Monday, October 18, 2010

October 18 2010: Gresham's Law Meets Murphy's Law

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Ilargi: Oh boy, there we go again, QE and Fraudclosure are the topics of the day.

There's a lot to say about foreclosures, so let me just say a few words about QE. Something I read this weekend gave me an A-HA moment; to understand what is wrong with the Fed's upcoming next round of quantitative easing (as well as former rounds, both domestic and abroad), we need to look at Gresham's Law, which states that bad money always drives out good money.

In an otherwise entirely forgettable piece, Mike Moriarty makes this astute observation:
The Mother of All Shorts
The Federal Reserve, in conjunction with the Treasury simply traded T-Bonds and T-Bills for the crap paper under the theory that trading good paper for bad paper turns the bad paper into good paper. There is a simple error in that logic. Actually the way the real world works is that trading bad paper for good paper morphs the good paper into bad paper.

Gresham's Law is not called a law for nothing: it always applies. Wikipedia:
Gresham's law states that any circulating currency consisting of both "good" and "bad" money (both forms required to be accepted at equal value under legal tender law) quickly becomes dominated by the "bad" money. This is because people spending money will hand over the "bad" coins rather than the "good" ones, keeping the "good" ones for themselves. Legal tender laws act as a form of price control. In such a case, the artificially overvalued money is preferred in exchange, because people prefer to save rather than exchange the artificially demoted one (which they actually value higher).

QE will achieve nothing positive for the American society as a whole, it will only serve to keep the banks afloat for a while longer. As a financial instrument, it remains entirely unproven; at best it's in essence nothing but a very costly wager. At worst, it's a blatant give-away. And in the end everything it touches will turn into lead, in what can best be seen as some sort of reverse alchemy. At your cost.

Please allow me a word on Countrywide brain Angelo Mozilo's SEC "punishment". Mozilo ends up paying maybe $20 million, which might come to $1 for every bad loan he's sold. He's made a few hundred million off the mess he created. This is one more slap in the face of the American people, but who's counting? They've been slapped silly, and their faces are numb. Gretchen Morgenson cites this gem:
"Mozilo is agreeing to a permanent ban on serving as an officer or director of a public company," said James A. Fanto, a professor at Brooklyn Law School and a specialist in corporate and securities law. "That is a significant punishment and does not look good for his legacy."

Yeah, sure. You want to know what Mozilo's legacy is? That crime still pays in America.

On to Fraudclosure.

Over the past few days, the foreclosure mess seems to have entered a whole new phase, albeit one that will undoubtedly be heavily contested from all possible sides, not least of all the White House, which wants no part of any of this. Still, It's one thing to have a number of foreclosures re-evaluated, be it by lenders or judges. It's quite another to have proper ownership of the vast majority of real estate, domestic and commercial, put into question.

The issue might change virtually overnight from: "Does the borrower make his mortgage payments?" to "Does the lender hold the mortgage note?". There have been isolated instances over the past two years where a judge has annulled eviction notices on account of shoddy paperwork, but this looks like it may be a whole new can of worms.

In an interview with Dylan Ratigan, lawyer Michael Pines says: "Nobody in this country knows for sure who owns any real estate", and that the only cases where we can be sure is people who paid off their homes before the early 1980's, when securitization started, owned it free and clear and passed it down from family to family. Other than that, any piece of property that was bought, sold or refinanced since then, nobody knows who owns that property.

It will take a long time and a bitter fight before Pines' view could ever go mainstream, for obvious reasons, but at the same time it could potentially take only one judge in only one case to throw the door wide open. And that means damage control is the number one issue on Monday morning, for banks, investors and politicians.

Here's a long quote by David Kotok, which comes to us via The Big Picture:

The Foreclosure Mess
Homeowners can only be foreclosed and evicted from their homes by the person or institution who actually has the loan paper—only the note-holder has legal standing to ask a court to foreclose and evict. Not the mortgage, [but] the note , which is the actual IOU that people sign, promising to pay back the mortgage loan.

Before mortgage-backed securities, most mortgage loans were issued by the local savings & loan. So the note usually didn’t go anywhere: it stayed in the offices of the S&L down the street. But once mortgage loan securitization happened, things got sloppy—they got sloppy by the very nature of mortgage-backed securities.
The whole purpose of MBSs was for different investors to have their different risk appetites satiated with different bonds. Some bond customers wanted super-safe bonds with low returns, some others wanted riskier bonds with correspondingly higher rates of return.

Therefore, as everyone knows, the loans were "bundled" into REMIC’s (Real-Estate Mortgage Investment Conduits, a special vehicle designed to hold the loans for tax purposes), and then "sliced & diced"—split up and put into tranches, according to their likelihood of default, their interest rates, and other characteristics.

This slicing and dicing created "senior tranches," where the loans would likely be paid in full, if the past history of mortgage loan statistics was to be believed. And it also created "junior tranches," where the loans might well default, again according to past history and statistics. (A whole range of tranches was created, of course, but for the purposes of this discussion we can ignore all those countless other variations.)

These various tranches were sold to different investors, according to their risk appetite. That’s why some of the MBS bonds were rated as safe as Treasury bonds, and others were rated by the ratings agencies as risky as junk bonds.

But here’s the key issue: When an MBS was first created, all the mortgages were pristine—none had defaulted yet, because they were all brand-new loans. Statistically, some would default and some others would be paid back in full—but which ones specifically would default? No one knew, of course. If I toss a coin 1,000 times, statistically, 500 tosses the coin will land heads—but what will the result be of, say, the 723rd toss? No one knows.

Same with mortgages. So in fact, it wasn’t that the riskier loans were in junior tranches and the safer ones were in senior tranches: rather, all the loans were in the REMIC, and if and when a mortgage in a given bundle of mortgages defaulted, the junior tranche holders would take the losses first, and the senior tranche holder last.

But who were the owners of the junior-tranche bond and the senior-tranche bonds? Two different people. Therefore, the mortgage note was not actually signed over to the bond holder. In fact, it couldn’t be signed over. Because, again, since no one knew which mortgage would default first, it was impossible to assign a specific mortgage to a specific bond.

Enter stage right the famed MERS—the Mortgage Electronic Registration System.

MERS was the repository of these digitized mortgage notes that the banks originated from the actual mortgage loans signed by homebuyers. MERS was jointly owned by Fannie Mae and Freddie Mac (yes, those two again —I know, I know: like the chlamydia and the gonorrhea of the financial world—you cure ‘em, but they just keep coming back).

The purpose of MERS was to help in the securitization process. Basically, MERS directed defaulting mortgages to the appropriate tranches of mortgage bonds. MERS was essentially where the digitized mortgage notes were sliced and diced and rearranged so as to create the mortgage-backed securities. Think of MERS as Dr. Frankenstein’s operating table, where the beast got put together.

However, legally—and this is the important part—MERS didn’t hold any mortgage notes: the true owner of the mortgage notes should have been the REMICs. But the REMICs didn’t own the notes either, because of a fluke of the ratings agencies: the REMICs had to be "bankruptcy remote," in order to get the precious ratings needed to peddle mortgage-backed Securities to institutional investors. So somewhere between the REMICs and MERS, the chain of title was broken.

Now, what does "broken chain of title" mean? Simple: when a homebuyer signs a mortgage, the key document is the note. As I said before, it’s the actual IOU. In order for the mortgage note to be sold or transferred to someone else (and therefore turned into a mortgage-backed security), this document has to be physically endorsed to the next person. All of these signatures on the note are called the "chain of title."

You can endorse the note as many times as you please—but you have to have a clear chain of title right on the actual note: I sold the note to Moe, who sold it to Larry, who sold it to Curly, and all our notarized signatures are actually, physically, on the note, one after the other.

If for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.

To repeat: if the chain of title of the note is broken, then the borrower no longer owes any money on the loan.

Read that last sentence again, please. Don’t worry, I’ll wait. You read it again? Good: Now you see the can of worms that’s opening up.


[..] following the housing collapse of 2007-’10-and-counting, there has been a boatload of foreclosures - and foreclosures on a lot of people who weren’t sloppy bums who skipped out on their mortgage payments, but smart and cautious people who got squeezed by circumstances.

These people started contesting their foreclosures and evictions, and so started looking into the chain-of-title issue, and that’s when the paperwork became important. So the chain of title became crucial and the botched paperwork became a nontrivial issue.

Now, the banks had hired "foreclosure mills" - law firms that specialized in foreclosures - in order to handle the massive volume of foreclosures and evictions that occurred because of the housing crisis. The foreclosure mills, as one would expect, were the first to spot the broken chain of titles.

Well, what do you know, it turns out that these foreclosure mills might have faked and falsified documentation, so as to fraudulently repair the chain-of-title issue, thereby "proving" that the banks had judicial standing to foreclose on delinquent mortgages. These foreclosure mills might have even forged the loan note itself—

Wait, why am I hedging? The foreclosure mills did actually, deliberately, and categorically fake and falsify documents, in order to expedite these foreclosures and evictions. Yves Smith at Naked Capitalism, who has been all over this story, put up a price list for this "service" from a company called DocX - yes, a price list for forged documents. Talk about your one-stop shopping!

Ilargi: Kotok has a lot more, and I strongly recommend you read his entire essay below, and watch the Ratigan video. And no, I’m not an expert on American property law, and yes, I do realize that many contradictory opinions on the issue will befall us. Ownership, property rights, these are not the easiest of legal issues. Still, Kotok and Pines raise a sufficient amount of sufficiently reasonable questions to warrant plenty more scrutiny.

The first knee-jerk reaction of "authorities" and the judicial branch will always be to side with the establishment, in this case the banking industry. But when the numbers of questionable documents reach a critical mass, that will not be so easy anymore. In rapid succession, we may find that the ice the whole system is skating on proves to be both mighty slippery and razor thin.

And even if government policies, broadly supported by QE2, remain focused solely on support for financial institutions regardless of their actual situation or even state of solvency, not even Washington can bend existing laws at will. Not that it won't try.

Lawyer Michael Pines encourages his foreclosed clients to move back into their homes. If that attitude spreads far and wide enough, the resulting chaos will suffice to drag down bank stocks considerably. And even if Bernanke buys another $5 trillion in toxic paper, that will not solve the property rights issue.

Both Washington and Wall Street may find that Gresham's Law, which leaves only bad paper to go around, meets Murphy's Law, and everything that can go wrong for them will go wrong.

The Foreclosure Mess
by David Kotok

Dear Readers, this text came to me in an email from sources that are in the financial services business and with whom I have a personal relationship.  The original text was laced with expletives and I would not use it in the form I received it.  Therefore the text below has had some substantial editing in order to remove that language.  The intentions of the writer are undisturbed.  The writer shall remain anonymous.  This text echoes some of the news items we have seen and heard today; however, it can serve as a plain language description of the present foreclosure-suspension mess. There is a lot here.  It takes about ten minutes to read it.

-David Kotok

Homeowners can only be foreclosed and evicted from their homes by the person or institution who actually has the loan paper—only the note-holder has legal standing to ask a court to foreclose and evict. Not the mortgage, the note, which is the actual IOU that people sign, promising to pay back the mortgage loan.

Before mortgage-backed securities, most mortgage loans were issued by the local savings & loan. So the note usually didn’t go anywhere: it stayed in the offices of the S&L down the street.

But once mortgage loan securitization happened, things got sloppy—they got sloppy by the very nature of mortgage-backed securities.

The whole purpose of MBSs was for different investors to have their different risk appetites satiated with different bonds. Some bond customers wanted super-safe bonds with low returns, some others wanted riskier bonds with correspondingly higher rates of return.

Therefore, as everyone knows, the loans were "bundled" into REMIC’s (Real-Estate Mortgage Investment Conduits, a special vehicle designed to hold the loans for tax purposes), and then "sliced & diced"—split up and put into tranches, according to their likelihood of default, their interest rates, and other characteristics.

This slicing and dicing created "senior tranches," where the loans would likely be paid in full, if the past history of mortgage loan statistics was to be believed. And it also created "junior tranches," where the loans might well default, again according to past history and statistics. (A whole range of tranches was created, of course, but for the purposes of this discussion we can ignore all those countless other variations.)

These various tranches were sold to different investors, according to their risk appetite. That’s why some of the MBS bonds were rated as safe as Treasury bonds, and others were rated by the ratings agencies as risky as junk bonds.

But here’s the key issue: When an MBS was first created, all the mortgages were pristine—none had defaulted yet, because they were all brand-new loans. Statistically, some would default and some others would be paid back in full—but which ones specifically would default? No one knew, of course. If I toss a coin 1,000 times, statistically, 500 tosses the coin will land heads—but what will the result be of, say, the 723rd toss? No one knows.

Same with mortgages.

So in fact, it wasn’t that the riskier loans were in junior tranches and the safer ones were in senior tranches: rather, all the loans were in the REMIC, and if and when a mortgage in a given bundle of mortgages defaulted, the junior tranche holders would take the losses first, and the senior tranche holder last.

But who were the owners of the junior-tranche bond and the senior-tranche bonds? Two different people. Therefore, the mortgage note was not actually signed over to the bond holder. In fact, it couldn’t be signed over. Because, again, since no one knew which mortgage would default first, it was impossible to assign a specific mortgage to a specific bond.

Therefore, how to make sure the safe mortgage loan stayed with the safe MBS tranche, and the risky and/or defaulting mortgage went to the riskier tranche?

Enter stage right the famed MERS—the Mortgage Electronic Registration System.

MERS was the repository of these digitized mortgage notes that the banks originated from the actual mortgage loans signed by homebuyers. MERS was jointly owned by Fannie Mae and Freddie Mac (yes, those two again —I know, I know: like the chlamydia and the gonorrhea of the financial world—you cure ‘em, but they just keep coming back).

The purpose of MERS was to help in the securitization process. Basically, MERS directed defaulting mortgages to the appropriate tranches of mortgage bonds. MERS was essentially where the digitized mortgage notes were sliced and diced and rearranged so as to create the mortgage-backed securities. Think of MERS as Dr. Frankenstein’s operating table, where the beast got put together.

However, legally—and this is the important part—MERS didn’t hold any mortgage notes: the true owner of the mortgage notes should have been the REMICs.

But the REMICs didn’t own the notes either, because of a fluke of the ratings agencies: the REMICs had to be "bankruptcy remote," in order to get the precious ratings needed to peddle mortgage-backed Securities to institutional investors.

So somewhere between the REMICs and MERS, the chain of title was broken.

Now, what does "broken chain of title" mean? Simple: when a homebuyer signs a mortgage, the key document is the note. As I said before, it’s the actual IOU. In order for the mortgage note to be sold or transferred to someone else (and therefore turned into a mortgage-backed security), this document has to be physically endorsed to the next person. All of these signatures on the note are called the "chain of title."

You can endorse the note as many times as you please—but you have to have a clear chain of title right on the actual note: I sold the note to Moe, who sold it to Larry, who sold it to Curly, and all our notarized signatures are actually, physically, on the note, one after the other.

If for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.

To repeat: if the chain of title of the note is broken, then the borrower no longer owes any money on the loan.

Read that last sentence again, please. Don’t worry, I’ll wait.

You read it again? Good: Now you see the can of worms that’s opening up.

The broken chain of title might not have been an issue if there hadn’t been an unusual number of foreclosures. Before the housing bubble collapse, the people who defaulted on their mortgages wouldn’t have bothered to check to see that the paperwork was in order.

But as everyone knows, following the housing collapse of 2007-’10-and-counting, there has been a boatload of foreclosures—and foreclosures on a lot of people who weren’t sloppy bums who skipped out on their mortgage payments, but smart and cautious people who got squeezed by circumstances.

These people started contesting their foreclosures and evictions, and so started looking into the chain-of-title issue, and that’s when the paperwork became important. So the chain of title became crucial and the botched paperwork became a nontrivial issue.

Now, the banks had hired "foreclosure mills"—law firms that specialized in foreclosures—in order to handle the massive volume of foreclosures and evictions that occurred because of the housing crisis. The foreclosure mills, as one would expect, were the first to spot the broken chain of titles.

Well, what do you know, it turns out that these foreclosure mills might have faked and falsified documentation, so as to fraudulently repair the chain-of-title issue, thereby "proving" that the banks had judicial standing to foreclose on delinquent mortgages. These foreclosure mills might have even forged the loan note itself—

Wait, why am I hedging? The foreclosure mills did actually, deliberately, and categorically fake and falsify documents, in order to expedite these foreclosures and evictions. Yves Smith at Naked Capitalism, who has been all over this story, put up a price list for this "service" from a company called DocX—yes, a price list for forged documents. Talk about your one-stop shopping!

So in other words, a massive fraud was carried out, with the inevitable innocent bystanders getting caught up in the fraud: the guy who got foreclosed and evicted from his home in Florida, even though he didn’t actually have a mortgage, and in fact owned his house free –and clear. The family that was foreclosed and evicted, even though they had a perfect mortgage payment record. Et cetera, depressing et cetera.

Now, the reason this all came to light is not because too many people were getting screwed by the banks or the government or someone with some power saw what was going on and decided to put a stop to it—that would have been nice, to see a shining knight in armor, riding on a white horse.

But that’s not how America works nowadays.

No, alarm bells started going off when the title insurance companies started to refuse to insure the titles.

In every sale, a title insurance company insures that the title is free –and clear —that the prospective buyer is in fact buying a properly vetted house, with its title issues all in order. Title insurance companies stopped providing their service because—of course—they didn’t want to expose themselves to the risk that the chain –of title had been broken, and that the bank had illegally foreclosed on the previous owner.

That’s when things started getting interesting: that’s when the attorneys general of various states started snooping around and making noises (elections are coming up, after all).

The fact that Ally Financial (formerly GMAC), JP Morgan Chase, and now Bank of America have suspended foreclosures signals that this is a serious problem—obviously. Banks that size, with that much exposure to foreclosed properties, don’t suspend foreclosures just because they’re good corporate citizens who want to do the right thing, and who have all their paperwork in strict order—they’re halting their foreclosures for a reason.

The move by the United States Congress last week, to sneak by the Interstate Recognition of Notarizations Act? That was all the banking lobby. They wanted to shove down that law, so that their foreclosure mills’ forged and fraudulent documents would not be scrutinized by out-of-state judges. (The spineless cowards in the Senate carried out their master’s will by a voice vote—so that there would be no registry of who had voted for it, and therefore no accountability.)

And President Obama’s pocket veto of the measure? He had to veto it—if he’d signed it, there would have been political hell to pay, plus it would have been challenged almost immediately, and likely overturned as unconstitutional in short order. (But he didn’t have the gumption to come right out and veto it—he pocket vetoed it.)

As soon as the White House announced the pocket veto—the very next day!—Bank of America halted all foreclosures, nationwide.

Why do you think that happened? Because the banks are in trouble—again. Over the same thing as last time—the damned mortgage-backed securities!

The reason the banks are in the tank again is, if they’ve been foreclosing on people they didn’t have the legal right to foreclose on, then those people have the right to get their houses back. And the people who bought those foreclosed houses from the bank might not actually own the houses they paid for.

And it won’t matter if a particular case—or even most cases—were on the up –and up: It won’t matter if most of the foreclosures and evictions were truly due to the homeowner failing to pay his mortgage. The fraud committed by the foreclosure mills casts enough doubt that, now, all foreclosures come into question. Not only that, all mortgages come into question.

People still haven’t figured out what all this means. But I’ll tell you: if enough mortgage-paying homeowners realize that they may be able to get out of their mortgage loans and keep their houses, scott-free? That’s basically a license to halt payments right now, thank you. That’s basically a license to tell the banks to take a hike.

What are the banks going to do—try to foreclose and then evict you? Show me the paper, Mr. Banker, will be all you need to say.

This is a major, major crisis. The Lehman bankruptcy could be a spring rain compared to this hurricane. And if this isn’t handled right—and handled right quick, in the next couple of weeks at the outside—this crisis could also spell the end of the mortgage business altogether. Of banking altogether. Hell, of civil society. What do you think happens in a country when the citizens realize they don’t need to pay their debts?

Barry Ritholtz: This commentary, forwarded by David Kotok, is a very worthwhile read — but it has a significant legal flaw in it that requires me to preface it with the following: Courts have long had the authority to apply principles of equity, as opposed to common or statutory law, to cases brought before it.

Included in this means is preventing outcomes that unjustly enrich wrongdoers, or other similar bad outcomes. With the foreclosure fraud cases, we have two actors that are not blameless here: The homeowner, who is in default, and the banks/securitizers, that failed to do the document creation and title management correctly.

Judges in civil cases do not want to see an absurd outcome. Rewarding either the homeowner (free house!) or the lenders (No penalty for massive screw ups!) would offend those principles of equity and fairness.

What might be a “just” outcome in these cases?  An example of a possible fix in a full blown litigation might be for the court to order the mortgage modified to the current equity value of the home, so that it a) punishes the lenders who failed to do their proper legal work on the documents, but b) does not give a home to a defaulted homeowner for free. The odds would be that the homeowner still gets foreclosed on, but does not owe additional monies to the bank. Since these are very often uncollectible judgments anyway, the court’s judgment can mete out justice fairly, not give anyone an undeserved windfall, yet move the cases forward. That is but one “just” solution, and I am confident that most courts have the sophistication to fashion an appropriate remedy.

Courts of “equity” (meaning “just, fairness”) can apply these principles to avoid ridiculous outcomes. Whether they choose to do so or not will be determined by them.

Fraudclosure: $45 Trillion At Risk, Nobody Knows Who Holds The Note
by Dylan Ratigan

Doubts over foreclosures embolden some to move back in
by Shannon Behnken - The Tampa Tribune

Recklessness and potential fraud have thrown so many home-foreclosure documents into doubt that some people are taking matters into their own hands. In some cases, lawyers are advising clients who lose their houses to move back in – even if the home already belongs to someone else. "The foreclosure and evicting was illegal and void," said Michael Pines, a California lawyer who has told clients it's OK to break into homes and reclaim them. "Therefore the property owners have the right to retake possession." Sound radical?

Matt Weidner, a St. Petersburg foreclosure defense attorney, said he can see the rationale: If a judge ruled based on faulty documents, reclaiming a home may be legal. Still, Weidner cautions, it's the wrong thing to do. Homeowners with grievances need to go back to court, he said, and prove their case. "Yes, there is a category of judgments out there that are so flawed that the homeowner is still legally entitled to the property, regardless of what the judgment says," Weidner said. "While it may be technically legally true that they have a right to the home, we are a system of laws, and we're talking civil unrest."

Would law enforcement intervene to stop someone from reclaiming a home? Not necessarily.

Pines began moving clients back into homes they lost this week. He's moved five families in so far and says he has no plans to stop. The first time, police were called to the home in Simi Valley, California. But they said it was a civil matter and only watched as the family, including nine children, changed the locks and moved their furniture in.

Other move-ins were quiet. But the stunt didn't go over so calmly Wednesday when Pines and one of clients were arrested on charges of trespassing and breaking and entering. He advises his clients to comply with law enforcement, then go back later and move in. And only to a vacant house. "Eventually, whoever is calling the police may get sick of it."

Locally, if law enforcement officers receive a trespassing complaint from a lender, they would rely on whatever documents were available. "If the family has nothing from the court to show that their case was overturned, they may be asked to leave," said Sgt. Tom Nestor, spokesman for the Pinellas County Sheriff's Office. "We have to depend on documentation from the court."

Judges are worried about the implications of the faulty documents, said Thomas McGrady, chief judge of the 6th Judicial Circuit in Pinellas County. "Some lenders and law firms have put us in a situation where we doubt many of the documents," McGrady said, "but judges have to act on the documents before them, and you can't just stop the system at this point."

Even in cases with improper paperwork, McGrady said, most lenders have a legal right to take back homes. If the process was flawed, and judgments are set aside, the lenders will just start over. McGrady said attorney Pines is giving homeowners bad advice that could result in criminal charges. "People have the right to address their grievances in our court system," McGrady said. "As frustrating as that is, and as disappointed as we are with our lenders, we just can't condone this kind of behavior."

Several major lenders nationwide recently halted foreclosure proceedings after learning employees were signing documents without reading them. The Florida Attorney General's Office is investigating whether four law firms working with lenders have faked and forged documents. The Attorney General's Office last week released a sworn statement by a former paralegal with one of the firms, Law Offices of David J. Stern, describing systematic forgery in the firm's Broward County office.

Jeffrey Tew, a lawyer representing Stern, said the fired employee was disgruntled and the allegations aren't true. No matter how they go about it, if homeowners use the growing doubt over foreclosure documents in an effort to get their homes back, it will be chaotic, said Weidner, the St. Petersburg lawyer. "I absolutely think some homeowners who bought foreclosed homes could be faced with the former owners trying to take them back," Weidner said. "It's could be a mess."

Why Foreclosure Fraud Is So Dangerous To Our System Of Property Rights
by Barry Ritholtz

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.

This morning, I want to explain exactly why this RE fraud is so dangerous, and the rights that are being trampling upon.I also want to demonstrate that the only way the nation could have the quantity and magnitude of errors we see is by willful, systemic fraud.

Perhaps this commentary will allow for a more intelligent debate of this issue, and focus on what can be done to fix the problems, rather than the blind parroting of talking points.


The process of purchasing a home in America culminates with an event called “the Closing.” It is an hour plus long contract signing that ensures the buyer is legitimately taking title, possession and legal ownership of a unique parcel of land and any structures upon it. The process gives any buyer specific rights to that property that cannot be abrogated under the laws of the United States.

At the closing, buyers sign and initial numerous documents. The goal is to accomplish the following:

1) Papers are signed that will be filed with the County Clerk (or appropriate officer) along with recording fees, for the official transfer of title from the prior owner to the new owner. The enabling purchase loan (i.e., mortgage note) is also filed with the Clerk.
2) The buyer receives title (ownership) of the land;
3) The mortgage lender establishes a new interest in that property contingent upon their mortgage note;
4) All other claims, liens, tax obligations and prior mortgages, home equity lines or second notes are satisfied and extinguished before title passes to the new owner.
5) Third party claims of any interest in that property superior to the buyer are eliminated;
6) Title Insurance is purchased and issued so the buyer has a recourse in case of defects in ownership occurs.

Every step of the process is designed to protect the property rights of all parties. The result is more than a mere transaction selling property from one party to another; rather, this has created a system where ownership interests are clearly defined; where title history can be reviewed going back decades and centuries. There is a certainty to the purchasers of this property against all future claims.

Everything about this process has been created to make sure the transfer goes off perfectly. In a nation of laws, contract and property rights, there is no room for errors. Indeed, even small technical flaws can be repaired via a process called “perfecting title.”

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.

We cannot have free market capitalism without this process. So what does it mean if banks have been systemically, fraudulently and illegally undermining this process?


The closing process described above took place with all parties participating voluntarily. The buyer wants the house, the seller wants the transaction, the financing bank wants to make the mortgage loan.

What happens during a proper foreclosure? The prior closing is essentially reversed, only its done involuntarily. The process requires another RE closing, only this time, the Note holder is exercising their right to repossess the house if the borrower has failed to uphold the terms of the mortgage note. It typically states that if a borrower fails to make the requisite payments, they become delinquent. After an extended period of delinquency, they go into default. That allows the note holder to exercise their rights to foreclose on the property, and take title and possession.

