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Gary A
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I am retired from Fresno County. I like to blog and comment on financial matters. I knew of the housing bubble in late 2005, way before Cramer. I believe that the central banking establishment set up excessive and damaging credit vehicles both for investors and for borrowers. Investors were... More
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  • People Still Defend the TBTF banks and the Fed. So Let's Boycott Mortgages
    There is a comment, on the Seeking Alpha discussion board, refuting my desire to see justice, or by some means of government power, limit the power of the international financial cabal. We end up discussing Gaussian Copula, the failed model that banks hid behind in order to deflect blame for their premeditated ponzi lending. The smoking gun is that Basel 2 embraced this fraud. First, the commenter has four points that I debate below.

    Point one: The cases against the TBTF banks, including foreign based ones, is only civil and not criminal.

    Point two: The Federal Government would already be pursuing criminal prosecutions if they had cause against the TBTF banks.

    Point three: The conspiracy theories should stop because 3 of the 4 investment banks mentioned in the article failed.

    Point four: The remaining TBTF banks were pretty conservative, with no desire for loan guarantees then or now, and that Citibank was the only reckless bank as they stepped up and bought a lot of mortgage junk.

    My response to these four points (edited for better reading) are as follows:

    1. All these cases should start as civil cases but should not end there.

    2. If they don't have firm ground it is because the odious bankers figured out the perfect crime. And believe me, offering easy money under the guise of sticking to a flawed model of risk is like a perfect crime. If the government wanted to end this risk management diversion for easy money lending, they need to let these banks fail.

    3. It doesn't matter if they were banks, investment banks, wanna be banks, arms of companies like GMAC or GE Money. If they offered risky loans to mainstreet and made obscene profits off mainstreet they should be forbidden from doing it again. Conspiracy theory is provable and just getting started. Most of the biggies remain and did not fail. Only a few of the big investment banks were wiped out. The insiders did not go under.

    Tell you what, there should be something in a mortgage contract that warns people that the price of their house could come down, with all other houses, based upon the actions of the Federal Reserve and the hedge funds who backed the bubble and then pulled out. Any disclosure less than this is inadequate to protect the buyer. How about telling the buyer that there could be manipulation of the money supply and mortgage regulation which could be modified anytime the central bank wants?  Without those disclosures, I just tell people to boycott the 30 year mortgage. Are you ok with that? Lets announce it to the world. Without full disclosure in a contract, people need to just boycott the process.

    4. JP Morgan had Chase. JPM gambles in other ways and has a boatload of tier three and tier two baggage, maybe more than the other TBTF banks. Wells bought Wachovia who bought World Savings which was a guilty of mass subprime lending without regulation. And I believe the Fed made all these TBTF banks buy these bad banks. Then the shareholders of the TBTF banks were thrown under the bus. Yet they were guaranteed bailout and all have massive unsellable debt.

    The problem is, Enron failed. These banks, as Chris Whalen has said over and over, were without excuse. The risk management was doomed to failure, and underwriters of mortgages were pulled, and the AAA bonds the CDO underwriters, the investment banks, offered were bogus. Rico could prosecute this just fine. And that is what needs to be done. Otherwise, let it be announced that bankers at the highest levels are lower than carnival barkers. If you are OK with that, so am I.

    If there is not a law to cover the misdeeds, and there no doubt is on some level anyway because of foreclosuregate, then there is a moral shame that must be applied to our Fed, Tim Geithner, Rubin, Greenspan, Clinton, Gramm and all the other characters that brought the Basel 2 scam to our shores. The Bush tax cuts gave too much money to the wealthiest Americans, causing the hedge funds to swell with leverage in real estate after the dot com crash.

    All I hear from you, sir, is deflection of blame and lawyerspeak. That does nothing to convince me of your position. It is my view that international banks, and these home grown TBTF banks are as international as UBS and the rest, have usurped the authority of the sovereign United States. And there is an anger building that cries out for this to be reversed.

    I also wrote: And conspiracy it was. The banksters knew Enron and others failed with risk models. They applied those same risk models really as an excuse to offer easy money. The hedge funds and shadow banking system was encouraged at Basel 2 in 1998 and with the repeal of Glass Steagall was implemented. It took over in late 2003 when Geithner became pres of the NY Fed, and private MBS created a bigger mortgage bubble than the CRA ever could. The CRA were out by mid 2003.

