Econ 2009

[garo]

Ernst, there is no doubt that the 47 billion Euro is a wildly optimistic figure. If it wasn't you wouldn't have had bank shares rise 25% in a day. The people who have been right about the crash from before it happened think the actual value is more like 30-35 billion. So this is a net transfer of 20 billion from the taxpayer to shareholders and subbies. There is some hope that the junior coalition partner, the Greens, may walk out of government in which case the Irish taxpayer may be saved. Else it is "Don't cry for me, Argentina' time.

[ewmayer]

Originally Posted by cheesehead

Will you please link to some well-informed explanation of what each index and subindex means in that Philly Fed report?

That comment in "Idiot Parade (Philly Fed Index)" at The Market Ticker about the prices paid subindex
("Prices paid up. By 50%. That's not good - what does that do to margins? Only two choices there, right? Pass it through or eat it.")
seems based on a misunderstanding of what the "prices paid" subindex actually means.

It does NOT mean that prices paid rose 49% (10.0 -> 14.9) from one month to the next, as the idiot (Karl Denninger) at The Market Ticker seems to indicate. Is Denninger often so careless?

Denninger may be many things ("alarmist" is the term that gets used a lot by polite society), but "idiot" isn't one of them - I'm sure he knows perfectly well that producer PRICES didn't jump 50%, and was referring to the 50% rise in in the PP component of the *index*, noting that in an environment where producers are having a hard time passing any production-price hikes on to consumers, for such a price rise to make a "manufacturing index" look "more positive" is simply idiotic. But feel free to check with him yourself: karl@denninger.net .

--------

Bloomberg`s Jonathan Weil (who represents the best of "the old Bloomberg" I alluded to in my comment yesterday) has a nice piece about "the judge who refused to play ball" with the SEC in its attempt to slip a cozy don`t-ask-don`t-tell settlement of the BofA/Merrill bonus scandal through the system:

GE’s Fraud Case Could Use the Judge Gone Wild

Sept. 17 (Bloomberg) -- Finally a judge has dared say no to the once-venerable Securities and Exchange Commission and one of its cozy corporate settlements.

If that wasn’t novel enough, this fellow first had the nerve to ask the SEC a bunch of questions about the way it does its business. Turns out, he got a lot of embarrassing answers about the government’s investigation of Bank of America Corp. that the SEC hadn’t planned to tell the rest of us about.

This jurist gone wild, now a folk hero of sorts, is U.S. District Judge Jed Rakoff. But before we go further, let me tell you a quick story about another judge, this one at the U.S. District Court in Hartford, Connecticut.

His name is Robert Chatigny. On Aug. 4, he was assigned a settled complaint the SEC filed that day against General Electric Co. Under the deal, GE agreed to pay $50 million of its shareholders’ money to resolve the agency’s claims that it had committed accounting fraud. The SEC didn’t name any actual people as defendants. We don’t know if it ever will. Chatigny approved the agreement six days later, with no hearing and no questions asked. GE neither admitted nor denied the allegations.

That’s how SEC cases usually go. And just think how much more we the public -- and certainly GE shareholders -- deserve to know about this supposed fraud. Who at the company committed it? Why hasn’t the SEC sued them? Doesn’t the SEC know who they are? Why aren’t they paying fines out of their own pockets? And why wasn’t Chatigny asking these kinds of questions?

I tried calling Chatigny yesterday to ask him. His law clerk said he couldn’t be reached for comment.

It seems our man Rakoff is a different kind of judge. He has the SEC and Bank of America in an awful spot...

My Comment: Since the "settled via the usual crony-crook route" fraud case cited by Weil involved GE, I`m gonna take a wild guess and surmise that coverage of that case on CNBC was something less than "critical and probing".


Friday Humor:

Gary North has a "King Benjamin" take on Psalm 23:

The FED is my shepherd; I shall not want.

It maketh me to lie down in green shootsdom: it leadeth me beside the still Lehman.

It restoreth my credit: it leadeth me down the paths of leverage for its name's sake.

Yea, though I walk through the valley of the shadow of debt, I will fear no evil: for thou art with me; thy TARP and thy TALF they comfort me.

Thou preparest a table before me in the presence of mine enemies: thou anointest my balance sheet with digits; my bonuses runneth over.

