Talbott on Banks and the Fed: The Trillion Dollar Fraud

by: John Lounsbury

The above title is used by John R. Talbott for a new article at Salon.com. Talbott describes the transfer of $1.2 trillion in assets from banks onto the Fed balance sheet, about $1 trillion of this in MBSs (mortgage backed securities). The actual value of these securities is unknown because there is no accounting surveillance.

Without an accounting there is no way to know if any of these MBS assets are as toxic as the synthetic CDOs that went into the Abacus 2007-AC1 securities offering by Goldman Sachs (NYSE:GS) that quickly lost all value and are the subject of the civil case SEC vs. Goldman Sachs. William K. Black has testified that, as a class, the so-called "liar loan" sub prime mortgage issuance has resulted in losses between 50% and 85%.

How much of the MBS related securities acquired by the Fed have resulted in (as yet unrecognized) losses of more than 50%? How many toxic assets were acquired at nominal value when they contained large current and future unrealized losses? How many other assets were acquired above true value?

Talbott describes the motivation of the Fed to engage in such questionable operations - namely, banks would have collapsed into bankruptcy without the deception. Talbott goes on to describe how Fannie and Freddie can be used in the future as a mechanism for the Fed (with government complicity) to transfer the bad assets to the taxpayers. Since the GOEs (government owned enterprises) are off balance sheet to the federal debt, the deception can be hidden from less discerning observers.

I have previously reported on the process by which worthless junk, such as the Abacus 2007 AC-1 securities mentioned above, was magically transformed into AAA rated securities which quickly became worthless as the housing bubble started to collapse.

About a year and a half ago I wrote that I feared the path chosen by the Bush administration (which has been continued by the Obama administration) was aimed at saving some diseased trees at the risk of the health of the rest of the forest. I still think that metaphor is appropriate.

If you have disease in some trees in the forest, you have a choice: (1) remove the diseased trees so that the disease can not spread; or (2) treat the diseased trees and hope the disease does not spread. We have chosen (2). It appears the disease may still be spreading.

Notes about John R. Talbott: He is a former executive in the investment banking arm of Goldman Sachs. See my article for the difference between bankers and traders. Talbott has also been an international economic consultant, a visiting scholar at UCLA's Anderson School of Management, a contributor to several leading newspapers and a commentator on many news and financial media outlets.

Talbott has authored several noteworthy books. My favorites are:

  • "The Coming Crash in the Housing Market" (2003)
  • "Sell Now! The End of the Housing Bubble" (2006)
  • "The 86 Biggest Lies on Wall Street" (2009)

He is currently working to eliminate the power of corporate and banking lobbyists in Washington. I have corresponded with him on that topic over the past year and plan to support his efforts.

Disclosure: No positions.