The same care and attention to detail that occurred during the initial closing must also occur in the foreclosure process. All of the steps noted in our initial closing must occur here also. But since it is an involuntary process for the (soon-to-be former) property owner, extra care must be taken to make sure that property rights are being maintained and respected. The entire process is, if anything, is even more rigorous.

The law does not tolerate any errors in this process. What does the foreclosure process legally require? It varies by state and mortgage note, but the following is a good outline:

1) Notice of Delinquency is sent to a borrower who has fallen behind his payment schedule;
2) Notice of Default is sent to a delinquent borrower who has missed the requisite number of mortgage payments;
3) Notice of Foreclosure is sent to the defaulted borrower, and the process begins;
4) Affadavit by the bank’s representative are signed attesting to: Ownership of the note, who the borrower is, the property in question, the date of last mortgage payment, amount of delinquency, tax escrow owed, other payments (such as homeowners insurance);
5) Notarized documents: A Notary Public affirms that the affidavit was actually signed by the signatory, and this allows it to be entered into the court as documentary evidence;
6A) Notice of Pendency (Lis Pendens) is filed with the County Clerk putting the world on notice as to the foreclosure action;
6B) Summons and Complaint are prepared by bank attorneys, who further verify the specific information attested to by the bank executives. The attorneys then file the Complaint, commencing the Foreclosure Action;.
7) Service of Process is filed, either hand delivered to the home owner, or nailed to the door of the home;
8) Referee is Appointed to review and process the case; calculate the amount owed, and report back to the Court; The Referees report is also notarized;
9) Judgment of Foreclosure is moved for by Note holder;
10) Court orders the property auctioned. The court specifies a notice of the auction, publicizing the property auction;
11) Bidders must Close on the auctioned house in 30-90 days; In the event of no sale, the bank takes possession (REO);

The fraud that has come to light are primarily occurring in steps 4, 5, 6 and 7. The verification of the specific data that is mandated legally is not taking place by bank executives. Reviewing a file can take anywhere from, 20 minutes to well over an hour. Yet some bank employees are testifying that they have signed off on as many as 150 per day (Wells Fargo) or 400 per day (Chase).

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.

That it is being done for expediency and to save a few dollars on the process is why the full criminal prosecution must occur.


The approach of most Western nations to property is an important legacy. In the United States, it has been enshrined in the Constitution. Even the rare exercise by the State to take private property during Eminent Domain requires an extensive and proper process. The Fifth Amendment to the US Constitution guarantees that no “private property be taken for public use, without just compensation.” The Supreme Court has detailed the process required for the State to seize any citizen’s private property without the owner’s consent.

There is simply no reason we should tolerate unlawful property seizure merely when it is done by banks. They are not the State, not the King, and not above the law.

Megabanks At Risk As Analyst Identifies New Problems With Mortgages
by Shahien Nasiripour - Huffington

Pension funds and other investors who have suffered losses on mortgage-backed securities could have a "strong legal basis" to call into question the very securitized mortgages they purchased stakes in, increasing the pressure facing large Wall Street firms that packaged these securities during the housing boom, a prominent mortgage bond analyst said Thursday.

Wall Street firms have packaged and sold trillions of dollars in mortgage-linked securities this decade. But in their rush to push paper through various levels, from the firm giving homeowners a mortgage ultimately to the investor, shortcuts were likely taken due to the large volume at play. More than $4.4 trillion in mortgages not guaranteed by the federal government were bundled into securities and sold to investors from 2003 through 2007, according to Inside Mortgage Finance, a leading trade publication and data provider.

Recent revelations by servicers that their employees and contractors were careless in their handling of basic paperwork now threaten to unravel an untold number of securities and mortgages. The issue prompted Bank of America and Ally Financial to halt their home foreclosures across the country; JPMorgan Chase is reviewing 115,000 foreclosure cases across 41 states. Other servicers stopped foreclosure proceedings in states where foreclosures must go through the courts.

The problem is, no one yet knows how many mortgages have been affected by the slipshod handling of paperwork. Some analysts say hundreds of billions of dollars in mortgage-linked securities could be affected. Others say this could be resolved with just a few weeks of reviews and after-the-fact fixes.

Noted bond analyst Joshua Rosner sent his clients a memo Tuesday floating a theory of how big the impact could be. Though the managing director at Graham Fisher & Co. said he believes the paperwork problems regarding foreclosed properties will ultimately be resolved, he wrote that "We have a larger and more significant concern, which, if proved out, could call into question the validity of nearly all securitizations."

Investors would thus have the upper hand in their negotiations with big Wall Street securities issuers and mortgage servicers, and could force the firms to buy back more of the shoddy loans underlying their securities. There are more than $1.3 trillion in outstanding mortgage-backed securities in which the mortgages are not backed by the federal government, Inside Mortgage Finance data show. But that doesn't mean Rosner thinks securities issuers could be forced to buy all of that back. Nor can all of it likely be challenged.

Investors could exact a hefty settlement from the Wall Street firms that issued those securities, or they could simply settle their claims if no widespread problems were found, Rosner wrote. Ultimately, he said in an interview, it's the lack of certainty that complicates matters -- the paperwork problems could give investors the ammunition to force Wall Street firms to buy back defective mortgages. Or, it could be a small and easy-to-digest problem that Wall Street handles like they would a temporary hiccup.

In a Thursday note to clients, Rosner bemoaned how media outlets took his comments to clients and to Bloomberg News out of context. "Several new-media have quoted an early story on our October 12th note which suggested we saw risks that origination flaws would allow investors to challenge securitizations on $1.3 trillion of mortgages. This is incorrect," he wrote. Rather, Rosner said, the current scandal "may give investors an opening to challenge the legality of deals, threatening to unnerve financial markets."

Those challenges, which would result from the revelations unearthed during the foreclosure process, could then be used to investigate the documentation practices that occurred when these mortgages were first given to borrowers. Inflated income levels, fake home appraisals and other lies inserted into mortgage documents -- something Wall Street and Washington have long suspected, but never truly investigated -- could then be used to force big banks to buy back the garbage they peddled in the first place to unwitting investors.

Another possibility is that trustees, who oversee the flow of documents from the originator of the mortgage to the vehicle that holds those documents for investors, may not have properly performed their role, either. "It is our belief that, given the black box nature of the process and the former white-hot origination market, some trustees may not have properly transferred notes to the trusts," Rosner wrote Thursday. "If not properly transferred, the 'true sale' of mortgages to the trusts that issued mortgage-backed securities would be in question. If this proves to have occurred we believe the Trustee may have liability."

Just four firms dominate the trustee market for mortgage-backed securities in which the mortgages aren't guaranteed by Uncle Sam: Deutsche Bank, U.S. Bancorp, Bank of New York Mellon, and HSBC serve as trustees for 70.5 percent of all such issuance since 2005, according to Asset-Backed Alert, an industry newsletter and data provider. An additional four firms -- Wells Fargo, Bank of America, JPMorgan Chase, and Citigroup -- control 29.1 percent, Asset-Backed Alert data show. All told, these eight firms have served as trustees for 99.6 percent of all private-label mortgage-backed securities issued since 2005.

Were the document errors now cropping up in a handful of cases "to be found to have resulted from [the] widespread failure of issuers and trusts" to properly handle and transfer documents, "there would ... appear to be a strong legal basis for the calling into question [of] securitizations," Rosner wrote. In a common example detailing how an investor may have either sold his bonds at a loss or lost money because of the trustee's inability to foreclose on a home, all because of paperwork problems, "it is reasonable to believe that this investor would consider suit against the trustee to recoup losses," Rosner wrote.

Shares of all eight firms were down at the close of Thursday trading on the New York Stock Exchange. Bank of America and Citigroup led the way, slipping more than 5 and 4 percent, respectively.

White House Urges Caution on Foreclosure Moratorium
by David Segal - New York Times

Amid a rising uproar over slipshod bank foreclosure practices, members of the Obama administration on Sunday expressed anger about the revelations, but urged caution as multiple investigations into the crisis unfold.

In a piece posted on the Huffington Post Web site, Shaun Donovan, the secretary of the Department of Housing and Urban Development, wrote: "The notion that many of the very same institutions that helped cause this housing crisis may well be making it worse is not only frustrating — it’s shameful." But, he added, "a national, blanket moratorium on all foreclosure sales would do far more harm than good, hurting homeowners and home buyers alike at a time when foreclosed homes make up 25 percent of home sales."

It was the second effort in two weeks by the administration to deflect pressure for a national moratorium on foreclosures. In televised comments last Sunday, David Axelrod, a senior White House adviser, urged moderation, saying there were foreclosures with valid documents "that probably should go forward." Given the outrage over the foreclosure revelations in the last two weeks, the administration’s comments Sunday sounded like an appeal for calm and restraint. They may also signal an attempt to defuse the potential for a party rift on the issue. Some Democratic leaders, including Harry Reid, the Senate majority leader from Nevada, have supported a nationwide moratorium.

On Wednesday, all 50 state attorneys general promised to conduct their own inquiries into foreclosure abuses, which center on accusations that banks cut corners in a rush to get signatures on thousands of documents required for the proceedings. That move came after a number of the country’s largest banks announced partial or total halts to foreclosures. Bank of America last week announced a moratorium on foreclosures in all 50 states, while JP Morgan Chase halted action in 41 states.

With no clear idea of the financial implications of this legal morass, bank stocks have swooned. Shares in Bank of America, for example, were off by 9.1 percent last week. Some analysts have suggested that Bank of America failed to set aside enough money to cover any number of potential liabilities — including buying back loans that were not appropriately processed — raising the prospect that it and other banks could face bigger losses related to foreclosure transactions.

As the foreclosure abuses have come to light, the Obama administration has resisted calls for a more forceful response, worried that added pressure might spook the banks and hobble the broader economy. But members of the administration who weighed in on the subject on Sunday signaled that there were no plans to alter their tone or tactics.

In an interview on C-Span, the chairwoman of the Federal Deposit Insurance Corporation, Sheila C. Bair, suggested the fallout from this issue might not be as severe as many now predict. "If it turns out this is just a process issue, then I don’t anticipate the exposures to be significant," she said on "Newsmakers." "If it turns out to be something more fundamental, then we’ll have to deal with that," she said. "But I think we need to get all the information before we jump to any conclusions."

The full extent of the foreclosure mess is still coming into focus. Congress has called for a hearing on the subject, and the housing market in certain parts of the country has come to a near standstill.

The officials on Sunday stopped short of announcing a criminal investigation, and did not suggest that one was imminent. Instead, Mr. Donovan wrote that the Financial Fraud Enforcement Task Force — a coalition of federal agencies and United States attorney’s offices — has made the foreclosure issue "priority No. 1," adding that Attorney General Eric Holder has said that if wrongdoing was discovered by the task force, it "will take the appropriate action."

"Banks must follow the law," Mr. Donovan wrote on The Huffington Post, "and those that haven’t should immediately fix what is wrong." If the goal of running the article in the Huffington Post was to win over converts among its liberal readership, it did not seem to work. "We don’t need a diagnosis, Einstein. We would like your department to do something about it," wrote one reader in the site’s comments section.

Another said that the moment for stern talk had long since passed, writing, "The time to get tough was when it first became evident that the crash was caused by unconscionable greed and criminal fraud, misfeasance, malfeasance, and hubris on the part of Wall Street."

Mortgage Damage Spreads
by Nick Timiraos, Jessica Silver-Greenberg and Dan Fitzpatrick - Wall Street Journal

The unfolding foreclosure-processing debacle is causing bank stocks to slide and putting millions of delinquent borrowers in limbo. But how disruptive the crisis ultimately becomes—for homeowners, the housing market and the broader economy—depends on how quickly a number of technical problems and legal challenges are resolved in the months ahead.

In essence, fast-paced modern finance is colliding with the much slower machinery of the U.S. legal system. While finance aims for efficiency and maximized profits, the courts demand due process. And that's becoming a growing issue as lenders come under attack for taking short cuts to oust homeowners who haven't mailed in a mortgage check for months.

Banks stocks were hammered on Friday for the second straight day as investors continued gauging the sector's exposure to higher operating and legal costs. Bank of America Corp. shares lost nearly 5%. Shares of Wells Fargo & Co. also fell nearly 5%, while J.P. Morgan Chase & Co. fell 4% and Citigroup Inc. lost nearly 3%. And the cost of protecting against the default of bank bonds continued to surge.

BofA and J.P. Morgan said they temporarily suspended foreclosure sales as they review procedures, while other big banks have said they are reviewing files but haven't promised to freeze foreclosures. But even here, bankers are having trouble slamming on the brakes. Banks still are referring some loans to foreclosure in states where they issued suspensions, despite the moratoria. This week in Illinois, Florida and Ohio, Bank of America and J.P. Morgan Chase continued proceedings that allow them to sell foreclosed homes at public auction, according to court clerks.

A J.P. Morgan spokesman said Friday that "we have asked our local foreclosure attorneys not to seek judgments." Bank of America said on Oct. 8 that it would "stop foreclosure sales until our assessment has been satisfactorily completed." On Friday, a bank spokesman said that its cancellations only cover foreclosure sales scheduled between Oct. 9 and Oct. 31 because it doesn't expect the review to take longer. BofA's moratorium includes all 50 states, while J.P. Morgan's covers 41 states.

The financial system and legal system have been on a collision course for some time in residential real estate. Both the lower standards for loans and the lax controls involving foreclosures were based on the premise that home prices would never fall, making it unlikely that many loans would go bad at once. Once that premise fell apart, the flaws in the system became obvious, and the long-term challenge now facing lenders is to rebuild the mortgage system on more solid footing.

Banks argue that these problems will be repaired swiftly, and they'll soon be running the foreclosure machinery at full speed again. But analysts say the problems could expand into a legal crisis if banks can't prove that they are following standard property-law procedures. Lawyers, politicians and consumer advocates, meanwhile, are using the legal problems to stop foreclosures and extract settlements for troubled borrowers that lower their mortgage debt.

Industry executives note that few, if any, borrowers in the foreclosure process dispute the fact that they're not paying their mortgages. "We're not evicting people who deserve to stay in their house," James Dimon, J.P. Morgan chief executive, told analysts Wednesday. But the banks' "reassurance is not reassuring," says Susan Wachter, a professor of real estate at the University of Pennsylvania's Wharton School, because it doesn't deal with how easily they can prove ownership of the underlying mortgages.

The legal drama partly represents the clash between a financial sector that developed electronic processing to speed up procedures versus the U.S. property-law system, which relies on physical paperwork filed by individuals.

There are two different problems. The first resulted after lawyers for troubled borrowers discovered that banks were using "robo-signers," or back-office employees who approved hundreds of foreclosure documents daily without reviewing them, in states where repossessions must be approved in court. Banks had no choice but to suspend foreclosures in those states because submitting false witness testimony meant they hadn't properly proved ownership of the loans in foreclosure.

The second, and perhaps thornier, issue is that banks could have trouble proving they have standing to foreclose as they go back to correct errors. That problem stems largely from mortgages that were bundled into pools and sold to investors as securities. This process, known as securitization, became the preferred method of financing U.S. home loans over the past 30 years. "This is back-office work. This is not all going to resolve itself immediately, and we're going to have to be patient," says Richard Dorfman of the Securities Industry and Financial Markets Association's securitization group.

Real-estate law requires the physical transfer of paperwork whenever mortgages trade hands, and analysts are raising questions about how often that happened during the housing boom. One concern is that banks may have lost, or didn't ever have, mortgage certificates. If that happened, banks will have to pause foreclosures for months as they track down certificates and refile paperwork.

"The best case is this is going to slow the process considerably but not change the outcome," says Joshua Rosner, managing director at investment-research firm Graham Fisher & Co. For example, in Florida, which requires banks to foreclosure through the court system, the average borrower had spent 678 days without paying before being evicted through foreclosure, according to J.P. Morgan.

Under a far gloomier scenario, the problems created by using robo-signers may be irrelevant if, instead of being lost, mortgage documents weren't ever properly transferred during each step of the securitization process, says Adam Levitin, a professor of law at Georgetown University. If that happens, "the whole system comes to a halt," he says. Investors could argue in court that they never owned the mortgages backing their money-losing securities.

Banks and their attorneys say such fears are overblown. Procedures for transferring loans into mortgage-backed securities "are sound and based on a well-established body of law governing a multi-trillion dollar secondary mortgage market," said Tom Deutsch, the executive director of the American Securitization Forum, in a statement Friday. For now, the foreclosure machinery operates in fits and starts. For instance, Bank of America said it had suspended foreclosures in Ohio while it reviews procedures there.

Still, attorneys for Bank of America moved to take back three homes through foreclosure on Oct. 12 in Franklin County, Ohio, according to a court clerk. In Summit County, Colo, J.P. Morgan on Friday took back a foreclosed condominium unit on the courthouse steps with a bid of $154,278, according to the county treasurer. A J.P. Morgan spokesman said the bank isn't suspending foreclosure sales in Colorado.

In Lee County, Florida, both J.P. Morgan Chase and Bank of America continued to pursue judgments moving homes through foreclosure, according to court records. April Charney, a Florida-based attorney with Jacksonville Legal Aid says she's been contacted by at least five attorneys across the state who represent borrowers whose homes are proceeding to sale. A J.P. Morgan Chase spokesman said "we have asked our local foreclosure attorneys not to seek judgments."

Michael Holmes, 55 years old, an antique dealer, is upset that GMAC Mortgage, a loan servicer, is going to auction his home in Belfast, Maine, next week. Mr. Holmes expected the company to suspend his foreclosure sale because the lawsuit against him included an affidavit from Jeffrey Stephan, a GMAC employee who testified to signing as many as 10,000 loan documents without reviewing them. "There's all this news everyday that foreclosures are being halted, but that's just not the case for me," he says.

GMAC had originally scheduled an auction of Mr. Holmes' Victorian-style home for Thursday of this week, but postponed the sale for seven days after Mr. Holmes' attorney, Andrea Bopp Stark, contacted the company. A GMAC spokeswoman said Friday it won't pursue a foreclosure sale based on a "defective affidavit, and in Mr. Holmes' case "an amended affidavit was filed and accepted."

Foreclosure Crisis Slams Into Banks
by Mark Gongloff - Wall Street Journal

After Days of Shrugging Off the Debacle, Financial Markets Start to Penalize U.S. Banks

The mortgage-foreclosure crisis spilled into the financial markets on Thursday, driving down bank stocks and weighing on mortgage bonds as investors took a grim view of the potential costs. Shares of U.S. banks fell, while the broader stock market was essentially flat. Bank of America Corp., potentially among the most affected, dropped more than 5%. Bank bonds also fell, and the cost of buying protection against a possible debt default by banks climbed.

"The level of uncertainty in the economy is at extraordinarily high levels to begin with," said Jack Scott, chief investment officer at BlackHawk Capital Management, a Charlotte, N.C., money manager that owns mortgage securities. "The foreclosure problem adds another layer of acute uncertainty." So far, the foreclosure crisis hasn't affected consumer mortgage rates, which remain near record lows. They are closely linked to rates on U.S. Treasurys, which have tumbled in recent months.

The crisis has been escalating for several weeks, as banks suspend foreclosures across the country, citing flaws they have uncovered, including faulty or missing documentation. Tales of mismanagement within the foreclosure process—including so-called robo-signers, who were paid to rubber stamp documents without properly reviewing them—are emerging daily.

Until recently, investors hadn't fled financial stocks. If the issues raised about foreclosure practices in recent days are easily resolved technical glitches, with most foreclosures resuming after brief delays, then the impact on most investors would be small. "The [mortgage] market seems to be functioning relatively well, but that could change depending on how we see this play out," said BlackRock Inc. portfolio manager John Vibert. But some fear that it may be difficult to do any foreclosures for a while. The risk is that foreclosure flaws are so widespread, or the political furor so heated, that the entire process grinds to a halt, as Citigroup analyst Joshua Levin said in a conference call this week.

In some cases, that would choke off much of the cash flow used to pay mortgage bondholders. Another concern is that banks could be forced to modify billions of dollars in loans, including reducing principal, which could leave bondholders as big losers. "All this does is increase uncertainty and make me question my estimates of returns" on mortgage bonds, said Mr. Scott of BlackHawk, which bought mortgages that aren't guaranteed by government agencies near the bottom in early 2009. BlackHawk started trimming its mortgage holdings this summer after a run-up.

Banks, meanwhile, could be hit with investor lawsuits, and foreclosure delays could bring short-term losses. Some investors are pushing for banks to take back nonperforming mortgages in cases of faulty documentation. Such worries helped push down shares of Bank of America on Thursday, in their biggest one-day drop since mid-July. Wells Fargo, with its own large mortgage portfolio, fell more than 4%, as did Citigroup Inc. J.P. Morgan Chase & Co. dropped 2.8%.

The annual cost of buying five-year credit-default swap protection on $10 million of Bank of America debt rose from $155,000 on Monday to $193,000 on Thursday, with the bulk of the rise coming in the past two days, according to data provider Markit. The cost of protecting similar debt from Wells Fargo rose to $129,000 from $95,000 on Monday. "If nothing else, this is creating uncertainty for the banks," Nomura Securities bank analyst David Havens wrote in an email. "Our take is that it could be quite negative for the banks, and the markets are waking up to this very quickly."

The latest foreclosure headache is just one in a string for owners of mortgage securities not backed by government agencies. This $1.3 trillion market has yet to fully recover from its implosion starting in 2007. Estimates of the size of the foreclosure problem are still forming. Some $154 billion in mortgages could be affected by foreclosure delays, according to an estimate this week by Laurie Goodman, senior managing director at mortgage-bond trader Amherst Securities Group LP in New York.

Morgan Stanley trading-desk analyst Greg Gore estimated in a conference call on Tuesday that as much as $134 billion of mortgage bonds held by the nation's four biggest banks could ultimately be affected by foreclosure delays. For now, many bond investors doubt the damage will be extensive. But wild cards remain. For starters, attorneys general in all 50 states are investigating foreclosures.

Some investors still feel burned by a 2008 settlement between attorneys general and Bank of America, after the bank bought Countrywide Financial. The bank agreed to modify mortgages, and investors say they are bearing the costs unfairly. They fear foreclosure investigations could result in mortgage modifications that once again hurt investors.

In an Oct. 7 ruling, a New York state justice dismissed a lawsuit by investors who argued they shouldn't bear any of the cost of the $8.4 billion settlement. Mortgage-bond investors will get more information at the end of the month, when they get fresh data on cash flows from the bonds they own. But that data may only partially reflect the impact of recent foreclosure delays.

For foreclosure processors hired by mortgage lenders, speed equaled money
by Ariana Eunjung Cha and Zachary A. Goldfarb - Washington Post

Millions of homes have been seized by banks during the economic crisis through a mass production system of foreclosures that was set up to prioritize one thing over everything else: speed. With 2 million homes in foreclosure and another 2.3 million seriously delinquent on their mortgages - the biggest logjam of distressed properties the market has ever seen - companies involved in the foreclosure process were paid to move cases quickly through the pipeline.

Law firms competed with one another to file the largest number of foreclosures on behalf of lenders - and were rewarded for their work with bonuses. These and other companies that handled the preparation of documents were paid for volume, so they processed as many as they could en masse, leaving little time to read the paperwork and catch errors. And the big mortgage companies overseeing it all - including government-owned Fannie Mae - were so eager to get bad loans off their books that they imposed a penalty on contractors if they moved too slowly.

The system was so automated and so inflexible that once a foreclosure process began, homeowners and consumer advocates say, there was often no way to stop it. "The problem is when you try to fight back against this machine, well, it's a machine," said Michael Alex Wasylik, an attorney for homeowners in Dade City, Fla. "You have to be able to get your case off the mass production line and to someone who will take the time to read what they file, but in many mortgage firms that person doesn't exist."

The financial incentives show that the problems plaguing the foreclosure process extend well beyond a few, low-ranking document processors who forged documents or failed to review foreclosure files even as they signed off on them. In fact, virtually everyone involved - loan servicers, law firms, document processing companies and others - made more money as they evicted more borrowers from their homes, creating a system that was vulnerable to error and difficult for homeowners to challenge.

"This was a systemic problem. It's not like a few renegade employees made mistakes," said lawyer Peter Ticktin, who defends Florida homeowners facing foreclosure. "It was industry-wide and pervasive, and everyone knew about it."

$1,300 per case
The law firm of David J. Stern in Plantation, Fla., for instance, assigned a team of 12 to handle 12,000 foreclosure files at once for big financial companies such as Fannie Mae, Freddie Mac and Citigroup, according to court documents. Each time a case was processed without a challenge from the homeowner, the firm was paid $1,300. It was an unusual arrangement in a legal profession that normally charges by the hour.

The office was so overwhelmed with work that managers kept notary stamps lying around for anyone to use. Bosses would often scream at each other in daily meetings for "files not moving fast enough," Tammie Lou Kapusta, the senior paralegal in charge of the operation, said in a deposition Sept. 22 for state law enforcement officials who are conducting a fraud investigation into the firm. In 2009 alone, Stern's law firm handled over 70,000 foreclosures.

"The girls would come out on the floor not knowing what they were doing," Kapusta said. "Mortgages would get placed in different files. They would get thrown out. There was just no real organization when it came to the original documents." Fannie Mae, Freddie Mac and Citigroup said they no longer do new business with Stern's firm.

Law firms were rewarded with additional bonuses from document processing companies if they met deadlines for preparing and filing foreclosures in courts. One of the nation's major processors, Lending Processing Services in Jacksonville, Fla., confirmed that it had paid such bonuses but said it no longer offers them. The company is under investigation by federal and state law enforcement.

Meanwhile, Fannie Mae imposes a $100 fee on contractors for each day they fail to notify the firm that the foreclosure process was a success and that it has the right to move ahead with the resale of a home. On top of that, Fannie charges a penalty - which escalates for larger mortgages - on contractors who delay selling off such properties.

Fannie declined to comment on these fees. But in a memo to loan servicers dated Aug. 31, Gwen Muse-Evans, Fannie Mae's chief risk officer, warned mortgage servicers that fees may be imposed based on "the length of the delay and any costs that are directly attributable to the delay." Speed is also rewarded by the nation's credit-rating agencies, which give higher grades to mortgage service firms that accelerate the foreclosure process and generally hand out lower grades to those who hold onto delinquent loans. A Fitch Ratings manual calls the speed of foreclosures "the key driver in the servicer rating," according to a report by the National Consumer Law Center.

Untrained hires
To keep up with the crush of foreclosures, document processors and mortgage service firms rushed to hire anyone they could - hair stylists, Wal-Mart clerks, assembly-line workers who made blinds - and gave them key roles in their foreclosure departments without formal training, according to court papers. A number of these employees have testified that they did not really know what a mortgage was, couldn't define "affidavit," and knew they were lying when they signed documents related to foreclosures, according to depositions of 150 employees for mortgage companies taken by the law firm run by Ticktin, the Florida lawyer.

These problems were compounded as banks began to rely more heavily on computer systems to quickly move people through the foreclosure process. That automation came at a price for the homeowners who had difficulty fighting incorrect decisions by inexperienced, anonymous employees who took what was in the computer as fact even when homeowners said there were data-entry errors.

