Mystery Economic Theater 2010

[ewmayer]

French Workers Strike Against Sarkozy Pension Plan: Railway and Paris subway workers and as well as teachers, air-traffic controllers and port and refinery employees walked out to protest plans to raise the retirement age to 62 from 60 and lift the age for a full pension to 67 from 65. Unions, which warn they may renew the strike every 24 hours unless the government backs down, said 244 marches will take place across France today in cities including Toulouse, Marseille and Nantes.

Interesting how the best way to get union parasites off their butts is to give them an excuse to avoid working. They are willing to work very hard to avoid working, so to speak. And I know it's a really cheap shot, but I couldn't resist advertising a suitable-for-framing poster capturing this ethos:

[ewmayer]

BTW, If you are still swallowing any of the MSM propaganda about Foreclosuregate being due to any bad-but-less-than-awful things such as "flaws", "errors", "expediency", "rush to foreclose", etc, you are missing how deep and pervasive the rot here is. Structured-finance expert Janet Tavakoli has called the mortgage-securitization-paperwork racket "the biggest fraud in the history of the capital markets."

Today, Barry Ritholtz takes a turn: Link and a few choice snips - all embedded links and highlighting-for-emphasis are Barry's in this case:

Why Foreclosure Fraud Is So Dangerous to Property Rights

There seems to be a misunderstanding as to why the rampant and systemic foreclosure fraud is so dangerous to American system of property rights and contract law. Some of this is being done by people who are naked corporatists (i.e., the WSJ Editorial Board) excusing horrific conduct by the banks. Others are excusing endemic property right destruction out of genuine ignorance.
...
As we noted previously, esteemed economists such as Hernando de Soto have identified that the respect for title, proper documentation, contract law and private property rights are the underlying reason capitalism works in Western nations, but seems to flounder elsewhere.
...
It is impossible to perform that many foreclosure reviews and data verifications in a single day. The only way this could happen is via a systemic banking fraud that orders its employees to violate the law. Hence, how we end up with the wrong house being foreclosed upon, the wrong person being sued for a mortgage note, a bank without an interest in a mortgage note suing for foreclosure, and cases where more than one note holders are suing on the same property that is being foreclosed.

This is more than mere accident or error, it is willful recklessness. When that recklessness is part of a company’s processes and procedures, it amounts to systemic fraud. (THIS IS CRIMINAL AND SHOULD BE PROSECUTED).

The next step in our cavalcade of illegality is the Notary. Their signature and stamp allows these fraudulent documents to be entered into court as actual evidence (no live witness required). Hence, we have no only fraud, but contempt of court on top of it (BOTH OF WHICH REQUIRE PROSECUTION).

Law firms preparing the legal documents are not doing their job of further verifying the information. And, it seems certain states such as Florida have foreclosure mills who were set up from the outset as fraudulent enterprises. (EVEN MORE PROSECUTION NEEDED).

Lastly, some service processors are not bothering to do their job. This is the last step in the foreclosure proceedings that would put a person on notice of the errors (YET MORE FRAUD).

There are multiple failsafes and checkpoints along the way to insure that this system has zero errors. Indeed, one can argue that the entire system of property rights and contract law has been established over the past two centuries to ensure that this process is error free. There are multiple checks, fail-safes, rechecks, verifications, affirmations, reviews, and attestations that make sure the process does not fail.

It is a legal impossibility for someone without a mortgage to be foreclosed upon. It is a legal impossibility for the wrong house to be foreclosed upon, It is a legal impossibility for the wrong bank to sue for foreclosure.

And yet, all of those things have occurred. The only way these errors could have occurred is if several people involved in the process committed criminal fraud. This is not a case of “Well, something slipped through the cracks.” In order for the process to fail, many people along the chain must commit fraud.

[ewmayer]

Fresh off his Rolling Stone article on the Tea Party movement (if you liked that, here is a hilarious blog followup on Alaska Tea Party senatorial candidate Joe Miller), Matt Taibbi still is seeing things through tea-colored glasses, but his latest finance-related blog entry nonetheless can serve as an excellent primer on central bank "Quantitative Easing" (in this case widely predicted second round of such by the US Fed, a.k.a. QE2, not to be confused with the famous luxury liner). Specifically, why Wall Street loves QE, even though it is a reliable sign that the economy is in really deep doo-doo:

The Fed's Magic Money-Printing Machine, Act 2

It’s amazing, given the attention the Tea Party allegedly is paying to government waste and government spending, that there hasn’t been more controversy about the now-seemingly-inevitable arrival of "QE2" – a second massive round of money-printing cooked up by the Fed to prop up both the government and certain sectors of the economy. A more overtly anticapitalist and oligarchical pattern of behavior than the Fed’s "Quantitative Easing" program could not possibly be imagined, but the country is strangely silent on the issue.

