The Market Ticker - Banking System

What The Lehman Report Proves: Financial Insolvency

nospam@example.com (Karl Denninger) — Fri, 12 Mar 2010 08:21:00 -0500

The Lehman Report on which I wrote last night regarding deeply troubling issues surrounding the Lehman Bankruptcy, has laid bare some very ugly facts relating to our financial system, corporate governance, and our government's active complicity not only in the Lehman collapse, but in ongoing balance sheet shenanigans and the current investment picture.

The conclusions I am forced to reach, after much reflection and sleeping on this article overnight, are not pretty.

They compel me to advise that, in my opinion, the market is now trading both technically and on a fundamental basis, exactly as the Nasdaq was in 1999.

I recognize this is a serious charge and has implications that are most unpleasant, in that it implies a probable detonation ahead at some time in the next year - one that will not only destroy all of the gains made since March of last year but go beyond that - indeed, perhaps as far as the banner on The Market Ticker has for the major indices.

The technicals of the last month leave no doubt what's going on - the market is moving in a parabolic upward fashion, exactly as was the case for the Nasdaq in '99, and indeed, we are approaching the sort of gains in the broad market that Nasdaq saw in 1999.

For those who need a refresher, here it is:

Now let's look at the S&P 500 since the March lows:

And if you need a refresher on what happened to the Nasdaq after it topped in early 2000, here's that unfortunate reality:

Not only did the entire ramp in 1999 disappear, more than another 50% was lost beyond that.

The seriousness of this cannot be overstated. Anyone who bought into the start of the decline in 2000 was wiped out by doubling into a decline that took a literal 85% off the NDX from the peak. Worse, today, nearly a decade later, we remain more than 50% below the peak valuation that the NDX reached.

The Nasdaq is not alone in this behavior. The Nikkei 225 reached 38.957 in 1989. Today it trades around 10,000 - a nearly 75% loss from it's all-time highs, and despite 20 years it has not healed.

An analytical look at history says that when markets rise on fraudulent accounting and false claims - that is, the booking of asset values that is fictional, the claim of profits that were never really made, the hiding of losses off-balance sheet - the losses, when they come, are not recovered for a generation or more.

When this happens to individual companies, they go bankrupt.

When it happens on a broad basis in a market index, the result is utter destruction.

Such happened in the 1930s as well. The DOW's high of 1929 was not recovered until more than 20 years later, and due to FDR's devaluation of the currency it was another decade before, on a purchasing-power basis, your original values were seen again.

So the seminal question for this alleged recovery has been whether or not the recovery is real - that is, whether the asset class at the core of the original problem, the banking system, now has clean balance sheets and it can be reasonably assumed that what is reported in terms of assets, liabilities and earnings is in fact real.

If you cannot be reasonably certain of this then you simply cannot, as an investor, be in this market. The reason for this is clear on its face - we will, at some point in the not-distant future, have a point where the insolvency of these institutions rises to public consciousness.

When (not if) that happens the market will collapse.

This is not conjecture.

It has occurred in each case through history where markets have been pumped through fraudulent balance sheets and similar game-playing, and when it happens the typical losses are in the 75-80% range. Those losses are maintained even a decade or more later.

Now let's examine the evidence on whether the core of the reason for the collapse - bogus accounting that led to the failure of Bear Stearns and Lehman Brothers - is in fact resolved and no longer present.

Tim Geithner and the Obama Administration understand this risk. That much was made clear last year when they ran their so-called "Stress Tests." The market understood this too, in that the promulgation of those "results" was a large part of the underpinning for the rally in the markets that has followed.

Is that reliance reasonable?

The evidence says it is not.

As was made clear in the article I wrote last night, Lehman failed multiple stress tests externally, and yet they were repeated with ever-looser standards until an internally-conducted test passed - at which point Tim Geithner's NY Fed proclaimed them healthy:

After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress‐testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.

Unfortunately the precise same practice took place with all of the other major institutions when Geithner ran the famous "stress tests" that were hung out in front of investors to "bring them confidence."

It was physically impossible for The Federal Reserve to actually perform the testing on its own - so instead, they provided metrics to the firms and asked them to run them.

This is the precise same process that was used to produce a "passing" grade by Lehman after the Bear Stearns failure and that process was administered by the same person who was responsible for the false Lehman outcome.

Now add to this that Diane Olick of CNBC has confirmed what I've been saying since the crisis began: If the banks really accounted for all the losses in the home loan market, they'd all be insolvent.

Wait a second. If the "stress tests" were valid, then the capital raises that were done were sufficient and none of the banks are insolvent.

Indeed, Diane Olick called this exactly as I have:

That's why the Obama Administration has created this kind of shell game in the first place.

Shell game?

Further, the fact that these loans have no economic value isn't just mine. It's also Barney Frank's, who is the lead guy in Congress on the House Financial Services Committee. He said:

Many second liens have little value because of the plunge in home prices, Rep. Frank wrote, adding: "Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans."

Accounting rules that Congress caused FASB to modify by literally pointing a gun at them.

I'm sorry folks, but the weight of the evidence is overwhelming on this point.

Whatever gains you think you're chasing in the stock market at this point in time, you're doing so against a risk of an 85% loss. The idea that Government can prevent this sort of collapse if it initiates is fanciful - remember that in the summer of 2008 the common belief was that we'd never see a crash right in front of an election, as "they" would not allow it to happen. If you bought into that belief, you lost half your money.

The risk here is even more severe. If, in point of fact, those "Stress Tests" provided false confidence (and I believe the evidence is strong that they have) then it is simply a matter of when the market comes to realize that these losses in the large banks are still present but being hidden.

If we apply the FDIC's own metrics to the expected losses from such a revelation that would "immediately appear" we get a number between $2 and $3.5 trillion that would have to be paid to depositors of the failed institutions - equal to somewhere around one full year's Federal Budget and dramatically exceeding what the FDIC and Treasury could cover - by more than 10 times.

The consequence of such an event would be literally catastrophic. Having squandered over $3 trillion in the last two years in new borrowing by The Federal Government to prop up the economy (instead of clearing this bad debt through resolving the bankrupt financial institutions) it is highly unlikely that The Government would be able to, on short notice, raise another $3 trillion.

I'm out of all long positional trades as of this morning and will not be back in them until this issue is resolved. Even if there is a potential 10 or 20% advance that I will miss by doing so, the downside risk of 85% is so extreme and the facts that we now have available strongly suggest that not only are all the large banks insolvent but that the government has been and is complicit in covering it up - not just temporarily, but as an ongoing practice, just as occurred with Lehman.

I'm sure many will call me crazy for this analysis.

We will see if you still think so in a year or two.

Bank Of America To Stop Charging 31,200% Interest

nospam@example.com (Karl Denninger) — Wed, 10 Mar 2010 09:57:00 -0500

No, that's not a misprint.

Let's say you went to Starbucks and bought a $5 Latte. You swiped your debit card and didn't have the $5 in your account.

Bank of America would charge you a roughly $30 overdraft fee, amounting to 600% of your purchase for a loan of that $5 for as little as one day. That's bad enough.

Let's assume you paid that overdraft fee (and the $5) in one week. There are 52 weeks in a year and the bad news is that when computing the annual percentage rate you must divide the interest charged by the percentage of a year you held the money to get the APR. Thus, 31,200% interest on an "annualized" basis, assuming you pay it in one week (it's 218,400% if you pay it off the next morning!)

The bank will soon stop doing this, and in fact is mandated to do so without getting permission first for each transaction, as of June 1st.

The question that should be asked is why we should have to wait until June 19th for new accounts, or August 1st for existing accounts, never mind why this sort of outrageous behavior has been permitted in the first place.

Guido on the corner typically will charge you something obscene like 500% interest over the course of a year.

The banksters put Guido to shame.

How much do the banksters make off this? Some $1.77 billion annually, at last count. None of which, I might add, will be refunded to their customers.

The banking industry has claimed that changes like this will "restrict credit" to lower-income customers, who allegedly "need" that credit.

I will simply observe that nobody "needs" a 31,200% interest rate loan except the bank that has been given license to rob the public blind - literally.

If you were wondering who the Congress and Fed work for, it clearly is not you.

The open question, and one that I cannot seem to find a reasonable answer to, is why we, the people, continue to allow both a Congress and Federal Reserve to sit in control of our government and financial system when they permit and endorse actions that constitute financial rape of such an egregious nature that absolutely everyone can understand it.

Buy Financials (Because I Was Right)

nospam@example.com (Karl Denninger) — Fri, 05 Mar 2010 10:06:00 -0500

Yes, that's sarcasm:

The mortgage firms are looking at every loan more than 90 days past due and “asking us basically to give them all the documentation to show that it was properly underwritten,” JPMorgan’s Scharf said. “We then go through a process with them that takes a period of time, and literally it’s every loan, loan-by-loan, and have the discussion on whether or not we actually should buy the loan back.”

That's exactly what I said would happen more than two years ago.

EVERY LOAN.

If there was appraisal fraud OR

If there was income fraud OR

If there was DTI fraud OR

If the automated underwriting was gamed OR

If there was asset fraud

THEN the bank gets rammed with a repurchase demand on the bad paper - paper that is 90 days+ and, in essentially every case, dramatically underwater.

The "dream" that this will result in "only" $7 billion in losses (30% of the repurchased amount) is a fantasy.

