Saturday, July 17, 2010

July 17 2010: Settlements and Tragedies

Dorothea Lange Peaches July 1936
"Peach picker in Musella, Georgia. Earns 75 cents a day"

Ilargi: As the financial regulation bill threatens to make Timothy Geithner even more powerful than he already is, probably enough so to thwart Elizabeth Warren's access to the leadership of the Consumer Protection Agency, a range of settlements concerning a range of illegal activities in the financial world are announced. And this is, make no mistake, where the real spirit of the present US administration shines through. The banks come first, and you the people come last. Our roving reporter VK has the following:

VK: What's with that word 'Settle'? I keep hearing it pop up all over the place, and in all the wrong places too. The major story of the week was probably that Goldman Sachs 'settled' with the SEC for $550 Million in its fraud case and didn't admit to much of anything except for conveniently "omitting" key information to the suckers who bought the "shitty deal" CDO. A Financial Times editorial says:
Goldman Sachs needs to change
Compared with what might have been, Goldman Sachs escaped lightly in its settlement with US regulators this week. Having suffered three months of reputational damage since being accused of fraud, it admitted only a "mistake" and paid a record-breaking $550m in fines and compensation.

Record breaking fines? Hardly. For a figure that's less than 3 percent of its annual bonus pool, Goldman gets off easy and in fact analysts now claim that they'll be able to get away with their "shitty deals" from the Department of Justice's investigations as well. The market rallied Goldman shares as soon as the news came out and that pretty much sums up what the market now thinks. They got away with a slap on the wrist and promised they won't do it again just like the last time they were caught serving up their "shitty deals". No admission of wrong doing, just unfortunate mistakes. 

Another settlement that riles me is the recently announced AIG 'settlement' for $725 Million.
AIG Sets $725 Million Settlement
American International Group Inc. agreed to pay $725 million to settle a long-running securities lawsuit alleging that the company several years ago engaged in insurance bid-rigging and inflated its stock price and insurance reserves.

The settlement, which requires the approval of a federal judge in New York, requires AIG to pay $175 million within 10 days of gaining preliminary court approval for the deal. The other $550 million would be paid later, with the insurer being required to consider one or more share sales to raise the funds.

So let me get this straight, the US Government is the owner of a company that was involved in rigging and stock price manipulation i.e. fraud and now the US taxpayer is going to cough up for its wrong doing? AIG is said to be considering issuing stock, so that'll dilute your holdings quite nicely. That's right, you're going to pay for a crime you never committed and the best bit is AIG once again gets a slap on the wrist and can carry on with its merry ways while admitting to nothing really, since they 'settled' and didn't admit to any wrongdoing. Any executive going to prison over this? Nope. Any change in top level management? Nada.

The third case involves Wachovia, which was forced into a sale by the US Government at the end of 2008 to come under the wings of Wells Fargo. The Government stepped into counter systemic risk I presume. Yet this very same bank was involved in laundering money to the tune of at least $378.4 Billion over a span of 5 years.
Banks Financing Mexico Drug Gangs Admitted in Wells Fargo Deal
Twenty million people in the U.S. regularly use illegal drugs, spurring street crime and wrecking families. Narcotics cost the U.S. economy $215 billion a year -- enough to cover health care for 30.9 million Americans -- in overburdened courts, prisons and hospitals and lost productivity, the department says.

"It’s the banks laundering money for the cartels that finances the tragedy," says Martin Woods, director of Wachovia’s anti-money-laundering unit in London from 2006 to 2009. Woods says he quit the bank in disgust after executives ignored his documentation that drug dealers were funneling money through Wachovia’s branch network.

"If you don’t see the correlation between the money laundering by banks and the 22,000 people killed in Mexico, you’re missing the point," Woods says.

The money quote is from Mr. Woods above. This is a practice which has cost thousands of lives and has created many broken homes. Yet, in the name of profit, Wachovia executives sold their souls to the highest bidder. Has anyone been prosecuted over this? Nope. Why hasn't Wachovia been shut down permanently to send a message? The article explains:
Large banks are protected from indictments by a variant of the too-big-to-fail theory. Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering.

The theory is like a get-out-of-jail-free card for big banks, Blum says. "There’s no capacity to regulate or punish them because they’re too big to be threatened with failure," Blum says. "They seem to be willing to do anything that improves their bottom line, until they’re caught."

In the end Wachovia was given a fine equivalent to 2 percent of Wells Fargo's annual profits in 2009, a fine of $160 Million. All they had to do was promise that they won't do it again and the charges would be dropped by the US Government in March 2011. A slap on the wrist once again.

The story of the above three 'settlements' is disturbing and ludicrous. Lady justice isn't blind, not at all, she likes the color green, she responds to money quite well and can always serve up a settlement, a measly fine and a slap on the wrist as long as you can tip the weighing scales with a rub of green. A tragic farce if ever we’ve seen one.

Goldman to Pay $550 Million to Settle SEC Suit
by Joshua Gallu and David Scheer - Bloomberg

Goldman Sachs Group Inc. agreed to pay $550 million and change its business practices to settle U.S. regulatory claims it misled investors in collateralized debt obligations linked to subprime mortgages. The penalty is the largest ever levied by the Securities and Exchange Commission against a Wall Street firm, the agency said in a statement announcing the accord today. Under the deal, Goldman Sachs acknowledged it made a “mistake” and that marketing materials for the instruments had “incomplete information,” the agency said.

For Goldman Sachs, the payment amounts to 14 days of earnings, based on first-quarter results. It’s the equivalent of 93 cents a share, said Brad Hintz, an analyst at Sanford Bernstein & Co., who had estimated a cost of $1.05. “This appears to be negligence, not fraud,” Hintz said in an e-mail, citing the SEC’s use of words such as “mistake” and “incomplete information.” “Bottom line the SEC and the administration gets a headline and a ‘political win’ and GS gets an ‘economic win.’”

Goldman Sachs created and sold the CDOs in 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicles, the SEC said in an April 16 lawsuit. Billionaire John Paulson’s firm earned $1 billion on the trade and wasn’t accused of wrongdoing.

‘It Was a Mistake’
“It was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process,” the SEC’s statement quoted Goldman Sachs as saying in settlement documents. The bank, based in New York, didn’t admit or deny wrongdoing under the accord, the SEC said. The payment includes a $300 million fine and $250 million as restitution to investors. IKB Deutsche Industriebank AG, the first German lender bailed out during the subprime crisis, will receive $150 million, and Royal Bank of Scotland Plc will get $100 million, the SEC said.

Shares of Goldman Sachs, which closed today at $145.22, dropped 21 percent since April 15, the day before the suit was filed, and jumped 4.4 percent today after the SEC said it planned a “significant announcement.” The S&P 500 Financial Index declined 13 percent since the SEC filed suit. “This takes a cloud off the stock,” said Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors in Cincinnati, which manages $13.3 billion including Goldman Sachs shares. For Goldman Sachs, the settlement means “we’re done, turn the spotlight off, we’re out of here,” he said.

Fabrice Tourre’s Case
Sorrentino said his firm may still reduce its holdings in Goldman Sachs on any price gains because he’s concerned about the effect of financial regulatory legislation passed today by the Senate. Goldman Sachs said the agency doesn’t ‘‘anticipate’’ it will bring more claims linked to collateralized debt obligations. Fabrice Tourre, the only Goldman Sachs worker targeted by the SEC, remains an employee of the firm and is on leave, said Lucas van Praag, a company spokesman. The firm promised to cooperate with the SEC in the case against Tourre and other “ongoing litigation,” the agency’s deputy enforcement director, Lorin Reisner, told reporters in Washington.

SEC Enforcement Director Robert Khuzami called the settlement “a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing.”

Goldman Sachs needs to change
by FT Editorial

Compared with what might have been, Goldman Sachs escaped lightly in its settlement with US regulators this week. Having suffered three months of reputational damage since being accused of fraud, it admitted only a “mistake” and paid a record-breaking $550m in fines and compensation. The Securities and Exchange Commission is already facing criticism that it should have been tougher on Goldman. In practice, however, it has regained its own reputation for enforcing securities law toughly on Wall Street. If the SEC had pushed its luck further, it would have been at risk of losing.

Despite Goldman’s relief at getting the burden off its back – its shares have risen since the settlement was announced on Thursday, just after the US financial reform bill passed in Congress – the bank has been humbled. It now needs to take steps to ensure it does not fall into a similar trap again. The central issue is that its hard-won reputation for putting its clients’ interests first – above those of its traders and proprietary investments – has been tarnished. Lloyd Blankfein, its chairman and chief executive, has promised a “rigorous self-examination”.

The Abacus deal over which Goldman settled involved a complex set of interests, including its own. Goldman should have been clearer with IKB, a German bank that was betting on a rise in the housing market, that the deal was being influenced by John Paulson & Co, a hedge fund taking the opposite view. Goldman’s balance of business has changed since Mr Blankfein, a former commodities trader and salesman, took over the leadership in 2006 along with Gary Cohn, its president and chief operating officer. Both men hail from the trading side and have focused it more on financing and proprietary investment than purely advising companies and investors.

Although this has been highly rewarding for its shareholders, and enabled Goldman to navigate the 2008 financial crisis better than other banks, it also involves taking bigger reputational risks. In the case of Abacus, it clearly failed to manage those risks correctly and to act in accordance with its own business principles. Any rigorous self-examination must involve the board deciding whether it has the correct balance of leadership at the top. There have been suggestions that Mr Blankfein will remain chief executive but give up the chairmanship, or perhaps that Goldman’s corporate bankers will regain a bigger say in management.

The Abacus affair is sufficiently damaging to Goldman’s reputation that it needs to think long and hard about a new way forward. It has survived the immediate crisis over the SEC’s charges but the questions over its future strategy and leadership remain.

AIG Sets $725 Million Settlement
by Erik Holm and Serena Ng - Wall Street Journal

American International Group Inc. agreed to pay $725 million to settle a long-running securities lawsuit alleging that the company several years ago engaged in insurance bid-rigging and inflated its stock price and insurance reserves. The settlement, which requires the approval of a federal judge in New York, requires AIG to pay $175 million within 10 days of gaining preliminary court approval for the deal. The other $550 million would be paid later, with the insurer being required to consider one or more share sales to raise the funds.

The agreement with the lead plaintiffs in the lawsuit, a group of Ohio pension funds represented by the state's attorney general, ends a protracted legal fight that began after former New York Attorney General Eliot Spitzer in 2005 accused AIG and then-Chief Executive Maurice "Hank" Greenberg of a variety of misdeeds, leading to Mr. Greenberg's departure. AIG, which didn't admit wrongdoing, said in a statement that the settlement enables the company "to continue to focus its efforts on paying back taxpayers and restoring the value of our franchise for the benefit of all our stakeholders."

It is unclear if AIG, bailed out by the government in September 2008, will be able to raise the $550 million before the settlement gets final court approval. If not, the settlement allows the plaintiffs to terminate the agreement or get the funds by other means. The settlement includes a stipulation that the company has to pay the $550 million if it raises that amount on behalf of the U.S. Treasury as it seeks to repay its bailout.

The civil lawsuit, filed on behalf of AIG investors, alleged that the insurer engaged in accounting fraud when it agreed to a transaction with Berkshire Hathaway's General Re Corp. that artificially boosted AIG's claims reserves. An AIG employee and four General Re executives have been found guilty of charges related to that transaction. General Re reached a settlement in the matter this year with the federal government.

The Ohio suit also alleged that AIG tried to inflate its stock price and paid undisclosed commissions to insurance brokers—the middlemen who match buyers and sellers of coverage—and participated in bid-rigging on some coverage. Ohio Attorney General Richard Cordray called the settlement the "final resolution of this matter." The settlement brings the total expected recovery for AIG shareholders for lawsuits tied to the 2005 allegation to more than $1 billion.