"These guys were caught off-guard with the onslaught of foreclosures," said Clifford Rossi, a former chief risk officer for consumer lending for Citigroup who now teaches at the business school at the University of Maryland. "So there were a lot of errors." In one case in Fort Lauderdale in July, for instance, Bank of America foreclosed on a man after a computer glitch and resold his home even though he had paid his mortgage in full.

Homeowners and their attorneys say the automated system especially hurts borrowers who may qualify for loan modifications through federal rescue programs.
Chandra Anand, 59, a telecommunications consultant from Germantown, called his lender in the fall of 2008, before he missed any payments, to warn the company that his wife's open-heart surgery might cause the family financial difficulty. He was told that in order to qualify for a loan modification he needed to miss payments.

So he did and applied for a modification. He never heard back from his lender until he got a foreclosure notice in January 2009. Every time he calls his lender to resolve his situation, an official tells him "to be patient, that it could take 60 more days to review things," Anand said. "It's now been a year and a half."

Andrea Bopp Stark, a lawyer with the Molleur Law Office in Biddeford, Maine, said that a number of her clients should be eligible for loan modifications through a Treasury Department program but that servicers "are in such a state of disarray that they often can't give homeowners basic answers about the state of their loan modification request." Then a few weeks or months later, the same servicers evict homeowners as if those applications were never filed. "Their whole bureaucratic procedure," Stark said, "is working against helping homeowners."

Big Mac Index: Euro 30% Overvalued, Swiss Franc 80%Economist
by Economist

A weak currency, despite its appeal to exporters and politicians, is no free lunch. But it can provide a cheap one. In China, for example, a McDonald’s Big Mac costs just 14.5 yuan on average in Beijing and Shenzhen, the equivalent of $2.18 at market exchange rates. In America, in contrast, the same burger averages $3.71.

That makes China’s yuan one of the most undervalued currencies in the Big Mac index, our gratifyingly simple guide to currency misalignments, updated this week (see chart). The index is based on the idea of purchasing-power parity, which says that a currency’s price should reflect the amount of goods and services it can buy. Since 14.5 yuan can buy as much burger as $3.71, a yuan should be worth $0.26 on the foreign-exchange market. In fact, it costs just $0.15, suggesting that it is undervalued by about 40%.

The tensions caused by such misalignments prompted Brazil’s finance minister, Guido Mantega, to complain last month that his country was a potential casualty of a "currency war". Perhaps it was something he ate. In Brazil a Big Mac costs the equivalent of $5.26, implying that the real is now overvalued by 42%. The index also suggests that the euro is overvalued by about 29%.

And the Swiss, who avoid most wars, are in the thick of this one. Their franc is the most expensive currency on our list. The Japanese are so far the only rich country to intervene directly in the markets to weaken their currency. But according to burgernomics, the yen is only 5% overvalued, not much of a casus belli.

If a currency war is in the offing, America’s congressmen seem increasingly determined to arm themselves. A bill passed by the House of Representatives last month would treat undervalued currencies as an illegal export subsidy and allow American firms to request countervailing tariffs. The size of those tariffs would reflect the scale of the undervaluation.

How does the bill propose to calculate this misalignment? It relies not on Big Macs, but on the less digestible methods favoured by the IMF. The fund uses three related approaches. First, it calculates the real exchange rate that would steadily bring a country’s current-account balance (equivalent to the trade balance plus a few other things) into line with a "norm" based on the country’s growth, income per person, demography and budget balance.

The fund’s second approach ignores current-account balances and instead calculates a direct statistical relationship between the real exchange rate and things like a country’s terms of trade (the price of its exports compared with its imports), its productivity and its foreign assets and liabilities. The strength of Brazil’s currency, for example, may partly reflect the high price of exports such as soyabeans.

Third, the fund also calculates the exchange rate that would stabilise the country’s foreign assets and liabilities at a reasonable level. If, for example, a country runs sizeable trade surpluses, resulting in a rapid build-up of foreign assets, it probably has an undervalued exchange rate.

The IMF has typically assessed its members’ policies one at a time. But the fund’s managing director, Dominique Strauss-Kahn, now proposes to assess its biggest members all at once to make sure their macroeconomic strategies do not work at cross-purposes. He is keen to identify the ways in which a country’s policies, including its exchange-rate policies, "spill over" to its neighbours.

Those spillovers depend on the size of the economy as much as the scale of any misalignments. But the biggest economies are also the hardest to bully. The fund’s last annual report on the Chinese economy, in July, included the government’s rebuttal of every criticism the fund offered. In a decorous compromise the report concluded that the yuan was "substantially" undervalued but refrained from quantifying the size of the problem.

Big revaluations of the kind required to satisfy the fund or equalise the price of burgers are unlikely. A recent study of the Big Mac index by Kenneth Clements, Yihui Lan and Shi Pei Seah of the University of Western Australia showed that misalignments are remarkably persistent. As a result, the raw index did a poor job of predicting exchange rates: undervalued currencies remain too cheap and overvalued currencies remain too pricey.

But since this bias is systematic, it can be identified and removed. Once that is done, the three economists show that a reconstituted index is good at predicting real exchange rates over horizons of a year or more. Since The Economist costs just $6.99 (a little less than two burgers) on the news-stand, the index provides decent value for money for would-be currency speculators, the authors conclude. The Big Mac index may itself be undervalued.

Is America On A Burning Platform?
by Jim Quinn - Burning Platform

David Walker, the former Comptroller of the United States from 1998 until 2008, has been warning politicians, the media, and the American public for over a decade that we are off course and headed for disaster. In August 2007, before the financial system meltdown of 2008, Mr. Walker declared:

The US government is on a "burning platform" of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon. There are striking similarities between America’s current situation and the factors that brought down Rome, including declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government. 

The fiscal imbalance meant the US was on a path toward an explosion of debt. With the looming retirement of baby boomers, spiraling healthcare costs, plummeting savings rates and increasing reliance on foreign lenders, we face unprecedented fiscal risks. Current US policy on education, energy, the environment, immigration and Iraq also was on an unsustainable path. Our very prosperity is placing greater demands on our physical infrastructure. Billions of dollars will be needed to modernize everything from highways and airports to water and sewage systems.

Three years have passed since Mr. Walker sounded the alarm and issued his dire warning. The National Debt in August 2007 was $8.9 trillion. Today it stands at $13.6 trillion, a 53% increase in just over 3 years. It took 205 years as a country to accumulate $4.7 trillion of debt. We’ve added $4.7 trillion in the last 38 months. It doesn’t appear that anyone in government heeded Mr. Walker’s warnings.

The perpetually optimistic pundits that occupy the positions of influence on CNBC and the other MSM networks try to paint a rosy picture of the American state of affairs day after day. They urge citizens to spend money they don’t have. They are sure that extending unemployment benefits to 99 weeks will improve the unemployment situation. They declare that Cash for Clunkers and the Home Buyer Tax Credit were successful government programs. They are sure that invading countries in the Middle East will make America safer. Nobel Prize winners in economics declare that the government should undertake another $8 to $10 trillion of money printing because the first $5 trillion wasn’t enough.

The Federal Reserve is pulling out all the stops in attempting to invigorate the American economy. The stock market is surging. Everything is surging. The optimists are crowing that all is well. Deficits don’t matter. We can borrow our way to prosperity. Cutting taxes will not add $4 trillion to the National Debt if not paid for with spending cuts. All is well. So, the question remains. Was David Walker wrong? Are we actually on a perfectly sturdy solid platform? Or, are we on the Deepwater Horizon as it burns and crumbles into the sea? Let’s examine both storylines and decide which is true.


  • The National Debt of $13.6 trillion is manageable because interest rates remain at historic low levels.
  • The addition of $1.6 trillion in debt per year is necessary because government must step in for the lack of spending in the private sector. This will jump start the economy. This is Keynesianism 101.
  • The debt to GDP ratio of 93% is not dangerous. Japan has a debt to GDP ratio of 200% and they are doing fine. This proves we have plenty of room to grow our debt.
  • The US dollar is the reserve currency for the entire world. We can systematically devalue the USD, which will reduce our foreign debt burden over time. The foreigners who leant us the money are on the hook and they have no way out.
  • A depreciating dollar will help our manufacturing industry by making American exports cheaper in foreign markets.
  • The $700 billion TARP plan saved the American financial system. The American taxpayer will end up making a profit in the long run from this program.
  • Cash for Clunkers was an astounding success. It increased demand for autos dramatically.
  • The Homebuyer Tax Credits resulted in a surge in home sales and stabilization of home prices.
  • The $800 billion Stimulus plan saved America from a 2nd Great Depression. Without it, we would have lost millions of jobs.
  • Consumer spending accounting for 70% of GDP is sustainable and desirable. If we can just get credit flowing again and encourage consumers that it is safe to use their credit cards to spend, the economy will come roaring back.
  • This is not the time to save. Nobel Prize winners in economics urge Americans to spend because of the Paradox of Thrift. It may be smart for one person to save more than they spend, but if everyone does it a consumer society will collapse. We can save later is the recommendation.
  • A QE2 of $8 to $10 trillion would surely increase the animal spirits of the dejected American people. The stock market would soar to 20,000 and everyone would feel rich. Spending would surge. All would be well again.
  • The Social Security Trust Fund is not broke. The money contributed by Americans over the decades is in a lockbox and the fund will be solvent for decades. A few tweaks and it will be solvent forever.
  • Medicare has been one of the best government programs ever conceived. It has sustained our senior citizens and delivered high quality care to all at a reasonable cost.
  • Baby Boomers are rational and realistic. The statistics that show they have not saved enough to sustain them in retirement is overblown. Social Security will suffice. If not, they’ll just work a little longer. No worries.
  • Obamacare will reduce healthcare costs, improve service, cover more people, and reduce the profits of insurance companies and drug companies.
  • We have the best educational system in the entire world. People from all over the world want to get into our best Universities. No Child Left Behind has been a huge success.
  • We are safer today than we were on September 11, 2001. We won the Iraq War and freed the Iraqis from the clutches of a madman. We are fighting them over there so we don’t have to fight them over here. The terrorists are in disarray and retreat.
  • The $1.1 trillion spent on the Middle East Wars, the trillions spent on the Dept of Homeland Security, and the expansion of government ability to protect its citizens through enhanced surveillance techniques and enhanced interrogation techniques on suspected terrorists has been beneficial to the safety and security of the American people.
  • A Defense budget of $900 billion per year is essential to our national security. We are surrounded by potential enemies.
  • It is a net positive for the US to allow illegal immigrants to stay in the country. Who else would we get to work in the fields picking lettuce and cutting our suburban lawns?
  • Gasoline is only $2.70 a gallon. We are awash in supplies of oil. Peak oil is a myth perpetuated by environmental nuts. We have centuries worth of oil in the Bakken Shale. If we would just open up Alaska to drilling, our troubles would be gone. Drill, Baby, Drill.
  • Our crumbling infrastructure is actually a fantastic opportunity. A 2nd Stimulus program to upgrade our infrastructure would create millions of high paying jobs.  


  • The National Debt is $13.6 trillion today. Interest expense for fiscal 2010 totaled $414 billion. Based upon the current spending path and assuming that the Bush tax cuts are extended, the National Debt will exceed $20 trillion by 2015. A reasonable expectation of 5% interest rates would result in annual interest expense of $1 trillion. The entire budgeted outlays of the US government are $3.5 trillion today.
  • Deficits exceeding $1 trillion per year are baked into the cake for the next decade. Non-Defense discretionary spending totals only $700 billion. Defense spending totals $900 billion. The remaining $1.9 trillion is on automatic pilot for Social Security, Medicare, Medicaid, and other entitlement programs. Politicians declaring they will freeze discretionary spending are treating you like fools. It will solve nothing.
  • Debt as a percentage of GDP will exceed 125% of GDP by 2015. Rogoff & Reinhart in their book This Time is Different point out the dangers once debt surpasses 90% of GDP: The relationship between government debt and real GDP growth is weak for debt/GDP ratios below 90% of GDP. Above the threshold of 90%, median growth rates fall by 1%, and average growth falls considerably more. The chances of bad things happening to a country increase dramatically after the 90% level is surpassed.
  • Japan began their 20 years of tears with a debt to GDP ratio of 52% and a National Savings rate of 15%. The Japanese people bought 90% of the debt that the government issued. Today, the debt to GDP ratio is 200% and the National Savings rate is 2%. The US entered this crisis with a debt to GDP ratio of 80% and a National Savings rate of 1%. We depend on foreigners to buy more than 50% of our new debt. We do not control our own destiny.
  • A depreciating US dollar is already creating inflation in many assets. Gold, silver, oil, and agricultural commodities are increasing in price faster than the stock market. The policy of the US government and Federal Reserve of devaluing the currency is being matched by similar efforts in countries across the globe. The result is a flood of liquidity creating bubbles which will pop. The American middle class will be squeezed harder as their wages stagnate, while their food, energy, and costs at Wal-Mart go higher.
  • TARP, the purchase of $1.5 trillion of Mortgage Backed Securities by the Federal Reserve, 0% interest rates, and accounting rule changes by the FASB have done nothing but paper over the fact that the biggest financial institutions in the US are insolvent. The assets on their books are worth 50% less than they are reporting. They are zombie banks. Their losses on residential real estate, commercial real estate and consumer credit continue to grow. The only beneficiaries of keeping zombie banks alive are the bankers who are receiving billions in compensation while the middle class dies a slow painful death.
  • Cash For Clunkers, Home Buyer Tax Credit and energy efficiency credits did nothing but shift demand forward and cost the American taxpayer $25 billion. The estimated cost to the tax payer per incremental home sold was $100,000. Auto sales and home sales plunged as soon as the credits ran out. Home prices are falling and used car prices have soared due to less supply, hurting the poor.
  • The borrowing of $800 billion from the Chinese to dole out to unions and political hacks all over the country has been a complete disaster. Unemployment has gone up by over 4 million since the stimulus was passed. Government spending has crowded out private spending. The economy hasn’t recovered because it was never allowed to bottom. Why look for a job when the government pays you for two years to watch Oprah in a house where you haven’t made a mortgage payment in 18 months?
  • Consumers’ spending money they don’t have, saving less than 5% of their disposable income, and putting away nothing for their retirement is unsustainable. The average credit card debt per household is about $15,700. In 1968, consumers’ total credit debt was $8 billion (in current dollars). Now the total exceeds $880 billion. Americans currently owe $917 billion on revolving credit lines and $80 billion of it is past due, according to the latest Federal Reserve statistics.
  • A scaling back of consumer spending to a sustainable 64% of GDP would reduce consumer spending by $500 billion per year. This would allow Americans to save and invest in the country. This is considered crazy talk in the Keynesian economic circles.
  • The anticipation of QE2 has already made the dollar drop 10% and gold, silver and oil jump 10%. Ben Bernanke and the Federal Reserve are conducting an experiment on the American people. What they are doing today has never been attempted in human history. It boils down to whether the authorities can cure a disease brought on by too much debt by doubling and tripling the dosage of debt. If this experiment fails, the dollar collapse and possible hyperinflation would lead to anarchy. Ben is confident it might work. Are you?
  • Social Security and Medicare have an unfunded liability exceeding $100 trillion. There is no money in a lockbox. Congress opened the lockbox and spent the money. Baby boomers are turning 50 years old at a rate of 10,000 per day. There is no possibility that the promises made to Americans by politicians can be honored. No politician of either party will tell the truth to the American public. A massive reduction in benefits or a massive increase in taxes would be required to deliver on this promise.
  • The 2,000 page Obamacare bill that no one in Congress read was sold to the American people as a cost saving, care enhancing package of goodies. The reality is that it will increase the national debt by hundreds of billions, ration care, drive more doctors into retirement, strangle small business with onerous regulations and enrich the insurance companies and drug companies. The unintended consequences will be devastating.
  • Total military expenditures for the entire world are $1.9 trillion annually. The US accounts for $900 billion of this expenditure. This is 7 times as much as the next largest spender – China.
  • The wars of choice in the Middle East since 2001 have cost unborn generations of Americans $1.1 trillion so far, with a final cost likely reaching $3 trillion. Just like Donald Rumsfeld estimated.  Over 5,700 Americans have lost their lives and another 39,000 have been wounded. The casualties in the countries that have been invaded number in the hundreds of thousands. Are we better off than we were on September 10, 2001?
  • Defense spending in 2000 was $359 billion or 3.6% of GDP. Today it is $900 billion or 6.1% of GDP. Every dime of these expenditures is borrowed. Are we safer today?
  • The Department of Energy was created in 1979 in order to create an energy policy that would reduce our dependence on foreign oil. The United States, which makes up 4% of the world’s population, consumes 25% of the world’s oil on a daily basis. In 1970 we imported 24% of our oil. Today we import 70% of our oil.
  • Over 50% of our oil imports come from countries whose populations hate the US. Mexico, which accounts for 9% of our current oil supply, will become a net importer by 2015.
  • The US has not built a new nuclear power plant or oil refinery since 1980.
  • The existing energy infrastructure is rusting away. 80% to 90% of the system must be rebuilt. The cost of rebuilding the infrastructure will be $50 – $100 trillion. We have no blueprints, few supplies and fewer trained engineers and construction workers.
  • Peak oil is a fact. World liquid oil production peaked at 86 million barrels per day in 2006. It has not reached that level since, even when prices soared to $145 per barrel. Demand will move relentlessly upward as China and India and the rest of the developing world march forward.
  • The US Military has concluded in a report put out a few months ago that by 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD. A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds.


David Walker was in a ship well ahead of the US Titanic crossing the Atlantic. He saw the dangerous icebergs floating in the ocean. He sent a message to the Captains (Bush, Obama) and Executive Officers (Greenspan, Bernanke, Paulson, Geithner) of the US Titianic that there was danger ahead. They should have reduced speed and doubled the lookouts. Instead they listened to the Managing Director of the cruise line (Wall Street) and increased speed. The US Titanic was unsinkable. When the inevitable collision with the iceberg occurred, those in command chose to disbelieve the possibility that the mighty ship could sink. The nearest ship was four hours away. If the US Titanic had stopped immediately after striking the iceberg, it would have remained afloat until the rescue ship arrived. Instead, the masters of the ship chose to keep going as the compartments below the surface continued to fill with water. Reputation and hubris drove them to take these actions.

Those in command knew that there was only room on the lifeboats for 1,100 people. There were 2,200 people onboard. It is interesting to note that 60% of the First Class (the ruling elite) passengers survived the sinking, while less than 25% of the Third Class (working middle class) and crew survived.

David Walker has presented a case for inter-generational sacrifice. Are today’s generations willing to keep robbing future generations of Americans by being fiscally irresponsible today? Every borrowed dollar spent today is a tax on future generations. Are we selfish enough to leave our children and grandchildren with an un-payable burden so that we can live well today? Don’t the Wall Street bankers and Washington politicians have children and grandchildren? It is immoral and despicable that American leaders and its citizens aren’t willing or able to make the tough choices needed to save the ship of state. Every great empire withered away due to the accumulation of bad decisions. Ask yourself whether this country has made the right choices in the last 30 years. Are we making the right choices today? If you are honest, the answer is NO. We’ve hit the iceberg. The ending is unavoidable.

QE Didn't Save Us From The Crisis -- Lying About Asset Prices Did
by John Hussman - Hussman Funds

One of the arguments for quantitative easing is the notion that the Fed's purchase of $1.5 trillion of Fannie Mae and Freddie Mac debt somehow "pulled the U.S. economy back from the abyss" of a Depression. But a closer examination of the past 19 months suggests that a much more specific mechanism - suspension of truthful disclosure - was actually the key element. Unfortunately, the benefits of this suspension are also impermanent, because the underlying solvency problems have been left unaddressed.

In early 2009, many major U.S. banks were faced with clear capital shortfalls that effectively rendered them insolvent - their liabilities exceeded their assets. Instead of restructuring this debt, or dealing with the problem in a sustainable way, the Financial Accounting Standards Board, responding to Congressional pressure, suspended "mark to market rules" and allowed major U.S. financials to use "substantial discretion" in valuing their assets. Since it was neither possible nor credible for banks to immediately write up those assets overnight, loans from the Troubled Asset Relief Program (TARP) were critical in bridging the immediate shortfall.

Over the following quarters, banks substantially wrote up their assets, and they issued a large volume of additional stock. The new issuance created a moderate but legitimate improvement in the financial position of these banks, but the asset writeups appear to be inconsistent with the growing volume of delinquent and unforeclosed homes, and the deteriorating debt-service performance of commercial mortgage-backed securities. Presently, the U.S. financial sector is essentially opacity masquerading as solvency.

As Meredith Whitney has observed, the "recovery" of the U.S. financial sector has been a two stage process - massive writeups of troubled assets on balance sheets, followed by large reductions in loan loss reserves on income statements. This activity has not only driven the improvement in operating earnings reported by banks, but has been one of the primary contributors to the recovery in the aggregate earnings of the S&P 500 Index. It is not a process that should be extrapolated.

As for Fed purchases of U.S. agency securities, there is little doubt that these actions allowed the U.S. housing market to function, albeit at a weak level, over the past 18 months. But this cannot be credited to anything inherent in quantitative easing. Rather, the Fed did something that neither the American public, nor the U.S. Congress were willing to do democratically: it essentially guaranteed Fannie Mae and Freddie Mac debt by taking massive amounts onto its own balance sheet. This was later followed up by more explicit 3-year guarantee by the Treasury (through the end of 2012).

Think of it this way. If Fannie and Freddie had already been explicitly protected by the full faith and credit of the U.S. government, their securities would have been indistinguishable from U.S. Treasury securities, and housing activity through Fannie and Freddie would have proceeded without any action by the Fed. It wasn't quantitative easing that helped the housing market. It was the Fed's willingness to put the U.S. public on the line for any losses sustained by these two insolvent financial institutions.

By purchasing $1.5 trillion in Fannie Mae and Freddie Mac obligations, the Federal Reserve has placed U.S. taxpayers in the position of absorbing whatever additional losses will come on two-thirds of the nation's mortgages. Prior to the Fed's actions, the bondholders of these institutions had no right to the full faith and credit of the U.S. government, but the Fed's massive purchases of this debt are now effectively irreversible without such a guarantee.

There appears to be no way for the Fed to extricate itself from this position without provoking massive economic dislocations, except through continued Treasury guarantees to make this agency debt whole so that private market participants will buy it back. By making that "monetary policy" decision, the Fed has actually forced an act of fiscal policy.
Despite the probable lack of measureable benefits, further QE poses significant risks. It has already triggered a steep decline in the exchange value of the U.S. dollar, and threatens a destabilization of international economic activity, a loss of confidence, and the creation of a "boom-bust" cycle threatening to choke off any economic recovery that does emerge.

Bernanke outlines case for easing
by Robin Harding - Financial TImes

The Federal Reserve has taken a large step towards a formal inflation target after chairman Ben Bernanke said that most of its officials think the rate of price rises should be "2 per cent or a bit below". Noting that current measures of core inflation are around 1 per cent, Mr Bernanke said that "inflation is running at rates that are too low" relative to what the Fed judges is most compatible with its mandate.

Mr Bernanke’s speech sends a clear signal that the Fed intends to anchor a new round of quantitative easing – the policy of expanding its balance sheet through asset purchases – on driving inflation up to its target level. This is the first time that Mr Bernanke has explicitly linked the long-term inflation forecasts of members of the Fed’s Open Market Committee – which have been published for some time – with the central bank’s inflation objective.

That makes "2 per cent or a bit below" tantamount to an inflation target. By making the figure explicit in this way Mr Bernanke risks conflict with Congress. Politicians such as Barney Frank, the Democratic chairman of the House Financial Services committee, have strongly opposed Fed moves towards a numerical inflation target in the past.

Mr Bernanke made clear that economic conditions justify easier monetary policy. Crucially, he said that rapid growth in 2011 is unlikely. "Although output growth should be somewhat stronger in 2011 than it has been recently, growth next year seems unlikely to be much above its longer-term trend. If so, then net job creation may not exceed by much the increase in the size of the labour force, implying that the unemployment rate will decline only slowly," Mr Bernanke said. 

He also said that only a small part of today’s 9.6 per cent unemployment rate in the US reflects workers who have the wrong skills or are in the wrong place to find jobs and most is due to a lack of demand. That is important because monetary policy may be able to cure a lack of demand but it cannot give workers new skills.  "Overall, my assessment is that the bulk of the increase in unemployment since the recession began is attributable to the sharp contraction in economic activity that occurred in the wake of the financial crisis and the continuing shortfall of aggregate demand since then, rather than to structural factors," Mr Bernanke said.

Mr Bernanke spelled out a view that the Fed should focus on inflation as a means to also achieve the other side of its mandate from Congress: maximum employment. "Whereas monetary policymakers clearly have the ability to determine the inflation rate in the long run, they have little or no control over the longer-run sustainable unemployment rate, which is primarily determined by demographic and structural factors, not by monetary policy," he said.

Mr Bernanke offered no further clues about how many assets the Fed will buy in a new round of quantitative easing. He focused on two policies – asset purchases or a promise to keep rates lower for longer – as tools that the Fed could use to push inflation back up but also noted their drawbacks.

The Fed's New Bubble (Masquerading as a Jobs Program)
by Robert Reich

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. It's already started. Stocks are up even though the rest of the economy is still down because of money is already so cheap. Bondholders (who can't get much of any return from their loans) are shifting their portfolios into stocks. Companies are buying back more shares of their own stock. And Wall Street is making more bets in the stock market with money it can borrow at almost zero percent interest.

When our elected representatives can't and won't come up with a real jobs program, the Fed feels pressed to come up with a fake one that blows another financial bubble. And we know what happens when financial bubbles get too big.

Bernanke Weighs Risks of New Action
by Sewell Chan - New York Times

The Federal Reserve chairman, Ben S. Bernanke, went further on Friday in outlining the risks the central bank was prepared to take by pumping more money into the flagging recovery. In formal remarks here, Mr. Bernanke explained a viewpoint that had taken shape gradually over several months. The Fed hoped to calm debate over its next move and prepare markets for the likelihood that it would pour money into the economy by resuming purchases of government, and possibly private, debt.

The new action would be aimed at lowering long-term interest rates and spurring growth, but it would also have effects far beyond American shores. It could contribute to the weakening of the dollar and complicate a festering currency dispute that threatens to disrupt global trade relations. For Americans, additional Fed activity is likely to mean that already low 30-year mortgage rates would fall even further. The moves would not help many savers, however, as yields on certificates of deposit and savings bonds would probably fall as well. But the Fed hopes that making credit even cheaper will encourage businesses and consumers to borrow and spend, and that could eventually bring relief to jobless workers.

Mr. Bernanke’s remarks, at a conference organized by the Federal Reserve Bank of Boston, confirmed Wall Street analysts’ expectations that the Federal Open Market Committee would approve new steps at its next meeting on Nov. 2-3. The question now is not whether the Fed will resume the debt-buying strategy known as quantitative easing, but how much it will buy, and how quickly, analysts said. Mr. Bernanke did not offer such details.

