Monday, January 16, 2012

NYT's Davidson's - What Wall St. does for us. How about if I let you see my hole, you let me strip you naked!

To quote Mr Davidson's assumption stated in the opening paragraph:

"The country’s largest investment banks, commercial banks and a few big insurance companies (what we generally refer to as Wall Street) play the crucial role of intermediation — matching borrowers with lenders."

Mr Davidson's reason for the reporting is defensive, masked as cheerleading, due to legitimate questions about the social utility of Wall St. However, right out of the starting gate he stumbles because his premise is INCORRECT.

As concerns the recent financial crisis in particular, Mr Davidson must not be aware of the $16T hole as at end of 2007, correct $16T. The existence of the hole is by definition, NOT intermediation. The Fed and or the US Treasury exchanged $1.2T cold hard, tinkling CASH for "model-valued-securities-NOT-MARKET-valued-securities" that, in part, made up the hole. Said another way, if they were truly and prudently intermediating they wouldn't own truly staggering, eye-popping sums FOR their own profit; these financial giants were not in the moving business, they were in the STORAGE business...BIG TIME! Even Mr Bernanke was rather astonishingly, unawares, and admonished, what could arguably be called a savvy audience, of the familiar textbook intermediation in an October 2007 (not a typo - 2007) speech to the NY Economic Club, see his fifth paragraph excerpt:

At one time, most mortgages were originated by depository institutions and held on their balance sheets. Today, however, mortgages are often bundled together into mortgage-backed securities or structured credit products, rated by credit rating agencies, and then sold to investors.

See the related "One Year, One Trillion Dollars; the education of Ben Bernanke from 2007 to 2008"

Mr. Davidson is correct in narrow sense, as the Hole was created BY the country’s largest investment banks, commercial banks. If Davidson understood compensation on Wall St and the $16T hole - he would recognize them for what they were; the indispensable cause, the BONUS BASE for incredible bonuses bestowed only upon a select few. Further, I might add, there seems little doubt that the overwhelming majority of workers, indeed fellow shareholders at these firms were defrauded by the secrets kept by the prop trading desks, in too many cases, sucking the entire life savings out of the pockets, including 401k accounts or company stock investment accounts all the way down to those toiling in the secretarial, janitorial, maintenance or livery pools; defrauded by the hiding and sheer magnitude of the $16T hole; what did they know about any $16T hole?

Here's what the FDIC had to say about the "Hole":
In May 2011, former Chair, Sheila Bair said:

We also learned in the crisis that leverage can be masked through off-balance-sheet positions, implicit guarantees, securitization structures, and derivatives positions. The crisis showed that the problem with leverage is really larger than the bank balance sheet itself. Excessive leverage is a general condition of our financial system that is subsidized by the tax code and lobbied for by financial institutions and borrower constituencies alike, to their short-term benefit and to the long-term cost of our economy.

In March 2011, FDIC TLGP director Jason Cave said:

Overall, the balance sheets at our largest financial firms have improved since the crisis. Firms have deleveraged since the crisis, as measured by stronger leverage and risk-based capital ratios. Further, many of the complex structures that concealed additional leverage and exposure, such as structured investment vehicles and other off-balance-sheet conduits have been largely consigned to the history books. Cash and liquid securities represent larger percentages of the balance sheet, while reliance on short term debt has declined. These are all positive trends from the FDIC's perspective as deposit insurer and guarantor of TLGP debt.

What institutions contributed to the $16T hole you may ask?
The following should help to illuminate:

How TBTF Banks (BHC's and former Investment Banks aka CSE's) dug themselves a Capital Hole trillions of dollars deep, filled it with Derivatives priced on Home court, then blew it out to create the Foreclosure and then Financial Crisis, however before 2008, EVERY mortgage borrower, many others including Fannie and Freddie, and Auction Rate Securities Investors were defrauded

Bank or CSE | Capital Hole 2007 | % of Balance Sheet NOT paid for

Bear Stearns $ (398,957,000,000) 97.4%
Lehman $ (885,427,000,000) 98.1%
Citigroup $(4,217,486,000,000) 98.5%
Goldman Sachs $(1,238,036,000,000) 97.3%
JP Morgan $(3,221,600,000,000) 97.7%
BankofAmerica $(3,180,155,000,000) 98.2%
Morgan Stanley $(1,128,917,000,000) 97.7%
Wachovia $ (894,109,900,000) 96.4%
Washington Mutual $ (433,404,000,000) 96.1%
Wells Fargo $ (785,486,000,000) 95.9%

