Let Us Call it Fraud

That anyone thought lack of regulation was possibly a good idea was never true. Many thought that certain changes were acceptable and the change makers were simply not smart enough to actually do it. We could call it a dumbing down driven by the honest competition for better returns on the capital deployed.

Recall that the profitability of S&L’s was low and made the industry a slow growth sector that found it difficult to attract new capital and management. The Canadian banking industry had the same rap.

The only way to juice earnings in the financial industry or in any industry with a mature business model is by fraud. That means using confidence to support the finance of lousy investments until the confidence evaporates. If you are the first to play and deftly pass the train wreck of to the most greedy of you successors, you can walk away very rich.

This economist is right. It was fraud and what is more, they all knew it was a pending disaster. The only ones who could be excused would be the salesmen who trusted their bosses and partners. You do not manufacture a package of crap mortgages and then get it ranked AAA and not know that you are constructing a fraud and that everyone is going wink - wink as this is peddled of to the hedge funds desperate for returns.

It is fitting that these fools were forced to pack so much in inventory, but that is likely a result of the last desperate moves to retain confidence. The players are all dead and all their competitors are very much in business since the clique could hardly let them play since they would have asked all the right questions.

As I have previously posted, all participants should be put on notice of a full investigation and asked to turn in their passports. And the crime is also treason because these greedy men put their interests ahead of their institutions and thir country's interest.

Economist: US collapse driven by 'fraud,' Geithner covering up bank insolvency

http://www.freedomsphoenix.com/Find-Freedom.htm?EdNo=001&At=048272

In an explosive interview on PBS' Bill Moyers Journal, William K. Black, a professor of economics and law with the University of Missouri, alleged that American banks and credit agencies conspired to create a system in which so-called "liars loans" could receive AAA ratings and zero oversight, amounting to a massive "fraud" at the epicenter of US finance.

But worse still, said Black, Timothy Geithner, President Barack Obama's Secretary of the Treasury, is currently engaged in a cover-up to keep the truth of America's financial insolvency from its citizens.

The interview, which aired Friday night, is carried on the Bill Moyers Journal Web site.Black's most recent published work, "The Best Way to Rob a Bank is to Own One," released in 2005, was hailed by Nobel-winning economist George A. Akerlof as "extraordinary.""There is no one else in the whole world who understands so well exactly how these lootings occurred in all their details and how the changes in government regulations and in statutes in the early 1980s caused this spate of looting," he wrote. "This book will be a classic."But that book only covers the fallout from the 1980s Savings & Loan crisis; Black's later first-hand involvement in that scandal being the ensuing liquidation of bad banks."

A single bank, IndyMac, lost more money than the entire Savings and Loan Crisis," reported PBS. "The difference between now and then, explains Black, is a drastic reduction in regulation and oversight, 'We now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80.'"That financial calamity, he explained, was brought about not by mishap or accident, but only after a concerted effort to undermine and remove all regulations, allowing a creditor free-for-all that hinged on fraudulent risk ratings for bad loans.

"[T]he way that you do it is to make really bad loans, because they pay better," he told Moyers. "Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced.

It also makes it inevitable that there's going to be a disaster down the road."...This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad," he continued. "And now it was getting triple-A ratings.

Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years.

So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."He equated the entire US financial system to a giant "ponzi scheme" and charged Treasury Secretary Timothy Geithner, like Secretary Henry Paulson before him, of "covering up" the truth.

"Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?" asked Moyers.

"Absolutely, because they are scared to death," he said. "All right? They're scared to death of a collapse.

They're afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we'll run screaming to the exits.

And we won't rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it's foolishness. All right? Now, it may be worse than that. You can impute more cynical motives.

But I think they are sincerely just panicked about, 'We just can't let the big banks fail.' That's wrong."Ultimately, said Black, the financial downfall of the United States in the wake of the Bush years is due to "the most elite institutions in America engaging in or facilitating fraud."

"When will Americans wake up and hold the real criminals - Banksters - accountable for their actions, and pressure the government to enact systemic changes to prevent future abuses?" asked Huffington Post blogger Mike Garibaldi-Frick.

Aube Balten on Interest rates

For those who like their financial news grim, I am serving up a further dose of Aubie Baltin. He is worth supporting, if only to prevent one from ever getting too exuberant.

He is quite right about the direct consequences of low interest rates on the global financial system. It has promoted reckless lending simply because it gave the lenders no other choice other than exiting the business. This way they postponed it for about five years and now they are all gone. I remember wondering where the portfolio managers were getting their returns from with interest rates so low. We now know it was from thin air and based on the unreasonable proposition that a third of the population was going to double their incomes in a couple of years.

