It’s Time for the Banks to Face the Hangman

How can one defend a system that creates wealth by making the majority poor?

— Henry C. K. Liu

Officials in the Treasury Department — working with their colleagues at Citigroup, J.P. Morgan and Bank of America — have concocted a scheme to rescue the banks from their massive losses in mortgage-backed securities. The group is planning to set up a $100 billion emergency fund that will purchase non-performing assets for short-term debt. In truth, the fund is a bailout that provides the financial giants with an excuse for not reporting their enormous losses from bad bets.

The story first appeared in Saturday’s Wall Street Journal and was followed on Monday with a second headline piece:

“RESCUE READIED BY BANKS IS BET TO SPUR MARKET”

WSJ: “The high stakes plan to RESCUE BANKS FROM LOSSES on mortgage securities amounts to a big bet that a consortium of financial giants — AT THE PRODDING OF THE US GOVERNMENT — can PERSUADE INVESTORS TO POUR MORE MONEY INTO THE TROUBLED CREDIT MARKET.”

That’s right. The Treasury Dept is directly involved in a scam that saves the banks while trying to “persuade” investors to “pour more money” into toxic mortgage-backed sludge. Treasury Department officials clearly have a different idea of “moral hazard” than the rest of us.

The banks are presently holding hundreds of billions of dollars in mortgage-backed securities (MBSs) that they cannot sell — because there are no buyers — and don’t want to take back on their balance sheets because they’ll be forced to increase their capital reserves. So they’ve decided to launch a public relations campaign to promote some goofy sounding fund, called the “Master-Liquidity Enhancement Conduit” or M-LEC, which will allow the banks to place their unwanted bonds in Limbo until some future date when the public appetite for garbage improves.

The WSJ does a good job of disguising the real motive behind the new “Super-Conduit” (a.k.a. the Bailout fund) but in the last paragraph, buried in Section C-3, they reveal the truth:

“The goal is to reassure investors and make them more willing to buy its short-term debt.” So, the fund is really just a way of rearranging the marketplace until the next crop of gullible investors sprouts up and buys more mortgage-backed garbage.

Bloomberg’s Mark Gilbert puts it like this:

“It seems the way to reassure investors that it’s safe to buy the repackaged junk that has torpedoed credit markets in recent months is to repackage the least-junky bits of the junk into more palatable securities. The pyramid just grew another layer. . .

I can’t decide whether the Treasury’s willingness to patronize such a misguided effort is evidence that the situation is more desperate than anyone thought, or a positive sign that financial markets will continue to evolve and innovate and might eventually wrestle the subprime demon to the ground.”

Indeed.

Where are the regulators? The SEC and Treasury should be forcing the banks to be straightforward with the public and let them know about the hanky-panky they’ve been up to with their risky SIVs (structured investment vehicles) Citigroup alone has nearly $80 billion in off-balance sheets operations which are in distress. The bank accounts for “25% of the global SIV market. As of August, assets held by SIVs totaled $400 billion”.

SIVs are set up as a way to make money without taking the risk onto their balance sheets. “They issue their own short-term debt, usually at relatively low rates …then use the proceeds to buy higher yielding assets such as securities tied to mortgages.” (WSJ)

Ever since Bear Stearns blew up in late July, investors have been steering clear of any securities connected to real estate, which means the SIVs are getting the Double Whammy — they can’t sell their asset-backed commercial paper (because it’s mortgage-backed) and they find buyers for their collateralized debt obligations. (CDOs) To a large extent, the market is still frozen despite the upbeat cheerleading on the business pages. Clearly, the worst is yet to come.

How bad is it?

An article in yesterday’s Financial Times of London said that, “Only $9.9 billion of home equity loan securitizations have come to market since July 1 — A 95% DECLINE FROM THE $200.9 BILLION IN THE FIRST HALF OF THIS YEAR AND A ROUGHLY 92% DECREASE FROM THE SAME PERIOD LAST YEAR.”

The banks are in trouble. Big trouble. Main sources of revenue have dried up overnight and they’re stuck with hundreds of billions of debt. That’s why the papers broke the story on Saturday when there was NO chance of triggering a stock market crash.

Imagine the horror of investors around the world when they discover that the major investment banks are running these shabby “off-balance sheets” operations while concealing their real financial condition from their investors. Consider the disgust the public feels when they see Treasury officials bailing out the banks instead of ordering them to report their losses and get on with business.

Still, Wall Street nonchalantly leaps from one swindle to the next never considering the damage it’s doing to the credibility of the market.

Susan Pulliam summed it up like this in the Oct 12 edition of The Wall Street Journal:

“Since the invention of the ticker tape 140 years ago, America has been able to boast of having the world’s most transparent financial markets. The tape and its electronic descendants ensured that crystal-clear prices for stocks and many other securities were readily available to everyone, encouraging millions to entrust their money to the markets. These days, after a decade of frantic growth in mortgage-backed securities and other complex investments traded off exchanges, that clarity is gone. Large parts of American financial markets have become a hall of mirrors.”

“Hall of mirrors” is an understatement. The system is thoroughly opaque and crooked as a ram’s horn. The market’s new architecture, “structured finance,” is a dismal rip-off from start to finish. Consider the mentality of the hucksters who dreamed up “securitizing” subprime mortgages and selling them off as precious jewels in the secondary market. This was a blatant con job. How can the liabilities of “borrowers with bad credit” be traded to foreign investors and pension funds like they were valuable assets? And where were the regulators while this scam was going on?

Isn’t this sufficient evidence that the system is totally out of whack?

Wall Street avoids transparency like the plague. That is to be expected. But what about the government? It’s the government’s job to protect the investor and maintain the integrity of the system. Is that what Treasury Dept is doing or are they “LURING investors to buy debt issued by the rescue fund as part of the plan”? (Wall Street Journal)

“Luring”? Is that how Paulson sees it; like luring turkeys to the chopping block with a trail of breadcrumbs?

The idea of protecting the little guy has never occurred to anyone in the Bush administration. Their job is to shift wealth from one class to the other via equity bubbles and government bailouts — anything that advances the corporate agenda.

