J. I.  Nelson, Ph.D.
October 2010
An  earlier 2008 article says the debt is enormous and the TARP bailout is justified.
This article says it was  willful fraud, the Fed is printing trillions to hide it, and I was naive to fall for TARP.

For a brief overview, go here.

Bottom:  TABLE of CONTENTS   &  links

In the last three weeks, we have finally done a half-baked investigation --- nothing like we did in the Savings & Loan days -- of Washington Mutual (WaMu), Citicorp, Lehman, and Goldman. And we have found strong evidence of fraud at all four places. And we have looked previously at Fannie and Freddie and found the same thing. So the only six places we've looked, at really elite institutions, we've found strong evidence of fraud. So where are the other investigations? Why are there no arrests? Why are there no convictions?
--William K. Black, 23Apr2010,  former bank regulator  during the Savings and Loan crisis, 1980s.
full transcript;   video  


I have made two political blunders in my life.  I supported the "shock and awe" second invasion of Iraq in March, 2003, thinking one dictatorship less in the world couldn't hurt.  My father, a CIA agent running covert operations in post-World War II Europe, participated in his generation's reconstruction of Europe's social democracies.  My generation destroyed Iraqi's families, society and future.  

Tom Tolles cartoon on Bush's TARP bailout speech 24 Sept 2008
This essay is about my second blunder:  I supported TARP, the $700B Troubled Asset Relief Program.  You know the phrases:  "securitized mortgage bundles",  "collateralized debt obligations", "credit default swaps", derivatives of all kinds.  It was almost humorous sorting them all out and you might have fun reading my rundown of what all the toxic assets are and how we got them.

I concluded that it was really bad.  The  crisis in late 2008 was global, and too big not to be immediately neutralized with money (injected liquidity).  Why? What's the alternative?   In a nutshell, everyone around the world would have gotten clobbered in his personal life, or would have known a financially-ruined person, and that psychological blow would have brought us a Great Depression, globally, and on Internet time.

I supported TARP, but as a first step.  My parents' generation followed their own bank collapse with criminal investigations (the Pecora Commission),  with the creation of the Securities Exchange Commission, the Federal Deposit Insurance Corporation,  with the structural changes in the financial industry that our generation dismantled.

Stupidity is its own reward.

Now our actions had run their course, producing financial collapse on a global scale.  If what we did was even worse than what happened in the 1932-1933 bank collapse, then the flood of criminal investigations, new agencies, and structural changes backed by Congressional law would surely be greater also.  Now it was even time for my generation to question capitalism and fix it.  We wouldn't waste time as the old generation had,  with Marxism and its Communist dictatorships.  We would create a productive, sustainable world, pro-business and pro-everybody.

You know what happened.   Nothing.  Money went to bankers who mailed bonuses to themselves and foreclosure notices to everyone else.

I had nothing more to say -- the country has lost its way, things will get worse.  Then  I  noticed the Federal Reserve had printed a trillion dollars in money, wired another trillion overseas, and then last Saturday (16Oct2010)  floated the idea that it would be a good thing for "the economic recovery"  to print a trillion more.

Time to take a second look at all this, and here it is.  We are in deeper trouble than I thought.  In what follows, I've tried to nail down how many dollars and how much fraud we are not facing, and what kind of a future we will all certainly face for this foolishness.  

It is financially advantageous  to change  a useless mortgage -- which no one will pay -- into one that works.  And yet  the financial industry fought against this in Congress, and fights against it in the conduct of their own foreclosure procedures.  If the financial industry appears to be working against their own interests, then there is something more I do not understand.  I've found it, here comes the answer, it is painful, I'm sorry.

I withdraw my support for TARP.  We have let the privileged, influential people who created the current economic collapse reward themselves for it.  Apparently we as a society cannot jail them for fraud, or even remove them for poor performance.  So I withdraw TARP even if that means global collapse.

Tremendous hardship teaches moral values.  For my parents and their generation, it was the Great Depression and Hitler's near-conquest of the entire Western world.  For us, the ultimate hardships lie ahead in our time, the Cataclysmic Century.

 "What Nature doesn't do to us will be done by our fellow man."
--Sheldon Harnick, for the Kingston Trio


You probably heard talk that the Federal Reserve has moved  trillions of dollars around.  This  Saturday the Fed's current chairman floated the idea of printing a trillion more.  I am not comfortable watching the Fed print trillions of dollars in money.  It never happened on this scale before,it's new, I'm uncomfortable with it.

How does the Fed do it?  Where does the money go?  What will it look like if we get severe deflation because we don't print the money, or severe inflation if we do?  This is pretty quick to sketch out.

The Fed will buy long-term treasuries and mortgage-backed securities.
After paying for them, it will list these on its books as owned "assets".

The FED is getting the money out of thin air.  It just declares  that it has the money.

All banks can wire other institutions large sums of money.
There is only one bank -- The Federal Reserve -- that does not have to record any debit (withdrawal) on its books when it wires money out.  The Fed only records the accumulation of the "assets" it bought. The Fed is "printing money."  But the vast sums (a  trillion at a time) are transferred electronically, so printing is not necessary.

The U.S. Federal Reserve (our nation's central bank) is not supposed to own assets.   In the long run, the assets should be sold back.  When sold, the assets go back into the economy, and the money paid for them is taken out of circulation (out of the money supply) and disappears back into the Federal Reserve.  But if the assets are worthless, they cannot be sold, and the trillions of dollars cannot be withdrawn from the money supply.  This money feeds inflation.

As in desperate countries of the past (Germany's Weimar Republic in the 1920s), "printing" money and pumping it into the overall supply of money leads to severe inflation ("hyperinflation").  So the Fed will be successful in stopping deflation now.  But the Fed may have a problem avoiding inflation later.


This time, we are not told that we must hand out money because banks that are too big to fail are about to fail.  This time, the Federal Reserve can't understand why we are not seeing happy people shopping at the malls, and it thinks this money will help.  Both the Federal Discount Rate for Fed loans to banks, and the largely symbolic overnight Federal Funds Rate are under 1%.  The Fed can't lower interest rates much more, so the only thing  the Fed has left to try is printing money.  And, if we don't let it try, the economy will fail. The economy will fail through "deflation".