Banks Financing Mexico Drug Gangs Admitted in Wells Fargo Deal
by Michael Smith - Bloomberg

Just before sunset on April 10, 2006, a DC-9 jet landed at the international airport in the port city of Ciudad del Carmen, 500 miles east of Mexico City. As soldiers on the ground approached the plane, the crew tried to shoo them away, saying there was a dangerous oil leak. So the troops grew suspicious and searched the jet. They found 128 black suitcases, packed with 5.7 tons of cocaine, valued at $100 million. The stash was supposed to have been delivered from Caracas to drug traffickers in Toluca, near Mexico City, Mexican prosecutors later found. Law enforcement officials also discovered something else. The smugglers had bought the DC-9 with laundered funds they transferred through two of the biggest banks in the U.S.: Wachovia Corp. and Bank of America Corp., Bloomberg Markets magazine reports in its August 2010 issue.

This was no isolated incident. Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers -- including the cash used to buy four planes that shipped a total of 22 tons of cocaine. The admission came in an agreement that Charlotte, North Carolina-based Wachovia struck with federal prosecutors in March, and it sheds light on the largely undocumented role of U.S. banks in contributing to the violent drug trade that has convulsed Mexico for the past four years.

‘Blatant Disregard’
Wachovia admitted it didn’t do enough to spot illicit funds in handling $378.4 billion for Mexican-currency-exchange houses from 2004 to 2007. That’s the largest violation of the Bank Secrecy Act, an anti-money-laundering law, in U.S. history -- a sum equal to one-third of Mexico’s current gross domestic product. "Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations," says Jeffrey Sloman, the federal prosecutor who handled the case. Since 2006, more than 22,000 people have been killed in drug-related battles that have raged mostly along the 2,000-mile (3,200-kilometer) border that Mexico shares with the U.S. In the Mexican city of Ciudad Juarez, just across the border from El Paso, Texas, 700 people had been murdered this year as of mid- June. Six Juarez police officers were slaughtered by automatic weapons fire in a midday ambush in April. Rondolfo Torre, the leading candidate for governor in the Mexican border state of Tamaulipas, was gunned down yesterday, less than a week before elections in which violence related to drug trafficking was a central issue.

45,000 Troops
Mexican President Felipe Calderon vowed to crush the drug cartels when he took office in December 2006, and he’s since deployed 45,000 troops to fight the cartels. They’ve had little success. Among the dead are police, soldiers, journalists and ordinary citizens. The U.S. has pledged Mexico $1.1 billion in the past two years to aid in the fight against narcotics cartels. In May, President Barack Obama said he’d send 1,200 National Guard troops, adding to the 17,400 agents on the U.S. side of the border to help stem drug traffic and illegal immigration. Behind the carnage in Mexico is an industry that supplies hundreds of tons of cocaine, heroin, marijuana and methamphetamines to Americans. The cartels have built a network of dealers in 231 U.S. cities from coast to coast, taking in about $39 billion in sales annually, according to the Justice Department.

‘You’re Missing the Point’
Twenty million people in the U.S. regularly use illegal drugs, spurring street crime and wrecking families. Narcotics cost the U.S. economy $215 billion a year -- enough to cover health care for 30.9 million Americans -- in overburdened courts, prisons and hospitals and lost productivity, the department says. "It’s the banks laundering money for the cartels that finances the tragedy," says Martin Woods, director of Wachovia’s anti-money-laundering unit in London from 2006 to 2009. Woods says he quit the bank in disgust after executives ignored his documentation that drug dealers were funneling money through Wachovia’s branch network. "If you don’t see the correlation between the money laundering by banks and the 22,000 people killed in Mexico, you’re missing the point," Woods says.

Cleansing Dirty Cash
Wachovia is just one of the U.S. and European banks that have been used for drug money laundering. For the past two decades, Latin American drug traffickers have gone to U.S. banks to cleanse their dirty cash, says Paul Campo, head of the U.S. Drug Enforcement Administration’s financial crimes unit. Miami-based American Express Bank International paid fines in both 1994 and 2007 after admitting it had failed to spot and report drug dealers laundering money through its accounts. Drug traffickers used accounts at Bank of America in Oklahoma City to buy three planes that carried 10 tons of cocaine, according to Mexican court filings. Federal agents caught people who work for Mexican cartels depositing illicit funds in Bank of America accounts in Atlanta, Chicago and Brownsville, Texas, from 2002 to 2009. Mexican drug dealers used shell companies to open accounts at London-based HSBC Holdings Plc, Europe’s biggest bank by assets, an investigation by the Mexican Finance Ministry found.

Following Rules
Those two banks weren’t accused of wrongdoing. Bank of America spokeswoman Shirley Norton and HSBC spokesman Roy Caple say laws bar them from discussing specific clients. They say their banks strictly follow the government rules. "Bank of America takes its anti-money-laundering responsibilities very seriously," Norton says. A Mexican judge on Jan. 22 accused the owners of six centros cambiarios, or money changers, in Culiacan and Tijuana of laundering drug funds through their accounts at the Mexican units of Banco Santander SA, Citigroup Inc. and HSBC, according to court documents filed in the case. The money changers are in jail while being tried. Citigroup, HSBC and Santander, which is the largest Spanish bank by assets, weren’t accused of any wrongdoing. The three banks say Mexican law bars them from commenting on the case, adding that they each carefully enforce anti-money-laundering programs. HSBC has stopped accepting dollar deposits in Mexico, and Citigroup no longer allows noncustomers to change dollars there. Citigroup detected suspicious activity in the Tijuana accounts, reported it to regulators and closed the accounts, Citigroup spokesman Paulo Carreno says.

Criminal Empires
On June 15, the Mexican Finance Ministry announced it would set limits for banks on cash deposits in dollars. Mexico’s drug cartels have become multinational criminal enterprises. Some of the gangs have delved into other illegal activities such as gunrunning, kidnapping and smuggling people across the border, as well as into seemingly legitimate areas such as trucking, travel services and air cargo transport, according to the Justice Department’s National Drug Intelligence Center. These criminal empires have no choice but to use the global banking system to finance their businesses, Mexican Senator Felipe Gonzalez says. "With so much cash, the only way to move this money is through the banks," says Gonzalez, who represents a central Mexican state and chairs the senate public safety committee. Gonzalez, a member of Calderon’s National Action Party, carries a .38 revolver for personal protection. "I know this won’t stop the narcos when they come through that door with machine guns," he says, pointing to the entrance to his office. "But at least I’ll take one with me."

Subprime Losses
No bank has been more closely connected with Mexican money laundering than Wachovia. Founded in 1879, Wachovia became the largest bank by assets in the southeastern U.S. by 1900. After the Great Depression, some people in North Carolina called the bank "Walk-Over-Ya" because it had foreclosed on farms in the region. By 2008, Wachovia was the sixth-largest U.S. lender, and it faced $26 billion in losses from subprime mortgage loans. That cost Wachovia Chief Executive Officer Kennedy Thompson his job in June 2008. Six months later, San Francisco-based Wells Fargo, which dates from 1852, bought Wachovia for $12.7 billion, creating the largest network of bank branches in the U.S. Thompson, who now works for private-equity firm Aquiline Capital Partners LLC in New York, declined to comment. As Wachovia’s balance sheet was bleeding, its legal woes were mounting. In the three years leading up to Wachovia’s agreement with the Justice Department, grand juries served the bank with 6,700 subpoenas requesting information.

Not Quick Enough
The bank didn’t react quickly enough to the prosecutors’ requests and failed to hire enough investigators, the U.S. Treasury Department said in March. After a 22-month investigation, the Justice Department on March 12 charged Wachovia with violating the Bank Secrecy Act by failing to run an effective anti-money-laundering program. Five days later, Wells Fargo promised in a Miami federal courtroom to revamp its detection systems. Wachovia’s new owner paid $160 million in fines and penalties, less than 2 percent of its $12.3 billion profit in 2009. If Wells Fargo keeps its pledge, the U.S. government will, according to the agreement, drop all charges against the bank in March 2011. Wells Fargo regrets that some of Wachovia’s former anti- money-laundering efforts fell short, spokeswoman Mary Eshet says. Wells Fargo has invested $42 million in the past three years to improve its anti-money-laundering program and has been working with regulators, she says.

‘Significantly Upgraded’
"We have substantially increased the caliber and number of staff in our international investigations group, and we also significantly upgraded the monitoring software," Eshet says. The agreement bars the bank from contesting or contradicting the facts in its admission. The bank declined to answer specific questions, including how much it made by handling $378.4 billion -- including $4 billion of cash-from Mexican exchange companies. The 1970 Bank Secrecy Act requires banks to report all cash transactions above $10,000 to regulators and to tell the government about other suspected money-laundering activity. Big banks employ hundreds of investigators and spend millions of dollars on software programs to scour accounts. No big U.S. bank -- Wells Fargo included -- has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.

‘No Capacity to Regulate’
Large banks are protected from indictments by a variant of the too-big-to-fail theory.Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering. The theory is like a get-out-of-jail-free card for big banks, Blum says. "There’s no capacity to regulate or punish them because they’re too big to be threatened with failure," Blum says. "They seem to be willing to do anything that improves their bottom line, until they’re caught." Wachovia’s run-in with federal prosecutors hasn’t troubled investors. Wells Fargo’s stock traded at $30.86 on March 24, up 1 percent in the week after the March 17 agreement was announced. Moving money is central to the drug trade -- from the cash that people tape to their bodies as they cross the U.S.-Mexican border to the $100,000 wire transfers they send from Mexican exchange houses to big U.S. banks.

‘Doesn’t Stop Anyone’
In Tijuana, 15 miles south of San Diego, Gustavo Rojas has lived for a quarter of a century in a shack in the shadow of the 10-foot-high (3-meter-high) steel border fence that separates the U.S. and Mexico there. He points to holes burrowed under the barrier. "They go across with drugs and come back with cash," Rojas, 75, says. "This fence doesn’t stop anyone." Drug money moves back and forth across the border in an endless cycle. In the U.S., couriers take the cash from drug sales to Mexico -- as much as $29 billion a year, according to U.S. Immigration and Customs Enforcement. That would be about 319 tons of $100 bills. They hide it in cars and trucks to smuggle into Mexico. There, cartels pay people to deposit some of the cash into Mexican banks and branches of international banks. The narcos launder much of what’s left through money changers.

The Money Changers
Anyone who has been to Mexico is familiar with these street-corner money changers; Mexican regulators say there are at least 3,000 of them from Tijuana to Cancun, usually displaying large signs advertising the day’s dollar-peso exchange rate. Mexican banks are regulated by the National Banking and Securities Commission, which has an anti-money-laundering unit; the money changers are policed by Mexico’s Tax Service Administration, which has no such unit. By law, the money changers have to demand identification from anyone exchanging more than $500. They also have to report transactions higher than $5,000 to regulators. The cartels get around these requirements by employing legions of individuals -- including relatives, maids and gardeners -- to convert small amounts of dollars into pesos or to make deposits in local banks. After that, cartels wire the money to a multinational bank.

The Smurfs
The people making the small money exchanges are known as Smurfs, after the cartoon characters. "They can use an army of people like Smurfs and go through $1 million before lunchtime," says Jerry Robinette, who oversees U.S. Immigration and Customs Enforcement operations along the border in east Texas. The U.S. Treasury has been warning banks about big Mexican- currency-exchange firms laundering drug money since 1996. By 2004, many U.S. banks had closed their accounts with these companies, which are known as casas de cambio. Wachovia ignored warnings by regulators and police, according to the deferred-prosecution agreement. "As early as 2004, Wachovia understood the risk," the bank admitted in court. "Despite these warnings, Wachovia remained in the business." One customer that Wachovia took on in 2004 was Casa de Cambio Puebla SA, a Puebla, Mexico-based currency-exchange company. Pedro Alatorre, who ran a Puebla branch in Mexico City, had created front companies for cartels, according to a pending Mexican criminal case against him.