Surely profits and influence shall follow me all the days of my life: and I will dwell in the house of the FED for ever.

September 17, 2009

[cheesehead]

Originally Posted by ewmayer

Gary North has a "King Benjamin" take on Psalm 23:

Is this the same Gary North who ten years ago was fervently predicting the downfall of Western civilization, and the subsequent rise of a Christian Reconstructionist government, because of Y2k problems?

http://en.wikipedia.org/wiki/Gary_North_(Christian_Reconstructionist) (You'll have to manually add a right parenthesis to the URL if you click on this link.)

The one who, in a moment of candor in a 1997 e-mail, wrote:

"Of course I want to see y2k bring down the system, all over the world. I have hoped for this all of my adult life."

?

http://www.sweetliberty.org/garynorth.htm

[garo]

A good article in the Boston Globe about Hyman Minsky and how his work was overlooked. Minsky did his Ph.D. with Schumpeter at Harvard but equally considered Keynes to be his hero.

Why Capitalism Fails

In his writings, Minsky looked to his intellectual hero, Keynes, arguably the greatest economist of the 20th century. But where most economists drew a single, simplistic lesson from Keynes - that government could step in and micromanage the economy, smooth out the business cycle, and keep things on an even keel - Minsky had no interest in what he and a handful of other dissident economists came to call “bastard Keynesianism.”
Instead, Minsky drew his own, far darker, lessons from Keynes’s landmark writings, which dealt not only with the problem of unemployment, but with money and banking. Although Keynes had never stated this explicitly, Minsky argued that Keynes’s collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff.
This insight bore the stamp of his advisor Joseph Schumpeter, the noted Austrian economist now famous for documenting capitalism’s ceaseless process of “creative destruction.” But Minsky spent more time thinking about destruction than creation. In doing so, he formulated an intriguing theory: not only was capitalism prone to collapse, he argued, it was precisely its periods of economic stability that would set the stage for monumental crises.

[ewmayer]

Originally Posted by cheesehead

Is this the same Gary North who ten years ago was fervently predicting the downfall of Western civilization, and the subsequent rise of a Christian Reconstructionist government, because of Y2k problems?

Quite possibly ... but I still find his snarky "updated" version of the psalm amusing.

I also manage to enjoy listening to Wagner even though I find his political/social views repulsive.

Ever consider renting a sense of humor?

[ewmayer]

Denninger has a long, incisive, scathing analysis of U.S. debt and GDP trends over the past half-century today ... most interesting is that nearly all of it is based on the Fed`s own data. Rather puts the lie to various claims by Bernanke and the galloping herd of Fed-owned economists, such as:

- The crisis is a liquidity, not a solvency issue
- Government debt trends are nothing to worry about - "we can grow out way out it"
- No one could have foreseen the crisis
- Leverage and financial innovation are great drivers of GDP growth
- The Fed is not monetizing Treasury debt
- "We can fix it"

I especially like his "Ponzi Finance Index" chart [defined as (GDP - total debt)]:

The Market Ticker: Why Ponzi Finance Fails

The problem we face today is that after thirty years of operating with a negative "Ponzi Ratio" we have exhausted the margin between debt service actually required and debt service that is possible. Proof of this is no more difficult to find than is found in the ramping default rates across all sectors of loans; debt is not being decreased by voluntary pay-downs, it is being decreased through default and the impossibility of new issuance into the securitization market given the present debt load.

The Ponzi-style "debt accumulation" game has hit its natural limit and yet The Fed refuses to admit to the facts and allow outstanding debt to default, instead conspiring with Treasury to transfer as much of the default risk as possible to The Federal Government itself! By purchasing nearly a trillion dollars of "agency" paper The Fed is essentially attempting to force Treasury to issue a full-faith-and-credit guarantee against securities where such a guarantee is explicitly disavowed.

I fully expect in the not-distant future an explicit threat that should The Fed be audited or worse, should that demanded guarantee be refused "The End Of The World" will ensue - yet another threat of martial law and similar "end times" prophecy, coming directly as a consequence of the intentional actions of The Federal Reserve and Treasury themselves.

There is no avoiding the math folks.