Current policies may produce deflation followed by inflation, so let's look at both.


During deflation, nobody buys today what will be cheaper tomorrow.  Jobless people who can't get their hands on any money give away their possessions, their homes, for next to nothing.  Consumers barter; no one has much money.

Companies don't want to hire people or invest in manufacturing machinery when no one is buying products.  And, if companies wanted to invest, it would be hard to find lenders for both psychological  and physical reasons.

PSYCHOLOGICAL AND PHYSICAL BARRIERS in DEFLATION -- Psychologically, deflation means  no growth and no upbeatDorothea Lange - 1936 - Migrant Mother - Farm Security Administration feeling.  People are not itchy  to find some way to get "it" now, whether "it" is a franchise on the corner, or  brand recognition and market share for a new product.  People are not itching to get "it" before  someone else does ---not itching to do "it" even if they have to borrow today to achieve their Great Tomorrow.  Using force to pull a house away from someone against their will is humiliating and helps people to feel this way.  

Physically, no one in a deflation (in a Great Depression) has made money selling any thing or service, so there are no piles of winnings to lend out again (loan, invest) in the hopes of another win.  During deflation, lenders think borrowers on the other side of the desk will fail.  A pile of cash grows in value as prices fall. Hoarding is good.  Cash sent out to create a building, a line of machines producing gadgets, etc. turns into worthless things no one wants to buy.  You can't turn those things back into cash again.  Your investment (the foreclosed mortgage, the bankrupt factory) is worthless.  Your money is gone.

INFRASTRUCTURE -- During deflation, large investments in national infrastructure are one of the few, best ways to invest money without losing it later.  Wealth can be created from investments in water systems, sewerage, electricity transport from wind farms & to electric vehicles, investments in communications at higher bandwidth and lower cost , modernized rail systems, putting up better public school buildings, putting up better public hospital buildings, creating  public health facilities, investing in parks and recreation facilities that embrace all members of society who work hard and need a break.  From such investments, the  wealth continues to flow back for entire generations, but some wealth comes immediately from placing money into the hands of jobless people who were buying nothing.  Typically, it takes the national government to initiate investments in national infrastructure.

We will see that the Federal Reserve has purchased 1.45 trillion dollars in assets without purchasing any new national infrastructure.

Non-recovery policies drive the current non-recovery toward depression and deflation.  But repeated, massive inflation of the money supply without buying prosperity will eventually bring inflation, to which we now turn.


 During inflation, money left in a pile evaporates in value.  Consumers must spend before the price goes up.  People higher up in society must invest.  Growth and prosperity always bring a little inflation.  With even more inflation, the government can repay the national debt in dollars that don't buy what they used to, dollars that are cheap and easy for the government to obtain.  Without cost-of-living adjustments ("COLA"),   pensions and social security become worthless.  In the looking-glass world of inflation, secure assets disintegrate.   For example, the defined-benefit pension with its fixed-sum payouts  becomes trivial.  Investment and a variable pension depending on the unpredictable market  -- what seemed the high-risk choice in stable times -- becomes the only way you and your assets can  survive.

The Reserve in McLean, VA
INFLATION BRINGS  BUBBLES -- When everyone acts this way -- indiscriminate investing -- all investments work.  When all investments work for psychological (no rational evaluation) and  market reasons (there is always a buyer for what you should not have acquired in the first place),  then we have a bubble.  Items in a bubble have value because people want them.

B Smaller New Yorker Aug 1998 - Stock Market BubbleThere is also real value in all bubbles.  Some of the dot-coms have value (Yahoo, eBay, Amazon, Google).  Some of the telecommunications networks have value (Level Three).  Some of the real estate is desirable, currently occupied by prosperous owners, and still carries an older, more reasonable price tag.  But we can create new ventures on paper faster than we can build them into profitability (dot-coms).  And too much of a good thing produces a saturated, commoditized market in which prices shrink and profits vanish  (for telecom networks phone calls -- once a $100B business for local calls  and $80B for long distance ones -- are suddenly  free).    Any value set chiefly by psychology is free to attain irrational values (real estate).   Bubbles (dot com, telecom) produce a lot of trash investments.   We will see that in a really good bubble like the American real estate bubble that burst  in 2008, more than psychological irrationality (in personal choice) and market frenzy (in setting value) were at play.  Bad investments were produced by willful fraud.  (The cartoon is by Barbara Smaller.  Get it on a mugs or T-shirts at  

BUBBLES ALWAYS BURST -- When the only thing valuable about most things (a dot com, a telecom network giant, real-estate) is that people want them, the bubble is set to burst.  No one can tell when the burst will occur, and it is rational for most people to be invested in it because of the inflation.   Investment is rational because the choice was not between stupid investment and a safe pile of cash.  The choice during inflation was between possibly stupid investment and a most certainly disappearing pile of cash.  Not investing is punishable by economic law: your cash pile slowly evaporates.  It's rational to invest,  the gun is pointed at your head, your own finger is not on the trigger.  Bubbles are so much fun.

PCRecycled PC CRT monitors 2006, FranceWhen the psychology changes, the bubble bursts.  The "bursting" is not economic, it is psychological.  People shove all companies towards bankruptcy as indiscriminately as they shoved money towards any company during the bubble.  Inflation, booms and bubbles (followed by busts, recessions and depressions) destroy wealth insofar as money that could be doing good things is tied up in silly things instead during the boom.  When the bust comes, wealth is destroyed as  companies disassemble themselves,  liquidate and sell off  what would otherwise have done good for the owners, done good for  their investors, and done good for the country.  We never get to enjoy  the goods and services, the innovative methods they were trying to create.

Countries that are stable economically tend to purchase the wealth of countries that go boom and bust a lot.  During a bust,  the purchases of things worth a dollar are made for ten or twenty cents.  The United States invented the laser, invented low-loss optical fibers, developed practical erbium doped optical amplifiers, Raman-pumped undersea cables, dense wavelength division multiplexing to magically increase network capacities 32 fold.  During the telecom bust, Asian companies bought trans-Pacific networks containing all this for 10¢ to 20¢ on the dollar.   It's gone.  


