Hail Mary Pass now a Golden snatch? Or 1 obvious + 2 not so obvious = 3 uncalled penalties and the risks of framing…

Many who watched the now infamous Monday Night Football interception which two on-the-spot refs ruled inapposite; one interception and the other touchdown; which because of NFL rules like all TD’s, was not subject to challenge hence review.  And prior to that missed a V obvious penalty by the Seattle receiver for interfering by shoving a Packer to the ground and out of his way just before the ball arrived – those were the two much heralded botched calls.

However, because media attention laser focused on the receiver’s catch or defender’s interception – many may have missed, make that most all missed the other two penalties. The first not so obvious penalty occurred when the QB was tackled after releasing the pass, and the second not so obvious penalty was on another potential receiver, Seattle’s #14 who was knocked down / overwhelmed by several Packers. #14 was standing to the left of the Packer’s MD Jennings; the player who caught the pass most everyone agrees first (and therefore intercepted) or at least before Seattle’s Golden Tate got his claws around the ball (and was therefore ruled a touchdown).

The debate over these refs will no doubt continue, and let us agree that all refs are prone to mistakes, because as many professional fans and commentators have pointed out, the “game is too fast” for them to make correct calls. And also because of on the sideline, S-L-O-W motion video replay in High Definition television, in the stadium and on millions of screens in homes around the country that in many cases are 50 inches or more.

The media immediately focused us on the catch or interception – but if the roughing the QB penalty was called (correctly) and the catch was (correctly) ruled an interception would there have been another play run? Would some time have been put back on the clock? After all the play as I recall was run with only 8 seconds left.

My point in writing about the issues of framing is to connect it to our “economy” and “financial markets” and I’m going to borrow a Bernanke-ism – economic naturalists. If investors and savers alike would stop for a moment and think about where we are and why we got here – well it just might be a good idea now – to go back and roll the videotape.

The Fed is now on chapter 3 of QE, and this iteration is open – ended; indeed although the Fed has not spoken of their program this way – I believe most would agree that this and the previous facilities are the so called BAZOOKA.

The need for the bazooka – was a very concise one page summed up by Kyle Bass in January 2010 – it’s page 13. Page 13 shows, if you do the arithmetic, that a very few, certain banks and former investment banks (CSE’s) were $16T+ in the hole, as of the end of 2007. The $16T of asset value, in large part appears a figment of these banks proprietary computer models.

Today, many Monday morning quarterbacks have appeared on TV to promote their new books of solutions to the financial crisis both here in the US and the Euroland – the most recent being (sorry to pick on you) Mr William Rhodes. Mr Rhodes, former chairman of Citibank, was introduced on a recent talk show as being connected to the most powerful and influential policy makers. During the course of the interview Rhodes dropped the name a prime minister who he expected to meet and ask questions – baloney comes to mind. Why? As well intended as Mr Rhodes may be – he and most all others, with few exceptions should have zero cred – where were they when the bubbles were created from 2003 to 2008? Were his fingers broken?

The lesson that bears repeating is yes, pay attention to the media and also pay attention to your instincts NOW for stuff that the media is not laser focusing YOUR attention on…otherwise known as framing; specifically models are not markets and markets are not models...

Time is money, but not at Facebook

Time is on my side, my side...those are the lyrics in a song; it seems these lyrics were the sine qua non for the executives at Facebook. Said another way, Facebook seems to have rather linearly assumed that since users spent so much time, that magically that time would be distilled into money, not so easy.

A new glue, now we hear there is a micro - site called Facebook Stories, initial vignette is about memory, reconnecting to the past...

Perhaps Facebook execs, might look in their past, way, way back to the time they were little children. To those birthdays, Christmas, Hannukah's past...the new toys, we enjoyed for all of 24 hours; then asked for new ones. It's what I call the half life of the novelty - effect...others will call this something else; cool, until it's not cool; like when your parents, grandparents and little brothers, sisters, and nieces and nephews are on Facebook too, time to find a new place to hang out...in a way Facebook has for many morphed into a utility.

Facebook also needs to be bold and upfront about their advert policy, no one appreciates ads, no matter how pre-selected they may be. A free membership version would include adverts, however a no - ad version of membership for a small annual fee - individual, family and corporate plans come to mind. Most members I'm sure (since they use, share and like Facebook every day) would be amenable to a small fee $11.95 per year, $19.95 for two, $39.95 for life. Later, tiered memberships with higher fees as new features, games, connections, premium contents are added could be rolled out. The idea that members can send or even influence "ads" to others is to many I believe, a net negative; unless those ads are very seldom and v carefully curated.

Facebook needs to admit that people use the service to share and play together satisfying certain critical human needs.

Adding up the negatives posed by the half life of the novelty, the ad turn offs, the trickle of abandoners against the initial great things about the service are formidable, but not impossible challenges.

Of course, there are plenty of myriad, and original ways to unlock the value of 900 million users, but not on the course we see charted thus far; it begins like any other business, by anticipating and providing good value, then rinse and repeat...

Libor's Deep Throat cries boo who? ~2008

The unfolding Libor rate setting scandal sets up a logic test.

The NY Fed (somehow) became aware of issues framed in today's Senate Banking Subcommittee exchange.
Senator Vitter (LA) ~ "Since you knew Libor was being manipulated why did the Treasury and Fed (continue to) rely upon it ~2008?". The witness ~ "...it was under reported, uh, misreported...but we didn't know if we were being hurt by it..."

Framing what, when and who knew matters, but unless and until we find out who complained to the NY Fed ~2008 it's not the whole picture and you want to know the whole picture. In other words - Who started the whole thing?

The LIBOR logic test, says the complainers (to the NY Fed) would not be any of the Libor panel banks, but others adversely effected. Wall St logic dictates "why complain unless it's hurting us or..."

So that leaves certain entities which may have had a dog in the hunt, perhaps the nascent BHC's (Bank Holding Companies), perhaps the world's largest CDO CDS seller at the time, perhaps the world's light bulb maker, and intriguingly why was one of the panel banks paid almost $250 million more IN cash by the CDS seller, than requested on Sept. 16, 2008.

But, there's always a but, by definition, the circumspect NY Fed could (or should) only field complaints or market rumors from those it supervised at the time - si? That could shrink the number of potential (legal?) complainers - si?