Presently, the banks are sitting on $200 billion in non-performing mortgage-backed securities (MBSs) and collateralized debt obligations. (CDOs) They are also holding another $300 billion in collateralized loan obligations (CLOs) from mergers and acquisitions that stalled after the Bear Stearns meltdown. If the present bailout doesn’t materialize, we’re likely to see bank closures and a plummeting stock market.

Shouldn’t the regulators have considered the probability of a crash before they allowed trillions of dollars of radioactive bonds to flood the market when no one had any idea of their real value? Wouldn’t that have been the prudent thing to do?

Now we know what they are worth. They’re worth nothing. That’s why the banks are running scared and refusing to put them up for auction. They’d rather sleaze them into a lofty-sounding superfund that masks their true value.

In the last two weeks the stock market soared on the news that the banks were reporting billions of dollars in losses. Investors were hoodwinked into believing the banks were being honest and had “come clean” about their financial condition. What a joke. In reality, the banks only reported roughly 5% of their potential losses; the rest were hidden in their off balance sheets operations.

Equities skyrocketed to new heights. Wall Street was euphoric.

Now we know the truth. It was all baloney.

The Wall Street Journal: “The new fund is designed to stave off what Citigroup and others see as a threat to the financial markets world-wide: the danger that dozens of huge bank-affiliated funds will be forced to unload billions of dollars in mortgage-backed securities and other assets, driving down their prices in a fire sale . . . . The ultimate fear: If banks need to write down more assets or are forced to take assets onto their books, that could set off a broader credit crunch and hurt the economy. It could make it tough for homeowners and businesses to get loans.”

It could “hurt the economy” and “make it tough for homeowners and businesses to get loans?” Ahhh, yes. It’s all clear now. The banks only cooked up this colossal bailout to make things better for us common people. How is it that we didn’t notice that before? Our problem is that we don’t see the magnanimity and altruism which drives the corporate agenda.

From the New York Times:

“The conduit (The bailout fund) is expected to start operating in 90 days and will stay in place for a few years until it has disposed of the assets it buys, according to people familiar with the negotiations. . . . To maintain its credibility with investors from whom it would raising money, the conduit will not buy any bonds that are tied to mortgages made to people with spotty, or subprime, credit histories. Rather, it will buy debt with the highest ratings — AAA and AA — and debt that is backed by other mortgages, credit card receipts and other assets.”

We already know about the problems with the ratings agencies and how they are in bed with the investment banks. We also know that the whole purpose of the new fund is to off-load mortgage-backed tripe which is no longer sellable on the market. What we didn’t know is that the New York Times eagerly provides the peppy public relations narrative to assist big business in dumping its failing assets.

New York Times: “The conduit will pay market prices for the securities it buys. But it remains unclear how officials will determine the price of some bonds that have not been actively traded since August, because the difference between what buyers are willing to pay and what sellers want has widened significantly.”

Of course, they’ll pay full price because they want to be “made whole” again. The truth is, however, that these derivatives will probably only fetch pennies on the dollar unless they get another Wall Street PR face-lift.

Christian Stracke, market analyst from the research firm CreditSights, said the effort appears to be “an attempt to soothe tense investors in the debt market, rather than to provide substantive relief to the worst-hit mortgage securities.”

Stracke added, “For me, this is more of a P.R. blitz.”

Bingo.

The announcement of the forthcoming Master-Liquidity Enhancement Conduit or M-LEC further underlines the gravity of the problems facing the banking system. The fund creates a “buyer of last resort” so that these dubious assets won’t be sold on the market at fire-sale prices.

Citigroup appears to be the greatest beneficiary of the current plan. They have a number of Enron-type SIVs that could be at risk.

Again, the problems that are surfacing in the banking sector today are the direct result of Greenspan’s loose monetary policies coupled with the dismantling of the regulatory regime that was created following the 1929 stock market crash. We are now back to Square 1. All of the various scams and swindles which permeated that hyper-inflated market are now back in full-force foreshadowing a steep decline in investor confidence, increased market manipulation, and an unavoidable economic calamity.

“Structured finance” has transformed US markets into a carnival sideshow. Productivity and real growth have been replaced with never-ending credit expansion and speculative abuses. Reckless monetary policies and the behemoth current account deficit have destabilized the global economy a set the stage for a fiscal Armageddon.

The subprime mortgage crisis and subsequent shrinking of asset-backed commercial paper (ABCP) has thrown a wrench in the funding of daily corporate operations. These are the harbingers of an impending recession. As mortgages continue to default at a record pace; the aftershocks will continue to rumble through the credit markets where subprime loans have been “securitized” into bonds and leveraged at maximum levels. It’s just one domino knocking down the next.

The financial system is at greater risk now than any time in the last 80 years. Regrettably, the only remedies coming from the Fed are more currency-destroying rate cuts or hundreds of billions of dollars in repos to remove mortgage-backed bonds from the banks’ balance sheets. Neither of these solutions addresses the critical issues; they do not stabilize the market, reinvigorate lending, or restore investor confidence. They are merely band-aids on a sucking chest-wound. They won’t stop the bleeding.

The Fed’s monetary policies promote financial speculation that inevitably leads to equity bubbles. Under Greenspan’s stewardship, the country has lurched from the 1990’s bond bubble, to the dot.com bubble, to the subprime meltdown, to the liquidity crisis, to the credit crunch — all engineered at the Federal Reserve with ancillary assistance from the charlatans in the banking industry.

An article in China Worker, “Credit Crunch threatens Global Downturn” summarizes our present predicament it like this:

“Financial globalization has rebounded on the system. Capitalist leaders boasted that the near total integration of financial markets across the globe would provide lenders and borrowers everywhere with instant access to a completely liquid money market. New types of financial securities and sophisticated derivatives would spread the risk of borrowing so widely that it would eliminate risk entirely. While economies were growing and bubbles inflating, it appeared that — through derivatives trading — losses would be widely diffused among speculators, reducing risk to very low levels. Not even the most astute financial analysts could predict what would happen in the event of recession. The unanswerable question was: Who would ultimately bear the risks arising from widespread defaults or bankruptcies? The veteran investor, Warren Buffet, warned that derivatives would prove to be ‘weapons of mass destruction’.

