Operation Fetal Position (American Thinker)

 

By Pamela Geller

The latest news out of the U.K. is that airports are introducing a new "priority lane,"
which helps air travelers avoid long security line for a fee of three or five pounds. But now airport security personnel are deliberately keeping lines long to make the priority lane (and its fee, of course) more attractive to passengers. One whistle-blower in Britain said, "Before the priority lane was introduced we had to keep queues down. Now the lane is there staff are told to create queues, which forces passengers to pay for the priority lane."

Nine years after 9/11, this is what things have come to.

While we are constantly being schooled in how insensitive we are to Muslims and how we should be bowing to the idea of a Ground Zero mega-mosque, or are being admonished for not embracing the Sharia, the state of wartime siege continues unabated. The Muslim world is under no such mandate to reach out or reciprocate. They only have to demand, and the West apologizes.

The war that no one will talk about for fear of reprisals blazes on. And when the brave actually do talk about it, they are relegated to the pile of racist-islamophobic-antimuslim-bigots. This schema defies reason.

The rise and resurrection of Islamic jihad, and its ensuing war on the west, rages on, thanks to the largest transfer of wealth in history from Western societies to petrol-rich Muslim nations and an incomprehensible, suicidal surrender of our once-exalted values system. Now the West chooses to respect barbarism and eschew the decent and the good.

We live in a constant state of low-grade war. And with each new Muslim attack, we lose a right. We lose a freedom. We have to adhere to some new restriction or loss of privacy. You cannot enter a major building in New York City without being carded. (I am not sure what illegal aliens do. Perhaps they are given a free pass -- as in so many things.)

There are daily brutal, bloody attacks by Muslim supremacists across the world, and the major concern is not to discuss or insult Islam. The only accepted dialogue is dawah, Islamic supremacist-dictated terms of dialogue (in mosques, no less).

The general silence from the mainstream media and our governing officials on last weekend's wholesale slaughter of Christians praying in a Church is indicative of how decayed, empty, and morally inverted our leaders and media have become. The slaughter of the churchgoers in Baghdad was a crime against humanity. And there are thousands of stories of Islamic slaughter, but the lambs remain silent. Have we become so inured to Islamic jihad that human life is cheap to us as well?

We have relinquished our most basic human right -- free speech. The media self-censors; our political leaders self-censor and obey the Sharia rule of not insulting Islam. We are not permitted to identify the enemy; doing so is "hate speech." According to the Department of Defense and media elites, the motive behind the Fort Hood jihad remains a "mystery." Yet Major Hasan's proposed "insanity" defense is dashed by the "premassacre preperations," his business card, his dawah before jihad, and his Powerpoint presentation.

So crippled have our military and other branches of government become by this self-imposed Sharia (do not insult Islam!) that despite the staggering loss of U.S. soldiers, the chief concern of Army chief Casey in the bloody aftermath of the Fort Hood jihad was that "speculation could potentially heighten backlash against some of our Muslim soldiers and what happened at Fort Hood was a tragedy, but I believe it would be an even greater tragedy if our diversity becomes a casualty here."

That was the concern.

Meanwhile, every aspect of the daily social fabric of our life has changed.

There was a time when air travel was fun, exciting. Instead it has become wretched, like entering into Sing Sing on the first day of a prison sentence. This, too, is part of the war. The time lost, the hassle. And think of the money. Vast wealth is being spent on this inane strategy, "Operation Fetal Position," instead of being spent on vanquishing our enemy (which we could do in a heartbeat with the will). Think of the ridiculous TSA, another huge bureaucratic agency created at the insistence of the Democrats. Bush did not want to create another bloated government agency. He wanted to keep it in the private sector, but the Democrats could not resist another parasitic, money-sucking agency, replete with all the entitlements of government mooching and looting.

And now, in Britain, our stupidity is being exploited for cash. It's just the next stage of the West's ongoing Operation Fetal Position.

Page Printed from: http://www.americanthinker.com/2010/11/operation_fetal_position.html at November 10, 2010 - 09:38:32 AM CST

Sarah Palin (economist?)

• 

• It would be hard to find two more unlikely intellectual comrades than Robert Zoellick, the World Bank technocrat, and Sarah Palin, the populist conservative politician. But in separate interventions yesterday, the pair roiled the global monetary debate in complementary and timely fashion.

The former Alaskan Governor showed sound political and economic instincts by inveighing forcefully against the Federal Reserve's latest round of quantitative easing. According to the prepared text of remarks that she released to National Review online, Mrs. Palin also exhibited a more sophisticated knowledge of monetary policy than any major Republican this side of Wisconsin Representative Paul Ryan.

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Associated Press

Former Alaska governor Sarah Palin

Stressing the risks of Fed "pump priming," Mrs. Palin zeroed in on the connection between a "weak dollar—a direct result of the Fed's decision to dump more dollars onto the market"—and rising oil and food prices. She also noted the rising world alarm about the Fed's actions, which by now includes blunt comments by Germany, Brazil, China and most of Asia, among many others.

"We don't want temporary, artificial economic growth brought at the expense of permanently higher inflation which will erode the value of our incomes and our savings," the former GOP Vice Presidential nominee said. "We want a stable dollar combined with real economic reform. It's the only way we can get our economy back on the right track."

Mrs. Palin's remarks may have the beneficial effect of bringing the dollar back to the center of the American political debate, not to mention of the GOP economic platform. Republican economic reformers of the 1970s and 1980s—especially Ronald Reagan and Jack Kemp—understood the importance of stable money to U.S. prosperity.

On the other hand, the Bush Administration was clueless. Its succession of Treasury Secretaries promoted dollar devaluation little different from that of the current Administration, while the White House ignored or applauded an over-easy Fed policy that created the credit boom and housing bubble that led to financial panic.

Misguided monetary policy can ruin an Administration as thoroughly as higher taxes and destructive regulation, and the new GOP majority in the House and especially the next GOP President need to be alert to the dangers. Mrs. Palin is way ahead of her potential Presidential competitors on this policy point, and she shows a talent for putting a technical subject in language that average Americans can understand.

Which brings us to Mr. Zoellick, who exceeded even Mrs. Palin's daring yesterday by mentioning the word "gold" in the orthodox Keynesian company of the Financial Times. This is like mentioning the name "Palin" in the Princeton faculty lounge.

Mr. Zoellick, who worked at the Treasury under James Baker in the 1980s, laid out an agenda for a new global monetary regime to reduce currency turmoil and spur growth: "This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves toward internalization and then an open capital account," he wrote, in an echo of what we've been saying for some time.

And here's Mr. Zoellick's sound-money kicker: "The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today." Mr. Zoellick's last observation will not be news to investors, who have traded gold up to $1,400 an ounce, its highest level in real terms since the 1970s, as a hedge against the risk of future inflation.

However, his point will shock many of the world's financial policy makers, who still think of gold as a barbarous relic rather than as an important price signal. Lest they faint in the halls of the International Monetary Fund, we don't think Mr. Zoellick is calling for a return to a full-fledged gold standard. His nonetheless useful point is that a system of global monetary cooperation needs a North Star to judge when it is running off course. The Bretton Woods accord used gold as such a reference until the U.S. failed to heed its discipline in the late 1960s and in 1971 revoked the pledge to sell other central banks gold at $35 an ounce.

One big problem in the world economy today is the frequent and sharp movement in exchange rates, especially between the euro and dollar. This distorts trade and investment flows and leads to a misallocation of capital and trade tensions. A second and related problem is the desire of the Obama Administration and Federal Reserve Chairman Ben Bernanke to devalue the dollar to boost exports as a way to compensate for the failed spending stimulus.

As recently as this week in India, Mr. Obama said that "We can't continue situations where some countries maintain massive [trade] surpluses, other countries have massive deficits and never is there an adjustment with respect to currency that would lead to a more balanced growth pattern."

If this isn't a plea for a weaker dollar in the name of balancing trade flows, what is it? The world knows the Fed can always win such a currency race to the bottom in the short run because it can print an unlimited supply of dollars. But the risks of currency war and economic instability are enormous.

***

In their different ways, Mrs. Palin and Mr. Zoellick are offering a better policy path: More careful monetary policy in the U.S., and more U.S. leadership abroad with a goal of greater monetary cooperation and less volatile exchange rates. If Mr. Obama is looking for advice on this beyond Mr. Zoellick, he might consult Paul Volcker or Nobel laureate Robert Mundell. A chance for monetary reform is a terrible thing to waste.

