How the Scam Works: The "Free Market" at Work, Financial Style

How the Scam Works: The "Free Market" at Work, Financial Style -Global Research

I think I may have figured out why banks are engaging in what seems to be over-paying. In fact, it was obvious from the outset that this is the danger. And it explains why the very worst offenders ­ Bank of America (now owner of Countrywide) and Citibank are the largest buyers. As the worst abusers and packagers of CDO's, shouldn't they be in the best position to see how worthless their junk mortgages are?

That turns out to be the key! Obviously, the government has failed to protect itself deliberately, intentionally failed to do so ­ in order to let the banks pull off the following scam.

Here's how I think it works: Suppose a bank is sitting on a $10 million package of collateralized debt obligations (CDOs) that was put together by, say, Countrywide out of junk mortgages. Given the high proportion of fraud (and a recent Fitch study found that every package it examined was rife with financial fraud), this package may be worth at most only $2 million as defaults loom on "liars' loan" mortgages and subprime mortgages where the mortgage brokers also have lied in filling out the forms for hapless borrowers or witting crooks taking out mortgages at far more than properties were worth and pocketing the excess.

The bank now offers $3 million to buy back this mortgage. What the hell, the more they bid, the more they get from the government. So why not bid $5 million. (In practice, friendly banks may bid for each other¹s junk CDOs.) The government ­ that is, the hapless FDIC ­ puts up 85% of $5 million to buy this ­namely, $4,250,000. The bank only needs to put up 15% ­ namely, $750,000.

Here's the rip-off as I see it. For an outlay of $750,000, the bank rids its books of a mortgage worth $2 million, for which it receives $4,250,000. It gets twice as much as the junk is worth.

The more the banks holding junk mortgages pay for this toxic waste, the more the government will pay as part of its 85%. So the strategy is to overpay, overpay, and overpay. Paying 15% is a small price to pay for getting the government to put in 85% to take the most toxic waste off your books.

OpenSecrets | Following the money in the Wall Street shakeout? Start here. - Capital Eye

OpenSecrets Following the money in the Wall Street shakeout? Start here. - Capital Eye: "The biggest [corporate] givers to American politics include the investment firms and commercial banks that have received [the most] federal bailout money."

Before the Fall, AIG Payouts Went to Washington - Capital Eye

OpenSecrets Before the Fall, AIG Payouts Went to Washington - Capital Eye: "Before the Fall, AIG Payouts Went to Washington"

In the last 20 years American International Group (AIG) has contributed more than $9 million to federal candidates and parties through PAC and individual contributions. That's enough to rank AIG on OpenSecrets.org's Heavy Hitters list, which profiles the top 100 contributors of all time.

Over time, AIG hasn't shown an especially partisan streak, splitting evenly the $9.3 million it has contributed since 1989. In the last election cycle, though, 68 percent of contributions associated with the company went to Democrats. Two senators who chair committees charged with overseeing AIG and the insurance industry, Sen. Chris Dodd (D-Conn.) and Sen. Max Baucus (D-Mont.), are among the top recipients of AIG contributions. Baucus chairs the Senate Finance Committee and has collected more money from AIG in his congressional career than from any other company--$91,000. And with more than $280,000, AIG has been the fourth largest contributor to Dodd, who chairs the Senate's banking committee. President Obama and his rival in last year's election, Sen. John McCain (R-Ariz.), are also high on the list of top recipients.

AIG has been a personal investment for lawmakers, too. Twenty-eight current members of Congress reported owning stock in AIG in 2007, worth between $2.5 million and $3.3 million. Sen. John Kerry (D-Mass.), one of the richest members of Congress, was by far the biggest investor in AIG, with stock valued around $2 million.

Last year AIG and its subsidiaries spent about $9.7 million on federal lobbying, or about $53,000 for every day Congress was in session in 2008. The company's spending on advocacy last year was down from an all-time high of $11.4 million spent on lobbying in 2007.

Paper gold - UK Telegraph

Paper gold: nice idea, shame about the politics - Telegraph: "A “paper gold” standard might be one way out of the global financial crisis. Zhou Xiaochuan, governor of China’s central bank, has proposed shifting the world from its dependence on the US dollar to a new reserve currency managed by the International Monetary Fund."

Economic Hitman

For more go to johnperkins.org.

Study says most corporations pay no U.S. income taxes | Reuters

Study says most corporations pay no U.S. income taxes (Reuters): "The Government Accountability Office said 72 percent of all foreign corporations and about 57 percent of U.S. companies doing business in the United States paid no federal income taxes for at least one year between 1998 and 2005."