The fantasy of financial alchemy transforming high risk gambling into low risk money-making has now been shattered.”

The author is right. “Structured finance” is a fraud. Risk has not been eliminated. In fact, it has exploded and become a system-wide problem. The dead wood is everywhere.

The banks are being crushed by a debt-load they generated through “securitization”. They need to accept responsibility for their poor judgment (or greed?) and report their losses. The Super-Conduit is just a dodge to put off the unavoidable day of reckoning. The whole wretched plan should be scrapped. No amount of financial chicanery will eradicate billions of dollars in bad bets. It’s time for the banks to face the hangman.

Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com. Read other articles by Mike.

49 comments on this article so far ...

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  1. Douglas D. said on October 19th, 2007 at 5:20am #

    Whatever happened to “personal responsibility”? These banks need to pull themselves up by their bootstraps! See, my friends, this is the “soft bigotry of low expectations”! The Fed is creating a dependency cycle that will trickle down from generation to generation.

  2. Tyler said on October 19th, 2007 at 6:12am #

    Great article. Even though, according to Paulson, “No taxpayer money” will be used to fund this new vehicle, the fact that the fundwas created at the behest or with the encouragement of the Treasury Department certainly provides an implicit guarantee from the US Government-much like Fannie and Freddie. If /when this fund fails miserably, and becomes a drag on the banks, then in a year some could claim that this was an invention of the government, so it needs to be bailed out to prevent it from destroying major banks.

  3. Boris said on October 19th, 2007 at 6:34am #

    This absouletly amazing what they did to the American Families. First of they tripled Americans mortage payments in the last five year for no good reason. The Banks put all these people into bad loans and now they dont want to take them out. They stole peoples retirement plans during the dot.com by misleading the public with insider conflict. They force the American people into credit card debt so they can make all those late fees. And Now the Gov’t wants to bail out the lenders. All Americans should stop paying their mortgages and lets see what the banks will do than. Teach them a lesson.

  4. Neil said on October 19th, 2007 at 6:34am #

    How can a government that lists Social Security as an “off budget item” possibly ask bankers to come clean? The fox is watching the chicken coop.

  5. d neufeld said on October 19th, 2007 at 7:55am #

    We can only guess at the magnitude of the legal liability awards which will be paid by both the banks that created and sold the “investments'” and the ratings agencies which, for a price, closed their eyes and gold plated them. But we can be sure that the combination of financial and legal liability will not only have all of these institutions not only facing the hangman, but standing on the trap as it is sprung.

  6. Rob Swinson said on October 19th, 2007 at 9:30am #

    As I sit and read this and many other articles, just a couple of things come to mind. Our “global credit and moral reputations” has been decimated. Our dollar is slowly becoming worthless and we manufacture almost nothing. What is going to happen when the piper get his do? The economic tools that are used to pull an economy out of a depression (because I feel we will slide right passed a recession) are no longer available to us. From my understanding manufacturing, public works, and war are generally the tools. What can we turn to for relief? Has the greed of the hand full of top individuals caused the demise of us all and does anyone really care? Our government is not only doing nothing to stop it, but with this fund seem to be promoting it. My last thought is that in all the other empires throughout history people wall around right up to the end thinking everything was “okay.” Is everything okay?

  7. Michael H said on October 19th, 2007 at 9:32am #

    The solution is simple when you look at the cause.

    Cause: Leverage sometimes as high as 30%. Your simple $500,000 sub prime loan drags down $15 million in leveraaged debt.

    Solution: Keep these loans current. Forget the vast amount of wealth you felt you created with a 2/28 or 3/27 ARM. Keep people in their homes by not allowing their loan to index. Write down the difference as a loss. Pay subsidies if you must. Create programs that retrain the
    the borrower if they need a better job. POUR ALL YOU MONEY AND TIME INTO KEEPING THESE LOANS CURRENT!!! THEN WAIT FOR THE MARKET TO CORRECT ITSELF!! As home prices stabilize and incomes rise you will have avoided a meltdown.

    INVESTORS YOU CREATED THIS, WORK IT OUT OR PAY THE PIPER!!!

  8. Hal said on October 19th, 2007 at 9:37am #

    Let’s see – banks achieve record profits six years running (2001-6) from the abusive lending/investing behavior in the mortgage lending and security markets. Now they want a bailout because the ponzi scheme starts to unravel. Just remember “Greed is Good!” Didn’t we learn anything from Enron?

  9. grant1863 said on October 19th, 2007 at 10:54am #

    Better this solution, you may want them to face the hangman but all those banks on that list are on the Fed’s unofficial “too big to fail” list. They will be bailed out one way or the other so giving time for the market to restore some sanity is a good thing. By the way, The greatest Ponzi scheme far worse than this comes up soon: social security.

  10. bill cogen said on October 19th, 2007 at 10:57am #

    Where is Neil Bush when we really need him? If Silvarado S&L could be resurrected it could manage the M-LEC and everything would be grand again!

  11. Greg Freedman said on October 19th, 2007 at 11:15am #

    Very well-written article. There are valid arguments for both sides and something that must be considered is that there is so much of this paper available for sale, yet only a few players still remain with the liquidity and interest in buying these assets. As such, the results are insulting prices that sellers are forced to accept. There are so many sellers that are willing to accept ridiculously low bids for even performing, A-paper loans because the warehouse banks are forcing their hands and making increased margin calls. As a result, you have a pricing inefficiency in the marketplace where loans are selling well-below their fair value. What is a fair value? The price associated with risk has certainly changed and will continue to change as the market continues to erode; however, if one looks at these assets from a straight yield play, they would agree that prices being offered for these assets are well below even true book value. For example, you can purchase an A-paper mortgage that has been performing since it was originated, with a borrower with a 700+ credit score that has never missed a payment on a mortgage with a note rate of 7% at roughly $0.75 on the dollar. This borrower has never missed a payment in their lives and the loan-to-value ratio is about 70%. Has the price of risk changed that much where even the best borrowers are succumbed to investors requiring double-digit yields for the highest grade of credit? My gut reaction is that this is an inefficiency caused by excess fear and desperation in the marketplace by sellers that are forced to clean out their books. While this poses great opportunity to those with massive liquidity to aggregate a selective portfolio of good loans that have been grouped in with the rest of the crap that has dragged the market down, I would say that there has to be a wise alternative where the banks would be forced to declare their losses on all mortgages below a certain credit grade but not be forced to mark to market their true investment-grade paper as there is not a meaningful barometer to do so when liquidity does not exist. How does one mark to market when the market is in such flux? Pick a number between 1 and 80?

