Tag: ek Politics

You see, the thing is that the US contribution is already so insignificant that it’s chump change even for Gabon.

Part 1

Part 2

Yup.  We are exceptional.

You know my methods Watson.

“But your grandiloquence, and your conduct in swinging the beetle – how excessively odd! I was sure you were mad. And why did you insist upon letting fall the bug, instead of a bullet, from the skull?”

“Why, to be frank, I felt somewhat annoyed by your evident suspicions touching my sanity, and so resolved to punish you quietly, in my own way, by a little bit of sober mystification. For this reason I swung the beetle, and for this reason I let it fall from the tree. An observation of yours about its great weight suggested the latter idea.”

The problem of fake gold bars

Felix Salmon, Reuters

Mar 25, 2012 16:19 EDT

You don’t need to be a conspiracy theorist to find this worrying: a 1kg gold bar, certified as 99.98% pure by XRF (X-ray fluorescence) tests, turns out to have been drilled out and largely replaced with tungsten. This bar was discovered only because it was 2 grams lighter than it ought to have been: the forgers failed to add quite enough gold to the outside of the bar to make up for the weight lost when they replaced gold with tungsten. But if they’d gotten the weight right, it would probably still be circulating today.

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In the case of gold, then, what JK Galbraith famously called “the bezzle” – the amount of wealth that people think they have, which in fact they don’t have – could be truly enormous. If there are 1.3 million salted 400 oz bars in existence, and each one is 75% tungsten, then that makes 390 million ounces of gold which in truth isn’t there. At $1,660 per ounce, that’s over $600 billion which people think they own but don’t. To put that number in context, it’s roughly half the total quantity of subprime mortgages which had been issued at the height of the housing bubble.

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In any case, there’s clearly now serious tail risk for anybody in the physical-gold market. And like most tail risks, measuring and/or insuring against it is extremely difficult. Any store of value has problems, be it fiat currency or sovereign debt or bitcoins. This latest discovery just goes to show that the problems with gold aren’t just the obvious ones surrounding things like the risk that the price of gold might plunge. There are non-obvious ones, too, which have the potential to be even bigger.

From the comments by Doly

Just to get people who worry about this slightly more worried: gold-plated tungsten will fail the density test, but this is because tungsten is slightly too dense. Making sure you leave some small hole of the right size, or add the right amount of almost any other metal (most metals are less dense), should solve this problem. This is an example of a very shoddy forgery. Somebody who took their forgery as seriously as they should when we’re talking some decent money, should have no trouble at all producing bars of the right weight and density. As Felix points out, conductivity would still show… but frankly, I think any competent chemist should be able to produce a gold-plated bar that passes most tests except cutting it in half.

As always, I only traffic in the most scurrilous rumors.

Anger at Goldman Still Simmers

By GRETCHEN MORGENSON, The New York Times

Published: March 25, 2012

Copper River relied on Goldman to handle its negative bets, known as short sales, in compliance with securities laws. These regulations require that before a short sale can be made, the shares must be borrowed; Mr. Cohodes said his fund had paid Goldman approximately $100 million to borrow shares over many years.

In his testimony, Mr. Cohodes said he and his partners at Copper River had even come to wonder if Goldman had in fact borrowed the shares for the firm. Without the shares, Copper River faced losses, while Goldman could have come under regulatory scrutiny.

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Along with a handful of traders at smallish firms, Goldman’s securities lending unit has been cited by regulators for lapses. In 2010, the S.E.C. sued Goldman on accusations that it “willfully” had failed to preborrow shares as required for its short-selling clients in January 2009, shortly after Copper River went out of business. The improprieties involved 385 short sales in which the firm had not located shares for its brokerage clients to borrow.

Goldman paid $450,000 to settle the case without admitting or denying the accusations.

