that's fine. I wouldn't either. Playing the percentages wins games in baseball too.

Still, confirming for us all that market analysts and market pros aren't always the best sources for understanding what's happening in the market is the following ...

Going Ape in 2008
We always want to keep in mind that a great deal of the market enthusiasm before the 2008 market crash came from market experts who were supposed to be objective analysts. None of them ever took a step back to explain that the market surge since the 1980s was a direct result of government bailouts, Fed money dumps, and reckless deregulation - or that it couldn't last.

In fact, none of the market experts who were cheer leading everything from deregulation-tinged CDOs and CDSs - or those who were coddling the financial titans that peddled financial crap - were made to pay for their boot licking incompetence after 2008.

Look at all the talking heads on the cable networks today. Who left? Who was forced to resign in disgrace from the networks?

Then we have all those bonuses that were paid out to Wall Street for doing such a bang up job before 2008 ... What made the "recovery" and record payouts possible? Taxpayer backed guarantees, or market acumen?

Which brings us back to what's happening in markets today. Let me make this real simple, again. The outlandish market successes we've been enjoying over the past 30 years have been the product of primarily three interrelated market subsidizing developments:

1. Bailout Nation 

2. Easy Money (the Greenspan Put + debt)

3. Favorable Legislation / Reckless Deregulation

At the end of the day, our market system is living on borrowed time, and borrowed money. And it's all government sponsored. When these three "magic of the free market" gifts end, or stop working - for whatever reason - the geniuses who have been managing your money, or talking up the markets, will no longer be geniuses.

And I should know. I've been a market guru for some time now ;-)

- Mark

UPDATE: From the Wall Street Journal, "Advisers' stock recommendations drag down clients' portfolio, study finds."

WALL STREET OPERATING AS A CRIMINAL ENTERPRISE?

If you want to know what's helping to drive the protests on Wall Street check this out ...

I've been saying that we should use mob-driven RICO statutes to go after the banksters for some time now. The key is prosecuting our biggest banks as criminal enterprises. So, have our nation's biggest banks become criminal enterprises? This July article from Money Morning's Shah Gilani - "The Bank of America Settlement: The Latest Travesty in the U.S. Banking System" - says the answer is "yes."

Those of you who follow this blog know why I agree. So, I'll leave it at that for now.

On another note, this article on pensions explains why we need to keep public sector defined benefits programs with the public sector, instead of shifting public sector retirement monies to Wall Street/private sector managers.

In a few words, the private sectors fee and bonus stuffed overhead costs are prohibitive, with guaranteed percentages regardless of performance. In many ways, it's the essence of wealth extraction over wealth creation.

Neither article is long or overly complex, so I'm pretty sure you'll enjoy both.

- Mark

THIS SHOULDN'T BE A SURPRISE TO ANYONE (but I'm sure it is)

Bank of America is being accused of cooking the books to hide potential losses of at least $10 billion. Yawn ...

If you've followed this blog, and read about Bank of America's faux paybacks ... or the wonderful world of book cooking Structured Investment Vehicles here and here ... or corporate America's evolving legal blame game ... Bank of America hiding $10 billion in losses shouldn't be a surprise to anyone. But I'm sure it is.

The only question now is how they explain and then bury the problem with some more creative book keeping.

And you wonder why market-to-market is so important for the banks ...

- Mark  

GAMBLERS IMITATING WALL STREET ...

Life imitates art. This the phrase we use when events in the real world mirror or seem to be inspired by creative work. Now we have this example of gamblers imitating Wall Street ...

The Justice Department is filing charges against online's Full Tilt Poker, claiming that it's really a Ponzi scheme that's cheated its players out of hundreds of millions of dollars.  The Justice Department claims that over the course of four years Full Tilt Poker's executives used $444 million of player gambling deposits - which were supposed to be protected separate accounts - to pay themselves millions. Specifically, federal prosecutors claim top executives Raymond Bitar paid himself $41 million and Howard Lederer received $42 million.

Gamblers imitating Wall Street ... this is the essence of what Bill Black meant when he wrote about "control fraud" in The Best Way to Rob a Bank is to Own One.

- Mark

P.S. Here's a thought. To be fair, Wall Street did imitate Vegas when it created and then collapsed our Casino Economy in 2008. Kind of begs the chicken/egg question, doesn't it? Twilight Zone here we come ...