  12. winston smith said on October 19th, 2007 at 11:38am #

    its all so simple like most of you. if the subject isnt about overpopulation not worth discussing. we are too many. situation hopeless. its the end of living and the beginning of survival. continue to contaminate your bed and some night you will die in your own waste.
    ws, mot

  13. Rena said on October 19th, 2007 at 11:43am #

    Very enlightening article. Why is it so hard for the pres to say the truth? It’s only a matter of time before the general public will be aware of the situation but then again, for the majority of the people it will be too late.

  14. DJ said on October 19th, 2007 at 12:23pm #

    The author has neglected to point out that all of this is happening as planned by the men behind the black curtain. The same thing happened in 1907 and then again in 1929 only this time around, the scale of this downturn is massive by comparison. In the very near future, the Bilderberg Group will take control of the world. We are merely pawns in their game of monopoly and we are about to lose bigtime. There will be a tremendous transfer of wealth occurring and this same group of men will once again reap the rewards of being slaveowners. Come on people….

  15. Nico said on October 19th, 2007 at 1:12pm #

    This is a very good article. I have been in the mortgage industry for over 18 years adn the root of this problem starts with the industry itself. Yes, it’s true that Wall Street exacerbated the problem with its never ending greed and lust for riduculous returns, but the mortgage industry screwed itself when it moved from banks securing loans to letting the so called wizards of Wall Street doing it. This created loan programs that were set up to fail from the beginning. And since the mortgage industry refuses to regulate itself in a sensible manner, the crooks and morally bankrupt scumbags that infest this business saw the opportunity of a lifetime and took advantage of every consumer they could. As the industry implodes on itself and many, many good people lose their homes these “loan officers” (i.e. thieves) are sitting back refusing to take responsibility in their actions and instead stating that they “were just doing their jobs.” You want to fix this problem? Start at the bottom and clean out the amatuers that have direct contact with the public. Make the licensing requirements ridiculously hard and you’ll see all the used car salesmen disappear overnight. As for Wall Street, it seems to me that before anyone would invest in any of this junk, they should hire a few folks that know what they’re doing when it comes to analyzing whether any of these loans in these pools are legit. Yes, it might take a bit longer to assign a value to the asset, but I can guarantee you it would eliminate the fraud and garbage. As well, they might want to take a hard look at some of the so called wizard kids on Wall Streets that are assigning ratings to this stuff. I know for a fact that many of these kids were playing Pokemon a few years ago and now they are assigning AAA ratings to assets that are mere junk. Book smarts is one thing, life experience is another thing altogether and if some of these kids have never gone through a cycle like the one were in how do you expect them to know what could happen. Just a thought….

    By the way, Michael H. your solution makes a whole lot of sense. Great comment. As much as the Wall Street guys would like you to believe otherwise, it’s not rocket scientry…it’s simple math.

  16. Deadbeat said on October 19th, 2007 at 2:04pm #

    How can a government that lists Social Security as an “off budget item” possibly ask bankers to come clean? The fox is watching the chicken coop.

    The reason why the government can do this with Social Security is that SS IS and off budget item. SS is a trust fund and IT IS NOT discretionary dollars. SS belong to US the workers and the government role is to ADMINISTER the program. The “fraud” is that the government put SS ON THE BUDGET in 1969 to conceal their military spending especially on the Vietnam War. Ever since then the government has LIED about the “cost of entitlement” in order to cut social spending in order to preserve huge military outlays. In fact the DEBT and the deficits is mostly due to military spending.

    The government is suppose to fund itself via the progressive income tax and other taxes like tariffs. However in 1983 in order to recover revenue giving to the rich and the corporation from the 1981 Kemp-Roth tax cut Alan Greenspan came up with a scheme falsely claiming that SS was in crisis and needed more money. They shifted the tax burden onto the regressive SS tax by overtaxing workers and “borrowed” the extra money collected to shift those dollars into the discretionary budget. This is how the government shifted tax burdens away from progressive income taxes onto the regressive SS tax. For this scheme Alan Greenspan was reward the FED chairmanship for the next 20 years.

    Before you slam SS please EDUCATE yourself to the ongoing class war.

  17. catherine said on October 19th, 2007 at 2:29pm #

    what a great honest to the point article…….you nailed it. I believe they will have to come clean and Wachovia, Suntrust, Washington Mutual will GO DOWN……………the reserve set aside for bad loans is going to be the nail that finishes most banks off……………..foreclosures are doubling daily and there is not enough reserves in their good side to set aside for all the crap coming down the road…………the fix was for subprime, the problem had nothing to do with subprime and when the “A” paper borrowers start foreclosing as bad as the subprime (they have already started enough to take out two PMI companies) it is over. THIS IS A DEVALUATION PROBLEM BECAUSE WE HAVE 5 HOUSES FOR EVERY BUYER AND BECAUSE THEY FIXED SUBPRIME BUT GETTING RID OF ALL MORTGAGES EVEN IF YOU FIND A BUYER THEY WON’T GET FINANCING………………Values will be down 30% by Christmas and 50% or more by March, PMI companies, 8 large builders, they are all gone……………these foreclosures will start not having their taxes and insurance payments made, (that will sink the tax base of communities and insurance companies) this is the “D” train on the tracks getting ready, the bad part is THIS HASN’T EVEN BEGUN YET…………..I pray that I am wrong, but nothing, NOTHING IN THE STORIES DISAGREE WITH WHAT I AM SAYING and the big boys are just taking their profit right now…………….I was right about one thing 6 months ago, ANGELO MOZELO WILL BE DOING THE WORLDCOM PURP WALK SHORTLY………….HE WILL BE THE FACE OF A LOT OF THIS CRAP……………..THIS IS GETTING READY TO GET REAL UGLY AND THE BANKS WILL HAVE NO WHERE TO HIDE……..

