U.S. Financial Markets: The Well Has Been Poisoned (Anger of the Honest Part II)

Of Two Minds ^ | 10-23-2010 | Charles Hugh Smith

[blam]

U.S. Financial Markets: The Well Has Been Poisoned (Anger of the Honest Part II)

October 23, 2010
Charles Hugh Smith

When financial markets have become riddled with fraud, embezzlement and corruption that goes unpunished, then institutional players will avoid that market as crooked: the well has been poisoned. The full consequences of what I termed The Rot Within: Our Culture of Financial Fraud and the Anger of the Honest (October 15, 2010) are now unfolding: the well has been poisoned. One of my most astute correspondents made a critical observation that I've seen nowhere else: once a market has been poisoned by fraud which goes unpunished, then institutional players will avoid that market as untrustworthy.

Without institutional trust and participation, the market then withers on the vine-- exactly what has happened to the U.S. mortgage securities market. The market for mortgage-backed securities has vanished, except for one player: the Federal Reserve, which has bought a staggering $1.2 trillion in the past 18 months to create the facsimile of an active market.

The well has been poisoned. The only mortgages being traded are those 100% guaranteed by the U.S. government: in effect, the risks intrinsic to a corrupted market have been shifted to the taxpayers, while the criminals who profited from the fraud and embezzlement got away scot-free.

Here are the correspondent's comments:

RE: Will bankers Go to Jail for Foreclosuregate?:

When I was in the Wall Street game, our small-cap fund was for a time in the top 5% of performers. I got bored and left, which is a longer story. Anyway, I observed a phenomenon about fraud. First it happened. Then it was widely publicized. Then it was prosecuted, and some big names were jailed. At that point, it was safe to go back into the water.

This happened in a few industries prior to the mid-1990s, at which point basic law enforcement was neutered and there were no more fraud prosecutions that mattered. I have always thought that the lack of fraud prosecutions for Internet/telecom fraud was a significant reason why the NASDAQ has never made a significant recovery to anything close to its peak reached in March 2000.

Watch carefully on the foreclosure frauds. If real jail terms are handed out to some (doesn't need to be all) big players, that will be a green flag. The public at large won't see it or believe it, but the professionals will. I am not predicting that this will happen. In fact, I'm quite skeptical that it will. However, any intelligent skeptic considers all the possibilities.

This is why no institutional investor will touch private-market mortgage securities with a 10-foot pole. The U.S. government and the Fed had a stark choice: either impose the rule of law and indict and convict hundreds, if not thousands, of people who perpetrated and profited from the systemic fraud and embezzlement at the heart of the mortgage and mortgage-securities industries, or socialize the corrupted, poisoned markets and use taxpayer funds to prop up the wizened shell of a stripmined market and reward the criminals with freedom.

They chose to reward the criminals and prop up a simulacrum market with only one buyer: the Federal Reserve. You can go to the the Fed's balance sheet and see the $1.2 trillion in mortgage-backed securities it owns. There is no effort to hide the brazen socialization of what once was a private-sector, free market.

When the well has been poisoned, the only players dumb enough to drink from it are the taxpayers, who have no choice as the politico toadies of the investment banking/financial Power Elites have funneled some $13 trillion in cash, backstops and guarantees into their "partners" who fund their campaigns and write the laws via their lobbyist proxies.

The Fed isn't dumb--it's desperate. The markets, systemically riddled with collusion, cronyism, fraud, embezzlement, misrepresentation and outright lies, have no participants except Central State proxies and "marks" who sadly still believe the ceaseless propaganda about "rising corporate profits," "recovery" and "a free-market economy." Hahahahaha--free market! Please don't make me laugh that hard, I might hurt myself.

If you are so confident in the "transparency" and trustworthiness of the mortgage securities market, please tell us how many private institutional investors are buying mortgage securities which aren't 100% guaranteed by the Central State.

The same distrust has poisoned U.S. stock markets. The high keening cry to "get into the market while stocks are cheap" which has been spewed daily for months on end on network TV and other channels of raw propaganda has been ignored by the "retail investor," a.k.a. the top 20% of Americans who have financial wealth to preserve and invest.

