The Market Ticker - Corruption

"Global Warming" SCAM - Hack/Leak FLASH

nospam@example.com (Karl Denninger) — Fri, 20 Nov 2009 12:01:00 -0500

Apparently a "Global Climate Center" was hacked and the contents have been posted to the Internet. A ZIP file exceeding 60MB and containing a huge number of emails and other documents has been posted worldwide.

Original speculation as to whether the files posted were legitimate or some sort of spoof appears to now be confirmed as legitimate:

“It was a hacker. We were aware of this about three or four days ago that someone had hacked into our system and taken and copied loads of data files and emails.”

I have not had time to read all of the material yet (there are over a thousand files involved!) but what I have skimmed looks VERY damning. Contained within the documents are what appear to be admissions of intentional tampering with data as well as intentional falsification of results to "show" man-made global warming.

One of the emails says:

"I’ve just completed Mike’s Nature trick of adding in the real temps to each series for the last 20 years (ie from 1981 onwards) and from 1961 for Keith’s to hide the decline."

That is, to hide a decline in global temperatures.

It gets better. Another message, this one allegedly from 2000:

It was good to see you again yesterday - if briefly. One particular thing you said - and we agreed - was about the IPCC reports and the broader climate negotiations were working to the globalisation agenda driven by organisations like the WTO. So my first question is do you have anything written or published, or know of anything particularly on this subject, which talks about this in more detail?

Oh, so it's not about the planet getting warmer, but rather is a convenient means of advancing an agenda that has already been pre-determined?

Then there's this:

In my (perhaps too
> > harsh)
> > view, there have been a number of dishonest presentations of model
> > results by individual authors and by IPCC. This is why I still use
> > results from MAGICC to compare with observed temperatures. At least
> > here I can assess how sensitive matches are to sensitivity and
> > forcing assumptions/uncertainties.

(Pardon the formatting, it's text-mode email 'yanno.)

Guess who that was addressed to? Michael Mann. You know, the (infamous and now discredited) "Mann Hockey Stick"?

Guess where that email originated? NASA.

Yes, I have the file. So do a few million other people.

There's enough evidence in there, in my opinion, of outrageously fraudulent conduct to make this the scandal of the 20th and 21st century.

Sorry folks, there's no science here - this is, from what I see, a massive and outrageous fraud, and now that the documents have been confirmed as authentic it is time to pull the curtain down on this crap and start locking up all of the proponents - starting with AL GORE.

Here are some interesting "meta statistics" on the documents, and the number of times the words referenced appear:

Fraud: 79
Falsify: 6
Inflate: 14
Conceal: 5
Hide: 19

Just for starters.

If you think that's bad, you might like this - from the file "ipcc-tar-master.rtf":

General Comments

The idea that climate without human intervention can only undergo “natural variability”, and that “climate change” can only result from human activity is false and fallacious. It is in conflict with all that we know of evolution and geology. It is simply wrong to assume that “ climate change” automatically implies human influence on the climate.

This fallacy is embraced by the Framework Convention on Climate Change, but the IPCC (Footnote to “Summary for Policymakers. Page 1) claim that they are prepared to accept “natural variability” as “climate change”. They are, however, unwilling to accept the truth, which is that climate can change without human intervention.

....

47 out of 91 models listed in Chapter 9 assume that carbon dioxide in the atmosphere is increasing at the rate of 1% a year when the measured rate of increase, for the past 33 years, has been 0.4% a year. The assumption of false figures in models in order to boost future projections is fraudulent. What other figures are falsely exaggerated in the same way?

Update 12:58 - Oh oh.... From Phil Jones... and its recent:

From: Phil Jones <p.jones@uea.ac.uk>
To: "Michael E. Mann" <mann@meteo.psu.edu>, "raymond s. bradley" <rbradley@geo.umass.edu>
Subject: A couple of things
Date: Fri May 9 09:53:41 2008
Cc: "Caspar Ammann" <ammann@ucar.edu>

....

2. You can delete this attachment if you want. Keep this quiet also, but this is the person who is putting in FOI requests for all emails Keith and Tim have written and received re Ch 6 of AR4. We think we've found a way around this.

And then there's this...

From: Phil Jones <p.jones@uea.ac.uk>
To: "Michael E. Mann" <mann@meteo.psu.edu>
Subject: IPCC & FOI
Date: Thu May 29 11:04:11 2008

Mike,

Can you delete any emails you may have had with Keith re AR4? Keith will do likewise. He's not in at the moment - minor family crisis.

Can you also email Gene and get him to do the same? I don't have his new email address.

We will be getting Caspar to do likewise.

I see that CA claim they discovered the 1945 problem in the Nature paper!!
Cheers
Phil

One has to wonder: was the "way around it" (the FOI) mentioned in the first correspondence to intentionally destroy the emails requested?

WHERE ARE THE DAMNED INDICTMENTS?

nospam@example.com (Karl Denninger) — Fri, 20 Nov 2009 11:18:00 -0500

It really doesn't get much more damning than this.

Specifically, read starting at Page 20 of the PDF (Page 14 of the document) in which the profile of these "loans" is outlined:

More than half are cash-out refinances.
The AVERAGE FICO is 626. Nearly 1/3rd have a FICO below 600, and only 16.7% have a FICO over 660.
The pool's DTI is 41.78%.

It gets worse.

Only 8.98% of the loans are 30 year conventional fixed-rate mortgages. 88.2% of the loans are 3/27 and 2/28 "teaser-rate" ARMs.
The majority of the loans amortize over 40 years but are for a 30 year term. This adds even more risk because the borrower will either have to refinance or face a balloon at maturity.
The typical loan (72.5%) also contains a prepayment penalty. In many cases the penalty period either matches or exceeds the "teaser" period, preventing a refinance at reasonable prices until that period has expired.
EXPECTED payment resets raise the DTIs to anywhere from 50-58%! This is clearly impossible for essentially all borrowers to carry - that is, either the borrower will have to refinance prior to this happening or they will default.

As if that's not enough it gets better!

As the table in the prospectus shows, by dollar value:

72.21% were taken for cash-out refinances and 12.28% were to refinance existing loans. Only 15.52% of the principal balance was taken out to BUY a house.
Of that 72.21% balance, the AVERAGE FICO of the person taking the cash-out refinance was 604 (!) - the lowest average of all categories. (If that isn't special I don't know what it is - people with severely-impaired credit attempting to keep their head above water by cashing out alleged "equity" in their homes at usurious interest rates!)
The vast majority of the loans had a lifetime maximum rate of 15% or higher, with 26% having a cap OVER 16%. This in a time when "conventional" financing was at half that interest rate. If that's not hard evidence of predatory behavior, what is?
46.85% of the principal balance was stated documentation. That is, no verification of income or assets.

Yet if I'm reading the prospectus correctly the entire set of tranches was rated investment grade (the worst being "BBB-"), with most of it being rated "AAA."

Yeah, right.

Loans that were on the basics of sound credit impossible to pay as agreed to term, where the majority of the borrowers were distressed at the time of origination and took the loan for cash-out purposes - that is, to support their current income requirements, and where half of the principal balance was supported not by documentation but by STATED income and assets.

Yes, I know this was disclosed in the prospectus - if you read it.

Here's a simple question: Would Ford have been perfectly ok in selling the Pinto with exploding gas tanks if buried in the owner's manual was the statement that if involved in a rear-end collision the fuel tank would be punctured and thus lead to a high probability of fire and/or explosion?

No?

Then how did these BANKSTERS get away with pedding this TRASH, not to mention selling these "loans" to people in the first place when they knew full well there was not a snowball's chance in hell the alleged "borrower" was going to be able to make the payments?

EVERYONE INVOLVED IN THIS CRAP SHOULD BE ROTTING IN FEDERAL PRISON.

WHERE ARE THE DAMNED INDICTMENTS?

IF OUR PROSECUTORS - INCLUDING HOLDER AND THE 50 STATE AGs - DON'T START ISSUING THEM SOON THE PEOPLE MAY START BUYING - AND CONTEMPLATING THE USE OF - THESE:

Paul/Grayson Amendment Passes In Committee

nospam@example.com (Karl Denninger) — Fri, 20 Nov 2009 08:17:00 -0500

It's about damn time.

