Motley Moose – Archive

The bailout of failing financial institutions in 2008-09, while arguably necessary, missed an essential step which may now be stalling our economic recovery:

Specifically, [former Chairman of the Federal Reserve Alan Greenspan] said today in a panel discussion at a Fed conference in Jekyll Island, Georgia:

Banks operated with less capital because of an assumption they would be rescued by the government, he said.  [Lehman Brothers] wouldn’t have failed with adequate capital, he said.  “Rampant fraud” was also an issue, he said.

“Fraud creates very considerable instability in competitive markets,” Greenspan said. “If you cannot trust your counterparties, it would not work.”

Greenspan is right.

George Washington – Even Greenspan Admits that Moral Hazard and Fraud are the Main Problems Washington’s Blog 7 Nov 10

This is highly out of character for Greenspan who once noted, “I don’t think there is any need for a law against fraud.”  And he was hardly alone.

Underlying the outcome of the recent midterm shift in our political landscape is the almost universal acknowledgement that the electorate is not happy.  Down on Congress, certainly, concerned about the direction the country is headed and pessimistic that things will change any time soon.  We all seem to understand it’s because our economy is broken and we are broke, and more importantly the remedies we’ve applied are widely unpopular.  Looking back to 2008 one is staggered by the cupidity of those whom ‘free market’ theory entrusted with our national economy:

Wall Street has turned the economy into a giant asset-stripping scheme, one whose purpose is to suck the last bits of meat from the carcass of the middle class.

What really happened to [Bear Stern] and [Lehman Brothers] is that an economic drought temporarily left the hyenas without any more middle-class victims – and so they started eating each other, using the exact same schemes they had been using for years to fleece the rest of the country.  And in the forensic footprint left by those kills, we can see for the first time exactly how the scam worked – and how completely even the government regulators who are supposed to protect us have given up trying to stop it.

This was a brokered bloodletting, one in which the power of the state was used to help effect a monstrous consolidation of financial and political power.  Heading into 2008, there were five major investment banks in the United States: Bear, Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs.  Today only Morgan Stanley and Goldman survive as independent firms, perched atop a restructured Wall Street hierarchy.  And while the rest of the civilized world responded to last year’s catastrophes with sweeping measures to rein in the corruption in their financial sectors, the United States invited the wolves into the government, with the popular new president, Barack Obama – elected amid promises to clean up the mess – filling his administration with Bear’s and Lehman’s conquerors, bestowing his papal blessing on a new era of robbery.

To the rest of the world, the brazenness of the theft – coupled with the conspicuousness of the government’s inaction – clearly demonstrates that the American capital markets are a crime in progress.

Matt Taibbi – Wall Street’s Naked Swindle Rolling Stone 15 Oct 09

Could it really be that bad?  America seems to think so and the widespread disaffection with both political parties will continue until it is fixed.

Back during Prohibition federal agents were used to break up the crime syndicate of Chicago’s Al Capone, using federal law, because local law enforcement was unwilling or unable to do so.  Unsuccessful bribery attempts by the syndicate were widely publicised, hence their nickname.

Now the situation seems reversed, with state attorneys general taking virtually the only steps to investigate allegations of fraud, in this case state law governing evidence submitted by plaintiffs, which have arisen from foreclosures nationwide:

Ever since the financial crisis began two years ago, the federal overseers of the banking industry have been consistently unwilling to take the rod to the institutions they regulate.  The robo-signing scandal – and it is, unquestionably, a scandal – hasn’t changed that attitude one iota.

The Treasury Department and the Federal Reserve have made it clear that they are more concerned about keeping the foreclosure mill going full speed than they are about determining whether the banks broke the law.  Somehow throwing people out of their homes quickly is supposed to help the economy.