What is "QE"? The first round of "quantitative easing" was a program announced by Ben Bernanke last March in response to the financial crisis, ending in March of this year. In what will soon be known as "QE1"(i.e. once QE2 is announced), Bernanke printed over a trillion dollars out of thin air, then used that money to buy, among other things, mortgage-backed securities (MBS) and Treasury Bonds. In other words, the government was printing money to a) lend to itself and b) prop up the housing market, with Wall Street stepping in to take a big cut.

That was QE1. There has long been speculation that another trillion-plus money-printing program called QE2 is coming, but only recently have there been concrete hints from the Fed along those lines ... most everyone now expects the Fed to announce a new QE program in November. The big banks have now openly begun to predict this, with JP Morgan Chase among others raising its odds of the Fed buying mortgages in the next 6 months from 10% to 50%. Another effect we’re seeing is that mortgage originators are hiring again, in anticipation of being able to fork out QE-funded mortgages.

QE is difficult to understand and the average person could listen to a Fed official talk about it for two hours right to his face and not understand even the basic gist of his speech. The ostensible justification for QE is to use a kind of financial shock-and-awe approach to jump-starting the economy, but its effects for ordinary people are hard to calculate. Theoretically the entire country has some sort of stake in this program, as (among other things) U the Homeowner may see your home value stay stable or fall less than it would have thanks to this artificial stimulus. You also may be able to buy a house when you wouldn’t before, thanks to declining mortgage rates.

And jobs, I suppose, may theoretically be created by all this dollar meth being injected into the financial bloodstream – although the inflationary effect of printing trillions upon trillions of new dollars would probably wipe out the value of the money you make at that job. When it comes to calculating what QE actually does for you, or how much it harms you, that question is just very hard to answer.

But one thing we know for sure is that big banks and Wall Street speculators are real, immediate beneficiaries of the program, as they suddenly have trillions of printed dollars flowing through the financial system, with endless ways to profit on the new chips entering the casino.

And by an amazing coincidence, many of the biggest players in the financial services industry have a habit of buying up MBS or Treasuries just before these magical money-printing programs of the Fed send their respective values soaring. If you own a big fund, for instance, and you know that the Fed is about to buy a trillion dollars of mortgage-backed-securities through a new Quantitative Easing program, buying a buttload of MBS a few weeks early is a pretty easy way to make a risk-free fortune. One of the worst-kept secrets on Wall Street is that the big bankers and fund managers get signals about the Fed’s intentions about things like QE well before they are announced to the rest of us losers in the public.

A hilarious example of this cozy insiderism popped up just a few weeks ago, when PIMCO bond fund chief Bill Gross let it slip on a live CNBC interview that he was getting inside info from the Fed. The interview is with former Goldman analyst and (now) CNBC anchor Erin Burnett, as well as my slimeball former colleague from the Moscow Times and (now) CNBC bobblehead Steve Liesman, who slobber typically over the bond king in the segment.

Gross at one point says this:

"What is important going into November is the staff forecast for economic growth for the next 12-18 months. Our understanding is that the Fed is about to downgrade their forecast from 3% down to 2%. Which in turn would suggest that unemployment won’t be coming down… and so that would be the trigger to my way of thinking for Quantitative Easing in November."

The admission is so untoward that the ex-Goldmanite Burnett immediately races to clean up the problem, saying to Liesman, who is also on the panel, "We don't have that forecast yet, right, Steve?"

At which point the ever-helpful Liesman replies, "We won't get that for 3 weeks, Erin. That's when it comes out with the minutes of this meeting ."

Check out 5:20 of this video (courtesy of Zero Hedge):

There are so many different ways for Wall Street guys to make risk-gazillions off of QE, it’s not even funny. When I was researching the "Wall Street Bailout Hustle" story last year, for instance, I learned about one fund that loaded up on MBS before the first QE announcement, then saw their MBS skyrocket in value after QE – at which point the fund sold off a lot of its MBS holdings and bought Treasuries, effectively taking money from the Fed and lending it right back to the government at interest.