Yes, it's a first step - but an important first step, and it happened yesterday. Here's what Representative Grayson said at the time of debate:

Bloomberg wasted no time giving the "loyal opposition" to transparency all the digital ink they desired:

“It’s going to be seen as weakening the independence of monetary policy with consequent negative implications,” Frank told reporters after the vote. “People are going to be worried about the impact on the dollar, on the interest rate.”

Go listen to Mr. Grayson's statement again. Now tell me how The Fed's move to dilute our currency literally by half isn't going to "raise inflation expectations" and "have an impact on the dollar."

Never mind the impact that has already occurred. Is Barney Frank freaking blind? What say you to this, Mr. Frank, considering that all of this dollar damage has occurred since The Fed decided to start monetizing Treasury and MBS debt:

Exactly what sort of "damage" are you worried about Mr. Frank? Is not this enough for you? This damage - a roughly 20% devaluation since March - occurred since The Fed announced its "purchase" programs, specifically the purchase of MBS paper for which it appears to have absolutely no legal authority.

How does an audit - determining if The Fed intentionally overpaid, if the transactions were commercially reasonable, if they were designed to help some people and screw others, if The Fed is hiding losses and if the transactions performed even comport with the law - hurt the dollar and inflation expectations? Have you seen the price of GOLD lately Mr. Frank? The gold traders clearly believe The Fed has every intention of re-creating Weimar Germany!

Justified or not, those are the current "expectations" that secrecy has brought us.

How much worse than Weimar could expectations get Barney? Are you now splitting hairs between Weimar and Zimbabwe?

“Everybody would like to beat up on the Fed and call them the bad guys,” Watt said during debate on the measures. “So if we make this decision on a political basis, I know what the result will be.”

“This committee is called upon to transcend the politics of the moment and do what is in the interest of the country,” Watt said.

Really Mr. Watt?

Are you advocating the "best interest of the country" or are you advocating for the best interest of Bank of America, with their corporate headquarters in your district - a firm that has been the beneficiary of unprecedented Federal Reserve largess along with a healthy dose of arm-twisting?

Let's face the facts here. There are many people (myself included) who believe The Fed is "the bad guy." They have behaved as a dictator, they have in my opinion ignored black-letter law and they have intentionally debased the currency of this nation for the explicit benefit of their bankster buddies while screwing the middle class. The Fed's intentional bubble-blowing and now its "zero interest rate" policy has fostered a dollar carry trade now estimated to be over $500 billion - a carry trade that like all others through history will unwind in an uncontrolled and disastrous manner, trashing our economy and markets.

If all this was an "emergency response" that could not have been avoided I might even overlook it - after all, this has been a time of crisis.

But it was and is not.

No, The Fed is why we're in this mess in the first place! They have been responsible for every asset bubble of the last 20 years - intentionally so. Greenspan's foibles over the last 20 years, and now Bernanke's, have guaranteed a complete "hands off" approach to risk by financial institutions and regulators, with both being comfortable in the knowledge that the Fed both could and would simply print up more "funny money" and shower it from helicopters if anything went wrong.

Indeed, Bernanke was dubbed "Helicopter Ben" years ago for suggesting exactly that response to a monetary crisis - that is, he propounded an intent to intentionally destroy every saver's wealth, with the same effect on the victims - in this case the prudent in this nation - as if they were all subjected to armed robbery.

The Fed has intentionally ignored banks buying hundreds of billions of dollars worth of so-called "hedges" (CDS) from AIG, even though it knew or should have known AIG had no money to pay off on those instruments. It has permitted banks under its direct supervision to create and trade hundreds of trillions of dollars in notional value of derivatives ($605 trillion according to the BIS as of June 2009) traded with zero transparency over the counter - an amount so staggering that if these banks' net exposure is even one percent of their notional value it is sufficient to bankrupt every large banking institution in the country several times over and if it is just two percent the net exposure to loss approximates US GDP!

It looked the other way on purpose while the large banks and other financial institutions put together garbage securitizations chock full of liar loans and other exotic products that the producers knew would never be paid as agreed - securitizations they were so sure would default that they were shorting them while selling them to their "marks", er, "customers."

The Fed sat back and supported, rather than speaking against, Hank Paulson's entreaty to have the leverage limits removed from Investment Banks in 2004 - the very feature that was directly responsible for the failure of Bear Stearns and Lehman Brothers.

The Fed has not only allowed banks to circumvent leverage limits and reserve requirements through the abuse of off-balance-sheet vehicles and sweep accounts, it lobbied for and received from Congress the right to set the required reserve ratio for banks TO ZERO in the EESA/TARP legislation - a change buried in the law that received almost no attention (except by myself and a few other bloggers!)

When the crisis began The Fed responded by loosening leverage limits further through the issue of literally dozens of "23A" exemptions to Fed Regulations - including institutions that later failed. The damage done to the financial system was thus dramatically increased by allowing these firms to increase their exposure when they got in trouble rather than strictly limiting it as regulations allegedly required.

The Fed refused to crack down on predatory mortgage, credit card and consumer lending until literally forced by Congress, which passed the credit card bill over its objections. Until threatened with same, the very same Fed refused to intervene in the practice of automatically "opting in" customers for "overdraft protection" on ATM and point-of-sale charges, going so far as to permit banks to display ATM balances that included uncleared funds so as to encourage customers to generate overdraft charges by deception!

The public is well-justified in viewing The Fed as a "villain" because it is. Whether through active malfeasance or simple idiocy The Fed has been and is directly responsible for the impoverishment of millions of Americans who were punished for their imprudent borrowing while the imprudent lenders, who should have also gone bankrupt, were protected with money extracted by force from the very same people the lenders screwed!

Here's the list of Representatives that voted against stopping the daily violations of America. They voted to allow The Fed to have their way in secret, to debase the dollar and destroy Americans' purchasing power, to double the price of oil and essential energy products, to fund chicanery and even protect those who commit fraud. Worse, they violated their oath of office to uphold and defend The Constitution, which says on this matter:

Section 8. The Congress shall have power to.....

To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;

The Federal Reserve does not have the power of currency debasement (or the lack thereof) - Congress does, and with good reason. Congress is accountable to you, the people.

The Fed is, at present, accountable to nobody.

Each and every one of the Representatives listed below, by voting "NAY" today, has violated his or her oath of office, has committed an act of violence against The Constitution of The United States, is unfit for their office, and must resign:

NAY - Rep. Barney Frank, MA
NAY - Rep. Paul E. Kanjorski, PA
NAY - Rep. Maxine Waters, CA
NAY - Rep. Carolyn B. Maloney, NY
NAY - Rep. Luis V. Gutierrez, IL
NAY - Rep. Nydia M. Velázquez, NY
NAY - Rep. Melvin L. Watt, NC
NAY - Rep. Gary L. Ackerman, NY
NAY - Rep. Gregory W. Meeks, NY
NAY - Rep. Dennis Moore, KS
NAY - Rep. Michael E. Capuano, MA
NAY - Rep. Joe Baca, CA
NAY - Rep. Stephen F. Lynch, MA
NAY - Rep. Brad Miller, NC
NAY - Rep. Al Green, TX
NAY - Rep. Emanuel Cleaver, MO
NAY - Rep. Melissa L. Bean, IL
NAY - Rep. Gwen Moore, WI
NAY - Rep. Keith Ellison, MN
NAY - Rep. Ron Klein, FL
NAY - Rep. Charles Wilson, OH
NAY - Rep. Joe Donnelly, IN
NAY - Rep. Bill Foster, IL
NAY - Rep. Andre Carson, IN
NAY - Rep. Mary Jo Kilroy, OH
NAY - Rep. Jim Himes, CT

Why don't you give 'em a call and tell 'em what you think of 'em.

I'm sure they'd love to hear from you - you can find their phone and fax numbers at http://www.house.gov.

Oh Oh - Here Comes Cummings (Fed Audit)

nospam@example.com (Karl Denninger) — Thu, 19 Nov 2009 09:42:00 -0500

This one is definitely worth a read folks.

It appears that Representative Cummings, along with a half-dozen other Representatives, have had enough of The Fed's games.

They are now calling for a FULL CONGRESSIONAL REVIEW of THE ENTIRE FEDERAL RESERVE SYSTEM, including A FULL PUBLIC AUDIT.

To this I say:

It's about damn time.

