Another Post For Idiots To Ignore

As I have noted elsewhere (and many other elsewheres too), I started blowing the whistle on the real estate bubble in December 2005.  The market was too hot, there was obvious fraud, mortgage rates were going up, etc.  I didn't know when the bubble would pop because I had not yet identified the forces driving it, but I figured it had to be soon, say in the next year or so.  Frankly it should have, and I guess I'll relate that tale whilst I am at it.

Thanksgiving 2006 Wells Fargo and JP Morgan Chase froze a pile of business lines of credit and converted them to straight loans with 60-month amortizations.  When I contacted Chase, not one but two EVP/AGCs informed me Chase had done this pursuant to a clause in the LOC agreement that had been fully disclosed.  While the clause did exist, the allegation it had been in any way disclosed was patently false.  I then knew something strange was going on, but I did not yet know what.  It took me awhile to dig up the puzzle pieces and fit them together.  What was happening was that the levels of fraud in the mortgage market had become so obvious it was no longer politically feasible to continue ignoring them, and so the regulators had been awakened from their previously mandated slumbers and were now on the move.  Wells, Chase, Goldman Sachs, and all the other players needed to spread some chicken feed to keep the regulators distracted while they got on with the business of lining up a nice collection of marks (AIG, Bear Stearns, Lehman Bros., pension funds, and mortal schmucks who believed the rating agencies were playing a straight game) to take the garbage off their books.  The regulators pounced on the chicken feed in Spring 2007, which gave the players enough time to keep playing.  And then in 2008 everything conveniently hit the fan.  Wells got a seat at the big-boy table via taking over Wachovia, Chase got a new lease on life via its sandbag takeover of Washington Mutual and its sweetheart takeover of Bear (I imagine Barclays wishes it had gotten a deal like that for Lehman,), those with cash (And in spite of, or more likely because of, all the illiquidity, certain players had piles of cash.) snapped up piles of assets on the cheap (Because after all the purpose of bubbles is to pop them to allow further asset concentration in the hands of Those Who Matter.), and we hit the reset button for the next bubble.  So the evidence indicates the bubble pop was delayed by over a year to protect certain players that had created the bubble in the first place.

Anyway.  In the middle of all this, August 2006 to be precise, Peter Schiff concluded the real estate party was over and things were heading down.  In December he noted the market had peaked the prior December (Now when was it again that I called my shot?) and would crash in 2007.  It's apparent he was just looking at market fundamentals (as was I) and thought the market would behave according to those fundamentals (as did I), having no real knowledge of the market manipulation going on that would stall the inevitable for over a year (knowledge I did not have either).  But unlike me, Schiff became a major talking head and got lots of influence and money.  But I'm not bitter.  At least not much.  Because I can point to Schiff as an example of how even a broken clock is right twice a day.

Because since then he has a record of being spectacularly wrong.  He thinks Medicare should be slashed, demonstrating a fundamental ignorance of how Medicare works, how it could work if expanded, and how it would be better than our current system of no one seeking medical care and when they do they have to file bankruptcy.  He thinks we should replace the current income tax system with either a sales tax (which would be regressive and hit hardest those least able to afford it) or a flat tax (which would be little better).  And in a doozy of pretzel logic, the US went from being a creditor nation to a debtor nation in the 1970s because people stopped saving.  Yes, that must be it.  Let's ignore the October 1973 OPEC embargo that ended the US's energy price advantage that had kept its products competitive around the world.  Let's ignore the resulting recession that destroyed millions of jobs.  Let's ignore that most people had no options allowing them to adapt to this new normal because our entire society was based on urban sprawl and the automobile.  Let's ignore that productivity kept increasing, but instead of any of that gain going to wages, it was all syphoned off to pad corporate profits.  Let's ignore that in spite of the recession, expenses were still going up even though wages weren't.  Let's ignore that families had to get second, third, and fourth incomes to try and make ends meet.  Let's ignore that that didn't work any better then than it does now.  And let's ignore that people stopped saving simply because there was nothing left over to save.  Schiff's positions are designed to keep moving public and private money from all of us to the 1%.  He ought to change his name from "Schiff" to "Shill".