Something is wrong with this Goldilocks choice between deflation and inflation.  

Alan Greenspan played Goldilocks and got it just right.  Rates were high enough to slow the overheated economy, without going too high and crashing it.  We got our "soft landing."  Now I am supposed to believe in a new Goldilocks game, a soft landing between enough trillions of printed money to escape a deflationary death spiral, but not too much to drive us into inflationary instability.  Is that the picture?

I don't think so.  Three "no compute" issues leave me with nagging doubts that any of us have the picture yet.  .  

1. FACE VALUE:  It makes financial sense to realign mortgages with the true underlying value of the collateral asset, the home, but banks are not doing this. The face values printed on a mortgage that no one will pay are meaningless.   You and I do not yet know why the mortgage paper is so tied to the fraudulent number printed on it.  

2. FORECLOSURES: For economic recovery, it makes political and economic sense to stop as many foreclosures as possible.  Yet there is no political will to stop foreclosures even when they are based on illegal procedures (no personal review of the victim's case) and fraudulent paper work (the entity pursuing the victim does not own the mortgage).  Just for expository purposes, let's pretend for a moment that politics is dysfunctional and politicians are corrupt, so that none of them exercise any wisdom or integrity of their own.  Fine.  But why is pressure to recycle occupants coming from the financial industry even though it  would be better for the neighborhood, families, and property values to delay evictions?

3. HIDDEN AGENDA.  Dear Bankers, the money we give you doesn't solve your problem, because you keep asking for more.  What is the true problem?  The problems you claim to be solving (economic recovery) are not what you spend the money on.  What's the true problem?  The talk is the economy, but the money -- trillions -- goes to banks. I understand economics; you tell me what the issue is with banks.  

The answer lies inside a pyramid of financial products, in which all the layers are interlocked, the upper layers are worth the most money, but  the foundation, the Mom and Dad mortgages on the bottom, sets the worth of everything.  In a nutshell, homeowners are just an inconvenience that must be recycled in order to preserve great wealth and privilege at the top.  We will have to review that pyramid.  

MORTGAGE MERRY-GO-ROUND.  I first thought the upper layers of the pyramid affected the foundation in only one important way: recycling the money.  If mortgage originators can sell their mortgages to people who know how to form them into new products (e.g., a bond or REIT,  real estate investment "trust"), then those products can be sold to a different class of investor (wealthy buyers who are not interested in buying another house) and -- ready? -- all the money comes back to the mortgage originators, who can look for another set of customers, a new neighborhood.  After I understood how the mortgage merry-go-round kept recycling trillions in cash
($5.5 trillion regenerated by Fannie and Freddie MAC alone), how the industry was structured to keep demanding more mortgages, then the industry drive to ever-more marginal deals ("sub-prime" mortgages), fraud and criminality became obvious. Without market regulation, the children were doomed to fights and crying.  

When my house sells, the new owner pays me (using his own down payment money and mortgage arrangements) and I pay off my mortgage and move on to my new house.  But, alas, as long as my mortgage is written for more than my house is worth, no one will buy my house, and I can neither sell it nor pay the mortgage each month without shelling out "money for nothing".   My bank can't sell it either.  The local bank publishes a newspaper notice, someone stands on the grounds of the county courthouse building and shouts into empty space at no one in particular (he gets paid for this), and another "public auction" with no attendees passes.  (The bank's price might even be higher than the original mortgage, due to penalties and administrative fees.)

It makes no sense financially, it makes no sense for the bank that nominally holds the mortgage, not to do a mortgage "cram down", resetting the loan to something more realistic that people will pay, whether it's the owner in the house or anyone else.  Yet this is not happening in America.  The banking industry lobbied Congress to avoid granting any judge in a court of law the discretion to save any family brought before him.  This weakens the country's courts, as well as the country's families.  

AT THE BOTTOM OF THE PYRAMID, NO ONE CAN HELP YOU.   Here is part of the answer.  The "banks" going through foreclosure-and-auction moves doomed to fail are not banks.  These are the mortgage originators (salesmen) or mortgage administrators (billing agencies) at the bottom of the financial pyramid.  They do not own the mortgage, so they are not hurt if it does not sell.  Because they do not own the mortgage, their authority depends on power-of-attorney-like paperwork to give them authority to evict, hold the sham auction, etc.   At the present time (October 2010) this paperwork has been missing in so many foreclosures that the foreclosures were illegal and were halted.

 "Illegal" means "broke the law," but there has been no prosecution -- no arrest, arraignment, trial, sentencing, jail.  There has been nothing, but something else is more important:  the entire foreclosure procedure has been hijacked by higher-ups in the financial industry.  None of the players here -- the mortgage originators, the mortgage administrators, the paper-pushers working for a fee -- none of them have any authority to fix  a mortgage that no one will pay.  It is a red herring, it is a diversion of our attention as citizens to worry about "sloppiness" and "doing the paperwork right."  

The issue is getting stiffed when the sheriff comes to throw you out.  You have no push-back, no power to protect your own freedom.  The laws to protect homeowners are rendered irrelevant by the recent (last 10 years) transformation of the financial industry from a local bank run by one of the "good" families in town that cares about other families and the properties they live in.  Instead, we all face to a vast pyramid of players built on mortgages.  However good the paperwork gets, no one you deal with will give a damn for saving you or your mortgage, or be in any position to do anything about it if they do.  

The eviction process does not publicly reset the mortgage, it only flips the occupant.  Mortgages are re-written behind closed doors, as we will see below.  

Forget the paperwork and fix a broken process with no protections -- you and the mortgage are trash, and the industry will steadily recycle all the owners -- 9 million homes will get rotated owners, according to current foreclosure projections.  


The industry's new pyramid of financial products changes the lending industry in two ways:

1. Recycling.  
The money is recycled back to the loan originators so that mortgage sales can be driven down-market forever.