  18. Jay said on October 20th, 2007 at 4:05am #

    ALLELUIA!

    This is the ideal setting for THE SECOND COMING OF JESUS CHRIST !!
    HE will just be too delighted to KICK the ARSES of these ELITIST RACKETEERS and GOONS!!!

    Good article though I just managed to understand the gist of it…I’m no economist….but I can recognise a FRAUDSTER a mile off…CHOP their hands off and then HANG THEM!!! and GOOD RIDDANCE….
    LUCIFER will only be too glad to welcome them in HELL with open arms!

    END WORLD HUNGER
    EAT THE RICH

    Start a World Revolution that will make the FRENCH REVOLUTION look like a tea party!

  19. James said on October 20th, 2007 at 11:11am #

    I have been watching the US situation for several years. As an advisor to Canadian retail investors, I have been advising to invest in currency neutral US funds to avoid collateral damage. Although Canadians are subject to the upheavals of your markets and face some “bubbly” issues of our own, they are much smaller in scope than yours. The guy on the Canadian street is becoming aware that something big is happening in your country.
    Because of the differences in our systems, I can tell my client to mortgage his 300k Can$ home, go to Florida and buy one of your houses cash at a 50% discount since our dollar is now worth more than yours and your markets are melting. Since he’ll only using it when he retires, he’ll get an American to pay his Canadian mortgage. On his behalf, let me thank you for creating this mess as this is turning out to be the greatest long term wealth creation schemes in his lifetime.
    As a Canadian, I cannot help feeling both concerned and optimistic. Optimistic because of the financial opportunity you are creating. Concern because the worst case scenario is the implosion of you financial system, your mighty Greenback becoming a second rate currency, social and economic upheaval crossing our wide border, our financial bearing the ripples of your instability. These may be trying times indeed.
    I have been religiously preaching to my clients to max their credit capacity while they still can to enable them to buy US. Our consumers are heading across the border in record numbers buying in border stores and taking vacations in your country.
    I imagne legions of people are thinking the same thing with alot more ammunition than my clients could ever imagine. The barbarians are at the gate! As your famous historical line says “The British are coming!, you may want to practice your chants as it won’t only be them, but the Chinese, Canadians, Indians, South Koreans, Russians, Europeans, etc. When your banks get killed, look for one of our banks to ride to rescue (we only have 5, but they are big and very rich!!!) . Atleast we speak the language.
    You can never underestimate the resilience of the American spirit. The question is not will you get out of it, but more what will you look like in the end. I took a Great Depression and a World War to end British supremacy in the world which allowed you to become a Super Power allowing you to have political and economic dominiation of the planet. It may take a similar condition to let someone else take over as your leadership is obviously no longer morally and eithically equipped to do so. There may be more at stake than the little guy losing his house just like in the end, there was ALOT more than the little farmer losing his stead in 1933.
    Maybe a course in Chinese is in order?

  20. Rumple Stiltskin said on October 20th, 2007 at 1:19pm #

    Brother, can you spare a grand?…

  21. Lynne H. said on October 20th, 2007 at 2:12pm #

    If we had followed the Constitution and never allowed this fraudulent Federal Reserve to come into play with their fraudulent debt instrument notes that we call “money” this country wouldn’t be in the state that it’s in. There is NO true money in circulation right now. The Fed just keeps printing worthless notes. The banks don’t have money. They’re foreclosing on people when they never truly loaned them anything to begin with! Your promissory note acts as a negotiable instrument to fund the so-called loan. Look at what happened at Northern Rock in England. People stormed the bank demanding their money, and the back couldn’t produce it. As for the US(A), this country isn’t rich – it lives on credit. As of October 1st we ran out of money to pay our obligations and Paulson had to go to Congress to ask them to raise the debt ceiling limit. The American people need to start learning about the fraud that has been placed upon them so that the Revolution and Awakening can begin!!

  22. R. Schulz said on October 20th, 2007 at 2:51pm #

    Democracy is the system of rule by money. All money is the property of the Federal Reserve Bank which is owned by the largest banks in America and the World. The Banks ARE the US government and they will process the poor into dog food rather then give up any of their usury stealings. The banks cannot take these losses. It would bankrupt them all. So they have to dump their bad debt onto the public , here and abroad. The method will be inflation. The Fed will create enough money to buy the bad debt at par and we will pay for it with inflation.

  23. douglas gray said on October 20th, 2007 at 2:51pm #

    Because government intervention is such a large part of the equation, this crash will play out differently from 1929. What will end up happening is that investors will be stuck with large paper assets whose value is maintained artifically, but eventually, there will be no buyers; we will have a special class of asset rich, and cash flow poor investors and financiers. The Government will not allow the market to crash, but will have to resort to increasingly ridiculous schemes to prop it up.

  24. August said on October 20th, 2007 at 3:00pm #

    SSA is not owned by the pepole who paid SSA taxes. Supreme court has rule we are not owed a thing. We are at the mercy of the govs payments.

  25. Brad said on October 20th, 2007 at 3:02pm #

    I did not like or agree with this article. The so called Super Fund is to help the economy and stabilize a mortgage system that has been brought down with questionable lending and a media blitz over emphasizing how bad things were. Only 1 in 9 subprime mortgages is over 30 days late. An even smaller portion over 90-120 days late which is where a homeowner should start worrying about foreclosures. The author of the forum obviously has a background in Economics, but not on mortgages/finance. The fund seems like it will be used to back Alt-A mortgages form the statement that borrowers will have AAA or AA credit. These are mortgages to people with good credit that are not backed by Fannie Mae or Freddie Mac.

    The statement that the credit bureaus are in bed with the banks is accurate. Banks are the largest purchaser of credit bureaus. Of course they are going to do what banks want. You have to give your customer what they want or they go somewhere else. They are not however making peoples credit look good artificially. Banks do not want to approve bad loans that is why they pay underwriters. The average foreclosure costs $30,000. With house prices dipping banks stand to lose even more if the borrower owes more than the current value of the home. This means that the bank will have to pay for the legal fees and take a hit for what amount the house has lost in value versus what the current balance is.