The fraud-investigation noose tightens around BofA`s Ken "weak link" Lewis:

Edolphus Towns is Latest Shark in Ken Lewis Chum-filled Pool

There is blood in the water... that of Ken Lewis, and the sharks are all over it. The latest to join the dismemberment party of one Bank Of America Chief Executive Officer, is New York Representative, and Chairman of the Committee on Oversight and Government Reform, Edolphus Towns. And while the traditional defense provided by Lewis, BofA, and respective lawyers, has been one which delegates any wrongdoing to the attorney-client privilege gray area, Towns has told the bank it "cannot use attorney-client privilege when dealing with Congress." The last piece of armor that Lewis had has just been torn off. From a strategic point of view, the question now becomes whether Ken Lewis, soon to be faced with the traditional prisoner's dilemma, will out his "dealer" Hank Paulson, in exchange for a slap on the wrist, as the alternative could be a much more gruesome fate easily involving an 8x10 cell.

My Comment: This will get especially interesting once the trajectory of the mounting number of ongoing investigations (including one by the FBI which has apparently been going on for several months) leads - as it inevitably must - to former Treasury Secretary Paulson and Fed Chair Bernanke ... once the waters get too hot for TPTB I`m imagining actions ranging from legal maneuvering from the Bush Obama administration ("so-and-so has no jurisdiction ... agency privilege ... national security...") to key parties (FBI investigators on the case, NYAG Cuomo, Rep. Towns, etc) suddenly coming down with a case of the cold-feetsies, Lewis` making a "surprise plea agreement" which leaves all the key answers magically unanswered, to possibly a convenient case of messy death-by-paper-cut "Bankster Seppuku" by Mr. Lewis. We are talking about some of the most powwerful people in government being implicated here ... don`t expect them to go down without a major shitfight


Obama shows his true colors: Bankster Bonus Beige

Flashback to 14 September - Obama gives a speech in NYC on the need for financial reform:

Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them. They do so not just at their own peril, but at our nation’s. So I want them to hear my words: We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.

...

Here on Wall Street, you have a responsibility. The reforms I’ve laid out will pass and these changes will become law. But one of the most important ways to rebuild the system stronger than before is to rebuild trust stronger than before — and you do not have to wait for a new law to do that. You don’t have to wait to use plain language in your dealings with consumers. You don’t have to wait to put the 2009 bonuses of your senior executives up for a shareholder vote. You don’t have to wait for a law to overhaul your pay system so that folks are rewarded for long-term performance instead of short-term gains.

My Comment: Sounds pretty good, don`t it? The tipoff to me in Obama`s speech, however, was this snip: "...we are calling on the financial industry to join us in a constructive effort to update the rules and regulatory structure to meet the challenges of this new century. That is what my administration seeks to do. We have sought ideas and input from industry leaders, policy experts, academics, consumer advocates, and the broader public." This sounds all too similar to the "constructive engagement" played by Big Pharma and Big Insurance in the Obama health care overhaul proposals.

Now fast-forward a couple days to this interview with Bloomberg, in which the Chosen One says something just a tiny bit different:

I was startled last week when Mr. Obama, in an interview with Bloomberg News, questioned the case for limiting financial-sector pay: “Why is it,” he asked, “that we’re going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or N.F.L. football players?”

That’s an astonishing remark — and not just because the National Football League does, in fact, have pay caps. Tech firms don’t crash the whole world’s operating system when they go bankrupt; quarterbacks who make too many risky passes don’t have to be rescued with hundred-billion-dollar bailouts. Banking is a special case — and the president is surely smart enough to know that.

My Comment: Perhaps the folks at Vampire Squid Inc 85 Broad Street called the White House and reminded BHO of that campaign contribution, not to mention their ability to take down the equity markets with a couple of keystrokes (GS_HFT -> Administrator Options -> Market Target Direction -> [Switch from "Meltup" to "Meltdown"] -> <Enable>]


Merkel, Steinmeier Face Economic `Mess' in Germany as Stimulus Peters Out: Germany’s recovery from recession came in time to give a boost to Chancellor Angela Merkel’s re- election bid in the Sept. 27 vote. It may not last much longer.

Unemployment is set to jump and consumer spending to fall in 2010 as government stimulus runs out, according to the Halle- based IWH institute, an adviser to the government. Companies are warning of a credit crunch, and debt at a post-World War II high leaves policy makers with few options to counter a double dip.