Bernanke's Cowardice Has Sealed Our Fate (American Thinker)

November 09, 2010

 

By Monty Pelerin

The day after the election, the Federal Reserve launched QE2, the second round of Quantitative Easing. This public relations euphemism attempts to hide the fact that the Fed is "printing money" (the Fed actually does it electronically these days). "Cheating, debasing and inflating," as in stealing from the public, is a more accurate description.

Bernanke indicated from 600 to 850 billion additional dollars would be created. To put this in perspective, the Tarp package was in this range. The total Federal Reserve balance sheet was $829 billion at the end of 2004 and only $869 billion in August 2007. At the end of 2009 it had ballooned to over $2,200 billion. This announcement means it is headed to $3,000 billion (3 trillion).

Ben Bernanke weakly defended his action with the following justifications:

• ... further support to the economy is needed
• Easier financial conditions will promote economic growth.
• higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.

The first two statements are true as stated, but unlikely to be affected by additional QE. The third is partially true, although it is unclear that his action will raise stock prices. Furthermore, empirical data is not supportive of the alleged relationship between stock prices and spending (see the Kass reference below).

Many economists and analysts believe that the Fed actions will not help. Several believe they will actually make conditions worse (two examples are Doug Kass and Pimco's El Erian).

The Real Reason for QE2

Mr. Bernanke's justification for committing nearly another trillion dollars does not meet the "smell" test. In prior life, Professor Bernanke would flunk an Econ 101 student for such weak justification (of course we know no one really gets an F at Princeton, no matter how deserved). 

Mr. Bernanke's performance was a charade meant to hide the fact that the government is now illiquid! Mr. Bernanke instituted QE2 because the Federal Government has reached the point where it cannot pay its bills.

If the Fed does not buy government bonds (print money), checks will stop for programs like Social Security, Medicare and Medicaid reimbursements, military pay, etc.

The Madoff Model of government just ended. There are no longer enough bond buyers or taxpayers to pay for the profligate spending of the US government.

For more than a decade, responsible economists and analysts warned how this situation had to end. That point has apparently just been reached as a result of some of these reasons:

• We are increasingly viewed overseas as a profligate, fiscally irresponsible country with no willingness to change.
• Our debt levels have become dangerously high, raising the probability of sovereign default.
• Our annual deficit is 3 to 4 times larger than ever before and looks like there is no political will to address it. Interest rates are too low to compensate for the perceived risk.
• Foreign countries that supported us are now either unwilling or unable to purchase our debt.

Solving Insolvency

The root cause of the liquidity problem is insolvency. Insolvency is a condition where eventually obligations cannot be met. Illiquidity then results. QE2 provides liquidity, but does nothing to solve the insolvency issue.

Unless the insolvency problem is solved, illiquidity will continue. From a mathematical standpoint, it is possible to solve the insolvency problem. From a practical or political standpoint, it is likely impossible. 

Our funded Federal Debt is almost 100% of GDP. Our unfunded social obligations are about another $100 trillion. The total net worth of the country is about $55 trillion. Government has promised benefits that are twice what everything in the country is worth. To understand the math, see Spiraling to Bankruptcy. 

Laurence Kotlikoff  referred to a recent International Monetary Fund assessment of the US financial condition:

... the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: "The U.S. fiscal gap associated with today's federal fiscal policy is huge for plausible discount rates." It adds that "closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP."

The government would have to double every tax it collects (including payroll taxes) to run 5% surpluses for decades in order to bring government obligations into manageable range.  Such tax increases would plunge the US and probably the world into an economic Dark Ages.

Alternatively, current government spending could be cut by about 50%. Managing spending forward so that a 5% surplus was maintained would also work.

Bernanke's Morton's Fork

Mr. Bernanke was faced with two choices, neither of which were good.  He could have refused to initiate another round of QE, which would have forced the government to make tough decisions. Such action might have put the economy into another Great Depression. He likely would have lost his job and been blamed for any economic difficulties that followed.

He chose the other option -- provide the needed funds. As such, he chose to be the Enabler-in-Chief, reinforcing the out-of-control government fiscal policies. This choice likely enabled him to keep his job (for the time being) and made him appear to be the White Knight responsive to economic needs.

Unfortunately for the country, his choice makes matters worse, much worse.

The Road Ahead

With QE2, the government will be able to pay its bills. If the shortfall were temporary, Bernanke's actions might be considered prudent. Of course if the shortfall were temporary, the government would be able to borrow in the marketplace.

Without a solution to spending excesses and social commitments that cannot be met, there is no end to our shortfalls. Welcome to QE2, soon to be followed by QE3, QE4 ... and hyperinflation.

QE2 is just another step toward "banana republic" status. We are on the same road travelled by Argentina, Brazil, Zimbabwe, Weimar Germany and many others who destroyed their currencies.

These countries did not intend that result. Each step was justified based on the expediency of keeping the government going. As Hayek pointed out:

I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments.

In every case, including our own, the government had already failed. Its attempt to survive made matters much worse for its citizens.

QE2 may only represent the first step, but its effects alone are apt to be profound. Pimco's Bill Gross anticipates it will produce a 20% decline in the value of the dollar. If you were China or Japan, would you want to buy Treasury Bonds? Would you continue to hold dollar-denominated assets? These types of considerations trigger currency runs.

Mr. Bernanke has deferred the day of reckoning. His action will not prevent government collapse, it will ensure it, along with collapses in the currency, economy and likely society itself. This little man, unelected and accountable to no one, has just sentenced the country to an Economic Apocalypse.

Milton Friedman's concern seems especially appropriate:

The power to determine the quantity of money... is too important, too pervasive, to be exercised by a few people, however public-spirited, if there is any feasible alternative. There is no need for such arbitrary power... Any system which gives so much power and so much discretion to a few men, [so] that mistakes - excusable or not - can have such far reaching effects, is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic - this is the key political argument against an independent central bank.

How Will This End?

There is no pleasant ending. Political activity over the past fifty years guaranteed that. As Ludwig von Mises observed:

Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump.         

The best solution is for Mr. Bernanke to cease and desist from his QE policy. That would require the political class to face up to its problems. It would require a massive roll-back of the welfare state and government. It would require resizing government to a level that productive citizens would support. Transitional hardships would occur, including civil unrest and possibly a Depression.

The worst solution is the one that Mr. Bernanke has selected. If he stays on this course, fiat money will become worthless. So will Social Security checks, because they will have no purchasing power. All fixed income and savings will be wiped out. The middle class will be financially destroyed.

Markets will cease to function except on a barter system. Food and other necessities will be in short supply, possibly to the extent of health risks developing. Unimaginable civil unrest is likely.

A Greater Depression is assured. Unlike the first Great Depression, citizens would be without any financial wherewithal. Their savings and fixed income will have been stolen from them via hyperinflation. In short, it would be the worst Economic Hell imaginable.

Mr. Bernanke was unwilling to tell you what is happening. His action has moved us into the eye of a massive storm. Do not be lulled into complacency for as von Mises stated:

A fiat-money inflation can be carried on only as long as the masses do not become aware of the fact that the government is committed to such a policy.

Now you know and others will pick up on this quickly. Make like the political elite and protect yourselves from the Level Six economic hurricane that Mr. Bernanke is stoking.
The history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception. Friedrich Hayek

Monty Pelerin blogs at www.economicnoise

Page Printed from: http://www.americanthinker.com/2010/11/bernankes_cowardice_has_sealed.html at November 09, 2010 - 07:00:36 AM CST

Bernanke's Folly: The End Game (Karl Denninger)

Bernanke's Folly: The End Game

The Market Ticker ® - Commentary on The Capital Markets

Posted 2010-11-04 12:49
by Karl Denninger
in Editorial

Consider the following number:

9,069,879,047,803.52

That's the "marketable" debt - $9 trillion.

Here's The Fed's numbers in debt held, as of now, in billions:

834 - Treasuries
1,059 - Mortgages (at what embedded loss?)
150 - Agency (Fannie and Freddie) debt

There are some other things in here too, but that's the basics as of October 27th.

The Fed proposes to buy $600 billion of additional Treasuries, and at the same time roll off agency debt and mortgages, rolling that into Treasuries.  Call the entire thing $800 billion.

So their balance sheet will look like this:

1,600 - Treasuries
959 - Mortgages
50 - Agency debt

Over time they expect the balance sheet to shift, so that the Treasuries are all that's there.  This means they want it to look like:

2,700 - Treasuries

Yeah.

Now remember, as of right now, China holds $860 billion of Treasuries and Japan holds $836 billion.  The UK is down at $400 billion and then Oil Exporters, at $226. 

