THE FEDERAL RESERVE IS PRINTING MONEY J. I. Nelson, Ph.D.
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
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
PREFACE -- TWO BLUNDERSI
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.
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.
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.
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.
know what happened. Nothing. Money went to bankers
who mailed bonuses to themselves and foreclosure notices to
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.
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.
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,
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.
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
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
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.
WHAT IS THE FED BUYING?
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".
WHERE IS THE FED GETTING THE MONEY?
The FED is getting the money out of thin air. It just declares that it has the money.
HOW DOES THE FED CREATE MONEY OUT OF THIN AIR?
All banks can wire other institutions large sums of money.
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.
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
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
WHAT CRISIS JUSTIFIES PRINTING MONEY AND SENDING IT TO BANKS?
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.
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.
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
AND PHYSICAL BARRIERS in DEFLATION -- Psychologically, deflation
means no growth and no upbeat 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.
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.
-- 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
will see that the Federal Reserve has purchased 1.45 trillion dollars
in assets without purchasing any new national infrastructure.
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.
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
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
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 cartoonbank.com.)
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.
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.
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.
WHAT'S MISSING? WHY IS NOTHING GETTING FIXED?
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?
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.
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.
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
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.
THE EVICTION PROCESS DOES NOT RESET THE MORTGAGE
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.)
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
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
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.
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
INVESTMENT BANKING'S PYRAMID OF FINANCIAL PRODUCTS
The industry's new pyramid of financial products changes the lending industry in two ways:
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.
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.
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 doc.com
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
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?)
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
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
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:
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 IS INVOLVED?
much money? So much that we have to print it at the Fed. No
budget is big enough to support such subsidies.
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
REAL ESTATE RELATED ASSETS PURCHASED BY THE FEDERAL RESERVE
$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
$1.2 trillion to overseas banks started out as swaps of our currency
for theirs to stabilize the dollar. Then it got nastier.
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).
country was turned into a fool on the global stage by private
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
FEDERAL RESERVE DOES INTEREST RATE CONTROL WELL. Let me
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.
is mad and wants to take away some of the autonomy of the Federal
Reserve, which Congress sees as aloof and arrogant. Without
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
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
THE BANK'S GAME PLAN FANTASIES
The original plan:
Send money. Recapitalize the bankrupt banks until the toxic
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?
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.
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.
MULTIPLE LAYERS OF FRAUD
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.
endless supply of recycled money for more loans pushed mortgage
originators into circumstances they should never have entered.
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.
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.
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.
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.
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,
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.
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.
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.
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.
MARKETS CRASH BUT AIRPLANES FLY -- DO YOU EVER WONDER WHY?
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.
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?
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
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:
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."
Black's book drew this comment from someone on amazon.com:
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.
THE VAST WEALTH of the DERIVATIVE WORLD
produces new, more "derived" financial instruments. Offering them
for sale produces cash for their creators.
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.
of corporate and private jets brought home to me why we cannot expect these people
to think about the welfare of anyone but themselves.
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.)
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.
Most corporate jet interior designs provide a lounge and bar area, dining area, and sleeping quarters.
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.
CONCLUSION: A BLEAK FUTURE
1. No halt in foreclosures
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
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.
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
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).
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
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.
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.
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
for our free market foolishness.
of this money for corrupt banks and poorly-chosen wars has been
invested to build
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."
- a strong national infrastructure,
- a strong
rising generation, or
- a prosperous nation.
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.
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
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
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?
WHAT's MISSING? WHY IS NOTHING GETTING FIXED?
THE EVICTION PROCESS DOES NOT RESET THE MORTGAGE
INVESTMENT BANK's PYRAMID of FINANCIAL PRODUCTS
How it drives the industry.
Commercial & investment banking differences.
Building the pyramid of mortgages, bonds, swaps.
HOW MUCH MONEY WAS HANDED TO BANKS?
It used to be billions.
THE BANK'S GAME PLAN FANTASIES
Waiting for a recovery that won't come.
MULTIPLE LAYERS OF FRAUD
1. Liar loans. 2. Credit agencies. 3.
MARKETS CRASH, but AIRPLANES FLY
An interview of William K. Black by Bill Moyers.
THE VAST WEALTH of the DERIVATIVE WORLD
Palatial homes, corporate and private jets.
CONCLUSION - A BLEAK FUTURE
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: HousingFraud.notlong.com (this one)