Saturday, November 20, 2010

Courage Of Our Forefathers, Part 1

(This has become far too long a piece by itself, and I consider it important enough to repost in two parts.)

Analyst Gordon Long Posits It Is Not Getting Better
(via The Big Picture; click on image to see larger version)

The response of the American government, whether conservative or liberal, to the financial collapse that began in 2007 has been to do whatever the Banking and Investment sector wanted done. By saving the major banks and investment houses, it slowed the rate of collapse from a plummeting fall to a snail's pace, but we're still falling.

A lot of Americans can remain in denial, because we have 400-channel cable teevees and really big trucks, and can dial up as much internet porn as we want -- and, how often, recently, have you seen headlines or heard the comforting sounds of some talking heads, all saying Surprising Economic News Points To Recovery!

It's harder to stay in denial in Greece, or Portugal; or, Ireland -- which is about to experience a near-total financial collapse, and is anticipated to suffer the largest wave of emigration since the Great Depression, or even The Famine.

Broke Like You: Ireland Shows What's Coming

Morgan Kelly, writing in the Irish Times, describes what could easily be a description of what has been happening in the U.S. for two years:
Where the first round of the [Irish] banking crisis centered on a few dozen large developers, the next round will involve hundreds of thousands of families with mortgages... Banks have been relying on two dams to block the torrent of defaults – house prices and social stigma – but both have started to crumble alarmingly.

People are going to extraordinary lengths – not paying other bills and borrowing heavily from their parents – to meet mortgage repayments, both out of fear of losing their homes and to avoid the stigma of admitting that they are broke... admitting that you cannot afford your mortgage is unspeakably shameful.

That will change. The perception growing among borrowers is that while they played by the rules, the banks certainly did not, cynically persuading them into mortgages that they had no hope of affording. Facing a choice between ... the banks and to their families – mortgage or food – growing numbers are choosing the latter.

The crisis in Ireland in our own, in miniature: Major real estate developers built housing developments; it was a major building boom, which kept a lot of other, allied businesses afloat. Five major banks were involved, and handed out mortgage loans with terms as insane as those offered in the U.S. The Irish homeowners, like their American cousins, also refinanced those mortgages, multiple times, using their properties like ATMs to fund their lifestyles.

And, like us, they expected property values would simply increase, forever. This was the the theory behind the American Housing Bubble, the Irish Housing Bubble, the Portuguese Housing Bubble; the Italian Housing -- well, you get the idea.

This Nifty Graphic Appeared In The U.S. In 2004, Three Years
Before Things Unraveled -- And It Applied To Ireland, As Well

When America's financial sector partially sank, the Irish bubble was affected, too -- and the Irish government paid to bail the Banksters out, just as we did.

Remember this part of the story: The Irish government, in giving / lending money to their failed banks, transferred the private debt of a bunch of greedy, stupid people into public debt, and made it the responsibility of every private citizen in Ireland.

Rather than allow the Banks to fail and force their stupid, greedy executives and directors to take responsibility for their bad decisions (which would also have affected other European banks which the Irish ones had borrowed money from) the present Irish government -- whose politicians were in very, uh 'cozy' relationships with the Banksters and the Real Estate Developers -- saved their pals and dumped everything on The Irish People.

I don't really have to say, Just as we did, here, but will anyway. It's a bit like throwing the Night Slops Jar out the second-story bedroom window into the Road, and not giving a damn who you'll hit.

But now, the Irish government can't continue to pay for all the things it does for its citizens, without a loan from the European Central Bank (it isn't a direct comparison but for the EU, think of the ECB as playing roughly the same role as our Federal Reserve), and the International Monetary Fund, which is under discussion.

This puts Ireland in the same category as Greece, or Portugal -- private banks and finance companies fail; governments rush to rescue them. Then, with no money to pay for public-sector programs or government employees, infrastructure upgrades or street cleaning or police officers down at the Garda... you get the picture. If not, you will, soon.

In his Irish Times piece, Kelly noted the ECB loan is, like our own bailouts, just a bandaid to slow the inevitable: Two things have delayed Ireland’s funeral. First... the [Irish] Government built up a large pile of cash a few months ago, so that it can keep going until the New Year before it runs out of money. Although insolvent, Ireland is still liquid, for now.

Meanwhile, On The Good Ship Lolly: POP Goes The Bubble

In America, it's about CDO's -- 'Collateralized Debt Obligations'; securities based on pools of mortgage loans. No one knows their true value without careful audits of their underlying 'pools' of mortgages, which no one wants to do. Their current value is based on theory, an estimate, which the Banksters who created and sold them all agree with so they can still be traded.

However, everyone knows that the estimate is a fiction. Every U.S. and foreign bank, investment house, insurance company, pension fund, and hedge funds which hold these CDO's have no idea of their real value.

So, how the mortgages were tracked to be bundled in pools, then offered as securities and traded all over the world, is the science-fiction part of the story:

Briefly put, the investment and banking community wanted to be able to trade in 'derivitaves' -- securities backed by something else; in this case, mortgage loans. But they couldn't create those securities without being able to 'pool' the mortgages, and to do so they needed to change the fundamental way home loans were recorded in America for nearly 200 years.

Changing The Rules: I'm Forever Blowing Bubbles

Real estate law and real estate transactions in the US have been subject to state regulation, and transferring ownership of land is to be recorded at the county level. This has been true since the establishment of the United States as an independent country.

Mortgage loans have always been traded, or sold to another bank -- usually as part or a merger or other deal, but the scale of these trades was small. And, every time a mortgage (which is both a deed of trust and a promissory note, obligating the borrower buying a home to pay on the debt) was sold or traded, it had to be re-recorded in a County court, and fees in that County had to be paid.