Federal Indictment
A federal grand jury in Miami indicted Puebla, Alatorre and three other executives in February 2008 for drug trafficking and money laundering. In May 2008, the Justice Department sought extradition of the suspects, saying they used shell firms to launder $720 million through U.S. banks. Alatorre has been in a Mexican jail for 2 1/2 years. He denies any wrongdoing, his lawyer Mauricio Moreno says. Alatorre has made no court-filed responses in the U.S. During the period in which Wachovia admitted to moving money out of Mexico for Puebla, couriers carrying clear plastic bags stuffed with cash went to the branch Alatorre ran at the Mexico City airport, according to surveillance reports by Mexican police. Alatorre opened accounts at HSBC on behalf of front companies, Mexican investigators found. Puebla executives used the stolen identities of 74 people to launder money through Wachovia accounts, Mexican prosecutors say in court-filed reports.

‘Never Reported’
"Wachovia handled all the transfers, and they never reported any as suspicious," says Jose Luis Marmolejo, a former head of the Mexican attorney general’s financial crimes unit who is now in private practice. In November 2005 and January 2006, Wachovia transferred a total of $300,000 from Puebla to a Bank of America account in Oklahoma City, according to information in the Alatorre cases in the U.S. and Mexico. Drug smugglers used the funds to buy the DC-9 through Oklahoma City aircraft broker U.S. Aircraft Titles Inc., according to financial records cited in the Mexican criminal case. U.S. Aircraft Titles President Sue White declined to comment. On April 5, 2006, a pilot flew the plane from St. Petersburg, Florida, to Caracas to pick up the cocaine, according to the DEA. Five days later, troops seized the plane in Ciudad del Carmen and burned the drugs at a nearby army base.

‘Wachovia Knew’
"I am sure Wachovia knew what was going on," says Marmolejo, who oversaw the criminal investigation into Wachovia’s customers. "It went on too long and they made too much money not to have known." At Wachovia’s anti-money-laundering unit in London, Woods and his colleague Jim DeFazio, in Charlotte, say they suspected that drug dealers were using the bank to move funds. Woods, a former Scotland Yard investigator, spotted illegible signatures and other suspicious markings on traveler’s checks from Mexican exchange companies, he said in a September 2008 letter to the U.K. Financial Services Authority. He sent copies of the letter to the DEA and Treasury Department in the U.S. Woods, 45, says his bosses instructed him to keep quiet and tried to have him fired, according to his letter to the FSA. In one meeting, a bank official insisted Woods shouldn’t have filed suspicious activity reports to the government, as both U.S. and U.K. laws require.

‘I Was Shocked’
"I was shocked by the content and outcome of the meeting and genuinely traumatized," Woods wrote. In the U.S., DeFazio, who had been a Federal Bureau of Investigation agent for 21 years, says he told bank executives in 2005 that the DEA was probing the transfers through Wachovia to buy the planes. Bank executives spurned recommendations to close suspicious accounts, DeFazio, 63, says. "I think they looked at the money and said, ‘The hell with it. We’re going to bring it in, and look at all the money we’ll make,’" DeFazio says. DeFazio retired in 2008. "I didn’t want anything from them," he says. "I just wanted to get out." Woods, who resigned from Wachovia in May 2009, now advises banks on how to combat money laundering. He declined to discuss details of Wachovia’s actions. U.S. Comptroller of the Currency John Dugan told Woods in a March 19 letter his efforts had helped the U.S. build its case against Wachovia.

‘Great Courage’
"You demonstrated great courage and integrity by speaking up when you saw problems," Dugan wrote. It was the Puebla investigation that led U.S. authorities to the broader probe of Wachovia. On May 16, 2007, DEA agents conducted a raid of Wachovia’s international banking offices in Miami. They had a court order to seize Puebla’s accounts. U.S. prosecutors and investigators then scrutinized the bank’s dealings with Mexican-currency-exchange firms. That led to the March deferred-prosecution agreement. With Puebla’s Wachovia accounts seized, Alatorre and his partners shifted their laundering scheme to HSBC, according to financial documents cited in the Mexican criminal case against Alatorre. In the three weeks after the DEA raided Wachovia, two of Alatorre’s front companies, Grupo ETPB SA and Grupo Rahero SC, made 12 cash deposits totaling $1 million at an HSBC Mexican branch, Mexican investigators found.

Another Drug Plane
The funds financed a Beechcraft King Air 200 plane that police seized on Dec. 29, 2007, in Cuernavaca, 50 miles south of Mexico City, according to information in the case against Alatorre. For years, federal authorities watched as the wife and daughter of Oscar Oropeza, a drug smuggler working for the Matamoros-based Gulf Cartel, deposited stacks of cash at a Bank of America branch on Boca Chica Boulevard in Brownsville, Texas, less than 3 miles from the border. Investigator Robinette sits in his pickup truck across the street from that branch. It’s a one-story, tan stucco building next to a Kentucky Fried Chicken outlet. Robinette discusses the Oropeza case with Tom Salazar, an agent who investigated the family. "Everybody in there knew who they were -- the tellers, everyone," Salazar says. "The bank never came to us, though."

New Meaning
The Oropeza case gives a new, literal meaning to the term money laundering. Oropeza’s wife, Tina Marie, and daughter Paulina Marie deposited stashes of $20 bills several times a day into Bank of America accounts, Salazar says. Bank employees got to know the Oropezas by the smell of their money. "I asked the tellers what they were talking about, and they said the money had this sweet smell like Bounce, those sheets you throw into the dryer," Salazar says. "They told me that when they opened the vault, the smell of Bounce just poured out." Oropeza, 48, was arrested 820 miles from Brownsville. On May 31, 2007, police in Saraland, Alabama, stopped him on a traffic violation. Checking his record, they learned of the investigation in Texas. They searched the van and discovered 84 kilograms (185 pounds) of cocaine hidden under a false floor. That allowed federal agents to freeze Oropeza’s bank accounts and search his marble-floored home in Brownsville, Robinette says. Inside, investigators found a supply of Bounce alongside the clothes dryer.

Guilty Pleas
All three Oropezas pleaded guilty in U.S. District Court in Brownsville to drug and money-laundering charges in March and April 2008. Oscar Oropeza was sentenced to 15 years in prison; his wife was ordered to serve 10 months and his daughter got 6 months. Bank of America’s Norton says, "We not only fulfilled our regulatory obligation, but we proactively worked with law enforcement on these matters." Prosecutors have tried to halt money laundering at American Express Bank International twice. In 1994, the bank, then a subsidiary of New York-basedAmerican Express Co., pledged not to allow money laundering again after two employees were convicted in a criminal case involving drug trafficker Juan Garcia Abrego.In 1994, the bank paid $14 million to settle. Five years later, drug money again flowed through American Express Bank. Between 1999 and 2004, the bank failed to stop clients from laundering $55 million of narcotics funds, the bank admitted in a deferred-prosecution agreement in August 2007.

Western Union
It paid $65 million to the U.S. and promised not to break the law again. The government dismissed the criminal charge a year later. American Express sold the bank to London-based Standard Chartered PLC in February 2008 for $823 million. Banks aren’t the only financial institutions that have turned a blind eye to drug cartels in moving illicit funds. Western Union Co., the world’s largest money transfer firm, agreed to pay $94 million in February 2010 to settle civil and criminal investigations by the Arizona attorney general’s office. Undercover state police posing as drug dealers bribed Western Union employees to illegally transfer money, says Cameron Holmes, an assistant attorney general. "Their allegiance was to the smugglers," Holmes says. "What they thought about during work was ‘How may I please my highest- spending customers the most?’"

Smudged Fingerprints
Workers in more than 20 Western Union offices allowed the customers to use multiple names, pass fictitious identifications and smudge their fingerprints on documents, investigators say in court records. "In all the time we did undercover operations, we never once had a bribe turned down," says Holmes, citing court affidavits. Western Union has made significant improvements, it complies with anti-money-laundering laws and works closely with regulators and police, spokesman Tom Fitzgerald says. For four years, Mexican authorities have been fighting a losing battle against the cartels. The police are often two steps behind the criminals. Near the southeastern corner of Texas, in Matamoros, more than 50 combat troops surround a police station. Officers take two suspected drug traffickers inside for questioning. Nearby, two young men wearing white T-shirts and baggy pants watch and whisper into radios. These are los halcones (the falcons), whose job is to let the cartel bosses know what the police are doing.

‘Only Way’
While the police are outmaneuvered and outgunned, ordinary Mexicans live in fear. Rojas, the man who lives in the Tijuana slum near the border fence, recalls cowering in his home as smugglers shot it out with the police. "The only way to survive is to stay out of the way and hope the violence, the bullets, don’t come for you," Rojas says. To make their criminal enterprises work, the drug cartels of Mexico need to move billions of dollars across borders. That’s how they finance the purchase of drugs, planes, weapons and safe houses, Senator Gonzalez says. "They are multinational businesses, after all," says Gonzalez, as he slowly loads his revolver at his desk in his Mexico City office. "And they cannot work without a bank."

Banks repossess homes at record pace: RealtyTrac
by Lynn Adler - Reuters

Banks repossessed a record number of U.S. homes in the second quarter, but slowed new foreclosure notices to manage distressed properties on the market, real estate data company RealtyTrac said on Thursday. The root problems of job losses and wage cuts persist, making a sustained U.S. housing recovery elusive. Banks took control of 269,962 properties in the second quarter, up 5 percent from the prior quarter and a 38 percent spike from the second quarter of last year, RealtyTrac said in its midyear 2010 foreclosure report.

Repossessions will likely top 1 million this year. "The underlying conditions haven't improved," RealtyTrac senior vice president Rick Sharga said in an interview. The housing market still grapples with "unemployment, economic displacement in general, and still sits on over 5 million seriously delinquent loans that in all likelihood will at some point go into foreclosure," he said. In 2005, the last "normal" year in housing, Sharga said, about 530,000 households got a foreclosure notice and banks took over a comparatively minuscule 100,000 houses. 

This year more than 3 million households are likely to get at least one foreclosure filing, which includes notice of default, scheduled auction and repossession, Irvine, California-based RealtyTrac forecasts. In the first half of the year, foreclosure filings were made on 1.65 million properties. That was down 5 percent from the last half of 2009 but up 8 percent from the first half of last year. One in every 78 households got at least one foreclosure filing in the first six months of this year.

Regulators close 6 U.S. banks with $2 billion assets, 2010 total nears 100
by Reuters

Regulators closed six U.S.-insured banks with combined assets of $2 billion on Friday, raising the number of failed banks to 96 this year, said the Federal Deposit Insurance Corp. NAFH National Bank of Miami will take over three of the banks, which together had 23 branches and $1.39 billion in assets. NAFH is a newly chartered bank subsidiary of North American Financial Holdings, Inc, a bank holding company based in Charlotte, North Carolina.

"Together with our planned investment in TIB Bank, today's transaction continues our progress toward building a strongly capitalized, high performing, regional bank," NAFH Chairman and Chief Executive Gene Taylor said in a statement. North American Financial Holdings says it raised $900 million in equity capital to invest in failed and undercapitalized banks. On June 29, it said it would invest $175 million in TIB Financial Corp in Naples, Florida.

The failed banks acquired by NAFH National Bank were:
  • First National Bank of the South, Spartanburg, South Carolina, with $682 million in assets and $610 million in assets.
  • Metro Bank of Dade County, Miami, with assets of $442.3 million and deposits of $391.3 million.
  • Turnberry Bank, Aventura, Florida, with assets of 263.9 and deposits of $196.9 million.

The three failed banks were not affiliated, said FDIC. They will reopen as branches of NAFH National Bank using their current names.