    Truth is, maybe there weren't laws to protect US citizens sans foreclosuregate. But I am dubious of that view. And even if there weren't, there can be laws in stone to forbid any easy money mortgages going forward. And those laws should not be subject to change. There should be usury laws against credit card lending and against payday lending. Online payday lending should be banned. 

    There is a lot the US government can do to protect the consumer, but really, congress is so used to lining their pockets with ill gotten banker money that they will likely never do the right thing.

    Sir, with all due respect to your right to your opinion, for you to say that the big banks do not want government guarantees is simply not the truth. If a banker said that I would call him a liar. Clearly Wells wants it. Did you read the NY Times article at all?
    It says:
    Wells Fargo and some other large banks would like private companies, perhaps even themselves, to become the new housing finance giants helping to bundle individual mortgages into securities — that would be stamped with a government guarantee.

    But banks, for their part, have told the administration that removing the guarantee would wipe out the widespread availability of the 30-year mortgage, fundamentally reshaping the American housing market. Though some other countries do not promote long mortgages, some analysts warn that such a change would be devastating to the market here. At firms like Goldman, analysts are predicting that a government guarantee on a broad swath of mortgage securities will survive in some form.

    This is the bottom line to anyone reading this article. The central banks had a plan to hide bad loans at Basel 2. It is not the government's fault. It is not the borrowers' fault. It is not anyone's fault but the central banks who set up the scam. My adversary in debate said this:

    "Banks don't want government guaranteeing lending. They never did and they were conservative lenders who mostly loaned to companies with strong balance sheets. If you knew your history the government inserted themselves into the market because they felt the lending was not aggressive enough, not friendly enough to consumers and they also wanted to take loans off the banks balance sheets so they could loan more." 

    Here is my reply with a bit of embellishment:
    Enron and Parmalat and Worldcom used models of risk to hide transactions in order to look profitable. As many as 3000 companies are playing this off balance sheet accounting game today and many did so in the 1920's, with very bad results. And the banksters played the same game. They hid bad mortgages and transactions they wanted to hide, with the blessing of the central banks at Basel 2. That allowed them to operate with less capital and lend easy money while pretending to be sound banking institutions. And the hedge funds were backing these shadow banks. It was a scam. It was an obvious scam. And it will happen again.
    People need to forget about government and march on Wall Street, and protest at the bank shareholder meetings and do whatever they can, peacefully, to stop these banks from offering easy money loans that artificially drive up the cost of a house ever again. More people need to walk away so that the banks really understand the consumer will not tolerate this predatory lending behavior.
    Mark my words Sir, it will happen again and these banks want the government to guarantee all manner of lending. I have figured it out but you just throw your hands up in the air and blame citizens and the government. Sorry, that doesn't wash.

    What my adversary needs to realize is that banks lobbied for securitization and the repeal of Glass-Steagall. Government was captured by the Fed and the big banks, not the other way around. The Gaussian copula, a statistical method of applying risk to mortgage bonds was already suspect before the credit crisis! The formula was weak in accounting for extreme events! How convenient for the ponzi schemesters!

    So then, underwriters took these flawed bonds and sold them. Investors bought them thinking that the underwriters knew what they were doing. This is securitization gone wild, people. And they will tinker with it and most likely try it again. They will hope that the extreme event possibility will be no threat. But they will likely be wrong again.

    So since 30 years is a long time, and bankers can't seem to measure risk, why don't we just boycott the 30 year mortgage and call for an end to securitization on loans that are that long in duration? As Steve Shreve has said in his Pablo Triana article, "all modeling is wrong". All financial models are detached from reality by degree.

    And of course, the banks picked the weakest of all models, the Gaussian Copula, which doesn't work when you have a crisis! When you are dealing with long term lending and with securitization of people's shelter, I suggest that modeling being wrong always is proof that we cannot subject housing to the securitization process.

    According to Susan Lee at Forbes Magazine, it was JP Morgan who rolled out the Gaussian Copula, and this formula massively underestimated the probability of mortgages all defaulting at the same time. But they all defaulted at the same time, JPM! Add this to the cocktail of off balance sheet banking, the hiding of these bad loans that supposedly won't default at the same time, and you have a recipe for a financial meltdown. Susan Lee calls it "dirty".