The stock markets, which have risen since the Fed took an incremental step in August toward additional monetary easing, largely shrugged off Mr. Bernanke’s remarks, though new stimulus efforts would probably raise equity prices, at least in the short run. Stocks ended mixed, with the Dow Jones industrial average slightly lower and the Standard & Poor’s 500-stock index up slightly.

In the past, the Fed sometimes changed rates when the market didn’t expect it. But in this difficult economy, it felt it had to telegraph its moves well in advance so as not to disturb markets or other major economies. The economic outlook offered by Mr. Bernanke was sobering. He said that the rate of growth was "less vigorous than we would like," and that the unemployment rate was likely to "decline only slowly" next year, even as the recovery gains steam.

Mr. Bernanke centered his analysis on the Fed’s "dual mandate" to foster maximum employment and price stability. He said that inflation was "too low" relative to the desired rate of "about 2 percent or a bit below," and that unemployment was "clearly too high" relative to Fed officials’ long-run forecast of 5 to 5.25 percent. "Given the committee’s objectives, there would appear — all else being equal — to be a case for further action," Mr. Bernanke said.

Mr. Bernanke noted that one key measure of inflation — the price index for personal consumption expenditures, which excludes food and energy prices — had fallen to about 1.1 percent over the first eight months of this year, from about 2.5 percent in the early stages of the recession. Weighing in on a debate that has preoccupied Fed officials, Mr. Bernanke planted himself on the side of those who view the high unemployment rate — 9.6 percent — as an outcome of the sharp contraction in economic demand that followed the financial crisis, rather than of structural factors like a mismatch between workers’ qualifications and the skills required by employers.

But Mr. Bernanke acknowledged, with greater candor than Fed officials usually have, the tension between the two parts of the Fed’s mandate. "Whereas monetary policy makers clearly have the ability to determine the inflation rate in the long run, they have little or no control over the longer-run sustainable unemployment rate, which is primarily determined by demographic and structural factors, not by monetary policy," he said.

In interviews, economists at the conference here offered mixed reactions. "The Fed is trying to achieve too much," said Mickey D. Levy, chief economist at Bank of America. "They want to stimulate demand, but there are a lot of nonmonetary factors that are inhibiting the economy, including distressed mortgages and foreclosures, the need for households to save, and a whole array of factors deterring businesses from hiring."

John B. Taylor, a Stanford economist, disagreed with Mr. Bernanke’s conclusions. "From my perspective, the cost-benefit analysis would suggest that it wouldn’t be a good idea to do a big, massive quantitative easing because the gains are quite small in terms of the impact on interest rates," he said. But Laurence H. Meyer, a former Fed governor, defended Mr. Bernanke’s stance.

"If the economy has a negative shock, or continues to grow as slowly as it has, it’s going to be sliding toward deflation," he said. "The Fed can’t sit on its hands," he added, and should pursue additional action "as long as it has an effect — even if it’s small." Dean Maki, chief United States economist at Barclays Capital, said more Fed action "should be positive for economic growth, though the amount is uncertain."

The Fed lowered short-term rates to nearly zero in December 2008 and then pursued its first round of quantitative easing beginning in 2009. By April this year, it had bought $1.7 trillion in mortgage-related debt and Treasury securities to put downward pressure on long-term rates. As recently as the spring, the Fed was considering when and how it would begin to raise interest rates. But as the recovery stumbled, the Fed reversed course, and by late summer it was debating how best to prop up the recovery. Mr. Bernanke cautioned that "unconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used."

He admitted that the debt-buying strategy was largely untested. "We have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public," he said. And he acknowledged a fear that new asset purchases might "reduce public confidence" in the Fed’s ability to eventually make a smooth return to normal monetary policy and lead to "an undesired increase in inflation expectations." But he said he was confident that the Fed could tighten policy when the time came.

Along with more quantitative easing, the Fed could communicate that it intended to keep short-term interest rates low for even longer than markets expected. That could help lower longer-term rates, as they partly reflect expectations of future short-term rates. But Mr. Bernanke appeared to play down that option, saying it would be difficult to convey that intention "with sufficient precision and conditionality."

Regional Fed Presidents Back More Policy Action Against Deflation Threat
by Joshua Zumbrun - Bloomberg

Two regional Federal Reserve presidents said the central bank should consider more policy action to stimulate the economy while seeking to avert a debilitating, broad-based decline in prices. Chicago Fed President Charles Evans, speaking at a Boston Fed conference yesterday, advocated targeting a path for the price level as a way to stop the inflation rate from falling. He said the U.S. economy is in a liquidity trap and more accommodation is not a "close call." Boston’s Eric Rosengren said "insuring against the risk of deflation may be much cheaper than" trying to eradicate it after it takes hold.

Fed Chairman Ben S. Bernanke and the Federal Open Market Committee are considering strategies, before their Nov. 2-3 policy meeting, to raise inflation expectations and purchase additional assets to help reduce unemployment persisting at more than 9 percent. Bernanke said in a speech opening the conference that there appears to be a "case for further action."

Evans said further action was needed because the U.S. is caught in a "bona fide liquidity trap" where additions to the money supply fail to stimulate the economy. "This belief is not a new development for me; instead it is a dawning realization," Evans said to the Boston Fed’s 55th Economic Conference.
Evans’ comments are among the strongest of any Fed official in favor of additional easing steps. With projections for unemployment to be at 8 percent and for inflation excluding food and energy to be at 1 percent by the end of 2012, "the Fed’s dual mandate misses are too large to shrug off," Evans said.

Price Path
He gave his support to a target for the path of the price level over a "reasonable period of time" that is communicated "regularly and often" to the public. Such a policy could complement large-scale asset purchases and be a change to the FOMC’s statement to include a pledge to keep rates near zero for longer than "an extended period."

Targeting a path for the price level would help the Fed push inflation higher "for a time," Evans said. The central bank would need to state the terms for exiting the policy, he said. "I’ll admit that my views on this are evolving," Evans said in response to audience questions at the conference. "The central banks of the world, including ours, have been on an inflation targeting regime and moving to a brand new regime like that is quite difficult to explain" and poses "the danger of undermining credibility," said Alan Blinder, a former Fed Vice Chairman and now an economist at Princeton University.

Damping Demand
Some Fed officials are concerned that expectations of lower inflation will become self-fulfilling, damping demand by increasing borrowing costs in real terms, minutes of the September meeting said. By encouraging Americans to believe prices will start rising at a faster pace, the Fed would reduce inflation-adjusted interest rates and stimulate the economy. Japan’s battle with deflation shows policy makers should take action to stimulate growth before price levels drop, Rosengren said.

The Bank of Japan pledged last week to keep its benchmark interest rate at "virtually zero" until deflation has ended, after first introducing the rate policy in 1999. Japan also created a fund to buy government debt and other assets. "The fact that Japan is still battling deflation highlights how pernicious deflation can be, and how difficult it is to counteract once it has been firmly established," Rosengren said.

Several Options
In the minutes, the Fed gave several options for raising short-term price expectations, including providing more information on the inflation rate policy makers consider consistent with their long-term goals and targeting a path for the price level. For the first time, the Fed said it could also target a path for nominal gross domestic product, which isn’t adjusted for inflation.

Treasuries fell on Oct. 15, driving 30-year yields to a two-month high, and the Dollar Index rebounded from its 2010 low amid confidence Bernanke will succeed in stoking inflation. U.S. stocks rose as technology shares rallied, overshadowing losses in banks and General Electric Co. Fed presidents rotate voting on monetary policy. Evans doesn’t vote on the rate-setting FOMC this year. He votes every other year on the FOMC, as does Cleveland Fed President Sandra Pianalto. Rosengren votes this year.

US Government Reports $1.3 Trillion Budget Deficit
by artin Crutsinger And Andrew Taylor - AP

The Obama administration said Friday the federal deficit hit a near-record $1.3 trillion for the just-completed budget year. That means the government had to borrow 37 cents out of every dollar it spent as tax revenues continued to lag while spending on food stamps and unemployment benefits went up as joblessness neared double-digit levels in a struggling economy. While expected, the eye-popping deficit numbers provide Republican critics of President Barack Obama's fiscal stewardship with fresh ammunition less than three weeks ahead of the midterm congressional elections. The deficit was $122 billion less than last year, a modest improvement.

Voter anger over deficits and spending are a big problem for Democrats this election year. Republicans are slamming Democrats — who face big losses in November — for votes on Obama's $814 billion economic stimulus last year and on former President George W. Bush's $700 billion bailout of Wall Street. Democrats say the recession would have been worse if the government hadn't stepped in with those programs to prop up the economy. They also note that most of the bailout, which began during the previous administration and was supported by many Republicans in Congress, has been repaid.

Outside of the bailout, the federal budget went up by 9 percent in the 2010 budget year to $3.5 trillion, the Congressional Budget Office reported last week. Food stamp payments rose 27 percent as record numbers of people took advantage of the programs, while unemployment benefits rose 34 percent as Congress extended benefits for the long-term jobless. "The FY 2010 deficit remained elevated as a result of the severe economic recession, high unemployment, and the financial crisis inherited by the current administration," Treasury Secretary Timothy Geithner and acting White House budget director Jeffrey Zients said in a statement announcing the results.

Rising deficits will present headaches for policymakers regardless of which party controls Congress after November. The administration is projecting that the deficit for the 2011 budget year, which began on Oct. 1, will climb to $1.4 trillion. Over the next decade, it will total $8.47 trillion. Deficits of that size will constrain the administration's agenda over the next two years and will certainly be an issue in the 2012 presidential race.

"Since the Democrat majority has taken control of the nation's checkbook, deficits have risen to staggering levels and will average $1 trillion annually for the next decade under the president's policies," said Sen. Judd Gregg, R-N.H. "These abrupt and shocking changes in our fiscal situation cannot be dismissed as 'inherited' problems when the tally of the majority's spending spree has climbed into the trillions."

Government revenues rose by $57.4 billion in 2010 compared to 2009, but more than two-thirds of that increase reflected higher payments from the Federal Reserve to the Treasury on all the investments the central bank has made to support the economy and the financial system during the recession. Income tax revenue fell slightly as unemployment stays near 10 percent nationwide, though corporate tax receipts were up almost 40 percent as the economy slowly pulls out of the worst recession since the Great Depression.

Leading officials with the National Association for Business Economics forecast this week that the 2011 deficit will total $1.2 trillion, only slightly better than the administration's estimate. They cited excessive federal debt as their single greatest concern, even more so than high unemployment. Obama's bipartisan deficit commission is supposed to report a deficit-cutting plan on Dec. 1, but panel members are unsure at best whether they'll be able to agree on anything approaching Obama's goal of cutting the deficit to about 3 percent of the size of gross domestic product (GDP).

The recommendations of the commission need the backing of 14 of its 18 members to trigger a congressional vote. Building that level of consensus will be difficult. Republicans are strongly opposed to a plan that includes tax increases to chip away at the deficit. Democrats are less inclined to move a package that relies solely on spending cuts. Even if Congress doesn't vote on a deficit-cutting proposal, it faces the challenge of reaching a consensus on what to do with the Bush-era tax cuts that are set to expire on Dec. 31.

The Republicans are fighting to renew all of the tax cuts. Obama and the Democrats want to extend the tax cuts for every family making less than $250,000, but let them expire for the wealthiest households. The difference between the two parties amounts to $700 billion that would be added to projected deficits over the next decade if the tax cuts for the wealthy were extended along with the other tax cuts.

So far, the huge deficits have not been a threat to the country. That's because interest rates have been so low coming out of the recession and the United States has been seen as a safe haven for foreign investors willing to keep buying U.S. Treasury bonds. But the situation could change once the economy gains more momentum, analysts warn. "If we get to 2013 and policymakers don't look like they have a credible plan to deal with the deficit, then interest rates are likely to rise significantly and that will jeopardize the recovery we have under way at that time," said Mark Zandi, chief economist at Moody's Analytics.

$1.1 Trillion of US Corporate Loans to Come Due Over Three Years, Fitch Says
by Lisa Abramowicz - Bloomberg

U.S. companies have almost $1.1 trillion of leveraged loans coming due from 2012 through 2014 after pushing out debt maturities past next year, according to a Fitch Ratings report. Borrowers have paid back or extended about $175 billion of loans during the first three quarters of the year, creating a higher volume of debt that will need to be addressed several years from now, according to the report published yesterday.

"There is still a significant amount of work to be done in reducing maturities in the 2012-2104 time frame," the report’s authors wrote. "Near-term pressure has been eased by a slowly improving U.S. economy and a strong rebound in the credit markets after the sovereign debt scare in May and June." Over the next five years, an estimated $255 billion of debt will have the maturity date extended in exchange for higher fees and $180 billion will be retired through high-yield bond issues, the New York ratings service said. That will leave a supply of leveraged loans that may exceed demand by $375 billion to $425 billion, Fitch predicted.

Debt Woes May Damp $3 Trillion Corporate Refinancing in Europe
by John Glover - Bloomberg

Government debt concerns may hinder efforts by companies and banks in Europe to refinance more than $3 trillion of bonds through 2013, Standard & Poor’s said. Corporate borrowers may also be crowded out by sovereign fundraising in the region, while slowing economic growth may persuade banks to hoard cash rather than lend it on, S&P analysts led by Diane Vazza in New York wrote in a report published today. There’s also the risk that rising interest rates will hurt financial issuers, which account for 71 percent of bonds due in the next three years, according to S&P.

Investors’ collapsing confidence in the euro area’s ability to contain soaring budget deficits forced governments to cut spending and triggered a European Union-led bailout package for the region’s most indebted economies. "The worsening state of public finances in some European countries -- particularly in the euro zone periphery -- remains an important source of concern," the analysts wrote in the report titled ‘Public Finance Woes Could Hamper Europe’s Ability to Meet Upcoming Refunding Needs.’ "Further deterioration in sovereign creditworthiness likely will have negative implications for financial and non-financial entities’ borrowing costs and access to markets."

Portuguese, Irish, Greek and Spanish companies have $395 billion of debt maturing through 2013, and about 86 percent of the bonds are investment grade, according to S&P. About 86 percent of the total is from financial issuers, S&P said. Spain-based borrowers have about $185 billion coming due, followed by companies in Ireland with $140 billion and those in Portugal with $48 billion. Issuers in Greece have to refinance $22 billion in the next three years, according to the report.

About a quarter of the financial-company debt coming due is in the form of covered bonds, which are easier to refinance, according to S&P. That’s because the securities are backed by mortgages or loans to public authorities and stay on issuers’ balance sheets, giving investors another layer of protection.

Lower- and Middle-Income Spending Lowest Since January '08
by Gallup

Lower- and middle-income Americans' self-reported average daily spending in stores, restaurants, gas stations, and online averaged $48 per day during September -- down $6 from August and $16 from July. Consumer discretionary spending by these Americans making less than $90,000 a year is now at its lowest level since Gallup began daily tracking in January 2008, as the recession was just getting underway.

Lower- and Middle-Income Consumer Spending, January 2008-September 2010 Trend

Upper-Income Spending Remains Essentially Flat

Upper-income Americans reported spending an average of $118 per day in September -- up $9 from August but virtually the same as they spent in June and July. Spending among this group making $90,000 or more annually is not much different from the $114 they spent in September 2009. Only once -- in May -- has 2010 upper-income spending exceeded the 2009 "new normal" upper-income spending range of $107 to $121 per day.

Upper-Income Consumer Spending, January 2008-September 2010 Trend

Overall Spending Ties Previous Lows

Overall, Americans' spending averaged $59 per day during September -- down from $63 in August and $68 in July, and lower than the $66 of September 2009. Americans' spending has generally been running slightly higher in 2010 than it did in 2009 -- though substantially below the recessionary spending levels of 2008. September spending matches the previous lows of February 2010 and March 2009.

U.S. Consumer Spending, January 2008-September 2010 Trend

Spending Trends Could Mean Double-Dip

The decline in lower- and middle-income Americans' spending to new lows over the past two months may be a precursor of another significant drop in the overall economy. Gallup's self-reported spending data tend to measure consumers' discretionary or marginal expenditures, making these measures highly sensitive to shifting consumer spending patterns.

Gallup modeling suggests that lower- and middle-income spending is significantly more sensitive to job market conditions than is upper-income spending. In this regard, the September decline in lower- and middle-income spending may reflect the sharp increase in unemployment over the same period and continued high underemployment levels. Further, the lagged effects of continuing high and increasing unemployment are probably yet to be fully felt.

On the other hand, upper-income spending tends to be more responsive to the "wealth effects" associated with higher stock and commodities prices. Although upper-income spending hasn't been increasing in response to the best September on Wall Street in 71 years -- at least to this point -- upper-income Americans have maintained their spending, while that of other Americans has declined.

Given this context, the recent Federal Reserve discussions about another round of quantitative easing seem to make a lot of sense. The Fed needs to do everything it can to keep the U.S. economy from experiencing another decline in economic activity -- a so-called double-dip. While it is not clear that this Fed effort will help the overall economy in the immediate term, anticipation of it has Wall Street surging and the dollar plummeting. In theory, the resulting wealth gains could have the beneficial effect of increasing upper-income spending.

Regardless, Gallup's September spending and jobs data suggest that the possibility of a double-dip is no longer negligible. Congress needs to show the same sense of urgency as the Fed concerning what it can do for jobs and the economy when it convenes in its planned lame-duck session after the midterm elections.

US Retail Sales: The Stunning Impact of the Financial Crisis
by Doug Short

The September 2010 Advance Monthly Sales for Retail Trade and Food Services was released this past week. The seasonally adjusted tally of $367.7 billion is an increase of 0.6 percent (±0.5%) from the previous month, and 7.3 percent (±0.7%) above September 2009.

The chart below shows the complete data series from 1992, when the US Census Bureau began tracking the data. I've highlighted recessions and the approximate range of two major economic episodes that have impacted consumer attitudes. The Tech Crash that began in the spring of 2000 had little impact on consumption. The Financial Crisis of 2008 has had a major impact.

Click to View

Click for a larger image

Here is the same chart with two trendlines added. These are linear regressions computed with the Excel Growth function.

Click to View

Click for a larger image

The green trendline is a regression through the entire data series. The latest sales figure is 7.9% below the green line end point.

The blue line is a regression through the end of 2007 and extrapolated to the present. Thus, the blue line excludes the impact of the Financial Crisis. The latest sales figure is 17.7% below the blue line end point.

We normally evaluate monthly data on a month-over-month or year-over-year basis. The September 0.6% increase over August and 7.3% over September 2009 look encouraging. But a snapshot of the larger historical context illustrates the devastating impact of the Financial Crisis on the US economy.

Boomerang kids: 85% of college grads move home
by Jessica Dickler, CNN

Getting a degree used to be a stepping stone to limitless career opportunities. Now it's more of a hiatus from living under your parents' roof. Stubbornly high unemployment -- nearly 15% for those ages 20-24 -- has made finding a job nearly impossible. And without a job, there's nowhere for these young adults to go but back to their old bedrooms, curfews and chore charts. Meet the boomerangers.

"This recession has hit young adults particularly hard," according to Rich Morin, senior editor at the Pew Research Center in DC. So hard that a whopping 85% of college seniors planned to move back home with their parents after graduation last May, according to a poll by Twentysomething Inc., a marketing and research firm based in Philadelphia. That rate has steadily risen from 67% in 2006. "It's peaking at levels we have not seen before," said David Morrison, managing director and founder of Twentysomething.

Mallory Jaroski, 22 graduated from Penn State University in May but has been living at home with her mother while looking for a job in press relations. "It's not bad living with my mom, but I feel like a little kid. I have a little bed, a little room," she says. Jaroski thought she would stay for summer. But like many others, she's found her stay becoming significantly longer. "There's almost an expectation that kids will move back home, there is no stigma attached," Morrison said. "The thought now is to move home for 6-12 months but in reality those young adults will be home for a year and a half or longer. Even if they have jobs, they are living at home."

Jessie Sawyer, 23, graduated in May of last year and moved back home with her parents while she looked for a job. She has since been hired as a writer for The Register Citizen, a daily newspaper in Connecticut, but has yet to move out of her parents' home. "I'm trying to save up to move out," she said. But "the new job is 10 minutes from where I live so it's convenient." Even though living with her parents comes with some rules and restrictions, Sawyer says that's a small price to pay for the comfort and convenience of home. "My parents have been really supportive so if they ask me to do something like wash the dishes I feel like it's reasonable."

The job picture for recent grads may be brightening, however. Employers expect to hire 13.5% more new grads from the Class of 2011 than they hired from the Class of 2010, according to a new study conducted by the National Association of Colleges and Employers. And that's good news beyond just employment. These boomerang years are "a life interrupted," Morrison said. "Time on the job is important and you won't get that time back."  

How Countrywide Covered the Cracks
by Gretchen Morgenson - New York Times

On June 27, 2006, Countrywide Financial, the nation’s largest mortgage lender, was about to close its books on a record-breaking six-month run. The housing market was on fire and Countrywide’s earnings were soaring. Despite all the euphoria inside the company, some executives noticed that Angelo R. Mozilo, the company’s brash and imperious chief executive, seemed subdued.

At a town hall meeting that day with 110 of the company’s highest-ranking executives in Calabasas, Calif., Mr. Mozilo sat alone on a stage, fielding questions and offering rosy predictions about his company’s prospects. But then he struck a sober note in response to a question from one of his colleagues. The questioner wanted to know what, if anything, worried Mr. Mozilo, according to a participant. "I wake up every day frightened that something is going to happen to Countrywide," Mr. Mozilo said.

A year and a half later, that day arrived. In January 2008, Countrywide, the company he had built from a two-man mortgage operation into a lending behemoth, had to sell itself to Bank of America at a bargain price because it was being smothered by losses tied to a mountain of sketchy loans. Yet almost until the moment Countrywide was taken over, Mr. Mozilo was publicly buoyant about its ability to ride out the mortgage crisis. Privately, however, he occasionally offered a gloomier assessment of Countrywide’s prospects and practices, according to e-mail and interviews.

What Mr. Mozilo, now 71, knew about Countrywide’s problems, and precisely when he knew it, was what eventually led the Securities and Exchange Commission to file civil securities fraud charges against him last year. And on Friday, in the Los Angeles courtroom of John F. Walter, a federal District Court judge, representatives for Mr. Mozilo and for two of his top lieutenants — David Sambol, Countrywide’s former president, and Eric Sieracki, the company’s former chief financial officer — settled those charges.

As part of the settlement, Mr. Mozilo and his co-defendants didn’t admit to any wrongdoing. But Mr. Mozilo agreed to pay $67.5 million in a penalty and reparations to investors and is permanently banned from serving as an officer or a director of a public company. Mr. Sambol is paying $5.52 million in a penalty and reparations and agreed to a three-year ban from serving as an officer or director of a public company. Mr. Sieracki agreed to pay a $130,000 penalty.

The settlement is a signal event in the credit crisis and its aftermath, including the foreclosure debacle that is now rattling the mortgage market and upending the lives of average homeowners. Although Goldman Sachs settled securities fraud charges earlier this year, Mr. Mozilo is the first prominent chief executive to be held personally accountable for questionable business practices that contributed to the housing bubble, the dizzying financial machinations that surrounded it, and a ruinous lending spree that ultimately threatened to undermine the nation’s economy.

Mr. Mozilo and his two former colleagues were accused of misrepresenting the company’s declining lending standards during 2006 and 2007 and portraying themselves publicly as underwriters of high-quality mortgages even as they learned that the company’s loans were becoming increasingly risky. The government also contended that Mr. Mozilo and Mr. Sambol improperly profited on inside information about the company’s problematic loans when they sold Countrywide shares. From May 2005 to the end of 2007, Mr. Mozilo generated $260 million from his stock sales, while Mr. Sambol’s sales produced $40 million, the government says.

Lawyers for Mr. Mozilo declined to comment. Mr. Sambol’s lawyer said his client had "put the matter behind him for the benefit of his family and loved ones." Mr. Sieracki’s lawyer noted that the S.E.C. had decided not to pursue fraud charges against his client and that his client had not been barred from serving at a public company. Bank of America is paying Mr. Mozilo’s legal bills. Countrywide is paying $5 million toward Mr. Sambol’s repayment to investors and $20 million of Mr. Mozilo’s reparations.

The S.E.C.’s legal team, led by John M. McCoy III, associate regional director of the enforcement division, said the settlement amounted to a hard-won victory. In a statement on Friday, Mr. McCoy said: "This settlement will provide affected shareholders significant financial relief, and reinforces the message that corporate officers have a personal responsibility to provide investors with an accurate and complete picture of known risks and uncertainties facing a company."

Battered by widespread criticism that it failed to corral scam artists like Bernard L. Madoff and to effectively police Wall Street as a whole during the years leading up to the credit crisis, the S.E.C. may now regain some stature as a successful litigator and investor advocate from its settlement with Mr. Mozilo. "As is the case with most settlements, this is a compromise where nobody comes out a complete winner," said Lewis D. Lowenfels, an authority on securities law at Tolins & Lowenfels.

"The S.E.C. gets a substantial monetary settlement and a bar with respect to Mozilo serving as an officer or director. On Mozilo’s side, he is probably satisfied to have this behind him. He suffers a considerable stain on his reputation, has to pay a substantial amount of money but retains significant wealth and at the age of 71 may find the possibility of being an officer or director of another public company less enticing."

Countrywide Financial began operations in 1969, when Mr. Mozilo and his mentor, David Loeb, refugees from an established mortgage lender, decided to start their own loan originator. The company grew slowly at first, but by 2004, Countrywide was the nation’s largest home lender, generating annual revenue of $8.6 billion. Mr. Mozilo ran the company alone after Mr. Loeb retired in 2000. (Mr. Loeb died in 2003.) An up-by-the-bootstraps entrepreneur — his father was a butcher in the Bronx — Mr. Mozilo was obsessed with wresting market share away from his buttoned-down rivals in the staid world of banking.

"I run into these guys on Wall Street all the time who think they’re something special because they went to Ivy League schools," he told The New York Times in 2005. "We’re always underestimated. And we still are. I am. I must say, it bothered me when I was younger — their snobbery and their looking down on us."

In an industry that favored low-key behavior and conservative dress, Mr. Mozilo stood apart. He offered blunt opinions about banking and was open about his corporate aspirations. To complement his ever-present tan, he wore flashy clothes and drove expensive cars like Rolls-Royces that were often painted in a shade of gold. Still, he managed his business for most of its history with a tight focus on the bottom line and on vigilant lending practices.

For years, Countrywide specialized in plain-vanilla, fixed-rate loans. As recently as 2003, such mortgages accounted for 95 percent of the company’s loans, according to regulatory filings. Countrywide was the biggest supplier of mortgage loans to Fannie Mae, the federally backed mortgage finance giant that was also hobbled in the credit crisis.

In 2004, Countrywide’s sober-minded lending style changed significantly. It began aggressively offering loans to first-time home buyers and to borrowers with modest incomes. These mortgages were known in the industry as "affordability products," but that ho-hum designation belied the potential financial dangers embedded in the loans if borrowers — particularly low-income borrowers — wound up unable to pay their debts.