But he must be getting desperate, because with his latest move, he has outdone himself.  He has teamed up with none other than Jim Rickards.  I've noted the credibility, or lack of same, of Rickards's "financial advice" elsewhere.  Now they've partnered up and doubled down.  And what they're selling is no better than ever.  As I've said more times than I care to count, just because you've seen somebody on TV or YouTube doesn't mean you should listen to them.

I Come Here to Bury, not to Praise

And unlike Marc Antony, I mean it.  Karen Martinez has retired as local counsel for the SEC, and the hagiographies are everywhere.  Pardon me if I don't join in.

As I've said numerous times on this blog, its companion, and elsewhere, the 2007 crash was an obvious thing, and it happened because the regulators were ignoring what was going on.  Of course, the regulators had been ignoring most things since Reagan took office, ratcheted it up several notches with the introduction of derivatives in the late 80s, and went into full snooze mode after the repeal of Glass-Steagall.  By 2005, there were billboards and radio and TV ads for straw buyers, no doc liars' loans were everywhere, appraisers were making up values, and rating agencies were making up risk levels.  The banks knew their game was crooked, but they were making to much in commissions and fees to stop it.  I have no doubt they also gave orders to the regulators to look the other way.

Then in Fall 2007 the banks figured out the merry-go-round was coming to a halt, so they woke up Martinez and everyone like her, pulled a Louis Renault, "We're shocked, SHOCKED to find that mortgage fraud is going on here," threw them some of their own people as sacrificial lambs, pointed them to the smaller players and ordered them to crack down on the small graft because it was interfering with large graft, and reminded them to leave the large graft alone.  And Martinez and everyone like her dutifully obeyed.  And along the way they slandered me all over the territory because they had decided I was the kingpin of one operation because they flunked Corporations 101 by not being able to tell the difference between a registered agent and a principal.

Now she's retired with her federal pension.  I wish I were compensated so well for accomplishing so little.  So I shall not be praising Caesar, now or any time in the foreseeable future.

Slaps on the Wrist

US, UK, and Swiss regulators have slapped fines against Chase, Citi, Bank of America, UBS, RBS, and HSBC for turning forex trading into a fraud factory for their own benefit.  The fines total US$ 4.3 billion, trumpeted as the heaviest penalties in history.  The traders involved have been shown the door, along with one of the forex chairs at the Bank of England.  And the fact that this crap is being touted as some sort of regulatory triumph shows just how messed up the system is.

First, this scam went on for years, the players were brazenly communicating their activities with each other, and no one did a thing.  Second, the forex market trades over US$ 5 trillion per day.  Even if these banks took only 0.1% commissions (HA!) and held just 10% of the market (They're well north of that.), the fines would amount to less than two weeks of commissions.  Third, once again only the little people have been punished while the players who make the policies that created these crimes remain in place.  It would be as if Donald Segretti took all the blame for Watergate and everyone else got to stay in the White House.

The game is rigged.  Makes you want to run right out and put your retirement in the market, doesn't it.

New Posting on Credit Slips

New discussion on Credit Slips with yours truly commenting.  Topic is the brouhaha over whether Chase Bank is actually a secured creditor in the GM Chapter 11.

I Can't Let This Slide By

Just about all my clients have the same problem Senator Lee is facing.  There are a few differences, though.  First, I doubt Senator Lee is going to lose his job over this, and I also doubt he won't be able to get a loan for the next several years.  Second, rank has its privileges; Chase was more than happy to play nice and not pursue him for the deficiency.  Third, my clients aren't constantly preaching about personal responsibility and living within your means.  Things happen, even to a US Senator.

Big Boys of BK

Lots of Chapter 11 news today.