Two banks in South Carolina and one in Michigan also were closed. FDIC said they were:
  • Mainstreet Savings Bank, FSB, Hastings, Michigan, with $97.4 million in assets and $63.7 million in deposits. Commercial Bank, Alma, Michigan, will take over the Mainstreet, which will reopen on Saturday under Commercial's name.
  • Olde Cypress Community Bank, Clewiston, Florida, with $168.7 million in assets and $162.4 million in deposits. National Association, Winter Haven, Florida, will take over the bank, which will reopen on Saturday as a branch of CenterState.
  • Woodlands Bank, Bluffton, South Carolina, with $376.2 million in assets and $355.3 million in deposits. Bank of the Ozarks, Little Rock, Arkansas, will take over the bank and its eight branches will reopen on Monday under the name of Bank of the Ozarks.

FDIC entered share-loss transactions with the successor banks. It estimated the closings will cost the Deposit Insurance Fund a total of $334.8 million. Seventeen banks in Florida, three in South Carolina and four in Michigan have been closed by regulators this year.

Municipal Bond Defaults at Triple the Typical Rate, Lehmann Says
by Darrell Preston - Bloomberg

Municipal borrowers defaulted at three times the typical rate even as the pace fell from records the past two years when Jefferson County, Alabama, and Lehman Brothers Holding Inc.’s failure sustained historic levels. Thirty-five municipal bond issues totaling $1.5 billion defaulted in the first six months of 2010, the Miami Lakes, Florida-based Distressed Debt Securities Newsletter reported in its July edition. That annualized $3 billion pace is triple the rate of $1 billion or less a year going back to 1983, Richard Lehmann, publisher of the newsletter, said in a phone interview today. "I wouldn’t start celebrating just yet," said Lehmann. "I wouldn’t think things are getting better. A lot of issuers are on the brink." 

At least 60 so-called dirt districts in Florida with about $1 billion of debt that may default have managed to stay afloat because of reserve funds, Lehmann said. The "dirt bonds" finance infrastructure for housing developments, and districts in California, Arizona and Nevada continue to struggle with lower revenue and costs they can’t control, he said. New defaults this year include Crawfordsville, Indiana, which missed a July 1 payment on a $16.6 million debt issue sold to build a high-speed Internet system and the Carter Plantation Community Development District in Louisiana, which missed a May 1 payment on a $23.5 million bond issue for a golf resort, according to the newsletter. Last year, 194 municipal borrowers defaulted on $6.9 billion of bonds, compared with 162 issues totaling $8.2 billion in 2008.

Jefferson County
High levels of defaults in those years were led by Jefferson County, which is trying to restructure more than $3 billion of sewer debt after almost being bankrupted by it during the credit crisis, and Main Street Natural Gas Inc. in Georgia, which failed to pay after Lehman Brothers, which backed its bonds, sought bankruptcy protection, Lehmann said. The cost of insuring against default on July 15 fell to $222,890, the annual sum of buying protection on $10 million of municipal bonds for five years, from $266,500 on June 30, the highest level since March 2009, according to an index of swaps for 50 local government issuers.

U.S. corporate defaults hit record in 2009: S&P
by Deborah Levine - Marketwatch

The number of companies who defaulted on their debt reached a record high in 2009, more than doubling from 2008 as the recession weighed heavily on companies with below-investment grade ratings, according to Standard & Poor's. In 2009, 191 U.S. corporate issuers defaulted, the highest total in the 30 years S&P has been tracking defaults, Diane Vazza, a managing director at the rating agency, wrote in a report Thursday. The report is S&P's first ever focusing on U.S. corporate defaults. U.S. defaulters accounted for $516 billion in affected debt last year -- 82% of the global amount. The speculative-grade corporate default rate in the U.S. was 11% at the end of 2009. The investment-grade default rate was 0.34% at the end of 2009, with only five companies defaulting. It was higher in 2008, at 0.73%.

Real Joblessness Far Grimmer Than Government Stats
by Raghavan Mayur  - Investors Business Daily

Writing in the New York Times in November 2003, Austan Goolsbee, then a professor at the University of Chicago, flamboyantly accused the government of "cooking" the books regarding unemployment. "The situation has grown so dire," he said, "that we can't even tell whether the job market is recovering. The time has come to correct the official unemployment statistics to account for those left out." Professor Goolsbee is now a top economic advisor to President Obama. Would he admit that the official jobless of 9.5% grossly underestimates the pain of job losses in America and do something to correct the situation?

Findings in recent IBD/TIPP polls suggest that now would be a good time to undertake such a project. According to Labor Department data, the civilian labor force in June totaled 153.7 million people, 14.6 million (9.5%) of whom were unemployed. But in the latest IBD/TIPP poll conducted last week, 28.6% of respondents said at least one member of their household is unemployed and looking for work. This number for June was 27.8% and for May 28%.

When we project our household job-seekers rate and calculate the share of Americans who are unemployed and looking for work, we get a job-seeker rate of 24.1% for July for a total of 37 million Americans vs. the government's aforementioned 14.6 million. The difference between our crude job-seeker rate of 24.1% and the Labor Department's jobless rate of 9.5% is night and day. The difference between our job-seekers (37 million) and Labor's unemployed (14.6 million) is a staggering 22.4 million. How does one account for 22 million people? Which is the reality?

To come up with its monthly jobless rate, the Labor Department surveys some 60,000 households. But the popular unemployment measure that results, dubbed U-3, is not a good indicator, because the department counts as "unemployed" only those who report actively looking for work in the past four weeks. Some 8.6 million Americans responding to a tight job market have taken part-time jobs, though they'd like to be working full-time. In calculating U-3, the government counts these "underemployed" people as "employed," which helps reduce the unemployment rate.

Another 6.5 million individuals in the government survey say they want a job, but they are counted as not being part of the labor force ("persons not in the labor force but who currently want a job"). This category includes 2.6 million who are marginally attached persons. Of these passive job-seekers, some have other obligations but would take a job if offered.

True, the Labor Department puts out a broader unemployment gauge, known as U-6, that includes "underemployed" and "discouraged." For June, it stood at 16.5%. This alternative measure has been in existence since the mid-'90s and is comparable to methods used by Canada, Japan and Western Europe. But even U-6 doesn't capture the nation's real pain. The underemployed (8.6 million) and those not in the labor force but who want a job (6.5 million) bring down our difference with the Labor Department from 22 million to 7 million.

Labor also has a large category of 18 million workers classified as "part-time not for economic reasons." These are people who the department believes have voluntarily opted for part-time employment. If we assume 7 million of the 18 million voluntary part-timers are looking for full-time employment, we can reconcile the statistics globally. Americans have lived through a deep recession and are feeling real pain. But if we continue to measure that pain by the government's official unemployment rate, we are living in denial. It's time to come up with a statistical model that tells the truth.

Critics call California foreclosure plan a big bank bailout
by Jim Wasserman - The Sacramento Bee

A $700 million state plan to prevent 40,000 California foreclosures came under fire Tuesday from activists who called it another bailout for the nation's largest banks. The charges, made at a Capitol news conference, and later to leaders of the state's affordable housing bank, marked fresh tensions over a loan crisis still stubbornly resistant to government solutions.

Representatives of statewide unions, churches and community groups said new state plans to partially pay off mortgages of struggling homeowners will largely subsidize bank losses and leave owners still owing too much to avoid foreclosure. Groups including the Service Employees International Union and One LA-Industrial Areas Foundation want banks to absorb more losses in trimming mortgages to today's lower market values. The financial practice, widely resisted by lenders, is called principal reduction.

"Our concern is this plan provides far too much funding to investors and banks in return for mortgages to be reduced," said Yvonne Mariajimenez, a One LA-IAF representative addressing directors of the California Housing Finance Agency on Tuesday. CalHFA, launching the nation's biggest principal reduction program on Nov. 1, will spend $420 million to trim mortgages by up to $50,000 each. Lenders are being asked to match the state's contribution, jointly cutting mortgages to a level where owners aren't tempted to walk away.

No one knows how banks will respond, though CalHFA staff described "positive" meetings with them. But even a CalHFA board member, Paul Hudson, chairman and chief executive officer of Broadway Federal Bank in Los Angeles, expressed doubts that lenders would step up to CalHFA's requests. "I'm not even sure banks are committed to 50-50," he said.

Timothy Geithner's realm grows with passage of financial regulatory reform
by David Cho - Washington Post

Half a year after some predicted he would be booted from the Obama administration, Treasury Secretary Timothy F. Geithner stands to inherit vast power to shape bank regulations, oversee financial markets and create a consumer protection agency. Few Treasury secretaries have had such sweeping influence over such a wide realm as Geithner will wield once President Obama signs the new financial overhaul legislation passed this week by Congress.

The effort to dramatically expand financial regulation bears the stamp of no one more than Geithner. The bill not only hews closely to the initial draft he released last summer but also anoints him -- as long as he remains Treasury secretary -- as the chief of a new council of senior regulators. The legislation also puts him at the head of the new consumer bureau until a director is confirmed by the Senate, allowing Geithner to mold the watchdog in coming months. And it will be up to him to settle a raft of issues left unresolved by the bill -- for instance, which financial derivatives will be subject to the tough new trading rules and which risky activities big banks will be required to spin off.

The legislation "will help restore the great strength of the American financial system, which -- at its best -- develops innovative ways to provide credit and capital, not just for our great global companies, but for the individual with an idea and a plan," Geithner said to reporters shortly after the bill was approved. Obama will sign the bill in the middle of next week, according to White House officials.

It has been a remarkable turnaround for the 48-year-old Treasury secretary, who endured repeated calls for his head from lawmakers a few months ago. Anger over the Treasury's bailout of troubled banks was high. The unemployment rate was soaring. In a January interview, Geithner called the hubbub over his job security "a price of this office." In the wake of the bill's passage, there is recognition within the administration as well as on Capitol Hill that Geithner is not going anywhere anytime soon. White House officials said the speculation earlier this year about his tenure misunderstood his standing within the administration.

These officials said Geithner endeared himself to Obama and senior White House advisers by advocating a response to the financial crisis that later proved correct. Geithner vigorously resisted calls by some lawmakers and financial experts to nationalize the nation's largest and most troubled banks during the most perilous days. Instead, he helped get the financial system back on its feet, in particular by pressing for stress tests of big banks. The results of these tests showed that nearly all the banks would be able to weather the financial storm and quickly restored investor confidence.

The campaign to win passage of the financial regulatory bill has been driven primarily by the Treasury, showing that Geithner has gained significant latitude within the administration, a far cry from the early days when senior White House officials kept close watch over his public statements and sought to burnish his image. "This is a very substantial victory for the president, and it is a credit to Tim's leadership that we have achieved so comprehensive a reform so quickly," said Lawrence H. Summers, director of the National Economic Council and a senior adviser to Obama.

Geithner has not won every battle over the legislation. Notable losses include measures added by lawmakers that would exempt auto dealers and banks with less than $10 billion in assets from new consumer protection rules. These firms represent a significant proportion of the financial industry. But the bill broadly reflects his faith in regulators and his overriding belief that large financial companies can be protected from upheaval if they set aside large enough capital reserves. His has been a middle course, rejecting the era of deregulation that preceded the financial meltdown but also dismissing proposals to fundamentally restructure the financial industry, for instance by cutting the nation's biggest banks down to size.

In an interview last summer, as his team was drafting its version of the bill, Geithner said the heart of any financial reform effort must consist of "three things: capital, capital, capital." That statement reflected Geithner's evolution from the time he was president of the Federal Reserve Bank of New York, starting in 2003. The New York Fed allowed Citigroup to create massive pools of mortgage loans and other assets worth more than $2 trillion, but it also allowed the company to hold a relatively thin cushion in its capital reserves to cover losses in case those investments went bad.

The New York Fed pressed Citigroup to raise its capital levels in the fall of 2007, just as the financial crisis was gathering steam, but by then it was too late for the company. When its portfolio blew up, Citigroup ended up needing $45 billion in direct aid and federal guarantees on $335 billion of its worst assets -- a bailout exceeding that of any other bank. The legislation passed this week does not specifically set new capital levels for banks but directs U.S. regulators to work with their counterparts in other countries to set international standards. Geithner is leading this effort -- just one of the ways he will be able to put his imprint on the banking industry.