My own experience has informed me that when everything is working fine, bright young rookies are allowed free rein because they simply do not understand the limits. These guys go full out producing crummier and crummier product. They barely know better. And once the genie is out of the bottle, only a market downswing can end it, usually by busting the tyros.

The banks need to start lending and to accept that they must now charge their best clients perhaps six percent while forgetting about apparent unlimited access to cheap money. They need the real income because their real cost of money is no longer tied strictly to the nominal interest rate. It is tied to a ballooning loss rate that is certainly no longer 0.5% but likely closer to 3%. That means that even at zero interest for money that their cost of money is too high. Therefore, if they project a 3% loss ratio on their portfolios and place the funds at 6% they will be fine. At the portfolios improve, this cost structure will return to historic levels fairly quickly.

The mismanagement of the mortgage portfolio is already under control, except that they have yet to restructure the loans as per my suggestions. The overhang is so large that the underling real estate will continue to sink in value putting all mortgages underwater. The price drop in the USA was an astounding 20% this past quarter. This process is the equivalent of approaching every mortgage holder and effectively demanding immediate repayment.

We must set a mark to market day against which all mortgages can be automatically be restructured by the lenders.

Otherwise we will go to a price structure that taps only folks able to pay mostly cash.

The truth is that this is all pretty depressing to dwell on since ye and thee can do naught.

This crisis or collapse of confidence has exposed all the weak sisters for what they are and they will now be either fixed or rooted out. It is difficult and will require time.

Two things are happening or need to happen.

First of and well underway, the financial industry has had its capital replaced to make up present losses and thus permitting them to stay in the business of trying to fix their portfolios. All this money has already been lost into the economy over the past five years and cannot be recovered. It prevents fire sale liquidation of the banking industry as occurred in the, and was the real cause of the Great Depression. It is one thing for half the financial system to disappear into thin air, it is quite another for half the real economy to disappear as a direct result.

Second and not yet beginning we need a massive encouragement of investment in the energy business with guarantees and related contracts. This should include a massive switch over to electric cars ASAP. These will all repatriate cash flow into the domestic energy business. The Middle East needs to be put on notice that we are withdrawing from the oil business permanently.

If this were all happening, the USA balance of payments would quickly right itself and we would enter rapid growth. But as Aubie Balten laments, who is listening?



Dec 1st Issue

UNCOMMON COMMON SENSE
For People Who Think


THE PERILS OF PAULINE

THE DANGER AND PITFALLS OF LOW INTEREST RATES
The world, as well as all the experts, are witnessing in utter shock and disbelief the potential break down of the world’s financial system. They still can’t figure out why this is happening and therefore do not know what they should or could do about it.

UNINTENDED CONSEQUENCES are the main reason why free markets work and managed markets (Socialism) must eventually break down; nobody ever even thinks about the potential seemingly unrelated unintended consequences. Even if there were a few smart people who do think about such things, it is impossible to conjure up all the possible permutations and combinations that over time only a Free Market can factor in while giving the exact right amount of weight to each factor and come up with the exact right price and solutions.

ARTIFICALLY LOW (ZERO) INTEREST RATES

That’s enough of generalities; the main topic is ZERO interest rates and the unintended consequences of the FED maintaining artificially LOW interest rates. On numerous occasions, I have pointed out and explained the functions of interest rates, such as determining the marginal propensity to consume vs. save. and the most efficient allocation of scarce savings among investment projects. But theses are well known factors even though they have been ignored and are the main causes behind the business cycle.

LEVERAGE has become the main unintended consequence of artificially low interest rates. With a real inflation rate of 3% and yield spread of only 2%, it is impossible for Banks to make money and therefore no lending will take place unless a way could be found to increase the rate of return on their capital: Low and behold, LEVERAGE was discovered. If you could leverage your capital at 10 to 1, a 1% profit becomes a 10% profit. At 40 to 1, 1% becomes 40% and at a 100 to 1 you double your money every year. Not to bad, AY? But alas, there is a catch; leverage is a two edged sword. A 1% loss on a 100 to 1 leverage wipes out your capital completely. Among the first highly leveraged deals was the carry trade; buying US Treasuries with borrowed Yen. And what a deal that turned out to be. Initially, not only did they make money on the interest rate spread but they made even more as the Dollar began increasing 5% to 8% a year against the Yen. This gave rise to the Hedge Fund Industry as they convinced everyone how smart they were. Of course they did not warn anyone about the risks involved or of the possibility that the Yen would reverse and go up against all currencies. Therefore the only safe thing to do was to move the business offshore, limiting the investors to exempt investors and institutions: Low and behold, no Government rules or oversight and no SEC approved audited prospectus requirement: After all, exempt individuals and institutions are supposed to be smart enough to protect themselves, right? Too bad they had to ignore all the little suckers but never mind, there were enough rich suckers with a lot more money to go around. What they never expected was that after a few years of 40%+ returns, the biggest suckers of all, the major Pension and Endowment Funds, after 10 years of no gain in stocks, would jump into the quicksand with both feet.. PARADISE FOUND.

