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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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  • Originate to Distribute Was Ramped Up in 2004:Quigley BIS Prediction Came True!  4 comments
    Oct 24, 2010 6:39 PM | about stocks: BAC, USB, FNMA, FMCC

    This is an older chart and many of you have seen these charts before, but the fallout is still being felt with Foreclosuregate and a massive mistrust of banks.The chart shows the private MBS frenzy starting in the second half of 2003. This plan, to massively increase private MBS activity, was preplanned in the originate to distribute scheme of Basel 2 in 1998. The process, as you can see, really went wild in 2004, through the crash in 2007. Even though the bubble in real estate was detected by myself and many others, in 2005, the parade of MBS origination mania went on, until it didn't. It is my contention that this MBS "scam" was a preplanned scam orchestrated by the BIS. The Bank of International Settlements was indeed behind the establishment of shadow banking and toxic loans. I try to prove that here with quotes from Chris Whalen and the WSJ.

    That above link proves the amazing prediction of Professor Quigley, who wrote in 1966 this disturbing quote:
    "The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."
    An interesting aside was that Bill Clinton was mentored by the professor. This tells me that his claim that he didn't understand the ramifications of the repeal of Glass-Steagall was simply false. The Clintons sold out and Quigley would no doubt have been deeply disappointed. We know Phil Gramm was at the center of this push for massive securitization that resulted, but Clinton was not an innocent bystander.

    Note that it was early in 2004, February to be exact, that Alan Greenspan uttered the infamous words, that you could get a "better deal" by taking out an adjustable mortgage. Truly, bank underwriting took a vacation in this time period as I point out in my article, Foreclosuregate for Dummies.

    If anyone doubted that the investment banks took over for government underwriting, this chart should dispel that notion. The private label loans were jumbos and other loans that were not subprime. Subprime folks didn't qualify for these mortgages at all. Most of California began to exceed subprime values fairly quickly.

    So to argue, simplistically, like you see on Fox News, that the mortgage meltdown was all about Fannie and Freddie is simple fallacy. Did the crash include subprime? Of course, and that is why we cannot exclude the involvement of Fannie and Freddie in kick starting the bubble. I was looking through some of the older articles on Seeking Alpha and found some that were obscure but helpful in understanding the issue of private MBS and the role of central banks after Fannie and Freddie pulled out of the securitization process.

    Here is an interesting article that has an obscure reference to central banks wanting more private agency mbs in this article: but the article was not seen by too many folks. However, the article doesn't place enough emphasis on the premeditated nature of the central bank involvment private mbs leading to the crash.

    And this great article which shows that fannie/freddie jumpstarted the ponzi but did not carry it to conclusion was so obscure that it had one comment!

    The fact that the central banks wanted this scam of risky lending to take place should give a blanket and loud condemnation of the central banks, with the Fed being guilty of involvement. This was a planned scam, as I link the Basel 2 1998 meeting with my article above quoting Chris Whalen, who said that in May, 2004 the BIS was still involved in this process. That was long after the GSE's pulled out.

    I just think there cannot be too much information on this topic. It is a topic that links the bad behavior of banks in foreclosuregate with the bad behavior of the central banks in the ponzi housing scheme from the beginning. A scam upon the people is ruthless, and the resulting foreclosure process is ruthless. People need to understand the connection between the two attacks upon the people as well as the premeditated nature of this scam and I don't think most do.

    Going forward, we need to watch the actions of Basel 3, as I have written about the possibility that the central banks will want federal guarantees for investors.

    How this would play out if private MBS creation would ever be large once again is a matter of debate. But the investors are drooling for guarantees, and Fannie and Freddie to play a much larger role in mortgage distribution. Can a new bubble be blown from that arrangement? It would all depend upon what Fannie and Freddie were permitted to accept and repackage. Congress would find a way to blow a bubble if they see dollar signs in front of them.

    My personal opinion is that until the bubble nature of this moral hazard, the permanent guarantee of loans, wanted by Basel 3, goes away, we should consider doing away with securitization of mortgages altogether. I recently spoke to a real estate agent in Reno, NV, who said that BAC, US Bank and others are holding their mortgages. He implied this made people trust the banks, but I have to tell you that I don't think this is a permanent policy on the part of all of these banks.

    While the paperwork issues that confront the big banks haunts them we have folks like Sheila Bair coming out recently and stating that lenders should be allowed to foreclose on the abandoned houses, implying that they have the power and to hell with the rule of law. This is an example of the thuggery that continues.

    Make no mistake, the risky loan models created and implimented by the BIS as well as unregulated shadow banking, were nothing more than thuggery, and an attack on mainstreet. This continuation of bad behavior is not very democratic in nature, but very central bank in nature after the days of Paul Volcker.

    The difficulties with MBS securitization has frozen this market for now. But easy money could flow with the guarantees, even by the taxpayer, of ABS which include home equity loans, auto loans, student loans and other credit issues. This easy money setup will work only if there is a lot of demand for these loans. Home equity loans that are easy to get could drive up the price of houses. But houses need to come down in price in order for the US to be globally competitive as to wages and cost of living, however.

    Reckless lending could be the result of this easy money, and once the fever is kindled, I don't see it stopping with just home equity loans. Wall Street will likely find a way to extend this bubble mania to MBS, as they can't seem to make a decent profit without big bubbles. And easy money generally causes the price of the underlying commodity to go up in price. Consumers may end up paying more for automobiles, houses, college books, tuition, dorm rooms, etc. This can't be good for mainstreet in the longer term.   

    Disclosure: no positions

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Stocks: BAC, USB, FNMA, FMCC
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Comments (4)
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  • hipno
    , contributor
    Comments (190) | Send Message
    I thing the next round of bubbles will show up elsewhere. Not R/E.
    Commodities? Commercial assets? I don't know, but it's inevitable.
    2 Nov 2010, 02:57 AM Reply Like
  • Gary A
    , contributor
    Comments (3154) | Send Message
    Author’s reply » Yes, it has to start with something besides real estate, but you have to wonder what it will be. And you wonder how it will happen if people aren't demanding massive loans. Massive QE could result in commodities that are too expensive, which will short circuit any recovery.
    2 Nov 2010, 03:02 AM Reply Like
  • Michael Clark
    , contributor
    Comments (11994) | Send Message
    Thanks for posting this, Gary. Everyone should read it.
    2 Nov 2010, 11:52 AM Reply Like
  • Gary A
    , contributor
    Comments (3154) | Send Message
    Author’s reply » I was hoping to get it published at Seeking Alpha as an article but I had to take it to Oped news. But thank you for the kind words, Michael.
    2 Nov 2010, 11:57 AM Reply Like
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