    Furthermore, the mortgage market is self correcting. Banks will test programs and eliminate them if servicing shows a high delinquency rate. The knee jerk reaction of investors to bad media publicity is a lot of what is causing instability in the mortgage markets. Lenders have already felt the bite of what the subprime mortgages did and backed off of originating short term fixed to adjustable mortgages. As subprime was having some defaults the media got a hold of the story as every body loves dirty laundry and blew the situation out of proportion actually casuing the situation to get out of hand. Investors backed out of the market in record numbers so quickly because of the media that many banks became unable to fund loans. Mortgage previously sold on Wall Street had no where to go. Including mortgages to borrowers with perfect credit on jumbo loans because the loan amount was over conforming loan amount set by Freddie and Fannie Mac. Banks have eliminated a lot of programs that would have been sold previously to investors. Many of the programs eliminated weren’t bad, but the perception by someone not in the mortgage industry that mortgage backed securities were worthless caused the bank to have liquidity issues and not be able to originate that kind of loan. Many Jumbo loan programs are gone or subject to high pricing for instance.

    Before you side with the author of this blog think how many of the statements in this article are opinions and not fact based only referring to one article and blaming mortgage companies and the Treasury who have helped millions of people have a nice place to live or a nice place to shop or do business. The consumer is as much to blame as anyone else. You can blame everyone else but yourself for your problems or you can take action to solve them.
    A number of factors have affected an increase in foreclosures that banks could not predict. The largest of which is the high cost of energy. Hurricane Katrina doubled the price of oil and our oil government liked the record profits they were getting and decided not to go backward. I can’t say I agree with the Treasury helping out banks like this, but do you really want to live in another Great Depression Era country? I would like to hear the author of this article show a structured idea on how to fix the problem instead of complaining about the problem. Ultimately it is always us the little guy who takes the hit, because they don’t have the funds or no how to lobby. The banks are going to figure out ways to bounce back like merging and cutting costs, eliminating programs that aren’t working. If you can figure out a better system than the one setup to help most people be able to afford a home then let us know.

  26. Tadpole said on October 20th, 2007 at 4:59pm #

    This is pure slight-of-hand to gloss-up the sky, and keep us looking up; but the real driving force is located firmly on Terra-firma – personal debt of the common sheeple. Whatever mechanism you may elect as the causitive factor – real estate, inflation, credit crunch, etc. – the bottom-line issue is the inability of the “majority” to make-ends-meet. Doesn’t make a damn what the banks do or do not do, at this point.

    But ALL CREDITORS are screwed along with the little guy this time around though, because as inflation deflates the dollar, this same inflation is eating the value of all those secure and unsecure debts. If you owe a 100k on your mortgage, and the dollar should drop to say 50% of it’s current value, you still only owe $100k, but the creditor is only going to get $50k worth of equity out the deal if you were to pay it off, or DEFAULT. This is why creditors are really shaking in their boots right now because they are looking at massive, across the board negative returns.

    In reality, the situation is far worse than most admit or know.

  27. wolfenstein said on October 20th, 2007 at 5:11pm #

    Very simple, Americans stop paying taxes, stop paying mortgages.
    Financial pyramid collapses, The United States falls apart; much like the old Soviet Union. The debt and repayment, and taxes are the only things holding the country toghther. Come to think of it, this will happen in the medium run anyway.

  28. Ben Franklin said on October 20th, 2007 at 6:41pm #

    We must all believe the God Paulson and his demi-God Bernanke.
    Al Gore is SUPREME GOD, with Little G.W. Bush his Loki.
    All Hail Brad, uh, well, brad.
    The Banks are on the rocks, with the dollar and the pathetic American middle class soon to be the newly poor (already happening). Now, just
    all you all go ahaid and take off them pants!

  29. Pish Tosh said on October 20th, 2007 at 6:43pm #

    Pish Tosh!
    I say, sir, you r-r-r-Ruffian! My my, he actually has a set of balls.

  30. iyamwutiam said on October 20th, 2007 at 6:59pm #

    As R. Shulz astutely pointed out – the federal reserve is in FACT a consortium of private banks (who by the way are zealously guarding their link to the Federal reserve -so we don’t know who they actually are). Some deduction can be used and may point to banks who have taken the largest risks – eaxmple Citigroup. Chase, Deutchbank etc.
    It is only those players that have had the latitude to make the rules that feel the greatest liberty in neglecting them since any extra-ordinary risk which does not play out WILL be passed onto the taxpayer. See the S&L fiasco, Long Term Capital Magement as well as the Keating five for a review of how the cost is invariably borne by the ‘ordinary citizen’.

    In addition – this may be a good place to make people aware that when the MSM keeps stoking the fires of fear by saying the US owes (20-30 percent) of the total debt to foreigners – they are NOT mentioning to whom the 70 percent of the debt is owed to!!!! Once again – the obvious is hidden by distracting the focus of attention AWAY from the scene of the crime. That debt is being held by private banks – and if the US defaulted on these debt obligations (as Russia was FORCED to do) – these banks would be wiped out and western financial hegemony would change the world.

    The leverage issue is quite important and its calamitous scope can be seen here: http://www.federalreserve.gov/monetarypolicy/reservereq.htm- which essentially states that banks can loan out up to 10 million dollars with NO reserves and up to 50 million dollars with only 3 percent as reserves (in other words 1.5 million dollars ). Note- that LOANS are booked as ASSETS -so a bank with assets of 300 billion – may only have 30 billion in reserve which are booked as LIABILITIES. Therefore – it is a fantastic incentive for bamks to loan out as MUCH money as possible because onthe balance sheets – they ‘appear’ as assets- which of course helps them sucker in tons of people at the stock market and gain tremendous amounts of market capitalization. This explains why the bailout for Long Term was ‘only’ 3 billion dollars (liquidity injection) which allowed the largest banks:
    $300 million: Bankers Trust, Barclays, Chase, Deutsche Bank, UBS, Salomon Brothers,Smith Barney, J.P.Morgan, Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, Morgan Stanley
    $125 million: Société Générale
    $100 million: Crédit Agricole, Paribas
    Lehman Brothers and Bear Stearns declined to participate.
    To be able to make a tidy profit DESPITE a complete reversal of fortune in the ‘model’. Notice – these are the SAME banks involved in the Sub-Prime mess!!