The most common include inflated appraisals or falsely stated incomes in the loan applications, said Larry Platt, a Washington-based partner at law firm K&L Gates LLP who specializes in mortgage-purchase agreements. The government agencies hire their own reviewers who go back and compare the appraisals with prices from historical home sales, he said.

Ding ding ding ding ding ding.

The truly ugly news isn't found in these mortgages. It is found in the second lines - HELOCs and "Silent Seconds" - that are behind these agency mortgages. Those are worth zero once the first defaults, and when the repurchase demand is perfected the auditors are going to force these loans to be recorded at their likely recovery value - which is zero.

There are literal hundreds of billions of dollars worth of that trash on all of the big banks balance sheets, and all of it is being carried under assumptions that nearly every one of those loans is "money good." 80% of the dollar value of these HELOCs and Seconds are in the bubble areas and of those virtually all are behind an underwater first.

The assumption that these loans are "money good" is blatantly and intentionally false. It is a fiction that our regulators, examiners and auditors have foisted upon the public, and if you rely on it, you will get burned.

Oh, JP Morgan's net income for all of 2009? $11.7 billion.

They recorded $1.6 billion last year for this "expense", and I'm willing to bet that it's double that or more for the coming year, not to mention the impairment or outright write-off of the seconds.

That would be roughly 20% of their net earnings - not exactly an immaterial amount of money.

PS: $21 billion is tiny compared to the tsunami headed these folks' direction. In the end every piece of this bad paper is going to head back to the securitizers and originators. All of it - and the seconds behind that paper are all going to wind up marked to zero, because they are subordinate to an underwater first. It is simply a matter of time before the people who hold these RMBS and the more complex securities structured on top of them decide to come after the banks and, to the extent that they can prove malfeasance or misfeasance, these banks will eat it.

FDIC Report: "We Were Broke And Getting Broker"

nospam@example.com (Karl Denninger) — Tue, 23 Feb 2010 10:11:00 -0500

Amazing...

700 troubled banks is bad, and far worse than 552 last quarter.

But the $20.9 billion loss in the deposit fund, after losing $8.2 billion last quarter, is beyond bad and well into the psychotropic medication range.

Remember that the Deposit Insurance Fund went negative last quarter. Now it has lost another $20.9 billion.

What does the FDIC say?

The agency hopes to make up that loss through advance payments by banks of $45 billion in fees

There's that "hope" word again.

Oh, once you've prepaid your fees, what happens if the losses continue? Can't collect the same fee more than once, right?

That's what I thought.

"Each account insured to at least $250,000 through 12/31/2013 - so long as we can continue to borrow money from Treasury to pay you."

They leave that last part of the sentence out, of course.

Time To Leave Citibank Folks

nospam@example.com (Karl Denninger) — Fri, 19 Feb 2010 17:00:00 -0500

Seeking Alpha (and Business Insider) report:

Seen on a recent Citibank (C) statement: "Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change."

The writer there says that he called Citi (as did the other author over on the other site) and was told this applied "only to accounts in Texas."

Huh?

Folks, the formal name for a checking account is a demand account. It is called a demand account for the very reason that you have a right to all your money, on demand.

Now maybe there's some new law that applies only in Texas, or maybe there isn't. Who knows - or cares.

The fact of the matter is that any bank that reserves the right (whether they claim through some external cause or not) to throw up a gate on a demand account is no longer marketing demand accounts.

My checking account is such a demand account and I'll be damned if I'll have my checking money anywhere that doesn't fit that description.

In my opinion, you shouldn't either.

Complex Loans Didn't Cause Crisis? Bull!

nospam@example.com (Karl Denninger) — Fri, 19 Feb 2010 11:49:00 -0500

The WSJ carried an interesting (and misleading) opinion piece today:

Regulatory reform that can improve competition and consumer choice in financial services is long overdue. But no new federal bureaucracy such as the Obama administration's proposed Consumer Financial Protection Agency (CFPA) is needed to bring that about.

More importantly, the administration is incorrect in claiming that such an agency would have prevented the present financial crisis and is necessary to prevent the next crisis. On the contrary, such an agency might be the first step toward more problems.

How does forcing lenders to reduce a credit card or mortgage agreement to language that can fit on both sides of an 8-1/2 x 11" page in 10 point courier type constitute "a first step toward more problems?"

During the housing boom bankers made a raft of extraordinarily foolish loans. Some were the result of lenders defrauding borrowers; probably at least as many were the product of borrowers defrauding lenders. But there is no evidence, as Elizabeth Warren (a champion of CFPA and chair of the TARP Congressional Oversight Panel) recently asserted on these pages, that lender fraud was the overriding cause of the crisis.

The bank loans were not foolish because borrowers didn't realize what they were doing. They were foolish because of the incentives they created for borrowers, especially when housing prices turned south.

No, the bank loans were foolish because the banks lied about what they were selling, to some degree to consumers but to a much larger degree to investors.

My own research confirms the analysis provided by University of Texas economist Stan Leibowitz on these pages last July: The initial onset of the foreclosure crisis was a problem of adjustable-rate mortgages, whether prime or subprime. It was not initially a subprime problem.

Who wrote loans without qualifying the borrower on the fully-indexed (that is, the highest rate the loan could reach) rather than (as they did) qualifying them on teaser rates that were known to have a short expiration date, sometimes as short as two years post-initiation?

That would be the banks, who created not a mortgage product but instead a product for asset-stripping the consumer, in that they wrote paper that they knew the consumer could not "pay as agreed" through the entire term.

The intent was to force the consumer to come back and get a new loan in a couple of years. This was insanely productive for the banks for two reasons: it gave them another set of fees they could strip off from the consumer, and in addition virtually the entire payment stream during those first two years on an amortized note is interest, with almost none of it principal.

That is, the intent of such a note was not a "mortgage" - an amortizing loan contemplated to be retired at maturity. The essence of these "loans" was in fact more akin to a typical commercial real-estate loan where amortization is not the prime purpose; these are typically written as interest-only balloons and refinanced, with the interest payments made from tenant leases. In this case the interest payment is made from the "home tenant's" employment cashflow. A Consumer Financial Protection Agency could and should bar the marketing of such loans as "mortgages" and instead demand they be called what they are - a complex financial transaction that effectively amounts to a lease!

The error of course in the bank's thinking was that home prices could never go down. In fact, their bet was that home prices would always appreciate fast enough to accommodate both the paid interest and the fee to refinance after two years.

In the second phase, falling home prices provided incentives for owners whose mortgages were under water to walk away from their houses. And in the third phase, which we are now experiencing, traditional macroeconomic factors like unemployment led to more foreclosures—especially where homeowners' mortgages are already underwater. Reflecting this situation, the Mortgage Bankers Association reports that the fastest-rising segment of foreclosures in recent months has been traditional prime, fixed-rate mortgages.

Again, we get down to my favorite graph:

It doesn't matter how you slice the pie here. House prices cannot expand faster than wages forever, just as debt cannot expand faster than GDP forever. The compound function of exponents makes all such claims and expectations false and dangerous.

The proliferation of mortgages with minimal downpayments, interest-only or even negative amoritzation terms, and cash-out refinances meant that many consumers fell into negative equity territory much more rapidly than they would have otherwise.

Those mortgages were made available only because the banks willfully and intentionally ignored warnings by The FBI, HUD and private credit analytical firms that these loans were not as represented. They packaged them up and sold them to investors either knowing (or willfully blind) that the credit quality of the paper inside those MBS (and the more-complex securities structured upon them, including the partially and fully-synthetic versions) were not as represented.

This was not an accident it was a scam.

Regulators may want to limit mortgages that provide so many borrowers with such strong incentives to walk away when housing prices fall. They may want to prohibit lenders from making loans with minimal downpayments or interest-only loans that result in consumers having minimal equity in their homes. But that's an issue of safety and soundness, not protection against fraud.

If regulators prosecuted and jailed those executives who misrepresented the credit quality contained in these securities then the loans could not have been made. Without the ability to obtain funds you can't loan funds.

The bank that has $100 million to loan out must sell its loans to be able to make more loans. If it cannot sell them at a price representing the risk and make money (because it allowed people to take out loans on "prime" terms when they were poor credit risks, and upon disclosing this honestly to buyers nobody will pay anything close to "par" for that paper) then they are immediately restrained from continuing this conduct and the fuel for the bubble is immediately removed.

Without that free-flowing and fraudulently-granted credit there is no price appreciation spiral that drives the bubble. The bubble does not inflate. The price appreciation does not happen. The mania is quelled before it begins and the damage to the economy does not happen.

The financial crisis resulted primarily from the rational behavior of borrowers and lenders responding to misaligned incentives, not fraud or borrower stupidity. Policies that fail to appreciate the difference will not protect, and may hurt, the very consumers they are intended to protect.

Bah. The financial crisis resulted primarily from promises by lenders (on both the funding and lending side) that were knowingly false and in some cases maliciously so. Borrowers were flatly told they could come back and refinance before any "payment shocks" happened - not that they might be able to, but that they would be able to. They were led to believe by the statements of what amounted to con men that they were getting not only a great deal but that they could come back at any time and continue to get a new great deal.