(click for larger images)

GET ON THE PHONE NOW TO YOUR REP AND RAISE HELL. MOMENTUM ON THIS IS BUILDING, AND IT IS UP TO **US** TO MAKE A DIFFERENCE.

Where Are The INDICTMENTS?

nospam@example.com (Karl Denninger) — Thu, 19 Nov 2009 08:30:00 -0500

Jerry Brown is crowing about the most-recent "Auction Rate" security settlement:

"Wells Fargo convinced thousands of investors to purchase auction-rate securities with promises of robust returns and liquidity, but when the market collapsed, investors were left out in the cold," Brown said. "Based on misleading advice, investors bought these risky securities. Now, retail investors and small businesses are finally getting their money back."

Uh huh. That's the good part.

Now here's the bad part:

The lawsuit contended that Wells Fargo ignored clear industry and internal warnings about risk and previous auction failure. In March 2005, the Securities and Exchange Commission (SEC), the "Big 4" accounting firms, and the Financial Accounting Standards Board all determined that auction-rate securities should not be considered "cash equivalents."

Despite these warnings, Wells Fargo continued to aggressively sell and falsely market auction-rate securities as safe, liquid, cash-like investments until the nationwide auction markets froze in early 2008.

In marketing and selling these investments, Wells Fargo failed to inform investors about how auction-rate securities or the auction process worked, as well as the risks and consequences of auction failure.

Fraud defined:

A false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.

Racketeering defined:

(n) Racketeering is defined as the process of forming or running an organization to operate or commit or otherwise execute ongoing criminal activities.

Perhaps the question we should be asking is why we keep seeing "settlements" instead of prosecutions.

Oh, So Jefferson County Wasn't Alone?

nospam@example.com (Karl Denninger) — Tue, 17 Nov 2009 10:34:00 -0500

Gee, you mean there's never only one cockroach?

The lawsuit, filed by the Sacramento Municipal Utility District, is based on federal and state antitrust claims. It alleges Charlotte, North Carolina-based Bank of America and more than a dozen other banks conspired to pre-select winners of municipal derivative auctions, coordinated their pricing, and accepted kickbacks disguised as fees from co-conspirators.

Where have we heard that before? Oh yeah, I remember!

The SEC alleged that JPMorgan, Charles LeCroy, the banker who pitched the refinancing to Jefferson County, and Douglas MacFaddin, the former head of the New York-based bank’s municipal derivatives desk, made more than $8 million in undisclosed payments to close friends of county commissioners. The associates owned or worked at local-broker dealer firms that didn’t do any work on the deals, the SEC said.

Ding ding ding ding.

Gee, you think this might have been a pervasive practice? Naw, those good bankers would never cheat the state and local governments, right?

SIGTARP Report on AIG Counterparties

nospam@example.com (Karl Denninger) — Tue, 17 Nov 2009 08:23:00 -0500

The SIGTARP counterparty investigation related to AIG has been released.

I'm sure there will be much digital ink spilled on this report over the next few days. But I'd like to focus in on one specific area - found on page 8 of the PDF file. Specifically:

Although credit default swaps are sometimes referred to as insurance-like contracts, they are not technically considered insurance, and, unlike insurance contracts, credit default swaps are not regulated. As a result AIGFP was not required to hold reserves to cover losses or other claims as it would if it was selling insurance policies. AIGFP was thus able to sell swaps on $72 billion worth of CDOs to counterparties without holding reserves that a regulated insurance company would be required to maintain if it had written an equivalent amount of insurance coverage. Counterparties assumed that AIG, which was a highly rated company at the time it wrote the swaps, would be able to pay any claims on the swaps that might occur as required by the contracts.

There are two problems here, neither of which our government and regulatory apparatus have addressed in any form:

Mr. Barofsky identifies these as "insurance-like contracts." Indeed. The financial industry has managed to get regulators to specifically exempt these products from regulation - including the requirement that capital be reserved against these products when originated. This has in turn allowed literally indefinite amounts of leverage to be carried by firms who then claim to be "hedged" against disastrous outcomes by virtue of these contracts. This claim is a lie, because a contract to do a thing without the ability to perform is no contract at all - it is a fraud.
While there was, at the time of the AIG bankruptcy and before, no ability (due to the financial firms' lobbying) to prevent AIGFP from selling these contracts The Fed did have the ability to prevent institutions over which it has supervisory authority from counting "naked" contracts without counterparty reserves to guarantee performance as "money good" hedges.

It is incumbent on our government to identify the root causes of the crisis and address them - particularly if they still remain outstanding risks for a second round of "detonate the financial system" that could be far worse than the first one.

Yet nobody in either Congress or The Fed has done so and their claims to the contrary via these circuitous claims of "re-regulating" CDS (with holes big enough to drive a truck through) are laughable.

The simple reality is that our financial system is now more vulnerable than it was prior to September of 2008. Why? Because we have increased risk - the collapse of Bear Stearns and Lehman along with other major lenders such as Wachovia and Washington Mutual, with the latter two absorbed into existing large banks, has concentrated risk instead of dissipating and mitigating it.

The issue of "systemic risk" is one of counterparty failures that create cascading failures in other firms. When one allows "insurance" to be written without the ability to pay, one has effectively allowed the wide-scale commission of fraud and circumvention of regulatory capital and leverage limits.

There has been no evidence presented thus far that anyone in our government and regulatory apparatus is willing to address this issue - yet until and unless it is addressed the very same meltdown path that we took last fall both can and will happen again.

Wall Street's Armageddon Chimera

nospam@example.com (Karl Denninger) — Fri, 13 Nov 2009 08:44:00 -0500

For how long will The American People tolerate the "do what I want or we will detonate the world" claims from "Big Business"?

“If the U.S. dismantles our leading institutions, then it will destroy the American financial center, which is largely anchored in New York,” said Kathryn Wylde, president and CEO of the New York partnership. “It’s just frightening.”

Arrest that woman and charge her with extortion and terroristic threats made against The United States.

Then ask who would like to be next.

I'm tired of this crap. All of America is tired of this crap. The claim is:

“We're trying to rally the New York congressional delegation on an issue that again goes beyond regulation and starts making judgments about business plans that we don’t think are good for the New York economy,” said Wylde

Good for the New York economy eh? Let me guess: bank robbers argue that it's good for the economy when they show up at Tiffany's with their loot?

That may be true, but it is only true while the robberies are continuing. When the bank robber runs out of banks to rob, or gets caught, if Tiffany's and their pals are depending on the revenue from those robbers they are all finished as going concerns.

“We will be active on Capitol Hill, pointing out the unique and important value large financial firms contribute to economic growth and job creation in the United States,” Rob Nichols, president of the forum, told The Hill this week.

The only thing "large financial firms" have contributed to over the last 20 years in The United States is the asset stripping of America and the taking of risk with other people's money, most specifically the taxpayer's.

Wylde’s group sent a letter to New York congressional lawmakers this week noting that financial, insurance and real estate business account for roughly 32 percent of New York’s overall economy.

I'm sure John Dillinger made the same argument during his time of playing "spin the dial", but that doesn't mean a damn thing. Of course if I steal money from people and spend the proceeds of my outrageous behavior around a given local economy that part of the economy that I spend it in will prosper.

The people I rob, on the other hand, are most likely to have a slightly different opinion regarding the wisdom - and sustainability - of my activity. If the law refuses to put a stop to the blatant ripoffs, some of them might even resort to taking the law into their own hands and, where they can't manage to accomplish "redistribution", settle for vigilante justice.

“We will be active on Capitol Hill, pointing out the unique and important value large financial firms contribute to economic growth and job creation in the United States,” Rob Nichols, president of the forum, told The Hill this week.

Debt expansion is not economic growth, and the job creation from debt expansion is fleeting, to be followed by lots of job loss that inevitably results from the carrying costs of that debt. Said job loss is permanent, while the "gains" are both local to New York and temporary.

The problem comes back to the graph I have repeatedly posted here:

Wall Street makes its loot by expanding that spread. But expanding that spread is both unsustainable (thus leading to busts) and asset-strips the rest of America. To the extent that the government permits this to occur and then bails out Wall Street it shifts the risk of the bust to itself, instead of forcing those who did the mathematically impossible to eat their own cooking and choke on it.

