Corruption

Now that I've had to time to read the entire AIG 10Q there's a nasty ditty in here that in my opinion goes materially beyond the "going concern" language.  It's here:

A deterioration in the credit markets may cause AIG to recognize unrealized market valuation losses in AIGFP's regulatory capital super senior credit default swap portfolio in future periods which could have a material adverse effect on AIG's consolidated financial condition or consolidated results of operations. Moreover, depending on how the extension of the Basel I capital floors is implemented, the period of time that AIGFP remains at risk for such deterioration could be significantly longer than anticipated by AIGFP.

A total of $150.0 billion in net notional amount of the super senior credit default swap (CDS) portfolio of AIGFP as of December 31, 2009, represented derivatives written for financial institutions, principally in Europe, which AIG understands to have been originally written primarily for the purpose of providing regulatory capital relief rather than for arbitrage purposes. The net fair value of the net derivative asset for these CDS transactions was $116 million at December 31, 2009.

So AIG "understands" that $150 billion of credit-default swaps were written by AIGFP to European Institutions (no note by the way as to exactly what's in there - or who owns them) for the explicit purpose of getting around capital requirements - either by banking regulators or (possibly worse) EU sovereign regulations.

When did they come to "understand" this?  Did they write these swaps originally knowing that their essential purpose was to evade capital requirements, or was this a "recent" revelation of some sort?

Indeed, the section goes on to say:

In addition, although AIGFP receives periodic reports on the underlying asset pools, virtually all of the regulatory capital CDS transactions contain confidentiality restrictions that preclude AIGFP's public disclosure of information relating to the underlying referenced assets.

Isn't that nice?  So AIG insists that we trust them, and in addition, that everyone else trust them, as to the precise composition of these "assets", their performance, and who is on the other side of the transaction.

Oh, it gets better.  The weighted average maturity of these transactions is 1.35 years, we can't tell what's left in there, and we also can't know who's on the other side of the transaction, but what we are told is that the essential financial purpose of these transactions was to evade regulatory capital requirements.

Net notional?  Oh, that's nice.  Since the claimed underlying "net derivative asset" is essentially nil against this "notional", one wonders what the real risk is on the table here in terms of the firm.  Seeing as it's in the "risks" section of the 10Q, it has to be material to results, right?

Why do I smell sulfur?

Heh, Bloomberg is blowing a whistle!

A potentially more important development slipped by with less notice, Bloomberg Markets reports in its April issue. Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.

Yeah.  But that 62.1 billion is just part of the problem.  See, we seem to be into these clowns for $180 billion.  How come, if there was "just" $62 billion in bad paper out there?

“It’s almost too uncanny,” Calacci says. “If these banks had insight into the underlying loans because they had relationships with banks, originators or servicers, that’s at the least unethical.”

The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured -- more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.

I don't think there's anything uncanny about it.  Look, this wasn't so simple as "someone placed a bet."  That goes on every day, and there's nothing wrong with it.

No, this has more nefarious overtones.

They met with bankers at Bear Stearns, Deutsche Bank, Goldman Sachs, and other firms to ask if they would create securities—packages of mortgages called collateralized debt obligations, or CDOs—that Paulson & Co. could wager against.

The investment banks would sell the CDOs to clients who believed the value of the mortgages would hold up. Mr. Paulson would buy CDS insurance on the CDO mortgage investments—a bet that they would fall in value. This way, Mr. Paulson could wager against $1 billion or so of mortgage debt in one fell swoop.

At Bear Stearns, however, Scott Eichel, a senior trader, and others met with Mr. Paulson and later turned him down. Mr. Eichel said he felt it would look improper for his firm. "On the one hand, we'd be selling the deals" to investors, without telling them that a bearish hedge fund was the impetus for the transaction, Mr. Eichel told a colleague; on the other hand, Bear Stearns would be helping Mr. Paulson wager against the deals.

Some investors later would argue that Mr. Paulson's actions indirectly led to the creation of additional dangerous CDO investments, resulting in billions of dollars of additional losses for those who owned the CDO slices.

Please go read "The Audacity of Synthetics" again, which I wrote a couple of weeks ago.  The problem with these things is simple - they existed only because someone wanted to make a bet that the person who bought them would lose all their money!

As I have repeatedly said I don't give a damn what people bet on or what they want to do in the markets.  We have a huge casino here on Wall Street and always have, and trying to make that "go away" is a waste of time.  It won't.

No, the problem is lack of disclosure and the "I'm just the bookkeeper" defense, which is the essence of the investment (and commercial) bank perspective.

Speaking of the latter, how's that work out for the bookie's "accountant" when the FBI comes in and raids a wire room that's running ponies or whatever?  Not so good, right?

So how come the "bookkeepers" are still operating in this case?

Now there's something to think about.

Remember the market's "cheering" of the "-0.1%" CPI-U reading (core) yesterday?

There's a problem - it was wrong.

Look at the highlighted numbers.  Let's multiply them up.

(5.966 x 0) + (.769 x -2.1) + (25.206 x -0.1) + (.347 x 0.4) / 32.288 = -0.12%, or -0.1%.

But it was reported as -0.5% in the line directly above (inverted tone.)

Oops.

I didn't re-run the weightings for the entire series but a quick "eyeball" of the table shows that this should result in a CORE reading of 0.1% (positive), not the negative number reported.

Will the BLS admit to this error?  Who the hell knows, but if you have a calculator, you can verify that yet another game to "boost" the market was run, with desire effect - a roughly 1/2% spike in the S&P 500 futures right on the BOGUS data release.