On the one hand, Real Estate developers began building large numbers of homes. Banks would issue and hold the mortgages. In 1998 - 2000, when Congress (principally Republicans) provisions of the Glass-Stegal Act were eliminated, this dissolved the barriers between Banks and Investment Houses -- Merrill-Lynch became a bank, just as B of A could offer investment advice. And, as the housing bubble began to expand, the financial sector wanted to start trading mortgage loans like any other commodity -- that meant, on a large scale, because that's where the money is.

What held them back were the county-by-county land, title, and promissory note recording requirements that had been law in America for generations.

So, the financial industry, eager to trade in Mortgage-backed securities, developed the Mortgage Electronic Registration Systems, Inc, or MERS. It was a little company in McLean, Virginia (oddly enough, a stone's throw from CIA headquarters at Langley and the nearby NSA), with a handfull of employees that, in 2004, the MBA contracted with to begin recording all mortgage transactions in America -- this bypassed every single County Recorder's office in the United States.

MERS is a shell company representing the Mortgage Banker's Association and its members -- a purportedly separate, private corporation, acting as the agent for a Lender (the "Bank") and the Lender’s successors and assigns (whoever the mortgages are traded to).

MERS, and not the individual bank or Lender, became the holder of the mortgage, and replaced the actual lender in U.S. real estate records at the county or state level. MERS was also responsible for tracking all subsequent changes in ownership of the mortages in MERS' databases, owned and run by its members. As a result, no county recordation fees have been paid and no county records have been changed, saving financial industry enormous costs and ensuring quick trades of any securities backed by large 'pools' of mortgages on national and international financial markets.

Okay, pencils down; let me ask a question: What if MERS were an incompetently-run business, and that its records (used as the only basis for determining the loan 'pools' supporting Trillions of dollars in mortgage-backed securities) were in any way defective? Wouldn't that make it nearly impossible to determine the true value of any of these securities?

Pencils back up -- please write down the following phrase and underline it: Single Point Of Failure. Please remember it, when you're living in a mud Yurt and watching children play with toys made of animal dung, as you are being photographed by groups of Swiss and Japanese tourists.

A Side Story

At my job, between late 2004 and 2006, the guy who sat in the cubicle beside me acted as the agent for a home loan broker. I listened as he spent his days performing cold calls, convincing people to buy properties through the broker he was shilling for. He asked people to pool together with their friends, and buy properties together -- multiple properties, as investment opportunities, because "man, the sky is the limit; it's all gonna be good, Dogg. Market's hot. It's just gonna go up and up -- you get in for nothing, hold 'em for a while -- then sell, and you're set for life."

He used our employer's telephones, faxes, computers, and time, to do this -- the kicker being that he had gotten his immediate manager and (so the rumor goes) others in our management chain involved as clients as well. So, any complaints made about what he was doing were ignored.

In 2006, he quit, having purchased an apartment building and several other properties, and allegedly made a killing. After the Bubble burst in 2007-2008, I'd heard the guy lost most of his properties and cash -- but had managed to get himself rehired in our company by the same management chain he'd done business with before. However, he turned out to be incompetent, and so was let go. Gee; tough sledding.

We Know What Happened, But It's Worse Than You Think

Everyone knows what happened between 2003 and 2007: Real Estate Developers built McMansions like there was no tomorrow. Banks / Investment Houses ("The Banksters") offered home mortgage terms that were insane. People jumped at the chance to own a large, new home for little down, or no down; interest-only payments; loans made on terms that meant house payments would reset and triple in three or four years, which the borrowers didn't have a hope of repaying.

And, so many people were refinancing their homes, over and over; KA-CHING! pulling money out for home improvements, to increase the value of their primary residence, sure... but also to finance lease of that new Beemer, or get Little Chippy into that private girls' school, or to take a cruise, a trip to Cabo for a week, or Europe in the summer; hell, let's look at buying s little place in Greece, or Ireland! We can get loans there with the same kinda terms!

And, people were trading up, to newer, better properties; remember all that frenzy? People purchasing additional properties -- and why not, with mortgage terms so ridiculously low?... because everyone seemed to believe that the value of real estate would go up, and up, forever. C'mon; what could happen?

I've mentioned this multiple times, but in addition to all the other hundreds of billions our government has given the financial sector, the Treasury has also assumed the risk for over 1.5 Trillion dollars in toxic CDOs still on the books of major financial institutions. Financial analyst and writer John Talbot, in a May, 2010 article in Salon, reported [emphasis mine]

...We now know that the financial crisis was not caused solely by a liquidity crunch, or an irrational loss of confidence, but rather by the fact that ... commercial banks held more than a trillion dollars of very poor-quality ... mortgage securities such as... CDO’s, and that these bad assets were sizable enough to bankrupt even our biggest banks...

The Fed, I am convinced, went to these commercial banks and offered to take many of their toxic mortgage assets off their books, often accepting them as collateral for loans
[from the government] to the banks...

So the Federal Reserve, with no approval by the President, the Congress, the people or their elected representatives, ended up purchasing $1.5 trillion of new assets of unknown quality... What concerns many knowledgeable investors is that the Fed doesn't have the money needed to purchase these assets and instead prints new money.

As of March 2010, there was approximately $1 trillion of currency outstanding in the country, not including the more than $1 trillion of bank reserves at the Fed.

If I were you, I'd read Talbot's entire article. By the end of it, you might feel the Statue Of Liberty has been thrown over the hood of a '57 Chevy and gang-banged by the Banksters; and that our government, and We, The People, are owned by them.

(You know what absolutely blows my mind? How quick the Teabaggers and the Right are to defend the forces that created all this, and how they stroke and pamper and Fluff the Masters Of The Universe who run the banks. To these clowns, our current emergency is all the fault of some Liberal conspiracy, or lazy minorities. Unbelievable.)

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