I have no problem with people taking risk. I have no problem with "financial innovation." I have a major problem with gambling with the taxpayer's money, I have a major problem with shifting the risk of failure to the taxpayer's balance sheet, exposing the government to failure (instead of some fat cat Wall Street firms) and I absolutely refuse to accept the lies, scams and fraud that are inherently necessary for any of these expansions of the spread between growth and debt to take place.

The market, left to its own devices, absolutely prohibits the sort of "excess profits" that Wall Street has "earned" over the last couple of decades. Risk-adjusted returns cannot exceed economic growth over time. It is mathematically impossible.

This applies literally everywhere when one looks at the longer term.

Home prices cannot go up faster than incomes. Profits cannot increase faster than revenues. The risk-adjusted return on a given loan or basket of loans can never increase beyond the point of origination, as nobody works for free and spread between borrowing and lending costs is set at the time the note is negotiated.

These are mathematical facts, not suppositions.

Oh sure, there are times when profit growth exceeds revenue growth - when large productivity gains are made, for example. But the incessant demand to continue to do that which is mathematically impossible has driven millions of jobs overseas to India, such as Capital One's "call center" for their credit cards, as the mathematical reality has collided with the demands of Wall Street. The continuation of the demanded "growth" then turns into a wealth-stripping game as the company, in an attempt to force continuation of the impossible, offshores its employees, firing those employees in the United States.

Likewise with "home price appreciation." Remember the famous Lereah Books:

The claims made by "pundits" and "experts' such as Mr. Lereah were mathematically impossible. But they were sold as "good for America" and when mathematical reality intruded the housing and lending industry responded with scams and frauds to keep the game going! OptionARMs and Liar Loans became the means by which the game could be kept alive for a little while - but that "keep alive" had catastrophic consequences for America as a whole, as it turned into a raw asset-stripping exercise for the benefit of the banksters on Wall Street.

We refuse to recognize this when it comes to housing even today, and have now shifted this garbage game into the FHA, which yesterday reported that its fund is now levered at more than 100:1, which is the exact same BS game that Fannie and Freddie tried to pull. Yet all three are now seeing ridiculous levels of default as mathematics catches up with the BS artists.

Rip-offs, scams and frauds are against the law. Most of them are felonies, and with good reason. We need no new laws - it is and always has been against the law to rob people, irrespective of how you accomplish the robbery.

Yet we refuse to treat those who make terroristic threats ("let us strip off the assets of ordinary Americans or we will detonate the world!") as identical to the guy in a ski mask that sticks a gun under a teller's nose.

But the essence of what someone does is not found in whether they wear a ski mask or a $5,000 pinstriped suit. It is in their actions; if you extract money by force, whether that force is presented with a gun or by threatening to blow up the economy unless you get what you want, the fact remains that the foundation of that act is the threat of lawless action should you not get what you demand.

Blatant Insider Call Buying (COMS)

nospam@example.com (Karl Denninger) — Wed, 11 Nov 2009 16:24:00 -0500

The story:

PALO ALTO, Calif. & MARLBOROUGH, Mass.--(BUSINESS WIRE)--HP (NYSE: HPQ - News) and 3Com Corporation (NASDAQ: COMS - News) (“3Com”) today announced that they have entered into a definitive agreement under which HP will purchase 3Com, a leading provider of networking switching, routing and security solutions, at a price of $7.90 per share in cash or an enterprise value of approximately $2.7 billion. The terms of the transaction have been approved by the HP and 3Com boards of directors.

And the insider trading activity today:

There of course was every reason for nearly 4,000 $5 front-month calls, with nine days remaining, to trade against this issue and an open interest of less than a thousand today.

Those 4,000 calls appear to have recorded (assuming the price rises immediately to close to the deal price) a roughly $2.10 profit each, and since each call is 100 shares, someone made $840,000 due to their "prescient" knowledge that they should buy these $5 calls which, I might add, were more than a half-buck in the money and had nine days left to expiration.

If you believe that's a coincidence I'm Santa Claus.

The scam factory continues unabated....

Followup On "Extortion By Banks"

nospam@example.com (Karl Denninger) — Mon, 09 Nov 2009 11:06:00 -0500

Across The Curve, in an attempt to disagree with my analysis appears to have unintentionally validated it.

Let me explain.

John Jansen links to a posting talking about the "need" (or lack thereof) for reverse repos.

What he misses (perhaps because he fails to understand the mendacity of people who have been caught with their pants around their ankles) is the reason for the waiver from Tier Capital demand from the primary dealers.

The linked analysis is correct presuming that the "excess reserves" created still exist.

But the demand for "relief" from Tier Capital requirements is apparently real.

Occam's Razor applies to the obvious discrepancy: The simplest explanation is likely to be correct.

In this case the question is:

Why would the primary dealers demand relief from Tier Capital requirements in order to engage in reverse repos with The Fed, when they were recipients of the original "excess reserves" that occurred when the money was printed in the first place?

The answer is simple: those "excess reserves" no longer exist, having been sucked into the vortex of debt deflation.

Let's recount what we know to be facts:

Lending has not increased since "QE" began, despite the alleged purpose for "QE" being to increase lending. In fact total bank credit is decreasing at a rate never before seen in the history of modern data collection. This is being reflected in consumer credit, business credit, all forms of credit - except for Federal Government debt.
The Primary Dealers are asserting that they require Tier Capital Relief to be able to participate in the reverse repo operation.
Yet in theory at least, the "new reserves" that were created, since they financed Treasury issue, which the primary dealers intermediate, should be sitting on their "credit balance" with The Fed. That is, either The Primary Dealers are lying (they require nothing) or they don't have the reserves any more.

2 (original reserves) + 2 (QE'd reserves) = 4, and as a consequence The Fed should be able to execute 4 (total reserves) - 2 (QE'd reserves) = 2 (original PD reserves) without doing any damage at all to the market or to the primary dealers.

BUT THIS IS TRUE IF AND ONLY IF THE "PRINTED" PD RESERVES ARE STILL THERE!

It is therefore rather obvious that the truth is that the "4" may in fact be a "3" (or worse, a "2"!) and thus The Fed would execute 3 - 2 = 1, where "1" is less than the required Tier Capital leading to an instant

Let me put the structure of this alleged "reverse repo" in bold for those who have a problem with reading comprehension:

The Fed's Balance Sheet shows a HUGE growth in "excess reserves" - there is ALLEGEDLY over $1 trillion in such "excess reserves" at The Fed as of the last balance sheet release last week. These reserves are allegedly (according to The Fed's balance sheet) ON DEPOSIT with The Federal Reserve. They were created by The Fed when The Fed purchased open market securities (MBS and Treasuries) and each of those transactions were completed through a primary dealer. As each of those transactions was made with a Primary Dealer that PD is the putative "owner" of those "excess reserves" that are held on deposit.

As such a "reverse repo" to the PD community is a BOOK ENTRY for the cash in that NO CASH EITHER PHYSICALLY OR ELECTRONICALLY MOVES. It is already on deposit and if it is really there unavailable to the Primary Dealer for their business purposes.

The PD thus "gains" the securities that are "PUT" in the Reverse Repo but what they "give" is the deduction from their on-deposit AND UNTOUCHABLE FOR OTHER PURPOSES "excess reserves."

This, of course, assumes that these "excess reserves" which are allegedly present really are, and that they really are "excess" - that is, not otherwise encumbered - and they're not SUPPOSED to be encumbered.

Jansen was one of the bloggers recently "invited" to Treasury. Nonetheless, it is rather galling to watch a clearly-intelligent individual entirely ignore what amounts to kindergarten math when it comes to what is the obvious and indeed only rational explanation for the Primary Dealers' demand.

Simply put, the system is (still) insolvent as it was last fall and that insolvency has been papered over with The Fed's "money hose."

The system has NOT "stabilized" - quite to the contrary. As with the FDIC that has refused to close banks until they are 30, 40, or even 50% underwater on their assets The Fed has effectively papered over the insolvency of the primary dealers to the point that they are now demanding the ability to ignore the primary safety and soundness metric for a bank - Tier Capital - as "compensation" for participating in The Fed's attempt to drain the excess reserves it pumped in. This says that they're not only still broke they're more broke than they were last fall!

The bottom line is that The Fed is screwed; Bernanke was gamed and instead of "QE"d funds being used to increase lending the "printed money" was used to both cover defaulted debt and speculate in the markets.