    Michael H’s solution would HAVE to be coupled with increasing the amount of reserves that banks held to decrease the incentive to lend out as much money as possible – therefore – if all loans upto 500,000 required 10 percent reserves and 25 percent for 50 million and 35 percent for loans over 100 million. The market for loans would drastically plummet – and banks would HAVE to ensure that their existing loans do pay off – and so they will be left with two potions – leave the market – and have Fannie Mae/FHA be the bourse forhome ownership in America or adjust to increased reserve requirements – which would have a tremendous effect on not only home loans but the billions in Corporate fraud (Worldcom, Tyco, Enron, ad nauseum), derivatives, and SIV.

    Also – in terms of better systems:
    Both Lincoln’s greenbacks, and Hitler’s labor certificates showed that it IS possible to have a economy run with out inflation and financial chicanery when a gvernment acts as the sole guarantor and printer of money. There are probably other examples as well – such as counting sticks being used in medieval England, and India’s silver based economy pre-East India Company dominance.

    Deadbeat is absolutely correct regarding the SS trust fund and its pillage by many administration – in short – he is right – we are being robbed. An interesting point of FACT is the United States is 38th in life expectancy!! Remember life expectancy is a FAKE number – see here for more clarity:
    Which shows that people do die and ALL of their social security is forfeited- and the system was set-up in 1960 with the expectation that a MAJORITY of people would die with a few years after eligibility- hence it is a significant hidden tax and not an entitlement as it is trumpeted to be.

  31. robert said on October 20th, 2007 at 7:24pm #

    It will take more than words to fix this problem.

  32. james arthur said on October 20th, 2007 at 7:42pm #

    Why don’t you crybabys grow up and smell the stench of the garbage you are responsible for creating. Your collective greed and stupidity have produced a mountain of worthlessness that is impossible to climb over. It was all of you that wanted a Government that could be bought by the highest bidder and is now picking your pockets the same way it shamelessly embezelled our nation’s wealth via selling off our gold, stealing our Social Security funds, inflating our currency(?) to the extreme that a barrel of oil now sells for $90+…well get ready for $125+/bbl oil and $7/gal gasoline because the party is just begining. Meanwhile, SS colas of $24/mo. for the coming year, which will not purchase 1/3 of a tank of gas but might buy a box of kleenex to dab the tears of ripped-off taxpayers is the best our “massa’s” can offer us.

  33. Andrew Jackson said on October 20th, 2007 at 9:09pm #

    That WELFARE QUEEN, Rockefeller and his cohorts are complete fuc#ing morons. Elite, my ass. Let me debate the little traitor and we’ll see who is elite. This asshole and his cronies should have been bankrupt long ago. The Federal Reserve has outlived its usefulness.

  34. Jack W said on October 20th, 2007 at 9:53pm #

    Federal Reserve, yet another infringement on our rights by the gov’t. Add it to the ever-growing list of violations:
    They violate the 1st Amendment by opening mail, caging demonstrators and banning books like “America Deceived” from Amazon.
    They violate the 2nd Amendment by confiscating guns during Katrina.
    They violate the 4th Amendment by conducting warrant-less wiretaps.
    They violate the 5th and 6th Amendment by suspending habeas corpus.
    They violate the 8th Amendment by torturing.
    They violate the entire Constitution by starting 2 illegal wars based on lies and on behalf of a foriegn gov’t.
    Support Dr. Ron Paul and abolish the Federak Reserve.
    Last link (unless Google Books caves to the gov’t and drops the title):
    http://www.iuniverse.com/bookstore/book_detail.asp?&isbn=0-595-38523-0

  35. Nestor said on October 20th, 2007 at 10:49pm #

    “Furthermore, the mortgage market is self correcting. ”

    I disagree. If this statement were true, then Housing prices would have never skyrocketed. All that was facilitated by ‘easy’ credit policies of the FED.

    As to the rest of your argument, what you don’t understand is that all you see before you is well planned and thought out years, if not decades in advance. The US economy must be destroyed in order to usher in the monetary policies of the globalist agenda. The US dollar, like the constitution, stand in the way of this agenda.

    The changes have occur gradually so that “joe six pack” doesn’t know what hit him. You’re echoing a lot of “six pack” rhetoric there.

    I feel that the bailout plan was designed to further erode the dollar and the markets. This was beginning to be understood by the market Friday and the stampede soon began. In the coming weeks, we’ll see instability compounded exponentially.

    Additionally, you have a lot of your arguments plain wrong. You admit that the bad sub primes are but a fraction of the entire sub prime equation. This is VERY true! However, the problem doesn’t lie in the sub prime delinquencies as much as it does in the “repackaged” CDO’s that were falsely rated and THEN sold as solid investment instrument. The speculation that ensued is what is causing the run on liquidity and not the late paying little guys that got hurt by these deceptive loan products.

    The sub prime market is simply the fall guy to the larger CDO debacle. The media and Wall St. keep trying to blame the wrong parties and do so to cover up the fact that the ponzi scheme that created this mess has now collapsed. You keep hearing key words like “delinquencies” and “foreclosure” yet it’s the fact that banks really have no money to cover all the over leveraged CDO market whose investors now are dumping these back to where they originated; that is the heart of the problem. It is a systematic breakdown that is being covered up by blaming the wrong people.

    Know your enemy!

  36. ecofeco said on October 20th, 2007 at 11:22pm #

    It’s about time the big boys got a taste of their own medicine.

    Poetic justice is giving some damn fool enough rope to hang themselves.

    I remember the Savings and Loan debecale and the Subprime Meltdown is shaping up the very same way. Only this time, the largest banks in the world are going to get the shaft.

    It’s really kinda funny. The big money has been shafting the average person for years (decades)and now the tables are turned. All because they had to steal every last coin in the little guys pocket only to find out who was really paying the bills. :-)

  37. dick said on October 21st, 2007 at 4:29am #

    What everyone is forgetting is that the USA is set to get a new currency in 2010 called the AMERO that will be for Canada, USA, Mexico. You don’t get a new currency till you destroy the old one. The housing mess will give us that objective with a banking crash, a falling dollar and a end of our economy as we know it. As FDR said” Nothing happens by accident”. This was stagged along time ago to meet a different agenda. Eventually that will be a one world currency and a one world government. This was wrote about 2000 years ago in the book of Revelations. Go read abut it!.