So once QE is done The Fed will own more than China and Japan combined, about 18% of the total.

Why is this a problem?

Simple: The purpose of issuing bonds into the market is to provide a putative check and balance on Treasury overspending.  That is, at some point the continued issuance causes the bond market to revolt and refuse to buy, driving rates much higher.  That in turn causes the interest expense to go to the moon. 

This threat is the primary check and balance on an out-of-control Federal Government.

The "Chartalists" (and their useful idiots everywhere) claim that the Federal Government simply spends money into existence, and thus they can do this all they want.  Well, technically true - you can print all the money you want.  However, you cannot control it's value except through relative scarcity!

The Bond Market, rather than being a monetary tool as these people claim, is in fact a fiscal discipline enforcement device.

This is what The Fed with its QE and now QE2 has destroyed.

When Ben Bernanke said "we will not monetize the debt" what he was saying is that he would not permit that fiscal discipline device to be removed from the scales of financial balance.  He lied - he not only removed it with QE1, he has now ratified that this discipline function will remain removed via QE2.

The problem with removal of this device of restraint is that fiscal discipline is in fact the only way one avoids imposing taxes on the public.  Taxes come either in the form of a literal tax that must be paid or they are financed by causing an increase in the price of things denominated in a currency as a result of debasement.

Taxes inhibit business profits by diverting income from the business and to government.  Therefore, in the general sense, the lower the tax rate the more business prospers.  Of course taxes cannot be zero, because the government must have funding to perform its essential functions - we merely argue over what those essential functions are and how to pay for them.

QE is effectively naked emission of currency into the economy by government spending.  It thus always results in shifting the price equilibrium on commodities in that currency to the right - that is, higher.  At the same time since input costs are effectively a tax on production pressure downward is increased on wages.  This in turn means that while cost pressures go upward, wages go downward.

Thus QE cannot spur employment.  It in fact does the opposite by imposing an effective tax on business operations and consumers, which tends to drive down after-tax compensation of employees. 

Ben Bernanke claims that QE is intended to "spur investment" by increasing the "wealth effect."  But any such effect is in fact transitory, as one cannot support higher stock valuations while margins are being pressured.  You need margin expansion to be able to support higher valuations over time, and that means you need either lower input costs, higher employee after-tax earnings or both.

Bernanke's policies are in fact pushing both of these factors the wrong direction.

But worse, consider the certain "death spiral" scenario on the path we are now traveling:

1. QE is an implicit tax on the population.  Input costs go up.  This is an effective tax increase on everyone in the country.  A dollar increase in the price of gasoline is an effective $140 billion dollars a year in additional tax, as just part of the impact. Basic staples are already up about 10% annualized, despite Bernanke's claim of "no inflation." Note that the "tax on the rich" everyone is talking about is a mere $70 billion a year by comparison. 
2. This in turn means lower disposable income for consumers.  That in turn hits discretionary spending.  And that, in turn, means companies don't need to hire people to provide discretionary goods and services.  This is what Bernanke did with QE1.  He in fact destroyed job creation, which is a big part of why we still have 10% unemployment!  Bernanke CAUSED that unemployment by creating a price ramp in the commodity space!
3. This, in turn, means more demand for social programs.  More unemployment.  More Medicaid.  More food stamps.  More government spending of all sorts.  But there is no tax revenue increase coming in to pay for these increased demands (it's all going to the commodity producers) so the government once again turns to the bond market and issues debt to fund this increased spending demand.
   
4. Left alone, the bond market will react to this "never-ending" deficit spending cycle by increasing rates in an attempt to cut it off.  This in turn provokes The Fed into even more QE to "spur employment and increase asset prices."

See the problem?  The more QE you do, the more jobs you destroy because you continue to trash margins through the imposition of an effective tax on the entire economic system.

Eventually The Fed ends up being, for all intents and purposes, the entire government bond market. 

At that point the issuance of credit money is no longer backed by anything at all - it is simply emitted raw, and for every dollar emitted in this fashion you have both a 100% transmission into prices and a premium applied on your threat to do more of it.

That's Weimar Germany folks - it is exactly what happened there, and exactly what will happen here unless Bernanke stops this crap.  Since he won't stop on his own volition it is up to Congress and the people to stop him.

Metals will not save you if this spiral occurs.  Nothing will save you, other than not being in the nation that this happens to.  Government will, in its last gasps of trying to prevent itself from being unable to pay the military, Congress, and of course Ben, find ways to literally confiscate everything in a futile attempt to increase the asset base upon which it issues its increasingly-worthless currency.

There is no exit that can come from a "growing" economy when you are continually increasing the implicit tax rates in the general economic system as your response to each previous tax increase.  That is, when your tax increase results in more unemployment and you respond by further increasing taxes, you are simply tightening the noose around your own neck.

The implied tax that has been imposed on the economy thus far since QE1 was put in place is a stunning $250 billion annually due to oil's price increase alone, or nearly four times the so-called "Bush Tax Cuts" for the rich. QE2 will add another $1/gallon (roughly) to gasoline which is another $140 billion, for a total of almost $400 billion each and every year.

And that's just in oil prices - then you have to add in all the other input cost-push problems, from corn to wheat to oats to cotton to wood pulp.  The total effective tax increase from QE2 is in fact the entire $600 billion QE package, plus whatever the market anticipates Ben will do as a follow-on!

What is being done here, if it is not stopped by Congress and/or the people, will destroy the economy.  There is no ability to withdraw the QE-anything without causing all of the previously-hidden costs to immediately assert themselves in the economy.  This is not speculative - it is factual.  We cannot get wage inflation due to the lack of pricing power by labor in a market with 17% of the people either out of work or underemployed and another 7 million who are not counted as they are not part of the labor participation rate, which has declined by 5% in the last two years.  The true unemployment rate is thus closer to 25%. 

Without the ability to pressure wages higher there is no means available to set in motion Bernanke's "virtuous cycle" he is looking for as there is no pricing power for labor today.

We won't get a "high inflation" spiral.  We will instead get a downward-spiraling economic disaster where employment and productive investment is successively destroyed by these artificially-imposed tax increases that amount to hundreds of billions of dollars over the next six months - north of a trillion in just one year, or some seventeen times the amount Congress is "debating" with the "tax cuts for the rich."

This is the true tax issue that will destroy our economic future - and nobody's talking about it.

The Curse of the Welfare State (American Thinker)

October 26, 2010

 

By Vasko Kohlmayer

It is Europe's autumn of discontent. All across the continent, people are taking to the streets to protest the austerity measures of their governments. The governments have to cut for a simple reason: They are broke. They no longer have the money to sponsor the kind of padded lifestyles to which their citizens have grown accustomed. This in turn makes the citizens angry -- so much so that they are willing to turn their countries upside-down in order to obtain benefits their governments simply cannot provide.

In France, where the deeply unpopular President Sarkozy is trying to raise the retirement age of 60, things have turned decidedly unpretty. Across the country, cars are getting burned, shop windows are getting smashed, garbage is left uncollected, roads are being blocked, and people are getting beaten up. Nearly one fourth of France's twelve thousand-plus gasoline stations are suffering shortages. Even secondary schools are being blocked and disrupted.

Across the border in Belgium, a rail workers' strike halted rail transport across the country. Only in the northern region of Flanders -- which is the less socialistic part of Belgium -- were some trains running intermittently last week. According to Agence France-Presse, "the strike triggered massive traffic jams on Belgian roads and also disrupted the services of the Eurostar train line which links London, Paris and Brussels."

Late last month, a strike in Spain shut down much of the country's industry and paralyzed transportation services. As many as 70 percent of Spain's workforce walked off their jobs. "The strike has been an undoubted success," gloated a union leader.

Greece now seems to be in a perpetual state of unrest and protest. Two weeks ago, protesters -- mostly government workers -- besieged and then occupied parts of the ancient Acropolis. Meanwhile, on the other side of town, rail workers and students marched on the Greek parliament. Even though it is bankrupt and dysfunctional, the Greek government still managed to rally the riot police to beat up on the state's hapless wards.

The Frenchmen's sense entitlement to Big Brother's dough is truly staggering. It apparently makes itself felt early in life, as evidenced by Laura Tanniou, a 22-year-old student, who probably spoke for many in her generation when she said, "We may be only students now, but we still want to make the most of our retirement." What she actually meant by the word "retirement" was state-provided retirement.

In the past, students used to dream about how they would become rich and make it big through their talents and efforts. But now, under the welfare state, they are fantasizing about how they will retire on generous government pensions. In light of the young lady's statement, the expression "forward-looking young people" gains an entirely new meaning.

