Gary A's  Instablog

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? www.nytimes.com/2011/0...

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.

and:

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.