At the same time buyers of the paper emitted by these lenders and their cronies on Wall Street failed to disclose that as early as 2004 The FBI was warning of an epidemic of falsehoods in mortgage applications - that is, that the paper contained in those securities was trash. Despite having authorization to verify the statements of borrowers (via 1003s and 4506-Ts) the lenders willfully did not do so and issued paper with reps and warranties that were issued as statements but which they intentionally failed to verify. Ratings agencies accepted data submitted without verification and filled in "blank" data with unsubstantiated guesses, along with running computer models that presumed there would never be a home price decline (a mathematical impossibility given the flat income curve for the median citizen since 2000.) All of these assumptions were made by "wise people" who either factually knew or, had they actually exercised their claimed wisdom and knowledge, should have known.

Synthetics were then created at the behest of hedge funds and others through the purchase of a naked credit-default swap - a bet that the reference securities would default - while not owning the reference security. Those synthetic CDOs were then sold to investors, rated on the underlying (bogus) credit of the reference instruments. The outrageously-overrated credit quality claimed for these reference instruments came to light almost immediately, in many cases mere months after these synthetics were created, with the buyers taking heavy and in some cases total losses. Was it disclosed to the buyers of these synthetics that they came into existence only because someone bet that the purchaser would lose all their money? Would you buy a security that came into existence only because the person at who's behest it was created believed that it was in fact worthless, if that fact was disclosed to you up front?

The essence of the crisis was, as Mr. Zywicki notes, the three-cycle collapse of the housing market first by adjustable-rate loans, second by price declines and now by unemployment.

Mr. Zywicki acknowledges (in a phone call I just completed with him) that but for the price increases caused by these fraudulent misrepresentations the bubble would not have happened - and thus neither would the collapse.

BUT what he refuses to recognize is that the essence of the Consumer Financial Protection Agency is to prohibit practices that amount to fraudulent and misleading conduct on the part of lenders in their dealing with consumers. That is, promising that you "will be able to refinance" before that teaser expires, qualifying borrowers on other than fully-amortized and fully-indexed rates and other abusive practices that lead consumers to believe that the fundamental mathematical laws that govern all exponential functions have somehow been repealed, even if temporarily.

Fraud in all it's forms was the essence of this crisis. It could not and would not have occurred but for that fraud, as the home price increases seen in the 2000 decade could not have occurred without the money flow necessary to fund the spiral, and that money flow could not have happened without misrepresentations by both omission and commission up and down the line.

Each and every part of the flow of funds was involved - lenders, borrowers and investors.

Even those who were not involved in the fraud in any way - who took out traditional, fixed-rate 30 year mortgages during these years - were harmed by this fraud. They were induced to pay a price that was fraudulently inflated for the property they purchased - a price that was not supported by the fundamentals of the market - that is, free action by informed buyers and sellers - but rather a price that was inflated by the fraudulent loan originated, made and securitized to the person who bought a house down the street. That fraudulent loan presented itself in the marketplace as false demand in that the "buyer" was incapable of affording the home he allegedly "purchased." Each and every buyer of a home from 2003 to 2007 was thus harmed by these practices, irrespective of whether their loan was honestly represented to them or not.

Resolving the crisis demands prosecution for all those involved in the myriad frauds, starting from the top down. We have done exactly none of what has to happen to clear the system of this fraud, nor have we punished the perpetrators, even though intentional misrepresentation by omission or commission is, in nearly all cases where financial injury results, already illegal.

Preventing this from happening again requires not only that the financial industry be subject to true oversight and enforcement to keep it from defrauding investors, but that consumers be protected from the misrepresentations perpetrated upon them by the financial industry in the lending products offered and that it be made clear that consumer misrepresentations and frauds perpetrated upon lenders will not be tolerated either.

Mr. Zywicki is a law professor at George Mason University and a senior scholar at the Mercatus Center. This op-ed is based in part on a Mercatus working paper, "The Housing Market Crash."

Mr. Zywicki claims in his areas of expertise consumer credit and consumer lending. It is clear from his piece (and my phone call) that in point of fact his position is that anything a consumer gets themselves into is a function not of deception and defective understanding (due to omissions or commissions by the lending industry) but rather simply a matter of "efficient markets."

I strenuously disagree, and submit that if you're attending George Mason University to become versed in how to claim that it's all the consumer's fault (even when actively misled) or perhaps even to defend against allegations of these misrepresentations and omissions while working for a financial institution, you'll do well to attend his classes. He'll fill your head with everything you need to recite in a puerile attempt to defend the indefensible.

I'll take a pass as that's the sort of lawyering that leads me to recall my Shakespeare - Henry VI, of course.

Tricky Bond Deals: Not Just Synthetics

nospam@example.com (Karl Denninger) — Wed, 17 Feb 2010 08:46:00 -0500

It appears that our "wonderful" investment banks have been involved in tricky bond-market deals in more than just the synthetics that I have propounded on before:

Feb. 17 (Bloomberg) -- Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.

No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.

Why does this matter? Because not disclosing these swaps made it look like Greece had less debt than it in fact had, and therefore resulted in a lower coupon (interest rate) and higher price for the bonds.

This of course feeds into the question about whether Greece was intentionally hiding its financial picture from EU regulators and others, but the bigger question is how many other nations have played similar games?

“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”

Yep.

Just like "Synthetic CDOs", where the essence of the deal was that some investor wanted to place a bet that the very security that was being created for sale would not perform!

The investment (and commercial) banks involved all claim (with some justification) that the folks doing the buying are "sophisticated investors" and thus should understand what they're buying. But that belies the fact that the sellers apparently have intentionally hidden information from buyers. One can reasonably conclude that such hiding of information has only one purpose in the marketplace - to induce someone to take an action that they would otherwise not.

We have done exactly nothing in this country - or anywhere else for that matter - to punish those who took these actions. We have not dismantled the perverse incentives that make such intentional misrepresentations profitable. We have not barred those firms involved from doing business with The Federal Reserve or Treasury (e.g. by revoking their primary dealer status.)

We hear claims that reinstating Glass-Steagall would not fix this problem, yet the fact remains that with Glass-Steagall in place no commercial bank would ever do such a thing because it would be barred from transacting in these markets in the first place! Therefore, there would be no opportunity for those institutions that are systemically-important to get involved in these sorts of intentional acts of obfuscation.

Those people who take losses as a consequence of their own foolishness should not be protected, and yet in this crisis they were. As a consequence the essential lesson of such a crisis - that there is no such thing as a "free lunch" - has been lost.

But there's a difference between losing that lesson and countenancing intentional deceptive acts. In most cases it is my contention that these actions should be treated under the common-law definition of fraud, because the intentional omission of material facts that, were they disclosed, would influence the behavior of the buyer, and the fact that these buyers took losses they would have avoided but for that failure to disclose absolutely fits the definition.

Finally, one must ask - if this has become an embedded and pervasive practice in our "Banking System", does The Federal Reserve's reluctance to submit to a full audit of it's operations suddenly make more sense?

"Mistaken" Foreclosure Or Felony Criminal Conduct?

nospam@example.com (Karl Denninger) — Sat, 13 Feb 2010 12:35:00 -0500

Oh, the Tampa Bay fishwrapper tries to claim that this was a "foreclosure" on the wrong house:

SPRING HILL — Charlie and Maria Cardoso are among the millions of Americans who have experienced the misery and embarrassment that come with home foreclosure.

Just one problem: The Massachusetts couple paid for their future retirement home in Spring Hill with cash in 2005, five years before agents for Bank of America seized the house, removed belongings and changed the locks on the doors, according to a lawsuit the couple have filed in federal court.

Let me be clear: To foreclose on something you must first be holding a mortgage on that thing.

Bank of America did not "foreclose" on anything as the home in question was purchased for cash and thus owned free and clear.

Bank of America had no more right to be present upon that property for any purpose whatsoever than a crack dealer, gangster or other street thug.

The firm, by their proxies acting at their direction, allegedly unlawfully broke into someone's home, stole their possessions and destroyed them, and then unlawfully denied the rightful owners access to their own property.

In the State of Florida (and many other states), if you do this while someone is present in their home, you are presumed to be acting with the intent to do great bodily harm or worse, and the occupant(s) are authorized under the Castle Doctrine to use deadly force to stop you.

Bank of America will undoubtedly claim it was all an "innocent mistake."

But that's not likely to hold water if this allegation proves up:

The bank had an incorrect address on foreclosure documents — the house it meant to seize is across the street and about 10 doors down — but the Cardosos and a Realtor employed by Bank of America were unable to convince the company that it had the wrong house, the suit states.

In other words Bank of America allegedly was told they were attempting to seize the wrong house and yet did it anyway.

Lawsuit?

This looks like criminal conduct to me with the line being crossed when the bank refused to listen to their own Realtor who told them they had the wrong house.

If I was to try such a stunt myself I would be lucky if I was not filled full of .40 caliber holes by the occupants of said home and I would deserve exactly that fate for not only attempting to seize the wrong house but intentionally and willfully ignoring warnings that I was trying to seize the wrong house.

Of course when you're a big TARP'D bank and everyone in our government including the President himself has declared that you are effectively above the law things are just a bit different than when you're an ordinary person with an obligation toward law and order.

This is the bank's alleged reply:

"We have reached out to the Cardosos' representatives and hope to have the opportunity to work with them to properly assess and address their allegations," the statement said. "We are reviewing the allegations in the lawsuit, the actual events that led to them and the causes of those events, and will consider any hardship that resulted."