Who were the Libor Deep Thoats in ~2008 or before? And for that matter, does this go all the way back to Prime - rate setting? Why did Libor replace prime, and become the benchmark for nearly all world's derivatives? It's not new news that Libor was a survey - based, rather than market-based rate since...like forever.

Facebook IPO compared to tagline - "a more open, TRANSPARENT and connected world?"

Last Friday, 5/18 will I believe become known as "Facebook Friday" for several reasons. Today, The Daily Beast reports that certain underwriters may have lowered their revenue projections prior to the IPO AND may have informed some investors; but not all investors. I was jammed up last week and could not get the fact out of my mind that while on the road show that there would be private one-on-ones for certain investors. The general road shows surface questions, many questions over and over; there is no doubt that these questions (I wasn't there) were laser focused on revenues; whether new models compared to pre-IPO or ARPU (average revenue per user). The private one-on-ones cast extreme scrutiny on revenue numbers and assumptions - past present and future. NO DOUBT: When underwriters, no doubt listening, perhaps bristling and responding to potential investor's questions, probes and scrutiny - likely, as is often the case when more than two people look at the same set of numbers, raised some hard-to-dispose-of aka troubling issues causing them (apparently) to adjust projections DOWN; but they decided not to disseminate that to ALL investors. What are the future prospects? Some may ask with approximately 800 million users how many more would sign up in the future? And given the anti-climactic IPO fallout how many will remain active, revenue paying users? Facebook's tagline ironically is, I believe, to promote a more open, transparent and connected world. Really? There can't be a more prominent example, assuming the Daily Beast is accurate of informaion assymetry; unequal, untimely and incomplete information - perhaps knowing, willful and intentional and approaching recission of all those IPO allocations - si?

Leverage a/k/a assets owned (by certain banks) but not paid for...a $16T case of leverage

McLean, in today's Reuters, takes up the issue of whether the infamous, few have ever heard of 2004 SEC CSE program's voluntary-adoption-of-models'-leverage was the cause of the financial crisis? McLean says no, because, it was the same elevated (30 to 1 plus) level as in 1998; as for example in Professor Andrew Lo's recent paper; hence they say it did not cause or explain the 2008 financial crisis.

(CSE stands for Consolidated Supervised Entity program. Five investment banks applied to become CSE's, all five ceased to exist as CSE's by September 26, 2008 including Bear, Goldman, Lehman, Merrill, Morgan Stanley.)

However, McLean and others fail, in my view, to appreciate the alternative definition of leverage: Assets owned (controlled) but not paid for.
Example from the borrowers point of view: One guy says to his friend "I own my house and it's worth $600,000" Does the guy say that he owes $550,000? Usually not.

Banks'(and CSE's) leverage was flawed in several ways: they didn't make clear that their assets' values; hence net capital were based on models, remarkably they didn't somehow appreciate that what Gorton labeled informationally-insensitive assets would become hyper sensitive, they didn't make clear the amount of assets concealed or masked off balance sheet and they sure as you know what did not inform any individual mortgage borrowers of the above. The UCC Article 9, by the way, reminds us that mortgages evidence a "consensual interest".

As of the end of 2007, the sheer dollar amount of unpaid for “assets” (or off balance sheet, off shore exposures to assets) was $16T – correct $16T.
(For comparison purposes, I invite and welcome any so inclined to supply the dollar amount for 1998 assets owned but not paid for.)
That works out to over 97% of the “assets” on (off and or off shore) the books were NOT paid for at the end of 2007.
Banks and CSE’s assets of choice in the 2000’s were MBS and CDO’s often “enhanced” by CDS, credit default swaps.

The Fed (and its sundry support programs were undertaken in emergency, exigent circumstances).
Bloomberg estimated that such support approached $8T. The Fed did not purchase liabilities, they bought “assets”.
Why did the Fed have to buy anything? Because for years, not months, there was NO market, arms-length trading of those “assets”; had there been more trading; market participants would have been aware that $16T of MBS and or CDO's were flooding the market. More supply, especially a veritable flood of anything depresses its value.
The presence of increased leverage is a flag that banks were not TRADING – they were holding – speculating. Further it was a clear, unmistakable, flashing red, neon light they STOPPED intermediating; that’s the point. In medical terms, when banks stopped intermediating it was like the US financial system had 3 arteries 95% blocked; blood flow shrunk to a trickle but the patient had not yet had a heart attack. It was not a question of whether or not the financial system would have one, it was when and how severe it would be.

The tagline many will recall the fact upon which many swore by: for decades US house prices had NEVER gone down year over year. Remember that one?
However, behind that fact was this:
For decades borrowers were required to put down 20% that’s 4 times leverage on the underlying collateral (asset), the house.
For decades borrowers had to fully document all information on the loan application; gifts were prohibited.
Loan applications had to be reviewed by an underwriter and approved.
In the 2000’s we know that few borrowers were rejected for loans; FDIC OIG in 2006 report pointed to widespread violations and repeat violations of TILA and RESPA in 2004 and 2005.

Inherent in every MBS and CDO are thousands of individuals’ mortgages.
What was the underlying collateral in the 2000’s?
Houses on Main St. were the underlying collateral in the 2000’s.
Houses are themselves leveraged AT the point of origination.

Mixing drugs and alcohol can be lethal. Mixing bank balance sheet leverage, hiding leverage off balance sheet, borrower leverage, thong-like underwriting and using models upon derivatives (and second derivatives) to imply value and determine net capital is guaranteed systemic cancer, when-not-if global, not just US financial napalm.

Back to McLean, debunking CSE leverage is ascribed to several economists who cite leverage of approximately 30 to 1 in 2008 was about the same as in 1998. So they conclude that since leverage was the same then it didn’t explain or cause the crisis. However, no it wasn’t and it’s not anywhere near an analogue and here’s why:

1. First, 2008 was not 2007; leverage as of September 2008 would have been MUCH more pronounced, that means north of 30 or 40 to 1.

2. According to Warren Buffett’s Bloomberg interview in June 2009 30 or 40 to 1 was just what was reported at the end of the quarter, intra-quarter was, I recall the sage saying, was “much more crazy or worse” or words to that effect.

3. Accurate marks of collateral (50 cents on the dollar) in 2008 indicate effective leverage of 60 to 1 or more.

4. Leverage of 60 to 1 means if the underlying collateral declines by just 1.6% the institution, correct the institution, is insolvent.

5. Real, arms length trade, marks of 50 cents on the dollar were common, and mean that a 50% decline in value occurred, CDS aside.