“The pace of the upswing can’t be maintained,” said Klaus Baader, co-chief European economist at Societe Generale SA in London. “Next year is going to be more difficult, with unemployment rising and government stimulus petering out.”

Exceptional measures of 85 billion euros ($124 billion) lifted spending and subsidized jobs, helping keep unemployment below levels in the U.S. and France, even as the economy suffered its worst post-World War II recession.

The return to growth in the second quarter enabled Merkel, 55, to “exploit” the issue in her campaign, Laurent Bilke, an economist at Nomura International, said in an interview.

My Comment: That`s because - just as in Ponzi Finance Central (the U.S.) there WAS NO RECOVERY - there was just an artificial boost to GDP from government "stimulus" spending. That`s no different from you and I running up the credit card balance via cash withdrawals, depositing the money in our banking account and claiming a "recovery in our savings balance" - except that government stimulus is nearly always a much more wasteful form of Ponzi finance. "Return to growth" - what a load of Dampfende Scheisse.

[garo]

Our favourite doom and gloomer:

http://finance.yahoo.com/tech-ticker...-Be-Very-Bleak

[japelprime]

This is TV interview with Joseph Stiglitz about 40 min.
I found that interview interesting. It is about the situation here in Iceland (first 26 minuts) and then more USA and global matters.
Probably some of you can find similarity what can happen in your country.

http://ruv.is/heim/ahugavert/nanar/store218/item297094/

I am not strong in english to draw out the main issue here. Maybe someone else like to do that.

[ewmayer]

Government as the "New Countrywide": 22.9% of all FHA loans are either delinquent or in foreclosure.

My Comment: Check out the FHA`s "underwriting standards" illustrated in the above article and in a followup here. And they continue to make such loans at a frightening clip.


U.S. charges Obama fund-raiser in $290 million fraud: Hassan Nemazee, a fund-raiser for Barack Obama, Hillary Clinton and other Democrats, has been indicted for defrauding Bank of America, HSBC and Citigroup Inc out of more than $290 million in loan proceeds, U.S. prosecutors said on Monday.


Oracle CEO sees long slog for U.S. economy

Billionaire Oracle CEO Larry Ellison doesn't expect the U.S. economy to significantly improve until halfway through the next decade – a gloomy scenario he dubbed an L-shaped recovery.

"The American consumer is so deeply in debt, this is not going to come back, certainly for five years," he told a packed ballroom at a Churchill Club event in San Jose. "I believe we're going through some fundamental changes."

My Comment: Ellison may be a Bill-Gates-obsessesd egomaniac, but the quality of his business acumen is beyond doubt.


Bankruptcy Filings Approach 2005 Highs

Pummeled by unemployment, foreclosures, the credit crunch and other manifestations of the worst recession in memory, Americans are filing bankruptcy petitions at rates approaching those that mounted before the new bankruptcy law took effect in October 2005.

"That law was draconian, and it included huge disincentives to filing for bankruptcy," said Robert Lawless, a professor of law at the University of Illinois College of Law and a nationally recognized expert on bankruptcy rules, regulations and rates. "So these numbers show that people are really hurting right now."

FDIC considers borrowing cash from banks

In other Ponzi-Finance news, check this "truth is indeed stranger than fiction" story out:

FDIC considers borrowing cash from banks: Insurance fund that protects depositors is quickly running out of money

Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.

The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.
Story continues below ?advertisement | your ad here

A hallmark of the financial crisis has been the decision by successive administrations over the last year to lend hundreds of billions of taxpayer dollars to large and small banks.

“It’s a nice irony,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company. “Like so much of this crisis, this is an issue that involves the least worst options.”

Bankers and their lobbyists like the idea because it is more attractive than the alternatives: yet another across-the-board emergency assessment on them, or tapping an existing $100 billion credit line to the Treasury.