Failing to borrow shares on behalf of customers is illegal because of concerns about market manipulation. But it can also leave a brokerage firm’s client who is short a stock dangerously exposed to an escalating price in the shares. If a stock shorted by an investor began to trade higher and the shares were not borrowed, closing out the transaction would require the fund to buy them in the open market. That could propel the already rising price of the shares even higher, adding to the costs of the trade.

On the Meaningless of Contracts and the New Optionality

Yves Smith, Naked Capitalism

Monday, March 26, 2012

With a rise in an options-based view of business, it isn’t hard to see how a pernicious dynamic sets in. It used to be that only occasional scumbags would behave this way, and you’d write it off as bad luck and a reminder to do a decent amount of due diligence on new customers. But when this sort of behavior becomes common, the cost of doing business escalates since no one can trust anyone’s commitments. You can see this now in the way many types of contracts have changed. It used to be possible to do business with a short agreement. In many fields, they’ve now become excruciatingly long, since the odds of them being litigated is correctly seen as higher, so nailing down all sorts of possible outcomes is more important. And longer agreements means more protracted negotiations. It amounts to a tax on commerce.

And this pattern is particularly devastating to small businesses. It’s comical to see the Administration talk up the need to help entrepreneurs yet gut the rule of law to help banks.

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We can see the damage of the breakdown of the norms of commerce. The private label securitization market, which functioned fairly well when originators and servicers acted in accordance with their agreements with investors, is now dead. The securitization market, which was 60% private label prior to the crisis, is now effectively 100% government guaranteed (there was all of one private label deal last year). Various reform proposals have been suggested; some have been well thought out enough that past investors reacted positively. But of course, the sell side nixed anything far-reaching enough to make a real difference. The investors I know say there won’t be a private label securitization market ex root and branch changes for at least ten years.

So it looks like Marx is being proven correct, that capitalism sows the seeds of its own destruction, although not by the route he envisaged, that of a worker revolt. Instead, it comes about via the capitalists turning on each other to try to secure an even better deal.

CNN

MSNBC

C-SPAN

Faux Noise

And The Rest

Here on Gilligan’s Island

You can listen to it here.

Samantha Bee

Jon Stewart

by Herman Cain and Stephen Colbert.

Unintended irony from the NYT

By Glenn Greenwald, Salon

Thursday, Mar 8, 2012 10:47 AM Eastern Standard Time

It’s simply shocking to find a country which would allow its political class to be dominated by those who “have profited from the crony capitalism that has come to define its economic order” and who “nearly brought down” its banking system. What must it be like to live in such a country? But even more bewildering still is that the Afghans simply refuse to prosecute their high-levels financial criminals, even though the U.S. is providing advice and oversight! Maybe it’s unsurprising to see a country treat its powerful criminals with impunity, but not when they have the United States of America providing guidance and wise counsel. What could possibly explain this? Are they simply ignoring the important lessons we’re teaching and the shining example we’ve set?

Maybe he should just throw them in the dryer for a few minutes.

Credit Default Swaps (CDS) Are Insurance Products, Not Tradeable Assets

Author: Barry Ritholtz, EconoMonitor

March 2nd, 2012

The CFMA radically deregulated derivatives. The law changed the Commodity Exchange Act of 1936 (CEA) to exempt derivatives transactions from regulations as either “futures” (under the CEA) or “securities” under federal securities laws. Further, the CFMA specifically exempted Credit Defaults Swaps and other derivative products from regulation by any State Insurance Board or Regulators.

This rule change exempting CDS from insurance oversight led to a very specific economic behavioral change: Companies that wrote insurance had to explicitly reserve for expected losses and eventual payout in a conservative manner. Companies that wrote Credit Defaults Swaps did not.

Hence, AIG was able to underwrite over THREE TRILLION DOLLARS worth of derivatives, reserving precisely zero dollars agianst potential claims. This was enormously lucrative, except for that whole crashing & burning into insolvency thingie.