For 24 straight weeks, retail investors have been pulling tens of billions of dollars out of U.S. mutual funds and plowing hundreds of billions into low-yield Treasury bonds.

Why? Because they sense the stock market is hopelessly, deeply corrupt and by comparison Treasuries are trustworthy. You won't make a lot of yield in Treasuries, thanks to the Fed's zero-interest rate policy (ZIRP) which is designed to drive money into risky assets, but then you won't lose 40% like you did in 2008-09 or 2000-2002 in the stock market.

We can also see how insiders are responding to the knowledge that the well has been poisoned: they're selling 500 shares for every share they buy. This unprecedented cascade of insider selling has been noted elsewhere many times, as has the declining expectations for the "recovery" of U.S. CEOs.

Those who know the most are selling their shares as fast as they legally can, and are publicly expressing their lack of faith in the tricked-up "recovery."

The U.S. financial markets have been poisoned, with long-term negative consequences. Only crooks, fraudsters and "marks" (those who still believe the propaganda about the "recovery" and "stocks are cheap" poison) will be left in a stock market propped up by the same socialization of risk which keeps the flimsy facade of a mortgage market from crumbling. High-frequency trading machines create the illusion of a market, and State intervention via proxies and other corrupt games provides the liquidity needed to fund the facsimile of a "rising market" and a "recovery" in the U.S. economy. But the public isn't buying the fraud any longer; they finally "get it": The well has been poisoned and only a fool drinks from a poisoned well.

This is why we can safely anticipate a hollowed-out stock market which trades at a steep discount to its present propped-up levels in the years ahead--until the crooked players are indicted and the financial markets thoroughly cleaned. That will take political will which is completely lacking in the Demopublican-Republicrat status quo. For more on this, please read:

The Loss of Trust and the Great Unraveling To Come (October 18, 2010)

The Normalization of Sociopathology in America (October 16, 2010)

The Rot Within: Our Culture of Financial Fraud and the Anger of the Honest (October 15, 2010)

The Coming Collapse of the Real Estate Market (October 14, 2010)

Runaway Feedback Loops, Wealth Concentration and Gaming-The-System (October 13, 2010)

Bernanke's QE2 Heading for the Shoals (October 11, 2010)

Look Out Below (I've got a bad feeling about this) (October 8, 2010)

[Kartographer]

I’m not really interested in seeing bankers and their lawyers go to jail, what I want to see is the ‘dead beats’ punished. Maybe not only foreclose on them, but maybe flogging or force them to sell their organs. I don’t understand why we can open debtor prisons, I mean these people need to be punished!

[Jimmy Valentine]

I will say this. Bill Clinton did not start this, but he damned sure made it all right.

The only crime in his world was getting caught.

Remember that this is the clown who along with his wife STOLE things belonging to the people of the United States from the White House.

[BobP]

For 24 straight weeks, retail investors have been pulling tens of billions of dollars out of U.S. mutual funds and plowing hundreds of billions into low-yield Treasury bonds

-----------------------

The only thing Federal Reserve Chairman Ben Bernanke has to offer is to print more dollars (Monetary easing).

Fire up the presses.

What's standing in the way of the self-correcting mechanism?

Not what but who?

Answer: The turd-in-the-punchbowl president, the Speaker of mumbo-jumbo Pelousy & Senate Majority Leader Harry Odious-Ridiculous.

The 'Three Stooges' from hell.

In November, please vote out anyone who supported them in any way.

[Ghost of Philip Marlowe]

As always, when the financial/banking system gets into trouble, the leftists and idiots turn the situation into, 1. the poor stupid people who borrowed money were taken advantage of by bankers, and/or 2. Evil greedy bankers need to go to jail and be punished.

It is amazing to me the number of “experts” (including the bloviator Karl Denninger who is so myopically focused he can’t see beyond his own middle finger) who attack the banks and make no mention of our central-banking system (the Federal Reserve) which is THE SINGLE SYSTEMIC CAUSE of ALL of these banking problems.

And, as usual, the “foreclosuregate” will be used as an excuse to give people their houses. So when that useful idiot during Obammie the Commie’s campaign shouted, “we won’t have to pay our mortgage, we won’t have to pay for gas” we all thought she was a fool for believing socialist/communist spew.