  38. kikz said on October 21st, 2007 at 7:17am #

    Du’mericans… hide your gold, they’ll come for it again very soon.
    the new and improved confiscation law is already on the books.

  39. NVMojo said on October 21st, 2007 at 8:47am #

    Staged? Perhaps. Now we know why Senator Harry Reid helped push along that bankruptcy bill in the past 3 years. He had to help out Congress’ pals. Citi, WaMu, you name it. He helped him.

    And yes, it is the media’s fault, Tadpole. They are corporate-owned and benefit from the lies they helped cover up. And now it is too late.

    What’s missing? Ethics. Morals. Integrity.

  40. NVMojo said on October 21st, 2007 at 8:48am #

    Meant to say Reid and his pals in Congress helped enslave the consumer to banks that knew they were selling false promises 4 years ago.

  41. David Roblee said on October 21st, 2007 at 12:26pm #

    The simple fact of the matter that we have been brainwashed to be obedient consumers/slaves of monied lies. Our entire economic structure is built on greed as survival that has been built by those that control OUR money supply that is used against US at OUR expense.

    Given these simple provable assertions it should be obvious that to solve our problems we should take back control of OUR money supply and economic structure in order to re-design ‘it’ to work for OUR benefit.

    Three simple steps.
    Forgive debt for all in-common goods and services.
    Retain debt for all un-common goods and services.
    Pay ourselves a yearly stipend based on the cost of in-common goods and services.

    The benefits are profound, the downsides few if any.

    Free the slaves-us-and enjoy unlimited prosperity.

    http://www.planetization.org/soulutions.htm

  42. Fellow Traveller said on October 22nd, 2007 at 5:21am #

    it might be a good idea to hide one’s gold.

    i’ve been advising folks to buy silver for
    some time now.

    having larger bulk, it is impacticable
    for a criminal government to try to
    seize all of the silver.

    burying a weapon or three isn’t a bad idea either.

    putting aside food, in a quiet place goes
    without saying.

    there is a Sh*t coming this way quickly.

    Most of the people can’t see it just
    out at the horizon.

    People wondered for decades, “how
    did the Nazis come to power”.

    We are getting a “free” education as
    to exactly how that tragic event did
    occur.

    May God Help Us All.

  43. AJ Nasreddin said on October 22nd, 2007 at 6:01am #

    So? Should I buy gold or a gun?

  44. iyamwutiam said on October 22nd, 2007 at 10:48am #

    Guns- their cheaper-and plenty of ammo-

  45. 007 said on October 22nd, 2007 at 11:02am #

    >>> So? Should I buy gold or a gun?

    Why not both? Or, heh, maybe a golden gun? ;-)

  46. Tony Zee said on October 22nd, 2007 at 4:15pm #

    The bottom line is who is gonna hold the debt paper at the end of the day… Blind Freddy could see the whole system was gonna collapse… The homes were mass produced on many housing estates… The influx of people into the new homes were recent immigrants, the estate traffic overburdened local infrastructure… so they taxed the people and spent the money on freeway systems which were civil engineering theme parks… The stench of kickbacks… nepotism and all the accompanying trash like union crooks getting in on the action… that meant bashings and murder. All this thrived during the boom times…

    It was a scheme to centralize money ownership into one place, that holds debt paper on a vast numbers of people, making seizures and bankruptcies a very real thing for the rest of their lives… and to be forced into slavery trying to pay the bills, as the immigrants undercut the labor market… Says Jew to me… Resembles the chicanery of Joseph , he of the Technicolor coat whose schemes enslaved the Jews…

  47. David Roblee said on October 22nd, 2007 at 9:18pm #

    Waiting to be further enslaved/devolved by hiding in plain sight is not in any way shape or form a solution. The problem is known. Its OUR economic policy that causes ALL OUR problems . ALL of them, every single one. The financial MACHINE that dictates OUR freedoms to US at OUR expense in order to benefit the financial MACHINE is NOT your friend!

    The solution then is to fix OUR economic system that is destroying US for ‘its’ gain! Why not redesign the economy to benefit ALL of us instead of the few that have designed the machine AND control OUR money supply in order to keep us enslaved? Prosperity, opportunity, freedom and growth can be had for all through simple economic reformation.

    Forgive debt for all in-common goods and services.
    Retain debt for all un-common goods and services.

    These two simple reforms will go a long way to fixing things with little to no downside. Simply and humbly put, a win-win situation for all. Griping about the state of things without a solution only contributes to the festering problems.

    All problems are economic in origin and in fact are caused/created for economic reasons. I say time to end this idiocy and work together to solve our problems.

  48. JAMES E. BAKER said on October 23rd, 2007 at 8:42am #

    Alan Abelson of Barrons has an excellent column on this subject titled “Buddy Capitalism: Ain’t the Welfare State Great?” As to this scheme to bail out the greedy, Mr. Abelson sarcastically said: “We are not talking about giving handouts to undeserving wretches who are starving, out of a job and sleeping on the grates because they lack moral fiber. No, we’re talking about rallying to the aid of the best and brightest among us, the risk-takers, who in their zealously altruistic pursuit of profits find themselves (temporarily, of course) in need of financial succor — so they can continue to exercise their remarkable wealth-amassing skills that are so necessary if our free-enterprise system is to continue to flourish and Tiffany is to continue to prosper.”

  49. David Roblee said on October 24th, 2007 at 8:07am #

    Ah yes, survival of the greediest judged by self-appointed elitist greedmongers with high ‘moral’ fiber employing trickle down economics aka communism disguised as capitalism.

    The love of money is the root for all evil. Wearn to share for the good of all our relations? Economists with their monied numbers theories for far too long have been allowed to screw up things and have caused untold millions to suffer in the process of backing up flawed economic models with money printed out of thin air, which in reality is nothing but an international ponzi/pyramid scheme run amok and destined to fail.

    Why not simply abolish debt and allow the global economy to soar?