Bank of America will consider?

Bank of America will assess?

How about this response to your lawyering jackasses:

Blow it out your ass Bank of America.

This is MY reply and is addressed to ALL AMERICANS:

Do you support this sort of crap? Is this what AMERICA stands for? Breaking and entering into someone's PAID IN CASH home DESPITE being warned they had the wrong house, stealing and destroying the contents thereof and other acts that, were you or I to engage in them would rightfully result in felony prison time - or worse?

If you do not, then you have an affirmative obligation to not only not do business with these SPECIFIC Banksters yourself but also to refuse to do business with anyone who does.

Further, YOU have an affirmative obligation if you live in this area and honor the rule of law to DEMAND that the District Attorney bring FELONY CRIMINAL CHARGES against everyone involved up and down the line for the unlawful act of entering upon this property, taking and destroying the contents therein and unlawfully denying the rightful owners access to their home.

Mistakes stop being innocent errors when you are told of your mistake and yet continue pursuit of your wrongful conduct, and if this newspaper account is accurate that is exactly what happened.

THE POWER TO STOP THIS CRAP STARTS WITH WE THE PEOPLE.

Are You SITTING DOWN Folks?

nospam@example.com (Karl Denninger) — Wed, 10 Feb 2010 15:09:00 -0500

You better be, when the implications of this one ripple through:

McLean, VA – Freddie Mac (NYSE: FRE) announced today that it will purchase substantially all 120 days or more delinquent mortgage loans from the company's related fixed-rate and adjustable-rate (ARM) mortgage Participation Certificate (PC) securities.

What this means is that all the defaulted loans in these packages that Freddie bought up, bundled up and then puked out into the marketplace are coming home.

To Freddie.

Well, at least initially.

But now, every one of these loan files is going to get the fine-tooth-comb treatment. And believe me, there's gonna be a lot of lice found in there, along with more than a few cockroaches.

This is going to be a problem folks, because those loans in which reps and warranties (that is, the promises made to Freddie by the banks when they were sold to them) were breached due to a material falsehood of some sort will be, as a matter of fiduciary responsibility, puked back onto the bank involved.

Note that most of the "warehouse" funded brokers and such are already gone. They went under in 2007 and 2008. They're done.

But those folks got their warehouse lines from the big banks. Countrywide (now BAC), Wells, WaMu (now absorbed), Chase, etc.

Now to be sure not all of these bad loans went bad because of some sort of fraud. Some were made to legitimate borrowers on legitimate terms with everything on the up-and-up - no lies, no schemes, income and assets were as represented, no fraud - but the borrower lost his job and, well, just doesn't have any money.

But I'm willing to bet that a huge percentage of these - likely a majority and perhaps even a supermajority - had some element of fraud in them.

Those, my friends, are headed home, and will land like a millstone around the neck of the bank that tendered them.

Bet on it.

More Examples: Massive BS Accounting

nospam@example.com (Karl Denninger) — Fri, 05 Feb 2010 11:05:00 -0500

I know I keep harping on this, but it's important.

I keep getting copies of various evidence that the banks are not properly handling defaulted mortgages. The instance I present here is a mortgage - a "conventional" loan - that has been reported as "120 days past due" to the credit bureaus for THIRTEEN CONSECUTIVE MONTHS.

What the hell sort of game is this?

Note that it was also reported 60 late twice too, but that's reasonably possible - it went late, went 60 late, the debtor made one attempt to pay it down but still was 60 late, then gave up.

This person has been living in their house without making a mortgage payment for nearly a year and a half, and the bank - it's one of the "Big Three" - HAS NOT FORECLOSED.

This crap has to stop folks. Yeah, this is an anecdote, but I have to ask whether the auditors have looked into this. A loan that has this "payment history" ought to be carried at recovery value, but that would mean it would be "marked to the market", and we know the banks all got permission to mark 'em to "model" back in the early part of 2009.

This sort of BS game is too damn prevalent. There is no reason other than cooking of the books that institutions would hold paper like this in a perpetual "not paying and not gonna pay either" state rather than foreclose and take the hit - except to present a view of their financial status that is less than completely honest.

"Extend and Pretend" may have been made legal but that doesn't make you solvent - it just means that the government made legal what formerly was called accounting fraud, and the inescapable reality is that eventually the cash flow will get you anyway.

To the banks: CUT IT OUT!

To the regulators: STEP ON SOME NECKS!

To Congress and "The Cops": STOP THE LOOTING AND START PROSECUTING!

Swiss Bleating: Now We're Getting Somewhere

nospam@example.com (Karl Denninger) — Sun, 31 Jan 2010 17:50:00 -0500

Gee, now The Swiss are warning that UBS could "collapse" if UBS lost it's US banking license:

"The actions of UBS in the United States are very problematic. Not just because they are punishable but also because they threaten all of the bank's activities," Eveline Widmer-Schlumpf told Le Matin Dimanche newspaper.
"The Swiss economy and the job market would suffer on a major scale if UBS fails as a result of its licence being revoked in the United States," she said.

Let's boil this down, shall we?

Is UBS a US company that locates itself in Switzerland for the express purpose of evading US law or is it a Swiss company that happens to do a significant (but not critical) amount of business in The United States?

The difference is in fact crucial.

If UBS is a Swiss Company located in Switzerland as it's primary domicile because that's where it transacts most of its business, but it happens to do some business here in the US then a revocation of its US banking license (which I have repeatedly argued should happen, including here) would be inconvenient but hardly catastrophic.

But if UBS is in fact a US company - that is, in form, volume and character of the business it does it is US-centric, and continues to be domiciled in Switzerland as a means of dodging enforcement of US law, including that pertaining to customers that are US citizens, then we have a larger problem.

I think we are owed an answer as to which case we're dealing with, and the simplest way to find out is to revoke UBS' United States banking charter.

And before the usual cadre of "useful idiots" pipes up and starts attacking me without engaging their brain first, let me be perfectly clear:

The Swiss are free to set any sort of legal standard up for their corporations they wish. I have no argument with their national sovereignty and in fact kind of like some of their viewpoints.

HOWEVER, this is immaterial to the point at hand, which is that just as they demand we respect their sovereignty and the rule of law with regard to their citizens, we have the right to demand the same of all firms that wish to do business inside the United States.

Therefore, if UBS wishes to have a US Banking License they must be forced to comply in all respects with US law irrespective of where the transaction takes place, and when it comes to accounts held by US Citizens this means they have an absolute obligation to report to the IRS as does every United States domiciled bank. If they do not like this obligation they must surrender their US Banking License and then are free to deal with US Citizens as they desire anywhere else in the world - but they may not have an office, representatives, or business presence in The United States nor may they enjoy the benefits of US Government Support as is offered to all US-licensed financial firms.

Oh, The Truth Is The Banks Are Insolvent? (Still)

nospam@example.com (Karl Denninger) — Tue, 19 Jan 2010 07:47:00 -0500

Gee, what have I been saying now for over two years?

Jan. 19 (Bloomberg) -- The U.S. Treasury Department has failed to win agreements to get struggling borrowers’ home- equity debt reworked, among the biggest roadblocks to reducing foreclosures that may reach a record 3 million this year.

None of the lenders holding a combined $1.05 trillion in the debt has signed contracts requiring participation in the second-mortgage modification plan announced eight months ago. The largest banks remain “committed” to joining, Meg Reilly, a department spokeswoman, said in an e-mail.

Amusing. My view as expressed somewhat-recently on this issue can be found here:

They are sitting on over a trillion of dollars of this paper (about $1.1 trillion to be exact) and several hundred billion is severely impaired or even worthless. Wells Fargo, just as one example, has (as of its last 10Q) $106 billion of second lines outstanding on balance sheet, and God only knows how much in SPVs (Wells is known to have significant off-sheet exposure "inherited" from Wachovia.) Let me put this in perspective for everyone.

Uh huh.

RealtryTrac says that three million foreclosures are likely this year and that as much as 23% of all mortgages are currently in negative equity - that is, any second line is severely impaired on that property and may be worthless.

All the BS and games has not changed a thing. The big banks all claim to be "committed" to working with the Treasury on these programs, but the fact of the matter is that if they are forced to recognize reality they are insolvent.

But the conundrum is that in order to normalize the economy and lending environment we must stop playing games with home prices. House prices must contract to where average Americans can afford to buy them without using exotic and tricky loans.

HAMP fails to do it - as Mark Hanson Advisers has noted there is no fix in the HAMP program as total DTIs - that is, total amount of debt service as a percentage of GROSS income - remains solidly in the unsustainable area.

As far back as the first few Tickers, dating to April of 2007, I wrote on the fact that sustainable loans are written on a 28/36 basis - that is, 28% DTI for housing expenses and a total debt-to-gross-income ratio (DTI) of no higher than 36%.

Treasury's HAMP is still resulting in DTIs, on average, of 55% and while this is an improvement over the impossible-to-service 72.2% a 55% DTI is still impossible to service if there is even the smallest challenge in the borrower's life.

Why isn't there a focus on how banks managed to sell people not only first mortgages but also HELOCs when their DTIs were in the 70s? That sort of "lending" is BY DEFINITION predatory as there is NO REASONABLE EXPECTATION that such a borrower would EVER be able to pay as agreed!