Beyond that, QE is a highly dubious idea in general, and probably an indication that the economy is worse off than it seems by far. When the Fed stops being able to stimulate the economy by the traditional method of slashing interest rates, and has to resort to printing money by the trillions, that is a sure indication that things in the economy are seriously FUBAR. If this is what it takes to prop up home values and keep the government liquid and the stock market from collapsing, we’re all in a lot of trouble.

Add to that the nearly infinite possibilities for corruption when one group of private citizens (i.e. big banks) gets concrete info about government stimulus before others, and QE2 has the potential to be a fiasco of oligarchical manipulation, the worst example possible both of government meddling in the market and of corporate cronyism and regulatory capture. It should be a huge political issue for both the left and the right, and yet it is not an issue at all outside of Wall Street, where there are few objections to the impending arrival of this new rush of money – and what few objections there are seem mostly to be intellectual and theoretical.

[ewmayer]

Reported in numerous venues, here is the link to The Big Picture's:

October 14, 2010

Robert S. Mueller III
Director Federal Bureau of Investigation
935 Pennsylvania Ave, NW
Washington, DC 20535

Robert O'Neill
US Attorney
Central District of Florida
400 North Tampa Street, Suite 3200
Tampa, FL 33602


Dear US Attorney Robert O'Neill and Director Mueller,

When it comes to foreclosures, there is mounting evidence of a state of rampant lawlessness in Central Florida. There are increasing signs that big banks routinely evade laws meant to protect homeowners, in many well-documented cases of ‘foreclosure fraud’. Despite the demonstrated existence, for instance, of ‘robosigners’ signing affidavits attesting to documents that they have never seen, the parties engaging in such misconduct are not being brought to justice. Big banks are mischaracterizing this as mere “technical problems,” and apologizing only where there is clear and very public evidence of harm.

It is not enough for big banks only to apologize for fraud, perjury, and even breaking and entering – when they are caught. It is time for handcuffs. Fraud does not become legal just because a big bank does it.

On September 20, 2010, after my office found evidence of systemic foreclosure fraud perpetrated by big banks and foreclosure mills, I called for a halt to illegal foreclosures.

Since then, big banks such as Bank of America, JP Morgan Chase, GMAC, PNC and others have suspended foreclosures or foreclosure sales. These banks are still claiming that the massive fraud they have perpetrated amounts to nothing more than a series of technical mistakes. This is absurd. This is deliberate, systemic fraud, and it is a crime.

To give but two of the many available examples, attached is a deposition from an ex-employee of one of the largest ‘foreclosure mills’ in the state, the Law Offices of David Stern. In it, this employee testifies under oath that it was routine for that office to falsify documents regarding military records, in order to move foreclosure cases along more quickly.

The local media has reported on the case of Nancy Jacobini; a contractor for JP Morgan Chase broke into her home after the bank mistakenly foreclosed on it. JP Morgan Chase ‘apologized’ for terrifying her. But we do not have an apology-based legal system; we have a system of laws. I am writing to ask you to enforce them.

The organized and systematic manufacturing of falsified documents to deprive people of their homes is not only a threat to the integrity of the legal system. It also aggravates and extends the weakness in the housing market. Who is going to feel comfortable buying a home if a big bank can simply take it, whether or not that bank has a right to it? Given the securitization of mortgage-backed securities, this misconduct is a threat to our securities markets as well. But fundamentally, this is a question of protecting basic property rights – if you don’t own it, then you shouldn’t try to take it. Without clear property rights, and a legal system that insists on clear proof of those rights before transferring ownership by force, the economy will fall apart.

If perpetrators of perjured affidavits and other systematic criminal activity can get off simply with civil liability -- or even less, an insincere bureaucratic apology -- the freedom that Americans enjoy will erode quickly in the face of lawless seizures of property. I appreciate your work on the joint Middle District of Florida’s Mortgage Fraud Initiative, and respectfully request that the efforts of your offices turn towards reining in this rampant criminality.

Regards,

Alan Grayson
Member of Congress

My Comment: How much do you want to bet that the bank-owned stooges in the gubbermint try very hard to make all these shenanigans legal retroactively?

"Over the past half century the financial industry has not treated the law as a bedrock institution that constrains the nature of its activities, but rather as a set of rules that can be forced to adapt to the industry’s needs and desires. Thus, the industry knowingly and deliberately creates standardized contracts that are either designed to circumvent the law or in some cases flatly illegal under current interpretations of the law, and then when a case involving the contract arises (which in many instances happens only long after the standardized contract has become an institution), the financial industry tells the court that the dubious or illegal contract is so widespread that the court would create systemic risk by enforcing the law."

