Posted on 10/14/2010 2:45:53 AM PDT by dennisw
The truly depressing thing in all of this is the political bind in which we find ourselves.
One one side of the fence, we have a party of mendacious hacks and grifters, who know full well behind closed doors how the financial system works, and they’re fully happy to work that system for their own private benefit and that of their Ivy League cohorts. Grifters, frauds and thieves all. The bank fraudsters know they can buy their way into huge profits and buy their way out of trouble when the crap hits the fan with this bunch.
On the other side of the fence, we have a party of people who either know nothing about finance, or people who *think* they know something about finance but who, in fact, have an idea of finance as it worked about 30 to 40 years ago. The bank fraudsters know they can depend on this group to squawk like a bunch of trained parrots about such nonsense as “free markets” when in fact there hasn’t been any such thing in this country in decades. The bank fraudsters know that if they talk a good game of “let the private sector solve the problem” with this bunch, they’re too stupid to follow the game of three-card monty as the banksters swindle, dupe and cheat the taxpayer into taking monstrous risks, the American public into giving up their money and the banksters into making absurd profits.
So that’s what we’ve got: the political parties of Cunning Duplicity and Blissful Ignorance.
In between, we’re getting robbed blind.
I’d like to hope that the GOP would do something about this mess, but I cannot name ONE Republican in office today who could tell me the mechanics of this mess off the top of their head, using the correct terminology. Not ONE. They’re all too stupid about finance to do anything other than sound like clones of Larry Kudlow. As such, I have no delusions that the GOP will do anything other than watch the world burn down around them, asking innocently as the rest of us are running around like a Chinese fire drill: “ Do you smell something? I thought I smelled something, but I can’t be sure... “
Think of a mutual fund as a good example. If I am a mutual fund manager and you are a prospective (or current) investor, you are basically investing money in my fund based on the expectation that I am going to make prudent, sound business decisions that you don't have the time or knowledge to make on your own. Maybe I do some research into Company X and decide that it's a terrible investment at $45 per share for any number of reasons . . . but despite all those problems it is well worth the investment risk at $15 per share. Am I obligated to disclose -- to all current and prospective investors in my fund -- the information I used to make this decision, along with the reasons why I thought it was a wise decision to buy at $15 something (shares in Company X) that I wouldn't have even dreamed of buying at $45? Absolutely not.
If an individual investor does their own research and decides that investing in Company X at $15/share was a bad idea, then they really don't have any recourse against me at all. In fact, they're just making the case that they probably shouldn't be investing in my mutual fund in the first place.
What Citi did in negotiating the prices of those "risky" loans downward is no different than what any bond fund manager does when determining what price he/she is willing to pay for different grades of corporate or government bonds. If a bond fund manager decides that a corporate bond paying 6% interest is a high default risk, then they just don't pay "face" value for that bond. It doesn't mean they don't buy the bond, it just means they discount (substantially) the amount they're willing to pay for it.
MCI (before it got taken over by the criminal Ebbers of Worldcom) was a great example of this. It was built largely on 'junk' bonds, and had grown from a small regional service prior to the Bell breakup into a multinational with plenty of money in the bank and cash-flow. This was what made it such an attractive target by the scum-bag Bernie Ebbers, who was running a ponzi scheme that he couldn't keep going after leveraging himself so heavily to take over MCI.
There was nothing inherrently wrong with so-called junk bonds as they were a vehicle to finance growth of smaller companies that didn't have the resources of their blue-chip competitors.
That’s a very good point. It’s also interesting to note that back when Milken first began doing research into junk bonds back in the early 1970s, there was no such thing as a corporate bond issued by a small company. The world of corporate finance hadn’t yet reached the point where they would even consider lending money to small companies. As a result, the only low-grade corporate bonds (i.e., junk bonds) on the market in those days were those bonds known as “fallen angels.” These were the corporate bonds of large companies that had formerly been low-risk, blue-chip giants but had been relegated to “junk” status as they declined over time.
The difference with a Mutual Fund is that the price of the underlying assets is known, and all public info is known, and the assets themselves are known. If the assets themselves (the morgages) aren’t public knowledge, and Citi didn’t pass along the price difference to the buyer, but just increased their margin, it seems fraudulent to me.
Which regulatory body and which regulations apply to derivatives are confused and confusing. CDOs included. Not sure what laws apply, so I can’t speak intelligently to it.