Joe Nocera – The States Take on Foreclosures NYT 29 Oct 10

On 13 October forty-nine states, now joined by Alabama, announced a joint investigation into allegations of fraud and perjury resulting from submissions by mortgage servicers and their agents in foreclosure cases:

“This is not simply about a glitch in paperwork,” said Iowa Attorney General Tom Miller, who is leading the probe. “It’s also about some companies violating the law and many people losing their homes.”  […]

“What we have seen are not mere technicalities,” said Ohio Attorney General Richard Cordray. “This is about the private property rights of homeowners facing foreclosure and the integrity of our court system, which cannot enter judgements based on fraudulent evidence.”

Alan Zibel – Officials in 49 states launch foreclosure probe AP via MSNBC 13 Oct 10

While there was initially some doubt that this probe would produce significant results there are signs the states’ attorneys general are increasingly concerned with their findings and may take an aggressive role in asserting state law, tightening requirements in their court procedures and establishing evidence which may eventually lead to criminal prosecutions.

Back in April the House of Representatives passed a bill known as HR 3808, the Interstate Recognition of Notarizations Act of 2010 and sent it to the Senate where it languished in the Judiciary Committee until late September.  The circumstances of the passage of this bill in the Senate are curious, to say the least.  It was discharged from committee and passed by unanimous consent, with no debate, just as the 111th session of Congress was coming to a close.

The bill is relatively simple:

Each Federal court shall recognize any lawful notarization made by a notary public licensed or commissioned under the laws of a State other than the State where the Federal court is located if –

(1) such notarization occurs in or affects interstate commerce; and

(2) (A) a seal of office, as symbol of the notary public’s authority, is used in the notarization; or (B) in the case of an electronic record, the seal information is securely attached to, or logically associated with, the electronic record so as to render the record tamper-resistant.

Superintendent of Documents – H. R. 3808 GPO 111th Congress

Seems pretty innocuous, really, but in the context of emerging reports of foreclosure fraud at the time it qualified for notorious distinction as the ‘silver bullet’ which banks were hoping would solve their documentation problems and earned itself a presidential veto.

The Federal Reserve has bought a ‘staggering’ $1.2 trillion of bad debt since the beginning of the sub-prime mortgage and credit crisis of 2008.  There is considerable evidence that this bad debt was a direct consequence of faulty, if not outright fraudulent, processes which pervaded the securitisation of this debt during the housing boom:

Faulty underwriting appears to be prevalent across the board, with originators complicit in overvaluing both the lender and the collateral at the point of underwriting – and doing so systematically.

Julian Fisher – How the mortgage mess could spread beyond sub-prime Reuters 22 Oct 10

Under the circumstances, with the failure of Lehman Brothers and the imminent collapse of credit threatening major financial institutions, an injection of public capital seemed prudent, perhaps even inevitable.  Yet although these systemic problems were widely suspected there have been virtually no regulatory penalties or criminal prosecutions.  In fact the government has simply absorbed the losses on our behalf:

The U.S. government and the Fed had a stark choice: either impose the rule of law and indict and convict hundreds, if not thousands, of people who perpetrated and profited from the systemic fraud and embezzlement at the heart of the mortgage and mortgage-securities industries, or socialize the corrupted, poisoned markets and use taxpayer funds to prop up the wizened shell of a stripmined market and reward the criminals with freedom.

They chose to reward the criminals and prop up a simulacrum market with only one buyer: the Federal Reserve. You can go to the the Fed’s balance sheet and see the $1.2 trillion in mortgage-backed securities it owns.

Charles Hugh Smith – U.S. Financial Markets: The Well Has Been Poisoned Of Two Minds 23 Oct 10

From Karl Denninger’s chart you can see the debt is still there but it is now the taxpayers’ liability.  The profits, however, have been retained by the financial institutions with the hope that their solvency will be the first step towards our economic recovery.  But what are the consequences for consumers, homeowners and taxpayers?

Today Bank of America stock rallied.  The Fed is talking about ‘quantative easing.’  We are alarming our friends and allies by crimping the US dollar worldwide in an effort to improve exports and ‘pump prime’ our flagging economy.  We are in the midst of a tenacious recession and our equity market is overhyped daily and undermined after-hours by insider profit-taking.  