How Greece’s default could kill the sovereign CDS market

By Felix Salmon, Reuters

February 29, 2012

The way that CDS auctions are meant to work is that once a borrower defaults on its debt, that defaulted debt continues to be traded in the market, and its value then determines the amount that credit default swaps need to pay out. But in this case, Greece’s defaulted debt might well not continue to be traded in the market. In which case, when traders need to find a cheapest-to-deliver bond to bid on in the CDS auction, they’re going to have to use one of the new bonds, rather than one of the old ones.

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In other words, Greece’s CDS really aren’t protecting holders of Greek bonds at all – or if they do, it’s more a matter of luck than of law. When they get paid out on their CDS holdings, people owning protection against a Greek default won’t get paid according to how much money they lost on their old bonds. Instead, they’ll get paid according to the nominal price of the new bonds.

What this means is that the CDS architecture is broken, and can’t cope with collective action clauses. And as a result, according to the hedge fund manager who tipped me off to the whole problem, “this Greece CDS imbroglio might be the final blow for sovereign CDS as a product.”

Greece Readies Record Debt Swap With 60% Commitments

By Maria Petrakis and Fabio Benedetti-Valentini, Bloomberg News

Mar 8, 2012 6:59 AM ET

While Greece would prefer a voluntary deal, the government has said it will use collective action clauses to force holders of Greek-law bonds into the swap if the so-called private sector involvement falls short and it gets sufficient approval from investors to change the bonds’ terms.

“I think that the markets are aware of the risk that a majority for voluntary restructuring is not available, and so I think the surprise won’t be too big if tonight when they realize the collective action clauses will have to be applied,” Bofinger said.

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“I do fully expect to be part of the collective action clause,” Patrick Armstrong, managing partner at Armstrong Investment Managers in London, said yesterday in a Bloomberg Television interview. He won’t voluntarily join in the swap because of the “minuscule” chance his bond maturing March 20 will be redeemed at face value.

Compelling holdouts to take part will likely trigger insurance contracts on the debt known as credit default swaps.

“I can’t see any scenario where people are forced to participate against their will and they aren’t triggered,” Armstrong said.

How all CDS are at risk of not paying out

By Felix Salmon, Reuters

March 5, 2012

At heart, the problem is what happens when an issuer swaps out all of its bonds for some new bonds. There’s no reason at all why the new bonds should trade at a massive discount to par – indeed, issuers often like it when their new bonds trade at or near 100 cents on the dollar. But if the CDS auction happens after the bond exchange, and if all of the old bonds are exchanged, then holders of the new bonds are forced to tender new bonds into the exchange, even if they’re trading at 100 cents on the dollar. Which means that holders of old bonds could suffer a huge haircut in the value of their bonds, but still get no payout from their CDS.

This has been an issue in the past. When Anglo Irish Bank restructured its bonds, it amended the old bonds to include a call option which allowed the bank to buy back every €1,000 of bonds for €0.01. That was an effective way of wiping out the value of the old bonds – but it also risked serious damage to the CDS market, since in a CDS auction, the value of a bond is calculated as the price of the bond considered as a percentage of the outstanding principal – and the outstanding principal is considered to be not the face value of the bond but rather the amount of the call option. If Anglo Irish had done the exchange quickly, before a CDS auction was possible, then bondholders would have had to tender bonds with a call option at €0.01 – which would mean that they couldn’t claim any payout on their CDS at all.

In the end, Anglo Irish took pity on the CDS holders, and staggered its restructuring so that there was enough time for ISDA to conduct an auction before the bonds got changed out of all recognition. But hoping that the issuer will act in a friendly manner is not exactly an optimum strategy – especially since, by definition, the issuer will be in the process of going bust.

…

This doesn’t just seem unsatisfactory at first blush; it is unsatisfactory. And there is no second blush. Essentially, CDS holders are reduced to hoping that the issuer will be nice, and structure the exchange in such a way as to let them get paid out. But there’s no particular reason why the issuer should do that, especially seeing as how the CDS holders were the people who were effectively shorting the issuer as it tumbled into bankruptcy.