While the youth of France is dreaming about easy retirement, some of their mature compatriots think that work may pose a danger to health. Véro Du Cheyron, 51-year-old social worker, said this to a reporter: "They say that people are living longer so they have to work longer, but they don't say anything about the health problems that come by doing that."

This is a strange claim, especially when coming from France, where people are not known to  overextend themselves during their working years. By law, they enjoy a 35-hour working week, which they tackle, for the most part, at a less-than-breakneck pace. Their blasé attitude toward work is not surprising, given that more than half of Frenchmen work either directly for government or in government-related jobs. Yet there are people in France who think that adding two more years of this to a person's work-life could endanger their health.

What we see happening in France and across Europe are the devastating effects of the welfare state. We see a citizenry whose work ethic, morals, power of reason, and grasp on reality have been grievously damaged. They balk at hard work, yet they want to enjoy lives of plenty and ease. Their governments are bankrupt, but they still keep demanding benefits that are impossible to deliver. And while they refuse to engage in hard labor themselves, they see nothing wrong with living at someone else's expense.

The welfare state -- once the pride and glory of European democracies -- has become a curse. This sad situation should have not come as a surprise. The outcome was predictable, given what we know about human nature and the workings of government. More than two hundred years ago, John Adams warned of welfarism's pernicious effects:

Like a cancer; it eats faster and faster every hour. The revenue creates pensioners, and the pensioners urge for more revenue. The people grow less steady, spirited and virtuous, the seekers more numerous and more corrupt, and every day increases the circles of their dependents and expectants, until virtue, integrity, public spirit, simplicity and frugality become the objects of ridicule and scorn, and vanity, luxury, foppery, selfishness, meanness, and downright venality swallow up the whole of society.

Adams' words describe the disposition of the contemporary western welfare state almost to a T. One could only perhaps add "widespread amentia" to Adam's list of afflictions.

If they were clear-thinking, the Europeans would protest against the criminal waste and recklessness of their governments and demand that they shape up. They would call for the resignation and prosecution of those politicians responsible for their bankruptcy. They would insist that the fiscal house be put in order. But they never do that. On the contrary, they march and demand even more spending. Instead of demonstrating against those who brought on their fiscal ruin, they protest those who try to do something about it.

In one respect, America is still very different from Europe. It is the only Western country where people march against the bankrupting policies of their government. We have seen this in numerous Tea Party rallies across the land. It is encouraging to see this reaction, especially since such thinking is completely alien to most people in the rest of the developed world.

But even in America, welfarism has exerted its devastating effects. Even though many in this country are angry about our fiscal plight, they are unwilling to support the kind of measures necessary to bring about remedy. Anyone who looks at the budget and long-term spending trends will quickly realize that it is entitlements that account for the bulk of the federal fiscal burden. The much-talked-about national debt -- large though it is -- represents only a small portion of the government's overall obligations. To avoid the fiscal train wreck that lies ahead, drastic cuts will have to be made in entitlement programs. But this is precisely what the vast majority of the American people -- including those who are upset about our national bankruptcy -- refuse to accept.

We saw a striking demonstration of this last week when Carly Fiorina, a California Senate candidate, appeared on "Fox News Sunday." One of the themes of Fiorina's campaign has been reinstating financial sanity in Washington, D.C. -- so much so that she recently even issued a budget plan intended to bolster her fiscal hawk credentials. But when asked by the host to name a single entitlement benefit she would cut or reduce, she refused to answer. When pressed on the point, she accused her interlocutor of "asking a typical political question."

Some would say that Fiorina's evasiveness is indicative of a lack of political will to make the hard choices. But this is not the case. Fiorina's attitude is, in fact, reflective of a lack of popular will. Had she said that she would cut entitlements, her chances of getting elected would have effectively dropped to zero.

Nor is Fiorina's quandary peculiar to left-leaning California. As far as this writer is aware, no Tea Party candidate for federal office has publicly advocated deep cuts in entitlement programs. In fact, according to research by James Ostrowski, not one Tea Party-favored senatorial candidate is calling for significant reductions in even the over-bloated federal agencies. To say, as Fiorina did, that she plans to cut waste will simply not do. For one thing, the savings from what is officially termed waste would be too small to make any real difference. But the larger point is that most federal spending is a waste in the first place, not to mention the fact that it is also unconstitutional.

What the concerned Americans need to realize is that we cannot have it both ways: We cannot gripe about the size of the federal cake while munching on it all the while. Until we resolve this contradiction in our hearts and minds, we cannot be fiscally cured.

Page Printed from: http://www.americanthinker.com/2010/10/the_curse_of_the_welfare_state.html at October 26, 2010 - 11:21:40 AM CDT

Maybe There Was Something to TWO Majorities for Mike Harris, and now Rob Ford!

October 26, 2010

Good News for GOP and Great News for Conservatives

By Bruce Walker

The latest Battleground Poll, the last before the midterm election, has just been released. It has good news for Republicans. By a margin of 48% to 42%, respondents favor Republican congressional candidates over Democrat congressional candidates. Even better, voters now view the two major parties differently: 50% of respondents view the Republican Party favorably, compared to 41% who view it unfavorably; 50% of respondents now view the Democrat Party unfavorably, compared to 42% who view it favorably. Better still, against a generic Republican candidate, President Obama now loses in 2012 by 48% to 42%.

I have been writing about the Battleground Poll for a long time. There are important reasons to take this poll very seriously. The poll is the joint product of a Democrat polling organization, Lake Research, and a Republican polling organization, The Tarrance Group. George Washington University conducts the poll, and anyone who sees a conservative bias in academia should have his head examined. The internal questions of the Battleground Poll are fully reported. This includes, critically, demographic questions so that we know the partisan breakdown of the respondents, and also their marital status, income, age, and religious affiliation. The Battleground Poll is also the most accurate poll in America in predicting election results. 

Among the demographic data is a very important nugget of information: the ideological persuasion of respondents in Question D3. The answer to Question D3 is the single most constant response in these polls. In every single one of the last nineteen Battleground Polls over the last decade, about 60% of Americans describe themselves as "conservative," while about 35% of Americans describe themselves as liberal. The October 25, 2010 Battleground Poll is no different: 62% of Americans described themselves as "conservative," and only 35% described themselves as "liberal." Only 2% of Americans call themselves "moderate," and another 2% of Americans were unsure or refused to answer. This anemic response of ideological neutrality is completely consistent in all nineteen Battleground Polls.

Gloomy conservatives who comment on my articles propose reason to doubt this fabulous news. People, some conservatives seem to believe, really do not know what "conservative" means. This makes no sense: respondents are explicitly given the options in Question D3 of choosing "don't know / unsure" or "moderate," but almost no one ever chooses these safe options. Other pessimistic conservatives believe that Battleground Poll respondents are intimidated into choosing "conservative" because of Fox News or Rush Limbaugh. How silly! Nearly all the institutions of power in American life, from public schools to NPR, have been overrun by radical leftists, who portray conservatives as racists, homophobes, Nazis, or morons. Americans describe themselves as "conservative" despite the tremendous pressure to call oneself at least a "moderate."

The biggest reason for trusting that the overwhelming majority of Americans are conservative is the uncanny consistency of the answer to Question D3. Perhaps in one poll, the population sampled might have been confused, but in nineteen straight Battleground Polls over a decade? Statistical validation comes in consistency over time and over different random populations of the data provided. How much has the ideological data varied in last nineteen polls? The number of respondents who call themselves "conservative" has been as low as 58% and as high as 63%. The mean response -- adding all the "conservative" responses together and dividing that sum by nineteen -- provides an average percentage of Americans who call themselves conservative as 61.2%. The mid-range, another statistical averaging tool derived by adding the highest and lowest values and dividing by two, produces an average "conservative" response of 60.5%. Any method of statistical averaging produces the same conclusion: this datum, the sixty percent of Americans who call themselves "conservative," is a very solid number. What percentage of respondents called themselves "conservative" in the October 25, 2010 Battleground Poll? A whopping 62%.

What does this conservative majority mean?  It means that Democrats reject the label of "liberal" and embrace "moderate." It means the left, who invariably tag all conservatives as "far-right-wing," "ultra-conservative," or some insulting term, indeed recognize the existence of ordinary conservatives who favor smaller government, lower taxes, states' rights, restoration of traditional moral values in schools and media, and the de-politicization of everyday life. There is a vast gulf between Stalinists who occupy the choke points of education, information, government, and entertainment in America and us, the huge conservative majority. This disconnect is so vast that there are two Americas: the ocean of conservatives and the small, delusional islands of leftists whose ignorance of America is so profound that they might as well be colonial governors from some European kingdom. It means that "Flyover Country" includes much more than those states called "Jesusland." Flyover Country is all of America, except for imperial enclaves in Washington, Manhattan, Hollywood, and those leftist monasteries called universities. Even Gallup concurs: conservatives outnumber liberals in every state of the union. 