6. Example, in May 2007 Goldman informed a Bear Stearns unit that their MBS were worth 50 to 60 cents on the dollar; correct May 2007.

7. Collateral in 1998 was not concentrated in MBS or CDO, leverage in 2008 was laser concentrated in MBS and or CDOs.

8. Leverage in 2008 was concealed and or hidden, off balance sheet, and or off shore. Leverage in 1998 was NOT concealed and or hidden; leverage in 1998 was likely temporarily goosed upwards due to the Fed-mandated (and supported) industry rescue of LTCM. The Lo graph clearly shows that 1998 leverage retreated south until it began to rise again after the CSE program became effective in August 2004.

9. CSE’s and certain banks’ number of on and off balance sheet and or off shore entities in the 2000's was in the hundreds, one, as I recall, had over 2,200;

10. The CSE program allowed proprietary models to imply asset values, risk and net capital.

11. The decision to apply for CSE status and use of this alternative method was voluntary; that meant the SEC did not impose the alternative (model) method ON the CSE’s; they decided to use it on their own.

12. Models were not in use to determine net capital in 1998; markets and or arm’s length trades were. In fact, a future CSE, Merrill Lynch had this to say about models in their 1998 annual report (as Roger Lowenstein wrote in his When Genuis Failed tome on LTCM, page 235):
"Merrill Lynch uses mathematical risk models to help estimate its exposure to market risk"...and "may provide a greater sense of security than warranted; therefore, reliance on these models should be limited".

13. The 2000’s we (and most of the rest of the world) had several bubbles as a result of leverage – the house price bubble, the house overbuilding bubble, the consumer spending bubble and the stock market bubble (the Dow peaked at ~14,700 in October 2007).

14. Brooksley Born, in the late 1990’s, pointed out derivates’ dangers but was disregarded – derivatives exploded in the 2000’s NOT in 1998.

15. Last, and I’m surprised economists' oversight of this: “the leverage ratio” is one of many financial ratios, called common size measurements and while generally explanatory do not account for drastic changes in either the numerator or denominator. Example: Roger Maris' single baseball season 61 home run record, eclipsed Babe Ruth’s 60 was marked with an asterisk * for decades. Why? The number of games in the season increased to 162 from 150 games.

16. The dollar amount of MBS created from 1996 to 2000 was $4T, from 2001 to 2008 was $16T.

17. And when it comes to assigning responsibility
a. No borrower approved their own loan application;
b. No borrower consented to their mortgage morphing into an MBS or CDO or something else;
c. No borrower knew at or before they signed their mortgage, to ask their lender (or loan securitizer) what leverage was or what their leverage ratio was;
d. No bank was forced by a borrower to turn their mortgage into an MBS or CDO;
e. No bank was forced to leverage an MBS or CDO;
f. No bank was forced to use models to imply value upon any MBS or CDO;
g. And no bank was forced to conceal, mask or hide leverage off balance sheet;
h. And no bank informed any borrower that the combination of the above meant that their house was effectively leveraged up to 3,000 to 1 or more.
i. And that my friends is the story of leverage in the CSE (2004 to 2008) era, not 1998 as some would lead you to believe.
j. By the way, it took the Fed until 2009/10 to figure out and draw up the schematic of the 3 banking systems we had and still have - the Traditional, Cash Shadow and Synthetic Shadow, yet the diagram (scarcely readable, and only with a magnifying glass in 2 foot by 3 foot format); explains the Traditional banking system, easily and clearly in 3 inches, the two Shadow banking systems take up 23 of 26 inches of space, nor does it capture the essential and indispensable $16T "leverage";
k. And there’s more to come.

Any and all comments, questions, reactions or corrections are welcome and appreciated.

Shhhhhhhh....please be quiet, I'm trying to play capitalism...

This piece is an invitation for anyone else to document, contribute or just write about their own personal experiences as to how the financial crisis has interrupted, disrupted their lives, others, and or business or any other pursuits.

So - Shhhhh…I’m trying to play capitalism, has had huge effect on me. Every day it seems there is new information. Mind you not just incremental daily creep of news BUT often seismic news. Just this past week the NY AG, who had initiated investigation into any and all mortgage banking practices, was named to head a new federal investigation. So, although I didn't have to, I begin to read, research into what happened to cause this, why, who was involved and what other agendas may be at play in contrast to a plain old vanilla investigation the Empire State AG has enough wits to launch LAST year.

How long did that interruption take me to do? Probably an hour or more; it's not just the elapse of time; it's the interruption and sapping of the precious daily amount of creative energy I have away from other pursuits.

See my point is, with all the interruptions of news, (and I'm not even counting the social media disruptions) NORMAL capitalism, defined perhaps with an extra spoonful of nostalgia, free markets don't happen. News and information drive markets. Free markets, at least those we deserve, are for example, like the familiar parties of guys and girls, girls compete with each other and guys compete with each other to get their choice preference in rank order and guys we know there ain't no...at closing time; by the way the girls already know that we know this and are LONG gone before it even comes close to that point.

However, getting back to the party for capitalism, there is a new, brutish and uninvited guest - the Fed. In addition he's a financial drug dealer, having arrived dressed not in a toga, but a white doctors coat and has a matching beard.

The capitalism party, has always been played by the same open, understood and agreed upon in advance rules of Darwinian competition and winners and losers; only to be played at the next week's party. Except, for the past few years the brute has shown up and in fact held press conferences so as to tell us one more time that he's a student of TGD (right - we heard it the very first time) after the party so as to improve his image.

Pretty soon, those who had been attending the Party for Capitalism decided to stay home, not even go out, well...it just wasn't fun for anymore; because they've been hearing there's now even more weird people showing up at the party with the financial drugs.

Volcker Rule, Proprietary Trading and...

concerns expressed by some, mostly those whose bonuses, options and or compensation depend(ed) on it or their political sock puppets, over the free flow of capital.

Let's be clear - proprietary trading is a misnomer. How's that?
In the past, trading did NOT take place, HOLDING did and valuing prop positions with home grown computer models for proprietary profit. In fact, at the end of 2007, summing up such holdings came to a breezy $16T; correct $16T of assets owned (NOT traded, perhaps never) but NOT paid for. Hiding of marks seem to have taken place too - when certain people take the time to READ a 518 pp FCIC document.