My Comment: It`s more than a "nice irony", Karen - it`s blatant fraud, in which the same banks which are only able to claim "healthy" status by virtue of massive government support and legalized accounting fraud are now lobbying to self-insure and (likely) charge the government a hefty fee for the privilege! Knowing full well that they don`t actually need to set aside any real capital as insurance, because if and when the next crisis erupts, Uncle Stupid will have no choice but to step in again with a branmd-new round of bailouts. And with the past half-year`s massive "green shoots" propaganda campaign having conned most economists and the administration`s mainstream-media-lapdogs that the "government rescue was successful" and "economic recovery is underway, albeit fragile", when TSHTF the next time, everyone of the crooks involved in this scammery can claim with a straight face "no one could have seen [insert trigger event whose details are basically irrelevant here] coming" and beg for more handouts. and why is the FDIC so reluctanty to use the $500 billion line of credit (more Ponzi finance to be sure, but at least on government-borrowing-from-itself terms) Treasury has set aside for it ESPECIALLY FOR SUCH HAPPENSTANCE that it would even seriously consider such a patently ludicrous proposal? Perhaps because tapping the Treasury emergency-credit line would an admission that the banking system (except for the TBTFs, which have managed to offload most or all of the fuckedness onto present and future generations of U.S. taxpayers) is still fucked, which might lead some influential people to begin questioning whether the folks at the Treasury/Fed/FDIC have been truthful in their assertions that the banking sector is in recovery mode. Or perhaps (as the article goes on to note) it`s just the bad blood between Sheila Bair and Tim Geithner ... but in either event, this proposal is more fraud piled atop existing and ongoing fraud.

I notice that Barry Ritholtz has a much more benign on the proposal, with an interesting bit of not-to-distant fincial-crisis history:

"Note that it is courtesy of a 1991 law passed during the S&L crisis that the FDIC is allowed to borrow from banks. The lenders would get government bonds, with interest rates set by the Treasury secretary."

Sorry, Barry, gotta disagree violently with you on this one - even if the Treasury sets rates on the aforementioned bonds which are comparably low as the bailed-out banks are paying their own depositors, it still amounts to the government paying the banks to self-insure ... the same banks whose fiscal recklessness it was which caused the FDIC insurance fund to be exhausted to begin with, and which are only able to claim "healthy" status by virtue of explicit government backstop and what is arguably the biggest legalized accounting fraud in history (the FASB "mark to fantasy" scam).

I have a better idea: Rather than increasing assessments on *all* banks (including the few prudent ones) like the FDIC did earlier this year, or paying the same bad actors who bankrupted the FDIC to "self-insure" (while still knowing that the government has their back if - or better, when - they screw the pooch again), the FDIC actually makes assessments on individual banks at rates reflective of their risk-taking? What a radical idea, eh? Why, that would be the moral equivalent of charging 20-30-something males who ride motorcycles more for insurance than Volvo-driving soccer moms. Crazy, I know...

[ewmayer]

The arrogant Financio-royalists at the Fed are now so drunk with their own power, they`re even telling their buddy Terrible Timmay over at Treasuray to get stuffed when it comes to any attempt to shed light on how the Fed operates:

Fed Rejects Geithner Request for Public Study of Its Governance, Structure: The Federal Reserve Board has rejected a request by U.S. Treasury Secretary Timothy Geithner for a public review of the central bank’s structure and governance, three people familiar with the matter said.
My Comment: The Fed is such a curious institution ... notice the continued party line about "maintaining independence" from the government. An interesting contrast offers itself here, by way of comparison with the Federal judiciary. Like the Fed, the judiciary is also intended to be "independent" of the executive and legislative branches of government, although those branches nominate and approve (or disapprove) judges, as they do (part of) the Fed leadership. So why is the judiciary an actual branch of government with strong requirements about transparency and subject to appeal and judicial review (except at the highest level, and even there Congress has a say by its ability to make new laws), whereas the Fed is a de facto privately-held corporation? Is not the fact of private ownership (or quasi-private, in the sense that private banking interests get to nominate 2/3 of board of governors, and that the goings-on in FOMC meetings are secret) of the Fed at least as large a potential conflict of interest as any potential "undue influence" from the official branches of government might be?

I find it no end of astonishing that the FedHeads can get away with their ongoing hue and cry about “independence” when their very origins, history and carefully-protected cult of secrecy raise huge questions of “Who does the Fed serve”?