Remember, these DTIs are computed on gross income - that is, before both state and federal income and other taxes. Further, it is widely agreed and understood that tax rates are at generational lows and as such the tax bite will only increase in years to come.

In short ALL of this so-called "lending" was a SCAM and Treasury is hell-bent and determined to cover up the underlying scam and screwing that the banks inflicted on borrowers instead of both putting a stop to it and punishing those who willfully and intentionally hosed The American Public.

The bottom line? The banks are still insolvent, Treasury is still lying, the banks are still refusing to recognize losses that have already happened as a direct consequence of their intentional and outrageous conduct and all of this together will prevent any meaningful recovery the broader economy from taking hold.

We should have forced all of these banks through insolvency in 2007 and gotten it over with. We still can and should. The institutions that wrote these loans were radically irresponsible and protecting them from the consequences of their idiocy has provided only a temporary respite from the underlying reality - the amount of debt in the marketplace exceeds the ability of those who earn incomes to service it.

Until we face reality any alleged "recovery" is a chimera created by ever-increasing allowance of and reliance on fraudulent accounting, not fundamental improvement.

ALT-A: "Here It Comes"

nospam@example.com (Karl Denninger) — Sat, 16 Jan 2010 17:41:00 -0500

One of my favorite movies of all time...

I have often commented that we're nowhere near done with the mortgage explosions, and that where subprime was bad, those loans made in 2005-2007 to people who lied about their incomes - which is 90% of those who took out "ALT-A" loans - were going to be a catastrophe.

Well, as Kirk said, "here it comes"

Moody's Investors Service put $572.7 billion in Alternative-A residential mortgage-backed securities issued from 2005 through 2007 on watch for possible downgrade after it revised its loss provisions.

The rating agency said Alt-A loans that are 60 or more days delinquent "have increased markedly" since it last revised its loss projections. Alt-A mortgages, which sit between prime and subprime, typically were granted without the borrower showing proof of income or assets.

That's a cool half-a-trillion worth.

And guess what this means for loss rates?

Moody's said it now projects, on average, cumulative losses of 14% of the original balance for 2005 securitizations, 29% for 2006 securitizations and 35% for 2007 securitizations. The updated loss projections will have the greatest impact on senior securities issued in 2005, the firm said.

That ought to leave a mark.

No, the banks have not taken write-downs of some 27-30%ish on these securities in aggregate (that's another $150-170 billion worth), nor has anyone else.

One wonders when our government will recognize that a loan made to someone who claims to have $200,000 in income but really makes $50,000 simply cannot be refinanced into anything the borrower can afford nor is there any way to prevent that loan from defaulting. This is the ultimate fraud and outrage in "extend and pretend" and "mark to fantasy" - there is no possible way for these loans to be "made good" no matter what happens in the future - they were always going to blow up unless house prices continued to rise forever, thereby allowing the "borrower" to roll them over time and time again.

Those who believe we can "make it all ok" are delusional beyond words.

Goldman Under Fire (Again): Ponzi Bonuses?

nospam@example.com (Karl Denninger) — Fri, 08 Jan 2010 08:16:00 -0500

Are we seeing once again the same game being played that WaMu played in the spring of 2007 - and which started me writing Tickers?

In his lawsuit (PDF), Brown states that Goldman Sachs gave out $4.82 billion in bonuses in 2008, despite earnings of only $2.32 billion that year. The lawsuit alleges that the company spent 259 percent of its income in the first quarter of 2009 on compensation.

Uh, that's kinda interesting. It is somewhat like WaMu, no?

If you remember back in 2007 I wrote one of my seminal Tickers - one of the first - that spoke to Washington Mutual paying out funds they didn't really have in cash in dividends. That is, they were booking "capitalized interest" (negative amortization on Option ARM loans) as "earnings" and then paying part of that - plus all of their cash earnings - out to shareholders in the form of a dividend.

The problem with such a game is that non-cash "earnings" aren't money and while they look good on the balance sheet if they don't materialize later on you're sunk! My call at the time was that they wouldn't materialize and WaMu would indeed be sunk, and it was.

This is a bit different, in that nobody is (yet) claiming that Goldman doesn't have the money. What's being alleged here is that they have effectively pilfered the public Treasury and then paid that out as bonuses, rather than doing with it as Treasury intended and their shareholders were entitled to, which is to use the capital to rebuild the firm's foundation and strengthen it against future potential losses.

This also ties in with the revelation yesterday that The NY Fed tried to cover up the pass-through via AIG of Treasury money to Goldman when Tim Geithner was it's head, as I wrote about yesterday.

Goldman, for its part, claims the lawsuits are without merit. We'll see.

The better question from my point of view is not whether Goldman's compensation practices are reasonable. It is whether public companies (or private ones for that matter) should have access to public support under any set of circumstances.

It is my position that such support, if it is required to be offered at some point, come with the effective dissolution of the firm - and the wipe-out of shareholder equity. Bondholders would get whatever is left as the firm is liquidated in bankruptcy.

Commentators call this "disorderly." I call it what Capitalism prescribes when you blow it. Having had my "best laid plans" in business go boom on me before, I don't see the issue.

Those who argue for a "too big to fail" viewpoint are in fact arguing for a "too big to exist" firm. If some company asserts such a position in the global financial marketplace then in my view it has declared of its own volition that it is a danger to the economic stability of the United States and as such it must be immediately broken up and dissolved.

If the firm requires public support before that can occur then it must be liquidated immediately, with that public support being used to maintain order - not enrich employees and allow yet more skimming off of funds for a privileged few.

Where Are The Damn Handcuffs?

nospam@example.com (Karl Denninger) — Tue, 05 Jan 2010 08:18:00 -0500

If you're not mad enough to contemplate the use of your pitchfork and torch after reading this, you are unfit to be an American and should immediately book yourself on a one-way flight - to Yemen.

This is about PPIP - and a game I predicted would be played in March of last year. Specifically:

Only months after it was started, the U.S. program designed to purge debts of no immediate discernable value from the balance sheets of troubled banks has helped transform the frozen debt into a money-maker as the bonds have rallied. Bank of America Corp. and Citigroup Inc., who received 22 percent of the $418.7 billion American taxpayers loaned to troubled financial institutions, boosted holdings on their trading books of home- loan bonds that lack government guarantees while investors were raising cash for the program, according to Federal Reserve data.

You got that?

Let me 'splain it in English.

The banks bought bonds that were worthless in the open market, because The Government intended to intentionally overpay for these bonds.

This is exactly what I said would happen in March of 2009:

There's nothing complicated about this at all.

Buy for 30 cents, sell to the PPIP for 50 cents, pocket a quick (and huge) profit immediately and nobody's the wiser.

Now here's the problem.

We were later told that the FDIC would not allow the banks to game the system like this.

That was a lie too.

It’s “absolutely ridiculous” that banks, which were expected to reduce their holding of such volatile mortgage securities, bought them before the government program was running and may now profit, said Michael Schlachter, managing director of Wilshire Associates, the Santa Monica, California-based investment-consulting firm. “Some of them created this mess, and they are making a killing undoing it.”

The people involved need to be indicted for looting the Treasury and Geithner along with Sheila Bair must be removed from office for permitting it, after BOTH said it would not happen.

They lied - period.

Here's what The Fed's Dudley said at the time:

His comments add to signs that Treasury Secretary Timothy Geithner’s Public-Private Investment Program to boost debt prices and rid banks of devalued assets to expand lending is stalling, after helping to spark a rally in stocks and bonds. The Federal Deposit Insurance Corp. yesterday delayed a test sale of bad loans held by U.S. banks that had been billed as a tryout for its role.

Well it sure rallied the prices of those assets, but the banks didn't rid themselves of them. They instead bought up yet more worthless paper, adding to the trash they were holding, and now are in fact using the speculative gains to record "profits" on securities that still have not and cannot perform as the underlying loans are still not paying as agreed!

I thought The Fed was supposed to REGULATE banks? You know, when they decide this is how something should happen (or something that should not happen) they then PREVENT IT FROM HAPPENING AND/OR FORCE IT TO STOP?

Lying is an art form but in this case you literally had your pocket picked by Congress so these banksters could intentionally game the system, exactly as I said they would, and instead of REDUCING their holdings of toxic assets THEY ADDED TO THEM!

What happens when, not if, the true "value" (that is, ZILCH!) of these so-called "assets" pokes its head through NOW?

Back in April of 2009 I posted the following:

And since the banks will apparently get paid (by you the taxpayer) any difference between internal marks and the sale price, not only get to prevent more than a 5% loss off the market price, they do even better as they get to guarantee no more than a 5% loss off their internal mark!

We just keep adding scams on top of scams; if $170 billion stolen from taxpayers to "bail out" banks via AIG isn't bad enough, this program will be some $500 billion (or more), and that's not even the total value since some banks have been buying up "distressed" ALT-A liar loans with TARP money in front of this program's announcement!

I hate it when I'm right.

The question is when Americans will be pissed off enough to do something about being literally robbed blind by the banksters that infest this nation.

Consumer Credit And BOA

nospam@example.com (Karl Denninger) — Tue, 29 Dec 2009 09:20:00 -0500

Gee, a "credit card fix"?

When Bank of America Corp.'s new chief executive takes over next week, one of the first problems he will face is one he's already been grappling with—the bank's credit-card business.

