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If you are brave, and read Michael Lewis latest book, The Big Short, like I just did (and it's a slender little thing, easily consumed in an afternoon or two), you will learn exactly how we got to where we are today, and why we are being set up for another even harder fall (and a lot about the one we just came through - badly).
He says that "Everything is correlated," and he is not kidding you. In the slightest.
When I published my book about the financial 1980s, the financial 1980s were supposed to be ending. I received a lot of undeserved credit for my timing. The social disruption caused by the collapse of the savings and loan industry and the rise of hostile takeovers and leveraged buyouts had given way to a brief period of rcriminations. Just as most students at Ohio State University read Liar's Poker as a how-to manual, most TV and radio interviewers read me as a whistleblower. . . . Anti-Wall Street feelings then ran high enough for Rudolph Giuliani to float a political career upon them, and the result felt more like a witch hunt than an honest reappraisal of the financial order. The public lynching of Michael Milken, and then of Salomon Brothers CEO Gutfreund, were excuses for not dealing with the disturbing forces underpinning their rise.
Ditto the cleaning up of Wall Street trading culture. Wall Street firms would soon be frowning upon profanity, forcing their male employees to treat women almost as equals, and firing traders for so much as glancing at a lap dancer. Bear Stearns and Lehman Brothers in 2008 more closely resembled normal corporations with solid, Middle American values than did any Wall Street firm circa 1985.
The changes were camouflage. They helped to distract outsiders from the truly profane event: the growing misalignment of interests between the people who trafficked in financial risk and the wider culture. The surface rippled, but down below, in the depths, the bonus pool remain undisturbed.
. . . There was an umbilical cord running from the belly of the exploded beast back to the financial 1980s. The crisis of 2008 had its roots not just in the subprime loans made in 2005 but in ideas that had hatched in 1985.
Gene Lyons in Salon comments on John Paulson's and many others' role in the shorting documented so ably in The Big Short after Goldman Sachs was finally charged with fraud. I don't agree with his judgment that this was a part of the madness driving the market - after all - the shorters were screaming loudly the whole time about the catastrophe that lay ahead as they tried to ensure that they were seeing the situation clearly before placing their bets (emphasis marks added - Ed.):
How could so many allegedly brilliant people do something so dumb as to gamble the nation's — nay, the world's — financial system on shaky subprime real estate loans to millions of Americans drowning in debt? After all, as Michael Lewis points out in his trenchant book The Big Short, "the people who worked on the relevant Goldman Sachs mortgage bond trading desk were all extremely intelligent. They'd all done amazingly well in school and had gone to Ivy League universities."
How could they not see what an obscure financial advisor named Michael J. Burry, one of several quirky Cassandras profiled by Lewis, warned his clients against in 2003? "The consequences could very easily be a 50% drop in residential real estate in the U.S. ... The collateral damage is likely to be orders of magnitude worse than anyone now considers."
By 2005, Burry, an autodidactic loner with Asperger's syndrome, had grown almost frantic: "Markets ... are erring right now by continuing to float along as if the most significant credit bubble history has ever seen does not exist."
Two weeks ago, Burry, who made a huge fortune by purchasing credit default swaps (a kind of insurance) against mortgage bonds and the investment banks who issued them, wrote a New York Times column asking why, in the second Bush administration, "the Federal Reserve chairman, the Treasury secretary, the president and senior members of Congress repeatedly underestimated the severity of the problem, ultimately leaving themselves with only one policy tool — the epic and unfair taxpayer-financed bailouts."
The short answer is ideology: free-market fundamentalism that obscured their ability to apprehend reality. Not that Democratic politicians stood on street corners preaching against collapse. Instead they, Barack Obama included, were also petitioning Wall Street grandees for campaign contributions.
It's a legitimate criticism of Lewis' book, a witty and highly entertaining work of explanatory journalism, that his contrarian heroes aren't quite as blameless as he implies. By pestering Wall Street to create and sell them credit default swaps for the purpose of "shorting" — betting against — the market, they helped drive speculative frenzy ever higher.