Kodak finally filed last night.  It had been in trouble for a long time (I think I'm one of the few fossils remaining who uses film.), but it was trying to reshape itself as a printer company.  To do so, it was relying on a revenue stream from its patent portfolio (At one time that portfolio rivaled the likes of Bell Labs and IBM.).  Unfortunately, Kodak didn't account for aggressive (i.e. predatory) behavior by some major license users, including Apple and Research in Motion (I have to say I don't use much of anything from Apple.  I hate black boxes, so I didn't care much for the products, and I didn't care for the culture, either.  Seemed too much like a religious cult.  I see people walking around festooned with 500 i-Crap products, and I wonder why anyone needs to be so simultaneously plugged-in and cocooned from the world.  They remind me of Neo in The Matrix before he's released from his pod.  RIM, though, hurts.  I've rocked the Crackberry for over a half-dozen years now.).  The big users decided to stop paying for the licenses, forcing Kodak to litigate.  They wouldn't buy the patents outright, either, at least not for more than a dime on the dollar.  So Kodak is in Chapter 11, where it might be able to force a few things.



American Airlines, on the other hand, might be getting forced.  It's nearly two months since it filed, and American has barely gotten off square one.  As I blogged the day it filed, American's big motivation was to take down the labor contracts and pensions.  It hasn't, and everyone (including Your Truly) is confused about the delay.  Confused about it, but still willing to take advantage of it.  Delta and US Airways are making noises about rival bids, and others are getting into the game.  If American doesn't have a reorganization plan in front of creditors in two months, it's looking at getting parted out.



And of course we can't let the day go by without some more mess from MF Global, this time with a heapin' helpin' of JPMorgan Chase.  It seems that back in October, right before it filed, MF Global was selling piles of assets to raise cash.  Problem was, it was selling them through JPMorgan, which decided to do a by-the-book slowdown of the transactions.  Consequently, MF Global had neither the assets nor the cash and couldn't meet the inevitable margin calls.  Welcome to bankruptcy.  Now the creditors and trustee are finally getting around to asking JPMorgan where the money went, because it certainly hasn't been turned over.



JPMorgan's involvement in "where did it go" scenarios is getting to be a habit, and it's long past time someone pulled the curtain back and took a look.  Somebody needs to look at where Washington Mutual's assets went, because they were there until JPMorgan stepped in.  And unless something drastic has happened this week, JPMorgan is still sitting on piles of cash involved in investment schemes from five and six years ago (I have to be careful here.  I've had two, executive-VP-level in-house counsel lie to me about the creation and handling of those accounts, so it's hard to say what the "official" records look like any more.  And I've had outside counsel threaten me with bar discipline for daring to represent anyone opposing JPMorgan.  But then that's SOP for Utah.  The Bar doesn't care if an attorney makes a groundless threat like that so long as he is representing a 1% client and he makes it against an attorney with a 99% client.).  Any wonder I refer to the place as "JPMorgoth"?  We'll see if anybody decides to use the big microscope this time or if JPMorgan skates again.

Another Muni BK

So we have another municipal bankruptcy filing, this one in Alabama.  And it's a biggun, with over $5 billion in debt, sure to send some shockwaves through the bond markets (The centerpiece of this solid waste is a series of sewer bonds.).  The one bright spot is that this isn't the result of anything systemic but rather of outright corruption, and that people have actually gone to prison for it (Gee, how did that ever happen?).


What I can't believe in all this is the remark by the receiver, John Young Jr., that the filing is an "utterly irresponsible act".  Excuse me, but allowing the public purse to continue to be eaten away by creditors who were ratcheting up the terms of the settlement would have been utterly irresponsible.  Your job, though, was to keep the creditors in line, and you failed, so if we're talking about "irresponsible"....