Some Treasury officials sought to play down the influence Geithner will have. One aide said the bill merely details the authority that Treasury secretaries could exercise during a crisis -- powers that Geithner's predecessor, Henry M. Paulson Jr., largely made up on the fly as the financial world teetered in 2008. "It essentially enshrines their ability to handle this stuff," the official said. "In the middle of a crisis, now you have real, defined responsibilities." The official added that "in the near term, Tim has a lot of new powers, but I don't think he'll use them."

But government analysts say the bill greatly enhances the Treasury secretary's role within government. "The Treasury Department and the Treasury secretary in particular pick up significant influence compared to what they formally had in the past," said Douglas Elliott, a financial analyst at the Brookings Institution.

Geithner's influence might go beyond what is delineated in the law, Elliott noted. As head of the Financial Services Oversight Council, the Treasury secretary will be able to use the bully pulpit to shape the thinking of other agencies on matters such as capital reserve levels at banks. In theory, these agencies are supposed to work independently of any political actor, such as Cabinet secretaries.

Sen. Christopher J. Dodd (D-Conn.), who shepherded the financial overhaul package through the Senate, said it wasn't his preference to put the Treasury secretary in charge of the new council. He said he would rather have a member of the Fed board fill that role. Still, he said, having a member of the president's Cabinet in charge could make the council "more politically responsive."
"It gives you some accountability," Dodd said.

Tim Geithner Opposes Nominating Elizabeth Warren To Lead New Consumer Agency
by Shahien Nasiripour - Huffington Post

Treasury Secretary Timothy Geithner has expressed opposition to the possible nomination of Elizabeth Warren to head the Consumer Financial Protection Bureau, according to a source with knowledge of Geithner's views. The financial reform bill passed by the Senate on Thursday mandates the creation of a new federal entity charged with protecting consumers from predatory lenders. But if Geithner has his way, the most prominent advocate for creating the agency may not be picked to lead it.

Warren, a professor at Harvard Law School whose 2007 journal article advocating the creation of such an agency inspired policymakers to enact it into law, has rocketed to prominence since the onset of the financial crisis as one of the leading reform advocates fighting on behalf of American taxpayers.

Warren has been an aggressive proponent for the bureau in public and behind the scenes, working regularly with President Barack Obama's top advisers and the Democratic leadership in Congress. Since 2008, she has overseen the Congressional Oversight Panel, a bailout watchdog created to keep tabs on how two administrations spent hundreds of billions of taxpayer dollars to bail out Wall Street while struggling to keep distressed homeowners out of foreclosure and small businesses from collapsing.

Yet while her work on behalf of a federal unit designed solely to protect borrowers from abusive lenders has been embraced by the administration, Warren's role as a bailout watchdog led to strained relations with the agency her panel has taken to task with brutal reports every month since Obama took office: Geithner's Treasury Department. It's no secret the watchdog and the Treasury Secretary have had a tenuous relationship. Geithner's critics have enjoyed watching Warren question him during his four appearances before her panel. Her tough, probing questions on the Wall Street bailout and his role in it -- often delivered with a smile -- are featured on YouTube. One video is headlined "Elizabeth Warren Makes Timmy Geithner Squirm."

While her grilling of Geithner in September, over what members of Congress have called the "backdoor bailout" of Wall Street through AIG, inspired the "squirm" video, just last month Warren pressed Geithner on the administration's lackluster foreclosure-prevention plan, Making Home Affordable. Criticizing him for Treasury's failure to keep families in their homes, she questioned Treasury's commitment to homeowners. Warren's persistent oversight is part of the reason for Geithner's opposition, according to the source.

In addition, her increasing public profile could make it difficult for Geithner, who will oversee the unit until it's transferred to the Federal Reserve. His role would involve trying to balance her advocacy on behalf of borrowers with the demands of the nation's major financial institutions, his traditional constituency. Geithner's objections to Warren taking over that role also involve her views on Wall Street, sources say. The longtime professor believes the nation's megabanks are Too Big To Fail and have been among the biggest abusive lenders in the country. Her toughness on giant banks is said to be a longtime source of tension with Geithner.

Obama's top economic adviser, Lawrence Summers, is also said to have a strained relationship with Warren, though his stance on her nomination is not known. Democrats in Congress have been among her most enthusiastic supporters. House Financial Services Chairman Barney Frank is one of many influential members who hope she'll get the nod. And while labor and consumer groups often butted heads with Geithner on various aspects of the financial reform legislation, they have lauded his support for strong consumer protections. Warren, however, has been referred to as a "rock star" among consumer advocates. Many have told HuffPost they're hoping Obama picks her to head the new bureau.

Geithner's opposition could have political implications for a White House determined to prove it's gotten tough on Wall Street. Since March, Obama has devoted four of his weekly Saturday addresses to highlight and promote the consumer agency.

In March 2009, in response to a question during a town hall event in Southern California about the bailout for Wall Street firms and whether Obama supported tougher consumer protections on credit cards, Obama promoted Warren's academic work:

"The truth of the matter is that the banking industry has used credit cards and pushed credit cards on consumers in ways that have been very damaging," Obama said according to a transcript. "There's a woman named Elizabeth Warren who's a professor at Harvard who did a great deal of study around this. And she made a simple point. You know, if you bought a toaster, and the toaster blew up in your face, there would be a law, a consumer safety law, that would protect you from buying that toaster. But if you get a credit card that blows up in your face, that starts off at zero-percent interest, and once they kind of suck in the -- buying a bunch of stuff and suddenly it's 29 percent; and if you're late two days, suddenly, you know, you just paid another $30, and all kinds of fine print that a lot of folks didn't understand -- well, somehow that's okay.

"I think generally having some consumer safety, some consumer protection around credit cards, is important," Obama added. Three months later, the administration released its blueprint for how it wanted to fix the nation's broken financial system. Warren's idea for a consumer agency was a heavily-promoted part of it. Warren, a Treasury Department spokesman and a White House spokesperson all declined to comment for this article.

Treasury Makes A Mistake – Claiming They Are Not Blocking Elizabeth Warren
by Simon Johnson - The Baseline Scenario

It’s one thing to block Elizabeth Warren from heading the new Consumer Financial Protection Bureau.

It’s quite another thing to deny in public, for the record, that any such blocking is going on (e.g., see this report; Michael Barr apparently said something quite similar today).

There is a strong groundswell of opinion on this issue from the left – see the BoldProgressives petition.  But the center also feels strongly that, given everything Treasury has said and done over the past few months, it would be a complete travesty not to put the strongest possible regulator in change of protecting consumers.  (See Ted Kaufman on the NYT’s DealBook, giving appropriate credit to the SEC, and apply the same points to broader customer issues going forward.)

This can now go only one of two ways.

  1. Elizabeth Warren gets the job.  Bridges are mended and the White House regains some political capital.  Secretary Geithner is weakened slightly but he’ll recover.
  2. Someone else gets the job, despite Treasury’s claims that Elizabeth Warren was not blocked.  The deception in this scenario would be nauseating – and completely blatant.  “Everyone was considered on their merits” and “the best candidate won” will convince who exactly?

Despite the growing public reaction, outcome #2 is the most likely and the White House needs to understand this, plain and clear – there will be complete and utter revulsion at its handling of financial regulatory reform both on this specific issue and much more broadly.  The administration’s position in this area is already weak, its achievements remain minimal, its speaking points are lame, and the patience of even well-inclined people is wearing thin. 

Failing to appoint Elizabeth Warren would be the straw that breaks the camel’s back.  It will go down in the history books as a turning point – downwards – for this administration.

It is time to face down the threat of deflation
by John Makin - Financial Times

"When inflation is already low and the fundamentals of the economy suddenly deteriorate, a central bank should act more pre-emptively and more aggressively than usual in cutting rates."

Ben Bernanke, the chairman of the Federal Reserve, would be well advised to heed his own advice from 2002. The current environment is more unnerving than the one he described then as a governor of the US central bank. Cutting rates is no longer an option. Inflation is now low and falling in the US and Europe (year-over-year core inflation at 0.9 and 0.8 per cent) and has firmly taken hold in Japan at minus 1.6 per cent year-on-year.

There are sound economic reasons for the persistence of disinflation and the appearance of outright deflation in the aftermath of the 2008 financial crisis. Financial crises are ultimately deflationary because they create a rise in the demand for cash that depresses aggregate demand at a time when substantial excess capacity exists. The excess capacity is created in the run-up to the crisis, when underpricing of risk expedites a substantial build-up in the capital stock.

Demand for cash is driven first by a sharp rise in uncertainty – Keynes’s "precautionary motive". Next, falling inflation and, ultimately, deflation reinforce this precautionary demand for cash whose value is enhanced – tax free – in direct proportion to the pace of deflation. Falling prices thereby become self-reinforcing.

The deflationary impulse has been inflamed by the failure of the banks to resume their role as financial intermediaries since 2008. In the US, banks have preferred to utilise the zero cost of money provided by the Fed to finance purchases of Treasury securities instead of supplying loans to households and small businesses. After a financial crisis, banks too become much more risk-averse, as is manifest in their willingness to lend only to the government. That development has resulted in virtual stagnation of broader monetary aggregates at a time when the demand for money is rising. The sharp drop in credit growth, to a negative 9.7 per cent annual rate over the three months ending in May, suggests that US households are adding to cash balances by deleveraging and paying off debts. Ultimately, this process turns disinflation into deflation and probably will do so in the US by late 2010.

At this point in the post-bubble transition to deflation, fiscal rectitude and monetary stringency are a dangerous policy combination, as appealing as they may be to the virtuous instincts of policymakers faced with a surfeit of sovereign debt. The Group of 20’s shift toward rapid global fiscal consolidation, a halving of deficits by 2013, threatens a public-sector Keynesian "paradox of thrift" whereby, because all governments are simultaneously tightening fiscal policy, growth is cut so much that revenues collapse and budget deficits actually rise. The underlying hope or expectation that easier money, a weaker currency and higher exports can somehow compensate for the negative impact on growth from rapid fiscal consolidation cannot be realised everywhere at once – especially when a move towards deflation is increasing the demand for cash.

Policymakers need to recognise more clearly that, while the acute phase of the financial crisis may be over, the chronic trend toward deflation that has followed it is not. Two things should happen in this dangerous environment to prevent a relapse back into crisis. On the fiscal front, deficit reduction measures must be undertaken to reduce expected future outlays. Legislation to raise retirement ages for public pensions and index pension outlays more conservatively can be enacted now to take effect in the future. On the monetary front, central banks – led by the Fed, as the European Central Bank and the Bank of Japan are just not going to do it – will have to announce firm price level targets that imply rapid money creation through more aggressive asset purchases.

Protests from my conservative colleagues notwithstanding, such measures are needed. They are clearly implied by Mr Bernanke’s 2002 argument for aggressive monetary policy measures when inflation is low and growth slows suddenly. He spoke then of cutting rates to effect this goal. Let us hope that now he is prepared – it has to be said – to print money "more pre-emptively and more aggressively than usual".

My $80,000 Says Deflation Will Only Get Worse
by William Pesek - Bloomberg

Naoto Kan may get the state dinners and the motorcades, but he no longer runs Japan. Economist Masaaki Shirakawadoes. If anything is clear since the drubbing that Prime Minister Kan’s Democratic Party of Japan took earlier this week, it’s that politicians are passing the buck to the central bank. Expect Bank of Japan Governor Shirakawa to feel more pressure to boost economic growth than ever before. You may think you have seen this movie before. You haven’t. Increased reliance on the BOJ will end badly for the world economy. It’s now entirely possible that, come September, Japan will have its sixth leader in four years. Speculation is growing that a power struggle could nudge Kan out of a job he assumed just five weeks ago. That would be a blow to investors. Kan is the only leader in 20 years who has talked seriously about ending Japan’s debt-fueled-growth insanity. With Kan now weakened to lame-duck status, the odds of him reining in a debt that is double the size of Japan’s $4.9 trillion economy are dwindling. His party lost control of parliament’s upper house in July 11 elections. The International Monetary Fund yesterday warned about the nation’s fiscal trajectory.