There is an inspirational story we should heed. A sailing ship, becalmed in the water and far from land, desperately hailed a passing vessel to send fresh water: the crew was dying of thirst. The other ship responded, "Drop down your buckets. You are in the mouth of the Amazon." Fear, isolation, hopelessness -- these are the only weapons of the left. Once we wake up and know that we are America, the battle is won. The 60% conservative majority is no illusion, no aberration, and no misunderstanding. Our imperial colonial rulers and their paid agents are as popular in America as British soldiers were in Ireland in 1900 or as Soviet troops were in 1980 in Poland. Dip down your buckets. We are in the mouth of the Amazon.

Bruce Walker is the author of a new book: Poor Lenin's Almanac: Perverse Leftists Proverbs for Modern Life.
Cartoon by T. Hynes

Page Printed from: http://www.americanthinker.com/2010/10/good_news_for_gop_and_great_ne.html at October 26, 2010 - 08:03:05 AM CDT

U.S. Housing Subprime Mortgage Market Securitization Debacle, They Knew What They Were Selling

U.S. Housing Subprime Mortgage Market Securitization Debacle, They Knew What They Were Selling
The Market Oracle ^ | Oct 24, 2010 | John_Mauldin

Posted on Monday, October 25, 2010 3:54:08 PM by An Old Man

At the end of last week's letter on the whole mortgage foreclosure mess, I wrote: "All those subprime and Alt-A mortgages written in the middle of the last decade? They were packaged and sold in securities. They have had huge losses. But those securities had representations and warranties about what was in them. And guess what, the investment banks may have stretched credibility about those warranties. There is the real probability that the investment banks that sold them are going to have to buy them back. We are talking the potential for multiple hundreds of billions of dollars in losses that will have to be eaten by the large investment banks. We will get into details, but it could create the potential for some banks to have real problems."

Real problems indeed. Seems the Fed, PIMCO, and others are suing Countrywide over this very topic. We will go into detail later in this week's letter, covering the massive fraud involved in the sale of mortgage-backed securities. Frankly, this is scandalous. It is almost too much to contemplate, but I will make an effort.

But first, let me acknowledge the huge deluge of emails I got over last week's letter, the most I can ever remember. I thought about just making this week's letter a response to many of them, but decided I needed to go ahead and finish the topic at hand. Maybe another time. As a side note, I quoted a letter that came to me anonymously via David Kotok. I said if I found out who wrote it, I would give them credit. It was originally written by Gonzalo Liro, at www.gonzalolira.blogspot.com.

Many of you wrote to point out that his argument about the tracking of title was not correct, but others pointed out many other issues as well. This is one of the most complex problems we face, and I got a lot of good information from readers. It just makes me wish I had our new web site finished so you could avail yourselves of the wisdom among my readers. We are close, down to final changes. And now, on to today's letter.

They Knew What They Were Selling

It’s hard to know where to start. There is just so much here. So let’s begin with testimony from Mr. Richard Bowen, former senior vice-president and business chief underwriter with CitiMortgage Inc. This was given to the Financial Crisis Inquiry Commission Hearing on Subprime Lending and Securitization and Government Sponsored Enterprises. I am going to excerpt from his testimony, but you can read the whole thing (if you have a strong stomach) at http://fcic.gov/hearings/pdfs/2010-0407-Bowen.pdf. (Emphasis obviously mine.)

"The delegated flow channel purchased approximately $50 billion of prime mortgages annually. These mortgages were not underwritten by us before they were purchased. My Quality Assurance area was responsible for underwriting a small sample of the files post-purchase to ensure credit quality was maintained.

"These mortgages were sold to Fannie Mae, Freddie Mac [We will come back to this - JM] and other investors. Although we did not underwrite these mortgages, Citi did rep and warrant to the investors that the mortgages were underwritten to Citi credit guidelines.

"In mid-2006 I discovered that over 60% of these mortgages purchased and sold were defective. Because Citi had given reps and warrants to the investors that the mortgages were not defective, the investors could force Citi to repurchase many billions of dollars of these defective assets. This situation represented a large potential risk to the shareholders of Citigroup.

"I started issuing warnings in June of 2006 and attempted to get management to address these critical risk issues. These warnings continued through 2007 and went to all levels of the Consumer Lending Group.

"We continued to purchase and sell to investors even larger volumes of mortgages through 2007. And defective mortgages increased during 2007 to over 80% of production."

Mr. Bowen was no young kid. He had 35 years of experience. He was the guy they hired to pay attention to the risks, and they ignored him. How could a senior manager not get such an email and not notify his boss, if only to protect his own ass? They had to have known what they were selling all the way up and down the ladder. But the music was playing and Chuck Prince said to dance and rake in the profits (and bonuses!). More from his testimony:

"Beginning in 2006 I issued many warnings to management concerning these practices, and specifically objected to the purchase of many identified pools. I believed that these practices exposed Citi to substantial risk of loss.

Warning to Mr. Robert Rubin and Management "On November 3, 2007, I sent an email to Mr. Robert Rubin and three other members of Corporate Management… In this email I outlined the business practices that I had witnessed and attempted to address. I specifically warned about the extreme risks that existed within the Consumer Lending Group. And I warned that there were ‘resulting significant but possibly unrecognized financial losses existing within Citigroup.’"

And now taxpayers own 75% of Citi, and our losses to them are huge. They are going to get worse, as we will see.

Now let’s turn to the testimony of Keith Johnson, who worked for various mortgage companies and in 2006 became the president and chief operating officer of Clayton Holdings, the largest residential loan due diligence and securitization surveillance company in the United States and Europe. This is testimony he gave before the Financial Crisis Inquiry Commission. Part of the testimony is by his associate Vicki Beal, senior vice-president of Clayton. The transcript is some 277 pages long, so let me summarize.

Investment banks would come to Clayton and give then roughly 10% of the mortgages that they intended to buy and put into a security. Clayton rated them on whether the documentation was what it was supposed to be, not as to whether they thought it was a good loan. Still, 46% of the loans did not have proper documentation (out of a pool of 9 million loans) and 28% had what was determined to be level 3 disqualifications that simply had no mitigating circumstances. Understand, these were loans that were already written, and there was no effort to check the facts, just the documentation.

And ultimately 11% of these loans (39% of the level 3′s) were put back in by the investment bank. And what happened to the loans that were rejected? (This might require an adult beverage and a few expletives deleted.)

Popping Through They were put back into another pool, where again only 10% of the loans were examined. Quoting from the testimony:

"MR. JOHNSON: I think it goes to the ‘three strikes, you’re out’ rule.

"CHAIRMAN ANGELIDES: So this was a case of – okay, three strikes.

"MR. JOHNSON: I’ve heard that even used. Try it once, try it twice, try it three times, and if you can’t get it out, then put -

"CHAIRMAN ANGELIDES: Well, the odds are pretty good if you are sampling 5 to 10 percent that you’ll pop through. When you said the good, the bad, the ugly, the ugly will pop through."

Yes, you read that right. If a loan was rejected a second time, it went back into yet another pool for a third try. The odds of coming up three times, when only 5 or 10 percent are sampled? About 1 in a thousand. Popping through, indeed.

Clayton presented their data to the ratings agencies, investment banks, and others in the industry. They were frustrated that no one was really paying attention or taking heed of their warnings.

Here is what Shahien Nasiripour, the business reporter for the Huffington Post, wrote (his emphasis). For those interested, the entire article is worth reading. ( http://www.huffingtonpost.com/2010/09/25/wall-street-subprime-crisis_n_739294.html):

"Johnson told the crisis panel that he thought the firm’s findings should have been disclosed to investors during this period. He added that he saw one European deal mention it, but nothing else.

"The firm’s findings could have been ‘material,’ Johnson said, using a legal adjective that could determine cause or affect a judgment.

"It’s unclear whether the firms ended up buying all of those loans, or whether Wall Street securitized them all and sold them off to investors.

"’Clayton generally does not know which or how many loans the client ultimately purchases,’ Beal said. That likely will be the subject of litigation and investigations going forward.

"’This should have a phenomenal effect legally, both in terms of the ability of investors to force put-backs and to sue for fraud,’ said Joshua Rosner, managing director at independent research consultancy Graham Fisher & Co.