According to the Government Accountability Office, nearly all of America's top 100 corporations maintain subsidiaries in countries identified as tax havens.

You are not going to hear much about this in the news because they are all doing it.

Presenting the Other Side: Hyperinflation is Impossible

To be balanced, here is information that suggests the sky is not falling at Futronomics blog: Hyperinflation Is Impossible.
Excerpt:

There are hundreds of trillions of dollars floating around the world in credit. Much of that is an insurance contract on top of another insurance contract, on top of a securitized mortgage, on top of an asset. The total value of all the aggregate claims on the asset vastly outnumber the value of the asset itself. That is what this crisis is about at it's very heart. Picture an inverse pyramid with assets occupying the bottom bit, securitized mortgages in the middle, and credit derivatives at the top. A stable economy would have a right-side-up pyramid with assets occupying the bottom, etc.

Our problem now, is not that the assets are going to go to zero. It's the value of the much larger derivatives and mortgages that back the assets going to zero. Their values were derived from faulty computer models that grossly underestimated risk in the underlying asset, but more importantly in the ability for a counterparty to make good on their promise in the event of a default. The counterparties, like AIG or Citi, issued 30 or 40 times more in insurance than there were in assets to back them up. Their models told them that the possibility of all the different assets declining at the same time was negligible, therefore justifying such enormous leverage. Now that the assets have fallen by at least 20-30%, the holders of the securities that were tied to them want to be paid for their insurance. Only there's nothing to pay them with. So the people that hold these contracts are trying to get rid of them as fast as they can, and for whatever price, because they fear that if the counterparty goes belly-up, they'll get nothing. If they can sell, they take the loss. If not, they keep the asset off their balance sheet in what's known as a SIV (Special Investment Vehicle) until they can be sold. While they are kept off the balance sheet, they are still considered to be worth 100% of their original value.

The total amount of these assets is far greater than the equity banks have and their sum represents future losses that eventually need to be realized. No, the value of these assets is not completely nil - because the value of the underlying assets are not nil. But for all intents and purposes, it might as well be zero because it dwarfs their tangible equity.

Read also Part Two.

Overpricing Toxic Assests?

Futronomics blog: Geithner Should Resign: "There are more inherent benefits for the private investors to purchasing these toxic assets at far above their real value than meets the eye. Enough for banks to over-price the toxic assest and commit fraud."

The Real AIG Scandal

The feds must investigate AIG's fishy $12.9 billion payment to Goldman. - By Eliot Spitzer - Slate Magazine: "The Real AIG Scandal, Continued!

The transfer of $12.9 billion from AIG to Goldman looks fishier and fishier.
Posted Sunday, March 22, 2009, at 9:42 AM ET

The AIG scandal is getting ever-more disturbing. Goldman Sachs' public conference call explaining its trading relationship and exposure with AIG established once again that Goldman knows how to protect itself. According to Goldman, even if AIG had failed, Goldman's losses would have been minimal.

How did Goldman protect itself? Sensing AIG's weakening capital position through 2006 and 2007, Goldman demanded more collateral from AIG and covered outstanding risk with instruments from other firms. Continued...

Rolling Stone: The Big Takeover

Sub-title: The global economic crisis isn't about money - it's about power. How Wall Street insiders are using the bailout to stage a revolution

Please read the entire RollingStone article. Here are a few excerpts the wet your appitite:

Joseph Cassano the head of a tiny 400-person unit within AIG called AIG Financial Products was selling so-called "naked" CDS deals. In a "naked" CDS, neither party actually holds the underlying loan. In other words, Bank B not only sells CDS protection to Bank A for its mortgage on the Pope — it turns around and sells protection to Bank C for the very same mortgage. This could go on ad nauseam: You could have Banks D through Z also betting on Bank A's mortgage. Unlike traditional insurance, Cassano was offering investors an opportunity to bet that someone else's house would burn down, or take out a term life policy on the guy with AIDS down the street. It was no different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal. Cassano was taking book for every bank that bet short on the housing market, but he didn't have the cash to pay off if the kick went wide.

AIGFP's returns went from $737 million in 1999 to $3.2 billion in 2005. Over the past seven years, the subsidiary's 400 employees were paid a total of $3.5 billion

In the 10-year period beginning in 1998, financial companies spent $1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists. They quickly got what they paid for. In 1999, Gramm co-sponsored a bill that repealed key aspects of the Glass-Steagall Act, smoothing the way for the creation of financial megafirms like Citigroup.