Since the sponsors of proprietary trading have been called out for what they are, the next rallying point "free FLOW of capital" also fails.

The 2007/8 financial crisis is THE case study that prop trading INHIBITED, indeed was the polar opposite of the free flow of capital. How or why else would the Fed, lender of last resort, have to take action, under extreme, exigent circumstances and step up and rescue, with $1.2T in CASH in exchange for certain prop trading securities, if assuming arguendo prop trading had any positive effect on the free flow of capital? I'm not even going to list the trillions of dollars of amelioration (attempts) on behalf of the erstwhile prop trader aficionados - please spare me.

The champions of prop trading, do not even have support in the "end justifies the means" and are EVEN MORE preposterous, disgusting, revolting, and abhorrent as saying (with apologies in advance, if I offend any victims) "A few guys, got drunk and just gang raped your sister but it's ok, because society benefits from an increasing birth rate, and a growing, younger population, not worrying about the fact that the victim contracted AIDS as a result of the brutal attack."

YES - that's it - certain prop trading units on Wall St gave Main St and the rest of the US and world real economies AIDS from private, exclusive financial sex orgies going on ALL NIGHT LONG.

If, the bonus cry babies, false flag waving, money sucking vampires and their considerable, ill-informed, lobbying corp d'esprit inside the beltway WANT to fix the problem then all that's required is a few simple, doable things:

Disclose EVERY trade on an independent exchange or platform
Clear EVERY trade on an independent clearing agent
Every trade would include any security including any and all private placements of any stripe or regulation, future, option, currency, derivative, credit default swap contract, or any other new financial interest or contract on (or derivative of) any of the above
Hedge funds, need to disclose, just like their 1940 Act competitors, holdings (long, short, repo, swap, etc.) twice per annum.

On that basis, let the largest, most sophisticated financial institutions TRADE (that's an action verb) all they want as long as it's arms-length and market - based; THEN AND ONLY THEN THE MARKET WILL SEE CAPITAL TRULY and EFFICIENTLY FLOW.

The SEC terminated the CSE (Consolidated Supervised Entity program) on September 26, 2008 for a reason - EVERY SINGLE CSE FAILED, MERGED OR CEASED OR APPLIED TO BECOME LUCKY DISCOUNT WINDOW BORROWERS AS BHC'S ON SEPTEMBER 21, 2008- including:
Bear Stearns,
Lehman Bros.,
Goldman Sachs,
Merrill Lynch,
Morgan Stanley.

Period, full stop.

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."

LET ME JUST CUT TO THE CHASE:
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%

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

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

TOTAL ALL CSEs & BANKS
$(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
Link: http://fcic-static.law.stanford.edu/cdn_media/fcic-testimony/2010-0113-Bass.pdf
Copyright © Chris McConnell & Associates 2012 All rights reserved
www.fiduciaryexpert.com

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.

Let’s talk about sex baby! just kidding; let’s just talk about consensual...interest

UCC article 9 covers instruments of commerce including Mortgages.
Article 9 of the UCC, uses the term “mortgage” to include a consensual interest in real property to secure an obligation whether created by mortgage, trust deed, or the like. It says a mortgage includes a “consensual interest” in real property to secure an obligation (to repay the debt) whether created by a mortgage, trust deed (deed of trust) or the like. See the link here to the UCC PEB November 14, 2011 document”

So back in the day, when everyone who had a pulse got a mortgage, did mortgage applicants, who later became approved borrowers, know, consent to, WHEN (AT the time) they were signing their mortgage docs (promissory note and mortgage, deed of trust and the like) the real, indispensable and fraudulent cause of house prices rocketing further and further north and out of their reach?

Has anyone ever mentioned the CSE program to you? Let me cut to the chase.
See the attached testimony from Kyle Bass, January 2010 to the FCIC – go to page 13, flip it sideways, and print it out. You will see about half way down the line that says gross leverage to tangible common equity; that my friends is a fancy term for a financial shock absorber. You might ask “How could this be – when for decades such leverage was kept to the single or low double digits?” Keep this handy; I’ll explain why in one sentence with 15 bullets: One note, not all were CSE's but the majority were.

In 2004, your friends at the SEC (Securities Exchange Commission) approved the CSE program for only the “largest, most sophisticated investment banks;” (that’s a verbatim quote and I recall that it was stated more than once). The CSE program, enabled the investment banks to:
1) figure out their own capital cushions – overturning a 30 year old rule;
2) use their own models to determine #1;
3) use their own values for securities they held for their own profit;
4) is it a surprise, that as a result the amount of assets (and contingent liabilities) surged to over 30 times their capital, and as of 2008 it got worse than that?
5) Who were the CSE’s?
6) You’ve heard of the CSE program before right?
7) You know it was created when? Answer 2004. And it was terminated on? September 26, 2008 exactly five days after two CSE’s applied for a sex change to a BHC – no, silly that means a Bank Holding Company; (so they could borrow on the sly AND on the cheap from the Fed’s discount window);
8) Why has it taken until now, New Years Day 2012, fully 3 plus years AFTER the so-called financial crisis to tell you that if it weren’t for the CSE’s we wouldn’t have a foreclosure crisis or much less a financial crisis; just good ole; plain vanilla, safe and sound banking system;
9) But the bonuses (based on model values) were just a little too tempting for some at the CSE’s, now called TBTF banks or officially known as SIFI's;
10) Oh, I forgot to mention the answer to question #5; I’ll just provide the link and you can read for yourself here -
11) And if you have 4 minutes you can listen to the excellent narration of the CSE program by the NY Times’ Stephen Labaton here
12) If you have 55 minutes you can actually listen to the 2004 hearing wherein the 5 SEC commissioners prompted by the Staff and a 400 plus page briefing book, approved the CSE program – go back to the link under #10, scroll down the left side bar, there’s a VERY tiny link – you have to click where it says “(mp3)” At about the 20 minute mark you will hear who the CSE's had building the models; fascinating stuff.
13) In case you hadn't noticed - the word "market" did not appear in items #1, #2, or #3 above - and why is that? Because the CSE's proprietary computer MODELS led to the housing bubbles - the two of them - price and overbuilding. MARKETS which we all know are transactions among arms-length parties, for MBS, CDOs etc. did not occur on anything like a regular basis. What if a few extra trillions (plural) of supposedly Mortgage backed securities were to trade; i.e. to hit the market? Like the Japanese tsunami, the extra trillions washed away the trillions of paper wealth just as swiftly and as surely as the flood waters overtook northern Japan; except this, my friends, was no act of God.
14) If you were listening carefully to the 55 minute hearing ; you did hear that the "models" were 1) supposed to be approved in advance and 2) monitored and 3) adjusted over time - correct? Want to take a guess what happened in reality? I'll bet you might know, NOW, the answer.
15) I just found a fitting quote for the last bullet:
During 2008, [ALL] the CSE institutions failed, were acquired, or converted to bank holding companies which enabled them to access government support. The CSE program was discontinued in September 2008 by former Chairman Christopher Cox.
Testimony to US Congress' House Financial Services Committee, Mary Schapiro, Chair, US Securities and Exchange Commission, April 2010 [emphasis added].