2. The money isn't in the mortgages, it just depends upon them.
 Because recycling is accomplished by turning each train load of mortgages (level 1)  into a new product appealing to a new class of investors (level 2; bonds, REITs), and those products are bundled into a yet another, more derived financial instrument (other collateralized debt obligations and derivative contracts, level 3) and insurance is created based on the behavior of all previous products (swaps, level 4) and offered to anyone already in the pyramid, the value of the financial products based (ultimately) on mortgages is far greater than the mortgages themselves.   For example, the value of all mortgages in the USA today is, in round numbers, 11 trillion dollars.  But the value of outstanding credit default swaps is 32 trillion dollars.  That makes the point, since these swaps were driven by the real estate boom.  For the record, all outstanding derivatives (many having nothing to do with real estate) represent $614 trillion in obligations (Bank for International Settlement, June 2010 quarterly report giving Dec 2009 data).   What is the "load" on your mutual funds?  Have you got it down to 0.2 or 0.3%?  Does your broker give you any free stock trades?  A commission of 0.1% on $614 trillion in derivatives already sold and out there brought 614 billion dollars in profit to this industry.  Not revenues, profit.  

COMMERCIAL & INVESTMENT BANKING DIFFERENCES.  Commercial banking gives real people real money to make investments in wealth-creating businesses. Go here for   commercial building mortgages or industrial plant construction.   Investment banking is the gambling casino.  Yes, it can perform useful functions when everything goes right, just like capital punishment can never kill the wrong person.  For example, the funds multinational corporations have to commit to spend -- or plan to win --  in big projects overseas can be hurt by currency swings between the countries they work in.  It is not their fault.  A "forward contract" derivative guarantees their ability to buy the foreign money they will need later at the exchange rate assumed when this year's budget was drawn up.  "Options" and "swaps" permit other protections.  

Investment banking is always the creatively wayward child.  The constant stream of newly-invented financial instruments evade tax laws and financial regulation of any kind.  The politician who says that legislation has been passed so that XYZ will never happen again is a fool.  And people will gamble with these toys.  You and I may differ about the value to society of gambling, but we should both be clear that lack of transparency always sets the stage for manipulation and fraud.  Open markets (remember Republicans and Libertarians and the "free market"?)  open markets maximize social benefits and suppress evil.  For newly-invented financial instruments, there is not yet a market, and sometimes that's the whole point -- to work behind "closed doors".   After the turmoil of market crashes and bank runs (1929-1933), a separation of insurance, commercial banking, and investment banking was imposed  by the Glass-Steagall Act of 1933, and repealed in 1999 by the Gramm-Leach-Bliley Act.  The crash was in early 2000, the telecom crash was early that Fall, and the banking crash was in September 2008.  
In our current real estate bubble and crash, an investment banking pyramid was created because of a familiar, powerful motivating force:  each new layer generates a new round of commissions and other fees for the wizards who invent them.  A look at how the pyramid was built shows that it is a house of cards, in that the higher products are based on the lower ones whose value was willfully falsified.  

BUILDING THE PYRAMID OF MORTGAGES, BONDS, SWAPS.  In the most important, first step of pyramid building, mortgages were sold to "securitizing operations" famously run by Fannie Mae and Freddie Mac (the Federal National Mortgage Association, itself trading under the ticker FNMA, then FNA; and  The Federal Home Loan Mortgage Corporation, ticker FMCC, then FRE, both finally delisted from the New York Stock Exchange last June, 2010).  There, the individual mortgages were securitized into bonds and other financial instruments.  The bonds went to new investors, some of them overseas.  Packages of bonds were reborn as other CDO's, "Collateralized Debt Obligations" and those went to a third layer of even larger investors, many of them now significant institutions with significant political access.  At the fourth layer, insurance policies were sold to some of these buyers against the possibility that the revenue streams everyone expected to get (bond "interest rate" or stock "dividend" to them; monthly payment to you) might dry up due to a bankruptcy here or there in the financial pyramid.  Simply to avoid regulations still in effect for the insurance industry, the insurance policies were called "credit default swaps". (See?  No word "insurance" in the name -- makes you wish you were a lawyer too, doesn't it?)  

Credit default swaps went to many municipalities and pension funds around the world. They underwrote the policy and expected to pocket a steady stream of modest premium payments, but were liable for huge underlying obligations if bankruptcies occurred.  I recall a "council shire" (county government) in rural Australia that had the misfortune to meet a big city financial adviser.  The shire was ruined when a modest income stream turned into a crushing debt.  These "credit default swap" insurance policies are the complex derivatives that brought down AIG. By October 2009, it had taken $183B to buy back AIG's worthless policies from irate groups around the globe.  As we saw with the UBS, the Union Bank of Switzerland, most of the American tax payer dollars that went to AIG were promptly shipped overseas.  At least the shire in Australia deserved it.  

Laying all this out when it happened in 2008 showed me that the pyramid was big, big enough to persuade me that TARP was needed.   In those days, the problem looked billions big.  

FAMOUS BANKRUPTCIES.  Fannie Mae and Freddie Mac, two of the many large institutions that received and securitized mortgages from loan originators (feet on the street) and local banks, required $100 billion in rescue money, authorized by the end of 2009, and another $100 billion in 2010.  Today (21 October 2010), while I'm trying to get this out to you,  the news interrupts with assurance from the Federal Housing Finance Agency (Fannie and Freddie's supervisory agency) that the total bill won't reach $400 billion, even though last December President Obama lifted a cap on taxpayer funding previously set  at $400 billion, and even though Fannie and Freddie hold about $1.6 trillion in mortgages.  

Moving up the pyramid to the largest seller of credit default swaps,
which earned palatial homes and private jets for so many at American International Group's Financial Products Unit, we see AIG getting an  $85 billion bailout on 16  September 2008.  All by itself, this first "tranche" was the largest government bailout of a private company in history.   $38 billion more followed on 9 October 2008, and $20B on 30 November 2008, bringing AIG's total to $143 billion.   By  October the next year, the AIG total had risen to $183 billion.  Knowing how much money was needed ahead of time was impossible for them then, as it is for us and remaining banks now, because there is no open market  in many financial instruments listed on their books from which to "get a quote" and assign a value, and because many book values are fraudulent.