In order to reverse the QE'd money hose and suck those excess reserves out of the system The Fed will have to accept the truth relating to where that new Fed Credit went coming to light - either in the form of bankruptcies or forced selling of assets.

Neither is acceptable to The Fed (or the politicians) but that doesn't change the fact that this is the only rational explanation for the Primary Dealers' demand, nor does it change what the final outcome will be. The politicians would be wise to stomp on this now to stem the damage but they won't just as the Japanese Government didn't.

We have learned nothing from history even when the lesson was taught just one year ago.

The underlying mathematical truth - that this was nothing more than "extend and pretend" writ large, and failed to result in actual asset quality improvement - has not been lost on the FX market, nor on commodities such as gold. The Dollar has tanked as currency traders have come to recognize that creating synthetic shorts on dollars through carry trades are essentially risk-free, since forcing The PDs to cover the reverse repos means either crashing the stock and commodity markets, the PDs themselves, or both.

This, by the way, is exactly what Japan had happen to them. The unwind of the Yen Carry featured prominently in the 2008 market collapse, especially in the credit markets where the loss of the "free money hose" caused risk premia to blow wide and created a feedback loop that was arguably one of the primary triggers for the global meltdown.

Notwithstanding The Japanese Government's desire to prevent it the unwind happened anyway and The Japanese Government found itself on the hook for the balance it had printed, which it has now tried to absorb. This made the damage from the carry permanent, just as it will in our case.

Those who refuse to learn from history are consigned to repeat it, and with our tax receipts crashing we will not be able to cover the damage when it becomes apparent, especially if we continue to allow that damage to accumulate.

More Extortion By The Banks

nospam@example.com (Karl Denninger) — Sat, 07 Nov 2009 13:14:00 -0500

Yeah, that's a strong word.

In my opinion it is also the only word that's appropriate for the circumstances:

The Fed has been informed by dealers that they would be willing to enter into very sizable amounts of reverse repos with the Fed, if asked to do so, provided they could get some relief from Tier I capital constraints, MNI also understands.

Ah, the old "let us lever up and we'll do it, but if it blows up, we'll then be back at the public trough for another bailout since we're too big to fail."

Two words need to be spoken to these clowns by Congress; the first begins with "F" and the second with "Y".

It was precisely the relaxing of leverage limits by Congress and The SEC that got us into the mess in the first place. Henry Paulson, you remember, got the former 12:1 leverage limit dropped, and the consequence is now known.

BEAR STEARNS, AIG, LEHMAN, FANNIE AND FREDDIE - ALL BLEW UP SPECIFICALLY DUE TO EXCESSIVE LEVERAGE. ALL HAD MORE THAN DOUBLE THE PREVIOUS LIMIT.

ALL OF THEM.

NONE OF THEM WOULD HAVE BLOWN UP UNDER A 12:1 LEVERAGE LIMIT.

LET ME REPEAT THAT: NONE OF THEM WOULD HAVE FAILED HAD THEY BEEN OPERATING UNDER THE FORMER LEVERAGE LIMITS.

Zerohedge reported back on October 21st that the repo test was allegedly "a failure." We now have confirmation that it indeed was, and in addition, we now apparently have the primary dealers - once again these are the "really big oligarchs" - Goldman, Morgan Stanley, JP Morgan, Citibank, etc - that are now twisting The Fed's arm to allow them to do exactly what caused the meltdown in the first place as "compensation" for entering into these reverse repos.

We also have this:

Amid the ongoing financial regulation overhaul, the banking industry is hoping to pull off a quiet power grab that has eluded its grasp since the Great Depression, by stripping the independence of the board that sets financial accounting standards.

The move could effectively let banks set their own accounting standards in rough economic times.

That is unbelievably outrageous. The bottom line is that the banks feel that not only was the blatant extortion pulled this spring with "mark to market" appropriate, but now they want the ability to force changes to the accounting rules any time they get in trouble to make it look like they're all ok when they're not!

Not one thing has been done about what got us into this crisis. The causes of this mess are:

Asset bubbles blown by intentionally loose monetary policy coupled with intentionally-absent regulation and monitoring. None of that was a mistake - it was willful blindness and intentional promulgation of known-dangerous policies.
A legal structure that has allowed banksters to asset strip Americans. Specifically, the law explicitly allowed the peddling of so-called "mortgages" that were designed to not be affordable beyond their "teaser expiration", thereby guaranteeing that the applicant would have to come back for another bite at the apple. In addition Congress has both allowed unlimited interest rates to be charged on credit cards and (at the banksters behest) made dramatic modifications to the Bankruptcy Code that had the effect of turning many debtors into debt slaves, prohibiting discharge of those debts in liquidation. At the same time corporations can and do file bankruptcy without the same consequences for the directors and officers of the firm!
Intentional lobbying for (by Henry Paulson when he was with Goldman Sachs before becoming Treasury Secretary), the granting of, and then full utilization of ever-increasing leverage. As noted above every single one of the large bank and bank-style institutions that has failed had more than double the formerly-level "investment bank" limit of 12:1 leverage. The housing asset bubble could not have effectively grown beyond 2004 without this change as investment bank capital requirements would have stopped it in its tracks.
Willful and intentional blindness to insolvency in financial institutions. The FDIC has been repeatedly found wanting in this regard, in that of the over 100 banks that have failed essentially every one of them has been "underwater" at the time of seizure, typically by 30, 40 or even 50%. Prompt Corrective Action (12 USC Ch 16 Sec 1831o), if actually followed, makes this outcome impossible. More than two years into this mess our banking regulators including the FDIC, OCC, OTS and Federal Reserve are still willfully and intentionally refusing to follow the law, for the simple reason that if they did they would have to have seized hundreds of banks including several of the "too big to fail" ones.

The economy cannot resume sustainable growth and health until and unless the causes of the mess are remedied, as all of the above have led to unsustainable debt levels throughout the economy. The current "remedy" being applied is to pretend the bad debt does not exist, pretend the excessive leverage does not exist, and meet the cash flow requirements by loading even more debt into the Federal Government. This is a Ponzi Scheme writ large that is unsupportable in the medium and long term as a consequence of mathematics, irrespective of whether or not policymakers and banksters want the scams of the last two decades to continue.

This says the following things to me loud and clear:

EVERY ONE OF THE LARGE BANKS HAS TO BE BROKEN UP RIGHT NOW. They are ALL a public menace and have learned exactly NOTHING from the pain they have inflicted on America - and from which America is still suffering with sky-high unemployment, 30% interest rates on their credit cards and more. No firm that is "too big to fail" can be allowed to exist and any firm that makes this argument in any form must be deemed to have declared its own demise. Glass-Steagall had this right - the depository and fractional lending function is a public utility and must maintain absolute separation from the other other areas of finance, including but not limited to securities dealing, proprietary trading and insurance. Glass-Steagall prevented these destructive "boom and bust" cycles for nearly 50 years; they returned only after it was repealed and we have now seen four (LTCM, Latin America, The Internet Bubble and Housing Bubble) in less than three decades, with Citibank in particular having to be bailed out at least three times all on its own. The evidence is incontrovertible.
MARK TO MARKET MUST BE BROUGHT BACK RIGHT NOW ACROSS THE BOARD AND ALL OFF BALANCE SHEET STRUCTURES MUST BE BANNED. This gaming of the regulatory environment is beyond ridiculous - it is blatant robbery.
THE BANKS WILL NOT BEHAVE RESPONSIBLY UNLESS FORCED BY EITHER THE THREAT OF MARKET DISCIPLINE (BANKRUPTCY) OR THE BOOT OF GOVERNMENT REGULATION ON THEIR NECKS. They will in fact attempt to use their position as primary dealers to force The Fed and Congress to allow them to take more and more risk once again siphoning off the wealth of Americans for their own personal benefit until they blow up the world again, at which point we will hear once again threats of imminent "Armageddon" unless we shovel in yet more taxpayer funds and guarantees.
THOSE INSTITUTIONS AND INDIVIDUALS WITHIN THEM IN OUR GOVERNMENT WHO THUMB THEIR NOSES AT THE LAW AND SOLID PUBLIC POLICY MUST BE REMOVED AND REPLACED. Prompt Corrective Action (Title 12 Ch 15 Sec 1831o) is sufficient to prevent losses from being taken by the FDIC's Deposit Insurance Fund - if it is followed as written. Mark-to-market may cause many banks to go out of business, but that process of bankruptcy will also resolve the excessive leverage and debt, forcing asset prices to sustainable levels. Leveling the playing field between corporations and individuals with regard to bankruptcy may force rates of interest to rise, but appropriately pricing risk is necessary for sustainable economic growth. Raising The Fed Funds Rate may be politically difficult, but doing so will cause lending to resume as the "risk free" trade of borrowing at zero and buying 10 Year Treasuries at 3.5%, then swapping off the interest rate risk (without any nightly mark-to-market for the counterparty!) to yield 300 basis points (radically in excess of normal "AAA" credit risk profits) will disappear.