[ewmayer]

Another day which threatened to have stocks selling off into the close, on the increasing realization that foreclosuregate is a very real threat to the banks ... thanks goodness for the ever-watchful of our Dear Chairman and his bestowing another invisible handjob to help pump up flaccid equity prices. But c'mon guys, you were only a teeny bit short of getting that sucker to close green - couldn't you have turned up the NYFED stock-buying spigot just a little more? People - not me, mind you, but there are always some of little faith - might start to question your omnipotence:

[Spherical Cow]

Originally Posted by ewmayer

Hence, how we end up with the wrong house being foreclosed upon, the wrong person being sued for a mortgage note, a bank without an interest in a mortgage note suing for foreclosure, and cases where more than one note holders are suing on the same property that is being foreclosed.

This is more than mere accident or error, it is willful recklessness. When that recklessness is part of a company’s processes and procedures, it amounts to systemic fraud. (THIS IS CRIMINAL AND SHOULD BE PROSECUTED).

The next step in our cavalcade of illegality is the Notary. Their signature and stamp allows these fraudulent documents to be entered into court as actual evidence (no live witness required).

This is not new, either- we had two different banks (Flagstar and Lehman Bros) claim to own our mortgage simultaneously clear back in 2001. A two-year nightmare. Both swore they had in their possession the original, signed notes; both refused to produce the documents for us or for the other bank. Our lawyer advised not paying the mortgage to either one until they could figure it out, because he said we’d never get any money back. Flagstar even foreclosed, and the note in our credit report read “Foreclosure Proceedings Started/ Never Late on Payments”. They did not even see the irony of that.
It cost us hundreds of hours of time, thousands of dollars in lawyers' fees.

Our loan was part of a set of “problem” loans, sold by one bank to two different banks (a profitable practice), after which they declared bankruptcy (equally profitable if you do it right, I guess; you get to keep all that money you made selling things twice). One of the other “problem” mortgages that ours was bundled with was a mortgage apparently taken out by a dead man. Witnessed and Notarized, mind you, but signed many months after he was deceased. Must have really wanted that house.

I came out of it with no respect at all for banks or lawyers. Ours or theirs. None of what’s happening is even mildly surprising after what I experienced during those two years.

Norm

[ewmayer]

Norm, thanks for the story of your personal mortgage-ownership-morass nightmare ... one wonders how many folks have been victims of similar unjust harassment.

On the same topic, I notice that NYT Head Keynesian stimulator Paul Krugman, when he gets off his pet theme of "you, too, can borrow your way out of debt", can actually make sense:

The Mortgage Morass

American officials used to lecture other countries about their economic failings and tell them that they needed to emulate the U.S. model. The Asian financial crisis of the late 1990s, in particular, led to a lot of self-satisfied moralizing. Thus, in 2000, Lawrence Summers, then the Treasury secretary, declared that the keys to avoiding financial crisis were “well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement.” By implication, these were things the Asians lacked but we had.

We didn’t.

The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance. These days, the idea that our banks were well capitalized and supervised sounds like a sick joke. And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law.

The story so far: An epic housing bust and sustained high unemployment have led to an epidemic of default, with millions of homeowners falling behind on mortgage payments. So servicers — the companies that collect payments on behalf of mortgage owners — have been foreclosing on many mortgages, seizing many homes.

But do they actually have the right to seize these homes? Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage. More significantly, certain players have been ignoring the law. Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by “robo-signers,” or low-level employees who had no idea whether their assertions were true.

Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist. In the frenzy of the bubble, much home lending was undertaken by fly-by-night companies trying to generate as much volume as possible. These loans were sold off to mortgage “trusts,” which, in turn, sliced and diced them into mortgage-backed securities. The trusts were legally required to obtain and hold the mortgage notes that specified the borrowers’ obligations. But it’s now apparent that such niceties were frequently neglected. And this means that many of the foreclosures now taking place are, in fact, illegal.

This is very, very bad. For one thing, it’s a near certainty that significant numbers of borrowers are being defrauded — charged fees they don’t actually owe, declared in default when, by the terms of their loan agreements, they aren’t.