More to come on the 2004 SEC CSE program too…

Happy/ier 2012!

Merrill announces the NEW rules for investing - so what were the old rules? Or should we revisit Merrill's 1998 Annual Report?

While on drive time today, a commercial interruption brought to you by Merrill Lynch Private Wealth Management beckoned would be customers to learn the "new rules for investing" - last I checked the securities industry was fighting tooth and nail against a fiduciary standard.

But MORE inportantly what were the "old" rules?
Perhaps we could go back to Merrill's 1998 annual report wherein it stated - as captured in Roger Lowenstein's LTCM tome "When Genius Failed"
see page 235, "Merrill Lynch uses mathematical risk models to help estimate its exposure to market risk" as Lowesntein wrote, in a phrase that suggested some slight dawning awareness of the dangers of such models, the bank added that they "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 2004 vintage CSE (Consolidated Supervised Entity) program "only for the largest and most sophisticated broker dealers" the annual report writers and or signatories had had a technologic transformation only to be undone in a mere four years; as the Chairman Cox ended the infamous CSE program on September 26, 2008.

However, still today those models' valuations are wreaking havoc the world over and then some; some "markets"! What would US and or EU regulators today think of the opportunities they lost from not having passed their eyes over the prescient words from mother Merrill and taken counsel! How many foreclosures could have been avoided? How many bonuses could have been avoided? Oops or perhaps that's the reason they forgot to read - anything?

Be careful, someone's gonna get hurt...

Yes, things parents say, or an ode to George Carlin.

Picture the time when you were kids, and you were on a see saw, balanced by your friend who was on the other end; OH what great fun, and giggles and laughs, up and down, up and down, and the giggles and laughs wafted all over the playground; then up and down sped up, then you were overcome, all of a sudden out of nowhere, by the great silliness, soon other kids heard and saw what loads of fun and silliness was to be had and they wanted to sit on your side too; then more kids joined; then one suddenly jumped off one end and the kids on the other end went ploof, banging their heads, breaking arms and dislocating shoulders as they spilled onto the play ground pavement, like scatter shots.

Pity, before 2008, certain TBTF banks' didn't remember that lesson of leverage implicit in the children's frolic of see saw; for it is indeed great fun for BOTH sides of the see saw when it's a balanced game; except TBTF banks', knew at the time WHY house prices were rocketing north, but somehow forgot to inform mortgage borrowers that their leverage bets were being doubled, not carefully underwritten if at all, and hidden and upped, to be fueled by an relentless push for more new mortgage, often no-money down 2nd, 3rd, 4th house, borrowers (mind you primarily if not nearly only within GSE conforming loan limits) who fully thought they were playing real estate see saw but in reality were being suckered, make that defrauded into believing that house prices were going up due to market (make that FREE MARKET, some would recognize that as Capitalism) forces...

After doing God's work they...applied for gun permits

Why would that be?

See Bloomberg article from 2009. It's sort of interesting that the release of requested information has not been reported on...
http://www.bloomberg.com/news/2009-12-03/arming-goldman-sachs-with-pistols-alice-schroeder-correct-.html

I wonder if this is Goldman's version of a new "quiet period"?

Arming Goldman Sachs With Pistols: Alice Schroeder
By Alice Schroeder - Dec 3, 2009 Bloomberg Opinion
(Corrects second paragraph of story published Dec. 1 to say the New York Police Department believes some bankers may have received handgun permits.)

“I just wrote my first reference for a gun permit,” said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied to the local police for a permit to buy a pistol. The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank.

I called Goldman Sachs spokesman Lucas van Praag to ask whether it’s true that Goldman partners feel they need handguns to protect themselves from the angry proletariat. He didn’t call me back. The New York Police Department has told me that “as a preliminary matter, it appears that some of the records you requested may be in the possession of this department” after I asked for information on approved handgun permits for bankers. The NYPD also said it will be a while before it can name names.

While we wait, Goldman has wrapped itself in the flag of Warren Buffett, with whom it will jointly donate $500 million, part of an effort to burnish its image -- and gain new Goldman clients. Goldman Sachs Chief Executive Officer Lloyd Blankfein also reversed himself after having previously called Goldman’s greed “God’s work” and apologized earlier this month for having participated in things that were “clearly wrong.”

Has it really come to this? Imagine what emotions must be billowing through the halls of Goldman Sachs to provoke the firm into an apology. Talk that Goldman bankers might have armed themselves in self-defense would sound ludicrous, were it not so apt a metaphor for the way that the most successful people on Wall Street have become a target for public rage.

Pistol Ready
Common sense tells you a handgun is probably not even all that useful. Suppose an intruder sneaks past the doorman or jumps the security fence at night. By the time you pull the pistol out of your wife’s jewelry safe, find the ammunition, and load your weapon, Fifi the Pomeranian has already been taken hostage and the gun won’t do you any good. As for carrying a loaded pistol when you venture outside, dream on. Concealed gun permits are almost impossible for ordinary citizens to obtain in New York or nearby states.

In other words, a little humility and contrition are probably the better route.

Until a couple of weeks ago, that was obvious to everyone but Goldman, a firm famous for both prescience and arrogance. In a display of both, Blankfein began to raise his personal- security threat level early in the financial crisis. He keeps a summer home near the Hamptons, where unrestricted public access would put him at risk if the angry mobs rose up and marched to the East End of Long Island.

To the Barricades
He tried to buy a house elsewhere without attracting attention as the financial crisis unfolded in 2007, a move that was foiled by the New York Post. Then, Blankfein got permission from the local authorities to install a security gate at his house two months before Bear Stearns Cos. collapsed.