    And the smoking gun which ties this fraud to Basel 2 is that Basel embraced this formula, and it was "enshrined in the regulatory framework of Basel 2" according to Lee. But they saw what happened in Japan with an easy money housing market gone wild. That risk was ignored completely in the formula! Susan Lee didn't bother to point that out, and I wish she had.

    But I think it has to be pointed out that central banks knew exactly what would happen when you deposit too much money at the top classes (with tax cuts that are excessive as one way of doing it), easy credit, and risky loans and mix these together. It is easy to determine if these central banks had fraud in their hearts as they applied this mathematical monstrosity to the American housing market.

    Basel knew what happened to the Japanese housing market because a central bank was intimately involved in the process! Too bad we cannot prosecute central bankers. They should be subject to prosecution for sure.

    Basel 2 jettisoned Basel 1 which interfered with the Japanese market with additional capital requirements. Basel 2 sought lower capital requirements in order to fool people into thinking that the banks were solid while everyone was lending at high risk.

    The housing bubble was a conspiracy from the highest reaches of banking authority, Basel 2, through Greenspan panhandling adjustable mortgages in February, 2004. This was at the height of the orginate to distribute model, and at the height of the selling of crap CDO's across the known world.

    Without the Gaussian Copula Fraud, these CDO's would never have been sold as being virtually risk free. Since they could all implode together, the risk was very, very great. Add to the Japanese failure the Enron failure, and you see that "models are always wrong" means something. It means that the central bankers are without excuse and are culpable.

    But I have no doubt that banksters are waiting for this crack high of easy money to roll again and we will be watching them. If they fail again, it will be blamed on a model and the math and not on their intent to defraud.

    When people want to offer easy money loans, and hiding off balance sheet is a clue that Basel allowed this, there is no better way to get the job done than to establish the appearance of sound risk management based upon bogus statistical models. What a shame.

    We have to fight back against this very hurtful economics. It is war from Basel and while Basel 3 has some increase in capital requirements, it does not have the bite that was expected. Brace yourselves for more toxic lending going forward, at some point down the road. Resist this temptation to live for easy money, because we all could get fooled again. 

    May 05 11:04 PM | Link | 3 Comments
  • I Know What the Next Bubble Could Look Like and the Tea Party Needs to Pay Attention
    I have written articles about the efforts by Basel 3 to control Fannie and Freddie in an effort to force the government to guarantee all loans. It is a simple procedure, really. They just buy Fannie and Freddie bonds and make those bonds part of the Tier 2 capital structure. Any destruction of the loan guarantee that underpins that Tier 2 edifice will trigger an instant banking crisis.

    Now that the Tea Party is becoming politically influential, there may be a push to substitute private banks for Fannie and Freddie. A lot of business would go to Wells Fargo and the other TBTF banks and the central bankers want certain guarantees in that arena as well. 

    As Basel stays a step ahead of the politicians, Wells Fargo has come out and advocated that all loans, regardless of quality, be guaranteed by the government. This includes loans that would be purchased by the TBTF banks in place of Fannie and Freddie, thus shrinking the influence of Fannie and Freddie. Wells Fargo actually has held the politicians hostage, warning them that the demise of the 30 year mortgage will be the result of their interference in loan guarantees for every mortgage.

    Ok, Tea Party, most of the movement worships at the feet of the private banks, while hating Fannie, Freddie, the CRA and the Fed. My argument all along has been these are all in collusion against the borrow, taxpayer and sovereign nation of the United States. But the big lie has been that the private banks are the victims of the CRA, of Fannie and Freddie, and were forced to take over bad actors like Wachovia. But if they are victims, why are they getting bigger, and why are they becoming even more greedy in their attempts to survive no matter how that affects the nation or the taxpayers?

    The truth is, the shadow banking system was created at Basel 2, with off balance sheet banking being a central foundation of that system. The central banks looked the other way when a homeless guy got four no-money-down mortgages, as this private shadow/investment bank scam took off in mid 2003. Tim Geithner was named president of the Fed in late 2003 and looked the other way as this system, which was bigger than the CRA and Acorn, by far, took over the mortgage process.