FAMOUS FRAUDS.  Here, high on the pyramid, products based on millions of home mortgages and worth billions of dollars have been bought and sold between major players.  As fast as tax payer money went into AIG, AIG sent our money out to other banks, many overseas, many ($4 billion worth) not publicly accounted for.  Quickly, a word on my favorite AIG beneficiary, the Union Bank of Switzerland,  UBS.  UBS salesmen fanned out across the best country clubs and highest dollar-a-plate charities in the US, offering anonymous, numbered accounts to over 52,000 wealthy Americans for tax evasion.  How to get the money out of the country?  No problem.  Buy diamonds, I'll take them back in my toothpaste tube. The wealthy American tax evaders were never named, the IRS  granted them immunity from punishment for their Federal crimes if they paid the IRS enough money, and the whistle blower who exposed UBS was the only one jailed (maybe you need to read that again?).  Wait, there's more.  One hand of the United States government succeeded in extracting a $780 million fine from the bank for not paying taxes; the other hand gave AIG billions of taxpayer bailouts from which AIG sent $5 billion to UBS.  UBS defrauded our government -- hey, no big deal -- but, with a whistle blower inside the bank, we can't cover this up.  Not to worry.   Pay the bank enough to cover its fine, maybe a few billion more, and, by the way, would you jail that whistle blower?  

Institutions committed to fraud promote employees who get with the program, and fire those who paint true pictures of perceived reality.  Matthew Lee never blew a whistle outside Lehman Brothers to get fired. His mistake was to cite the company's code of ethics requiring accounting to comply with "Generally Accepted Accounting Principles" and then deliver a letter stating that "The Firm has tens of billions of dollar of inventory that it probably cannot buy or sell in any recognized market, at the currently recorded  current market value [i.e.,at the value recorded on the books today] . . .I do not believe the manner which the Firm values that inventory is fully realistic or reasonable, and ignores the concentration in these assets and their volume size given the current state of the market's overall liquidity."  PERSONAL AND CONFIDENTIAL: Lehman Brothers VP Matthew Lee's letter of 16 May 2008.  

Not retired and still going to work?  Maybe read Lee's oral testimony to Congress on the collapse of Lehman Brothers:

MATTHEW LEE: I hand-delivered my letter to the four addressees and I'll give a quick timeline of what happened, May 16th was a Friday, on the Monday I sat down with the chief risk officer and discussed the letter, on the Wednesday I sat down with the general counsel and the head of internal audit, discussed the letter. On the Thursday I was on a conference call to Brazil. Somebody came into my office, pulled me out, and fired me on the spot with out any notification (voice falters, drinks water).  

A bubble based on fraud is unstoppable from the inside.  

The tremendous amount of money involved in a pyramid with trillions at stake at the top explains why any individual homeowner and his mortgage are trash.  This pyramidal structure is why trillions not billions are needed when recovery stalls and bets go sour,  why this money must go to the financial industry, not for recovery of the country, and why many of those financial industry recipients are overseas.  

Let's look at the amounts.
Just like the oil that has disappeared from the Gulf, so the bailouts have all been paid back to TARP (they say).  It is hard to know.  The handing out of funds (e.g., $85B to AIG on  16 September 2008) preceded any legislative authorization (the Troubled Asset Relief Program wasn't authorized legislatively until President Bush signed the Emergency Economic Stabilization Act of 2008, hours after its passage on 3 October by the House, which had previously rejected it).  The government has worked hard not to tally funds made available by the Executive Branch.  We can expect visibility of funds released by the semi-autonomous Federal Reserve to be even more lacking.


How much money?  So much that we have to print it at the Fed.  No budget is big enough to support such subsidies.  

It is striking how little talk there is about these Fed moves.  The total was at least 1.45 trillion dollars  before  last Saturday's talk of more.  This is not the $700B in TARP funds (the Troubled Asset Relief Program.  This is another pile, already twice as high.  There were an additional 1.2 trillion dollars worth of loans to foreign banks and governments in 2009 that we know about -- under questioning by Alan Grayson (D, FL), Bernanke has refused to inform Congress of the details.  I thought I'd better get the numbers and let you know as soon as I heard Fed Chairman Bernanke talking about a third trillion-ish pile of money last Saturday.  

$750B    new purchases from banks in 2009
$500B    previously purchased
$100B    new purchases from Fannie Mae & Mac in 2009
$100B    previously purchased
$1.45 trillion in purchased assets, not loans; twice the size of TARP

$1.2T    known loans to overseas banks,
    including the foreign central banks of 14 different  foreign countries
    search "liquidity swap lines" for more info

$1 trillion more proposed by Bernanke, Saturday, 16 Oct 2010.

These only-approximate figures come largely from this article:

Fed to Pump $1.2 Trillion Into Markets
Greatly Expanded Purchases Are Designed to Lower Interest Rates, Stimulate Borrowing
By Neil Irwin     Washington Post Staff Writer
Thursday, March 19, 2009

The $1.2 trillion to overseas banks started out as swaps of our currency for theirs to stabilize the dollar.  Then it got nastier. The  foreign banks had worthless American assets and bank failures were already starting to happen overseas.  The U.S.  Federal Reserve had to step in and cover for us as a country.  Most other countries made it.  Some were not so lucky (Iceland).

Our country was turned into a fool on the global  stage by private players.   

Some of this partly hidden Federal Reserve  money went out locally to save Goldman Sachs but not Lehman Brothers.  Some of the Goldman Sachs people are in the government, but Lehman Brothers executives are not.

They say the $1.2 trillion was a loan and came back.  Maybe it did.
Except for our reputation as a nation of free-market idiots, maybe it does not matter.

THE FEDERAL RESERVE DOES INTEREST RATE CONTROL WELL.   Let me defend the Federal Reserve's independence for what the FOMC (Federal Open Market Committee) does best. The FOMC sets interest rates to stabilize the business cycle.  The Fed should retain this power and this independence.  It's the corporate welfare for banks that I do not like.  