The foreclosure crisis has our whole system of real property in doubt across fifty states and the banks which we spent our last trillion capitalising have made provisions to cover a trivial fraction of their remaining exposure to toxic subprime debt.  Some originators no longer have the notes, some mortgages have been securitised into two or three trusts, all of them have been leveraged into endless tranches of CDOs whose value exceeds the world’s GDP.

And now this:

HOUSTON, Oct. 18 PRNewswire  Today, the holders of over 25% of the Voting Rights in more than $47 billion  of Countrywide-issued RMBS sent a Notice of Non-Performance (Notice) to Countrywide Home Loan Servicing, as Master Servicer (“Countrywide Servicing”), and to Bank of New York, as Trustee, identifying specific covenants in 115 Pooling and Servicing Agreements (PSAs) that the Holders allege Countrywide Servicing has failed to perform.

Institutional Holders of Countrywide-Issued RMBS Issue Notice of Non-Performance… PRN Newswire 18 Oct 10

Just wanted to post this as a marker, really.  The first $47 billion.  Of the $1.4 trillion worth of dodgy securitised mortgage trusts we know about.  A little time-capsule of our current condition.  “Iceberg, right ahead!”, exclaimed the lookout.

For weeks there has been an emerging story which casts doubt on the validity and provenance of documents used in foreclosure proceedings nationwide:

It is a legal impossibility for someone without a mortgage to be foreclosed upon.  It is a legal impossibility for the wrong house to be foreclosed upon, it is a legal impossibility for the wrong bank to sue for foreclosure.

And yet, all of those things have occurred.  The only way these errors could have occurred is if several people involved in the process committed criminal fraud.  This is not a case of “Well, something slipped through the cracks.” In order for the process to fail, many people along the chain must commit fraud.

Barry Ritholtz – Why Foreclosure Fraud Is So Dangerous to Property Rights The Big Picture 12 Oct 10

The use of the Mortgage Electronic Registration System by the majority of lenders, especially for mortgages securitised and resold to investors, inadequate or concocted documents and imperfect ‘due process’ by unqualified loan officers has created uncertainty regarding the status of mortgage-holders and their standing as plaintiffs at foreclosure:

“If people say that you cannot prove that you own the loan, it could be really cumbersome to untangle,” said [Jeffrey Gundlach, chief executive officer of DoubleLine Capital LP], whose firm manages $5.5 billion in investments, mostly mortgage-backed securities.  “It has the potential to spiral into much, much more.  There have been many twists and turns to the foreclosure process since the credit crisis started and this is one more turn of the wheel, and it can spin out of control.”

John Gittelsohn – Securitization Flaws May Lead Investors to Fight Mortgage Deals Bloomberg 14 Oct 10

In spite of the volume of foreclosure actions, 100,000 in the past month alone, the crisis emerging as securitised mortgage documentation is presented in court has led major institutions to declare a self-imposed moratorium on foreclosures, at least for properties ‘held’ by MERS.  

There is more to the problem, however.  The process by which these mortgages were originally transferred to trusts for sale to institutional purchasers is questionable and may be found to be defective, rendering them essentially worthless and exposing the banks who sold them to liability at par with their original value, roughly $1.4 trillion dollars.

Americans are feeling lousy and it’s no surprise.  Unemployment is at ‘recent memory’ highs, the Federal deficit is approaching existential crisis and the national economy is limping along with little sign of immediate recovery.  This disaffectation is based on real issues.  We have lost manufacturing and professional employment to overseas labour competition, an inevitable consequence of profit discovery by our ‘entrepreneurial’ corporate globalists.  Wages are stagnant, largely due to increasing, and arguably opportunistic, health care costs applied by a domestic ‘growth industry.’  The financial sector has recently plundered our collective savings and investments after having convincingly encouraged us to live beyond our declining means.