(includes Bear Stearns, Lehman Bros., Goldman Sachs, BofA (Merrill Lynch), Morgan Stanley)
$ (6,831,492,000,000) 97.9%

(Citigroup (Smith Barney), JP Morgan, Wamu, Wells Fargo, Wachovia)
$(9,552,085,900,000) 97.7%

$(15,950,173,900,000) 97.8%

Total Assets and Off Balance Sheet Contingent Funding Commitments are included as any and all on, off balance sheet conduits i.e. SIVs and or off shore entities; as during 2008/9 many of these items were brought back ON balance sheet

Source: FCIC, Mr Kyle Bass prepared testimony January 13, 2010; page 13
Copyright © Chris McConnell & Associates 2012 All rights reserved

2004 - Another SEC financial "innovation" - was Mr Davidson aware?
We can look to a program that few have ever heard of – but make no mistake – absent this SEC creation; yes another SEC innovation, we would NOT have had 1) the housing price bubble, 2) the housing overbuilding bubble, 3) faux (cash out mortgage equity refi's) economic growth from 2004 – 2007, 4) the financial crisis, 5) millions of unemployed, 6) millions of bankruptcy filings by fellow Americans, 7) millions of foreclosures, homeless families and children, 8) millions of vacant homes and 9) millions more foreclosures to come and more...

See the SEC created a 400 page briefing book and during a 55 minute meeting (condensed to a excellent 4 minute video from the NYT's Stephen Labaton's October 2008 article) impressed the 5 commissioners who sit atop the SEC in 2004 to approve “ONLY the largest, MOST sophisticated investment banks” including Bear Stearns, Goldman Sachs, Lehman Bros., Merrill Lynch and Morgan Stanley to 1) use, 2) IF they so chose, 3) voluntarily, 4) a new way to calculate their capital cushions; that new way was based on 5) their own computer models, not markets; yes you read correctly – MODELS, not markets.

However, back in 1998 one of the CSE’s had this to say about models; which they totally forgot in the 2000’s: Merrill Lynch’s 1998 annual report, as captured in Roger Lowenstein's "When Genius Failed" LTCM tome, page 235:

"Merrill Lynch uses mathematical risk models to help estimate its exposure to market risk" "may provide a greater sense of security than warranted; therefore, reliance on these models should be limited".

However, it appears that when it came time to lobby the SEC to create the CSE program "only for the largest and most sophisticated broker dealers" the 1998 annual report writers and or signatories had had a technologic transformation only to be undone in a mere four years; as SEC Chairman Cox ended the infamous CSE program on September 26, 2008.

Oh, by the way, CSE stands for the erstwhile Consolidated Supervised Entity program –when nothing of the sort seems to have occurred. The SEC did NOT even approve (or subject to proof) much less review and or understand the models each firm 1) created and 2) chose to use 3) voluntarily – in advance as promised by the staff of the SEC in the 55 minute meeting in April 2004 nor I believe the letter of the regulation. All, yes all five CSE’s have disappeared as they either merged into BHCs’, declared BK as with Lehman Bros, or applied to become BHCs as happened with Goldman Sachs and Morgan Stanley.

Getting back to the $16T hole the banks found themselves in was so large because – do you want to guess?

Yes, it was so large because – right – I’m sure you’ve figured it out by now, because – their BONUS checks swelled as the hole got larger!

Now, that hole is being filled up to cover up the largest financial swindle and theft of wealth in the collective history of the world. It’s being filled up with foreclosures, and bankruptcies, the Fed is helping out too with near, five years now, of free money, and its previous purchases (evidencing the ABSENCE of that oh, so fervently hoped for "intermediation" formerly known as "safety and soundness") of MBS from those banks over $1.2T and other kinder, gentler welfare courtesy of the UST, SEC and FASB.

Why do I say financial swindle and theft of wealth?
There’s several reasons:

1. Banks are AND were regulated depository institutions, and are REQUIRED to operate under “safety and soundness" applicable even, to most of the former CSE's;

2. Financial institutions’ concentrated pricing and market power created HUGE information advantages and exploitation;

3. Financial institutions in the US alone, spend over half a billion dollars a day on IT;

4. Financial executives KNOW the historical returns from the major asset classes like the back of their hand;

5. Financial executives KNOW regression to the mean behavior of MARKETS;

6. Certain financial executives KNEW that MODELS, not markets created that $16T hole;

7. Those executives owe a better explanation as to how exactly their bonus payments and everyone under them was calculated from 2004 to 2008.

So now that I let you see my hole, you let me strip you naked; from your brain down to your toes and along the way I rip out your soul.

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