Gramm compounded the problem by writing a sweeping new law called the Commodity Futures Modernization Act that made it impossible to regulate credit swaps as either gambling or securities.

For six months before its meltdown, according to insiders, the company had been searching for a full-time chief financial officer and a chief risk-assessment officer, but never got around to hiring either. That meant that the 18th-largest company in the world had no one checking to make sure its balance sheet was safe and no one keeping track of how much cash and assets the firm had on hand.

When the growing credit crunch prompted senior AIG executives to re-examine its liabilities, a company accountant named Joseph St. Denis became "gravely concerned" about the CDS deals and their potential for mass destruction. Cassano responded by personally forcing the poor sap out of the firm, telling him he was "deliberately excluded" from the financial review for fear that he might "pollute the process."

European Union was threatening to more strictly regulate the foreign operations of America's big investment banks if the U.S. didn't strengthen its own oversight. So the top five investment banks got together ... They named a commission of seven people to oversee the five companies ... and ended up being regulated by no one.

By early 2009, a whole series of new government operations had been invented [by the FED] to inject cash into the economy, most all of them completely secretive and with names you've never heard of. ...[see article]... pumping not billions but trillions of dollars into the hands of private companies ... this new, secretive activity by the Fed completely eclipses the TARP program in terms of its influence on the economy.

When one considers the comparatively extensive system of congressional checks and balances that goes into the spending of every dollar in the budget via the normal appropriations process, what's happening in the Fed amounts to something truly revolutionary — a kind of shadow government with a budget many times the size of the normal federal outlay, administered dictatorially by one man, Fed chairman Ben Bernanke. "We spend hours and hours and hours arguing over $10 million amendments on the floor of the Senate, but there has been no discussion about who has been receiving this $3 trillion," says Sen. Bernie Sanders. "It is beyond comprehension."

Nonetheless, the lion's share of the bailout money has gone to the larger, so-called "systemically important" banks. "It's like Treasury is picking winners and losers," says one state banking official who asked not to be identified.

This itself is a hugely important political development. In essence, the bailout accelerated the decline of regional community lenders by boosting the political power of their giant national competitors.

Which, when you think about it, is insane: What had brought us to the brink of collapse in the first place was this relentless instinct for building ever-larger megacompanies, passing deregulatory measures to gradually feed all the little fish in the sea to an ever-shrinking pool of Bigger Fish. To fix this problem, the government should have slowly liquidated these monster, too-big-to-fail firms and broken them down to smaller, more manageable companies. Instead, federal regulators closed ranks and used an almost completely secret bailout process to double down on the same faulty, merger-happy thinking that got us here in the first place, creating a constellation of megafirms under government control that are even bigger, more unwieldy and more crammed to the gills with systemic risk.

The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

Many Types of Derivatives Could Be Banned In Banking Overhaul

Seen on The Telegraph.

U.N. panel says world should ditch dollar

Wed Mar 18, 2009 11:16am EDT LUXEMBOURG (Reuters) -
A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.

Currency specialist Avinash Persaud, a member of the UN panel of experts, has long argued that the dollar would give way to the Chinese yuan as a global reserve currency within decades.

Full article.

SEC is to blame for the Markets Failure

Cramer states again that the S.E.C.’s failure to enforce the law in regard to naked short selling is the major target for why the market’s failed.

After they destroyed micro-cap companies did the financial institutions turned their destructive powers on their competitors in a showdown and succeed?

Beyond the AIG Bonuses

The $135 million in AIG bonuses is less than 0.1% of the $183 BILLION that the U.S. Treasury gave to AIG as a "pass-through" to its counterparties. But a thousand times that magnitude went somewhere else. Who? For over six months, the public media and Congressmen have been trying to find out just where this money DID go. Bloomberg brought a lawsuit to find out. Only to be met with a wall of silence.

Finally, on Sunday night, March 15, the information was finally released. The largest recipient turned out to be Treasury Secretary Paulson’s own firm, Goldman Sachs. [A little history: Last September Paulson drew up a terse 3-page memo outlining his bailout proposal. The plan specified that whatever he and other Treasury officials did (thus including his subordinates, also from Goldman Sachs), could not be challenged legally or undone, much less prosecuted.] Hellooo, is anybody out there?

Read The Real AIG Conspiracy.