You're seeing some evidence of recognition from over in the UK, to wit:

On the eve of the G20 meeting of finance ministers in Scotland, Andy Haldane, the Bank's executive director for financial stability warned that the relationship between the state and banks represents a "doom loop" which will keep inflicting crises on the public unless arrested.

Yep. Funny how over here in the United States the only people willing to speak truth are the bloggers and, oddly enough, The Huffington Post.

We cannot afford another disaster. Each of the last three has been exponentially more expensive, with this last go-around being a $12 trillion outrage.

The next one will literally destroy our government and economy and unless we act now to prevent it from happening we will suffer this outcome.

Tim Geithner was involved in this mess through its construction and still is, as he has not made a public issue of the regulatory arbitrage and extortion - indeed, he was one of it's chief architects when at the NY Fed.

HE MUST BE FIRED.

Be aware Congress: The People aren't as stupid as you think. There is a breaking point beyond which the people of this or any other nation simply will not tolerate the blatant extortion and theft of any hope for a better future for themselves and their children.

A 10.2% "official" unemployment rate and a real rate of unemployment approaching 20%, or one in five working-age Americans, after all the broken promises of "easier credit" (when the truth is 29.9% interest rates while the banks can borrow at ZERO) along with "better times" out of both Congress and Obama might just be it - especially if you let this sort of outrageous conduct by the banksters and their lobbying arms continue.

To The SEC: Prove It

nospam@example.com (Karl Denninger) — Fri, 06 Nov 2009 12:55:00 -0500

The SEC is laying out more details of their "bust" in the hedge fund world:

The defendants behaved like “common criminals” who took a “page from drug-dealer handbooks,” Manhattan U.S. Attorney Preet Bharara said yesterday at a press conference. The probe is focused on hedge funds and their sources of information, he said, adding that more arrests may be coming.

....

“And if you find yourself chewing the memory card in your cell phone to destroy any record of your misconduct, something has gone terribly wrong with your character,” Khuzami said.

Is it ok if you perform your insider trading in plain sight?

I am of course referring to (among other outrages):

The blatant and outrageous buying of stocks, options and futures contracts the day before Options Expiration in August of 2007 - the afternoon before Ben Bernanke made his "unannounced" discount rate cut. The market was down huge in the morning before reversing in an "unexplained" fashion that later proved prescient. What are the odds that was a "lucky guess?" A few hundred million to one?
A similar "magical" reversal right in front of the financial stock shorting ban - announced the next morning.
The put buying on Bear Stearns - front month with roughly a week left and dramatically out of the money, not to mention the request to open up strikes all the way down to $2.50 - with the stock trading at $60. There is no possibility that was a "lucky bet" either.
Ditto on Lehman Brothers, although somewhat (and only somewhat!) less-dramatic.
The incessant rumor-mongering and "pump and dump" played during the entirety of the summer and early fall of 2008 with MBI, Ambac and other mortgage insurance companies, which were the recipient of daily "leaks" promulgated through CNBC and elsewhere on "imminent" rescues (that never materialized.) Who fed Charlie Gasparino that (later proved false) information and did they trade on it, knowing that it would (and did) produce a huge pop in the market every time he came on the air?
The documented example of UBS employees sending emails stating that a security they were peddling was "Vomit" - yet they were peddling it to customers. They still have a banking license, despite this coming from a judge in that case:
- “Pursuit has established probable cause to sustain the validity of a claim that the UBS defendants were in possession of material nonpublic information regarding imminent ratings downgrades on the notes it sold to the plaintiffs, information UBS withheld from the plaintiffs,” Superior Court Judge John Blawie wrote in a Sept. 8 opinion in Stamford, Connecticut.
The incessant "Buffett is buying the world" garbage rumors of the same timeframe - also promulgated by CNBC and other media outlets. Again, the rumors were proved false but the question remains - who fed them to the media and did they trade on it?
Barofsky is said to have 35 active criminal investigations related to insider trading, among other sins, related to the bailout. Will we see those turn into criminal complaints - or indictments?
How about Dick Durbin (yes, the Senator) who disclosed trades on the back of information related to the bailouts?
The two-day-ago outrage with front-month UUP calls, 300,000 of them, that were bought (two weeks left!) for 15 cents and more than doubled yesterday (the next day) after a news release about a temporary liquidity freeze on the fund (thereby generating a massive squeeze.) Those were bought in 10,000 lots - that's clearly institutional activity. Did someone KNOW there was to be a squeeze? It sure looks that way!

Or how about a bit of statistical analysis? What are the odds of a large firm having only three losing days in about 120, and only one in 60? Who's that? Goldman Sachs and their proprietary trading. Again, quite simply: what are the odds?

Everyone likes to make a buck. But nobody wants to play in a rigged casino - unless they're one of the people who is either being kicked back profits for doing the rigging or one of the beneficiaries.

People seem to forget that it's not just wrong when someone profits by improperly driving some firm into the dirt. The market is a negative sum game in that it has fees and costs associated with participation.

As a consequence whenever someone makes a profit based on improper inside information and/or rumor mongering whether the move in the market is up or down someone else loses an equivalent amount of money.

That is, there is no "free lunch" - the scammers only profit by stealing a gain from (or larding a loss onto) someone else.

The comment from the SEC was that:

(the) probe suggests insider trading may be a fundamental part of the business model of some of the firms being probed.

No, really?

How about the major Wall Street players? How about those calls from Bernanke and Paulson to those executives right around major market "turning points"? Is it unlawful for a major Wall Street bank, for example, to buy futures after receiving a call from Bernanke in which he discusses intent to increase asset purchases and/or lending facilities?

If it isn't it should be, and if it is, I think some people have a bit of 'splaining to do.

Remember, the SEC said:

“If you’re a wealthy trader, you aren’t special,” Bharara said, urging Wall Street professionals to come forward to disclose crimes. “Knock on our door before we come knocking on yours.”

I'll believe it when I see explanations for the above list - for starters - along with an explanation of how in a fair and free market where there is no unlawful inside information being exchanged you can manage to put up a string of over 120 trading days with only three tiny losses.

When Does The CHARADE Stop? (Fannie)

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 19:42:02 -0500

It's a policy (according to Barney Frank) to lose money on purpose, right?

Well then Fannie Mae ought to get some sort of award:

Fannie Mae, operating under a federal conservatorship, said it will seek $15 billion in aid from the U.S. Treasury as its ninth straight quarterly loss once again drove the mortgage-finance company’s net worth below zero.

A third-quarter net loss of $18.9 billion, or $3.47 a share, pushed the company to request its fourth draw on a $200 billion lifeline from the government, Washington-based Fannie Mae said in a filing today with the Securities and Exchange Commission.

Let's face it. They're bankrupt. They've been bankrupt. They continue to become more bankrupt, despite being under "conservatorship" for more than a year!

Now let's first and foremost deal with what Fannie IS. From their 10Q:

Fannie Mae is a government-sponsored enterprise (“GSE”) that was chartered by Congress in 1938. Fannie Mae has a public mission to support liquidity and stability in the secondary mortgage market, where existing mortgage loans are purchased and sold. We securitize mortgage loans originated by lenders in the primary mortgage market into mortgage-backed securities that we refer to as Fannie Mae MBS, which can then be bought and sold in the secondary mortgage market. We also participate in the secondary mortgage market by purchasing mortgage loans (often referred to as “whole loans”) and mortgage-related securities, including our own Fannie Mae MBS, for our mortgage portfolio. In addition, we make other investments that increase the supply of affordable housing. Under our charter, we may not lend money directly to consumers in the primary mortgage market. Although we are a corporation chartered by the U.S. Congress, and although our conservator is a U.S. government agency and Treasury owns our senior preferred stock and a warrant to purchase our common stock, the U.S. government does not guarantee, directly or indirectly, our securities or other obligations.