It’s not hard to have some sympathy for the middle-Americans whom are now agitating for radical changes to the way our government does business.  Something is clearly wrong.  But many of us have apparently failed to identify the real problems.  There is a lot of money sloshing around in the hands of a few privileged actors with very radical political agendas.  That these actors have been channelling much of the public anger and frustration towards their own long-standing and inherently selfish objectives, the same policies which have already eroded the prosperity and quality of life of so many citizens, is the tragic irony of our current political dilemma:

As Politico recently pointed out, every major contender for the 2012 Republican presidential nomination who isn’t currently holding office and isn’t named Mitt Romney is now a paid contributor to Fox News. Now, media moguls have often promoted the careers and campaigns of politicians they believe will serve their interests. But directly cutting checks to political favorites takes it to a whole new level of blatancy.

Arguably, this shouldn’t be surprising. Modern American conservatism is, in large part, a movement shaped by billionaires and their bank accounts, and assured paychecks for the ideologically loyal are an important part of the system. Scientists willing to deny the existence of man-made climate change, economists willing to declare that tax cuts for the rich are essential to growth, strategic thinkers willing to provide rationales for wars of choice, lawyers willing to provide defenses of torture, all can count on support from a network of organizations that may seem independent on the surface but are largely financed by a handful of ultrawealthy families.

Paul Krugman – Fear and Favor NYT 4 Oct 10

This is a profound and serious challenge to ‘real America’ which we seem unwilling, or incapable, of meeting.

If you haven’t heard about the Stuxnet worm by now you probably soon will.  The analysis of this recently identified ‘weaponised’ worm is the opening chapter of a fascinating John le Carré novel for the 21st century with political, diplomatic and practical implications for all concerned.



A little background:

One of the most sophisticated pieces of malware ever detected was probably targeting “high value” infrastructure in Iran, experts have told the BBC.

Stuxnet’s complexity suggests it could only have been written by a “nation state”, some researchers have claimed.  It is believed to be the first-known worm designed to target real-world infrastructure such as power stations, water plants and industrial units.

It was first detected in June and has been intensely studied ever since.

Jonathan Fildes – Stuxnet worm ‘targeted high-value Iranian assets’ BBC 23 Sep 10

Unfortunately there is no specific forensic evidence that Iran was the target, although it seems the epicentre of infection.  And clearly this is not the work of some hacker ‘sitting in the basement of his parents house:’

Since reverse engineering chunks of Stuxnet’s massive code, senior US cyber security experts confirm what Mr. Langner, the German researcher, told the Monitor: Stuxnet is essentially a precision, military-grade cyber missile deployed early last year to seek out and destroy one real-world target of high importance – a target still unknown.

Bruce Schneier – The Stuxnet Worm Schneier on Security 22 Sep 10

Holy Thumbdrive, Caped Crusader!

As we come round the last bend toward the midterm elections of 2010, clearly an ‘economy’ election, it is worth reflecting on the trajectory of Republican economic theory and practice over the last few decades in an effort to pull the curtain back on some of their policy positions and rhetoric since Obama’s inauguration.

Let’s be clear, institutional Republicans want to remove the social support services in our country and return to what they imagine are the good ol’ days before income tax, Social Security and Medicare.  And they are deadly serious about it.  Don’t believe it?  Let’s review this archconservative economic manifesto in the concise words of its two-decades long architect, Grover Norquist:

To Norquist, who loves being called a revolutionary, hardly an agency of government is not worth abolishing, from the Internal Revenue Service and the Food and Drug Administration to the Education Department and the National Endowment for the Arts. “My goal is to cut government in half in twenty-five years,” he says, “to get it down to the size where we can drown it in the bathtub.”

Robert Dreyfuss – Grover Norquist: ‘Field Marshal’ of the Bush Plan The Nation 26 Apr 01

Strategically though, how does one dismantle programs, like Social Security, which are clearly favoured by voters of both parties?  Simple.  Reduce taxes, never unpopular, until there is a funding crisis and then use the ominous, looming deficit as an imperative for cutting services.  Oh, and the occasional unfunded war doesn’t hurt either.