Growing Burden
Before Greece’s debt crisis, it was perhaps possible to downplay Japan’s burden. Now, investors are questioning whether Japan can avoid an eventual default. That’s admittedly a stretch. Japanese households are sitting on trillions of dollars in savings and more than 90 percent of government debt is held domestically. Also, Chinese demand for Japan’s debt is growing markedly, as Finance Minister Yoshihiko Noda told Bloomberg News yesterday. Japan is neither Greece today, nor Thailand circa 1997. Yet attention is turning to a depressing figure: $80,000. Last November, the media worked itself into a tizzy over news that Japan owed $76,000 for each of us 126 million people residing here. Around the same time, former IMF Chief Economist Simon Johnson told the U.S. Congress that there is a "real risk that Japan could end up in a major default." Well, that figure has grown to $80,000 per person. If I could wager my $80,000 share, I’d bet that Kan’s travails are a harbinger of even greater trouble for Japan. Demographics alone are enough to keep you awake at night. Sony Financial Holdings Inc. tells the story. The insurance and banking unit of Sony Corp. said it’s expanding in Asia as an aging population constrains growth at home.

efuddled Japan
Japanese leaders seem completely befuddled by this phenomenon and others. Kan essentially committed political suicide by proposing higher consumption taxes amid deflation and weak employment. Even if Kan hangs on to his job, his credibility has taken a terrible blow. Kan, missteps aside, may be the most prescient Japanese premier in years. His focus on unsustainable debt trends is the right one. Japan needs to create growth organically, not via stimulus. Kan’s weakened position makes it much harder for him to balance the budget in 10 years. It’s possible Kan will get a second wind and that two years from now Japan will be on stronger footing. Kan will have to stay in his job and then win broad support for radical change. Both accomplishments look unlikely.

Blame Game
The DPJ’s poor election showing gave rise to a new crop of lawmakers. Rather than offering fresh ideas, many see the central bank as the answer. The sudden emergence of Yoshimi Watanabe’s one-year-old "Your Party" is a case in point. Japan’s newest political force is already calling on Shirakawa to do more. This isn’t change; it’s the same-old-same-old. For 20 years now, politicians have relied on the central bank to boost the economy. Never mind that Japan’s problems are more structural than monetary -- critics say the BOJ isn’t doing enough. Yet greater reliance on the BOJ is dangerous. In 2000, it was one thing to rely on monetary largess. Ten years on, it’s quite another. Moody’s Investors Service and Standard & Poor’s are sniffing around Tokyo for any whiff of optimism to offset Japan’s toxic fiscal and demographic trajectories. As Japan’s credit rating edges lower, so will investor confidence. The Land of the Rising Sun is becoming the Land of the Setting Sun. With the benchmark interest rate at 0.1 percent, what can Shirakawa do? He could return to the quantitative easing of the early 2000s. He could buy loads of government and corporate debt, essentially monetizing the economy. He could leave the yen-printing presses on indefinitely.

Avoiding Change
Any of these actions will take even more of the onus off politicians to do their jobs. Two decades after the bubble years ended, Japan still doesn’t know how to grow without massive government subsidies. BOJ moves to bail out thegovernment will punt true change another five or 10 years down the road. Japan doesn’t have that kind of time to spare. Pressure for the BOJ to take the lead smacks of desperation. It’s also a sign that Japan may underperform to an even greater degree in the years ahead.

Fed's volte face sends the dollar tumbling
by Ambrose Evans-Pritchard - Telegraph

Rarely before have a few coded words in the minutes of the US Federal Reserve caused such an upheaval in the global currency system, or such a sudden flight from the dollar. The euro rocketed to a two-month high of $1.29 and sterling jumped two cents to almost $1.54 after the Fed confessed that the US economy may not recover for five or six years. Far from winding down emergency stimulus, the bank may need a fresh blast of bond purchases or quantitative easing.

Usually the dollar serves as a safe haven whenever the world takes fright, and there was plenty of sobering news from China and other quarters on Thursday. Not this time. The US itself has become the problem. "The worm is turning," said David Bloom, currency chief at HSBC. "We're in a world of rotating sovereign crises. The market seems to become obsessed with one idea at a time, then violently swings towards another. People thought the euro would break-up. Now we're moving into a new phase because we're hearing alarm bells of a US double dip."

Mr Bloom said a deep change is under way in investor psychology as funds and central banks respond to the blizzard of shocking US data and again focus on the fragility of an economy where public debt is surging towards 100pc of GDP, not helped by the malaise enveloping the Obama White House. "The Europeans have aired their dirty debt in public and taken some measures to address it, whilst the US has not," he said.
The Fed minutes warned of "significant downside risks" and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.

"The Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," it said. The economy might not regain its "longer-run path" until 2016. "The Fed is throwing in the towel," said Gabriel Stein, of Lombard Street Research. "They are preparing to start QE again. This was predictable because the M3 broad money supply has been contracting for months." The Fed minutes amount to a policy thunderbolt, evidence of how quickly the recovery has lost steam. Just weeks ago the Fed was mapping out withdrawal of stimulus.

Goldman Sachs said it expects the euro to rise to $1.35 by the end of the year. The yen will appreciate to ¥83, through the pain barrier for most of Japan's big exporters. The new twist is that SAFE, China's $2.4 trillion fund, has begun buying record amounts of Japanese bonds, a shift in reserve allocation away from the dollar. The signs of a deep and sudden slowdown in the US are becoming ever clearer as the "sugar rush" from the Obama fiscal stimulus wears off and the inventory boost fades. California, Illinois and other states are cutting spending, tightening US fiscal policy by 0.8pc of GDP.

Thursday's plunge in the Philadelphia Fed's July index of new manufacturing orders to –4.3 suggests that the economy may have buckled abruptly, as it did in mid-2008. The Economic Cycle Research Institute's ECRI leading indicator has tumbled, reaching –8.3pc last week. This points to a sharp slowdown or recession within three months. While US port data looked buoyant in June, the details were troubling. Outbound traffic from Long Beach fell from 139,000 containers in May to 116,000 in June. Shipments from Los Angeles fell from 161,000 to 155,000. This drop in exports is worsening the US trade deficit, eroding the dollar.

The US workforce has shrunk by a 1m over the past two months as discouraged jobless give up the hunt. Retail sales have fallen for the past two months. New homes sales crashed to 300,000 in May after tax credits ran out, the lowest since records began in 1963. Mortgage applications have fallen by 42pc to 13-year low since April. Paul Dales at Capital Economics said the "shadow inventory" of unsold properties has risen to 7.8m. "The double dip in housing has begun," he said.

Alcoa, CSX, Intel, and JP Morgan have reported good earnings, but they mostly did so in July 2008 just before their shares collapsed. Such earnings rarely catch turning points and can be a lagging indicator. Profits have been boosted in this cycle by cost-cutting, which is self-defeating for the economy as a whole. The minutes confirm the Fed is split down the middle over QE. Fed watchers say the Board in Washington wants to be ready to launch another round of bond purchases if necessary, pushing the banks balance sheet from $2.4 trillion towards $5 trillion, but hawks at the regional banks are highly sceptical.

A study by the San Francisco Fed said the interest rates need to be –4.5pc to stabilise the economy under the Fed's "rule of thumb". Since this is impossible, massive QE needs to make up the difference. Tim Congdon from International Monetary Research said the US authorities have botched policy response. "They are forcing banks to contract lending by raising their capital asset ratios. They have let M3 shrink by 1pc a month, as in the early 1930s. The solution is simple. The Fed must raise the level of deposits by purchasing bonds from the non-banking system as the Bank of England has done. They refuse to do it," he said.

'Bail-in' will save the taxpayer from the bail-out
by Gillian Tett - Financial Times

Another day, another round of nail-biting debate about financial reform. On Thursday, the US finalised its mammoth regulatory overhaul, the Senate approving it in a long-awaited final vote.
But, even as the end looms, new evidence has emerged that voters are uneasy. A Bloomberg poll for example, shows half the US public question whether this bill will improve finance; instead, many fear the reforms will end up protecting Wall Street at the expense of Main Street.

And while the banking industry itself vehemently disagrees, the crucial issue is the question of "too big to fail". On paper, this bill is supposed to remove this, by including provisions to ensure banks are better run and better supervised – and thus less prone to collapse in the future. The bill also creates a resolution regime, to provide a way of handling a failed bank without sparking a systemic meltdown. But what is still unclear, even amid all the legislation, is whether this system will be robust enough to really prevent more big bank failures. Hence the lingering suspicion that taxpayers could soon end up back on the hook; and hence all that simmering anger.

Is there any solution? One fascinating idea now provoking a chorus of behind-the-scenes debate among regulators and central banks is the concept of a so-called "bail-in". This idea, mooted by Credit Suisse in an essay this year, argues that in essence the best way to handle a crisis at a large, systemically important bank is to force creditors – not taxpayers – to swallow losses if disaster strikes; and, more importantly, to do this while the bank is still operating as a going concern, so it does not collapse – and cause Lehman-style havoc.

Banks would, in effect, do this by copying bankruptcy codes in other areas of business and issuing subordinated debt that could be wiped out, or turned into equity, if an institution became insolvent. But this would be done at the discretion of regulators rather than lawyers. In some respects, this echoes another set of ideas on the table around contingent capital, or "cocos". This suggests banks should issue bonds that would automatically convert into equity when certain triggers were breached, a long?time before the point of potential collapse.

But there is a crucial distinction: the "bail-in" scheme does not use automatic triggers, but instead lets regulators decide when to wipe out creditors, just before the moment of collapse (or "one minute to midnight", as traders say). That would thus prevent banks from trying to game complex triggers, and investors from endlessly speculating about when triggers might be activated. Some banks hate this whole idea, fearing it would push up funding costs. But to my mind, at least, there are numerous merits to the scheme. Since it is designed to prevent a bank from going into bankruptcy, it offers regulators a way to deal with a failing cross-border bank without grappling with the nightmarish question of reconciling different national bankruptcy codes. Better still, large banks have such fat cushions of subordinated debt that these should easily be able to absorb losses in a crunch, without the use of taxpayer funds.

Credit Suisse, for example, reckons the top-20 US banks have about $3,400bn of debt that could theoretically be used for debt-for-equity swaps in a crunch. And even if some of that was ring-fenced (because, say, it has to be used to protect core liabilities), Credit Suisse reckons there is still at least a $2,000bn-odd cushion of debt in the US – and perhaps even more in Europe – that could absorb losses.

However, another big attraction of the scheme is its simplicity. Unlike the coco idea, the "bail-in" concept does not involve complex triggers; nor does anybody need to contend with the law courts. On the contrary, the concept of getting creditors – not taxpayers – to foot the bill is simple enough for even a journalist or politician to grasp. Better still, it reinforces basic market principles and a concept that has been shamefully ignored in recent years: namely that creditors have a responsibility to conduct real oversight.

So could the bail-in idea fly? That remains unclear. Some European regulators and central banks take the idea very seriously, and predict that it could be adopted by the Basel Committee in some form over the next year. In the US, some senior officials, such as Jeffrey Lacker, president of the Richmond Federal Reserve, are also warming to the idea of imposing haircuts on creditors. But that hefty US reform bill does not currently include any reference to "bail-in" schemes, and it remains an open question whether there is wider support for going down this path.

I hope this idea does catch on. It is not a perfect solution to the too big to fail problem; but it is probably the best idea out there right now. And perhaps the most feasible way to create what has been lacking recently: a sense of justice – and real market discipline – in the banking world, that might assuage voter anger.