Got that? This will become important later.

We recorded a net loss of $18.9 billion for the third quarter of 2009. Including $883 million in dividends on the senior preferred stock, the net loss attributable to common stockholders was $19.8 billion, or $3.47 per diluted share.

Note that in addition to losing $19 billion through operations, they also had to pay $883 million in dividends for the existing "draw" on their Treasury credit line. They propose to expand that by about 30%, which will of course increase their dividend expense on that draw by an equivalent amount, causing it to reach approximately $1.2 billion dollars next quarter.

The impact of these items more than offset our net revenues of $5.9 billion generated primarily from net interest income and guaranty fee income.

These dividends will reach approximately 20% of their net fee and guarantee income next quarter. This is an enormous (and effectively permanent) expense that will only expand so long as they continue to lose money.

In comparison, we recorded a net loss of $14.8 billion for the second quarter of 2009.

Operating losses are increasing sequentially, not stabilizing or receding.

The "serious delinquency rate" (loans three or more months past due) has continued to accelerate. In the third quarter it accelerated to 4.72% of Fannie's entire book of business (some $3.2 trillion) When one considers that older loans that become delinquent result in the immediate sale of the property and satisfaction of the note (since the home has positive equity) the magnitude of the disaster in play here becomes clear.

To put this in perspective, non-performing loans accelerated by 19.8% in the third quarter. In the second quarter the rate of acceleration was 25%, in the first quarter it was 30%, and in the last quarter of 2008 it was 40%.

This looks like a "better" rate of change but that is only because the original numbers were so small (1.72% originally.) In point of fact the "usual" default rate on their credit book has been around 1%, and was in the first quarter of 2008 (1.15%); as such the catastrophe should be clear in that the "serious delinquency" rate is now some 410% what it was in the first quarter of 2008!

Fannie also likes to keep some of their credit exposure "off balance sheet." Indeed, in the third quarter of 2009 they had almost $164 billion dollars of seriously delinquent loans off balance sheet, as opposed to $33.5 billion that are on the balance sheet formally. They are holding 72,275 foreclosed properties, up about 10,000 from what had been a very stable 62,000ish number since the fourth quarter of 2008.

Now let's talk about these "off-balance sheet" MBS. What does the footnote to that table say on Page 5? This:

Represents unpaid principal balance of nonperforming loans in our outstanding and unconsolidated Fannie Mae MBS held by third parties, including first-lien loans associated with unsecured HomeSaver Advance loans that are not seriously delinquent.

Who are those third parties? Do they include this particular this particular third party?

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities.

Just curious....

Now let's talk about Fannie's problems with their mortgages. I found this paragraph interesting:

We are experiencing increases in delinquency and default rates throughout our guaranty book of business, including on loans with fewer risk layers, such as loans with lower original loan-to-value ratios, higher FICO credit scores and mortgages with fixed rate mortgage terms.

This is bad. Loans that were formerly considered "safe" are defaulting. That is, they're not "safe".

Risk layering is the combination of multiple risk characteristics that could increase the likelihood of default. This general deterioration in our guaranty book of business is a result of the stress on a broader segment of borrowers due to the rise in unemployment and the decline in home prices. Certain loan categories continued to contribute disproportionately to the increase in nonperforming loans and credit losses for the third quarter and first nine months of 2009. These categories include: loans on properties in the Midwest, California, Florida, Arizona and Nevada; loans originated in 2006 and 2007; and loans related to higher-risk product types, such as Alt-A loans. The term “Alt-A loans” generally refers to mortgage loans that can be underwritten with reduced or alternative documentation than that required for a full documentation mortgage loan but may also include other alternative product features. In reporting our credit exposure, we classify mortgage loans as Alt-A if the lenders that delivered the mortgage loans to us classified the loans as Alt-A based on documentation or other product features.

So if a lender didn't classify a loan as "Alt-A" or otherwise risky, according to Fannie, it wasn't. How much attention was paid to whether or not those loans sold to Fannie were properly classified by the sellers? Countrywide Financial anyone? Note that a federal judge has ruled that Countrywide's Mozilo must face securities fraud charges for:

The SEC sued the defendants in June, accusing them of misleading investors about the quality of Countrywide's loans, including tens of billions of dollars of risky subprime and adjustable-rate mortgages.

"The specific allegations of the complaint relied on by the SEC describe in great detail the virtual abandonment of prudent underwriting guidelines and the resulting proliferation of poor quality loans, during the same period Countrywide was touting the superior quality of its underwriting guidelines and its loan portfolio," the judge wrote.

How many of those are (as constituents of MBS) sitting on Fannie's balance sheet (and off) and are in fact a rotting fish instead of the claimed "quality, prime loans"?

Under the senior preferred stock purchase agreement, as amended, Treasury committed to provide us with funds of up to $200 billion under specified conditions. The agreement requires Treasury, upon the request of our conservator, to provide funds to us after any quarter in which we have a negative net worth (that is, our total liabilities exceed our total assets, as reflected on our GAAP balance sheet).

The problem with drawing the entire facility is that it would make it almost impossible for Fannie to turn a profit. Indeed, if you look at the above original statement, multiplying the preferred dividend by five (roughly what would be involved) would result in a quarterly dividend payment that would consume nearly all of the free cash flow of the company.

This presumes zero credit loss. But that is improbable beyond all reason - even in an ordinary economy a 1/2% loss rate is reasonable and expected (1% default rate and recovery of 50 or so on the defaults, after all expenses, or 1.5% default rate and a recovery of 70ish.) On a $3 trillion credit book this implies an annualized $15 billion in credit losses. The firm not only has to post sufficient net earnings to cover this, but also has to cover the dividends that are roughly $5 billion a year (as of now with the new draw); that is, it must post more than $20 billion in earnings a year just to break even, and that doesn't retire any of the debt.

At least they're honest about this:

Our senior preferred stock dividend obligation, combined with potentially substantial commitment fees payable to Treasury starting in 2010 (the amounts of which have not yet been determined) and our effective inability to pay down draws under the senior preferred stock purchase agreement, will have a significant adverse impact on our future financial position and net worth.

My analysis: NO KIDDING!

Now on to The Fed and the intertwined snake pit between it, The Federal Government and Fannie:

In response to the strong demand that we experienced for our debt securities during the first nine months of 2009, we issued a variety of non-callable and callable debt securities in a wide range of maturities to achieve cost-efficient funding and an appropriate debt maturity profile. In particular, we issued a significant amount of long-term debt during this period, which we then used to repay maturing debt and prepay more expensive long-term debt. As a result, as of September 30, 2009, our outstanding short-term debt, based on its original contractual term, decreased as a percentage of our total outstanding debt to 30%, compared with 38% as of December 31, 2008. In addition, the average interest rate on our long-term debt (excluding debt from consolidations), based on its original contractual term, decreased to 3.76% as of September 30, 2009, compared with 4.66% as of December 31, 2008.

The Fed bought all they could get their hands on. Must be nice, eh?

Accordingly, we believe that continued federal government support of our business and the financial markets, as well as our status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in the government’s support of us or the markets could lead to an increase in our debt roll-over risk in future periods and have a material adverse effect on our ability to fund our operations. Demand for our debt securities could decline in the future if the government does not extend or replace the Treasury credit facility, which expires on December 31, 2009, as the Federal Reserve concludes its agency debt and MBS purchase programs during the first quarter of 2010, or for other reasons.

Uh, how do they intend to replace those facilities? We're talking about three and six months hence here folks!

Now on to their "help"....

On average, borrowers who refinanced during the quarter through our Refi Plus initiatives reduced their monthly mortgage payments by $154.

Well that's better than nothing, but you might try explaining how someone who has had their payments double - or more - is going to be kept from foreclosure by a $154 decrease in their monthly "nut." While any decrease is better than none, to believe that people are losing their homes over $150 a month is likely a losing bet.