Even so, Countrywide embraced such loans with gusto. For example, adjustable-rate mortgages — those with a low introductory rate that could ratchet up in later years — accounted for about 18 percent of Countrywide’s business in 2003. But a year later, they made up 49 percent of its loans.

Subprime loans also grew in 2004, to 11 percent of its originations, up from 4.6 percent in 2003. These loans often required no down payments and very little documentation of borrowers’ incomes, assets or employment; they generated immense profits to Countrywide but, again, presented a bevy of risks. And even when the going got rough for some homeowners, Countrywide didn’t hesitate to take a hard line with borrowers who fell behind.

A born salesman, Mr. Mozilo promoted his company’s prospects wherever he went. In front of a crowd of investors or analysts, he would predict what Countrywide would generate in profits five years down the road and how many of its competitors the company would vanquish. No matter what, Countrywide would survive, he vowed.

"Over the entire history of this country, housing prices have never gone down nationally. They have gone down in some local areas, but never nationally," he told an interviewer for CNBC in early 2005. "Secondly, any homeownership over the 10 years has proved to be the best investment that you could ever make. Over any 10-year period, housing prices go up."

Later that year, he was equally optimistic when he again visited CNBC’s studios. "From our perspective — and we’ve been doing this for 38 years — we’re still in a terrific mortgage market," he said. "So the road ahead to us appears to be extremely vibrant, very sound."

Even as the wheels were coming off of the Countrywide cart in 2007, Mr. Mozilo’s upbeat public pronouncements continued. "I think you have to keep things in perspective. You know, there’s an old saying that you don’t know who’s swimming naked until the tide goes out, and obviously the tide’s gone out," he told CNBC in March 2007, when a number of once-successful subprime lenders were plunging toward bankruptcy. "I think it’s a mistake to apply what’s happening to them to the more diversified financial services companies such as Countrywide."

When Bank of America invested $2 billion in Countrywide in August 2007 — a move that caused many analysts to question Countrywide’s financial wherewithal and its ability to remain independent — Mr. Mozilo again struck an optimistic note. "Countrywide’s future’s going to be great. You know, it’s always been great," he told CNBC at the time. "So I think, down the line, this is going to be a better company, a more profitable company and a company that’s going to be a great investment for shareholders as we continue down the line. Because the market ultimately will come to us. This is America. People want to own homes."

Privately, however, Mr. Mozilo had long been worried about some of the loans his company favored, as indicated by e-mails he sent to his deputies. And this gulf between Mr. Mozilo’s private views and his public proclamations went to the heart of the S.E.C.’s case against him. Beginning in 2005, for example, he fretted about lending practices at Countrywide, e-mail messages show. One target of his ire was the "pay-option adjustable-rate mortgage," a loan that let borrowers pay a fraction of the interest owed and none of the principal during an introductory period. These loans put homes within many borrowers’ financial grasp — at least initially.

When a borrower made only modest payments, the shortfall was added to the principal balance on the loan, meaning that the mortgage would grow in size. Given this arithmetic, borrowers could wind up owing more than their homes were worth. In 2004, pay-option A.R.M.’s accounted for 6 percent of Countrywide’s originations. Two years later, they accounted for 21 percent of its loans. The loans were moneymakers for Countrywide; internal company documents show that the company made gross profit margins of more than 4 percent on such loans, double the 2 percent generated on standard loans backed by the Federal Housing Administration.

Countrywide pushed the lucrative loans hard. A sales document called "Pay Option A.R.M.’s Made Simple" asked rhetorically what kinds of customers would be interested in these loans. "Anyone who wants the lowest possible payment!" was one of the answers.

But these loans unnerved Mr. Mozilo, as his e-mails indicate. In April 2006, for example, he learned that almost three-quarters of the company’s pay-option customers had chosen to make the minimum payment the prior February, up from 60 percent the previous August, according to the S.E.C.’s complaint. In an e-mail to Mr. Sambol, Mr. Mozilo wrote: "Since over 70 percent have opted to make the lower payment it appears that it is just a matter of time that we will be faced with much higher resets and therefore much higher delinquencies."

Two months later, and just one day after he talked up his company’s pay-option A.R.M.’s to investors at a Wall Street conference, Mr. Mozilo wrote an e-mail to Mr. Sambol predicting trouble ahead for many borrowers in these mortgages. They "are going to experience a payment shock which is going to be difficult if not impossible for them to manage," he said.

And in September 2006, Mr. Mozilo wrote an e-mail saying the company had no way to assess the risks of holding pay-option A.R.M.’s on its balance sheet. "The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales," he wrote.

Another Countrywide product that concerned Mr. Mozilo was its so-called 80/20 loan, named for the fact that the combination allowed a borrower to receive money covering 100 percent of a home’s purchase price. Mr. Mozilo had become worried about these loans in the first quarter of 2006, when HSBC Bank, a buyer of Countrywide’s 80-20 loans, began forcing the lender to repurchase some that HSBC contended were defective. "In all my years in the business, I have never seen a more toxic product," he wrote to Mr. Sambol in an April 17, 2006, e-mail cited by the S.E.C. "With real estate values coming down ... the product will become increasingly worse."

Such e-mails suggest that by mid-2006, Mr. Mozilo had recognized how reckless some of his company’s lending had become. And just three months later, according to the S.E.C. complaint, he met with his financial adviser to increase the amount of Countrywide shares he could cash in under a planned executive stock-sale program.

Mr. Mozilo had always been a big seller, and rarely a buyer, of the Countrywide shares he was granted as a part of his compensation. The timing of some of his sales, however, has drawn the scrutiny of the S.E.C. For example, on Sept. 25, a day before writing the e-mail about how Countrywide was "flying blind" on pay-option A.R.M.’s, he set up a new planned stock-selling program for himself, known as a 10b-5 plan, the S.E.C. said.

Such plans allow executives to sell stock regularly, without running afoul of regulations governing the sale of stock around significant corporate announcements. Mr. Mozilo also set up plans enabling a family foundation and a trust he oversaw to sell shares. Altogether, the S.E.C. said, from November 2006 to October 2007, he sold more than five million Countrywide shares under his personal plan. His gains were $140 million, the S.E.C. said.

Mr. Mozilo has long maintained that his stock sales were not unusual, and in the past Countrywide has said that it and Mr. Mozilo were battered by economic forces beyond their control. "No one, including Mr. Mozilo, could have foreseen the unprecedented combination of events that led to the problems borrowers, lenders and investors face with many of these loans today," a Countrywide spokesman told The Times in 2007. "Countrywide is proud of its role in making homeownership affordable to lower-income households."

But lawyers and analysts say Friday’s settlement means that Mr. Mozilo’s legacy is likely to be something quite different from that of a banker who brought homeownership to the masses. "Mozilo is agreeing to a permanent ban on serving as an officer or director of a public company," said James A. Fanto, a professor at Brooklyn Law School and a specialist in corporate and securities law. "That is a significant punishment and does not look good for his legacy."

Crime Pays: The SEC's Slap on the Wrist for Angelo Mozilo
by David Callahan - Huffington Post

Let's say a business leader makes hundreds of millions of dollars through criminal practices that end up wiping out the wealth of myriad homeowners and contributing to the biggest economic crisis in 70 years. Then, as punishment, he is forced to fork over $67.5 million -- and yet faces no prison time. Has justice been done?

Well, if you listen to the SEC -- and plenty of media commentators, too -- the settlement just reached with former Countrywide CEO Angelo Mozilo was tough stuff. It was reportedly among the largest fines ever imposed on an individual by the SEC. To be sure, $67.5 million is big money. Except in comparison to the fortune that Mozilo made presiding over one of the shadiest mortgage firms of all time -- reportedly a half billion dollars. Time magazine didn't just name Mozilo one of the "25 people to blame for the financial crisis," it put him on the top of the list.

Countrywide has been sued by nearly a dozen state attorney generals for its predatory lending practices. The company, now owned by Bank of America, has also been hit by a blizzard of other suits. One reason that Mozilo got away with so much is that he effectively bribed numerous regulators and lawmakers, of both parties, with dirt cheap mortgages through his so-called "Friends of Angelo" program. Ultimately, Mozilo wasn't even nailed for his mortgage practices. They SEC got him for insider trading and securities fraud, alleging that Mozilo unloaded Countrywide's stock on unwitting investors as the company began to tank -- all the while saying that everything was fine.

As is common in these cases, Mozilo did not acknowledge any wrongdoing as part his settlement with the government. That outcome is reminiscent of how the corrupt financial analysts, Jack Grubman and Henry Blodget, were let off the hook. Both settled with regulators after playing key roles in the dotcom scandals of the 1990s. When those settlements were reached, many observers predicted -- myself included -- that the absence of any personal punishment for the analysts would encourage future greed and lawlessness.

Now the cycle is being repeated. It is hard to see how the Mozilo settlement will deter future wrongdoing. Indeed, it could have the contrary effect. If you can make a great fortune behaving badly, get busted, and still end up with most of that future, then you've come out way ahead. At least in financial terms. In defense of the SEC, complex white-collar cases can be difficult to win at trial. Especially when the defendant can spend limitless amounts of money on the best legal team. And that truth, too, is well known among well-heeled criminals.

So in the end, here's the calculus that might run through the mind of an executive considering breaking the law in order to make a huge fortune: First, they probably will never get investigated. But if they do get investigated, they probably will never go to trial. But if their case does come to court, they stand a decent chance of winning by hiring superior legal firepower. And even if they lose in court, their sentence may be short and they may still end up very wealthy. (See: Michael Milken).

None of this is to say that Angelo Mozilo doesn't have regrets. Like many central figures in big financial scandals, he doesn't seem like an especially bad guy. He grew up the son of a butcher and worked his way to the top of the mortgage business over many years. His intentions seemed noble at earlier points in his career, as he talked about making homes more affordable to low-income Americans. Mozilo also raised questions about Countrywide's practices. As the New York Times describes,
In its complaint, the S.E.C. cited a series of e-mails written by Mr. Mozilo starting in 2006 that decried some of Countrywide's lending practices even as the company's executives publicly boasted about its high-quality loans.

"In all my years in the business, I have never seen a more toxic product," Mr. Mozilo wrote in an April 17, 2006, e-mail to Mr. Sambol [his chief financial officer], referring to loans that allowed borrowers with poor credit histories to buy homes without putting any money down.

Mr. Mozilo also warned his colleagues about the dangers of a popular type of adjustable-rate mortgage that let borrowers pay a fraction of the typical monthly charge. In an April 2006 e-mail, Mr. Mozilo wrote that he had "personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated."

And yet Mozilo let Countrywide's subprime mortgage machine march on -- ultimately to disaster. Mozilo's story is yet more testimony to the seductive power of big money in an age of lax regulation. It would be nice to think that this age has come to a close. But Mozilo's light punishment, with the clear message that crime pays, will help ensure that is not the case.

Pension Funds Flee Stocks in Search of Less-Risky Bets
by E.S. Browning - Wall Street Journal

After making the same kinds of investment blunders as many individuals, corporate pension funds now are seeking the same remedies: fleeing stocks for the perceived safety of bonds. A growing number of pension managers are concluding their pursuit of maximum returns was a mistake, interviews with managers and consultants show. Instead, many funds are trying to achieve stable returns that more or less keep pace with the plan's obligations.

Corporate pension plans loaded up on stocks in the booming 1990s and had almost 70% of their money in them by the mid-2000s, a pattern similar to individuals'. By this July, pension plans as a group had cut their stock exposure to 45%, according to the Center for Retirement Research at Boston College. Many say the trend will continue.

Their caution damages a pillar of stock investing. With individuals also currently reducing their exposure to stocks, the market is left increasingly in the hands of investors such as hedge funds that often trade rapidly, contributing to volatility. The pullback could be one reason the stock market has been choppy this year.

Some of the cutbacks at pension funds are the result of losses during the financial crisis. In a trend that began slowly in the 2000-2002 bear market and gained momentum when stocks took another dive in 2008, corporate pension managers have begun concluding that loading up on stocks in search of high returns was a fool's errand. Corporate plans saw the value of the stocks they held at the market peak in October 2007 decline by about $1 trillion through early March 2009, according to the Center for Retirement Research. "This was a slap in the face, definitely," for the pension world, says Ron Barin, chief investment officer for pension investments at Alcoa Inc. "Risk was never really a big part of the equation, and it really should have been."

More recently, the May 6 "flash crash," when the Dow Jones Industrial Average fell 700 points in eight minutes before rebounding, further spooked some fund managers, sowing concerns about the role computers and high-frequency trading now play in the stock market. The amounts at stake are large. Even though U.S. companies have long been reducing their use of pension plans, corporate pension funds still manage more than $2 trillion.

A multiyear shift of nearly half of that sum to other kinds of investments is under way, according to McKinsey & Co. This would mean a movement of nearly $1 trillion to bonds and to alternatives such as hedge funds, private investment pools, annuities, derivatives and insurance plans. Not all would be removed from the stock market, but the overall effect is an extensive rebalancing away from stocks. "The reallocation is massive," said Onur Erzan, a McKinsey consultant. That conclusion is based on a 2007 study and on more-recent interviews with pension managers, asset managers, insurers, investment bankers and others who cater to the funds.

Other evidence comes from a survey by benefits consultant Towers Watson of 100 large corporate pension plans in mid-2009. It found that, on average, they were planning this year to move 10% of their assets out of stocks and into bonds and alternative investments. "That is a sharp acceleration," said Carl Hess, the firm's global head of investment consulting. In the past, shifts had been more like 1% a year.

Alcoa's U.S. pension fund had 57% of its assets in stocks in 2006. The stock market started sliding late in 2007, and by the end of 2008 the decline had pulled stocks down to just 33% of Alcoa's pension portfolio. The fund's value tumbled by more than $2 billion, to $6.5 billion. Alcoa officials decided against restoring the stock exposure to its former level. With the blessing of the board, they looked for ways to insulate the fund from future damage.

By early 2009, the board signed off on a plan to push stocks down to 30% of fund assets, selling shares and buying bonds. As the stock market surged back starting in early March that year, Alcoa continued to sell stocks to keep that weighting at 30%. The change hasn't been painless. To bolster its pension assets, Alcoa in January contributed $600 million to the fund, in the form of Alcoa shares. Still, assets cover only 80% of pension obligations, and the company expects to make more contributions in the future, this time in cash.

Boeing Co. began de-emphasizing stocks in late 2006. Its pension plan had been hurt by the crushing 2000-2002 bear market. During the bull market that followed, Boeing decided it needed to make its holdings less volatile. "In the past four or five years it dawned on us that it would be better to find a different way," said a Boeing spokesman, Todd Blecher. "We wanted to bring more stability to the assets."

At the end of last year, Boeing cut the plan's stock holdings to 34% of assets, from 60% in 2004. Its goal is to move below 30%, shifting toward fixed income, real estate and hard assets such as commodities. Boeing recognizes the price of greater stability will be more contributions, because returns on assets in the fund are likely to be lower. Although the company contributed $1.6 billion in stock to the pension plan last year, it remains just 88% funded, leaving a gap of $6.4 billion.

Both Boeing and Alcoa have moved to end pension coverage for some employees, shifting them to 401(k)-type retirement plans. Among other big companies, International Business Machines Corp. and Pfizer Inc. reduced stock exposure in their funds in late 2007. PG&E Corp. and Time Warner Inc. announced shifts toward bonds in 2009. Exxon Mobil Corp. last year moved its U.S. pension plans down to 60% stocks from 75%, the first time it was that low in a decade. Although Exxon contributed $3.1 billion to the plans in 2009, they were still just 74% funded at year-end.

State and local-government pension funds, which oversee $2.8 trillion in assets, also have cut their stock exposure, but less deeply than corporate plans. The public funds' stock exposure exceeded 70% in 2007 and was about 65% last year. Governments don't have profits or stock they can contribute to pension plans, so they generally are keeping more risk, in hopes that stocks they own will rise and reduce the need for contributions.

The reduction in stock exposure at corporate plans means many companies are likely to face the need to contribute more to their pension plans in future years. Pension-fund assets at the biggest corporate plans covered more than 100% of their liabilities in 2007, according to research from Goldman Sachs Group's Global Markets Institute. By this summer, partly because of stock declines after the 2007 peak, the assets covered only about 75% of the funds' obligations.

Lockheed Martin Corp. was $10.7 billion under water at the end of last year, according to the Goldman data, while Ford Motor Co. was $6.2 billion behind. AT&T Inc. was $6.1 billion in the red and General Electric Co. $6 billion. The companies confirm those figures. Companies with underfunded plans don't face an immediate need to bring them up to snuff. They have years to make contributions, so funding gaps aren't a threat to an otherwise-healthy company. Still, the deficits are a burden, and volatile pension-fund returns affect companies' earnings and balance sheets.

Congress recently authorized companies to delay some contributions even more. But only about 25% of companies may take advantage of this relief, a study by Towers Watson suggests, partly because of restrictions the law imposed. Either way, the study suggests, the minimum required contributions for all corporate plans, large and small, could rise as high as $160 billion as soon as 2012, compared with only $37 billion in 2008.

Over the long run, bonds have produced weaker returns than stocks. So the corporate plans seem to be resigning themselves to more-limited returns at a time when they are underfunded, making it even harder to recover and spelling more pressure to cut future pension benefits. Some analysts worry that so much money has fled to bonds lately that they now could be overpriced and riding for a fall of their own. If so, the search for safety, by both pension funds and individuals, could backfire.

About two decades ago, in 1988, corporate pension funds had just 38% of their assets in stocks, according to the Center for Retirement Research. And 401(k)-type plans, in which individuals control investment decisions, also held less than 40% in stocks, according to the Center. During the stock boom of the 1990s, the percentage invested in stocks jumped for both groups, with individuals hitting 68% in stocks in 1999 and corporate pension plans hitting 67% in 2001.

Pensions remain an important part of retirement plans for many Americans, especially retirees. Among people still working, nearly a third of those with retirement plans in 2007 had some form of pension coverage, according to the Center for Retirement Research. That was down from 57% in 1993.

Today's low interest rates are a disaster for pension plans, for two reasons. First, they squeeze returns in funds increasingly dependent on bonds. Second, for corporate plans, they boost pension liabilities. That happens because, mathematically, falling interest rates raise the present-day cost of future liabilities. Higher liabilities make the funding gaps bigger.

Interest rates for corporate bonds—the benchmark that corporate pension funds use to gauge future liabilities—have dropped close to multi-decade lows. The falling benchmark and resulting higher liability figures mean that corporate pension funds' gaps in funding have widened since the end of 2008 despite the stock-market gains since then. Funds' desire to reduce volatility also is fueled by a series of legal and accounting changes that have forced corporations to reflect pension-plan losses more directly on balance sheets and in earnings reports.

Many pension managers have begun thinking about their business in new ways. Instead of trying to boost returns as much as possible, many are trying to match their plan's expected income to the expected need to pay benefits, with the least risk possible. Pension consultants are pushing the strategy, called "liability-driven investing." They offer to design mixes of bonds, annuities, derivatives and other investments with predictable maturities and yields that, if everything works correctly, will closely track payouts. Some companies are looking at insurance plans that cover future pension funding needs, in theory letting them terminate their pension exposure entirely.

To do that, companies typically freeze their plans, offering no new pension benefits and shifting employees to 401(k)-type programs. In eight major industries, new salaried employees were getting 19% lower retirement benefits as a percentage of pay in 2008 than in 1998, a Towers Watson study found. Many consultants expect a second wave of plan-freezing in coming years. "As the markets recover, we think that chief financial officers will move more aggressively now to close" pension plans, said a McKinsey consultant, David Hunt. Typically, a terminated plan is one that has stopped offering new benefits and whose remaining liabilities are fully funded.

Ireland's Unemployed Head Back to the Farm
by Louisa Fahy and Finbarr Flynn - Bloomberg

The country has a 13.8 percent jobless rate, but the food sector is thriving

At Bank of America, David Farrell spent his days taking calls from credit-card customers in Ireland. Then came the global financial crisis, and the 40-year-old father of five decided it was time for a career change. In 2008, after five years with the bank, he quit and enrolled at Teagasc, which runs a school at Dublin's National Botanic Gardens college, to study horticulture. It turned out to be a shrewd move: Today the Irish economy is reeling, jobs are scarce in financial services, and one of the few sectors that shows any promise is agriculture. "There's a resurgence in producing food," says Farrell. "It will become something people not only want to do but may have to do."

Plenty of other Irish workers are thinking along the same lines. Farrell's college program in Dublin turned away 250 students seeking places in its agriculture-related courses last month. Enrollment for courses at Teagasc climbed to 1,128 this year, 45 percent more than in 2007, before the economy collapsed. The government agency teaches students such skills as growing organic food at sites across Ireland and supports the country's agribusiness sector.

Promoting food exports is a major priority for Irish Prime Minister Brian Cowen's government. Ireland's gross domestic product doubled in size in the decade through 2007 and has since shrunk about 15 percent after the real estate bubble burst. The government, struggling with bailing out banks and slashing public spending, is counting on food exporters, including Kerry Group and Glanbia, to help spark an economic revival. "Farming and agrifood were totally lost during the boom. It just wasn't seen as sexy compared with property and financial services," says Jim Power, chief economist at Friends First, a Dublin financial-services firm. "That's changing: High-value export industries like food are the future for us now."

After falling 12 percent in 2009, Irish food and animal exports are up 5.4 percent during the first half of 2010, according to Ireland's Central Statistics Office. About 150,000 people work in farming, still the country's biggest indigenous industry after 20 years of decline. Agriculture now accounts for about 2 percent of the Irish economy, compared with about 16 percent in the late 1970s.

Global investors have warmed up to Irish food stocks. The share price of Kerry Group, Ireland's largest food company, has risen 47 percent in the past two years. Dairy food company Glanbia has seen its stock price increase 13 percent over the same period. Unemployment has more than doubled to 13.8 percent since the peak of the "Celtic Tiger" years in 2007 and has reached 18 percent in the country's rural southeast, according to the latest government numbers.

During the boom years, construction, which accounted for about a quarter of the economy in 2006, drew agricultural workers off the land, says John Bryan, president of the Irish Farmers' Assn., Ireland's largest farmers' lobby. (Bryan is a beef farmer who oversees 230 acres in Kilkenny in southeast Ireland.) No more. "This year is the first I'd say in about 14 or 15 years that you'd have people calling to the farm to see if there is any seasonal work going," says Paul Kehoe, 34, who farms about 380 acres in Country Wexford with about 120 cows and 200 sheep.

Another factor working in agriculture's favor is the decline in land prices. Developers pushed up prices to more than €58,400 ($81,140) a hectare in 2006, the highest in Europe, according to the National Institute for Regional and Spatial Analysis, citing data from property agent Savills. Last year, farmland prices around Dublin fell 57 percent, while the average price paid in the rest of the country declined 43 percent. Ireland's tough economic circumstances have changed perceptions about the country's agricultural sector. "Farmers have become a respected profession again," says Power, the economist. "And there's nothing else out there."

Debunking Money (#2): The US Monetary System and Orwell's Animal Farm
by Damon Vrabel

This lesson digs into the specific structure of the US monetary system--a global banking cartel controlled by global capital holders who effectively farm the US population to build the multi-national corporate empire that transcends nation-states.

Lesson 1 was necessary as a prereq to explain debt, balance sheets, and the power that comes from how the system is setup. It was not a description of the system itself.


pasttense said...

The "bad money" most of us are worrying about is the U.S. dollar--yet I&S keep insisting that that is a better financial asset than anything else.

And QE2 doesn't change their position on that?

zander said...

Was that the Dylan Ratigan show from April 1st??
I cant believe this stuff, it's from a parallel universe.
"we don't know who the bank is, and nobody knows...when you say the bank"
Where are we? I'm disorientated.


Ilargi said...

" pasttense said...
The "bad money" most of us are worrying about is the U.S. dollar--yet I&S keep insisting that that is a better financial asset than anything else.

And QE2 doesn't change their position on that?"

Not a chance. Americans over-focus on the USD, and forget that the Euro is crap too, as are many other currencies. But only one of them is the reserve currency. That means the US can do more initially to beggar its currency, but will be powerless when things start going real bad.

It's a race to the bottom, and that race is by no means done.

When in doubt, check the Big Mac:

Big Mac Index: Euro 30% Overvalued, Swiss Franc 80%


NoLNG said...

Quote: "That is a significant punishment and does not look good for his legacy."
Yeah, sure. You wnat to know what Mozilo's legacy is? That crime still pays in America.

Illargi -- I love your blog, and read it faithfully. And even toss a bone or two your way sometimes.

However, the most likely) feigned surprise and outrage you profess sometimes gags me.

The United States (almost certainly the same as every other nation) began as a criminal takeover of a prior order.

I paid off my house a couple of years ago (on your good advice), and I was startled to discover that I could not get a deed to it. The best I could do was a little Xerox copy of a document in the County Assessor's office that said there were no outstanding liens against the property! So, I possess the place, and there are no outstanding liens. That doesn't sound like a clear title!

On the other hand, if you go back to 1811 or so, when Astoria was first settled by Europeans, it becomes clear that no "clear title" to anything around here exists. The only attempt made by the American Government to negotiate a property settlement with the indigenous local inhabitants: In an 1851 treaty, the Clatsop tribe ceded 90 percent of their land to the U.S. Government. This treaty was one of many in the Northwest that were never ratified by Congress. Unlike other tribes, the members were not required to move to a reservation, and in fact, they were the only tribe in Oregon that was not removed to a reservation.[3] certainly does not provide an unbroken chain of possession back to Creation. Just back to some convenient point in time.

The U.S. Government has managed quite well over the last 200+ years to resolve disputes over land ownership and make murky titles seem clear -- often with the assistance of the U.S. Army when the U.S. Supreme Court was insufficient.

I don't really see any problem here, either. Not only does crime "still pay". In a very real sense, crime has always been the only thing that really pays.

Tristram said...

I see Ilargi is being pestered by a new generation of doubters, tapping their watches and asking, where is the crash ?? TAE has been steadfast in predicting:
-- stocks and real estate down
-- oil down
-- dollar up

But so far not. QE-1, QE-lite, QE-2 keep working their magic, with everything up except the dollar. I very much want I&S to be right, since I am long the dollar and short shopping malls. But my investments are famous as a contrarian indicator. Keeping the faith must be getting harder.

Ilargi notes that QE-2 won't benefit the economy, employment, or society. It won't "work" in that sense. OK, noted. But maybe it will succeed in trashing the dollar, driving commodity USD prices to the moon, and making a lot of TAE predictions never come true. John Williams (the shadowstats guy, I think) was quoted at ZeroHedge recently predicting stocks would go up in nominal but not real terms after QE-2, something which must be nearly impossible by TAE logic, and which would sure fry my shorts.

At some point you must wonder whether the forces that have delayed the next leg down so much longer than expected could actually change the outcome into something unexpected.

Twilight said...

I still believe that Fraudclosure will be fixed in some manner after the elections, but supposing for a moment that it cannot - doesn't that mean that it will become next to impossible to buy or sell a house?

jal said...

A very simple explanation.

If I borrowed $400,000 from a bankster.
The bankster borrowed the $400,000 from 40 people.
The bankster made the claim, to the 40 people, that their loans would be secured by the ability to seize an asset that is worth much more than what they are lending. He tells them that he has the ability to seize that asset. (A lien that is recorded at the land and title office), and that he will transfer that ability to seize that asset to those 40 people.