"’Original buyers of these securities could sue for fraud; distressed investors, who buy assets on the cheap, could force issuers to take back the mortgages and swallow the losses.

"’I don’t think people are really thinking about this,’ Rosner said. ‘This is not just errors and omissions – this appears to be fraud, especially if there is evidence to demonstrate that they went back and used the due diligence reports to justify paying lower prices for the loans, and did not inform the investors of that."

"Beal testified that Clayton’s clients use the firm’s reports to ‘negotiate better prices on pools of loans they are considering for purchase,’ among other uses.

"Nearly $1.7 trillion in securities backed by mortgages not guaranteed by the government were sold to investors during those 18 months, according to Inside Mortgage Finance. Wall Street banks sold much of that. At its peak, the amount of outstanding so-called non-agency mortgage securities reached $2.3 trillion in June 2007, according to data compiled by Bloomberg. Less than $1.4 trillion remain as investors refused to buy new issuance and the mortgages underpinning existing securities were either paid off or written off as losses, Bloomberg data show.

"The potential for liability on the part of the issuer ‘probably does give an investor more grounds for a lawsuit than they would ordinarily have’, Cecala said. ‘Generally, to go after an issuer you really have to prove that they knowingly did something wrong. This certainly seems to lend credibility to that argument.’

"’This appears to be a massive fraud perpetrated on the investing public on a scale never before seen,’ Rosner added."

It’s Time for Some Putback Payback Investment banks large and small originated a lot of subprime garbage in the 2005-2007 era. This week PIMCO, Black Rock, Freddie Mac, the New York Fed, and – what I think is key and no one has picked up on – Neuberger Berman Europe, Ltd., an investment manager to a managed-account client, came together and sued Countrywide for not putting back bad mortgages to its parent, Bank of America. This is the first of what will be a series of suits aimed at getting control of the portfolio and peeking into the mortgages. (Text of lawsuit at )

Basically, if buyers of 25% or more of a mortgage-backed security can come together, they have standing to sue the mortgage servicer to do its duty to the investors and make putbacks of bad mortgages, and if they fail to do so the plaintiffs can take control of the process and take the issuer to court directly (that’s a very simplistic description but roughly accurate).

There are two key take-aways. Fhttp://www.ritholtz.com/blog/2010/10/full-text-of-letter-to-bofa-from-ny-fed-maiden-lane-freddie-mac-pimco-western-asset-mgmt-neuberger-berman-kore-advisors/irst, note that a European entity is involved. Hundreds of billions of dollars of this junk was sold to European banks and funds. And these guys get together at conferences (sometimes they even invite me to speak). So Helmut will be talking to Lars who will talk to Jean Pierre and they will realize they all own some of this junk. They will be watching with very real interest to see how the big boys at PIMCO and Black Rock and the New York Fed fare in their efforts. And then you can count on them all piling on (more later on this).

Second, little noticed this week was the fact that The Litigation Daily wrote that Philippe Selendy of Quinn Emanuel Urquhart & Sullivan has been retained by the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, to investigate billions of dollars in potential claims against banks and other issuers of mortgage-backed securities.

Who? Not on your celebrity list? Just wait. He will soon be getting the best tables everywhere. He and his firm are the guys representing MBIA in all their cases against Countrywide and Merrill Lynch. And they are kicking ass. Slowly to be sure, but very steady. That means Fannie and Freddie are getting ready to get serious.

They were sold well over $227 billion of the subprime garbage issued in 2006 and 2007. And the bad stuff started before then. But they have one advantage that the guys at PIMCO, et al. don’t have: they (or actually the FHFA) are a federal agency. That means they have subpoena power. The agency has sent 64 subpoenas to issuers of mortgage-backed securities, and although they have not said who they went to, they obviously include almost everyone and clearly all the big players. (They couldn’t have ignored Goldman, could they? Naah. Too obvious.)

From American Lawyer.com (I know, this website is probably already on your favorites list, but for those souls who actually have a life I provide the text):

"Through those subpoenas, the agency could gain access to the loan files for the mortgages that backed the securities it bought and thus establish whether the mortgages were what the issuers represented them to be in securities contracts. According to the Journal, the difficulty of obtaining loan files has been a big obstacle for investors trying to force issuers to repurchase bonds.

"If the FHFA were to decide down the road to initiate litigation, it would still have to have the support of a percentage (usually 25 percent) of its fellow bondholders for each issue. But given what the agency and its Quinn lawyers will be able to see before bringing suit, it probably won’t be too hard to get other investors on the bandwagon." (http://www.quinnemanuel.com/media/183456/hurricane%20warnings%20fannie%20mae%20and%20freddie%20mac%20hire….pdf)

It is tough not to jump to the conclusion, but we need one more piece of the puzzle before we get there.

The Worst Deal of the Decade? Arguably Bank of America had Merrill shoved down their throats, but no one can say that about the acquisition of Countrywide. And Countrywide could end up costing BAC $50 billion or more in losses. That may prove to be a serious candidate for worst deal of the decade. (Although WAMU is a leading candidate too!)

Let’s look at a report by Branch Hill Capital, a hedge fund out of San Francisco. And before we start on it, let me point out they are short Bank of America. You can see the full PowerPoint at http://www.businessinsider.com/bank-of-america-mortgage-report-2010-10#-1.

(And let me say a big thanks to the author of the report, Manal Mehta, for all the background material he sent me and his help with this week’s letter. It helped make it a lot better. Of course, any erroneous conclusions or outrageous statements are all mine.)

First, they point out that the potential size of Bank of America’s (BAC) liabilities is $74 billion (with a B). And that is just for Countrywide. That does not include Merrill, which is also large. Against that they have set aside $3.9 billion. You can count on more suits than just the PIMCO, et al. mentioned above.

In the MBIA case, the judge has ruled that the suit can proceed even though BAC has denied responsibility. Although on appeal, this is high-stakes poker. Countrywide originated over $1.4 trillion of mortgages in 2005-2007. MBIA alleges that over 90% of the defaulted or delinquent loans in the Countrywide securitizations show material discrepancies. Care to take the under in the over/under bet on that?

Further to the case on BAC, Merrill was the largest originator of subprime CDOs during the housing boom, for another $120 billion, along with about $255 billion of residential mortgage-backed securities.

And then there are all those CDOs (collateralized debt obligations). Merrill did a lot of those that went sour. This deserves it own letter, but a gentleman named Wing Chau went from making $140k a year to $25 million in just a few years, putting together CDOs from Merrill, some of which were completely bankrupt in just six months.

Countrywide has already settled with the New York pension funds for $624 million, one of the largest securities fraud settlements in US history. And the line is growing longer.

Of course, BAC CEO Brian Moynihan denied this week that there is a problem. Let’s look at Moynihan’s statements at the last earnings call and compare them to what the judge in the case said earlier. Moynihan:

"… we execute repurchases on a loan by loan basis… And as we learn more, and again, our perspective on this – we’re going to be quite diligent as I said in defending the interest of our shareholders. This really gets down to a loan-by-loan determination and we have, we believe, the resources to deploy against that kind of a review."

Back in June the judge on the case (a Judge Bransten) said (from the transcript):

"I think that it makes all the sense in the world that you can use a sample to prove the case because otherwise I can’t imagine a jury listening to 386 thousand cases. Even if you have that available, nevertheless you are not going to present that to a jury or even to a judge. I’m patient but not that patient. So therefore it is going to be a sample in the end…"

OK, let me get this straight, Brian. Your company committed fraud, with robosignings and all the rest, and you won’t man up and take responsibility? You and your lawyers want to thrash this out, case by case, fighting a trench-warfare, rear-guard action? Well I’m afraid that’s not going to work out for you. There are so many examples of Countrywide outright fraud that it is going to be hard to convince a jury that BAC is not on the hook. Will it take years? Of course.

You can read the PowerPoint for details. Bottom line: BAC is probably liable for putbacks that could total over a hundred billion. And that is just BAC.

Think Citi. And any of the scores of mortgage originators and investment banks. There were a couple of trillion dollars in these securitizations issued. Plus how many hundred of billions of second-lien loans? And can we forget CDOs? And CDOs squared?

And let’s not forget all those completely synthetic CDOs that were written at the height of the mania. Most of it AAA, of course. Frankly, anyone stupid enough to buy a synthetic CDO should lose their money, but that is not what the courts will base their decision on. It is all about representations and warranties. And maybe a little fraud.