That said, like Burry, Lewis' protagonists were anything but secretive about their intentions. Iconoclastic investor Steve Eisman — his wife says that even by Wall Street standards, "people think he's rude and obnoxious and aggressive" — enjoyed telling smug insiders what chumps they were being.
It was during one such confrontation that Eisman grasped "the madness of the machine . . . There weren't enough Americans with (bleep) credit taking out loans to satisfy investors' appetite for the end product. Wall Street needed his bets in order to synthesize more" speculative financial instruments to sell at ever-higher prices.
By 2007, most CDOs (collateralized debt obligations) sold by Wall Street investment banks were as intrinsically worthless as poker chips — essentially their function. According to Eisman's associates, "the more we looked what a CDO really was, the more we were like, Holy (bleep), that's just (bleeping) crazy. That's fraud. Maybe you can't prove it in a court of law. But it's fraud."
Which brings us to the next question: Was it, in fact, fraud for Goldman Sachs to peddle dud CDOs assembled by contrarian investor John Paulson (not profiled by Lewis, for what now appear to be very shrewd reasons) specifically for him to bet against?
That's what the government has alleged in filing suit against the Wall Street icon: That by concealing Paulson's involvement from the German and British banks who invested in the securities, Goldman also hid its knowledge of their worthlessness — saving its own skin at the expense of its clients.
Warren Buffet commented on the scandal in his annual newsletter to shareholders:
The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is thebehavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price - one not reimbursable by the companies they've damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.
Andrew Leonard, reviewing for Salon, comments on Buffett's views:
Do yourself a favor and read this slim volume - and vote accordingly.It is instructive to compare Buffett's sense of corporate responsibility with a brief snippet from The Big Short, Michael Lewis' superb new book on the financial crisis.
Lewis devotes much of The Big Short to a short-seller named Steve Eisman who becomes convinced that the entire subprime mortgage industry is a house of cards - with special emphasis on the securitization games being played by the big Wall Street investment banks.
On the surface, these big Wall Street firms appeared robust; below the surface, Eisman was beginning to think, their problems might not be confined to a potential loss of revenue. If they really didn't believe the subprime mortgage market was a problem for them, the subprime mortgage market might be the end of them. He and his team now set about searching for hidden subprime risk: Who was hiding what? "We called it The Great Treasure Hunt," he said.... He'd go to meetings with Wall Street CEOs and ask them the most basic questions about their balance sheets. "They didn't know," he said. "They didn't know their own balance sheets."As we watch the parade of Wall Street lobbyists and CEOs complain about what new financial regulation will mean for their businesses, we should remember that their own record suggests that they don't have a very good handle on what they're actually doing, and their self-inflicted wounds, absent a government bailout, would have been far more lethal than anything coming out of Washington.
In a similar (and exactly the same actually) vein, who wants to know what's really going on in the latest foreclosure scandal news? You should, and I know I do as a friend has already had her purchase of a foreclosure delayed until some smoke-and-mirror clearing (if only!) interval occurs.
Ellen Brown at Seeking Alpha does also. And she is hot on the trail. Follow it at the major banks' peril (emphasis marks added - Ed.)
By most reports, it would appear that the voluntary suspension of foreclosures is underway to review simple, careless procedural errors. Errors which the conscientious banks are hastening to correct. Even Gretchen Morgenson in the New York Times characterizes the problem as “flawed paperwork.” But those errors go far deeper than mere sloppiness. They are concealing a massive fraud.Go Ellen! I nominate her for one of the top posts in economics in this country. I believe there are plenty of them in need of smart people.They cannot be corrected with legitimate paperwork, and that was the reason the servicers had to hire “foreclosure mills” to fabricate the documents. These errors involve perjury and forgery - fabricating documents that never existed and swearing to the accuracy of facts not known. Karl Denninger at MarketTicker is calling it “Foreclosuregate.” Diana Ollick of CNBC calls it “the RoboSigning Scandal.” On Monday, Ollick reported rumors that the government is planning a 90-day foreclosure moratorium to deal with the problem.