The bankster lied. He did not transfer the lien. In some cases he did not even have a lien.

The bankster lied by saying that he verified that I was a capable regular, standard, as expected risk of being able to pay back a loan of that size.

Therefore, The lenders do not have a secured loan. They cannot seize that asset.
They must go to court, (bankruptcy), to get some of their money back.

The lenders must also go to court to try to get their money back, from the bankster, by proving that the bankster lied.


Lynford1933 said...


Several older friends have Reverse Mortgages which essentially cashed out their equity in their home at an some 80% appraised value minus loan ballance. The reverse mortgage is insured by the HUD to the bank. Who actually owns the home?


Ric said...

2010 Local Future conference features Nicole Foss

Ilargi said...

"Lynford1933 said...
Several older friends have Reverse Mortgages which essentially cashed out their equity in their home at an some 80% appraised value minus loan ballance. The reverse mortgage is insured by the HUD to the bank. Who actually owns the home?"

Hard to say, as must be clear by now. But you can find out a lot here:

Where's the note?


Erin Winthrope said...


Correct Mugabe Man.

It doesn't matter whether or not I&S are right in the long term. Humans don't do long term.

We're all gamblers. And we all operate in the short term, even TAE-readers.

Unless you were born with a silver spoon, sitting on your cash in the mattress is equivalent to playing the slots with your kids' lunch money.

It's not responsible: it's a dangerous wager because this wave of printing will last for at least a year or longer.

I&S have been wrong for the past year (no crash....we're still cruising)

And you can define cruising however you want, but the only sense in which cruising matters to most folks is the value of their stock portfolio (i.e. their savings). Folks who define cruising in other ways don't spend their time reading blogs (they might be the odd-commenter here and there, but that's not representative).

I&S will be right in the long term, but that's a long way off, and the vast majority of you won't hold on that long.

Don't believe me? Read the TAE archives for the past year.

Ilargi said...

That’s it Randy,

You get put in your place one day, and you can just ignore that and come back the next time, pretending to look like a fresh chicken, like nothing ever happened. Isn't anonymous posting just your kind of thing?

”And you can define cruising however you want, but the only sense in which cruising matters to most folks is the value of their stock portfolio..."

Is that a fact now? Stock portfolio, huh? The same one that’s still 26% below its 2007 peak? Oh wait, you weren't done: "which cruising matters to most folks is the value of their stock portfolio (i.e. their savings)". Most people use stocks for their savings?! Silly me. Or is that "silly them?"

"Unless you were born with a silver spoon, sitting on your cash in the mattress is equivalent to playing the slots with your kids' lunch money. It's not responsible: it's a dangerous wager because this wave of printing will last for at least a year or longer. "

What would make it more dangerous than having a stock portfolio? What exactly is "responsible" about that? And what, pray tell, makes stocks not "playing the slots with your kids' lunch money"? That they always rise? That "this wave of printing will last for at least a year or longer?". That’s a guess on your part at best, and we both know it.

"Don't believe me? Read the TAE archives for the past year."

I would always recommend that.

bluebird said...

NoLNG - About that deed to your house...
Our house was paid off appx 8 years ago. We didn't receive the deed, so I called the county recorder, and was told we already had the deed when we bought the house.

Sure enough, I looked in my folder of house documents, and there it was. The recorder said what I was needing, was called 'Satisfaction of Mortgage'. She told me how to look online, and print it off. So that's what I did, but I was thinking I should have received it thru the mail.

What I just did, was look at this 'Satisfaction of Mortgage', and determined that there was nothing indicating MERS or Mortgage Electronic Registry Service. We always paid the mortgage payments to the same lender, never transferred, so I feel confident that we own our house.

Unknown said...

"Fannie Mae and Freddie Mac (yes, those two again —I know, I know: like the chlamydia and the gonorrhea of the financial world—you cure ‘em, but they just keep coming back."

Yuk, yuk, yuk. Anything that can get me laughing on Monday morning, I'll take it.

Since I had some kind of virus all weekend, I spent most of my time in bed with a new book called Last Call. It is a thorough history of US Prohibition. Most of it was about social things, politics, law and crime, etc. But the really interesting part of it for me was that it put some seeming unrelated economic things together in a whole new way:

1) The year before prohibition was passed, 71% of US internal tax revenue and 30% of all revenue (there were big import duties back then) came from alchoholic beverages.

2) Prohibition would have never happened without the passage of the 16th amendment first (income tax). See above. As any good tinfoil hat wearer knows, this led to the creation of the Fed.

3) Prohibition ended because the depression "dryed" up all the funding for the "drys". At the same time, Pierre DuPont, who was the wealthiest man in the US, took up the cause for the "wets" with a bunch of the reigning "masters of the universe" thinking that restoring the tax on liquor would eliminate or greatly reduce income tax on the wealthy.

4) Mr. DuPont and his buddies got screwed because...wait for it...FDR took the 14% immediate increase in federal revenue to spend on his alphabet soup, which (along with WWII) was how the depression was finally ended.

Since beefing up the depressing, stupid war in Afghanistan doesn't seem to be helping, maybe it's time to legalize pot.

Gravity said...

So I was looking over Bernanke's comments and that enigmatic dual mandate, and it seems that perpetuating an inflationary growth regime requires not just maximum employment, but continuously increasing employment that outpaces the labour force expansion to compensate for the cumulative inflationary bias, in conjunction with ever-increasing productivity or trade surplus.

Who decides what maximum employment is anyway, should't unemployment be zero at all times then, to achieve this? Perhaps one can have too much employment, and after such a point government interference just distorts the labour markets, or the price of labour, but then they should have mandated optimal employment instead, to illustrate this.

And price stability, does this entail purchasing power stability? How can prices be expected to remain stable as mandated when they're in fact always supposed to steadily increase, ever so slowly, that is how the money supply actually inflates successfully in normal times, no?

Now Bernanke attempts to set an inflation target of 2% by calling for an equivalent rise in price levels, which must first be caused by the desired inflationary pressure, and would then be measured as an approximate result thereof, which is not the same, but confusingly close enough for his purposes.
Then the short-term inflation target is seen to be perfectly compatible with adherence to the dual mandate in the long run, even though the cumulative devaluation under the Fed's policy since inception yields a price stability coefficient of 0.05?

Stoneleigh said...

The psychology of a top always leads to people taking pot-sits at the bearish case. The life of a contrarian is one full of disbelief and criticism, especially near major turns. People need to be patient, and to regard any extra time they get to prepare as a precious gift.

Gravity said...

my sympathies for your loss, btw, bit late, hadn't mentioned it.

But concerning price increases of foodstuffs, staples, is this properly a result of residual inflationary force, effective devaluation, if caused by speculation in commodities by easement overflow, or speculation upon further easement overflow via commodities?
Is this possible during debt deflation, to have some price increase still attributable to inflation, by a different route of price support, even though the net environment is heavily deflationary? Can such price increases in essentials become reinforcingly inflationary in this environment, or sooner defaultionary?

Erin Winthrope said...

Hey Randy, I agree.

The Fed can inflate asset prices.

No? Then what's happening right now?

What's happened since March 2009?

Why can't it keep going? Who's going to stop it?

Stoneleigh often says: "The Fed is the little man behind the curtain."

Maybe pre-1933, when we were on the gold standard. No longer.

There's a reason we haven't had a sustained fall in stocks since the depression. Reason = fiat money.

You can't prove your case about the Fed being a little man behind the curtain because you don't have a single historical example to back your claim. The Fed has all of history post 1933 on its side.

Yeah...we're down since Oct. 2007, but we've had little blips like that before... So what? That doesn't prove anything. You're talking about something that has NEVER happened historical example....nothing but conjecture on your part. Yet you speak as though you've got certainty. It sounds more like faith to me unless you can start explaining why what you say must come to pass this time.

Don't fight the Fed.

Erin Winthrope said...

Look at Apple earnings....

Tapped-out consumers can't buy iPods, iPads, iPhones, and Macs

How about....The American Consumer...that's who. Tapped-out? I thought the consumer had no money....the banks weren't lending....folks struggling on food stamps..

Yeah, we've got all of that....and record earnings for Apple to boot. Stocks anyone?

Erin Winthrope said...

JPM beats expectations

Citi beats expectations

Intel beats expectations

IBM beats expectations

Apple beats expectations

You guys just ignore data points when they don't fit the model. Why?

Kurt said...

For those interested in alternate points of view here's Martin Armstrong's latest:

"This historical battle between Public and Private interests has indeed been going on since man first put something on his head and decreed God anointed him to rule over all others. Those who constantly preach the doom and gloom that the Dow Jones will fall to 10¢ on the dollar because that is what took place in the 1930s, just don't get it and never will.

I have warned numerous times that the low is in place and that we will see new highs in the Dow Jones Industrials long before we see a new low. I have warned that gold will rise to the $5000 level and that it will rise WITH STOCKS! These are trends that appear when there is a major crisis in Public Confidence - the shift from Public to Private investments.

Erin Winthrope said...


About a week ago or so, someone asked you if you've been predicting imminent collapse since the 2001 Recession. You never addressed this question.

What were your views about where the economy was heading in 2001? Did you expect an imminent crash back then? Were you surprised by the successful inflation of the monstrous housing bubble starting in earnest around 2002?

Ilargi said...

Yeah, we got ourselves a Randy, a Phoenix, a Kurt, all swept asunder by markets, and convinced that what they see proves that we are ever so wrong. The economy is just flying! Look at the S&P!

No kiddos, look at the unemployment numbers, look at foreclosures, food stamps, EUC, those are the numbers you can rely on to last, not stocks. And on obvious grounds, too.

Case in point: Apple just lost 6% after hours. Who was it that claimed we need to look at Apple's earnings?

No, we do not think the markets will keep on rising, and no, we do not think QE2 will accomplish that. Matter of fact, the more of you pop up here, the more what we say becomes reality. Sorry...

Also, no, we do not think that money in a mattress is a worse bet than money in stocks. In fact, we think the opposite is true. But then, I've said multiple times we don't cater to gamblers. Sorry again.

And Arthur, what's the difference between you asking Stoneleigh about her views in 2001 and me asking you about yours in 1955? If you have to think about that one, don't bother.


Erin Winthrope said...

@ Arthur,

Stoneleigh has been predicting collapse for 10 years.

And no...she didn't predict the housing bubble back in 2000.

If she had held onto her home in Britain, she could have sold it in 2006 for 2X what she got in 2000.

That's a lot lost moolah because she didn't trust the Bank of England and the Fed. When you fight the FED, you end up getting hurt.

Erin Winthrope said...

Ilargi and the S&P:

Who you going to believe, me or your lying eyes?

Hombre said...

Ilargi - "No kiddos, look at the unemployment numbers, look at foreclosures, food stamps, EUC, those are the numbers you can rely on to last, not stocks."

That's right, and while at it nasayers, look around you! Where do you folks live? Hop out of your office and take a drive down main street... see the empty houses? And BTW notice the recently demolished shops, stores, and retail outlets! See the increasing numbers at food bank lines? See the looks on the faces of people at the high school event! The real world is crumbling around you, and you are here posing as a stock market critic as if that was what mattered.
Appreciate I & S for what they are trying to do rather than toss stones from a distance.

Real problems are here and more coming--already France is coming apart at the seams.
French strikes hit airlines, trucking, gas pumps.
"The protests in France come as countries across Europe are cutting spending and raising taxes to bring down record deficits and debts from the worst recession in 70 years."

Erin Winthrope said...


If I go to the doctor with chest pains and he recommends a triple bypass, then I say OK.

But, before I inhale the Anesthetic, I want to make sure that doctor didn't recommend the same thing to my neighbor with a sore toe.

If you have to think about that one, don't bother.

Erin Winthrope said...

No Coyote, I don't see any of that in my community.

Why? Because I live with winners, not losers.

Think like a loser and sooner or later you .....

Ilargi said...

Yes Randy,

Hail the S&P. After all, what else is there in your life? It's what, now, 56% HFT? Who you gonna believe indeed. Me or you or the deus ex machina?

And Arthur, repeating someone else's lines is not all that often the best way to get your point across. I got confused between the chest pain and the toes. There are courses available in arguments. Not sure Monty Python is best for you personally, but their rendering is revealing.

Long story short, to suggest anyone over 10 years old should have predicted anything at all 10 years ago to be credible today is either a hidden way to tell us you're getting real old or tantamount to showing you don't understand the difference between then and now.


Unknown said...

And how about gas stations? Anyone else see intersections with one gas station and three cement and asphalt lots growing three foot weeds where there used to be four gas stations at the same intersection? I see abandoned gas stations all over San Diego (with lots of commercial properties with "For Lease" signs nearby).

For the answer to the banks' "profits," record bonuses, and increasing share price, one possibility can be found in Bill Black's "The Best Way to Rob a Bank is to Own One" -- fraud. Just finishing the book, and I found it riveting and informative. Of course, Ilargi has been explaining this for years.


Ilargi said...

Priceless headline from Bloomberg:

"Bank of America Plans to Revive Foreclosures on 102000 Homes; Shares Gain"

Knowing that it takes at least an hour to properly review a loan file, do your math. This should make a major dent in unemployment numbers. And their shares go up on that?!


Hombre said...

Realism is truth, and the truth is always a winner in the end. ;-)

"Some profound seismic infarction deep in civilization's very soul - brought on, no doubt, by the sludgy buildup of vast swindles and frauds - now propels deadly tsunamis toward the land masses where money dwells. And when they break over the shorelines of banking and capital, little may be left standing."

Stoneleigh said...

I left the UK when I did because of its energy situation and its housing bubble. I wanted to buy a farm while there was still learning curve time, and while there was still time to find work in a new employment market.

I fully expect to see aggressive questioning at a top. There's a strong need to believe in continued expansion, and a desire to shout down people who rock the boat. Good luck with your positions. I think you'll need it.

Erin Winthrope said...


Why do you keep avoiding the question?

Were you or were you not predicting an imminent collapse after the 2001 recession?

ric2 said...

Here's a quote from Zerohedge for Randy/Phoenix/Kurt and others who think the Fed is "in control" of one of the most complex systems ever to emerge from collective human activity:

(referring to the current top 150 holders of Apple stock)

It is absolutely correct that all these investors have done great... on December 11, 2008 several hundred investors in Bernard L Madoff Securities thought they had done really great as well.

Sure, the Fed wields a fair amount of power to influence the large US part of the hypercomplex global financial system (the US part which is itself a hypercomplex system). But you are fools to believe that the Fed is the final arbiter of the future values of state variables of these systems like stock market indices or individual stock prices.

Draft said...

I must admit - I'm enjoying this discussion / debate between bullish commenters and Stoneleigh and Ilargi. Not for the spectacle or conflict, but rather because debate is something I learn from more than anything else.

(Though I would urge the challengers to be a bit more substantive in their critiques. I'll give you a leg up - Bonddad's blog is neither bullish nor bearish and has some recent posts that argue that while things are not good, they're not getting any worse either.)

scrofulous said...

Randy said...

"No Coyote, I don't see any of that in my community.
Why? Because I live with winners, not losers.

Randy, holy smoke, do you live with guys like this?

Well alls I godda say to that is that is right on pal, Rome knew the woes and that the Stat crux dum volvitur orbis

Ventriloquist said...

Blogger pasttense said...

The "bad money" most of us are worrying about is the U.S. dollar--yet I&S keep insisting that that is a better financial asset than anything else.

There is one, and only one,
currency that will survive this massive and unrelenting war that is about to explode:

Silver and gold.

These precious metals are the only currency on the face of the planet that have survived 6000 years of usage, while paper trash currencies typically last a very short time.

Please note that Illargi and Stoneleigh are not backers of silver or gold as a reserve currency. They have proposed paper fiat as the reserve to hold in a crisis.

I'm suspect of something that is not worth wiping my backside upon as being my reserve holding for my, and my family's future. Paper.

Silver mostly, and also gold, are the assets to hold when the going gets tough.

You can hold paper trash, or you can hold the metals that have, AND CONTINUE to increase in value.

Your choice, when the rubber hits the road:

Rock beats scissors,

Scissors beats paper,

And Precious Metal beats both.


scrofulous said...

Stoneleigh, ever figure that learning curves are really quite pointless if they just lead to what has been done wrong before? - Not a criticism of your motives but just that maybe we has it all inside out. Like, for one, I think a world without leaders and followers could be rather a charming place. Figure we have the imagination for a world like that?

scrofulous said...

Stoneleigh, ever figure that learning curves are really quite pointless if they just lead to what has been done wrong before? - Not a criticism of your motives but just that maybe we has it all inside out. Like, for one, I think a world without leaders and followers could be rather a charming place. Figure we have the imagination for a world like that?

jal said...

Are you in the stock market?

Stay there. You cannot lose. Just like in a flash crash, all orders will be cancelled.

When the market crashes you will not lose because all transactions will be cancelled and the crash will be deemed not to have happened.

hehehe! :-)

( It will also mean that you cannot get your money out.)



rcg1950 said...

Randy said...

No Coyote, I don't see any of that in my community. Why? Because I live with winners, not losers.
Think like a loser and sooner or later you .....

I find the arrogance, self-satisfaction and soul crushing lack of empathy in the above statement simply breathtaking. But then, the American culture seems to be obsessed with winning -- "it's the only thing" as Mr. Lombardi taught us some 45 years ago. Winning at any cost. Cheating, gaming the system, fraud, bribery, selling-out -- all OK if it's in the service of getting a win notched on your ledger. The obsession with winning (money is just for score keeping) has blinded the 'players' to the very priciples which permit the game (civilization)to go on in the first place. Universal barbarism as exemplified by our cartoonish bully-boy Mr. Randy here is the problem, is it not?

jal said...

You got to read the rest of the post.

The only things legally transferred here were the mortgages (the debt).  The property (collateral), has in effect, been severed from the mortgage notes, making these notes unsecured debt, which notes have been discharged in bankruptcy.  Nowhere is there any recorded rights to the collateral afforded to any entity but Countrywide, which institution no longer exists. 
So, is it any wonder the holders of Countrywide MBS (mortgage-backed securities) are a bit miffed?  They don’t hold securities – ie. debt that is secured by collateral – they own unsecured debt, much of which is defaulting and quite possibly, already discharged in bankruptcy, leaving the MBS holders absolutely no recourse to foreclose on the collateral to which their debt should have been attached.

anon10 said...

I agree with everything in the following article except the following statement. "Real estate will not see these heights again for at least 5 years, likely longer." I think the "5 years" (part) is far too optimistic.

"Canadians have never owed more and owned less. Our perception of the world around us is staggeringly rose-coloured, despite evidence to the contrary. We amassed more debt during the nasty (ongoing) recession of 2008-2009, the first time in history that consumers have gone further into debt during a recession. We sit at generational lows in terms of our savings rate. We have a consumer-driven economy that depends on the perpetual expansion of debt to continue with the charade. Interest rates have nowhere to go but up. We have let real estate comprise 20% of our GDP. We have watched in wonder as real estate prices have hit new levels, seldom asking why incomes, inflation, rents, or affordability have not kept pace. When we do wonder, we’re usually quite happy to accept the usual explanations: It’s different here….rich Asians…sound banks….more prudent….immigration….bla bla bla.

So how did we get here? We sit on the most unsustainable economy we have ever seen in Canada. If you’re a regular reader, you’ll know that I believe that the coming drop in real estate prices will lead to broad economic pain felt all across our great nation: Unemployment will be high. Consumer bankruptcies will be high. Pension issues will mount. Consumer spending and confidence will plummet. Real estate will not see these heights again for at least 5 years, likely longer."

There is more of this article at the following link:

How did we get here?

Erin Winthrope said...


Don't expect Stoneleigh to answer your question.

Most of TAE's cache is derived from the fact that the blog started in early 2008. That fact makes it appear that Stoneleigh had really great timing in terms of predicting the crisis of fall 2008. Truth be told, she's been saying the same stuff for years and years.

You know the saying about the stopped clock....

A Fall Guy said...

@ Arthur

I & S are not trying to sell you anything. They are providing their insights, along with many commentators here, to help clarify a vision of how things will unfold and to help identify local actions to reduce the pain that lies ahead. No one is asking to you act on blind faith. It is important to read the information here and integrate it with your view of the world. Then make your own informed choices for action. If you conclude that stocks can only go up, then by all means jump in the river, but I see a waterfall of interacting calamities ahead and I am trying to stay on shore. Also try to distinguish offensive actions (such as gambling) from defensive actions (that increase your future resilience).

@ Randy and Phoenix: have you noticed that bubbles tend to burst? If you want to critique the dominant view here, please offer constructive comments, not hot air.

soundOfSilence said...

Randy said...

No Coyote, I don't see any of that in my community.

Why? Because I live with winners, not losers.

Think like a loser and sooner or later you .....

Hey Randy/Arthur not that I want to break up your running conversation with yourself but I guess that means you'll be clearing out of Dodge here anytime now ... right?

And like the man said and you copied ... (what's that saying "copying is the sincerest form of flattery") if you got to stop and think about that...


Erin Winthrope said...

I & S don't know jack squat about what's going on.

I been here forever and its all blah blah terror terror the sky is falling blah blah and nothing happens.

My mom knows more about things....and she don't know diddly squiddly about nothing except who's the 'The View'

Anyway.....that's why el gal don't write no more. He got bored too.

Starcade said...

Twilight: The way it would have to be "fixed" will make it basically impossible anyway, since the concept of private ownership probably ceases to exist at all!

Starcade said...

Phoenix: Because they are ALL lies.

The entire economy has been based on fraud. Got it? Good.

Nassim said...

Shadow Elite: The "Inside Job" That Toppled Iceland's Economy

zander said...

Tell you this much, when I was down Harrogate (affluent area full of "winners") in England recently, there were so many for sale signs up, I swear if you could find the technology to hook 'em up, the UK energy problems would be solved in a heartbeat, anyone who doesn't recognize the -in your face- degredation of ALL aspects of our current civilization, financial and otherwise, is living in the land of cumulus and the wee bird who don't build her own nest.
Get real.


Unknown said...

Pareto ruins America!!!!!

Just like the fractional reserve banking system it makes sense to believe that 20% of the workforce employs the other 80% of the workforce.
One day you people will wake up!
I love the blogs and the comments and see taking the high moral ground is the always the approach of Americans.
Free Market Capitalism has failed full stop!
How did Hitler solve Germany's economic crisis? Why did Du Pont, Ford, Bush and my favorite Allen Dulles invest in Germany in the 30's and not the US?
Price/wage controls, government owned currency thus no controlled inflation or deflation (cut government spending in inflationary times print money in deflationary times) no foreign lending or foreign borrowing and best of all if the government owns its own currency it never has GOVERNMENT DEBT!!!!!

Hombre said...

QE for seniors! Likely the most openly transparent move in U.S political history... what a juvenile country we have become!

"Democrats are making a pre-election pitch to give Social Security recipients a one-time payment of $250, part of a larger effort to convince senior voters that their party, and not Republicans, will best look out for the 58 million people who get the government retirement and disability benefits."

"...although still unanswered is how they plan to cover the estimated $13 billion to $14 billion cost of giving $250 to each of more than 50 million Social Security beneficiaries."

I got an idea, take it out of the steady supply of funds to the banksters!

zander said...

Smith really hits a six with his post today, a superb read.
Funnily enough, I have always found him to be quite dovish, but he seems to be suggesting today that war of one sort or another is a possibilty now, I feel, however, that the huge contraction facing all nations, not least the US and China, will be enough to avert a mega scale war which would finish us off a little bit quicker than the path we currently pursue,
I also find it fanciful that the Saudi's will up the ante re. oil production merely to float the US boat, not to mention the fact they probably dont even have the capacity to over-produce enough to achieve this outcome.
Nevertheless a highly recommended read.


zander said...

Check the gigantic fall in gold this morning.
Not suggesting anything. Just saying.


Stoneleigh said...

In 2001 I was not in the habit of predicting timelines. I was busy learning how to operate my farm and getting it's infrastructure in place. I started writing on our present predicament in 2005, warning that tithe housing bubble was topping, and explaining to people that a credit crunch was coming (and what that meant in practice). I wrote my first major finance article on it in 2007 (called The Resurgence of Risk and available in the primers list). In it I described many of the fraudulent elements that most people are only discovering now in relation to foreclosure gate.

Many things were obvious years ago, which is why I was writing about them then. People who listened back then would have had the perfect amount of time to prepare. Those who have not will find that the best opportunities to cash out are already gone, and they will now have a less than ideal amount of learning curve time. There is still much that can be done, but time is short now, so the sense of urgency needs to be greater.

I am well aware how the psychology of a top works. It is not coincidence that so many aggressive posters are appearing now. A combination of desperate optimism and denial is absolutely characteristic of a top. The next move should be a sharp reversal.

The is nothing to be gained by shooting the messenger. I understand why people do it and do not take it personally, but people need to look at the situation divorced from their own emotional responses, which are leading them astray at this point, as emotions do at all major turns. I have the same emotional responses as everyone else (being human), but I interpret them differently because I have learned their role in misleading people (towards an approaching cliff) at major turning points.

Patience, grasshoppers. We are going to see this credit bubble unwind. It is inevitable, for the reasons I have described in a myriad postings. either be prepared, or do not. The choice is up to you. I will neither benefit nor suffer from what you decide to do, because we are not selling anything. We at TAE are merely offering you a resource of information and interpretation. Do with it what you will, but I strongly suggest you watch for an imminent trend reversal.

jal said...

Earnings are a total sham, yet they drive the markets higher?
Why is the market unable to see through these garbage earnings reports?

JUst remember that the brightest minds in the world have gone into finance and become the managers of those large pool of savings from those dumb non sophisticated savers.

(Sarcasm on)
Those investment advisors know how to take care of your money and know how to run the economy.
Your savings are in safe hands with them.


Stoneleigh said...


It's not that sham earnings drive the market higher, it's that optimism (disconnected from reality) does so. We are only at the beginning of the recognition of the extent of fraud in the system - earnings, foreclosures etc. The entire system is grounded in fraud. Once a critical mass of people realize that, we are collectively in big trouble.

VK said...

Oh great we have the moron brigade piling in here. At Zero Hedge clowns like Randy would be laughed into oblivion for not knowing 2 $hits about finance and economics.

Talk today dude, Bank Of America lost 7.3 Billion dollars, that's more than all the other banks sham profits combined. Goldman Sachs revenues were down 36pc.

If you actually read this blog and understood basic 3rd grade math, maybe you'd be able to decipher Chris Whalen's presentation that banks cash flows are so tight that they might have to be nationalized within 6 months.

Or that fraudclosure gate could cost the big banks trillions due to blatant FRAUD.

Or did you see the SPY flash crash more than 10pc last night? With the NYSE cancelling half a billion dollars in trades? No. The market is just fine isn't it?

Blah, blah, blah.

Draft said...

Hey - wasn't Sharon Astyk going to start writing here?

scrofulous said...

"Patience, grasshoppers."

Now, now my dear you are using 'ilargi speak' to talk down to the proles:)

Yes Stoneleigh I am an optimist , I am optimistic that we will do what has been done before, just with fewer resources and smaller minds.