There is always an element of self preservation at work at all times and now that they had found a license to print money, they looked for a way to both increase their leverage and more importantly, protect themselves against risks. Low and behold, Credit Default Swaps (CDS) and other insurance derivatives against other types of risks (interest rates, currency, etc.) were invented, which allowed leverage to be increased to unimagined levels. But it didn’t stop there. Whatever the Market was looking for Wall St. created. The one thing Pension, Insurance and other big Investors were looking for was AAA Bonds that paid a high enough rate of return (since Treasuries were no longer paying enough) to allow them to stay in business without taking undue risk. Sure enough, the experts on Wall St. provided that using sub-prime mortgages packaged and repackaged using CDS’S as they coerced the credit rating agencies into give them AAA ratings on junk sub-prime MBS’S and they were snapped up like crazy. The real professionals knew that the stock market was way overpriced and all they wanted was a reasonable 5% to 7% return on AAA no risk Bonds. Ask and you shall receive. Wall St. couldn’t package them fast enough. But they should have known better because any time you are offered something that is too good to be true, it usually is not true, especially not in the volumes that were involved. They were making so much money that Wall St. began to believe their own B.S. and so when Yen started to appreciate and the carry trade was no longer so hot they loaded up on their own junk. After all they had to put their ill gotten gains somewhere. Everything was going fine as long as the real estate market, the ultimate insurer, that was backing all this pie in the sky, was appreciating at a compound annual rate of 15% to 25% plus. But alas, all good things must come to an end as reality eventually sets in and all bubbles and Ponzi schemes must also eventually blow-up.

We are now living through and witnessing what happens when government interferes with the free markets and no matter how good the intentions, their inability to identify all of the unintended consequences of artificially low interest rates, came back to bite us all in the neck.

WONDER OF WONDERS

It is hard for me to understand why Economists (left & Right) still want to continue doing what got them into trouble in the first place. Hasn’t the last 20 years of Japan’s, zero interest rate, recession, taught them anything?

As far back as 2004, I began writing essay after essay, trying to explain what the functions of interest rates are and how they worked, but nobody was listening and nobody took any interest. In letter after letter there was often a paragraph that pointed out the perils of excessively low interest rates. What about the savers I screamed as the nation’s saving rate dropped from a high of 15% to zero and then -1%? What about the retired seniors who had their life savings in12% and 15% CD’S and Treasuries that were now maturing and could only be replaced with 3% or 4% CD”S - how will they be able to pay their bills?. Let them buy Stock Mutual Funds that have returned an average of 8% over the last 75 years (the BIG lie). Besides, what are they complaining about? We just gave them free prescription drugs didn’t we? But who cared, the party was a blast and the champagne (money) was flowing like water. Besides, who wants to listen to a kill-joy when you’re having fun? Unfortunately, even the best of parties must come to an end as the sun always rises and every party must be paid for by someone. The bigger the party, the bigger the bill. This party was so big that the whole world will end up paying a far higher price than anyone could possibly have imagined. (say unintended consequences?)

If history is any guide, World War III is near at hand. GOD I hope I’m wrong this time.

GOLD

They've been dumping Gold for a couple of reasons: 1) prices are falling; 2) credit lines are either being pulled back or completely taken away. 3) In many cases, investors have no choice but to liquidate their gold positions as they are their only positions that have a decent bid and or are their only positions in which they are still showing a profit. ( Great Idea; cut your profits short, so you can pay taxes on them, while letting your losses run; Is that how its supposed to go?)

During the heyday of the commodity bubble, I cautioned all investors that there would be a major supply response to continued high prices. The Laws of Supply and Demand may be asleep but they are not Dead.
What could keep Gold prices down?

You would really have to get back to a place where the economic, political and financial situations are no longer worrisome ... before you see people sell gold and jump back into stock and bonds. That's the only likely scenario for lower gold prices that I can come up with In the gold mining equity market or any other mining market, even Oil and Gas, you saw that the price of the equities were pushed much higher by the momentum players (hedge Funds) than what could be considered a reasonable value. Now, the prices of a lot of equities are far below what you could consider a reasonable value for the enterprise. The rules of the game never changes but they do masquerade in an attempt to fool the majority; the lazy and the gullible: It’s the way the world works, I guess.

WHERE TO NOW DOW?