Three large mortgage issuers – JPMorgan Chase (JPM), Bank of America (BAC) and GMAC - have voluntarily suspended thousands of foreclosures, and a number of calls have been made for investigations.
Ohio Attorney General Richard Cordray announced on Wednesday that he is filing suit against Ally Financial and GMAC for civil penalties up to $25,000 per violation for fraud in hundreds of foreclosure suits.
These problems cannot be swept under the rug as mere technicalities. They go to the heart of the securitization process itself. The snowball has just started to roll.
You Can’t Recover What Doesn’t Exist
Yves Smith of Naked Capitalism has uncovered a price list from a company called DocX that specializes in “document recovery solutions.” DocX is the technology platform used by Lender Processing Services to manage a national network of foreclosure mills. The price list includes such things as “Create Missing Intervening Assignment,” $35; “Cure Defective Assignment,” $12.95; “Recreate Entire Collateral File,” $95. Notes Smith: [C]reating . . . means fabricating documents out of whole cloth, and look at the extent of the offerings. The collateral file is ALL the documents the trustee (or the custodian as an agent of the trustee) needs to have pursuant to its obligations under the pooling and servicing agreement on behalf of the mortgage backed security holder. This means most importantly the original of the note (the borrower IOU), copies of the mortgage (the lien on the property), the securitization agreement, and title insurance.
How do you recreate the original note if you don’t have it? And all for a flat fee, regardless of the particular facts or the supposed difficulty of digging them up. All of the mortgages in question were “securitized” – turned into Mortgage Backed Securities (MBS) and sold off to investors. MBS are typically pooled through a type of “special purpose vehicle” called a Real Estate Mortgage Investment Conduit or “REMIC”, which has strict requirements defined under the U.S. Internal Revenue Code (the Tax Reform Act of 1986). The REMIC holds the mortgages in trust and issues securities representing an undivided interest in them. Denninger explains that mortgages are pooled into REMIC Trusts as a tax avoidance measure, and that to qualify, the properties must be properly conveyed to the trustee of the REMIC in the year the MBS is set up, with all the paperwork necessary to show a complete chain of title. For some reason, however, that was not done; and there is no legitimate way to create those conveyances now, because the time limit allowed under the Tax Code has passed.
The question is, why weren’t they done properly in the first place? Was it just haste and sloppiness as alleged? Or was there some reason that these mortgages could NOT be assigned when the MBS were formed? Denninger argues that it would not have been difficult to do it right from the beginning. His theory is that documents were “lost” to avoid an audit, which would have revealed to investors that they had been sold a bill of goods - a package of toxic subprime loans very prone to default. The Tranche Problem Here is another possible explanation, constructed from an illuminating CNBC clip dated June 29, 2007. In it, Steve Liesman describes how Wall Street turned bundles of subprime mortgages into triple-A investments, using the device called “tranches.” It’s easier to follow if you watch the clip (here), but this is an excerpt:
How do you create a subprime derivative? . . . You take a bunch of mortgages . . . and put them into one big thing. We call it a Mortgage Backed Security. Say it’s $50 million worth. . . . Now you take a bunch of these Mortgage Backed Securities and you put them into one very big thing. . . . The one thing about all these guys here [in the one very big thing] is that they’re all subprime borrowers, their credit is bad or there’s something about them that doesn’t make it prime. . . . Watch, we’re going to make some triple A paper out of this. . . Now we have a $1 billion vehicle here. We’re going to slice it up into five different pieces. Call them tranches. . . . The key is, they’re not divided by “Jane’s is here” and “Joe’s is here.” Jane is actually in all five pieces here.
Because what we’re doing is, the BBB tranche, they’re going to take the first losses for whoever is in the pool, all the way up to about 8% of the losses. What we’re saying is, you’ve got losses in the thing, I’m going to take them and in return you’re going to pay me a relatively high interest rate. . . . All the way up to triple A, where 24% of the losses are below that. Twenty-four percent have to go bad before they see any losses.