Now let's talk about The Fed and the impact of it's programs. Specifically:

The $649.9 billion in new single-family and multifamily business for the first nine months of 2009 consisted of $392.2 billion in Fannie Mae MBS that were issued,

It is rather clear that The Fed is buying more than "the entire market" of new issue thus far, since only $400 billion (roughly) of new issue into the market occurred. The rest was retained on balance sheet, and The Fed has been buying Fannie debt issues that are used to fund that as well.

In other words, The Fed is not a participant in the market, it IS the market.

We expect that our credit losses and credit loss ratio will continue to increase during the remainder of 2009 and during 2010 as a result of the continued high unemployment we have experienced and an expected increase in our charge-offs as we foreclose on seriously delinquent loans for which we are not able to provide a sustainable workout solution.

Fannie sees continued deterioration in the macro economic environment that bears on consumer mortgage performance.

This is in STARK CONTRAST to the media pumpers and pundits, all of whom are claiming that "the worst is behind us" for the economy. Since consumers are 70% of the overall economy, it is simply impossible for both of these views to be correct.

Fannie has more current and more topical information on the performance trends in their book than any of the media folks.

Guess who is more likely to be right, and who has nothing to sell you under the rubric of "hope"?

Fannie also has $47 billion of ALT-A and other "garbage" securities for which there is no market price (under "Level 3".) What are those really worth? Good question - and we also don't know what their acquisition cost was. Surprisingly (pleasantly so) there are few derivatives on their book.

In short while Fannie has managed to increase its interest and fee income dramatically (some 77% over last year) it hasn't mattered, as credit losses have risen at a stagging 246% over the same time period.

This is an organization that is going to die on it's present course. Only extraordinary intervention has kept it from happening thus far, but that intervention has imposed a bone-crushing liability in the form of dividend payments - a liability that will only increase as the line is further drawn down.

It appears that the original $200 billion line was set not with an eye toward what the firm could ultimately sustain and pay down, but rather with the singular goal of assuaging the financial markets at that instant in time. This, as we all know, was an utter failure, as the line was extended in the spring and summer of 2008, yet the market melted in the fall anyway.

Worse, we have now embedded The Federal Reserve in this charade, with them buying debt and MBS that under the black letter of the law appears to be flatly impermissible. I cite Section 14 of The Federal Reserve Act:

Purchase and Sale of Cable Transfers, Bank Acceptances and Bills of Exchange

Any Federal reserve bank may, under rules and regulations prescribed by the Board of Governors of the Federal Reserve System, purchase and sell in the open market, at home or abroad, either from or to domestic or foreign banks, firms, corporations, or individuals, cable transfers and bankers' acceptances and bills of exchange of the kinds and maturities by this Act made eligible for rediscount, with or without the indorsement of a member bank.

This paper is not a cable transfer, bankers' acceptance of a bill of exchange. This section thus does not apply.

(a) To deal in gold coin and bullion at home or abroad

They are not gold.

Nor does this paper qualify under:

Purchase and Sale of Bills of Exchange

(c) To purchase from member banks and to sell, with or without its indorsement, bills of exchange arising out of commercial transactions, as hereinbefore defined;

Again, these are not bills of exchange. This leaves us with:

Purchase and Sale of Obligations of United States, States, Counties, etc., and of Foreign Governments

(b)

To buy and sell, at home or abroad, bonds and notes of the United States, bonds issued under the provisions of subsection (c) of section 4 of the Home Owners' Loan Act of 1933, as amended, and having maturities from date of purchase of not exceeding six months, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage and reclamation districts, and obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof, such purchases to be made in accordance with rules and regulations prescribed by the Board of Governors of the Federal Reserve System. Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to the principal and interest may be bought and sold without regard to maturities but only in the open market.
To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.

These notes and debt instruments have maturities exceeding the limits specified; therefore, the debt must carry the full faith and credit of the United States as to principal and interest.

But again, according to the 10Q:

Although we are a corporation chartered by the U.S. Congress, and although our conservator is a U.S. government agency and Treasury owns our senior preferred stock and a warrant to purchase our common stock, the U.S. government does not guarantee, directly or indirectly, our securities or other obligations.

Treasury has the authority (under the laws passed by Congress) to prop up Fannie and Freddie in this fashion, ill-advised though it may be, and inextricable though it may be given their credit position, earnings power, and required dividend payments.

THE FED, HOWEVER, HAS NEVER HAD AND STILL DOES NOT HAVE THE AUTHORITY TO BUY EITHER FANNIE'S MBS OR ITS DEBT! THE ENTIRETY OF THAT $1.2 TRILLION DOLLAR PROGRAM CONTINUES TO APPEAR TO BE, AS I HAVE REPEATEDLY ASSERTED, ENTIRELY BEYOND THE LAWFUL CONFINES OF THE FEDERAL RESERVE'S AUTHORITY.

Fannie, by its own disclosure in this 10Q, is surviving ONLY due to the extraordinary acts of Treasury and, I would argue, the blatantly impermissible acts of The Federal Reserve. Fannie has turned into nothing more than a politically-motivated toxic waste receptacle, first abused by Countrywide (and others, assuming the SEC's complaint against Mozilo is valid) and now by the FHA! This is a black hole that has consumed almost $1 trillion dollars of taxpayer money thus far. Worse, there is no viable exit strategy on the table nor can there be under the current course we are on.

THIS CHARADE MUST STOP AND THE GSE'S MUST BE RESOLVED.

More Insider Trading (UUP Options)

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 14:00:00 -0500

Ok, who knew in advance of the UUP "dislocation" from this news:

Creations of new shares in the fund are temporarily suspended pending clearance of the registration statement by the SEC, the Financial Industry Regulatory Authority and the National Futures Association and declaration of the effectiveness of the registration statement.

SOMEONE came after the front month (November) $23 CALLs yesterday, with the underlying trading in the mid 22s. For 10-15 cents. Some 300,000 of them were bought yesterday.

They just spiked on the re-open for more than a clean double after UUP's halt and some 60,000 of those contracts have, in the last few minutes, been sold. The "nutso premium" has since relaxed and is now "only" a clean double from yesterday's 10 cent close.

You don't think they expected this to happen, do you?

You tell me what that looks like, and let me know when the responsible party for those CALL buys (they were happening yesterday in blocks of 10,000 at a shot - that's institutional) is identified and we see an investigation of what looks like blatant insider trading.

CNBC just asked "is insider trading literally everywhere" on air.

The answer, as I have repeatedly chronicled here in The Ticker, appears to be "Yep!"

Breaking Up The Big Banks?

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 13:37:00 -0500

From a Reuters blog:

We are hearing that discussion of breaking up large financial institutions that pose systemic risk to the market is gaining traction on the Hill. At this point, discussions are in the early stages, but we understand that an amendment addressing breaking up institutions deemed “too big to fail” could be introduced in the House over the next few days. How does one define “too big to fail” and how would the divestiture process work - these are good questions that Congress will have to address as the discussion moves forward. To our understanding, any amendment that could be introduced in the coming week would likely be vague and would give the regulators discretion to determine which institutions qualify as “too big” and how to address the risk they pose to the system.

The author goes on to say that Kanjorski may be the originator of this. Good, as far as it does, assuming it's real.

But that's not the bombshell in the post. No, it's this:

He left Geithner with two documents. One was a fact sheet that listed all the attributes of AIG FP [the division run by Joe Cassano that blew the company up] and argued why it should be given status as a primary dealer. The other–a bombshell that Willumstad was confident would draw Geithner’s attention–was a report on AIG’s counterparty exposure around the world, which included “2.7 trillion of notional derivative exposures, with 12,000 individual contracts.” About halfway down the page, in bold, was the detail that Willumstad hoped would strike Geithner as startling: “$1 trillion of exposures concentrated with 12 major financial institutions.”

Was that a threat?

And isn't threatening the United States (whether directly or otherwise) something you're not supposed to do?

Sounds like "Bail me out or I will crash everything."

Isn't that analagous to walking into a bank, opening one's coat to reveal an explosives-laced belt, and saying "gimme all the money or everyone dies!"

Does such an act constitute a terroristic threat? You decide.

Then decide whether or not anything has actually changed for the better in terms of stability, or whether we're really in far more danger than we were last fall, as we've not only failed to de-fuse the bomb, we've allowed those who made the threats to profit from it - and thus have increased, rather than decreased, the risk of an all-on collapse.