Cards were already the responsibility of incoming CEO Brian Moynihan in his previous job as president of consumer and small-business banking. But the 50-year-old executive had only taken that job in August so had little time to get his hands around the problem.

He did have enough time to realize that mistakes were made and the business had to change. "We gave a lot of cards out to our customers," Mr. Moynihan said in a Nov. 5 speech. "We were giving them to too many people."

What was your first hint Mr. Moynihan? Was it giving credit cards to undocumented aliens by not requiring a social security numbers - accepting "Consular Matricula" forms of "identification", thereby knowing providing banking services for people who are in the country illegally?

Or was it spamming college students with credit cards in the hope that they will become hooked like crack addicts? You know the business model well, right: "The first hit is free!"

Oh wait - that fits the so-called "balance transfer" and "convenience check" policies of years past too, right? Six or twelve months "free" (allegedly anyway), zero interest, but with a catch: if you charged so much as one dollar on that card after the transfer, that new charge would be paid off last and was subject to the full interest rate.

Bank of America was one of the most aggressive with these programs, going so far as to almost accost a depositor who came in to stuff a check in their account via a program they called "Teller Score." Of course the "results" (how many "free hits" were given out by a particular teller) became part of a performance evaluation, didn't it? You'd have to assume "yes."

A Bank of America spokeswoman declined to discuss specific losses from branch card sales and said the problems in the card division were largely the result of a downturn in the U.S. economy and the bank's exposure to troubled spots of the U.S. such as California and Florida.

Uh huh. A downturn in the economy eh? You mean a credit overhang that Bank of America did their damndest to create. After all, pulled-forward demand is great for the economy - for a little while. The hangover sucks however, and when the crack dealer is out of rocks the addict is really in trouble.

The banks all cry poverty about their losses but in fact their losses are self-inflicted. They intentionally played drug dealer and tried to hook as many addicts as they could, but the unfortunate reality of drug addicts is that the drugs are corrosive to their body and mind. Eventually the addict has a heart attack or their teeth rot out of their face, they're unable to eat, and die.

This, in our inestimable wisdom, means that these institutions need a bailout and "government support" (that is, you the prudent pay for their sins) instead of them receiving what a crack dealer receives: 20 years in prison with a cellmate named "Bubba."

Only in America.....

The Banker Version of "Screw Your Buddy"

nospam@example.com (Karl Denninger) — Thu, 17 Dec 2009 15:15:00 -0500

Now here's an interesting story....

The interesting thing was that even though he hadn't paid any credit cards in 60-90 days they are all reporting "as agreed" They have cut the lines to the outstanding balance but will not report a 30 day late. I can only assume that the banks C,BAC,Cap1,Wach) are doing this in the hope that a different bag holder will bail them out with either a balance transfer or a cashout refi. I suppose if I was the lender I would do the same thing and hope that a greater fool than I existed.

Now this is a new one.... but it wouldn't surprise me!

What, honor among thieves? Naw, who'd be honorable in this circumstance?

If you report it as late nobody will take him on a balance transfer. But if you don't, perhaps someone will and they are the bagholder!

What a riot!

I expected FICOs would become irrelevant as this mess progressed but that's a twist I had not counted on..... yet among the viper pit it certainly makes sense.

If there is any sort of pattern to this at all the FICO score and indeed the integrity of the entire credit bureau system has just gone straight in the trash can.

The Bank Capital Door is CLOSED

nospam@example.com (Karl Denninger) — Thu, 17 Dec 2009 08:25:00 -0500

Told 'ya so.

Citibank slammed the door:

Citigroup sold 5.4 billion shares at $3.15 apiece, less than the $3.25 the government paid when it acquired a one-third stake in the New York-based bank in September. The bank said Treasury won’t sell any of its shares for at least 90 days.

And, I might add, a solid 10% or so below the closing price, and worse, way down from the somewhat-over $5 price just a few weeks ago.

Like 40% down.

I said a few days ago that:

Gee, you think this might have something to do with the equity and tarp exit right now nonsense?

Yep.

Now here's the truly-bad news.

All of the big TARPed banks, and all the other banks, better hope they have enough capital, because they are not going to come back to the public markets for more.

Dick Bove was absolutely ballistic last evening on Fast Money, bloviating about lawsuits and such. Good. It's about damn time that people got pissed off at the outright looting of not only the taxpayers but the shareholders that these institutions have engaged in.

Let me be clear on my opinion:

I DO NOT BELIEVE THE BANKS HAVE ANYWHERE NEAR ENOUGH CAPITAL GIVEN THE HIDDEN LOSSES THEY ARE CARRYING ON AND OFF THEIR BALANCE SHEETS THROUGH THE LEGALIZED ACCOUNTING FRAUD THAT FASB HAS PERMITTED SINCE MARCH OF THIS YEAR.

THIS BOGUS ACCOUNTING WILL DETONATE IN THESE BANKS FACES WHEN THE CASH FLOW BECOMES INSUFFICIENT TO MAINTAIN THE CHARADE, AT WHICH POINT THE PRESSURE VESSEL WILL CRACK AND THE BANK WILL LOOK LIKE THIS:

Congress is not going to allow a second bailout.

The equity markets will not buy the stock for a second bailout.

THERE IS NOWHERE TO GO FOR ANOTHER BAILOUT.

Better let that one sink in, folks, and then hope that I'm wrong about capital adequacy, because if I'm not, the fuse on this sucker has been lit, it's both waterproof and impossible to cut, and I have no idea what the time delay is on it.

Global Financial Implosion Dead Ahead

nospam@example.com (Karl Denninger) — Wed, 16 Dec 2009 09:26:00 -0500

Basel is of course "not accountable" to anyone, as it deliberates in secret. But if you're wondering where the rally came from in the Nikkei and Europe today, this is why....

The transition period for tighter capital requirements will probably start in 2012 or 2013, according to officials who declined to be identified because the Basel Committee on Banking Supervision’s deliberations are private. Bank stocks in Asia and Europe rallied.

By delaying the introduction of stricter standards, regulators give banks longer to repair balance sheets weakened by $1.71 trillion of losses and writedowns during the credit crisis. The Group of 20 Nations agreed in April that banks should hold more and better quality capital to reduce risks to the financial system.

Let me fix that second paragraph:

By delaying the introduction of stricter standards, regulators ~~give banks longer to repair balance sheets~~ allow banks to lie about their losses of ~~weakened by~~ $1.71 trillion ~~of losses and writedowns~~ during the credit crisis. The Group of 20 Nations agreed in April that banks ~~should hold more and better quality capital to reduce risks to the financial system~~ should lie more frequently and flagrantly about their asset quality so as to bonus out money they don't really have, even though doing so will virtually guarantee that cash flow will become insufficient in the coming years and lead to a global financial meltdown worse than the fall of 2008.

You heard it here first folks. $1 trillion in HELOCs on balance sheets here in the US, many of them worth exactly nothing, all carried at or near PAR (100 cents on the dollar), and all a "great game" until they either mature or the underlying first mortgage forecloses - at which point the detonation that has been hidden is uncovered, revealing only a smoking hole where an asset was claimed to be.

Is That A Door Slamming?

nospam@example.com (Karl Denninger) — Tue, 15 Dec 2009 14:48:00 -0500

Gee, you think this might have something to do with the equity and tarp exit right now nonsense?

Citibank card chargeoffs 10.29% .vs. 8.79% (all month-over-month) and $617 billion in "Citi Holdings" (worth god only knows what), a cutesy game of asset-shifting and sausage-hiding the bank set up after Pandit came to power.

Capital One 9.6% .vs. 9.04%

AXP falls to 7.6% (that's actual improvement; was 7.8% last month)

JP Morgan/Chase, 8.81% .vs. 8.02%.

Bank America, 13% .vs. 13.22% (is that percentage even believable?) but lates are up to 7.69% from 7.59%.

Discover, 8.98% .vs. 8.54%.

(All charge-off rates annualized, but lates are current percentage of loans and banks use different definitions - some 30 days, some 60, etc. Once a loan goes beyond 60 days it rarely cures.)

So much for "The Recession is over" and "labor is stabilizing and jobs are even improving a bit."

Like hell.

These TARP exits are almost certainly the banks getting (from the bagholders they sold the shares to - that would be YOU if you were dumb enough to buy any!) while the getting is good.

The Potential Impact of Wells TARP Exit

nospam@example.com (Karl Denninger) — Tue, 15 Dec 2009 08:07:00 -0500

Wells became the last of the "big banks" to exit TARP today:

The bank plans to return all of the $25 billion that taxpayers invested last year, according to a company statement issued today. The exit from TARP would put Wells Fargo on the same footing as Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc., its largest competitors, which have already paid back the U.S. or announced plans to do so.

“TARP stabilized our country’s financial system when confidence in financial markets around the world was being tested unlike any other period in our history,” Wells Fargo Chief Executive Officer John Stumpf said in the statement. “We’re ready to fully repay TARP in a way that serves the interests of the U.S. taxpayer, as well as our customers, team members and investors.”

Uh huh.

Now let's consider a few things.

All of these banks have "exited" TARP. They have all diluted their shareholders and expended shareholder capital to pay the preferred dividends and pay other expenses associated with same. Yet post-dilution (on a dilution-adjusted basis) they are trading at or near (Citibank excepted!) where they were before it all went to hell.