    Even Fox News let Geithner off the hook because little was made of this private securitization practice, and much was made of the CRA/ACORN side show. The only reason Geithner would have been let off the hook was if Fox found no fault in him and in the bubble. Even John Stossel admits that the CRA was a side show, while talking about it far more extensively than of the private, Geithner guided private MBS scheme that took over in mid 2003.

    It is interesting to note that the big banks cry moral hazard when anyone suggests that homeowners be bailed out yet think nothing of creating massive moral hazard for the taxpayer and the borrower when seeking to get all mortgages guaranteed. This political hostage taking is moral hazard. The bubble of the future could be one where all loans, no matter how bad, get inflated ratings because of the guarantees.

    Whereas the last bubble hit investors with many loans that were not guaranteed, the next bubble will have the guarantee that investors require. The risk will fall to the taxpayer, as the easy money machine will ramp up one more time. And the borrower will be prey to the risk of easy money loans that will be one more time doomed to failure as they are written.

    And the thing that amazes me is that most people don't care, don't have a clue, and even the Tea Party people are going to either be a part of this scheme or will get blindsided. Fox News has not reported on this, or at least I can't find it on Google. They must know that Wells Fargo has attempted to extort the taxpayer, but either they don't follow the news (which is an absurd idea) or they are keeping silent on purpose.

    I personally believe that bubbles pay for wars and the old John Birch society talking points that seek conflict with Russia have been seen on Glenn Beck recently. As he glorifies McCarthyism, Beck is setting the stage for wars that can be fought indefinitely as long as securitization of crap loans pays for it.

    After all, Iraq was paid for by the first housing bubble. When Alan Greenspan advocated getting a better deal with adjustable mortgages in February, 2004, the Fed and the central banks showed their hand. This same Alan Greenspan advocated the taking of the oil ministry in Iraq first thing. It was in his book! There is a connection.

    I have argued that there is a new world financial order, but that it is a corporatist order, similar to the ideas expressed by Ron Paul. The Tea Party, with influences by the Koch Brothers, sons of a John Birch cofounder, have lied about this order, making it out to be a communistic order.

    While on the surface this would seem to be hair splitting for me to contend their position, it is most certainly not hair splitting. Here is why. Communism socializes profits and socializes losses. We don't have that. Roubini is correct. The system we have privatizes profits and socializes losses. That can't be communism. It can be corporatism. I repeat, that cannot be communism.

    I think Beck and the Koch Brothers have an ulterior motive in their quest to pin our financial problems on communism. And they should be exposed for that dangerous thinking. If you don't worry about World War 3 then maybe you don't think they are dangerous. I am not for shutting them up, but I am for an equal airing of the truth. As Beck's talking points become reality for so many, war fever and securitization seem to meld and you can't have one without the other.

    America is entering a very dangerous period in her history. Are these madmen who are running the nation really concerned with national security or are they concerned with world domination? And do they care about a little moral hazard as they allow mainstreet and taxpayers to be pillaged while they have an eye for hatred of communism and the reestablishment of the Cold War? Of course not. This financial/energy/military cabal has an apparent passion for destruction. It is a pretty dangerous form of mercantilism.

    I am not saying that the John Birch/Tea Party ideas will win out. Certainly cooler heads could prevail. But it all starts with toning down the securitization process, as that process gives the United States a lot of muscle, and is the steroid of war, to be sure. If our military is truly interested in stability and security, perhaps they could suggest to our politicians that these continued attacks upon taxpayers and borrowers is not ultimately in the national interest.

    We should be able to tell a lot about our nation's lust for war and uncertainty in the future based upon the direction of the securitization process, specifically regarding home mortgages. A policy that favors the banks and that puts the taxpayer in jeopardy is a policy that favors war and destruction. Something to think about anyway, isn't it? Too bad few in America are thinking about it.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 24 12:00 PM | Link | Comment!
  • What Is Predatory Lending Anyway? Payday Lending and Ponzi Mortgage Loans Come From the Same Sources!
    I ran across an article posted on the National Association of Realtors website regarding predatory lending. Turns out that this article warns about applying predatory lending rules to many toxic loans. The article admits that applying these rules would lead to a popping of the real estate bubble! Remember, this was posted on June 21, 2005. Yet David Lereah was on CNBC after this, as head of NAR, promising that real estate would recover. Daily I watched this pitch for recovery from what, even NAR has admitted, was a bubble. To be fair, NAR had many articles posted warning of interest only loans as well.