Since this table is undoubtedly computed (indeed, if I was to dump the raw data into EXCEL I could have a spreadsheet do this literally in a fraction of a second) it calls into question whether this was an accident or an intentional distortion of the data at the BLS.

It also leads to a few other questions, none of which are very comfortable to consider, but all of which, unfortunately and in light of this report, we must.

For example, is the BLS simply publishing whatever the government wants it to, and then making up the numbers inside the report to hit that target?  Even a simple high-school cheat knows that you must "fix" the constituent numbers that go into a cheated result in order to not get (easily) caught; in a world where people don't add things with calculators but instead have computers sum up columns and do the math it is essentially impossible that this sort of "mistake" is an error. 

Rather, it is virtually certain that this "reported" value was in fact intentionally false, and the persons doing so were too clumsy to "fix" the evidence behind it so that it would "add up."

We now officially live in a world where intentionally-incorrect data is published by our government for the specific intention of misleading the markets.

PS: This will, of course, be used to screw Social Security recipients out of their lawfully-mandated cost-of-living increases.  Count on that.  Oh, and don't ask about the money you already got screwed out of from other similar "errors" that neither I or anyone else caught because they weren't so clumsy as to fail to cover it up.

This is amusing....

Greece turned to Goldman Sachs Group Inc. in 2002, just after adopting the euro, to get $1 billion in funding through a swap on $10 billion of debt, Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time, said in an interview last week. Eurostat, the EU’s statistics office, was aware of the plan, he said. Risk Magazine also reported on the swap in July 2003.

“Eurostat was not until recently aware of this alleged currency swap transaction made by Greece,” spokesman Johan Wullt said by e-mail yesterday.

Bloomberg goes on to opine about whether the EU's statistics office knew about the swaps and their purpose at the time of origination.

This is not the correct question, in my opinion, to be asking.

The question to be asking is what was the essential purpose of transactions in question?

It appears that:

EU regulators pressed Greece yesterday to disclose details of currency swaps after an inquiry by the country’s finance ministry uncovered a series of agreements with banks that it may have used to conceal mounting debt.

Now that is a problem.

If the essence of the transaction was to deceive Brussels, then everyone involved needs to face sanction for this.

Better yet - did Greece lie its way into the EU?  If so would anyone care to tell the class for extra credit what fraud in the inducement means to a contractual agreement?  (hint: odds on Greece being expelled anyone?)

Simon Johnson of MIT raises an even more provocative possibility: That the EU may ban Goldman from dealing in EU government debt markets altogether!

Instead, Goldman will probably be blacklisted from working with eurozone governments for the foreseeable future; as was the case with Salomon Brothers 20 years ago, Goldman may be on its way to be banned from some government securities markets altogether.  If it is to be allowed back into this arena, it will have to address the inherent conflicts of interest between advising a government on how to put (deceptive levels of) lipstick on a pig and cajoling investors into buying livestock at inflated prices.

And the US government, at the highest levels, has to ask a fundamental question: For how long does it wish to be intimately associated with Goldman Sachs and this kind of destabilizing action?  What is the priority here - a sustainable recovery and a viable financial system, or one particular set of investment bankers?

The latter question is easier to answer: For as long as our so-called "regulators" and "Congressfolk" are willing to allow pension funds and others to be royally screwed blind through hinky derivatives transactions, there will be no effective anything coming out of Washington.

The Goldman revolving door between Washington DC and Wall Street is alive and well, and until we the people demand that it be slammed closed and bricked over forever, along with those who perpetrated these games investigated and, where appropriate, prosecuted, you will see no effective change coming from Washington DC.

As a consequence a viable and true economic recovery is not going to happen because we lack the leadership in either major political party to utilize a few thousand pair of handcuffs and instead excuse and even reward the sort of game-playing that I have been writing about for the last three years.

Indeed, that's all "the so-called stock market" (never mind the economy as a whole and our various forms of government) are running on right now - games, concealment and outright lies.

The truth of this statement is instantly clear when one thinks back to the malignant swaps "deals" made with Jefferson County Alabama along with many other municipal governments.  In these cases there were allegations of outright bribery and yet investigation, indictment and prosecution of banking industry executives for public corruption has yet to be seen.  Instead "a little fine" has been negotiated and paid, where if you or I screwed some little old lady out of 1/1000th as much money we'd be doing 20 years of hard time right now.

We are no longer a nation of laws - we're a nation of despots and, thus far, we the people are tolerating it.

It is time for every American to reflect on one simple question:

Why do I sit still for this?

"Gee, look over there!" says the mortgage industry.

In a rather-stunning posting on 4closurefraud.com we have a recorded assignment to BOGUS ASSIGNEE FOR INTERVENING ASMTS!

Yes, really.

Foreclosures are being prosecuted and people tossed out of their homes on the basis of a defective assignment?

Gee, who'd-a-thought?

You don't think that the clerks of these counties were recording anything that comes in the door, in proper form or not, simply to generate the fee income, do you?

Sharon Bock, County Clerk and Comptroller, were you SLEEPING when you accepted and recorded this document in PALM BEACH COUNTY or WERE YOU COMPLICIT IN A SCHEME TO RECORD BOGUS AND PERHAPS EVEN FRAUDULENT DOCUMENTS OF ASSIGNMENT OF PROPERTIES IN YOUR COUNTY?

WHERE THE HELL ARE THE DAMN COPS?