Congress is mad and wants to take away some of the autonomy of the Federal Reserve, which Congress sees as aloof and arrogant.  Without autonomy, the Federal Reserve would do a more political job, and a less-good economic job, of trying to even out our already boomy and busty economic cycles.  It is a depressing stand-off.  One institution, now dysfunctional and corrupted by money, is trying to make another institution more corrupt and dysfunctional.  That institution handed out perhaps a trillion dollars to foreign national banks because our financial industry "masters of the universe" sold so much of our real estate bubble junk overseas.  It is the FOMC, the Federal Open Market Committee, that traditionally decides rates and recently has been printing trillions of dollars and either loaning them (and claiming they came back) or spending them (and saying next to nothing about getting them back).  We need to keep one function and curtail the other.  In ever-mounting anger and frustration, we'll probably damage the institution without making it any better.  


The original plan:  Send money.  Recapitalize the bankrupt banks until the toxic assets recover.  Give banks billions from the Federal budget, get a fig leaf of Congressional approval for some of it, feed the public a story about "stress tests" on the banks to disguise their  bankruptcy. It will pass.  It's just another economic cycle.  The attention span of the public is short.  When recovery comes, the banks can clean up their balance sheets by selling assets that have recovered.  The main thing is, save the banks, save the world.  

The revised plan: The recovery is slower than we thought.  Congress is out of money, ask the Federal Reserve to print some. Our own creditors are losing confidence, so make it trillions not billions.  I don't know why mailing out over a hundred thousand foreclosure-related documents each month, year after year, is so upsetting to consumers.  If we can steadily flip just 9 million families out of their homes, everything -- swaps, CDOs, REITs, bonds, even the mortgages -- can be readjusted and our books won't be fraudulent anymore.  The main thing is, save the banks, save our world.  Keep a steady foreclosure pace.  The stress of a foreclosure moratorium is starting to drive one CEO I know out of his mind.  

(JIN: If your Internet connection is good, try the full screen version.  This parody takes off on House Resolution HR3808 which would have legalized document robo-signing and bestowed immunity on illegal foreclosures.  Our Congress passed the bill -- is anyone surprised? -- but President Obama in turn surprised the financial industry by refusing to sign it into law.)

The actual situation:  Money given to banks will bring anger, not economic recovery, to our nation.  This anger makes people more ungovernable (e.g., Tea Party) at the same time that economic failure and criminal injustice makes the government less legitimate. Toxic assets taken off the banks' books and hidden in the Federal Reserve were purchased for real cash.  When this printed money cannot be withdrawn from circulation (the Fed can't trade the toxic "assets" back again), inflation will wipe out the value of many people's savings and pensions, and impede private sector investment needed for actual wealth production.  

HOLDING ON UNTIL RECOVERY -- THEIR RECOVERY.  The banks must hold on until millions of homes can be re-filled with people who have jobs and will pay the mortgages. During this time, the mortgages must not change face value publicly.  Any move toward a  mortgage's true value reveals the true value of the banks assets.  The public would be tipped off to the banking crisis's true severity.  So how do mortgages get reset to reality?

Once the foreclosure is over and the charade of a bank auction has passed, the house becomes "REO" (real estate, owned) and passes up the pyramid to levels where mortgages are securitized.  Mortgages in the securitized bundle are changed out  of public view, and the homes are filled with new people that have jobs and will pay them.   The foreclosure pace is timed to keep the real estate market from becoming too depressed.  

Meanwhile, no leader in politics, the media, or Wall Street is saying that failed banks should close and the bonuses for those who ran them should end forever.  Without accountability, we teach our ruling elites to abuse the law, our society, and us.  It is a price not measured in dollars.


Willful betrayal of trust to obtain something of value is fraud.  The idea that fraud was willfully committed by privileged financial industry leaders is the theme of a new Sony Classics Film, "Inside Job."   Here's the story without pictures.  

1. Liar loans, the first layer of fraud.
The endless supply of recycled money for more loans pushed mortgage originators into circumstances they should never have entered.  People applied for a mortgage without establishing their assets or income.  If the applicant did not lie, the agent trying to sell the mortgage lied for them ("Here, I can help you with the paper work.")  The payoff (the fees and commissions) was for completing the deal, not for getting a good deal.  

Insiders called these "liar loans" or "Ninja loans":  no  income verification, no job verification,  no verification of assets.  The documentation of many "liar loans" is fraudulent, so the data in the server farms of Fannie Mae and Freddie Mac was false, so the credit rating agency ratings of the securitized mortgages, bonds, and REITs were fraudulent, so the trust of investors was knowingly violated, so the industry as a whole defrauded investors world-wide.  

If you prefer to say, "It was John Doe's fault for signing up for a mortgage John knew he couldn't afford," then go ahead and say it.  But if John tells the agent, "I don't think I can afford this," then the agent will say, "Don't worry, go ahead, in 1 year you can sell it for more than you paid, so you'll be able to put more money into your next house.  It is a good investment."  If you still  prefer to say, "It was John's fault for not taking personal responsibility for his own actions" then it is time to ask where you got that line from, and what their interest might be in getting you to repeat it for them, other than merely to distract you from seeking a better understanding than such a stupidly narrow one.

Paying off participants (the mortgage brokers)  to falsify documentation -- structuring the payoffs to get the inevitable result -- soon opened new markets for the mortgage-lending industry.  Leading the race to the bottom was the Independent National Mortgage Corporation, which destroyed $32B of its own listed assets by declaring bankruptcy 31Jul 2008 (two months before TARP).  Worse than the demise of "IndyMac" itself was the $80B pulled in from other financial institutions when it sold them assets based on the Indy Mac mortgage business.  Assets derived from mortgages of little value covered by fraudulent paper work are "toxic assets."  The biggest seller of "liars loans" was Lehman Brothers, now also bankrupt.    

Within the industry, it is assumed that liar loans will blow up, and derivatives are created to make money on their fall, most famously by John Paulson and Goldman-Sachs.  