    Another NAR article posted on February 22, 2005, the author was haggling over the appropriateness of interest only mortgages, and says that only on the margin, are these loans dangerous. Yet the OCC was to clamp down on these types of mortgages. That certainly didn't apply to the shadow banking set up by the Bank of International Settlements. Shadow bankers never stopped giving interest only loans and other toxic loans to almost any warm body.  

    But I think what these episodes show is that predatory lending was known to the mortgage industry, to banks and to governments, yet it was not at all stopped. There were rules in place to stop it but no one stopped it.

    I have argued that the ponzi housing bubble was a planned scam. This continual and consistent refusal to enforce the law sure adds to that argument. Loans that would never have been offered to first time buyers, to people with bad credit, to people with good credit but little reserve resources, would simply not have been allowed in the past. The concept of holding mortgage payments down by making toxic, easy money loans, and interest free or pay option arm loans, was sure to increase sales in a massive way. This increase of sales was a sure way to increase the values of the houses, until the ponzi stopped. For anyone wondering why this shadow banking was permitted need only to look at the Bank of International Settlements, who made certain that easy money loans and unsound underwriting would work together to drive the values of homes up.

    So, why did the central banks want this ponzi scam in the first place? Well, I believe it was patterned after the payday loan. These loans were very lucrative to banks, not just for the interest collected, but for the fees generated. These loans are only illegal in a small minority of states.

    The Defense Department forced congress, in 2006, to curtail rates with "usury' laws for military personnel. Georgia outlawed payday loans, but could not stop it until 2004 when they made payday lending subject to racketeering laws.

    Payday loans are debt traps. They turn out to be the guide for ponzi housing loans that turned out to be debt traps as well. It is interesting to know that the biggest banks fund the payday loan industry. JP Morgan, Wells Fargo, and US Bankcorp are the funders of these odious loans, according to a Los Angeles Times investigation. Taxpayers are subsidizing these loans through Fed loans to these banks at less than 1 percent. These banks turn around and lend this money out at over 300 percent, plus late fees! It is noted that this involvement by big banks started in the mid 1990's.

    It seems that there is no moral sensibility that large banks are not willing to abandon these days. People need to be aware of this bad behavior, even if they never go close to a payday loan establishment. If these big banks can rip off the poor, how much more would they like to do the same to you!

    As an aside, how seniors are treated is important for banks who are foreclosing at a fast pace. They must realize that they may be committing elder abuse as well as just confiscating without proper documents. People can get into a lot of trouble for abusing elders. It is my view that not only is traditional fraud elder abuse, but attorneys need to make sure that this elder abuse does not include foreclosing with faulty documents. Going forward, I would like to see prosecutions of big banks or any financial company for any abuse that may occur with the elderly.

    With regard to payday loans and mortgage easy money, it seems that many of the players in the payday funding industry also became subprime lenders. They then got involved in the packaging of all kinds of toxic mortgages to people with better credit, including jumbo and interest only, and option arms.

    Seeing that lending could be so lucrative to those who you could charge fees to seems to have become a model for mortgage lending. Also, seeing that lending to people without the need for underwriting became a model that began in payday lending. People were able to get mortgages, and "too much house", as lenders simply gave them loans that were destined to either generate late fees or fail.

    This lending without proper underwriting on such a large ticket item as a home is, was never contemplated until the payday model was brought to the mortgage models. No bank ceo would subject a bank to that sort of risk. However, we know now that it was not a major risk, as the originate to distribute model put risk on unsuspecting investors, and on the borrowers. The blame goes squarely on the lenders, as it is overwhelmingly proven to be their scheme. Houses should not be sold in this fashion, as people were never expecting loans that were so doomed to failure. Most people growing up in the United States in 1950-2000 had never seen anything so unethical in the lending industry. They were blindsided by a very sophisticated ring of predators.

    Disclosure: no positions
    Oct 30 6:10 PM | Link | 2 Comments
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