The remark I can believe is the one by the JPMorgoth Chase spokescritter, just not in the way she intended.  I bet JPMC wanted to avoid a BK filing; in Chapter 9 its backroom maneuvering and political clout are severely curtailed (Duplicity by JPMC?  I'm shocked, shocked!  Just because I've had two VP-level JPMC counsel lie to my face in multi-million dollar cases....).  Sorry, people, you overplayed your hand and left Jefferson County with no choice.

As If We Needed Any More Evidence

OK, so I haven't blogged for awhile, and the following is a bit stale. Hey, I work for a living, and this isn't getting the attention it deserves.

To preface, for those of you who may think I was late to the bubble prediction bandwagon, I suggest you look here and see that I was predicting the train wreck in December 2005. Beat that, Nouriel Roubini.

We know that the overwhelming majority of opinion makers in the US are just sock puppets for the Financial Overlords. Ditto for our supposed intellectuals. They don't need to rub our noses in it. But along comes Roger Lowenstein in Bloomberg Businessweek to "explain" why there have been effectively no prosecutions resulting from the collapse. It's because, simpletons, there were no crimes committed. Demands to the contrary are just the result of our overheated, plebeian blood.

Well, Roger, here's the deal, and I'm speaking as a former prosecutor who's handled white-collar crimes, which is one more claim that you can make (Yes, I know Daddy was a Wall Street lawyer and Columbia law prof, but I have a shingle on the wall too, and my kids know that doesn't make them legal experts.): If this mess wasn't created by a tsunami of crime, we have glossed "criminal fraud" out of our legal system.

I'm no accountant, and if you want that kind of analysis, I recommend you go read Francine McKenna's column in Forbes, which is heavily linked. I'll stick with what we know of facts and law.

In 2002, the Dot Com Bomb and 9/11 had deflated the preceding bubble (Anybody remember how outraged we were over LTCM? Those were innocent times.), and investment houses and banks were sitting on cash with investors clamoring for it to go somewhere that produced a return. Fortunately, "help" was at hand: real estate.

First, create a demand pool for the money. This required bringing a pile of borrowers to the table who had no business being there. No problem. No-doc loans and "creative financing" (Read: Fake it 'til you break it.) bring everyone to the table.

Second, you need properties that "support" the loans. Again, no problem. You have everything from investment groups flipping properties internally to jack the prices to armies of in-house appraisers for whom "MAI" means "Made As Instructed."

Third, take that freshly inked paper, cut it up like paper dolls, and securitize it all over the place. Get the ratings agencies to help by declaring that poo no longer stinks.

Fourth, the piece de resistance. Cherry-pick the securitized pools and hedge. Then buy credit default swaps on both the bets and the hedges. And THEN sell the swaps upstream and downstream. AIG and the monolines will be more than happy to help.

Oh, don't forget to make sure the regulators remain lapdogs by reminding them that if they do their jobs, the house of cards will collapse, and then there will be no place for them when they leave government and want to earn some serious scratch.

And at every one of those steps, the commissions and fees run hot and heavy. And so do the fibs, the half-truths, the misrepresentations, the blind eyes, and the outright lies. Countrywide lied systemically to produce the greatest pile of toxic, residential mortgages in history. JP Morgan Chase wasn't any different on the commercial side. Chase propped itself up with a forced take-over of Washington Mutual (No, kiddies, it wasn't really WaMu that needed the propping.). Bank of America swallowed Countrywide with all the due diligence of a five-year-old dragging home a stray dog. And Goldman Sachs got caught buried shoulder-deep in the cookie jar, selling products it had created so it could bet against them. And on, and on, ad nauseam, ad absurdum.

And nothing. Few meaningful investigations, fewer prosecutions, and business goes on as usual. Except that it's right out in the open now; no one even bothers with back rooms. And it all gets ignored. So I guess you're right, Roger, in a sick way, because legally there is no crime without a conviction, and there can't be a conviction without a charge. But who are you going to blame, Roger, when Joe Main Street starts treating the rule of law with the same contempt his lords and masters demonstrate?