The Anonymous said...

"And that next phase should carry the market down much further than anything we've seen so far. By the end of 2010 I'd be surprised if the DJIA was still over 1000." Stoneleigh 11/1/2009 - 2:50pm

Gravity said...

Gravity's Law:
Gravity is a recursive algorithm.
corollary; The cause of time is relativistic mass.

Stoneleigh said...

The Anonymous,

I didn't say it was impossible, only that I'd be surprised. That's still where I think we're going. It just seems like it'll take longer than I originally thought. Visibility only goes so far forward. Longer term forecasts are always less certain than near term ones. I don't think the outcome is in doubt, only the timing. Timing is always probabilistic.

Stoneleigh said...


What's wrong with Ilargi-speak? ;)

Rumor said...

Thanks for the link, anon10!

Stoneleigh, although I'm quite used to it by now, your extraordinary patience and civility is always impressive and, indeed, inspirational.

Although I must confess a sometime fondness for Ilargi's method of relentlessly kicking at the darkness.

LynnHarding said...

I imagine that some readers of this blog have been forecasting this outcome for a very long time. I moved to my current location in 1997 thinking that, because of the household formation practices of baby boomers that I had better sell my old place in an expensive neighborhood and buy something where I could produce food while still running FIRE business.
Of course many of the 1970's 'back to the landers' were here already and they had a good headstart. Plus, they have had good lives. I wish I had been able to join them back then but I couldn't for various personal reasons.
You may say that they have lost all of that money they might (might!) have made during the bubble. But here they are, debt free, living on farms that are not in foreclosure or declining in value. Their children are settled in sustainable jobs and their retirement is secure in their farm settings.
I look back at some of the things I wrote in 1998 about the peak of household formation being past. And I remember warning friends that they should cash out of their big houses before the boomers begin to do it. However, I had absolutely no clue about the fraud at the foundation of the system or about the Fed being part of an international banking cartel. All of my objections to the system were based upon considerations of morality, justice, resource management etc. I considered myself a pretty educated person and I am amazed and ashamed at how little I had learned about finance. I still wonder how I missed it.
Anyway, making a prediction in 1970 and having it come true in 2010 is not that bad. The people who predicted this mess back then and made the right choices seem to me to be doing pretty well.
Peace and luck to all of us!

scrofulous said...

Chee! Finally! But it shouldn't have taken that long to vet a post. I got things to do and places to go and I can't wait about all day to find out if youse guys are going to take umbrage at my words or or take the high road and ignore them.

In the meantime how about mentioning these two sites for anyone who has a dollar or two and wouldn't mind adding to their stash so they can buy photoelectric gee-gaws or water filters when the merde hits the electric wind.
and for GSers:

Draft said...

I've taken the advice of skeptics and believers alike and am reading Stonleigh's posts from TOD from years past. She has been saying the same thing since 2005. (The only thing that may have been a bit off is her comment in 2006 that we were likely to reach DJIA 1000 within five years and probably within ten - that would be by sometime next year being the five year mark. Maybe it'll happen, but I'm not sure I can see us losing that much that quickly. I can see it happening by 2015, say.)

Ilargi said...

Ok, that's enough from our contrarian brethren for now, lovely of you to stop by, but next time bring some substance, would you? It's not like we have nothing to do around here.

It never changes either, does it? The markets are up, gold is up and that will last into eternity. Yawn.

Well, we say it won't last. That's why there is a TAE in the first place. And we spend a lot of time here explaining why. Knowing full well that an incidental line or two in passing may seem to contradict all that, and also knowing that you guys invariably brings down the level of discourse. Wish that were not so.

No, we don't want our readers to get into stocks or gold, that's true. And yes, that's a point of view. The difference between the two points of view is that we have tens of thousands of words explaining why, and the passers-by have but a word or two to contradict it. Happens every few weeks or so, nothing new there.

We were dead on in 2008, but they keep asking where we were in 2001. Matter of choice, point of view, give it a name.

Anyway, I've had my fill, and this is my joint, so there you are. I see a bunch of things in the moderation list right now that don't contribute anything to anything, just the I am Right Why are You so Wrong Type, and I suggest y'all go be right somewhere else.

When I read someone who says "I've been here all along, and you guys have been wrong all along", I have to wonder what's missing from such a life.

If and when there are readers here who think the drive-by shooters are right, or have a point, or anything, feel free to follow them wherever they come from. I just hope you understand I have no time to repeat what we think over and over again, not for people who don't want a discussion, just want to be right.


scrofulous said...


Who said there was anything wrong about 'ilargi speak'? But now that you mention it ...;

TAE Summary said...

* Zoomers attack Doomers:
- I & S will be right right in the long term but happy days are here now
- Value of stock portfolio is what matters most in life
- Holding cash is gambling just like broccoli causes cancer
- Are you gonna believe the S&P or your lyin' CMIs?
- Apple beats estimates proving that the American consumer can take on an infinite amount of additional debt
- The Fed is not the man behind the curtain; The Fed is The Man
- The Fed has all of history on it side, if you count history as starting in 1933
- The stock market falling by 50% was just a blip
- An economy failing when fiat money is available has NEVER happened before
- Martin Armstrong says we are in for a long bull market
- Who was Stoneleigh's pick for the 1995 Superbowl? Enquiring minds want to know
- Stoneleigh could have made more money if she had bought plywood futures just before hurricane Andrew but she didn't - this tells the whole story
- Once on the operating table remember to ask your doctor how he treats a sore toe
- Stay away from losers and you will be fine

* The Doomers Strike Back
- Market is still 26% off highs
- Apple lost 6% after hours
- Topping markets inspire pot shots at doomers
- Fed induced rally is a gift to doomers, use it to prepare
- Have patience; Bad things come to those that wait
- QE2 will be a failure
- Drive down mainstreet and look at the shops and food bank lines; Green shoots are weeds in closed down gas stations
- Madoff investors did great until they didn't
- Real estate prices are not coming back for a long time
- The entire economy is based on fraud
- Those who see a tsunami first are ridiculed by those who see it last; The more advanced the warning they give, the longer they endure the ridicule of those playing on the beach

* US began as a criminal takeover; It is hard to get a deed to your house; If Fraudclosure isn't fixed it will be impossible to buy or sell a house; Only crime pays

* Paper is trash; Only silver and gold will survive currency wars; Gold fell way, way down to $1340 per oz today

* Prohibition killed liquor tax revenues; Income tax made prohibition possible; Unemployment in the Depression made liquor tax necessary again; Heroine tax could fund the Afgahn war

* Who steals my purse steals trash; 'tis something, nothing;
'Twas mine, 'tis his, and has been slave to thousands;
But he that filches from me my good name
Robs me of that which not enriches him,
And makes me poor indeed.

Ilargi said...

Oh, and I do know what's next: I'm going to be told I'm rude and sarcastic and [fill in the blanks], but all I have to say is that when I let a few Randy's and Minotaurs in yesterday, it was with the premonition that they would just grow bolder because of it, and lo and behold, here we are. They don't care about what we see, only about what they do, and I say there's a big old internet out there to vent your views, no need to do it here. I have plenty to do and feel no need to engage in a conversation that has no goal to start with other than for Stoneleigh and me to capitulate to a bunch of ill-defined views.

And yeah, sorry to give you the benefit of the doubt, and sorry you fall way short. But no surprise, we've been here many times before.


Stoneleigh said...

TAE Summary,

I love your posts, please keep them coming whenever you get the time :)

Gravity said...

Stoneleigh's been absolutely right about 2010 so far, she correctly anticipated it would be an unmitigated disaster from start to finish. Not a difficult prediction to make and easy to see realised, perhaps, but grounded in sound and comprehensive analysis.
Insofar as capital is subject to gravity, the stock market has also been an increasing disaster, its functioning corrupted and pricing mechanisms degenerated to the point where it no longer constitutes a viable marketspace as commonly understood. In its current unsustainable configuration it has become a direct threat to capital formation and preservation, but the skillfull misrepresentation of value or absense thereof, by means of econometric holography, has distracted and re-enchanted some people, thus postponing some panic, but not indefinitely.

What has been underestimated or relatively unanticipated is the willingness and ability to debase the markets themselves to act primarily as a conduit of numbness and cheap enchantment, rather than a place of beneficial exchange.

Draft said...

Some old Stoneleigh predictions.

"I doubt very much that the Republican party will survive in its current form. The political fallout from the financial and economic debacle to come on their watch should be enough to tear it apart. I expect their successors on the political right to be even worse - fundamentalist, xenophobic, fascist etc. " (2006) -- I'll say she hit the nail on the head there.

A great description of Stoneleigh's personal/family preparations (2006) -- lot to emulate here.

"One might think that making young children aware of a difficult future would amount to wallowing in doom and gloom, but in fact the opposite is true. Teaching children real skills and imparting to them how important these are likely to be is very empowering. Children who are aware and prepared now can become the leaders of the future when leadership will be crucial." (2006).

scrofulous said...

ilargi says "this is my joint,"

'Fraid not pal! Just like it is not the MSM's joint either.

I also don't believe that land should be owned though it should be protected.

If you want to run a private club then make it private ,don't make it part of the public media - all that amounts to is propaganda.

The commercials stole the airwaves and I do not want any commercial entity to dominate the ether, even if it considers itself a public service.

A Fall Guy said...


Good call. Logical, well supported arguments from different perspectives are good to help hone understanding of the system. But criticisms with no substance are just noise that takes time and energy from us all.

We are here trying to shine light on what's going on in order to help our families and communities to weather the coming storm. Not to get tips on how to make a fast buck. Comments should focus on providing info (e.g. links to relevant stories), well reasoned insights or practical advice (e.g. how to shift to a homesteading economic lifestyle).

Constructive comments help to sharpen our pencils, but destructive comments just dull the points.

BTW, I think that a posting every three days gives the right amount of time to digest the posting and comments. I appreciate TAE for thoughtful insights into the system.

zander said...

Ilargi says..."this is my joint"

aren't you goin to pass it round??


scrofulous said...

Good for you ilargi!

As long as you allow dissent and run a light hand on the censor button I think your site will not go too far wrong. (though a little thickening of the skin and suffering of the antics of the jester would do no harm);

The Q said...

"The entire system is grounded in fraud. Once a critical mass of people realize that, we are collectively in big trouble."

This past weekend I was at the local salvage yard looking for some used steel plate and had an interesting conversation with the old guy who has been running the business all his life. He was telling me that he had just loaded an entire ship with scrap steel to ship to China, and then, out of the blue, with no encouragement from me, said he sees "dark days ahead", and that while he isn't worried for himself, that he probably "hasn't more than another 10 or 15 years left", he "feels bad for the young ones coming up".

This is a rural area in a part of the world that has not yet been hard hit by the unfolding ecomomic crisis.

He is actually a cheerful, busy sort, so the choice of words really caught my attention and reminded me of the "social mood" shift predicted here.

The Anonymous said...

"Ilargi said...I see a bunch of things in the moderation list right now that don't contribute anything to anything"

Is that why you deleted my last post?

It was a legitimate question. Stoneleigh said DJIA will hit 1000 by 2010, and now she says she is "early" but it will happen eventually.

How long is "eventually"? 1 year? 5 years? A human lifetime? How many months, years, etc. of continuously saying "just wait, DJIA 1000 will happen" before you conclude "maybe I was wrong"?

Jeotsu said...

I&S, thank you for your hard work and insight, altruism in hard times is a wonderful trait.

A caveat I keep in mind when reading my doom-and-gloom. Most of us (at least those who comment) were raised in the west, and thus within a Judeo-Christian cultural mental framework. And this mental framework just *loves* a good apocalypse, rapture, judgement, etc. I know that this can color my own perceptions and predictions of what is to come.

Demanding I&S have perfect predictive powers is a waste of time. I very much appreciate their analysis and projections based on available data and their own substantial intellects, but taking what they say as the Received Truth is not a good approach. We should always apply critical thinking to everything we read. Financial data is always incomplete (due to unavailable data, plus fraud). And even the best minds don't always get it right. Those who are always looking for a Received Truth just don't want to think for themselves, and are the sorts that likely invested in Enron at its peak.

Personally, I am very, *very* happy that a complete meltdown has not happened… yet. Sure, the plane was flying into the mountainside two or three years ago. Yeah, the action of the government and central banks delayed impact, but made a wing fall off (Bailouts, QE1). Sure they are hoping to gain a bit more altitude by setting the plane on fire (QE2). Maybe that makes it worse when we crash, but I won't be able to tell the difference after the crash happens. All I will know is that it will be terrible.

While some may complain on "teh internets" that the predicted crash is not here, I am happy to use the time to prepare. We are in a much better position to weather a storm than 3 years ago. I am hoping they can hold off the crash for another 18 months or so. That would be really helpful! Lifeboat building can never be 100%, but we do our best.

Actually, our situation sounds very similar to the one Stoneleigh describes in her 2006 post. Even the alpaca! ;) Plan is to build another building on the farm in the next year which can be used as a second house in an emergency (either for friends/family who become homeless, or rent out for a source of income). Then we are hoping to get 2 or 3 KW of power systems installed- combination wind and solar. Never enough time, never enough money to do it all without debt!


Unknown said...

Great "action" on the Wall Street casino today, by the way. China makes a small adjustment in their interest rates and US Markets lose 2% and gold loses 3%. I'll keep mine in the matress for now, thanks.

Also, speaking of China, there is this . Sounds a lot like Orlando in 2007. I wonder if the citizens there have figured out "strategic default" yet.

mercutio said...

Raskolnikov's dream:

"He was in the hospital from the middle of Lent till after Easter. When he was better, he remembered the dreams he had had while he was feverish and delirious. He dreamt that the whole world was condemned to a terrible new strange plague that had come to Europe from the depths of Asia. All were to be destroyed except a very few chosen. Some new sorts of microbes were attacking the bodies of men, but these microbes were endowed with intelligence and will. Men attacked by them became at once mad and furious. But never had men considered themselves so intellectual and so completely in possession of the truth as these sufferers, never had they considered their decisions, their scientific conclusions, their moral convictions so infallible. Whole villages, whole towns and peoples went mad from the infection. All were excited and did not understand one another. Each thought that he alone had the truth and was wretched looking at the others, beat himself on the breast, wept, and wrung his hands. They did not know how to judge and could not agree what to consider evil and what good; they did not know whom to blame, whom to justify. Men killed each other in a sort of senseless spite. They gathered together in armies against one another, but even on the march the armies would begin attacking each other, the ranks would be broken and the soldiers would fall on each other, stabbing and cutting, biting and devouring each other. The alarm bell was ringing all day long in the towns; men rushed together, but why they were summoned and who was summoning them no one knew. The most ordinary trades were abandoned, because every one proposed his own ideas, his own improvements, and they could not agree. The land too was abandoned. Men met in groups, agreed on something, swore to keep together, but at once began on something quite different from what they had proposed. They accused one another, fought and killed each other. There were conflagrations and famine. All men and all things were involved in destruction. The plague spread and moved further and further. Only a few men could be saved in the whole world. They were a pure chosen people, destined to found a new race and a new life, to renew and purify the earth, but no one had seen these men, no one had heard their words and their voices. 17
Raskolnikov was worried that this senseless dream haunted his memory so miserably, the impression of this feverish delirium persisted so long."

Gravity said...

"The Fed can inflate asset prices.
No? Then what's happening right now?"

What is happening is that they're artificially supporting asset prices for lack of genuine price support, but this is not inherently inflationary as such, nor can it be called a direct effect of proper inflation. It might have contributed to organic reflation if these higher asset prices still afforded a reinforcing increase in velocity or credit expansion as they normally would, but no, these currently missupported asset prices are not the product of inflation as some would want, nor will they act inflationary on the money supply without the ability of re-establishing genuine price support from the base upwards, they'll recollapse as soon as support is withdrawn.

Conversely, I was ever so curious whether some commodity price rises can be more easily called an effect of highly localised static inflation by misplaced easement, or an isolated effect of premature inflationary expectations, somehow, despite the aforementioned asset support not being so, and if these particular price rises could possibly behave inflationary, or if they'd sooner contribute to further debt deflation.

It should be perfectly possible to focus scarce inflationary pressure into commodities while simultaneously suffering a catastrophic debt-deflation everywhere else, so some of those commodity price increases may be properly called an effect of compartmentalised inflation, but are not necessarily inflationary in such an overpowering deflation. The asset price support as pertaining to bank assets is more baseless, because they're not being levitated by virtue of directed inflationary pressure in the same way commodities might be, too heavy for that, no easement within reason could accomplish this, only a conflux of fraud.

Hombre said...

Draft quoted the StoneLady - "One might think that making young children aware of a difficult future would amount to wallowing in doom and gloom, but in fact the opposite is true. Teaching children real skills and imparting to them how important these are likely to be is very empowering. Children who are aware and prepared now can become the leaders of the future when leadership will be crucial." (2006).

It's true for adults as well, IMO, and thats what I meant by the above comment...
"Realism is truth, and the truth is always a winner in the end."
Realism is very close to gravity. One ignores either at their own peril.

steve said...

Wall Street is not a casino it is a zero sum game with price movements that are random and unpredictable

jal said...

The dominoes are starting to line up for the fall. (put backs)
They got 60 days to stop the dominoes from cascading.

Erin Winthrope said...

No problem with the content

You guys do need to pick up the pace though

Zero hedge is making your site increasingly irrelevant.

Things are moving fast. TAE is too slow.

weeone said...

I&S are taking a lot criticism for their short-term predictions here. My advice is to stay away from short-term predictions. Michael Ruppert and Jim Kunstler are other peak oil writers who have done this and have lost some of their credibility because of it.

Jay Hanson is the most visionary and intelligent analyst of human society I know. He will only say he expects anarchy to rule in the USA in roughly 12 years plus or minus 10.

It doesn't take a genius to figure out that all the resouce crises we are facing spell doom for industrial civilization. That much is a given. Whether or not the Dow crashes to 1000 this year or next or five years from now is hard to predict.

bluebird said...

FWIW, I think Randy, Phoenix, Arthur, Minotaur are the same person.

message_in_a_bottle said...

What Kotov says does not make sense:

If the chain of title is broken you owe the money to the last owner of the note before the first break in the chain.

The question is only if this owner can be identified. But very likely he can. You simply follow the chain of title transfers until you can't continue.

All this creates is some bureaucratic work and some delays.

The more important effect is that confidence in the propriety of transactions is shaken and without that confidence you can't engage in business transactions.

Unknown said...

Today disccussions seem a bit heating up.
Thank you Ilargi and Stoneleigh for all the hard work. Please do not stop writing.

scrofulous said...

@ Fall Guy

"We are here trying to shine light on what's going on in order to help our families and communities to weather the coming storm. Not to get tips on how to make a fast buck

Your last point here first: Considering what has been going on for the past couple of decades (and more) what else have we been doing here in the land of lotus except making a fast buck, whether by home ATM, or stock market 401K. Even then most jobs done are really very pointless and generally ecologically degrading. Compared to most of humanity all of us are making fast bucks.

About shining a light, the light you seem to be shining would fit right into the preparations for the fall of Rome and a back to the Dark Ages movement. We have done that and have done it in spades. Personally I would like this site to talk a little about how we can work it so that we don't just do what has been done before. You know, come out of the other end of the funnel with a decent world worth living in and not just a hide out from Mad Max and ensemble. (Actually that base does get touched at times here but not with the emphasis I think it deserves - gets sort of lost in the homestead chatter - all of which can be read in hundreds of books )

I think your heart is in the right place but we godda gets more than our hearts in the right place or in 500 or a thousand years from now we will be right back here having this conversation again.

Anonymous said...


"France is coming apart at the seams". Oh my. Sounds serious.

Except that, where I live (in France), there is gas at the pumps, food in the stores and a bunch of kids playing around in front of their school (including my daughter).

The foreign press would appear, again, to be alarming their readers. But this is just something that happens from time to time. You live with it, work around it and the kids let off some steam.

What worries me is that people are focussed on a silly pension reform when there are truly more important things to worry about and to deal with.

Oh well. Ciao,


P.S. Love the image of Ilargi relentlessly kicking the darkness.

P.P.S. El Gal is absent for reasons other than boredom.

Anonymous said...

China Said to Halt Some Mineral Shipments to U.S. -

The article speaks for itself. Trade wars widen. Down that road lies real war if we're not careful.

Hombre said...

Not to worry about this ole Hoosier. ;-) My roots are well grounded in earth skills, from a large Midwest farm family, construction trades, and a few decades spent in heavy manufacturing troubleshooting electronic machine systems. Around here we live in the real world of the community. Our survival skills will still be at work when a bevy of stock market junkies will likely be jumping out of their 36 story windows.
As for my neighbors, who are not “losers” BTW, they are as good a people (no better) as are to be found anywhere. Indeed, we did get a little spoiled and hoodwinked over the years.
And hey, TAE detractors, don't let your "winners" light shine too brightly, as you might make the most likely target when/if the projectiles start flying.
One doesn’t have to have extensive experience in economics and finances to see the crassness of this evolved world, common sense works just fine, although the articulation of TAE hosts and the fine comments viewed here are very much a help to those of us who spent their lives at other pursuits. What we do now is help each other and make fundamental plans to survive, with little or no regard for how much money we make doing so.

Erin Winthrope said...

@FB and the French Protests

"You've got a lot to learn about journalism......News is what a chap who doesn't care much about anything wants to read. And it's only news until he's read it. After that it's dead."

Evelyn Waugh, 'Scoop'

The best book about journalism ever written.

A Fall Guy said...

@ logout

I agree that western society has been focusing on making a fast buck (or getting something for nothing, as Kunstler says), or at least telling its citizens that's what they should be doing. But my point was that the TAE site is not about tips to making a fast buck. I am not interested in reading comments by selfish people trying to satiate their greed (who either lament loss, or brag about gains, on stocks, gold, whatever).

I also agree that we should be focusing on what can be done at various levels so we can help our families and communities be as resilient as possible.

One role of TAE is for constructive dialog to help clarify what we see in the media and going on around us. Collapse of a complex society can take a long time (i.e. multiple lifetimes). In our "instant gratification" culture, we seem impatient that it isn't happening fast enough. I am grateful for periods of calm to continue preparing. While I certainly expect some unpleasantness along the way (to put it mildly), we are traveling a winding road down the mountainside, with many blind corners and surprises in store (some of which will be good). It will be our surviving children's grandchildren (not that I have any) who may reach level ground to build something new from the much depleted world. The forces are titanic, but yet we can still plant seeds from which new gardens and forests can grow.

Craig Morris said...

"Wall Street is not a casino it is a zero sum game with price movements that are random and unpredictable"

I made a lot of money in the stock market because I worked for a large corporation and got options. I never bought a single share with my own money.

I think the stock market is worse that a zero sum game. There are a lot of people who get a cut without much risk (brokerage fees and taxes are other examples) leaving "investors" to fight for what remains. In this sense it is like a slot machine. It may pay back 98% with some winners and losers but the house (employees with stock options, brokers and the IRS) always get their cut.

Unknown said...

It looks like David Kotok plagiarised the article you quoted:

scrofulous said...

Sailor man said...

" Today disccussions seem a bit heating up.
Thank you Ilargi and Stoneleigh for all the hard work. Please do not stop writing.

A non sequitar if ever I read one.

Now why on earth would they do that, is there some sort of connection between that ceasing and desisting and a temperature increase?

You leave me all at sea sir.

Phlogiston Água de Beber said...

@ logout

Now there is a unique criticism angle. You are suggesting that we spend to much blog space discussing the little things that we can do and have some control over. It would be better, you suggest, if we devote lots of time and space discussing how to accomplish things over which we do not have and never will have any control at all.

Whether Max and the road freak show appear, or not, is not ours to determine. Discussing what one might do to avoid such folk or try to deal with them could be considered worthwhile. But, as was the case in Mad Max's world, it will be up to each to decide whether the world will be worth living in or not. We do not get to decide how a wine glass thrown into a fireplace will shatter. That it will no longer be a vessel from which to sip wine is not in doubt. A shattered civilization cannot be expected to be a very civil one. But, trying to predict exactly how uncivil it will get is just a complete waste of time and energy. There are way too many variables and unidentified and misunderstood fault lines.

scrofulous said...

ilargi, would you (or anyone else knowledgeable) comment on this From Jim Sinclairs Mineset:

"The End Of Securitized Mortgage Debt

My Dear Friends,

It is apparently above the head of most of the sheeple, but today the majority of OTC derivatives known as securitized mortgage debt ended.

The presence of the NY Fed in this potential litigation says that the Fed is holding paper which does not qualify for holding according to its own indenture.

This is the end of the majority of a pile of garbage two trillion dollars high. This is one of the best reasons to own gold, regardless of the mindless actions of algorithms impacting price today.

The New York Fed, Pimco and others threaten litigation via demand letters to force the Bank of America to buy back $47 billion in OTC derivatives known as securitized mortgage debt.

Because the OTC derivative cannot stand the light of day in court, a demand letter is a powerful first tool.


Does this have leggywegs or will it just end in smoke?

Phlogiston Água de Beber said...

It seems the water pistol armed drive by shooters picked a rather unpropitious day to join together, be they one or many, to sing in four-part harmony the praises of the market and the Fed. But, in their defense, how could they have known that the PBOC actually controls where the market will go?

Don't ya just love the smell of smoked brains in the evening? :)

Ilargi, much thanks for closing the gate. Even Doomerburghers are allowed to be a little discriminating in who they hang out with.

Ventriloquist said...

Ted said...

No problem with the content

You guys do need to pick up the pace though

Zero hedge is making your site increasingly irrelevant.

Things are moving fast. TAE is too slow.

Well, it's apparent that something happened here today. Something that rubbed Illargi the wrong way. And, I'm sure, criticism is a hard element to swallow.

However, as with all criticism, there is always an element of truth.

Witness, the above.

Our commenter Ted has compared TAE with ZH. Unfair?

Well, that depends upon your perspective. I personally peruse ZH on a regular basis. Actually, about hourly during the M-F business week. They are an extremely astute crowd, and they have commenters that are light-years above the riff-raff that postulates their pustulance on many other forums.

Of course the comparison is unfair.

But so is life.

My suggestion to I + S is that you pause a few moments before responding to the people here who respond, based upon their experience with ZH.

You cannot ever compete with that site, nor should you ever attempt to. But just place it in a small compartment somewhere in the back of your minds, that the very same people who pay attention to this site also follow ZH very closely, and the turnaround time is quite different. That's all.


scrofulous said...

Hi Greyzone,

Good of you to post that article about rare earth. Before we get that war though and if that today's news hasn't already gone old on the market, then anyone with a few extra sheckels they can afford to lose might gain a few more by putting them on a N.American rare earth company. There are rare earths in them thar hills but the Chinese have priced them out of the market.

scandia said...

@ Zander, Re Smith's excellent article on geopolitics and oil I would add the drone factor to his analysis. Not necessary anymore to transport armies by air and sea.

Starcade said...

Ilargi and Stoneleigh:

What you don't get is that these people's VERY LIVES are dependent on that gold is up and the stock market is up and that this will go on Forever and Ever, Amen.