Is there any chance that the securitization gravy-train that fed these pigs is coming back? Liar loans sold off to suckers worldwide? Housing Bubble Part II - or something of equivalent size (remember, we're talking upwards of $1 trillion a year here!)

Not a prayer in hell.

So how do these firms stock prices make sense?

Simple: Hope, hype and bald lies - just like in 2007 and 1999.

Let's be quite clear on all of this: TARP capital, while it came with onerous restrictions on pay and similar measures, was very cheap capital. It cost little, and the FDIC-guaranteed debt issues were damn near free.

That's all gone with these "exits."

So why do it now?

I have a few ideas - and none of them are very complimentary. In no particular order:

Paying big bonuses is more important than shareholder interests. This wouldn't be the first time the shareholders were thrown under the bus. Boards are rarely ousted for idiocy - even when it comes close to sinking firms. In this case, how many boards have been ousted? What is zero, Alex?
The FAS changes are forcing all off-balance sheet exposures back on now. This will be reflected in next quarter's earnings (everything that starts in December and beyond) and those exposures are at this point unknown to the investment community. Wells has a particular problem with this in that Wachovia (which Wells "acquired" in one of the famous "shotgun weddings" last year) was known to write CDS on the equity and mezzanine tranches of their own securitizations (in particular, their second line exposures!) - and a lot of those loans are on properties that are deeply underwater on their first mortgage. If the first defaults in such an instance the recovery on the second is a literal zero.
I am hearing repeated rumblings of major unloads of foreclosed property coming to market early next year. I cannot get confirmation of this from any of my "official" sources but the "off the record" whispers continue to pop up. One has to ask: Why now? The possible answers run the gamut from cash flow impairments to the "putback" of off-balance sheet assets but absolutely none of them are positive for the market's view of these issues, and to the extent that marks get established and losses taken the share price damage could be extreme.
Look at the IRX - the 13 week bill. It's been on a plunge-o-matic trip of late in terms of yield. So has the 4 week and the six month. Why are people willing to loan the government money at a negative real rate of return when one considers the CPI (which is positive at this point) unless they KNOW something nasty is about to happen?

All in all the bottom line may be quite simple:

The equity issue door may be about to slam shut on the banking sector.

If so we are due to get an interesting surprise in the broader market. I have no clue how the general equity markets will take to significant impairments being recognized in the banking system so soon after claims that "all is well', but this much I have learned in my years in the market: Whenever firms take actions that appear, on their face, to be detrimental, they are usually being taken because one or more of the "someones" involved knows something you don't, but should.

Something to think about......

The Architecture Of The Scam (Goldman .et.al.)

nospam@example.com (Karl Denninger) — Mon, 14 Dec 2009 10:25:00 -0500

The Wall Street Journal has put forward an article that adds color to the general view I have always held about securitization, risk-shedding, and what I allege amounts to organized, systemic fraud by our "big banks."

While they focused on Goldman Sachs, it is a serious error to maintain focus there as a "universal" or "sole" villain. Quite to the contrary - the entire financial system became one gigantic fraud machine during the last 20 and especially the last 10 years.

Nonetheless, let's walk through and identify the scams that were built into this model:

Goldman Sachs Group Inc. played a bigger role than has been publicly disclosed in fueling the mortgage bets that nearly felled American International Group Inc.

Of course.

In Goldman's biggest deal, it acted as a middleman between AIG and banks, taking on the risk of as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading partner—AIG, according to the Journal's analysis and people familiar with the trades.

This sounds ok, right? You take on a risk, then you insure against something going wrong. This is how one does business. Except....

The banks wanted protection in case the housing market tanked. Many turned to Goldman, which effectively insured the securities against losses. Then, to cover its own potential losses, Goldman bought protection from AIG, in the form of credit-default swaps.

Goldman charged more than AIG for the protection, so it was able to pocket the difference, making millions while moving the default risks to AIG, according to people familiar with the trades.

Here's the definition of the problem: Exactly how did AIG price the protection at less than Goldman?

One of them was wrong in their assessment of the risk.

But that's ok - people take on risk all the time, and at times they guess wrong. This is what makes a market, and if things ended here it would all be ok.

But it didn't end here.

A Goldman spokesman said that between mid-2007 and early 2008, Goldman showed AIG "market price levels" at which trades could be undone, allowing AIG to decrease its risk, but "AIG refused to accept that the market was deteriorating."

When Goldman didn't get as much collateral as it wanted from AIG, in 2007 and 2008 it bought protection against a default of AIG itself from other banks.

But wait a second - I thought AIG had prudently underwrote those original CDS? No?

What has Goldman said about this? Well.....

"What is lost in the discussion is that AIG assumed billions of dollars in risk it was unable to manage," the Goldman spokesman added.

Really? But Goldman was willing to buy that protection from a firm that was unable to manage their risk.

This goes back to what I have said since The Market Ticker began:

If I make a loan to you that has a risk-adjusted return of 300 basis points (that is, 3%) over Treasuries of the same maturity, that is all the return that is available in the transaction.

Each and every person who handles that transaction demands some amount of money to do so, as nobody works for free.

The only way to obtain more than 300 basis points of return from that transaction is to find someone who will enter into a trade that they cannot cover - that is, someone who will go broke and be unable to pay off in the adverse circumstance.

This is the fundamental scam in finance that has infested the banks and other institutions over the last 20 years - and which accelerated in the 2000s. The entire game rested on the premise of finding someone who would write insurance they could never pay on, or who would utter an "opinion" that the deal had less risk in it than it really did. In point of fact virtually all of the lending risk for all non-standard mortgage instruments written from 2003-2007 was predicated on one and only one thing - property values would never go down.

Why? Because none of those loans, analyzed dispassionately on the standard "5Cs of credit", were likely to perform to maturity. None of them.

This scam is in fact exactly what Paul Volcker was talking about in the piece quoted on the 9th:

“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” said Mr Volcker, who ran the Fed from 1979 to 1987 and is now chairman of President Obama’s Economic Recovery Advisory Board.

He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: “Is that a reflection of your financial innovation, or just a reflection of what you’re paid?”

Right.

Effectively, what the financial system has done is siphon off an increasing portion of the rents charged for various activities while justifying the increasing prices (that is, lower risk and therefore less reserve against "adverse events") through concealment via bogus "risk-shifting" and "risk-management" that in fact never really occurred.

Remember, "rent" is a generic term. We think of it as what you pay to occupy an apartment, but in fact "rent" is charged for the use of capital in all of its forms - as a place to live, as a means of financing investment, as a means of financing speculation. All involve the charging of rent of one form or another, and all the financial system has done over the last 20 years is find ways to increase the amount of rent that lands in the financial system itself - instead of being distributed to the actual owners of the capital that is being lent out!

The simple reality is that CDOs, CDS and similar articles when used to hedge large quantities of financial instruments or events (such as by a bank) are an artifice. The only way that one can "deal in" CDS and make a profit, as the banks have done, is if someone is willing to sell you protection at less than the true risk-adjusted cost, or you can manage to sell it at higher than the risk-adjusted price.

Both require that someone be deceived - that is, that someone intentionally misrepresent either by commission or by intentional concealment of material facts.

This is the definition of fraud!

Fraud is generally defined in the law as an intentional misrepresentation of material existing fact made by one person to another with knowledge of its falsity and for the purpose of inducing the other person to act, and upon which the other person relies with resulting injury or damage. Fraud may also be made by an omission or purposeful failure to state material facts, which nondisclosure makes other statements misleading.

It is not possible for you to buy protection for less than the actual risk of default from a party who can pay in the event of default. This should be instantly obvious to anyone who applies more than 15 seconds of thought to the problem - on balance it is impossible to insure a pool of risks for less money than the risk of loss across the pool.

Let's assume the risk of default is 1% and recovery if there is a default is 50. Therefore, if you have $100 million of such bonds 1% of them, or $1 million worth, will default, and of that $1 million there will be a $500,000 loss.

The price of purchasing insurance against that pool must always be more than $500,000.

If it is less then the company writing it will not be able to pay. If it is in fact equal they will not be able to pay, since the company must expend some amount of money (no matter how small) employing their staff and maintaining their facilities (buildings, etc.)

It is reasonable for someone to buy insurance against a single event, as a single actor, holding a single risk. That's because their individual risk is large for the return they receive. It is why you buy insurance against a fire in your house - the risk of a fire is small, but the damage if you suffer a fire is large.

But if you own 100,000 properties dispersed across the nation with no particular concentration you're an idiot to buy insurance against each and every property having a fire. Why? Because it is axiomatic that you will pay more for the insurance than you will lose to fires! You must - otherwise the insurance company that sells you the policies will go broke and be unable to pay at all!

The key point here is that when you buy below risk-adjusted cost "insurance" you have in fact bought nothing and are just as exposed as if you had not purchased said "insurance" at all.

It is therefore never prudent and appropriate for anyone who holds a large enough pool of risk to "transfer" that risk to a third party because the cost of doing so will always be higher than the cost of simply absorbing any losses that occur.

This must always be the case unless the organization holding the large pool of risks is able to find someone who will write that insurance at a loss. This, in turn can only happen if the entity writing the insurance either (1) is unable to appropriately judge the risk compared to the person purchasing the insurance or (2) is unable to pay if the loss occurs.