Here’s the magic as far as Wall Street’s concerned. We have taken subprime paper and created GE quality paper out of it. We have a triple A tranche here.
The top tranche is triple A because it includes the mortgages that did NOT default; but no one could know which those were until the defaults occurred, when the defaulting mortgages got assigned to the lower tranches and foreclosure went forward. That could explain why the mortgages could not be assigned to the proper group of investors immediately: the homes only fell into their designated tranches when they went into default.
The clever designers of these vehicles tried to have it both ways by conveying the properties to an electronic dummy conduit called MERS (an acronym for Mortgage Electronic Registration Systems), which would hold them in the meantime. MERS would then assign them to the proper tranche as the defaults occurred. But the rating agencies required that the conduit be “bankruptcy remote,” which meant it could hold title to nothing; and courts have started to take notice of this defect. They are concluding that if MERS owns nothing, it can assign nothing, and the chain of title has been irretrievably broken. As foreclosure expert Neil Garfield traces these developments: First they said it was MERS who was the lender. That clearly didn’t work because MERS lent nothing, collected nothing and never had anything to do with the cash involved in the transaction. Then they started with the servicers who essentially met with the same problem. Then they got cute and produced either the actual note, a copy of the note or a forged note, or an assignment or a fabricated assignment from a party who at best had dubious rights to ownership of the loan to another party who had equally dubious rights, neither of whom parted with any cash to fund either the loan or the transfer of the obligation. . . . Now the pretender lenders have come up with the idea that the “Trust” is the owner of the loan . . . even though it is just a nominee (just like MERS) . . . . They can’t have it both ways.
My answer is really simple. The lender/creditor is the one who advanced cash to the borrower. . . . The use of nominees or straw men doesn’t mean they can be considered principals in the transaction any more than your depository bank is a principal to a transaction in which you buy and pay for something with a check.
So What’s to Be Done?
Garfield’s proposed solution is for the borrowers to track down the real lenders -- the investors. He says: [I] f you meet your Lender (investor), you can restructure the loan yourselves and then jointly go after the pretender lenders for all the money they received and didn’t disclose as “agent.”
Karl Denninger concurs. He writes:
Those who bought MBS from institutions that improperly securitized this paper can and should sue the securitizers to well beyond the orbit of Mars. . . . [I]f this bankrupts one or more large banking institutions, so be it. We now have "resolution authority", let's see it used.
The resolution authority Denninger is referring to is in the new Banking Reform Bill, which gives federal regulators the power and responsibility to break up big banks when they pose a “grave risk” to the financial system – which is what we have here. CNBC’s Larry Kudlow calls it “the housing equivalent of the credit financial meltdown,” something he says could “go on forever.” Financial analyst Marshall Auerback suggests calling a bank holiday. He writes:
Most major banks are insolvent and cannot (and should not) be saved. The best approach is something like a banking holiday for the largest 19 banks and shadow banks in which institutions are closed for a relatively brief period. Supervisors move in to assess problems. It is essential that all big banks be examined during the “holiday” to uncover claims on one another. It is highly likely that supervisors will find that several trillions of dollars of bad assets will turn out to be claims big financial institutions have on one another (that is exactly what was found when AIG was examined — which is why the government bail-out of AIG led to side payments to the big banks and shadow banks). . . . By taking over and resolving the biggest 19 banks and netting claims, the collateral damage in the form of losses for other banks and shadow banks will be relatively small. What we need to avoid at all costs is “TARP II” – another bank bailout by the taxpayers. No bank is too big to fail. The giant banks can be broken up and replaced with a network of publicly-owned banks and community banks, which could do a substantially better job of serving consumers and businesses than Wall Street is doing now.
The truth - that no idiocy is too extreme to be taken seriously by the right-wing media establishment anymore - is, indeed, far worse.
Frank Rich
My guess is that facts won't apply to anything the rightwingnuts will say from now on.