2. Credit rating agency fraud.  Credit rating agencies (Fitch, Moody's, Standard & Poor) gave the mortgage-secured assets AAA ratings, making themselves accomplices to a fraud that makes Bernard Madoff insignificant.  (Madoff made off with about $18 billion;  the Federal Reserve and Congress have put $2,000 billion in play so far.)  You can say that these agencies were victims, like others, of the fraudulent paperwork of ninja mortgages and liar loans.  However, when Fitch checked paperwork post hoc (after the crash), it immediately found " there was the appearance of fraud in nearly every file we examined."  Later work reported by William K. Black shows fraud in 90% of liar loans (loans made under the provisions Alt-A, "alternative documentation".  

Spot checks were their job.  By not performing their job, the credit rating agencies aided and abetted industry-wide fraud.  Bottom-fishers in the industry could then drive better firms into markets (neighborhoods; personal income brackets) they would not have entered.  The credit rating agencies helped soon-to-be-bankrupt mortgage originators like IndyMac spread toxic derivatives of those mortgages around the globe.  Overseas,  big foreign banks and small rural counties ("shire councils") in Australia, looking for places to park funds, purchased toxic assets based on fraud, produced in America because she would not regulate -- bring transparency to -- her markets.

3. Database fraud.  
Freddie MAC HQ buildings in McLean, VADatabases are kept for every individual mortgage in a securitized mortgage instrument, many at the huge McLean,VA server farms of Freddie MAC (yellow dots, photo).  These databases give the illusion of transparency (right down to an image of original pages of paperwork) and give the illusion of a "quantitative" means to calculate the face value of a securitized mortgage.  They provide the lookups needed by the mortgage administrator to run his billing operations.  The fraud of the falsified application is enshrined in these databases.  The databases undermine all attempts to assign "true value" to all layers of derivative financial instruments built upon them.  We cannot know the true value of the $32 trillion in credit default swaps still on the books of the world 's banks as of 12/09.  Securitized mortgage bundles, collateralized debt obligations and credit default swaps on banks' books may not be the "assets" they seem.

An alternative way to determine value is "the voice of the market."  If there were an open market in these financial instruments, one could "mark to market."  However, many banks would fail, and the crisis in confidence which that  would produce would take down others.   If we preserve the corrupt and bankrupt institutions, then no structural change can occur in financial markets until  all fraud is flushed out of the system (until every delinquent mortgage is foreclosed).  Until then, the Federal Reserve will print as much money as the fig leaf fiction takes.  Until then, homeowner foreclosures are desirable, and mortgage renegotiations that make true value transparent are to be avoided.

Without regulation, bottom feeders take an entire industry to the gutter, and reputable firms are pressured to either join or lose out.  The purpose of regulation is to make business sustainable, and to make competition occur on the basis of quality of product,  not  audacity in the willful betrayal of trust.  

Business leaders cannot favor business-sustaining regulations because they cannot admit that they act like children.


An interview of William Black by Bill Moyers on National Public Radio in early 2009 crystallizes the element of fraud.

WILLIAM K. BLACK: Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.

These are all people who have failed. Paulson failed, Geithner failed.  Geithner is ... covering up. Just like Paulson did before him.

WILLIAM K. BLACK:  This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called The Prompt Corrective Action Law.  And it requires them to close these institutions. And they're refusing to obey the law.

BILL MOYERS: What the reason they give for not doing it?

WILLIAM K. BLACK: They ignore it. And nobody calls them on it.

BILL MOYERS: Well, where's Congress? Where's the press? Where--

WILLIAM K. BLACK: Well, where's the Pecora investigation?
[JIN: The banking industry malfeasance and conflicts of interest uncovered by the Pecora Commission led to the Glass-Steagall Banking Act of 1933.  The 1999 repeal of Glass-Steagall is widely cited as the foundation of the present banking crisis.]

BILL MOYERS: The what?

WILLIAM K. BLACK: The Pecora investigation. The Great Depression, we said, "Hey, we have to learn the facts. What caused this disaster, so that we can take steps, like pass the Glass-Steagall law, that will prevent future disasters?"  Where's our investigation?

What would happen if after a plane crashes, we said, "Oh, we don't want to look in the past. We want to be forward looking. Many people might have been, you know, we don't want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere.

--end extract from April 2009 interview  
( full transcript;  video ).

William Kurt Black (b. 1951) is an American lawyer, academic, author, and a former bank regulator at the national level with  expertise in white-collar crime.  His concept of  "control fraud" summarizes how a  business or national executive uses whatever institution they control as a "weapon"  to commit fraud.  Black served as Deputy Directory of the Federal Savings and Loan Insurance Corporation (FSLIC) and as  litigation director for the Federal Home Loan Bank Board, later called the Office of Thrift Supervision.  Black is currently an Associate Professor of Economics and Law at the University of Missouri-Kansas City School of Law.

Black's book, "The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry" (2005, 351 pp) drew this praise from a former Chairman of the Federal Reserve:

"Bill Black has detailed an alarming story about financial and political corruption….the lessons are as fresh as the morning newspaper. One of those lessons really sticks out: one brave man with a conscience could stand up for us all."
--Paul Volcker

Black's book drew this comment from someone on

"One of the lessons Mr. Black would like to get across is that FRAUD HAPPENS. ... Fraud is not accidental. It will arise when conditions make for opportunities. ... I can't avoid the conclusion that the environment that resulted in corruption 20 years ago is still with us. And I begin to think that Obama's economic advisors will not change things." --Rita Sydney, Walnut Creek, CA  

Bill Moyers (b. 1934) is an American journalist who served as White House Press Secretary for President Lyndon B. Johnson (1965-1967).  He production of radio and TV series and documentary films has brought him numerous awards and honorary degrees.



Creativity produces new, more "derived" financial instruments.  Offering them for sale produces cash for their creators.  

The total face value of derivatives of all kinds on the books as of 12/09 is $600 trillion (Bank for International Settlements (BIS) Quarterly Review, June 2010).  A broker's commission of one-tenth of one percent on the sale of these financial instruments would bring the financial industry $600B in immediate, hard cash.  This is without the origination fee, the placement fee, trade clearance fees,  custodial costs, etc.  This is how the financial industry is incentivized to -- this is how we pay them to invent a financial instrument, sell it, package those financial instruments into a new one and sell those too.