Think about it: You have a secretive cabal of bank-nominated "financial experts" to whom Congress has delegated its exclusive constitutional authority to "coin money" (an interesting side question is whether it is even constitutional in the first place for congress to delegate such authority - by way of analogy, imagine if they tried to delegate their power to declare war to a quasi-private institution whose members represented the defense industry), who can print as much money as they like literally out of thin air, with which they can do more-or-less as they wish (by way of their member banks` balance sheets). The historical effect has been an ongoing flood of new fiat money in an amount sufficient to devalue the dollar by 95% (!) in just a little less than a century. Since such monetary devaluation amounts to a tax on savings, this is nothing less than a form of taxation without representation. You can argue that the president nominates the head of the Fed who must then be approved by congress, and that amounts to a form of representation, but there is a *huge* difference in the government explicitly raising your taxes and the Fed stealthily doing so, and that is *transparency*. Government tax changes require a bill to pass congress and then be signed into law by the president, which allows for plenty of time for debate (now publicly broadcast) and the checks-and-balances intended by the framers of the constitution to take place. The Fed, on the other hand, can do an "implicit tax raise" with no transparency and no possibility of a veto by anyone in government.

Here`s a hypothetical scenario I've been contemplating in order to explore the limits (or better, lack thereof) on Fed power: Let`s start with the basic Fed Charter and status, which Wikipedia sums up thusly (underlines mine):

"The [Federal Reserve] System derives its authority and public purpose from the Federal Reserve Act passed by Congress in 1913. As an independent institution, the Federal Reserve System has the authority to act on its own without prior approval from Congress or the President."

The implications of the underlined snip are potentially rather frightening, in the hypothetical scenario of a "Rogue Fed" (not to be confused with the Swiss tennis champion - although there will indeed be a Swiss connection in our little morality play). So here`s the setup: Imagine if (for reasons unknown) the Fed chair and governors decided to approach some financially-distressed third-world country (other than the U.S., that is - let`s call it West Koranistanea) with a debt-to-GDP ratio of 100% or more and suffering from chronic poverty, and offer to buy up the nation's entire debt and shower its citizenry with a one-time windfall of one million $U.S. per person, in exchange for covert control of the nation`s government and military. Further imagine that the leadership of said nation, facing mounting social unrest and fearful for their own futures and lives, accept the offer. Further imagine that the nation in question is nuclear-armed. The Rogue Fed spends the next few months - under cover of a domestic financial crisis - monetizing West Koranistanea`s debt and setting up accounts for every West Koranistanean with a Swiss bank the Fed has "special business relations" with, with the backing and knowledge of the Swiss government, which was properly "incentivized" to encourage it to play ball. Once the money transfer is complete and West Koranistanea has started receiving the goods from the resulting national shopping spree, the West Koranistaneans hold a secret parliamentary meeting formalizing the deal and turn over the codes to the nukes to the Fed board. The next day the Rogue Fed presents the U.S. government with the fait accompli, says all the Fed governors have decamped to their new heavily-guarded luxury compounds in West Koranistanea, and if the U.s. attempts any retaliatory action, the missiles will fly.

Now to the question: Far-fetched as this scenario seems, is there anything which could in fact prevent a suitably-minded Rogue Fed from doing such a thing?

[ewmayer]

p.s.: A small nomenclatural note regarding the above hypothetical Rogue Fed - one which tennis fans will appreciate: We need suitable terminology for describing "degrees of rogue-Fed-ness". Which begs the question: What term would one use to describe a Fed that is even more out of control than a merely Rogue Fed? My suggestion:

(wait for it...)

Why, a "Roguer Federer", of course.


On a business-related note, has anyone had a chance to view japelprime's Joseph Stiglitz video? (I have not yet.)

------------------------------------------

Funny watching the market action this afternoon - Someone (probably the prop trading desks at GS and JPM) tried very hard to do a vertical-ramp market pump right as Ben reported what he and his trusty band of Merry Monetizers allegedly discussed about the economy at their latest FOMC meeting. It was really a non-announcement, just repeating the usual (and by now well-worn) propaganda about "incipient recovery" but things still being "fragile" so as to justify continuation of the Fed`s ZIRP and monetization by way of continued purchase of garbage MBS. But the prop trayda boyzz were apparently hoping that the hordes of speculators who`ve been helping to keep the garbage rally about nothing going would see the ramping-up of the major indices, immediately stop reading their RSS feeds of BB`s speech (which opens chirpily but then quickly sobers up) and pile into the usual garbage stocks which have been the most popular among the speculators - no such luck for once. The selloff was aided by legions of oil speculators betting on higher "green shoots recovery" demand getting caught flat-footed by a "surprise" jump in global stockpiles. I still think TPTB are going to do everything in their power to push the Dow up over the "magic" 10,000 mark sometime between now and year`s end just so they can say they did (and thus point to another fake "economic recovery milestone"), but it seems the pool of greater fools is now starting to turn a bit red with the blood of the speculators.

