Malkin: The mother of all financial scandals

If there is going to be a collapse on the scale of the Great Depression, this is one of the likely cadidates to trigger it. With all of the money now in mortgages, refinancing and mortgage backed securities, a failure or even severe weakening in confidence, of these GSE's could set off the thermo-nuclear derivatives bomb that Warren Buffet warned about a few weeks ago. And since the fools in Congress gutted the Glass-Spiegel Act, a lot of banks could be in danger a failure.

Too many similarities with the financial plight of Japan over the last decade. Their stock market fell through the floor, prices in Japan have been deflating for years and their real estate market crashed, putting some of their biggest banks in a position where there was serious talk of letting them fail to get the bad loans off of the books. Their central bank has been able to pull a lot of rabbits out of the hat to keep the whole system from crashing (kinda like what our central bank is doing) but all it seems to have done is prolong the misery. Buying gold would not be a bad idea. At least it won't pull an Enron or Global Crossing and become completely worthless like the stock in those companies has.

Back when I was trading governments Fannie, Home Loan and Freddie were issuing some weird stuff. A lot of it was embedded with a host of options that left the buyer exposed and the GSE's holding all the cards. Remember Orange County, Cal. in 1994? They went under because the Fed hiked rates all year and they were holding billions of this stuff and got wiped out.

Most of it (I call it toxic waste) was based on the movement of some underlying interest rate. For instance, they would issue debt that had a tremendous rate of return as long as interest rates stayed within a certain range. If rates got out of that range then, whoops, the holders got burned and the GSE's scoop in the pot. All of this stuff is hedged with derivatives. Back when it was issued a lot of assumptions were made and certain scenarios were considered to be acceptable risks. I'm sure no one foresaw that rates could go as low as they have. It's been almost ten years since I traded any of this stuff so I don't know much about it now but a lot of the stuff I saw would have been trashed and burned with these rates.

The underlying government exposure is approximately 20% of all assets (loans). This exposure is treated off-budget the same as social security. With Fannie and Freddie expanding over three trillion in the last two years do you think that our so-called federal debt limit is rational? The biggest crooks in the financial sector is your benevolent government. The prosecutions of Martha is an attempt to divert attention away from the real culprits, our leaders.

Hmm. Here we are 5 years later and this symptom (the way the GSE’s were used)of one of the root causes (agenda of central banks that caused the Federal Reserve to raise rates 7 times in 2007)seems to have been tidily swept under the rug.

All that had to be done to avert the crash was to lower the interest rates in 2007, and that wouldn't have cost taxpayers and their children's children anything.

I'm stunned by the magnitude of it, and the trillions being squandered without confronting the real causes.

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