…

If you own protection on a credit, then, you’re very much in a world of caveat emptor. You can trade in and out of CDS and make a good living; these things are, first and foremost, trading vehicles. That’s why they’re more liquid than bonds. But if you have a strategy which involves actually getting paid out on your CDS in the event of default, then you should definitely worry that the payout might not happen, even if the event of default is clear and declared. What’s more, there’s really no good way to hedge that risk.

Wall Street’s Broken Windows

By William K. Black, New Economic Perspectives

Sunday, March 04, 2012

James Q. Wilson was a political scientist who often studied the government response to blue collar crime. The public knows him best for his theory called “broken windows.” The metaphor was what happens to a vacant building when broken windows are not promptly repaired. Soon, most of the windows in the abandoned building are broken. The criminals feel little compunction against petty destruction because the building’s owners evince no concern for the integrity of their building. Wilson took social norms, community, and ethics seriously. He argued that as community broke down fewer honest citizens were active in monitoring and policing behavior. The breakdown in community was criminogenic – it led to widespread serious blue collar crime. He urged us to take even minor blue collar crimes and breaches of civility seriously and to demand that they be contained through social pressure and policing.

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Wilson was strongly conservative. His research focus in criminology was almost exclusively blue collar crime. That was a shame because “broken windows” theory is most compelling in the context of elite white-collar crime and because the application would reveal interesting twists in the theory’s potential.

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He predicted in his work on “broken windows” that tolerating widespread smaller crimes would lead to epidemic levels of larger crimes because it undermined community and social restraints. The epidemics of elite white collar crime that have driven our recurrent, intensifying financial crises have proven this point. Similarly, corruption that is excused and tolerated by elites is unlikely to remain at the level of “a few deals.” Corruption is likely to spread in incidence and severity precisely because it undermines community and the rule of law and it is likely to grow more pervasive and harmful the more we “tolera[te]” it.

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In the elite white collar crime context we have been following the opposite strategy of that recommended under “broken windows” theory. We have been breaking windows. We have excused those who break the windows. Indeed, we have praised them and their misconduct. The problem with allowing broken windows is far greater in the elite white collar crime context than the blue collar crime context. The squeegee guys make tiny amounts of money and are hated and politically powerless. The mediocre financial CEO who engages in accounting control fraud because it is a “sure thing” causes the bank to report record (albeit fictional) profits and becomes wealthy and politically powerful. He uses his wealth to make charitable and political contributions that make him far harder to sanction. He claims that any crackdown on him is “class warfare” by “neo-Bolsheviks.” Incredibly, the Wall Street Journal continues to serve as the cheerleader and apologist for those who become wealthy by breaking windows, communities, and economies.

Wilson warned of blue collar “super predators.” He called them “feral” – wild animals. These criminals are in fact dangerous, but they are odd candidates for the title of “super predators.” Wilson noted that they were disproportionately black and that they were confined almost entirely to the poorest neighborhoods in America where their pickings are poor. Accounting control frauds occupy Wall Street and other financial centers – the richest neighborhoods in the world. Their “take” from fraud is extraordinary. The blue collar criminals that occupied Wilson’s attention late in his career were politically and socially powerless. The fraudulent CEOs that drive our recurrent, intensifying financial crises are wealthy and socially and politically dominant.

When is Foreclosure Theft? When the Mortgage is Recorded at MERS

Author: L. Randall Wray, EconoMonitor

March 1st, 2012

(O)ne bank lawyer tried to defend home theft as a “victimless crime”: “As a lawyer who did foreclosure work for many years for both borrowers and lenders, I assure you that robosigning is a victimless technicality. In only a handful of exceptions is there a wrongful foreclosure in which the outcome would have changed had the technicality been corrected. I am astonished to see foreclosure characterized as “theft” on an otherwise reputable site.”