Maybe she was right.

Meanwhile, the rest of us have to continue paying our mortgages and our property taxes and our income taxes so that we can continue to give freebies to greedy bastards that run the central banking system, the greedy bankers who sixty-nine the politicians, and the greedy materialistic bastards who took out half a million dollar mortgages though they only make 50K a year.

[screaminsunshine]

For Bankers to to to jail a lot of politicians would have to join them. Thus no investigations or jail for either.

[dockkiller]

Yea. Shoot everybody who made bad loan decisions.
Except the loaners. They had no idea interest only, high commission subprime loans would fail.

[wendy1946]

You’re talking about some sort of an organized way to squeeze blood from turnips. People needing to buy houses do not create bubble markets and all banks would ever have to do to prevent them would be to stop lending more than houses are actually worth.

[Kartographer]

Yeah, I mean why follow the rule of law? When forgery and perjury make the wheels go so much faster? So you forge a few documents and commit a little perjury against the court why that nothing close to failing to honor a civil contract. If fact a little more perjury and fraud on the court would make so many judicial proceedings run smoother. All those laws just get in the way of justice. Besides laws are just documents and how needs those?

[wendy1946]

For Bankers to to to jail a lot of politicians would have to join them.

Sounds like a good start...

[blam]

Default Or Hyperinflation: The US’s Only Two Options

[Notary Sojac]

Right, those who loaned money to obvious deadbeats, and then came to the taxpayers to be made whole, should walk away clean. Preferably with a bonus to sweeten the deal.

[Kartographer]

Yes very important that we make sure the banks are made whole on these loans, because you know they sure didn’t make anything by selling the same mortgages two or three times to investors.

[dockkiller]

I’m confused. Are you upset at the loaners lies or the borrowers lies?

[webstersII]

“I don’t understand why we can open debtor prisons, I mean these people need to be punished!”

You may not agree with it but one of the reasons the colonists wanted to come to America was to get away from the English debtor prisons. People were put in prison until they could pay their fines, and they obviously couldn’t earn an income while in jail, so they would be stuck there for long periods with no real hope of getting out.

It was a cruel system and one which we should not return to. It’s already come back to an extent in the ‘Deadbeat Dad’ laws. Those are similar to the old debtor prison system.

[Traveler59]

People needing to buy houses do not create bubble markets and all banks would ever have to do to prevent them would be to stop lending more than houses are actually worth.

I can’t agree with your premise. The sellers will charge what the markets can bear. If there were a limit to the funds a buyer has, the seller would be foolish to price the item higher than that. In the case of the housing market, the Community Reinvestment Act (CRA) forced the lenders to give loans to people who wouldn’t otherwise qualify for home loans. The CRA used the threat of federal laws against lenders to accomplish this. With all of this money flooding the housing markets, the prices went artificially high. It was only a matter of time before the first defaults occurred, which stifled the amount of cash the lenders had available for new home loans, which caused sellers to be left with unsellable properties (at artificially inflated prices), causing a panic selling at reduced prices (underwater prices/mortgages), and the death spiral continues.

Do I want to see housing prices back up to where they were before the bubble burst? Hell no! They were artificial at those levels and were not based on realistic values.

[hosepipe]

Part I- http://www.youtube.com/watch?v=OLD6VChcWCE&feature=related

Part II- http://www.youtube.com/watch?v=D0MESB6VZM4&feature=related

Part III- http://www.youtube.com/watch?v=KkXI-MNSb8Q&feature=related

[Uncle Ike]

bttt

[blam]

The Loss of Trust and the Great Unraveling To Come

[wendy1946]

There is a sort of a myth which says that Republicans are the party of fat cats and old money, and that demoKKKrats more closely represent the common man. Nothing could be further from the truth and there is at least one book available i.e. Charlie Gasparino's "Bought and Paid For", which lays out the relationship between Wall Street and the demoKKKrat party in stark detail

The assumption I would make at this juncture is that the Wall Street fat cats are mainly gravitating towards the party (dems) which is more corrupt and corruption-friendly, and that ideology doesn't have much to do with it.