This is the kind of foresight that Goldman Sachs is justly famous for. Blankfein somehow anticipated the persecution complex his fellow bankers would soon suffer. Surely, though, this man who can afford to surround himself with a private army of security guards isn’t sleeping with the key to a gun safe under his pillow. The thought is just too bizarre to be true.

So maybe other senior people at Goldman Sachs have gone out and bought guns, and they know something. But what?

Henry Paulson, U.S. Treasury secretary during the bailout and a former Goldman Sachs CEO, let it slip during testimony to Congress last summer when he explained why it was so critical to bail out Goldman Sachs, and -- oh yes -- the other banks. People “were unhappy with the big discrepancies in wealth, but they at least believed in the system and in some form of market-driven capitalism. But if we had a complete meltdown, it could lead to people questioning the basis of the system.”

Torn Curtain
There you have it. The bailout was meant to keep the curtain drawn on the way the rich make money, not from the free market, but from the lack of one. Goldman Sachs blew its cover when the firm’s revenue from trading reached a record $27 billion in the first nine months of this year, and a public that was writhing in financial agony caught on that the profits earned on taxpayer capital were going to pay employee bonuses.

This slip-up let the other bailed-out banks happily hand off public blame to Goldman, which is unpopular among its peers because it always seems to win at everyone’s expense.

Plenty of Wall Streeters worry about the big discrepancies in wealth, and think the rise of a financial industry-led plutocracy is unjust. That doesn’t mean any of them plan to move into a double-wide mobile home as a show of solidarity with the little people, though.

Cool Hand Lloyd
No, talk of Goldman and guns plays right into the way Wall- Streeters like to think of themselves. Even those who were bailed out believe they are tough, macho Clint Eastwoods of the financial frontier, protecting the fistful of dollars in one hand with the Glock in the other. The last thing they want is to be so reasonably paid that the peasants have no interest in lynching them.

And if the proles really do appear brandishing pitchforks at the doors of Park Avenue and the gates of Round Hill Road, you can be sure that the Goldman guys and their families will be holed up in their safe rooms with their firearms. If nothing else, that pistol permit might go part way toward explaining why they won’t be standing outside with the rest of the crowd, broke and humiliated, saying, “Damn, I was on the wrong side of a trade with Goldman again.”

(Alice Schroeder, author of “The Snowball: Warren Buffett and the Business of Life” and a former managing director at Morgan Stanley, is a Bloomberg News columnist. The opinions expressed are her own.)

Click on “Send Comment” in the sidebar display to send a letter to the editor.

To contact the writer of this column: Alice Schroeder at aliceschroeder@ymail.com.

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net
.

Only the good...

assets (or what's left) in around the Euro zone are likely to experience that correlation event that makes models (and their technicians) sputter and gasp as they are victimized by their very liquidity, as bids head south in a hurry, deja vu all over again. Liquidity seekers find out real quick what they can sell in a hurry; it's not complicated, sort of like when your significant other doesn't answer your ring - when you really need them; dealers' that same interminable, telling...honest ring.

What's bad (assets) in the Euro zone will always be as it always was; any liquidity has long ago dried up; no matter the extra moisturizer from sponsors' sponsors.

Sort of like, make that a Gresham's law comeuppance only applied to markets of securities; not suspecting, but deserved indeed inevitable.

How many times do we have to suffer through this video tape.

Help me fill in the blanks - an exercise in Safety and Soundness a little too late...

The financial crisis underscores the importance of good risk management practices and systems. Some firms had a better understanding of the risks that they were exposed to and liquidated positions (of ________) and bought protection (on ________)as the housing boom (caused by ______)turned bust. But others took too much comfort in credit ratings (on _______) or felt too comfortable operating with very high risk concentrations (of ______). The desire to protect revenue streams (from ______)also caused some firms to stick much too long with businesses (composed of _________) that were much more exposed to risk than anticipated...

Today Mr Dudley told GARP (Global Association of RISK Professionals) the above.


I'm sure many of the attendees can attest to the Safety and Soundness drill that SHOULD have been plain to see; unless of course those bonus checks based on the risks enumerated above were too much to resist back in the day.

It's time...

to say Foxtrot Oscar to the TBTF Banks and especially the proprietary traders and their supervisors, and the media plants that will never get it, never report it; likely until their sponsors change.

Ratification EVERY time:
They ratified their on and off balance sheet MBS investments / exposures EVERY time they cashed a bonus check, EVERY single time they cashed a salary check, as they were supposed to be doing their job; minding the firm's capital. As far as I know, no trader EVER raised his or her hand and said "wait a minute my bonus is too much" did they? That means they ratified it.

Leading up to the so-called "2008 financial crisis" billions in bonuses were paid year after year to Wall St traders however, when they were bailed out, like rats (that's really too good for them as rats are not predators) they shrank away from the spotlight; as scripted by their "messaging" departments.

It's time to get back to the cause of the current crisis - caused by TBTF bank's prop trading departments; clawback and more...deserved.

If and that's BIG...

1. If the Chairman of the Federal Reserve, Ben Bernanke didn’t know,
2. If other dealers, counter parties didn’t know,
3. If investors sophisticated and not sophisticated didn’t know,
4. Borrowers are presumed to have known therefore their notes are valid contracts.

Yes that’s the insult to logic many mortgage borrowers, their lawyers, foreclosure attorneys and the courts believe or better said, are led to believe. That because a mortgage borrower; whether high school or college grad, English, Spanish or Mandarin speaking, signed their name to a loan to buy a house that they knew the secret that Wall St was keeping from them and many others including #1, #2 and #3 above.

The names were changed to protect the innocent - NOT
Wall St has been given a new name (remember the old TV show Dragnet “we changed the names to protect the innocent”?) is now SIFI (Systemically important financial institutions), formerly known as, like Prince, the “artists” formerly known as Too Big to Fail (depository) institutions including investment banks (formerly known as Consolidated Supervised Entities, circa the discontinued 2004 SEC CSE program) and Bank holding companies.

Why did and do many Americans still believe this?
Remember “Now a note from our sponsors” that quintessential introduction has vanished (been removed) from our airwaves and digital ink, it seems now like since forever. Belief, whether through manipulation of facts and or guilt, mortgage borrowers are being told and led again by the same financial media that waved the poms poms as they (the sponsors) paraded by with glorious, massive, free market, capitalism bonus checks in tow before 2008.