Well, I guess it is nice that the lawyer thinks this site is “otherwise reputable”. But, in fact, robosigning is a go-to-jail crime. And illegally taking a home is certainly not victimless. Let us count the victims:

• The homeowner
• The neighborhood
• The national economy
• The justice system
• Property rights

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When is a foreclosure a theft? When the mortgage was recorded at MERS. MERS has no standing to foreclose. The typical mortgage was bought and sold about ten times before it finally got securitized. And those sales and purchases were not recorded at the county recorder’s office. Several important court cases have ruled that servicers using MERS have no standing to foreclose because the chain of title was thereby broken. That is about two-thirds of all mortgages made since the megabanks created the MERS monster. Now, those who go up against banks trying to foreclose using the “MERS destroyed the chain of title” defense do not always win. Judges are having a hard time getting their minds around the fact that banks have destroyed property law in the US. Or, they make a calculation that recognizing this fact will throw the whole real estate sector into disarray, hence overlook the home thefts as the lesser of evils.

…

It is instructive just to read down the list of the variety of frauds the banks are using to illegally take homes, things like:

• Falsely claiming to be the owner/holder of the mortgage;
• Falsely claiming standing by use of names such as Trustee, Assignee, Nominee, Beneficiary, etc.;
• Fraudulently invoking the jurisdiction of the court;
• Preying on the ignorance of the court and homeowner;
• Falsely claiming Pooling & Servicing Agreements, industry standards, rules, guidelines or other industry-authored writings supersede the law;
• Failing to follow PSA guidelines;
• Robo-Signing legal documents without the legal authority to do so.
• Entering on-time payments as late, to exact illegal and unauthorized fees;
• Manipulating account records;
• Backdating legal documents;
• Filing forged documents in courts and public records;
• Charging force-placed insurance when the homeowner already has full coverage;
• Falsely reporting a default to the credit bureaus when it is the pretender lender who is manufacturing the default;
• Paying property taxes late, then charging the late penalties to the borrower;
• Paying taxes and insurance on the wrong property;
• Refusing payments to guarantee default;
• Adding thousands of dollars in unearned legal fees to create a default;
• Ignoring customer complaints and “qualified written requests”;
• Arrogantly violating numerous laws and regulations;
• Coercing the homeowner into signing a forbearance agreement to strip away their legal rights;
• Falsifying records and documents;
• Committing fraud upon the courts by stating they are the Holder and Owner of the Note – when in fact – they do not own or hold the “original” Note;
• Intentionally causing delays to run up your legal expenses;
• Creating fictitious documents (Lost Note Affidavits, Power of Attorney, etc.);
• Triggering the terms of the null and void Deed of Trust/Mortgage
• Apply to the trust for reimbursement after deducting the fees from the borrowers p&i payments, (Known as double-dipping)
• Rounding up ARM rates when on a downward trend;
• Not adhering to the terms of the loan documents;
• Creating additional false deficiencies through a variety of questionable practices;
• Adding misc. fees to purposely create a deficiency with the borrower’s next payment;
• Not applying payments to principal and interest;
• Committing perjury through misrepresentations;
• Withholding or redacting discovery evidence;
• Tampering with court transcripts and removing evidence from the record;
• Conjuring up events that never happened while refusing to provide documentation to support their fallacies;
• Refusing to cooperate with attempts to refinance and stop the illegal foreclosure;
• Using abuse of litigation, appeals and malicious prosecution to litigate forever;
• Payoffs to the consumer’s attorney, law enforcement officials, judges, court personnel and government officials;
• Threats & intimidation;
• Electronic surveillance;
• Wire Fraud / Mail Fraud;
• Conspiracy;
• Fraud in the inducement;
• Unjust Enrichment;
• Embezzlement;
• Racketeering – RICO;
• Extortion;
• Abuse of Process;
• Violation of ethics;
• Grand Theft;
• Tax Fraud (REMIC);
• Public Corruption;
• Notary Fraud;
• Evidence Tampering;
• Theft of Government Services;
• Perjury;
• Felonious Influence of Public Officials;
• Money Laundering;
• Insurance Fraud;
• Securities Fraud;
• Constitutional and Civil Right violations.