The fraudulent rightwingnutter TV scholar Dinesh D'Souza, who made his name originally by outing gays as a College Republican at Dartmouth has finally been outed. But don't hold your breath to see him disappear from all the Sunday Morning Snooze shows.
And, of course, you already knew about Bob Woodward being the source of the Hillary/Biden switch rumor? That crazy Woodward! You'd think he'd be busy enough spinning the lies that he publishes as facts in all his nonfiction novels, wouldn't you? (Guess after finishing that last book he felt the need to say something else (or he is completely off his leash now).) But no (emphasis marks added - Ed.).D'Souza's embarrassing history should've led this book straight to the remainder bin. Instead it made the cover of Forbes. Then Newt Gingrich endorsed it. Then Glenn Beck endorsed it. The book immediately climbed up the Amazon bestseller list.
Now the White House is involved, with Robert Gibbs asking Forbes to retract the numerous factual inaccuracies. All Forbes will say is that facts don't apply in opinion pieces.
So, Mark Penn is why Hillary's campaign was a nonstarter with me? Because I certainly sensed "stoopid" coming from somewhere. And Woodward? I've had no respect for that CIA-schooled machiavellian (who missed or purposely obscured every important story after his take on Watergate) since I read Russ Baker's Bush Family of Secrets. But many people still do, and he will be heard - mainly as a jokester this time, I'm hoping. But wouldn't it be loverly if all the con men (and women) could be exposed this election cycle? It seems to me that the clowns are leading the way - if only the citizens who are left paying for their financial and criminal detritus will demand their exposure. And then we could begin the serious cleaning up of the mess we've been left with after these last 30 years of fraudster leadership.CNN's John King (USA) started it, of course. He held up Woodward's book, then repeated some of that idle Beltway "gossip" that is usually just made up by pundits wishing to speculate. "You know the talk in town, a lotta people think if the president looks a little weak going into 2012, he'll have to do a switch there, and run with Hillary Clinton as his running mate."
Now, first of all, "a lotta people" do not actually "think" that will happen. It's something pundits like Mark Halperin fantasize about. But wishful thinking is not the same as an actual reasonable prediction of future events.
So, King asks Bob Woodward, America's most famous journalist - the man who speaks to everyone worth speaking to in the corridors of power, who just finished what he always refers to as "hundreds of hours" of interviews with everyone at the White House from the president on down - did he hear anything about a shocking and unprecedented Clinton-Biden switch? "It's on the table," Woodward said.
Wow! Except, as the Atlantic's Marc Ambinder succinctly tweeted: "No, it's not."
Does the world's most successful political reporter actually not understand politics? That's what Ambinder went on to argue in a piece that was also an amusing parody of Woodward's omniscient third-person prose:
Then again, Ambinder thought privately, one of the senior policymakers who played a starring role in Woodward's latest book had characterized its conclusions as "60 percent right, 40 percent completely wrong." And that was from a policymaker who came across favorably in the book."I can't believe Woodward would say something like that," Ambinder told his editor, Bob Cohn, over coffee in Cohn's Watergate office the next day. "It suggests that he knows next to nothing about the president's actual relationship with his vice president and secretary of state ... or that he has done no reporting on the question at all. Which is absurd, because Woodward is a reporter's reporter."
Woodward is notorious for giving favorable coverage in his books to the people who talk to him the most (and for worshiping certain members of the military, especially when they're engaged in policy battles with civilian leadership). But does the guy actually believe what his odious sources tell him in his lovely Georgetown home? Does he buy their lies? Does the guy who took down Nixon think political operatives are trustworthy?
Here's a big red flag: His source on the Biden-Clinton switch was apparently pollster grifter Mark Penn. Penn is a professional liar and nearly every political decision he made while attempting to steer Hillary Clinton's 2008 presidential campaign was epically, historically stupid.
So Woodward was just repeating half-baked speculative nonsense from professional (and inept) Clinton-booster Mark Penn as if it was something serious people in the White House were considering.
Suzan ________________
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