Beyond that, if trusts can’t produce proof that they actually own the mortgages against which they have been selling claims, the sponsors of these trusts will face lawsuits from investors who bought these claims — claims that are now, in many cases, worth only a small fraction of their face value.

And who are these sponsors? Major financial institutions — the same institutions supposedly rescued by government programs last year. So the mortgage mess threatens to produce another financial crisis.

What can be done?

True to form, the Obama administration’s response has been to oppose any action that might upset the banks, like a temporary moratorium on foreclosures while some of the issues are resolved. Instead, it is asking the banks, very nicely, to behave better and clean up their act. I mean, that’s worked so well in the past, right?

The response from the right is, however, even worse. Republicans in Congress are lying low, but conservative commentators like those at The Wall Street Journal’s editorial page have come out dismissing the lack of proper documents as a triviality. In effect, they’re saying that if a bank says it owns your house, we should just take its word. To me, this evokes the days when noblemen felt free to take whatever they wanted, knowing that peasants had no standing in the courts. But then, I suspect that some people regard those as the good old days...

[ewmayer]

Barry R. has a post comparing spending numbers for the past 5 presidents to all the tea party vilification of Obama as a big spender:

Hey, Big spender

There seems to be an increasing amount of rhetoric about government spending — how much of it there is, whether or not it’s affordable, the extent to which Obama is bankrupting the nation, that government spending is “crowding out” what the private sector might spend, etc., etc. So, does it wash?

My Comment:BTW, an interesting data point in light of Rogoff et al's work showing that debt-to-GDP of 90% appears to be a kind of critical threshold ... U.S. total debt outstanding (including SS borrowings) passed 90% this year:

http://en.wikipedia.org/wiki/United_States_public_debt

The accompanying charts also show a very clear upward ramp beginning (not surprisingly) at the end of Dubya's term. You can point fingers of the "he was just a big a spender as I was" variety all you want, but the bottom line is, with revenues likely to remain depressed for at least a decade, the current fiscal trajectory is a fast path to the crisis we've been steering toward (and trying to grow, inflate and borrow-to-stimulate our way out of) for decades.


Robert Reich takes “QE lite” (and by extension, QE 2) to task:

The Fed’s New Bubble (Masquerading as a Jobs Program): The latest jobs bill coming out of Washington isn’t really a bill at all. It’s the Fed’s attempt to keep long-term interest rates low by pumping even more money into the economy (“quantitative easing” in Fed-speak)

The idea is to buy up lots of Treasury bills and other long-term debt to reduce long-term interest rates. It’s assumed that low long-term rates will push more businesses to expand capacity and hire workers; push the dollar downward and make American exports more competitive and therefore generate more jobs; and allow more Americans to refinance their homes at low rates, thereby giving them more cash to spend and thereby stimulate more jobs.

Problem is, it won’t work. Businesses won’t expand capacity and jobs because there aren’t enough consumers to buy additional goods and services.

The dollar’s drop won’t spur more exports. It will fuel more competitive devaluations by other nations determined not to lose export shares to the US and thereby drive up their own unemployment.

And middle-class and working-class Americans won’t be able to refinance their homes at low rates because banks are now under strict lending standards. They won’t lend to families whose overall incomes have dropped, whose debts have risen, or who owe more on their homes than the homes are worth — that is, most families.

So where will the easy money go? Into another stock-market bubble.

[Fusion_power]

And just think, all that U.S. debt is backed up with $340 billion in gold reserves at $1300 per ounce.

DarJones

[ewmayer]

Originally Posted by Fusion_power

And just think, all that U.S. debt is backed up with $340 billion in gold reserves at $1300 per ounce.

Not since tricky Dick Nixon took us off the gold standard, it's not ... it's now backed with an impressive-sounding "full faith and credit" thingie, which roughly translates to "we promise to pay, but make no promises as to the relative purchasing power of the dollars you thought you bought, compared to the ones we will give you when the note matures."

[xilman]

Originally Posted by ewmayer

Not since tricky Dick Nixon took us off the gold standard, it's not ... it's now backed with an impressive-sounding "full faith and credit" thingie, which roughly translates to "we promise to pay, but make no promises as to the relative purchasing power of the dollars you thought you bought, compared to the ones we will give you when the note matures."

Isn't that roughly what FusionPower said? The value of the gold at the current exchange rate is less than the face value of the debt. Either he was being ironic, or he was implying that inflation will make the physical gold have a value in dollars equal to the size of the debt in dollars when it becomes time to pay up.

Paul