If you can recall my Jan. 2008 article “GOLD AND A KONDRIETIFF WINTER” If you can’t then I strongly suggest you go back in to my archives and read it again. By the S & P breaking down below its 2002 Bear Market lows; we now have confirmation that we are in multi-generational Bear Market of Grand Super-cycle proportions. If it is to be only a Wave {IV} down, correcting Wave {III} of the Bull Market that began in the mid 1700’s as Prechter, Hughs and some other well know Elliott Wave Theoreticians, believe and not the fifth and final WAVE {5} then the good news is “The World is Not Coming To an End” The BAD NEWS is that we will most likely see significant NEW lows that will probably go much lower than Thursdays lows (maybe as low as DJII 4000) before this Bear Market is over. We have only seen the first wave (Wave A) of the Tsunami and the devastating second Wave (Wave C) is yet to come. Luckily things are not all bad and the good news is we are about to enter a period of relative calm, Wave B of the Forth Wave {which is usually an a,b,c,d,e, Diagonal Triangle; with the a wave being the longest} is often only a sideways type phase- to this three phase Bear market. This Grand Super-cycle wave {IV} down is correcting centuries of Bull Markets and it will seem fast, and furious. But time-wise, it may be relatively short compared to other Grand Super-cycle waves, but damage-wise, this Bear Market could change the world. The next 4 years and the election of 2012 could be the most important election since 1776 as it will determine whether we regress into the Demagoguery of Communism - Fascism or explode into a new era of FREEDOM.

HAS THE BOTTOM BEEN MADE?.
We are at or near the end of the first phase; Wave {A} down. That bottom is imminent. In fact it may have been made Thursday, November 20th, 2008, Or, it may need one more declining wave to complete this wave {A} down move from October 2007, a Super-cycle wave that has wiped out a decade of stock market gains, over 50 percent of the market's value, in just one year!

Wave {B} up which may have started Friday, November 21st, or will within a week or so ( I will be able to get a better picture once I am sure that the Wave {A} bottom has been made)

.WARNING DO NOT CHASE A 1000 POINT BOUNCE:

Wave {B} up is a gift. It is for short term Traders only use it to BUILD YOUR CASH POSITIONS AND GET OUT OF DEBT. It is like the eye of a level 5 hurricane. Your last chance to raise cash at higher prices. Because, once it completes, the devastating plunge will resume and take prices far lower than anyone - even Bears can - now imagine, wave C’s down behave like Wave 3’s, They are usually the longest and strongest of the waves and therefore Wave {B‘s} are the best time to accumulate GOLD.
The Industrials are down 2,204 points, or 22.8 percent since Election Day. The S&P 500 is down 266 points, or 26.5 percent since Election Day.

What bothers me is that Thursday did not see a DJII closing low below the Bear Market low of 2002. But since Friday closed 5 percent higher, I cannot rule out a bottom but I am still a bit hesitant in calling a bottom because (a) my Elliott wave Declining pattern does not look complete and (b) the 10 day average Advance/Decline Line Indicator actually got worse Friday for both the S&P 500 and for the NDX, on a day when prices rose 5 percent. That is odd for the start of a rally phase after such a strong sell-off - Call it a minor Bearish Divergence. (c) New Lows were also way too high again on Friday, (d) 47 percent of total issues traded on the NYSE were down. And Advances were only 63 percent of total issues traded. The start of major rally phases normally do better than that. We also did not get a 90 percent up day Friday, which is something I would like to see at the start of a major rally. And finally Friday was options expiration day which is usually a rally day, anyway: And last but far from least The rally according to all the media talking heads was tied to the big news that Obama is tapping the popular New York Fed's President to be the next Secretary of the Treasury in 2010, really?. Rallies on news often can't really be trusted, especially when the big new is really no news at all.

THANKSGIVING DAY SPECIAL
I am offering a Special two year subscription for only $339. The one year subscription is still a reasonable $199 until the end of the year at which time prices will increase to $269.00 and $469: Extend your subscription Now “PROCRASTINATION IS THE THIEF OF LIFE”

If you have been enjoying these letters and have found them to be useful please tell your friends

HAPPY THANKSGIVING GOOD LUCK AND GOD BLESS


UNCOMMON COMMON SENSE November 24, 2008
Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
aubiebat@yahoo.com
561-840-9767

Please Note: This article is for education purposes only and is designed to help you make up your own mind, not for me to make it up for you. Only you know your own personal circumstances so only you can decide the best places to invest your money and the degree of risk that you are prepared to take. The Information on data included here has been gleaned from sources deemed to be reliable, but is not guaranteed by me. Nothing stated in here should be taken as a recommendation for you to buy or sell securities.