What they don't get is how many others' are as well -- and what's going to happen the moment they can't paper over the next "Flash Crash", caused by the paper-thin number of actual traders on the markets these days.

The reason I've been "wrong" is the same thing: I truly saw about 3 1/2 years ago (when I was actually trying to pay down some current debt) that the whole system was basically leaving the playing field, and the nationalization of Fannie/Freddie did the rest.

Foreclosuregate is basically the means used to Extend and Pretend. I was wondering for a long time how the banks could remain upright and the checks could continue unbounced.

I think we found it, people.

The moment BofA is held to account, welcome Bank Holiday, welcome eventual Jubilee.

(Then, welcome new currency and government too.)

Starcade said...

The Anonymous: You know what's going to happen soon:

The only three stocks basically doing anything in this market are going to be moved to the DOW 30 to prop it up for a while.


Once even they can't hold it up: 1,000 -- here we come.

Certainly not a "human lifetime" -- I'd certainly say in the next five years.

I've made my position known as to why I wouldn't be in the market even if I had millions: Every meaningful company in the country is a zero. It's being propped up by this whole fraudulent process.

That's why Foreclosuregate is so ominous. The moment we pass Event Horizon on the knowledge of the whole fraudulent process, be ready to move quickly.

Phlogiston Água de Beber said...

A lady named Sherry Wolf used this line to close an article on the Not-So_Great Depression over on Counterpunch.

This Not-So-Great Depression is a stage in what is likely to be a drawn-out process of decline, but its volatility is not just growing a batshit crazy right. It is starting to conjure a left into existence as well.

Whether her observations are 100% accurate or not, ask yourself this, how could that possibly end badly? Hmmm, does anyone remember how the Russian Empire became the Soviet Union or how the Wiemar Republic became the Third Reich?

But enough of politics, I have another line to steal. This one by Lily Tomlin, which Pam Martens purloined to lead off her excellent expose on the Koch Boys activities.

Lily Tomlin said it best: “No matter how cynical you become, it's never enough to keep up.”

anon10 said...

Your senator learns that a much- maligned weapons system now has enough votes for funding. Before the news gets to a reporter, he buys shares in the arms manufacturer for a quick, handsome profit.

What’s wrong with this picture? Nothing, according to the law. Nor would it be illegal for him to tip someone else, say, his largest campaign contributor.

Laws that criminalize insider trading cover corporate insiders and those they tip, but not specifically Congress. And while scholars differ on whether existing law could be applied on Capitol Hill, it hasn’t been.

It’s a gap in the law that two members of Congress have been trying for years to plug, to no avail. Congress is famous for telling others what they can and can’t do. When it comes to proscribing its own conduct, it’s a different story.

This week the Wall Street Journal reported that during the past two calendar years, 72 congressional aides from both parties made trades in companies that their bosses’ help oversee. Among them are top advisers to Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi. Their timely investments proved profitable, but the staffers deny the trades sprung from inside knowledge, the Journal reported.

Either way, suspiciously timed trading on Capitol Hill isn’t new.

Companies stuck in asbestos litigation suddenly saw inexplicably heavy trading and a rise in share price on Nov. 15, 2005. The next day, then-Senate Majority Leader Bill Frist announced a breakthrough on a bill to create a government-backed fund to settle asbestos cases. It turned out that political intelligence firms benefitted from a leak in Frist’s office, Business Week reported the following month.

Tristram said...

I am not sure what argument the latest crop of doubters is making (if any), but right now there definitely is a new feature on the horizon -- called QE-2, and it's not emotional or unreasonable to ask if this changes the game.

Ilargi has argued quite clearly that QE-2 can not achieve any of its goals as stated in the MSM -- mild inflation, renewed investment in plant and equipment, boost of exports, boost of employment. Fair enough; it's hard to find any credible writer who thinks QE-2 will work that way. But there is an entirely different, semi-underground way to explain the goals of QE-2, which has been clearly articulated at ZeroHedge and seems to be on the mind of a lot of Wall Street insiders: that the Fed is simply attempting to support asset prices, to create a wealth effect to keep people spending and stave off the deflationary spiral. The "Bernanke Put", it's called.

It strikes me as wrong for Stoneleigh to brand people who raise this issue as merely emotional. A lot of very sober commentators take it seriously, such as John Williams at shadowstats.

The main weakness of the TAE thesis, it has always seemed to me (and I said so in years past) is that it assumes some reasonable limits to what the Fed will do. It assumes that the Fed will at some point recognize its limits, say uncle, and let deflation occur. In fact, a major feud seems to have broken out within the Fed between Bernanke and the loose-money gang on one side, and a minority of "hawks" on the other. ZeroHedge follows that feud closely; TAE not so much. Bernanke has touted himself as a deflation expert who knows how to stop deflation; his pride is on the line. If you want emotion, there it is. Combine that with a lightweight, increasingly desperate fool in the White House, and where is the limit? The envelope of reasonable keeps shifting. For the Fed to buy every long-dated US treasury bond would have seemed unreasonable in the past, but suddenly not. Or for the Fed to buy corporate debt, or REIT equity, or commercial real estate outright, or what is really off limits now?

Tristram said...

[Continuation of previous]

A lot of people have been guessing from the start of this crisis that TPTB will try to engineer a more extreme version of 1979-80, with a brief bout of high inflation followed by tight money. Bernanke and the loose money gang seem determined to keep poking the beast until it roars. A good 50% inflation over a couple of years would reduce real debt loads by a third, and set the stage for renewed debt-expansionary growth. That will badly hurt holders of long-term bonds, though the Fed is setting itself up to take a lot of the loss (and in Stoneleigh's scenario those bonds would default outright so, hey, pick your poison). It would be an ugly scenario, but perhaps less ugly than any alternative; and it seems to have been telegraphed to all the Wall Street / PIMCO insiders.

It's not helpful to know that society will collapse in +/- 10 years, if your $USD wealth is about to take a 33% haircut in 2011. It's a very dangerous game for ordinary people trying to survive. Depending on which faction wins at the Fed, exact opposite strategies might be called for. But everyone here says over and over that TPTB don't work for our benefit. So who expects it to be easy?

P.S. I realize the foreclosure scandal weighs in strongly on the side of I&S. One pillar of Helicopter Ben's strategy of ZIRP forever was forcing people back into real estate. (Think of it like this: you can put your money in CDs for 0% interest and pay rent, or buy a foreclosed house for cash and save rent, with an effective return of around 5%. Or even if you need to borrow the money from F&F, you mortgage payment is still less than rent at the low end.) Now the MBS / foreclosure scandal has screwed that up and Bernanke is shouting obscenities in the Fed mens' room. Bailing out the banks post-putback will be politically difficult. So maybe that is the end of the game, and Bernanke can let himself off the hook by saying even he can't stop deflation in such a dysfunctional environment.

NZSanctuary said...

The could be the time it all starts to unravel faster: non-bank big business (such as pension funds), in an attempt to save their own butts, will go after the legitimacy of all the financial fraud... Corporate interest vs corporate interest... I like the odds much better than peons vs corporate interests.

Nassim said...

I think it is most unfair to go back many years and to ask what someone thought was going to happen at that time. It reminds me of my parents warning me off marrying some girl by telling me that she would become ugly when she is old.

Two years is reasonable but even that is meaningless when the rules of the game can be changed and unknown unknowns start cropping up like this property title imbroglio.

The lending of money to people who did not deserve it does not fall into the same category - more a known unknown. Everyone knew it was going on but the scale and effects were not.

Personally, I am amazed that this site is refreshed quite so often. I think a weekly edition would do adequately and it would drive the people who need their crash-fix to ZH.

Like many non-Americans, I really could not care less about the Dow and its sisters. I am sure it is important, but I don't quite know why.

Erin Winthrope said...

why can't the fed buy all the problem MBS?

they've already started

full steam ahead

zander said...

@ Scandia.

Yes true, that never occurred to me, and I noted he never mentioned a nightmare scenario nuclear exchange, as if not to tempt fate methinks.


Funny, I was just thinking myself about how the British media have indulged in the storm in a teacuppery of the French strikes, knowing full well we will feel the Lion's claws of full scale industrial action over the winter, hell no, after the spending review cutbacks today, which we have been reliably informed, will be the worst since the 30's. Result = 70 - 80 billion wiped off the budget deficit, that defecit being 160 ish billion, so let me see, hmm, we have at least another set of cutbacks coming eqivalent to, or greater than, these ones, and after that we gotta make a start on the 1.4 Trillion national debt,.... I do wonder about the rosy scenario brigade logic when faced with figures such as these. Anyway... point I'm trying to make is, with all due respect (and my own personal respect for them not taking any shit from authority) to the French, they will strike at the drop of a hat if their coffee is the wrong temperature, so what the hell is gonna happen there when the inevitable cuts come knocking on their door, Christ, the country will be brought to an abrupt standstill IMO. Your take??


Unknown said...

People that drive with a rear view mirror get into bad wrecks.

Nobody has a crystal ball here. QE and QE2 can keep the band playing for a bit longer, but we are not going to run out and dump cash into SPY and the like.

We built a passive solar home on tillable acreage in upstate NY back in 1979-80 at the time of the second oil shock. After being laid off in 1982, we went back to school and hung on to the place at great cost.

Business and work improved in the 1990s for us. In the mid-1990s we went to Arizona for a few years, and had a McMansion with a wonderful pool and view (we kept the doomstead). We cashed out in 2004 making a lot of money. We were a couple of years too early. BUT PIGS GET SLAUGHTERED.

One of my best friends bought his McMansion in late 2006 -- the peak was already in and I strongly advised against this move. His equity was wiped out in short order and he's now underwater with his prestigious boat anchor.

Getting prepared in the 1980s was a bit early, yes. Being prepared in 2007 or 2008 was a bit early, maybe. But we are in a much better shape for doom than most.

The trols have to be blind not to see that first world economies are utterly bankrupt. Financial wizardry might keep the ball rolling for a while, but only the ignorant will be fully invested in paper products. Good luck to those "investors".

Hombre said...

FB - merci monsieur. Your comments on the news from France is appreciated and if my perspective was a little over the top it is because of reports such as the following (below) from various news sources.
It seemed curious that the reported striker's motivation was based on a later retirement age, yet the main body of protesters are being described as youth. I suspect there is a lot more surfacing than meets the eye, (or the street.)

Rioters rampage, protesters block French airports

D. Benton Smith said...

Hi Nassim,

You said, "I think it is most unfair to go back many years and to ask what someone thought was going to happen at that time."

By that statement I must conclude that the recording and study of the distant past (i.e. History)is an unfair pursuit.

Somehow I just cannot believe that you disdain entirely the lessons of history.

D. Benton Smith said...

The manse of world Finance and Insurance is built upon the sand of bilaterally fraudulent Real Estate mortgages. All four corners of this FIRE economy are utterly dependent upon the sanctity (and enforcibility) of property rights, binding contracts, and legal records keeping.

It should be apparent to all that there is no solution to the so-called "Mortgagegate" that it not also fatal to one or the other (or both) parties in literally billions of transactions.

Even drastically fantastical solutions (which are the only ones so far proposed) cannot escape that primary impasse.

Therefore, involuntary Jubilee is in progress, but don't expect much jubilation to come with it.

And by the way, isn't it about time our vaunted main stream media came up with a better suffix for scandal than that tired old '-gate' thingy?

D. Benton Smith said...

Oh yeah, and one more little thing.

Has anyone even challenged the incredibly arrogant presumption that the stronger of two parties in a contractual agreement can somehow just OWN the contract... to the extent of being able to sell it at will to whomever wants to buy?

How would that work out in, say, a marriage contract, or the progenisis of children? Can I sell them, too?

Are they then bound over to their new owners with concomitant obligations intact?

Well, if not, then WHY not?

What if my mortgage were sold without my full informed consent (through a sequence of transactions to which I am not a party) in such a manner that my monthly house payment goes straight into the pocket of Osama Bin Laden? Is THAT okay? Would I still be obligated to pay, upon pain of foreclosure?

If not, then WHY not?

To recap my basic question, how is it that the more powerful of the two parties in a contract somehow gains OWNERSHIP of it?

In other words, if I sign a mortgage contract with Home Town Savings & Loan then what gives them the unilateral right to sell the paper to someone I have valid reasons not to be associated with?

Should I be forced into supportive association with Bin Ladin Securities, Goldman Sachs or Al Capone?

When I sign a contract I am shaking hands with an individual... not with every one that individual may do business with in the future... so doesn't the "sale" of a contract actually BREAK it in a very fundamental and significant way?

I say it does, and I further say that the practice is intrinsically unjust, unwise, and unlikely to last.

The current state of affairs shall constitute the supportive documentation for my position on this issue.

soundOfSilence said...

The Anonymous said...

"Ilargi said...I see a bunch of things in the moderation list right now that don't contribute anything to anything"

Is that why you deleted my last post?

It was a legitimate question. Stoneleigh said DJIA will hit 1000 by 2010, and now she says she is "early" but it will happen eventually.

How long is "eventually"? 1 year? 5 years? A human lifetime? How many months, years, etc. of continuously saying "just wait, DJIA 1000 will happen" before you conclude "maybe I was wrong"?

If Stoneleigh were to say 02/13/2011 (to pick a date out of the air) and the next day it wasn't 1000 what would you do - dance a jig?

If a few quarters after that the DOW (what is it a golden calf that you worship) were to be sitting at 1000 would you come back like a penitent, say "maybe I was wrong" and attempt to have an intelligent conversation?

I'll forgo the fact that we're talking about trends baked into the cake at this point that will take longer than the end of this week to play. The point is obviously lost on you.

Your question and the direction it has dragged everything for the last week is rather boorish and your re-asking of it should have followed first time you posed it into the dust bin.

soundOfSilence said...

logout said...

ilargi, would you (or anyone else knowledgeable) comment on this From Jim Sinclairs Mineset:

"The End Of Securitized Mortgage Debt

My Dear Friends,

It is apparently above the head of most of the sheeple, but today the majority of OTC derivatives known as securitized mortgage debt ended.

The presence of the NY Fed in this potential litigation says that the Fed is holding paper which does not qualify for holding according to its own indenture.

I saw a few articles last night the mentioned the NY Fed joining the litigation.

I'm not a expert ... but I can't see the Fed which has spent the last few years propping up the TBTF being a party to causing BofA to fall over (so to speak).

Smoke and mirrors for as long as the smoke and mirrors are deemed necessary. Wasn't Goldman just involved in a lawsuit that was going to shake the foundations of Wall Street? It ended with a slap on the wrist and fine that was a few percent of the previous quarters profit.

Punxsutawney said...

Coy Ote,

The youth are the main body of protesters in France because they understand that the longer their elders work, the fewer jobs will be open for them. Raising the retirement age has the effect of increasing the pool of workers and putting downward pressure on wages.

ric2 said...

From Charles Hugh Smith's latest posting, The Stock Market's Long Decline Has Begun:

The Fed's campaign to boost the risk-trade in equities by destroying the dollar has reached its limits. Now gravity will take hold as stocks enter a Long Decline.
. . .
Mr. VIX is waving the yellow flag of "crash ahead." Complacency in the face of sobering financial realities is not just unreal but completely deranged.

He describes several technical indicators that are pointing to a sharp decline in the stock market. He says the market rolled over on October 19th.

He seems to believe that the decline in the market is driven by macroeconomic events and trends such as the following:

-unresolved Eurozone debt crisis
-massive credit/real estate bubble in China
-bank insolvency crisis in the US

Unknown said...

@D. Benton Smith

I think the answer to your question is that a note is considered to be a negotiable instrument, not a contract per se. The laws relating to negotiable instruments of credit are very old and well established, as letters of credit were the first true paper money.

Not saying that I don't agree with you philisophically, but you are not going to change 500 year old law by not liking it.

Stoneleigh said...


But there is an entirely different, semi-underground way to explain the goals of QE-2, which has been clearly articulated at ZeroHedge and seems to be on the mind of a lot of Wall Street insiders: that the Fed is simply attempting to support asset prices, to create a wealth effect to keep people spending and stave off the deflationary spiral. The "Bernanke Put", it's called.

That's exactly what Bernanke is trying to do. It's a smoke-and-mirrors act designed to restore confidence, and nothing more. It isn't going to work once collective psychology no longer supports it, and that is right around the corner IMO. Rallies make central authorities look wise and effective, while declines make them look foolish and incompetent.

It strikes me as wrong for Stoneleigh to brand people who raise this issue as merely emotional. A lot of very sober commentators take it seriously, such as John Williams at shadowstats.

There is no shame in being emotional. I am not suggesting their view is trivial at all. Emotion is a vital part of being human - the major driving force for our behaviour - which is why the human herding model is so powerful.

Those who do not see the role emotion in human decision-making (including many, if not most, commentators) are often destined to confuse emotional signals with facts and rational constructs. At least the emotional signals colour the facts and affect interpretation. That is very dangerous near trend changes, as the emotional signals one picks up (and then reflects) can be sending exactly the wrong message at that time. This is such a time. Because IMO this is a peak, we are seeing a lot of strongly-worded denial.

Stoneleigh said...


I agree with Charles Hugh Smith.

Stoneleigh said...

We do not have the same focus or goals as Zero Hedge and are not trying to compete with them. ZH has a great deal of useful information and is aiming to help people with money make more of it. We are trying to help ordinary people not to lose money. The little guy never gets an even break, especially in a Ponzi collapse. We do what little we can to change that.

We are trying to improve he odds that some of the wealth that comes out of a system crash ends up in the hands of ordinary people who will do something useful with it for their families, friends and communities. That is far better than seeing it all end up in the hands of an oligarchy that will not care about the rest of the population at all.

el gallinazo said...

"Minotaur said...
I & S don't know jack squat about what's going on.

I been here forever and its all blah blah terror terror the sky is falling blah blah and nothing happens.

My mom knows more about things....and she don't know diddly squiddly about nothing except who's the 'The View'

Anyway.....that's why el gal don't write no more. He got bored too."


Totally wrong! Does Minotaur think that choosing to conjugate auxiliary verbs improperly makes him a grassroots populist?

I don't comment much because I no longer have internet in my house living (in semi-rural Argentina) about 2 km past the phone and cable lines. I go into town usually every other evening on a motorcycle over dirt roads and load up on caffeine and world events, downloading most of the stuff including TAE posts and comments, interesting ZH articles and various videos. When I comment, it's usually on the next thread and 48 hours later, so it's a little like a time warp. In a way, I have gone back to the snail mail sense of time and interaction. I am looking into a USB cell dongle. I tried one out and it was totally inadequate, but am looking into another company.

I have been building a house here and settling into a new marriage with some rough spots that need attention. Building a house where you actually are fluent in the language is difficult enough. So this has also reduced my time for commenting. Finally, my memory, to put it lightly, is not what it used to be, and in terms of commenting, it means that I can't use the internet for fact checking while writing. It has also made it far more difficult for me to progress in fluency in Spanish. I had four years of Russian in high school and a year in university, getting a 740 in it on the college board. My wife asked me at a party for one of the kids how do you say Happy Birthday in Russian and I couldn't remember :-( Oh well.

Anyway, I always read the entire comment section here. But circumstances have transformed me from being a loudmouth to a lurker :-) Additionally, I am a lot less angry now and my commenting has less of a bite to the jugular. There are also a lot of new tags on the site (plus the old standby's) who are doing a more laudable job of elucidating than I could.

As to whether to lay out my vision to the next generation, that is a bit of a quandary for me as I have now taken on four step-children ranging in age from 19 to 26. The younger girl is pursuing university studies in law, and I have no desire to demoralize her. The older boy is pursuing a university level course as a gourmet chef. If I can get my own ducks in a row, they will learn more subsistence things as circumstances demand.

As to some of the new "zoomers" here, they (he?) may be being paid by the federal government to post these views. As I mentioned in an earlier comment, Obummer has appointed one of his old Chicago law prof buddies (moved to Harvard and now husband of Samantha Powers) as Minister of Propaganda. His primary mandate is to infiltrate and disrupt the growing 9/11 truther movement, but the financial truther movement probably has some serious funding as well. This good old boy is Cass Sunstein. See the Guns & Butter archive of Sep 22 if you would like more details.

BTW and in a related posting, Dimitri Orlov has knocked another one out of the park. He is a man who cannot be bullshitted. See:

el gallinazo said...

Interesting that the giant scumbags have started to attack each other for the leftovers, namely the NY Fed and Pimpco suing BoA. Does this mean that they have decided to liquidate another of the TBTF, pumping its imaginary assets into the remainder of the TBTF primary dealers. More catabolism? Vrabel does a nice job, including the relationship of the PD to the Cartel. Looking forward to the rest of his tutorial. Never forget that 1000 families own more than 1/2 of the worlds well according to a UN research paper published earlier in the decade. That leaves about 7 billion with bubkas without raisins or nuts.

Also recommend the short video "Crashing markets Deflation explained". Don't have a URL though I saved it as a .flv. Was on CNBC a couple of days ago on squawkboxeurope.cnbc. Explains Stoneleigh's deflation perspective clearly and succinctly from a slightly different angle.

As to Gravity's question about a pocket of inflation in a deflationary credit collapse, don't fall into Ilargi's "cookie inflation" fallacy. As the billionaires realize that the light at the end of the tunnel is an oncoming train on the same track, they are trying to cash out of Ponzi financial "assets" into commodities, thinking that they will maintain wealth better than the financial bags of shit. This is just an abrupt shift of asset allocation in a credit collapse. Same thing happened in 2007-8 with USD 145 crude oil. Same result, with the intermediate result being that oil will collapse the economy faster as it rises, food will further starve the world's poor, and gold will lead to a further lack of confidence in fiat.

I expect another false flag operation to a USA city to coincide with a major collapse in the equities markets and/or a kick-off to an even larger war than Iraq and Afghanistan / Pakistan / Yemen. I would **guess** a dirty nuke in a city in the 1-2 million population range. Something bigger than 9/11. Like smack addiction, terrorism needs ever larger doses to make an impact. Eventually it may devolve to 1984 conventional cruise missiles pounding cities every couple of days. Time to dust off your Orwell. He got the idea from the German V-2's in Europe, but for Usacos it will be false flag as in 1984 (as much as a cruise can carry a flag).

Ever notice that the ethnic and religious groups conflated by the MSM and Hollywood with terrorism just happen to be sitting on **our** remaining oil under **their** collective brown and black butts? What a coincidence!

el gallinazo said...

IAs to the delay in the equities collapse, the one area that I disagree with I&S is the power of the Fed and the Cartel to influence the S&P. I think Stoneleigh underestimated it and this led to her predictions being a tad premature. However, I do agree that their power is limited, and that they are "running out of ammunition" rapidly. Devaluating the dollar with POMO's is the last gasp.

As to complaints that Our Lady of the Irrefutable Conception is not offering "solutions," Stoneleigh takes a "thermodynamic" approach to the big picture. There are no overall solutions to peak finance and peak oil. Just as enthalpy and entropy determine the free energy of a chemical system and dictate the movements to equilibrium, these peaks will determine the overall movement of the global population. Exhausting one's energy on national politics is a losing proposition. One's best bet is to focus on the local community and one's doomstead, trying to build a semi-isolated pocket of negative entropy in the system as it collapses. There are no macro solutions. However, when the hundredth monkey sees the light, the population may be able to curtail further indebtedness to the grand Ponzi. The vast majority of individuals have already opted out of the equities Ponzi as are the corporate insider individual execs currently. They know that their quarterly reports are totally fraudulent. So who is going to wind up with the "empty bag" as Stoneleigh puts it, or as I would, this giant bag of shit? The pension funds, the Fed, the Treasury, the Primary Dealers, i.e. the TBTF banking cartel? Inquiring minds want to know :-) Enough to keep me riding into town on my moto to catch the next installment of "As the World Swirls" (around the drain in the toilet bowl).

Vrabel reminded me that the Bank of North Dakota is the one bank in the USA out of the grand Ponzi. Wonder what it takes to open up a checking account and a conduit? They may be the last bank standing.

scrofulous said...

Hi Stoneleigh, I was having a bit of trouble swallowing this rather over boiled bouillabaisse Américain of an article by Charles Hugh Smith:

"The Great Game: Geopolitics and Oil "

but just couldn't keep it down when I bit down hard on this rather rancid indigestible fish bit:

"In effect, all the U.S. needs to do is either wait for this crash in oil prices, or nudge the Saudis into creating the crash with overproduction. " (my bold)

Rumor said...

El G,

Nice to have you ring in, you old vulture. I've been missing your touch around here (which is not to say others aren't appreciated).

Incidentally, thanks for the Orlov link, and I do agree with you, if there is to be another terroristic event, false flag or otherwise, it'll have to be bigger in the collective mind than the WTC attacks were in order to have a comparable impact. Human minds too quickly and easily moderate their fear levels in relation to past experiences.

This brings to mind a book I read last month, Risk by Dan Gardner, a precise, science-minded columnist (yeah, they exist as rare birds) from my own town of Ottawa. Great pop science book teaching how the human mind evaluates risk and probability, particuarly under the influence of fear. He also publishes regular political-related columns in the Ottawa Citizen (which otherwise is not a very commendable orgnanization).

ghpacific said...

While we argue over who to blame, this is the reality in China

scrofulous said...

Addendum to my last hasty note:

Stoneleigh that was not meant at a dig at your approval of Smith but merely a reaction to seeing his name after reading his article last night which I found rather of a whole cloth variety of item.

Unknown said...

D. Benton Smith,

Not positive, but I think the contract you sign says "We can sell this mortgage to someone else." And by signing, you agree. End of story. Pretty sure. Thankfully, it's been a while since I dealt with any of that crap.


Ruben said...

Re: the power of emotion.

I work in the field of trying to change behaviour for social good (think recycling). A video i enjoyed and have referenced often is of David Rock giving a Lunch n' Learn at google HQ, called Your Brain at Work. Rock likens the size of the prefrontal cortex--where rational thought, logic and analysis happen--to being about one foot cubed. At that scale, the rest of your brain--where emotion, narrative and memory lie--is the size of the Milky Way.

So, beware the Herd.

Ilargi said...

New post up.

Fear and Loathing in the Divided States of America


jal said...

Good link ghpacific

The truth/reality ... humans have set up a world wide social structure that includes all of us in the pecking order.

We have no other choice.

Its not pretty, but humans would rather be part of the pecking order than to be the worm in the chicken yard.

ghpacific said...

jal said

The truth/reality ... humans have set up a world wide social structure that includes all of us in the pecking order.

We have no other choice.

jal, I see this as a choice, albeit tough.
It gives me more hope than President O.

Unknown said...

Captured Nazi documents revealed that the vital industrial and technological help provided by Dulles and his Wall Street entourage had been indispensable for the Nazi war machine. In fact, Hitler’s War would not have been possible. One captured Nazi war document was especially informative: “Without lead-tetraethyl, (leaded gas) the present method of warfare would be unthinkable. The fact that since the beginning of the war we had been able to produce lead-tetraethyl is entirely due to the Americans (Du Pont, General Motors and Exxon) who had presented us with the productions plans complete with experimental knowledge.”

Anonymous said...

RE: I don't drive by, I walk...


Sorry, it's just that I've got a squeaky wheel...