NY attorney general to investigate whether AIG bonuses constitute fraud

New York Attorney General Andrew Cuomo said his office will investigate whether the employees activities involved in the American International Group's near-collapse were fraudulent and whether the $165 million in bonus payments are fraudulent under state law. (AP News)

Fight Foreclosure: Make them Produce the Note

If your home is currently in foreclosure, there may a chance to save it. As a result of lenders buying and selling mortgages your note could have changed hands several times, been split, blended and resold (in some cases multiple times--quite illegal). Did they do it in a manner that was legal and verifiable? Make them prove they legally own the debt they say you owe and not a counterfeit copy of your note. Don't let them profit multiple times over your mortgage. See Livinglies Weblog.

IMF poised to print global super-currency

The International Monetary Fund is poised to print billions of dollars worth of a global "super-currency". Read.

Ron Paul: Culprits Of Financial Collapse Should Be Arrested

Congressman Ron Paul stated on the Alex Jones Show that the people responsible for the economic crisis should not be hailed as saviors and given more power to fix the problem that they created, but arrested and criminally prosecuted.

Dr. Doom, the Cassandra

Peter Schiff made an amazing string of predictions in regard to the current economic crisis over the last 5 years, and in the process made all the experts look like idiots:

Audit the Fed

Ron Paul has introduced H.R.1207: Federal Reserve Transparency Act of 2009 to Congress and it’s been referred to the House Committee on Financial Services. The Fed has so far resisted attempts to provide information on how it is spending the bailout money and currently dictates how accountable it will be to Congress.

There is also a movement to end the Fed.

Jim Cramer Market Manipulator?

This article on Huffington Post states:

The host of Mad Money says he regularly manipulated the market when he ran his hedge fund. He calls it "a fun game, and it's a lucrative game." He suggests all hedge fund managers do the same. "No one else in the world would ever admit that, but I could care. I am not going to say it on TV."

Be sure to watch the video.
Another report.

Multi-Billion Dollar Phantom Treasury Bond Scam

Dr. Susanne Trimbath, who heads STP Advisory Services in Omaha, Nebraska and previously worked for the Depository Trust Co, a subsidiary of Depository Trust and Clearing Corp, the U.S. clearing house for stocks and bonds, stated:

"In fall of 2008, about two trillion dollars in Treasury bonds were sold but undelivered for six weeks, more than 20 percent of the daily trading volume, up from 8.6 percent in the first five months of 2008.
"There was excess demand for the Treasuries. Rather than allow this to push the price up, the Federal Reserve Bank of New York and the DTCC allowed failures to deliver to depress the price.
"The numbers look better now because the Fed threw two trillion at the market, which was used to cover these fails."

Read summary and details.

We have the Best Government Money Can Buy!

Who writes the laws in America?
NAFTA & GATT are thousands of pages long. They were written by Think Tanks funded by Tax-Exempt Foundations, established by protected Corporations, and signed by Politicians unread. So, who are the unseen law makers?

What motivates our elected officials?
I hear people say “My elected representative would not dare screw with my interests. He knows we would boot him out of office.” I’m afraid you failed to see it from his perspective: He is looking forward to retiring into a high paying cushy corporate board position as soon as he gets out of office. So, who is he more motivated to serve?

Some of these definitions for types of government seem a little too close for comfort:

Corporatocracy defines a government that is primarily influenced by agencies such as corporations, banks, oil companies, or the military-industrial complex. Today, of the 100 largest economies of the world, 51 are corporations. Many of pay little or no taxes. Globalization in many countries have led to a situation where the top 1% hold over 90% of the wealth.

Plutocracy is rule by the wealthy. Often in a Plutocracy the laws are skewed to make it difficult for the ordinary man to reach the level of wealth required to join the ruling class, while at the same time helping the wealthy elite maintain their status.

Kleptocracy (root: klepto+kratein = rule by thieves) is a term applied to a government that extends the wealth and power of the ruling class at the expense of the population. A kleptocratic government often goes beyond merely awarding the prime contracts and civil service posts to friends (a common feature of corrupt governments). They also create projects and programs at a policy level which serve the primary purpose of funneling money out of the treasury and into the pockets of the executives, with little if any regard for the logic, viability or necessity of those projects.

Khakistocracy refers to military rule of a country, often in collusion with the elite and business classes.

Fascism is a form of corporatism where government and business form a pact to work together and maintain the status quo for the benefit of those in the pact. Fascist governments forbid and suppress criticism and opposition to the government and the fascist movement.