Illinois Governor Quinn Doubles Furlough Days for 2,700 State Workers
Illinois Governor Pat Quinn doubled to 24 the number of unpaid furlough days for 2,700 managers and staff members this fiscal year as he cuts spending to close a budget deficit of about $10 billion. The unpaid days off for non-unionized workers amount to a 9.2 percent cut in compensation, and will save $18 million in the state's $24.9 billion budget, Quinn, a Democrat seeking another term in November, said in a press release announcing the furlough order. Non-unionized employees took 12 unpaid furlough days in the fiscal year that ended June 30. Quinn's order comes as he faces criticism from Republicans in the Legislature for awarding salary increases averaging 11.4 percent to 35 staff members over the past 15 months. Those raises cost about $300,000 per year, Kelly Kraft, a spokeswoman for the Governor's Office of Management and Budget, said in a phone interview from Chicago today.

"Unprecedented times call for unprecedented measures, and I thank our hard-working state employees for their dedication in getting Illinois back on track," Quinn said in the press release. He encouraged legislative staff and almost 50,000 unionized state workers who aren't covered by his administrative order to agree to unpaid time off. Illinois, the fifth-most populous U.S. state, has an A1 credit rating from Moody's Investors Service, matching California's as the lowest among 50. The budget includes plans to borrow $3.3 billion to begin paying $6 billion in overdue payments to contractors, and assumes that $3.7 billion in pension obligations will be funded with debt, a plan that hasn't passed the state Senate. Quinn took office last year when former Governor Rod Blagojevich stepped down amid a federal corruption investigation.

UK house prices 'to crash 20% by 2012' as Budget bites, says Capital Economics
by Philip Aldrick - Telegraph

House prices will crash more than 20pc over the next two years as a result of Government spending cuts, tax rises and a surge in unemployment, according to a leading economic forecaster. Capital Economics, the consultancy led by Roger Bootle, expects house prices to fall 5pc this year, and 10pc in each of 2011 and 2012. In total, the group predicts a collapse in house prices of 23pc from the start of 2010 – a deeper drop than the 19.3pc crash during the recession. The numbers imply a torrid second half of 2010 as house prices are currently 3pc higher than the start of the year according to Nationwide Building Society, whose figures Capital Economics is mapping.

"Higher taxes, spending cuts and rising unemployment all point to fresh house price falls this year and next," the forecasters said in a report. "The benefits of low interest rates will be undermined by a fresh tightening in mortgage lending criteria." It is the second report in less than a week to make grim reading for Britain's homeowners. PwC warned "there is a 70pc chance that UK house prices will still be below peak 2007 levels in 2015 in real terms ... and that real house prices [after inflation] may not regain their previous peak levels until around 2020". Average house prices peaked at around £187,000 in October 2007 before collapsing for 16 months consecutively, according to Nationwide. The subsequent recovery has left them at £170,111 – 9pc below the top of the boom.

Capital Economics justified its outlook by noting that the house price-to-earnings ratio is still far above its 4pc long-run average at 5.5pc, and stressing that mortgage rates will only get more expensive. It expects "London to be hardest hit by the second leg of the correction". However, it cautioned that the 2012 forecast "is highly uncertain". The firm's prognosis is based on considerably worse outlook for the economy than the Treasury's. Capital Economics expects the economy to grow just 1pc this year, 1.5pc next and 2pc in 2012, against official forecasts of 1.2pc, 2.3pc and 2.8pc. Unemployment, it added, will rise to 3m after 750,000 public sector job cuts against the official forecasts that unemployment has peaked despite a looming 500,000 civil service cuts.

64.5 million mainland China houses lying vacant
by Reuters

Mainland’s property market remains dangerously overheated and failing to tame the speculative bubble could threaten financial and social stability, a prominent economist said in an official newspaper on Friday. Yi Xianrong, an economist at the Chinese Academy of Social Sciences, a government think tank in Beijing, noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country, many of them bought up by people wagering on a constantly rising property market. 

In the overseas edition of the People’s Daily,Yi said the "shocking" level of empty housing showed the dangers brought by the country’s property boom, which the central government has been trying to cool. "If this outsized property bubble does not burst, it will hurt residents’ well-being, and also affect national financial security and co-ordinated national economic development," wrote Yi. He wrote that the overheated property market was creating "misallocation of resources, price distortions, squandering of wealth … and is magnifying national financial risks, so that the economic structure cannot be adjusted, ultimately leading to overall social instability." 

The People’s Daily’s overseas edition is a small-circulation offshoot that tends to be more forthright than the main, domestic edition. While the paper is not an unerring mirror of official policy, Yi’s commentary suggests that the real estate market remains a worry for policy-makers. Beijing announced a slew of measures in past months to cool the property market, including raising down-payments and mortgage rates, and that has already caused deal volumes to drop and property inflation to slow in many cities. 

Nationwide, property prices rose 0.2 per cent in May from a month earlier, and were 12.4 per cent higher than a year earlier. The increases were smaller than in April. Property prices will fall within a few months as government steps to cool the real estate market bite deeper, Xu Shaoshi, the minister of land and resources, said on Sunday.. Yi suggested that more robust steps are needed to beat back property price rises fuelled by speculation. "The problem now is that investment in the domestic property market has completely overturned China’s traditional concepts of wealth management and investment and its price formation system," he wrote.

In Bizarre Ruling, Maryland Court Denies Anti-SLAPP Motion Against Downpayment Launderer
In what is sure to go down in free speech history as a gross error, if not a blatant miscarriage of justice, has been denied its motion for anti-SLAPP dismissal in the Maryland lawsuit, Russell vs. Krowne (et al.) (a-k-a Global Direct Sales and The Penobscot Indian Tribe vs. Implode-Explode Heavy Industries, Inc./

The lawsuit concerns blog criticism posted on the site by contributor Krista Railey (“The Mortgage Whistleblower”) regarding Russell’s Grant America Program (“GAP”), a collaboration of his Global Direct Sales, LLP, and the Penobscot Indian Tribe of Mass. The venture specialized in arranging seller-funded downpayment FHA loans (“SFDPAs”). Put in lay terms, GAP arranged to make it appear there was a downpayment on FHA loans where there was no downpayment (FHA loans require at least a 3% downpayment).

To achieve this, funds were channeled through the Indian tribe, allowing the resulting loans to pass muster by having an apparently “government-sourced” downpayment (Indian tribes count as “governments” for federal purposes).

The company (like other similar outfits) went to great lengths to appear to borrowers to be a charity, and even claimed they were “FHA-approved” (even though there is no approval process or “approved” status for downpayment contributors). The IRS cracked down on such schemes that had elected 501(c)(3) tax-exempt “charity” status in 2006, which prompted Russell to launch the Indian tribe variant in response.

In its denial of the anti-SLAPP motion, the court gave two main points of rationale, the first being:

There are genuine issues of material fact as to whether this lawsuit is a SLAPP suit because the parties dispute whether the suit was brought in bad faith and whether the allegedly defamatory article was regarding any matter within the authority of a government body.

The court gave this justification despite the fact that the SFDPA was specifically outlawed in the July 2008 Housing and Economic Recovery Act (which the plaintiffs themselves acknowledge by having ceased their business in response). Thus, the suit obviously concerns a matter within the authority of a government body — before even considering that the loans in concern are all FHA, that is, federally-insured, and that the Indian tribe is considered a government, which is why the plaintiffs state that they were using them (these are all points all parties in the suit agree to).

Further, the very same court (and judge) ruled overwhelmingly against plaintiff’s “prior restraint” attempt to censor the web site with an injunction at the beginning of the suit, ruling that it met NONE of the federal court requirements to award a preliminary injunction. In fact, Judge Chasanow went further and stated (transcript):

… any injunction in this regard would chill the First Amendment rights of people like the defendants, never mind just the defendants, and would stifle rather than foster appropriate debate at this precise time when it is so important.

Most casual observers might thus legitimately wonder how a suit kicked-off with such a motion — meeting no court standards other than being filed in an official-looking document, with the clear intent to chill the target’s First Amendment rights — could not be in “bad faith”. It was also noted to the court in the anti-SLAPP motion that Russell sent at least one threatening message prior to filing the suit, spelling out his intent to punish the site. This is the only intent clearly discernible in the entire affair (see Turner declaration/exhibits, exhibit `F’).

The second reason the court gave for denying the anti-SLAPP motion was:

Additionally, there is a genuine issue of material fact as to Defendants’ civil liability because the parties dispute whether Defendants maliciously published the article. Therefore, Defendants’ motion will be denied.

This was a puzzling statement as well, because ML-Implode included in the anti-SLAPP motion proof — public web and internal email statements against SFDPA and taking any advertising money from SFDPA companies — released long before any interaction with Grant America persons (see Krowne anti-SLAPP declaration+exhibits, and Medecke declaration+exhibits . The plaintiffs, on the other hand, included no proof whatsoever (or even anything suggestive) that the critical article was published with malicious intent, instead relying on the flimsy happenstance that ML-Implode’s ad sales contractor had had independent contact with Grant America persons at some point prior to the article’s publication.

Worse for the court’s rulling, the plaintiffs conspicuously have not even claimed (let alone provided evidence) that ML-Implode then made any demands of advertising money in exchange for not publishing criticism. That is, of course, because no such evidence could exist, because ML-Implode was hostile to SFDPA long before Russell’s company came along, and thus wanted nothing to do with such companies (as it stated in the public record, and reproduced in the court record — see Krowne and Medecke declarations and exhibits above). As a result, the court is shamefully countenancing a fabricated extortion claim from the plaintiffs that lacks half of the founding of extortion. In other words, it’s nonsense, manufactured from whole cloth, which anyone can glean from reading the plaintiff’s filings.

ML-Implode founder Aaron Krowne stated in response to the ruling “This is a sad day for free speech. By allowing this SLAPP suit to drag on, the court is effectively enabling the continued proliferation of large-scale government loan con artists by allowing them to use their ill-gotten millions to sue into submission critics who attempt to speak out, as well as to lobby for abeyance of enforcement from the government.”

Krowne further states that IEHI, Inc. (ML-Implode’s parent company) will likely have to file bankruptcy in response to the expected continuing litigation costs.

Since the GAP/ML-Implode suit was filed, HUD has announced $11 billion in losses from seller-funded downpayment loans, which racked up a nearly 15% default rate (as of Fall 2009.) That means FHA holds in excess of a staggering $70 billion in fraudulent SFDPA loans, and continues to this day to pay out loss claims to the lenders who originated them.

In 2008 Forbes Magazine wrote an article about Russell’s activities which reported that he and his business partner Ryan Hill took home a combined $14 million in compensation from their earlier SFDPA project, Ameridream, a nominal “nonprofit.” That is proving to be a nice kitty with which to sue unruly websites that might prove a threat for “business”.


Unknown said...
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Abuwabu said...

Although the banks as institutions are too big to fail, it would be interesting if the guys at the top were actually held personally responsible (for the 22000 drug-related murders in Mexico, for example) and put on trial as if they had personally committed those crimes.

zander said...

@ Gravity from last post.

Yeah, Maybe my hope for a resolution to this mess has led to an uncharachteristic gullibility and a wait and see game would be more appropriate, let me therefore re-align my position to - I'm delighted BP might actually be telling the truth about the POSSIBILTY of the leak being brought under control -
suspended cynicism is allowed in the want of an end to a catastrophe such as this no? maybe I went into an upswing over the mean of optimism after an initial downswing below the mean of pessimism.
Anyway the BBC reported it so it MUST be true. ;)

@ DIYer,

sorry, you linked Jesse's under a different name. my mistake.


zander said...

Sorry for being off topic but.....Eh, maybe I'm missing something but could not the apparatus which has been used to secure/clamp this cap into place also have been used to secure some sort of a vessel/funnel type thing to transport the crude up to the surface where it could have been siphoned off or dealt with?

I'm all ears.


bluebird said...