This is the root of the scam folks, and that we refuse to understand and face the math is part and parcel of why it is that we continue to be abused by these large financial interests.

The sooner we wake up the better, as the math is never, ever wrong.

Volcker Pulls Back The Curtain

nospam@example.com (Karl Denninger) — Wed, 09 Dec 2009 10:16:00 -0500

Funny how this speech didn't get any ink over here in the United States... I wonder why?

The former US Federal Reserve chairman told an audience that included some of the world's most senior financiers that their industry's "single most important" contribution in the last 25 years has been automatic telling machines, which he said had at least proved "useful".

Echoing FSA chairman Lord Turner's comments that banks are "socially useless", Mr Volcker told delegates who had been discussing how to rebuild the financial system to "wake up". He said credit default swaps and collateralised debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown at "greater rates of speed" during the 1960s without such products.

Right on both points.

But what Mr. Volcker didn't say (but should have) is why government has sat back and watched all this so-called "innovation" that, in fact, has done nothing but screw us.

Let's go back to the "big picture" chart on GDP and debt:

Note that the debt-to-GDP ratio for the entire financial system was around the 150-175% level for a long time.

It was only in the 1980s that this ratio became "unhinged" and started its parabolic blowoff toward the present level of approximately 375% - more than a doubling.

Why?

For that one must look at the aggregate GDP generated since 1980. That's roughly $228 trillion (give or take a bit.)

So let's "back" out the accumulation of half of this debt - that is, take the $53 trillion and reduce it to a reasonable 175% of GDP, which would cut some $25ish trillion from the debt in the system.

What would have happened?

We would have to subtract 10%, roughly, from GDP during the entire period.

That is, the accumulation of this debt has caused an over-reporting of GDP by 10% over it's true value on an annual basis, since every dollar of debt buys something, and that "something" winds up being counted in GDP.

So we have a perverse cycle here fed by government and private business - both with a simple motive to cheat for as long as possible.

What holds this behavior back?

Only the certainty that when the math catches up with the cheating (and all the participants in this scam know it will) those who cheated will be the ones who get the bill.

Unfortunately our so-called "financial innovation" has impaired this natural feedback function in two distinct but intertwined ways:

By bailing out "too big to fails", starting with LTCM and continuing onward, we have made clear that there is an implicit taxpayer backstop. That is, you won't wind up in the street if you're a (big) bank and push the math too far.
By refusing to enforce the laws forbidding fraud in all it's forms, including fraud by deception, we have put in place an economic and political system where large firms can cheat while smaller ones (and others unprotected, from consumers to municipalities) suffer.

A dramatic example of the latter was offered up by McClatchy yesterday in the following article:

During the past three years, some of the nation's largest financial firms have been accused by the government of cheating or misleading clients and ripping off tens of thousands of consumers of their investments.

Despite these findings, these financial giants got, sometimes repeatedly, special exemptions from the Securities and Exchange Commission that have saved them from a regulatory death penalty that could have decimated their lucrative mutual fund businesses.

If you remember a month ago I talked about how Pfizer had pled guilty to two instances of the same felony charge. The man who was their general counsel in the first case and the firm's CEO in the second was subsequently "elected" to the Board of the Federal Reserve Bank of New York.

The voters were not, however, the general citizenry. Rather they were the members of the NY Fed, which just happens to include those firms that the NY Fed regulates.

I'm quite sure you could have elected Charles Manson to the position of County Sheriff - so long as those doing the voting were all imprisoned felons!

Look at who is running The SEC today - and the revolving door that exists in that agency. From the private sector (regulated by the SEC) to the SEC and then back to the so-called "regulated" firms.

This sort of incestuous nonsense is part and parcel of why we are here. It is, indeed, one of the biggest issues we face in any attempt to enact meaningful reform. The big banks and other financial interests have intentionally designed things this way to guarantee weak or non-existent "enforcement" of the laws that purport to protect the public against various forms of deception and even outright theft and then they come bleating to Congress and the people claiming that Armageddon will ensue if they're not bailed out and allowed to shift the consequences of their idiocy to the taxpayer.

Paul Volcker is right to expose the charade, but he doesn't go anywhere near far enough. What we need is people who are willing to talk about the why - not just the "what" - and who are willing to raise whatever amount of hell it takes to get the public enraged enough to demand change.

Unless, of course, you like having your pocket serially picked and are willing to suffer the inevitable consequence of economic collapse that the math says must eventually be the outcome of the policies we have promulgated and practiced over the last two decades.

Hmmm... Who Is On The "Boom" List?

nospam@example.com (Karl Denninger) — Sun, 29 Nov 2009 21:53:21 -0500

One wonders, after this report on who is "too big to fail":

North American banks:

Goldman Sachs, JP Morgan Chase, Morgan Stanley, Bank of America-Merrill Lynch, Royal Bank of Canada

Note who's missing: Citi and Wells.

Wells, it might be argued, has little cross-border involvement. Ok.

Citi, on the other hand.......

One wonders if there's a game afoot here, in that Citibank apparently isn't considered "too big to blow chunks", while they are unquestionably involved in world markets to an incredible degree - but they also have a whole bunch of interesting "assets" (including a massive amount off balance sheet) that I can't get my arms around.

Perhaps there's two categories among the "massively interconnected" - too big to fail, and too screwed up to save?

Update: Apparently Reuters was wrong, and Citi is on the list. Oh darn.

Solution: ONE DOLLAR OF CAPITAL

nospam@example.com (Karl Denninger) — Fri, 13 Nov 2009 12:27:00 -0500

It never, ever ends, does it?

Our company, J.P. Morgan Chase, employs more than 220,000 people, serves well over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. And if some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail. As Treasury Secretary Timothy Geithner recently put it, "No financial system can operate efficiently if financial institutions and investors assume that government will protect them from the consequences of failure." The term "too big to fail" must be excised from our vocabulary.

But ending the era of "too big to fail" does not mean that we must somehow cap the size of financial-services firms. Scale can create value for shareholders; for consumers, who are beneficiaries of better products, delivered more quickly and at less cost; for the businesses that are our customers; and for the economy as a whole. Artificially limiting the size of an institution, regardless of the business implications, does not make sense. The goal should be a regulatory system that allows financial institutions to meet the needs of individual and institutional customers while ensuring that even the biggest bank can be allowed to fail in a way that does not put taxpayers or the broader economy at risk.

The solution is very simple, but you will notice that Jamie doesn't bring it up. That's because he finds it unacceptable.

What's that solution?

Prohibit as a matter of Federal Law, and enforce it vigorously under pain of immediately dissolution, THE LENDING OF MONEY UNSECURED THAT EXCEEDS THE FIRM'S CAPITAL.

This is in fact the only way you can both end "too big to fail" and not constrain size or influence.

It is also the definition of sound lending.

It is also how lending was done prior to the banksters corrupting the government and literally usurping the sovereign credit of The United States.

As we have seen clearly over the last several years, financial institutions, including those not considered "too big," can pose serious risks for our markets because of their interconnectivity. A cap on the size of an institution will not prevent that risk. Properly structured resolution authority, however, can help halt the spread of one company's failure to another and to the broader economy.

A requirement that you hold one dollar of actual capital for each dollar of unsecured obligation you have, marked to market nightly, absolutely prevents this risk.

That actual excess capital can be lost but there can be no systemic bleed-through as your capital then backs your bets in each and every instance.

While the strategy of artificial limits may sound simple, it would undermine the goals of economic stability, job creation and consumer service that lawmakers are trying to promote. Let's be clear: Banks should not be big for the sake of being big. Moreover, regardless of a company's size, it must be well managed. As we've seen in many industries, companies that grow for the sake of growth or that expand into areas outside their core business strategy often stumble. On the other hand, companies that build scale for the benefit of their customers and shareholders more often succeed over time.

Then prove it by putting your own capital at risk in each and every unsecured lending transaction. For each loan you write where the collateral is worth less than the outstanding amount of the loan, at any point in time, hold one dollar of your own capital as security against that loan's default and the bleed-through effects on the economy.

And it's not just multinational corporations that rely on such a large scale. J.P. Morgan Chase and others supply capital to states and municipalities as well as to firms of all sizes. Smaller banks play a vital role in our nation's economy, too -- but a fragmented banking system cannot always provide the level of service, breadth of products and speed of execution that clients often need. Capping the size of American banks won't eliminate the needs of big businesses; it will force them to turn to foreign banks that won't face the same restrictions.

Yes, and JP Morgan/Chase will allegedly bribe states and municipalities (aka Jefferson County Alabama) to "obtain" that business and earn a 400% profit beyond the market rate too. Yes, I know, you didn't admit guilt in the "settlement", but you did pay $75 million and forfeit another half-billion+ in termination fees. Is it "usual and customary" for your company to pay nearly three quarters of a billion dollars in forfeits and fines when you did nothing wrong? Our states and municipalities would be far better off without your firm's "services."

Global economic growth requires the services of big financial firms. It also requires that big financial firms be allowed to fail.

ONE DOLLAR OF CAPITAL FOR EACH DOLLAR OF UNSECURED LENDING, MARKED TO MARKET NIGHTLY.

A one-sentence Bill that, were it to become law, would instantly end "too big to fail" and yet let you grow as large as you'd like - provided you are gambling with your own money and not the sovereign credit of The United States.