Wake up Americans…because it’s not your fault at all – it’s a 5 step program… (*unless you falsified your loan docs)
When mortgage borrowers wake up and realize the mistakes they made were:
1) not bad market timing or 2) taking on too large a debt burden or 3) thinking that their job was secure or 4) thinking that house prices had no where to go but further and further out of reach, but 5) that they were hoodwinked by TBTF banks’ trillions of hidden investments (which were the cause of the very large proprietary traders’ bonus checks) then that day will be big.

There’s a fine but bright line between the free market, capitalism champions and fraud.

Will we ever see the day when certain Bank trust departments sue their TBTF bank parents?

Thousands, if not millions of times banks serve as corporate trustee for private family trusts, many times IRS 501-c-3's non-profits, foundations and endowments and local charities including schools, hospitals, colleges, and museums are beneficiaries of these trusts in ADDITION to family members and future unborn generations.

Given the trillions of wealth lost to the fraud wraught on financial markets by TBTF banks shouldn't these trustees act as trustees should and "pursue any and all claims"or is that asking too much? Or is it a little to close to home base?

Morgan Stanley's CEO John Mack may have been the one quoted but he was surely not alone when he said in 2003 the "Agency model is dead".

As we entered the 2000's Wall St's bonus machine was broken, almost irreparably as competition ate away year after year at their meal tickets - commissions, M&A (Mergers and aquisition advisory fees) and underwriting new issues were confronted with unrelenting powerful, only going one way (down, faster and faster) - price competition.

Commissions were taking a hit from the likes of Schwab, Etrade, and Fidelity. From another angle the advent of ECN's (online stock trading auctions, dark pools of "liquidity") were forcing commissions levied by the NYSE to go down, and regulators ordered penny - based pricing on stocks, so bid ask spreads narrowed; all acted to force commission rates down.

Hordes of new competitors hungry for a piece of M&A and stock and bond underwriting forced fees down and or fee - sharing there as well; at the end of the day bonus pools were evaporating.

It was clear and recognizable that new competitors, many aided by available faster, better cheaper technology were forcing Wall St's profits south - so what did the TBTF banks scheme up to do to restore their bonus checks?

Leverage an American institution - the "home mortgage" as its implicit and explicit dual leverage made for maximum bonus; and in the wake of 9/11 it was "patriotic"...
A scheme to approve any and all mortgage apps, turn them into Mortgage backed securities, sell some of them to investors like mutual funds, insurance companies and pension plans both here and overseas; but begin to horde trillions of them in a second set of books literally OFF balance sheet (and in some cases off shore).

The beauty of this scheme was that the "market" and price competition would not be involved. Yes, let me repeat "the market and price competition would NOT be involved" traders at the same TBTF banks could use their own computer models to assign value to the increasing MBS stored in the likes of "200 stories tall mortgage warehouses". It was a rare event indeed for any of these off balance sheet holdings to see the light of any true, arms-length market - based trade.

Even the Fed chairman was unaware...
Federal Reserve Chairman Ben Bernanke gave a speech to the NY Economic Club, in October 2007 he educated the assuredly august, learned and rapt audience that in the "old days" banks used to make a mortgage loan and hold it ON their books until it was paid off by the borrower, departing from that practice he said that today (2007) banks packaged mortgages into mortgage backed securities and sold them OFF TO (third party, arm's length) investors. [emphasis added]

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.

However, as far as I can tell, there is no report, that anyone in that room raised their hand to correct the Fed Chairman. Why?

Because the same Fed chairman, a year later, would learn that his statement was incorrect. TBTF banks were NOT selling MBS off to investors; millions of mortgages were approved for one purpose, to create more MBS, while TBTF were cranking trillions of MBS out, they were NOT selling them off to investors, they were hiding them off balance sheet, misleading every mortgage borrower, every investor to replace what had been lost to fair, disclosed, free market - based price competition (some would call that capitalism) - THEIR MASSIVE BONUS CHECKS. The FDIC uses the word "concealed" here.

Excerpt: 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.

In comparison, today Amazon released it's new tablet called "Fire" priced at $199 to compete with others most importantly Apple's more expensive iPad. See we benefit from lower and lower prices on new technology why? Because it's out there people use it, compare it, blog about it - in a word any and all information from manufacturers to users is "transparent". In the year 2011 I remain incredulous (but not surprised) at the opposite by TBTF banks and their paid foot soldier representatives lobbyists, media and think tanks. Applying their business model's opacity, I wonder if they would be comfortable paying thousands for a Commodore II pc and for how much memory?

Estimates of the amount of TBTF Bank support direct and indirect provided by the Fed and or US Treasury is about $2o Trillion including the recent QE programs. MBS issuance largely by the TBTF banks from 2001 to 2008 is $17 Trillion; is there any connection?

The damage to the economy for years was a false growth from cash out refinancings, borrowers were defrauded when they applied for loans and were universally approved for any and all types of and amounts of mortgages. Borrowers did NOT approve their own loans, ultimately in effective control (and pricing) of the MBS markets; TBTF banks approved EVERY loan.

We later know, only from limited emails that mortgages and MBS deals composed of these very same mortgages were called shit, crap and cows by any number of TBTF-produced and or related information; one even said it's 100% ALL DEALER RISK, NO MTM. Translated it means that MBS held by TBTF banks was "only TBTF bank risk, no mark to market (only marked to traders' internal computer models.)"

Perhaps when bank trust departments wake up from the train wreck, home movie they've been watching they will recognize a claim and pursue it as fiduciaries should; of course they can always resign as they ALL serve voluntarily and with pay (or is that the reason)?

Thank God for the Department of Transportation

Americans love cars, perhaps we are forced to, after all most of us drive every day. There have been many impressive improvements over the years. When it comes to the car we choose I believe comfort remains at or near the top of most everyone’s list. The part on the vehicle that makes a vehicle comfortable is (it’s time for the interactive part to begin so fill in the blank) ____________ the shock absorber. Imagine the opposite, how would you feel driving a car that was not comfortable, or worse a car without shock absorbers, or missing even one shock absorber? You’d be pretty miserable wouldn’t you?

Since Americans remain fascinated by their cars I hope it makes it a little easier to understand the housing bubble. How it occurred and why it is still so bad, over seven years from the peak of home ownership in 2004, five years after the peak in prices in 2006 and over three years after the Wall St bailouts in 2008 and the movie that Mr Bernanke saw the first time plays on today in his latest trifecta wager on QE.