I don't think there's any question, though, that there is very little regulatory oversight at all.
Interestingly, this relates to a legal dilemma of sorts that goes all the way back to the establishment of the first mortgage bonds back in the 1970s. One of the basic problems Wall Street firms and investors faced back then was that there was no clear definition of what type of legal umbrella these bonds would come under -- and whether they were to be covered by real estate law, securities law, or some combination of both.
Here it is 30+ years later, and there are still a lot of unresolved questions about this.
In the 90’s I was tangentially involved in federal cases that gave plenty of warning of the legal confusion related to derivates regulation. Congress and the regulatory bodies apparently didn’t bother to clarify it. Probably were given plenty of donations not to . . .
It’s an “apres moi le deluge” mentality. Wall Street and hack politicians are trying to extract the maximum from the system before it collapses
If not one new home was built, it will still take three years to move all the inventory cuurently on the market.
Yep. This latest "government-political-legal-industry complex" and "social justice"-induced mortgage and "property title" mess in the states is all but guaranteed to shut down the remnants of real estate activity for at least a few months until this issue is dispensed with. The banks will lose a lot of money while deadbeats and "strategic defaulters" scream "mortgage fraud" and live rent-free in "their" homes. The banks will have to recover these losses with higher fees and cut services to their contracts-abiding "paying" customers... er, suckers... Just because there may have been a few legitimate cases where mistakes on the part of the banks, which are overwhelmed by sheer volume of defaults and related paperwork, have led to improper eviction proceedings.
Excerpt from Let’s Not Start Lionizing The Anti-Foreclosure Deadbeats - CNBC, by John Carney, 2010 October 13
The typical person who is fighting foreclosure on “show me the note” grounds is someone who has stopped making payments on their mortgage but refuses to surrender their house to the bank. Some of them may not even be suffering from financial hardship—other than having taken on debt that they cannot afford. ..... < snip > < snip > ..... know there are cases—or at least, one case—where people have been wrongfully foreclosed upon. But there is little evidence that banks are engaged in any systemic practice of throwing people who do not have mortgages or are current on their mortgages out of their homes.
The magnitude of losses for the banks is analyzed here:
JPMorgan Says Real Estate Could Wipe Out $3 Billion - CNBC, by Ash Bennington, 2010 October 13
What it means for future sales / real estate activity:
Foreclosure Fraud: It's Worse Than You Think - CNBC, by Diana Olick, 2010 October 12
It concludes with "..... Quite the can of worms. Anyone who says that the banks will fix all this in a few months is seriously delusional."
Excerpt from A Primer On The Foreclosure Crisis - CNBC, by John Carney, 2010 October 11
< snip >..... This issue has been quietly simmering in the background of the housing crisis for quite some time. Gretchen Mortgenson of the New York Times wrote about it back in 2007. It gave rise to a “show me the note” movement of people contesting foreclosure proceedings. ..... < snip >
Of course, many investors in MBS which are now underwater, could be using this newest legal crisis to try and shift the blame to the sellers of the securities for not doing their "due diligence" or the "inadequate disclosure" (SEC vs Goldman-Sachs) especially now, when the losses could be mounting due to the foreclose mess:
Foreclosure Halt 'Catastrophic' to Investors Says Group - CNBC / Reuters, 2010 October 11
The last word is from our newest consumer czar and protector Elizabeth Warren:
No More Tricks to Boost Bank Profits: Obama Adviser - CNBC / Reuters, 2010 October 12
< snip > ..... "The room for anybody in the financial services industry to make their money by squeezing you here and squeezing you there, tricks and traps, that is going to go away," she told an online White House forum to which the public submitted questions. Obama appointed Warren last month to stand up a new consumer protection bureau to ensure fair play in lending, in order to prevent a repeat of the abuses that led to a subprime mortgage crisis and a severe U.S. recession. ..... < snip >
... and the free-riders who enable them, feed them and feed on them.
Right on the money! Most of the loans in these portfolios were at or above the loan "standards" set and continuously lowered by the Feddie (Fannie + Freddie) and FHA (with the help of enforcement from HUD and the likes of Secretary Andrew Cuomo). None of this should have risen to the status of massive states-wide class-action torts, if it weren't for the benefit of lawyers and politicians.
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