Mortgage Electronic Registration Systems Loses Legal Shield

Back in April, we mentioned the The Mortgage Netherworld of MERS — the Mortgage Electronic Registration Systems.

MERS is the firm that (technically) holds 60 million US (securitized) mortgages on behalf of the actual buyers. They were created by a consortium of lenders in part to save money (on paperwork and recording fees) every time a loan changes owners. In the era of securitization, these savings amounted to billions of dollars.

But MERS also acts as a shield, making it all but impossible for many borrowers to deal directly with whoever happens to be holding their mortgage at the moment. As the NYT noted, it has “made life maddeningly difficult for some troubled homeowners.”

Now, the Kansas Court of Appeals has called foul. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. (Other than GlobalResearch.ca, I have yet to see any MSM coverage of the issue). The Court stated that MERS’ relationship is not that of a true party possessing all the rights given a buyer. Hence, the court ruled:

“By statute, assignment of the mortgage carries with it the assignment of the debt. . . . Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.” (emphasis added).

What does this mean for the 60 million people — over half of all US mortgages — whose loans have been securitized, sliced and diced, and are now held by MERS?

To start, it potentially gives a powerful weapon to homeowners who are being foreclosed upon. If their mortgage is held by MERS, they certainly have a strong basis for challenging the action on the grounds of standing. (Note that this was a Kansas COURT OF APPEALS decision, and while it is not binding on other states the way a US Supreme court ruling would be, it is likely to be influential). I also think the Kansas Court of Appeals could also review this case

I don’t quite agree with Ellen Brown, who in an extensive legal analysis of the decision, writes: “The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose.” It may be possible for trustees for the securitized loans to somehow perfect standing, i.e., develop the ability to claim loan ownership (perhaps via a purchase) and then move to foreclose. (Brown also calls it a Kansas Supreme Court decision, but it appears to be the intermediate 3 judge panel of the Court of Appeals that heard the case, not the full Kansas Supreme Court).

But Brown is correct when she states this is a very significant legal development, one that might dramatically impact foreclosure litigation.

My Comment: Denninger had a very detailed commentary on this yesterday, with some fascinating legal background on deeds of trust and the historical "wet signature" standard. This may very well prove a case where all the "modernization" by the mortgage-securitization industry (which led both efficiencies but also to the complete separation of mortgage originators from long-term financial interests in seeing that the debt was actually paid off) over the past few decades may come back to bite it in the ass in a big way:

Has A MERShole Opened Up?

A mortgage is a combination of a promissory note (that is, a promise to pay) and a security instrument. That is, there's a deed of trust and a debt (the promissory note.)

State law governs foreclosure and most states require as a matter of statute that these two items remain intact. Further, most states require as a matter of statute (that is, law!) that to foreclose you must present proof that you actually have an enforceable interest. In many cases this requires what is known as a "wet signature" - that is, the actual original signed document from the debtor confirming agreement to be bound to the terms. In addition you must establish ownership of that document - that is, you must show an unbroken chain of assignments from the originating bank to your hand.

This is where the problem comes in - the originating lender has no standing to foreclose once he sells off the mortgage. He was paid in full and thus has no standing to appear in court.

MERS' web page says this:

MERS is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.

They may as well have said "we have decided that we can abrogate state law with impunity." Oh wait - they did, didn't they?

Sorry folks, life doesn't work that way.

If state law requires an unbroken chain of recorded assignments in order to document ownership of a mortgage and thus standing to foreclose, MERS cannot override this state law by fiat.

My Comment: I agree with one of Barry`s readers who opines that while congress (after a furious bout of lobbying, no doubt) will surely find a way to "backdate" the legality of securitization in re. the chain-of-document-custody standard, but that the legal wrangling over this may "gum up the works" for quite a while.