The housing bubble was like a car that lost its shock absorbers,
Mortgage finance shock absorbers decline from 28% to 3%
Since the beginning of time, make that mortgage finance in the US in the 1930’s, borrowers nearly always had to put 20% down to qualify for a loan, after getting approved by the lender’s underwriting department. Lenders intermediated about 12 times over and above their total equity. That implies that lenders had about 8% equity stake in each mortgage loan. Adding up borrower’s down payment, known in bank underwriting parlance, as the initial loss absorbing cushion of 20% plus lender’s second loss absorbing cushion of 8% gives us a total of 28% loss absorbing cushion against any decline in the price of the home.


Total loss absorbing cushion shrank to 3% or less
When the music started playing in the 2000’s…certain lenders in arrangements with Too Big to Fail (TBTF) Banks let, I repeat let borrowers get loans with no down payment, so the first loss absorbing cushion was totally wiped out by, make that approved by, the lenders. Too big to fail banks issued almost $17 Trillion of MBS from 2001 to 2008. The TBTF banks having both nationwide and global sales teams, known as registered representatives, or as Goldman Sachs calls them “professionals” typically sold 100% of every deal off to third party investors, institutions like mutual funds, insurance companies and pension plans. However, TBTF banks started to amass trillions worth of these MBS for themselves, many concealed in a 2nd set of books. As a result of the hiding, although it was legal, nearly wiped out the 2nd loss absorbing cushion bringing it down from 8% as it had been for decades, to 3% or less.

Shock absorbers on a car are carefully engineered
Most of us drive on flat roads to and from work each day; however the engineers design the shock absorber to withstand pot holes or the occasional off road adventure. Shock absorbers play crucial safety functions when we put on the brakes or when we are going up and down hills.

When the housing market began to climb uphill, shock absorbers disappeared
As the housing market took off, rather than taking a breather it didn’t slow down, prices climbed faster and faster as home prices went up more than anyone had ever seen before, causing more and more first time home buyers to jump into the action. Many of these new home buyers were inexperienced, however, instead of requiring 20% down payments they were approved for loans with no money down, and worse, many lenders’ underwriting personnel approved every loan application; as in what’s become known as IBGYBG (I’ll be gone, you’ll be gone) passing problems whether big or small onto the next party.

As the car with no shocks, driven by new and inexperienced drivers approached the peak of the mountain, the lack of shock absorbers made for more than a bumpy ride…
The loss absorbing cushion of 20% down payments and banks 8% equity cushion fell by the wayside only after being approved by TBTF banks. Mortgage borrowers all across the country and institutional investors alike plummeted down the other side of the mountain with no shock absorbers, then the braking system became overwhelmed and it too gave out; as they are designed to work with the shock absorbers.

Banks’ Safety and Soundness regulations were blinded by the size of the bonus checks…
It’s clear that none of the TBTF banks’ prop traders or CEOs raised a hand and said it was too much or questioned the size of their bonus checks at the end of every year. No TBTF Banks' boards whether past or present, no regulator or official at the SEC, FDIC, OCC or OTS; no one on the FOMC, at the Federal Reserve Board appreciated that a car stripped of its shock absorbers makes for a bumpy, dangerous and when travelling up and back down a curvy mountain road often deadly experience. I wonder if any of the TBTF Bank CEO’s or the financial experts; Mr Bernanke, Mr Geithner, Mr Paulson, Mr Summers or Mr Rubin drive cars without shock absorbers? Thank God for them that the Department of Transportation is not part of the SEC, Department of Treasury and or the Federal Reserve Board and sees to it that automobiles are required to have shock absorbers; nothing fancy just basic safety equipment.

Fed's QE3 "the Twist" still ignoring TBTF Banks 2008's multi Trillion $ difference between Legal title and Equitable title to Assets; aka LEVERAGE

The Fed's 2011 QE3 called "Twist" (is a re-incarnation of the 1960's Fed Twist so named because Chubby Checker's song was the hit of the day) is yet another failed and failing attempt by Mr Bernanke to rejuvenate and re-liquify TBTF bank's assets back to life. Like previous "programs" failures is like the Fed pushing on the proverbial string.

As we wrote in 2007:
http://www.fiduciaryexpert.com/page3.html
"Cash infusions by operators, sponsors, market rescues, liquidity by the Federal Reserve bank through discount rate cuts, extended rollover provisions, open market operations band aid liquidity only; Fed action does not cure the credit (or credit worthiness) and or valuation issues surrounding these securities" never has and never will.

QE3 is yet another attempt to game, excuse me fix what's wrong on Wall St in the hopes it shows up in increased final demand; it's remotely possible in textbooks but unlikely.

Final demand, writ large, has been replaced by necessary versus nice for some time now; except for the lucky beneficiaries of Mr Bernanke's previous rescue attempts.

Not for nothing, but the Fed is somewhat conflicted in this endeavor as well - because it (QE3) is also supporting valuations for the $1Trillion of MBS it holds (renting) on its balance sheet too, acquired from the TBTF banks for 100 cents CASH on the dollar in 2008/9.

Although a persistent one, when will Mr Bernanke awake from his intellectual slumber and finally recognize that markets need to clear - sometimes at and in this case, distasteful prices. But there's no denying that the market now or will eventually know best; and then it likely won't be a string...

Burlington Northern; may be just priceless...information to Mr Buffett

Imagine, the head start on the "market" if you could triangulate securities gum shoes earnings reports, channel checks, industry confabs, supplier checks, conference calls, forward looking statements and official guidance, the Reg FD variety with REAL time shipping information from...manifests.

It's likely what Mr Buffett had in mind when he conjured up buying the railroad giant. Priceless, information, not just who is shipping, and where it's going, not just whether it's more or less weight compared to the previous shipment but likely SKU level information available to the investment pros "faster-than-I-can-type-this-sentence-fast" back in Omaha. Got SKU's and their origins and destinations can triangulate gross margins-critical to forecasting EPS.

BUT WAIT IT'S EVEN BETTER...shippers can't just show up to BN's with a container and say ship this to Chicago for me; they have to, da da da arrange for and disclose what they're shipping IN ADVANCE.

What could be better for the lucky Berkshire Hathaway shareholders and for Mr Buffett.

You never know what you'll think of when you watch one of those miles long Burlington freight trains wind slowly around the bend when you're driving from LA to Vegas.