I picked on BAC because that is the analysis I saw. But it could be any of dozens of banks. Look at this list from the Branch Hill PowerPoint

Could we see a hundred billion in losses to the major banks? In my opinion we will for sure, over time. $200 billion? Probably. $300 billion? Maybe. $400 billion? It depends on how organized the investors in the securities get and what gets settled out of court. Out of a few trillion dollars in securitizations? It's anybody's guess. I just made mine.

But let's not forget the $227 billion sold to Fannie and Freddie. Taxpayers are on the hook for $300-400 billion in losses. Those putbacks could save us a lot. Will this threaten the viability of some banks? Maybe. But most will survive. BAC made $3 billion last quarter. A steep yield curve (with the help of the Fed) can cure a lot of evils. But it will absorb the profits of a lot of banks for a long time.

And that of course, will come back to haunt the rest of us as banks have to raise more capital and get more conservative.

Anyone who owns stocks in banks with relatively large MBS exposure is not investing, they are gambling that the losses will not be more than management is telling them. There will be no bailouts (at least I hope not) this time around. Fool me once, shame on you; fool me twice, shame on me. There will be little sympathy for shareholders or bondholders this time, if it comes to that.

One more sad point. The FDIC (read taxpayers) is liable for some of this, as they took over some of these institutions. It just keeps on coming.

Final rant. If you were part of a group that knowingly created or sold flawed and fraudulent mortgage-backed securities to pensions and insurance companies and took home tens of millions in bonuses, up and down the management chain, maybe you should consider moving yourself and your money to a country that does not honor US extradition, because my guess is that, as all this comes out, you may have to hire some very expensive lawyers and get measured for pinstripes.

And the Mozilo agreement was a sham. Sigh. That would be the equivalent of fining me $10,000 and letting me keep my tanning bed. I don't have the space to go into the fraud at Countrywide, but their internal documents show they all knew what was going on.

And Now to the World Series

Ok, it is past time to hit the send button. There may be a few more gaffs in this letter than normal. It is 2 AM. I admit I stopped writing to watch the Rangers beat the Yankees. You gotta have priorities. It is kind of bittersweet, as for 15 years I had an office in the Rangers Ballpark, where I could look out my window or walk onto my balcony to watch the games, often with friends. And the year I leave we get into the World Series! And now I find I will be in a mad scramble to get tickets, along with the rest of Texas, and I HAVE TO go to at least one game of a World Series. As do some of my kids. And friends.

I have to thank Barry Habib for letting me sit in the second row behind home plate, behind Mayor Bloomberg, for the Monday night Yankees-Rangers game, to watch Cliff Lee shut down the Yankees. What memories! I got to meet my favorite all-time musician, Paul Simon. And the Mayor was gracious enough to autograph a picture we took last year. And of course to I got to meet Nolan Ryan (and get a picture!), who had seats behind us. (Nolan, any chance you can sell me a lease for two days to my old office? It's still empty. You remember me, don't you? Your new best friend?)

There did not seem to be many Ranger fans at the game, unlike when the Yankees are in Texas, when half the crowd is wearing Yankees jerseys. But after that 9th inning, where we pasted them for 6 runs, the Yankee crowd left (even Barry), and so the few hundred Ranger fans stood out. It was a great night, sharing that moment. You have to understand, this franchise has been around 49 years without getting past the first round in the playoffs. We were 1-9 against the Yankees in the three times we even got to the first round. There were a lot of demons that were haunting this team.

And now we have Cliff Lee ready for three potential games. And what a story Colby Lewis is. And the Phillies and Giants both have superb pitching. It will be a great World Series. The good guys have a real shot at this. I intend to enjoy it.

I will be on Fox Business with Liz Claman on Monday at 3:30 Eastern, and at the Bank Credit Analyst Conference in NYC for the first of the week.

And you have a great week. Despite the financial issues we all face, it is the real part of life that makes it worthwhile. Family, friends and, every now and then, maybe a World Series.

Your tired but contented analyst,

John F. Mauldin

Socialism and Reality (From American Thinker)

October 25, 2010

 

By Steve McCann

The images on the television screen emanating from Europe are a sobering reminder that socialism has failed wherever it has been tried and will always do so despite the best efforts of the die-hard true believers. The riots in the streets of France and Greece, the announced layoffs of nearly 500,000 government employees in the United Kingdom, and the potential national bankruptcy of Ireland, Spain, Italy, and Portugal are the current face of this failure.

Yet within the halls of power in Washington, D.C. there is a socialist/progressive cabal, and its titular leader Barack Obama, oblivious to this reality. These ideologues continue to cling to the belief that they have a unique ability to succeed where so many others have failed. The egocentric American Left know no bounds, and their determination to impose their will upon the United States has not and will not abate despite the results of any election.

Having been raised to believe in their preordinance to rule and incubated in an environment of national peace, prosperity, and a lack of adversity, these adherents to a powerful central government, with themselves at the controls, are incapable of change and admitting failure despite overwhelming current and historical evidence.

The original and present-day proponents of socialism fail to take into account one very basic but immutable factor: the fundamental nature of the human race as manifested in the industrial age. The most dominant trait mankind has, as do all living creatures, is an innate desire to survive and prosper.

While some may willingly choose to pursue subsistence on their own terms, to the majority of the human race, the path of least resistance is the most desired. Thus, mankind is susceptible to financial scams, gambling, crime, and resentment or violence towards those who may have more. But above all, many people are very open to the concept of a central authority providing them with the means of livelihood with no thought as to the how (the public-sector unions being the most egregious current example).

A secondary characteristic of human race, and the most dangerous, is the need by some to conquer or maintain total control over their fellow man. Lust for power has always been with us.

The mid-19^th century saw the industrial revolution and the rise in living standards and education for the populace in Europe. It was during this same period that socialist/Marxist theory appeared. Those who considered themselves superior to the masses, and in the past may have achieved ruling status through the power of intimidation over the illiterate and unwashed, now had to look to other means to achieve control of the levers of governing.

The easiest course to assume this power was to promise, in return for the support of the people, that the state, through a new ruling class, would provide the citizenry cradle-to-grave economic security. Thus, a Faustian bargain encompassing the desire by the majority for ease of survival and others for the need to rule was entered into. The populace, having committed itself to this compact, would expect never-ending freedom from adversity.

However, within this arrangement is the seed of its own destruction. For socialism to succeed, it must have an economic underpinning that can provide the foundation for massive social spending. The Soviet Union, as early as the 1920s and '30s, proved that complete state control of the means of production was a colossal failure, as it could not produce sufficient wealth to support the population, and their version of socialism (Communism) had to be enforced at the point of a gun or by starvation.

Only the capitalist economic system, which is anathema to a powerful central government and its attendant oligarchy, can produce sufficient wealth necessary to underwrite a social safety net for the general public, promulgate upward mobility, and finance the security of any nation.

Capitalism, reflective of that portion of mankind choosing to seek subsistence on their own terms, does by its nature celebrate the success of the individual, not the collective. Individuals, separately or together, driven by the motive of self-enrichment, produce goods or services desired by others. In the process, jobs and wealth are created, thus benefiting society as a whole.

A massive tension exists between those who adhere to central government control and swear fealty to socialist philosophy and those who produce the wealth of a nation. As the state inherently has more power than the individual, once socialist doctrine dominates the ruling class, government begins a relentless process of injecting itself into the affairs of the individual and producer class.

Those who believe they have a manifest destiny to rule and are faithful to socialist tenets have an overwhelming egocentric psyche and a predisposition to control the populace and economic activity through laws, regulations, taxes, intimidation, and in extreme cases, outright force. The result is the inexorable march toward state control of the economy. Despite the history of failure, every new generation of adherents to socialist ideology believe that they can make this arrangement work and maintain their unwritten agreement with the citizenry.

But the reality is that they cannot, as the economic engine of capitalism will not continue to produce wealth if it is increasingly put under the thumb of bureaucrats and central planners inevitably attempting not only to institute governmental management of the economy, but also to regulate the day-to-day activities of all citizens. The motivation of the producer class will be stifled, and they will either drop out, join the dependent class, or simply move on to other, more hospitable countries -- a reality more in play than ever in today's global economy.

In due course, centralized governments will, as history has shown, turn to excessive and unsustainable borrowing, as well as inflation, to finance their societal obligations. The contract between the statists and the citizens who were promised cradle-to-grave security cannot be maintained, as the economic underpinning of this arrangement will quickly erode.

Social and economic chaos resulting in dramatically lower standard of living must inevitably ensue, and in some cases, these circumstances will lead to violence or revolution. No amount of promises, demonization of capitalism, seizure of the means of production, takeover of the media, confiscatory taxes, or printing of money will reinstitute prosperity or security for the populace. These desperate actions serve only to accelerate the downward spiral.