Pictures of corporate and private jets brought home to me why we cannot expect these people to think about the welfare of anyone but themselves.

Galley area, private 707 Boeing jet
Think of  your last airplane flight.  The captain turned off the seat belt sign.
You got up and went to the galley and bathrooms in the back of your plane.  
(Private 707, galley area.)

Bathroom and master bedroom, Boeing 707 private jet
Think of your last long flight.  You hoped for a row of empty seats so you could stretch out.
This private jet has a double bed.  Perhaps the design is too traditional, considering the money it costs.

Corporate jet interior.  Sleeping area, 787.  Cororate Jet interior - 787 bar and lounge area.
Most corporate jet interior designs provide a lounge and bar  area, dining area, and sleeping quarters.  

Corporate jet interior - lounge area.

 Charles Ferguson, "Inside Job"
Charles Ferguson's new (Oct 2010) movie "Inside Job" from Sony Classics emphasizes the palatial wealth that financial industry executives made off the backs of ordinary home owners, and the knowing fraud they committed on those who bought their securities.  


1. No halt in foreclosures
There will be no moratorium in foreclosures and  no cram-down in mortgage values.  There will be no relief from home foreclosures because bringing homes to their true value brings insolvent financial institutions closer to their true value.    A pyramid of creative -- and lucrative -- financial instruments has been built on these mortgages, and revealing that the mortgage values  are fraudulent will collapse the pyramid. Instead of changing the mortgages in any publicly visible way, the owners must be flipped.   Many overseas government and banks hold these investments, so fixing them will require shipping money to foreign entities, not just American ones.

2. The government will print money and give it to the Executive Branch by buying U.S. Treasury bonds.

Once occupants are evicted and the "bank auction" has predictably failed, the house passes up the chain to financial institutions holding bundles of securitized mortgages, where new owners are inserted and the securitized mortgages (bonds or other instruments) are made viable again.

To insert new owners into the houses, cheap money must be available.  Buying Treasuries with printed money makes cheap money available because it drives down interest rates of all loans, not just Treasury bonds.   If you can sell any kind of debt in a heartbeat because the U.S. Federal Reserve acts like a private sector buyer, then you don't need high interest rates to attract loan money.  Home loan rates will fall until the Fed comes to the end of its next trillion (October 2010, proposed).

Seeing the problem as "creating cheap money" in order to "insert a new owner" into the home means the problem is seen as restarting a bubble, as rebooting the system to where it stood when it crashed.  Any grasp of job creation is absent.  Any grasp of the harm done to the evicted family, the education of their children, or the neighborhood is absent.

3. The government will print money (trillions) and give it to the banks in exchange for "assets" of questionable value that cannot be sold back to where they came from.  The inability to later withdraw this cash from the money supply will produce inflation severe enough to destroy a stable climate for business investment.

4. No economic recovery will occur.
Transferring wealth does not create it.  Recovery does not come from  transferring wealth to the financial class, any more than prosperity "trickles down" by exempting the wealthy from supporting the society in which they live through paying taxes like the rest of us.  

We are protecting incompetent people who drove their own institutions bankrupt.  The fraud, the fiction that banks were OK, wore thin when (surprise?)  economic recovery didn't come fast enough.  The banks are still foreclosing, the mortgages are still not crammed down, but it isn't working.  With little value returning to the houses, it is time to simply  inject pure cash directly into the banks.   This has been done is three tranches: $700B in TARP money to banks,   over $1.45 trillion in printed money through 2009, and new proposals coming at the end of 2010.

We have incurred a cost of 3 trillion dollars for wars of choice (book by Joseph E. Stiglitz;  today this Nobel Laureate in Economics  puts the cost at 4 to 6 trillion dollars, in part because the care of vets coming home is not fully unacknowledged and underfunded.  I have said something sad and disgraceful as correctly as I can.)  These wars  have weakened our world standing and have made us irrelevant rather than powerful.  We are now incurring costs of 3 or more trillion dollars for our free market foolishness.  

None of this money for corrupt banks and poorly-chosen wars  has been invested  to build
If enough money is printed today and not withdrawn from the money supply tomorrow, we will have inflation high enough to make business and business investment more difficult.  This country is headed in the wrong direction.  "Left" and "right" are not relevant if the direction to change is "down."

5. Failures of leadership will get worse.
The credibility of US power is weakened when we drag others down with our mistakes, and then refuse to learn from them.

Institutions committed to fraud promote employees who get with the program, and fire those who paint true pictures of perceived reality, even if there is no whistle-blowing outside the firm.  A bubble based on fraud is unstoppable from the inside.  Since President Obama populated his administration with insiders -- up to Cabinet and Fed Reserve Board Chairman levels -- there has been no criminalization of fraud from the outside.

The current generation of privileged, influential people who ran the  financial collapse today will do greater harm to the rest of us and to our country tomorrow.  New realms of dysfunctional government and social injustice lie ahead.    This has now become inevitable, because we let people today, in our generation and in our time,  reward themselves for failure, and we have not jailed them for fraud.


Good grief, you read this?  It's so outrageous, it's funny. Throw your head back and laugh at it with Jon Stewart, host of Comedy Central's "Today Show".  One of these links should get you there:

PREFACE      I didn't get it.  I blundered at first.
INTRO            What is the Fed buying? Where does it get the money?
                    How it drives the industry.
                    Commercial & investment banking differences.
                    Building the pyramid of mortgages, bonds, swaps.
                    Famous bankruptcies.
                    Famous frauds.
                    It used to be billions.
                    Waiting for a recovery that won't come.
                    1. Liar loans.  2. Credit agencies.  3. Data bases.  
                    An interview of William K. Black by Bill Moyers.
                    Palatial homes, corporate and private jets.
                    1. No foreclosure halt.
                    2. The government prints money.
                    3. No economic recovery
                    4. Continued failure of leadership.                 
COMIC RELIEF - Jon Stewart

top of this page              companion article, what went wrong 2008?          politics area           home for the entire site   

Easy links: (this one)

Rev 22Oct2010