…

Ah, yes, the banks are truly innovative. Keep this in mind the next time some bank lawyer tries to convince you that all this is “victimless crime”.

OCC Servicer Review Firm Also "Scrubs" Loan Files, Fabricates Documents

Yves Smith, Naked Capitalism

Tuesday, March 6, 2012

(T)here is considerable evidence of a widespread, perhaps pervasive, failure among the parties to mortgage securitizations to adhere to the terms of the contracts that created these deals. Specifically, they were required to transfer the notes (the borrower IOU) through multiple parties and get them to the securitization trust by a specified date. This process was laborious because each time, the note had to be signed (the term of art is “endorsed”) and the mortgage assigned (which confusingly is the lien against the home, although both professionals and laypeople often refer to the note + the mortgage, which are actually two separate instruments, as the mortgage).

…

Notes are like checks, they are negotiable instruments. You can’t enforce a copy or use a copy to try to recreate an original. This is exactly the sort of activity that got the notorious DocX shuttered. Yet he seemed to think the use of a copy or a “replacement” adequate. But you can’t “replace” a note; it’s an original, and you need to have the borrower’s signature for it to be binding, and I can guarantee no one is getting borrowers to sign replacement notes.

Similarly, one thing that foreclosure defense attorneys have seen as a huge red flag of servicer chicanery is the use of allonges. An allonge is a separate piece of paper used for endorsements that is required by the Uniform Commercial Code to be “affixed” to the note and used for endorsements when there is no more space left on the note for signatures. Allonges were pretty much never seen until the robosigning scandal, since all the space on a note (meaning the back and the margins) can be used for endorsements.

But SolomonEdwards official said that they’ve been able to get copies of the note from the seller and have been able to “bring them forward with allonges that were re-executed.” When asked, he confirmed that they create allonges now that confirm with the transfers that they’ve found ought to have taken place, either via the PSA, MERS, or other routes. Again, in a securitized trust, that it tantamount to trying to transfer the note now and is not valid. When I pressed him on how they did that, how they got signatures from intermediary parties, he demurred and said, “I don’t want to give away too much of our secret sauce.”

He also discussed using lost note affidavits. That is permissible only on an exception basis; indeed, many deals limited how many lost note affidavits could be used. If a firm like SolomonEdwards is seeing more than a couple of missing notes on a deal, that means transfers did not happen and there is a much more fundamental problem with the securitization, potentially a contract formation failure (if no notes were transferred by the cutoff date, the trust was not formed).

The SolomonEdwards executive also made it clear that he regarded the mortgage assignments as more important than the note, which is backwards (the lien follows the note) and that they spent more time on getting them executed. He said that his firm found “missing” mortgage assignments (“they can’t be found”) to be common. Again, since the assignments had to be completed by the cutoff date, that means they are either making obviously invalid assignments, are deliberately making back-dated assignments (not kosher) or have a time machine.

…

In fact, these reviews sound like documentation theater. The partner stressed how through SolomonEdwards was and how they had software that allowed them to record up data items and capture whether a item was material or not material and then risk rate an entire loan file.

…

(T)he reality is that there are really only 5-10 things you need to look at: Do you have an original note? Does it have all the endorsements that the PSA says it should have? Do the mortgage assignments correspond to the endorsements? Were they all completed on time?

…

It was disconcerting to speak to someone who obviously thinks his firm is highly professional engaged in activities that include document fabrication, which is what creating allonges now amounts to. And the worst is I have no doubt SolomonEdwards is more careful than most firms in the industry. This confirms, as we have said repeatedly, that there was a massive failure in the industry to conform to the requirement of the legal agreements that it devised. And there is a very big business, now with a government seal of approval, in covering up that fact.