Counterfeit Shares of Stock

Counterfeiting of securities is as illegal as counterfeiting currency, but because it is all done electronically, it is way too easy for the unethical broker to do.

Global Links Corporation is an example of how wholesale counterfeiting of shares will decimate a company's stock price. Global Links is a company that provides computer services to the real estate industry. By early 2005, their stock price had dropped to a fraction of a cent. At that point, an investor, Robert Simpson, purchased 100%+ of Global Links' 1,158,064 issued and outstanding shares. He immediately took delivery of his shares and filed the appropriate forms with the SEC, disclosing he owned all of the company's stock. His total investment was $5205. The share price was $.00434. The day after he acquired all of the company's shares, the volume on the over-the-counter market was 37 million shares. The following day saw 22 million shares change hands - all without Simpson trading a single share. Where did they come from? The answer.

Illegal Naked Short Selling

John McCain said:

"Mismanagement and greed became the operating standard while regulators were asleep at the switch. The primary regulator of Wall Street, the Securities and Exchange Commission (SEC) kept in place trading rules that let speculators and hedge funds turn our markets into a casino. They allowed 'naked short selling' -- which simply means that you can sell stock without ever owning it. They eliminated last year the uptick rule that has protected investors for 70 years. Speculators pounded the shares of even good companies into the ground. The chairman of the SEC serves at the appointment of the President and has betrayed the public's trust. If I were President today, I would fire him."

Snip from May 11, 2004 news report:

In comments to the U.S. Securities and Exchange Commission, C. Austin Burrell said that "Illegal Naked Short Selling has stripped hundreds of billions, if not TRILLIONS, of dollars from American investors," and have resulted in over 7,000 public companies having been "shorted out of existence over the past six years." Burrell said some experts believe as much as $3.5 trillion to $4 trillion has been lost to this practice.

That was back then. The practice has grown from attacks on small companies to now companies like Fannie May & Bear Stearns and is a major component to the current financial crisis.

What is it?:

. Legal short selling is a bet on stock price declines. The short seller borrows stock, and then sells that borrowed stock, hoping to buy it back at a lower price later, when he returns it to the lender.

. Illegal "naked short selling" involves placing a sales transaction, but not borrowing the stock, and simply failing to deliver it on delivery day. It is also called "failing to deliver" or FTD - or delivery failure.

. Delivery failure is a significant problem nowadays, as it can be used to run stock prices down in a manipulative manner. Delivery failure in any other industry is called fraud.

"Bear Stearns also was rocked that week by failed trades, a problem associated with naked short selling. Failed trades in Bear Stearns soared more than 10,800 percent during the week of March 10, according to data released by the SEC." (Article)

"Bluntly, the SEC behaved as any crooked cop would, which is to put on a show of trying to effect change, while studiously avoiding the only and obvious way to do so." (Article)

"traitorous federal government crime cartel"

Side point: I don't want to give the impression that I think McCain has his head on straight in regard to the economy. After all, he gets his advice from Phil Gramm, the man who sponsored the Commodity Futures Modernization Act of 2000 that created the "Enron loophole", and the Gramm-Leach-Bliley Act of 1999, which led to the 2008 mortgage crises.

Anyone favor putting Phil Gramm & Christopher Cox up for treason?

Credit Default Swaps are a form of Counterfeiting

SEC chairman Christopher Cox equated the sale of the unregulated bond derivatives with naked short selling:

"Economically, a CDS buyer is tantamount to a short seller of the bond underlying the CDS. Whereas a person who owns a bond profits when its issuer is in a position to repay the bond, a short seller profits when, among other things, the bond goes into default. Importantly, CDS buyers do not have to own the bond or other debt instrument upon which a CDS contract is based. This means CDS buyers can 'naked short' the debt of companies without restriction."

Read CFO Magazine article.

The man who predicted the crisis

Crisis was predicted in detail in Nov 2006 by financial adviser Peter Schiff. (Ron Paul's economic adviser.)


Learn more.

"the real unknown backroom story"

Jim Cramer on Mad Money (4 minutes into the show) stated "I will tell you now the real unknown backroom story of what happen to the economy" putting a lot of the blame on a particular villain. Watch the video (16 min.).

Humorus Explaination of the Subprime Crisis

The Most Under-Reported Cause of our Crisis

Bloomberg made a Special Report News Video on the Naked Short Sales Crisis. The information is shocking. This is one report you have to watch.