Within the United States, because of the socialist indoctrination of the governing class, this process is well on its way and will culminate, if not stopped now, in the end of this nation as an economic and military power.

The founding fathers of the United States, one of the greatest confluences of brilliant minds in the history of mankind, understood the basic nature of human beings. They accordingly set forth a form of government and written Constitution to greatly limit those who seek hegemony over the people and to limit the ability of the people to seek unlimited security from a central government. They recognized that only the individual free to pursue economic happiness will result in a society wherein all can benefit on a sustained basis.

President Obama and his minions represent the greatest threat to the United States since its founding. The images of failure from around the globe must not be lost on the American citizens. They must understand that the country's destiny rests in utilizing the governmental structure bequeathed to them by the founders to strip away, as quickly as possible, the power expropriated by today's ruling class. 

The winning of elections is tantamount. However, there must also be a concurrent resolve to purge the destructive and delusional philosophy of socialism from the institutions of government. Only then can the United States avoid the fate looming over the horizon.

Page Printed from: http://www.americanthinker.com/2010/10/socialism_and_reality.html at October 25, 2010 - 07:35:56 AM CDT

To The Media: Stop LYING About Foreclosuregate

To The Media: Stop LYING About Foreclosuregate

The Market Ticker ® - Commentary on The Capital Markets

Posted 2010-10-12 13:18
by Karl Denninger
in Foreclosuregate

To The Media: Stop LYING About Foreclosuregate

I'm getting tired of this, so I'm going to trot out the proof and stick it under everyone's nose.

We keep hearing that these "lost document" affidavits and similar are just "sloppiness."

They are not.  They are hard evidence of fraud, with the only decision left to be made being one on exactly where the fraud happened.

I'm going to show you a document - a Pooling and Servicing Agreement - from one MBS Trust.  There are literally thousands just like this.  I've read dozens.  Those that were sold to the public are all filed on the SEC's web page, and can be found either on EDGAR or SECINFO.  Every single one that I've read contains a certification that is, in form and substance, identical to that below.

This specific example is one that others have picked on and happens to be right from the top of the bubble around 2006 - and it also happens to be from our favorite Vampire Squid, Goldman Sachs.

It is GSAMP Trust 2006-FM1

Here is the CERTIFICATION form that the Trustee, post-closing, covenants and represents he will execute for the benefit of the buyers of these MBS (that is, your pension fund, your insurance company that is funding your annuity, your retirement account's bond fund, etc):

Re:  Trust Agreement, dated as of April 1, 2006, between GS Mortgage Securities Corp. and Deutsche Bank National Trust Company
Ladies and Gentlemen:
    In accordance with Section 2.02 of the above-captioned Trust Agreement (the "Trust Agreement"), the undersigned, as Trustee, hereby certifies that as to each Mortgage Loan listed in the Mortgage Loan Schedule (other than any Mortgage Loan paid in full or listed on the attached Document Exception Report) it has received:
        (A) The original Mortgage Note, endorsed in the form provided in Section 2.01 of the Trust Agreement, with all intervening endorsements showing a complete chain of endorsement from the originator to the last endorsee.

       (B) The original recorded Mortgage or a certified copy thereof.

         (C) Except with respect to each MERS Designated Mortgage Loan, an executed Assignment of Mortgage endorsed in blank in the form provided in Section 2.01 of the Trust Agreement; or, if the Trustee has actual knowledge that the related Mortgage has not been returned from the applicable recording office, a copy of the Assignment of Mortgage (excluding information to be provided by the recording office).
          (D) Except with respect to each MERS Designated Mortgage Loan, the original or duplicate original recorded assignment or assignments of the Mortgage endorsed in blank showing a complete chain of assignment from the originator to the last endorsee.

         (E) The original or duplicate original or certified copy lender's title policy and all riders thereto or, any one of an original title binder, an original preliminary title report or an original title commitment, or a copy thereof certified by the title company.

Now why are we filing "lost note" affidavits?

There are no "lost notes" ladies and gentlemen.

Either:

• The Trustee never got the notes, in which case he filed this certification and in doing so committed fraud upon the MBS investors,
  OR

• The Trustee has the notes and doesn't want to produce them because there is something in there that could lead to the foreclosure being dismissed (E.g. TILA violations) or the Trustee being sued (e.g. he took the note even though it violated their representations and warranties relating to loan quality), in which case the fraud is upon the court in the instant case.

Pick one, but either way someone has been defrauded.

It is literally impossible for it to be otherwise.

When will the damn media and prosecutors start STOMPING on this crap?

How Did it Happen???

 

Reference

By James Howard Kunstler
on October 10, 2010 11:31 PM

     The banking authorities were shocked - shocked - to discover last week that an awful lot of mortgage paper in this country is not quite in order... appears to contain, er, irregularities... seems less than kosher... frankly, exudes an odor like unto dead carp or, shall we say, a heap of dead carp the size of the building at 3900 Wisconsin Avenue, N.W., Washington, D.C. Any day now we will hear that... mistakes... were... made.

     Is it indelicate to say that the USA as an enterprise has its head so deeply and firmly up its ass that the all the proctologists alive on planet Earth could not extract the collective cranium from the collective cloacal chamber even with the aid of a Bucyrus-Erie 1060-WX bucket-wheel excavator? Like, where were we the past ten years? Surely not everybody in the nation was doing bong hits while playing Grand Theft Auto, or watching The Real Housewives of New Jersey, or downing tequila shots and Percocets in the parking lot of the Talladega Superspeedway, or cooking meth in the family room, or whacking it to Internet porn, or searching for "excitement" in one of America's 450 commercial gambling casinos.

     Did nobody, for instance at Fannie Mae or Freddie Mac, review any of the paperwork fluttering in from places like Countrywide or Ditech and scores of other boiler rooms where mortgages were hatched like Peking ducklings?  There was an awful lot of it, I'm sure, but aren't there a lot of seat-warmers at Fannie and Freddie who collect their salaries for the express purpose of reading mortgage documents? Was nobody the least bit suspicious about the mysterious flurry of "restaurant employees" and "lawn-care technicians" buying million-dollar condominiums with no money down at terms that would make a three-card monte dealer weep with laughter? After all, they had to sort and bundle all these contracts for the likes of Goldman Sachs and JP Morgan and Citibank - the list isn't that long, but you get the picture....

      And speaking of these august institutions, didn't anybody in the divisions charged with assembling complex securities composed of mortgages, or composed of bets against bundles of mortgages, or composed of some notion of something dimly related to a rumor of mortgage lending - didn't any of these expensively-educated chaps or lasses pause a moment in their aardvark-like labors of bonus-seeking to withdraw their snouts from the moist ground where swindles pupate and at least goggle in self-admiration at the fantastic legal novelty of their endeavors.

     And what of the numberless agencies, federal on down, starting with, say, the Office of Thrift Supervision, or the Comptroller of the Currency, or the Federal Deposit Insurance Corporation, or the Board of Governors of the Federal Reserve, or the chairpersons of a dozen senate and house subcommittees on matters related to finance, or the various inspectors general from sea to shining sea or the attorneys general of all fifty states plus the US Department of Justice, or the countless fiduciary officers of the pension funds who tripped over each other buying all the tainted paper churned out like so much Purina Rat Chow - or, for Godsake, a lonely loan officer here or there with something resembling a conscience?

     Nobody in the USA noticed anything the least bit fishy. And now all that epic rot has eaten through the last hanging tendrils of the banking system. And the whole shootin' match is fixing to seize up and blow like a Chevy Big Block Super Stroker 632 engine that some clown has poured karo syrup into.

     But, sadly, I can only return to the trope of cranial rectosis. And when your head is in such a dark place, it's hard to see the truth, let alone tell something you can't even see. And sadly too, the truth is that this ghastly mortgage fiasco was a fraud that the whole nation perpetrated on itself in a tragic rush to get something for nothing. Since the failure of authority is complete, it's now up to nature to act as the arresting officer. She's a harsh mistress. She's going to kick our ass.

     I'm sorry, but I don't see anyway out of this. With fraud absolutely everywhere in our banking system, like some advanced metastatic cancer, financial metabolism comes to a sickening stop. Nobody can buy or sell property. Nobody can trust any American financial institution. Money can't circulate. Nobody will be able to get any money. It won't be long before that translates into nobody getting any food. We may be a nation of clowns, but as Lon Chaney famously observed a while ago - when explaining his technique of horror movie-making - "...there's nothing funny about a clown in the moonlight...."