Yesterday Darby said "I am considering running for city council." This is a difficult decision. While it is worthwhile to lead and guide the herd from a leadership position, you must also think about the nature of the council itself, whether it is harmonious or contentious. If it is of contentious nature, your ideas may not be well received and might be better to meet informally in the homes of friends and neighbors throughout your city. Then each small group of people could fan out to spread the ideas and changes to more and more people. Perhaps others may have additional insight. And thank you for seeing a need and wanting to help others.

scandia said...

@VK, what with miniscule fines like these it will be BAU only more so. Hardly a deterrent.More a carte blanche, an irrevocable never go to jail card.
The corruption is so out in the open! " In my day" one protected one's reputation/standing in the community.Now it appears that an honest upstanding citizen is a pariah.
God forbid that a person be hired with scruples leading to postings on Wikileak. The boyz have put the legislation in place.Interesting to note how efficient the justice system is at charging whistleblowers yet somehow so blind to gruesome evidence of torture,fraud etc... Gotta admit the devil signed some smart players onto the yet again triumphant death squad.And any referee crying foul just gets replaced.
My own outrage is becoming tiresome, even to me.I am sure it is repetitively tiresome to this board as well. Crying foul is useless.
I am going to sit in " the silence"
for a time....find something to love to quote our dear friend, Bageant.Maybe a dog:)

Ventriloquist said...

"Twas ever thus."

Wm. Shakespeare
Twelfth Night

The only surprising thing about financial criminal malfeasance, is each new generation's discovery of it . . . as if this was something completely new.

No. This rigged crap game has been a part of human DNA since we dropped out of the trees, and probably before.

History is replete with thousands of examples of financial fraud by the wealthy and powerful perpetrated upon the serfs. And each successive generation gets to have its face shoved in it one more time again.


Bigelow said...


Could be me but you seem to have double posted including the picture.

eeyores enigma said...

I would like to point out that all of the above examples were roundly dismissed as "conspiracy theory" when they were brought up years ago.

jal said...

(Two copies of the main page)

Elizabeth Warren, of the Consumer Protection Agency, was on TV calling it like it is and projecting that 3,000 regional banks are going to have to extend and pretend, (50% underwater), that the commercial loans are not a problem if they wish to survive.
Those kinds of numbers mean that there will be a bailout to delay the day or recognition.

jal said...

Here is a video and transcript.

July 16th, 2010
[VIDEO] Elizabeth Warren and the American Holding Company

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Anonymous said...


So there is never one history. True, but humans repeat the same mistakes over and over again. The historical and archaeological record are proof of this. People are free to ignore that record. Reality is free to ignore those people.


"Time to eat the shit sandwich."

A better one line summary of our current situation I have not seen in a long time. Kudos.

jal said...

Canadians are not paying enough attention at what is happening to the CPP.

On the excuse that CPP would do better to invest in the market without using “brokers” they are cashing in + $1.5B.

Maybe they can invest better without the cost of fees to a “broker”, then again maybe they need the cash to replace a short fall in cash flow.

Laura Kreutzer of the Dow Jones private Equity Analyst reports in the WSJ, Canadian Pension System In $1.5B-Plus Secondary-Market Sale:

“The portfolio is heavily concentrated in large buyout funds raised at the peak of the boom, consisting of commitments to less than 10 funds from around a half dozen managers, two people said. That could make for a tough sale, as many secondary buyers don't want to get over-concentrated in the large buyout sector.
That could mean the portfolio is sold in several chunks, rather than in one piece. "I suspect that at the end of the day, they won't get bids for all of it," said one person with knowledge of the deal.”

A few comments on this article. If true, I think they're going to have a tough time selling this large portfolio of private equity funds in the secondary market. They won't suffer a substantial haircut, as if they were selling it a year ago, but it's safe to assume that they'll be unloading this portfolio at a discount (how big is anyone's guess).


EconomicDisconnect said...

If I was not too wimpy to get another tatoo (my only one hurt really bad!) I would get this line:
"Lady justice isn't blind, not at all, she likes the color green, she responds to money quite well and can always serve up a settlement, a measly fine and a slap on the wrist as long as you can tip the weighing scales with a rub of green."

Bigelow said...


"We could have regulated the big guy beforehand and we could have done something productive instead of spending our lives in the bloody casino. But we didn't."

Why not? We were subjected to an intense propaganda campaign to "deregulate" for over thirty years in the States. First fruits were the Savings & Loans banking collapse and it continued to get dirtier from there on. Why were the antitrust laws to prevent too-big-to-fail institutions repealed? In true 1984 Orwellian fashion because, they prevented "competition".

"Time to eat the shit sandwich."

Bringing down Leviathan Finance won't be left up to us. Not unless you count your conscious non-support of corporations.

btraven said...

Matt Simmons on the Gulf Oil Leak

Ric said...

...there is no such thing as an emergency with an octogenarian.

With respect to our hosts, I'll try to keep this on-topic re: geriatric care in a time of die-off. As everyone on this board knows, money is the only justice or caregiver in the U.S. "system." Like you, the powers that be went after my mother. A mentally-ill sibling accused me of causing my mother's illness and stealing from her. I'd been her signficiant care giver for several years as she slowly deteriorated (which meant seeing her most everyday and being her counselor and friend)--and when Mom began hallucinating and was no longer independently functional the sibling began accusing me.

It costs nothing to acuse, but once the system gets involved it works in its own glacial way and it takes enormous amounts of time, energy, and money to tame the beast. Perhaps I had more warning and resources than you had, but it took five years full-time--and almost destroyed me--but I was able to finally get the legal power (ie. the courts backing me up) to have complete control of my mother's medical care, including medications. The cost has been enormous--in the hundreds of thousands of dollars. I'm a poor, crazy artist-type living for 30 years in a one room garret and was able to get the money because I knew enough about peak oil/finance to sell real estate at the top of the bubble. She's now down the street in a private care facility, with three full time caregivers looking after six patients and I'm there every day. Now, the courts and police are my mother's protectors, but I had to pay for them first. I also have to say I couldn't have done it without my wife, who kept me together through it all.

The relevence for this board, I suppose, is the question of how far should we go caring for family? Is it worth all our resources and time as civilization collapses? It's such an odd question, isn't it? Sitting with Mom, I've had more than enough time to ponder this in many ways. Should I have taken her to the snow? Sometimes it seems no accident I first became aware of her deteriorating condition at the same time I discovered Jay Hanson's work on die-off, PO issues, etc around 2005.

What is appropriate care for another human being? Throughout my life I've been around a lot of dying people and am often surprised how squemish and scared people can get around it. Having the honor to be with someone at their death is one of the greatest gifts we can be given because we can't live well if we can't live with the abyss. This may be where I'm most out-of-step with this board. We can be concerned about the ethics/no-ethics of society, but it's far more fruitful to be concerned about our own ethics and forget the rest. The challenge of die-off, for me, is living with the transcendent all the way to the end.

Gravity said...

For the sake of argument, let's assume that there's only one rupture site, the televised one, and they've managed to seal it for now, so there's little additional oil and gas being discharged into the gulf. This outcome would be positive indeed, conceivably avoiding the worstcase scenario's, such as mass evacuation and complete sterilisation of the gulf, yet the econotoxic damage that will still occur after the next hurricanes cannot be discounted.

Some of the expectations surrounding this reported progress are overly optimistic, since a substantial portion of the oceanic foodchain has already been seriously disrupted and will take decades to recover at best, the damage to fishing industries cannot be reversed until the regions biointegrity is sufficiently recuperated. Tourism would only partially recover if the waters become clear again and dangers of poisoning are neutralised, although the larger decline of tourism and housing in the region would persist in deflation.

Denningers post 'where's the doom?'
does bring up some valid points about the verifiability of certain claims, but is indicative of a dismissive mindset that hastily discounts persistent damage to the region, he asserts that there will be no lasting damage to aquatic ecosystems or human health by exposure to oil-related compounds and the use of corexit, yet he admits fishing industries are devastated nontheless.

If one is inclined to believe the leak has now been stopped, the vast bulk of damage is still drifting out there, ready to come ashore or drench itself over the land after every hurricane or storm. The public health calamity is yet to begin, but won't recieve enough media exposure to alert people or scare off tourists.

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Bigelow said...

So, does Tungsten oxidize?
Rust Discovered On Bank Of Russia Issued 999 Gold Coins

Anonymous said...


Regarding your expressions, it appears you have no first hand experience with any of it, and perhaps invent other people to buttress what you enjoy believing is true. I.e, you have not actually owned and used guns,(growing up around is not it), engaged in combat, or lived in back country Mexico. Traveling thru the latter, for instance, or hearing about it from friends(as you say) is a far cry from residing there and earning a living even in the current world much less a collapsed one. You state you live in an area with excellent medical care and I have been there enough to know that means at least a semi urban center, not the totally rural areas you espouse as being collapse resistant and seedbeds of a new world. Certainly they have a better medical system there, I just would not count on it continueing.
We all believe your statement that your private house and adjoining courtyard,(as well as full bellies and spiritual equanamity) is the norm in Mexico, so it is a little confusing that so many risk death to come stateside. Hmmm--Oh well. Your life is better then in America now under the current system, perhaps, but maybe you are confusing that with conditions under collapse. Undoubtably you have some kind of entitlement, savings etc. from the states but that will disappear. A year down the road from that your opinion of Mexico as a refuge for Americans may be worth something. Of course, we probably won't be able to hear you. If you are still better off because of unique factors not mentioned, I still wouldn't apply that to most.

Your responses(7/16-12:10 AM and 2:53 PM) to my post 7/15 7:09 pm ignore the few simple points I made and pretended(as a way of avoidance) to think I was insulting your husband or the U.S military. However, to cover the unlikelyhood that you are really so obtuse, I will elaborate one issue.(Others forgive me).
Your repeated suggestion that people can resolve spiritual/pschological dilemmas of collapse by relocation to a more just and gentle culture is absurb. At best an urban American can find an American rural area that is marginally better, but unless you have the right connections there is really no time left and additionly the country most places is all ready full up. It is an undertaking few(without independent wealth) can accomplish in the present world much less a decayed one, so your suggestion to someone that the Inuit might recieve them with open arms is really insane. Can you buy a house after losing on your current, earn a living under even semi collapse conditions, be accepted by and useful to the locals?.Just to begin with the difficulties. Plus even if successful you will have violence to deal with. And of course America for at least 15 years has become very homogeneous in both it's culture and violent stupidity, so really the only option is the very rural foreign culture that you suggest wherin all the above obstacles and more increase by 20 orders of magnitude plus the legal problems and you'll never be able to compete with the skill set the natives have. Heh! I know it. America sucks and it's probably going to be worse here then anywhere. Mexicans etc. will be at least a little better off tho the farther away from the Empire the better. If I was a Doctor I'd give up everything to get out and gladly sleep on a blanket some place and spend the remainder of my live helping people for real.

As one poster said, "Wherever you go, there you are". Tools (including guns) and skills are important, but often overemphasized. Physical fitness and, at the top, awareness is the key, as it has allways been. Watch you mind constantly. The inability to detach from a useless thought stream means we never know what's going on in the present, we get caught, and we die stupidly, regardless of what skills or possessions we have. Currently I've been trying Buddhist meditation. Can't be sure yet that it will help me, but the basic truth of mind is there.

Good luck to all

Jim R said...

Don't sweat it, I think Jesse is worth mentioning twice.

Jim R said...

Tungsten oxidizes and its oxide, WO3, is yellow and somewhat water soluble. It washes off.

The stains on those Russian coins look like rust. But from the pictures I saw on ZH, and the linked articles, it looked like surface rust -- that is, a particle of iron somehow stuck to the coin and rusted. It didn't look like the coin itself was corroding from within.

If the CSI lab can take a little booger from the crime scene, and put it in a machine, and get a picture of the perp, you'd think a decent lab could analyze the coin (disclaimer: I have a bachelor's in chemistry). Looks like a surface stain, and not rusting gold.

Anonymous said...
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Jim R said...

Correction: according to Wikipedia, WO3 is insoluble in water. However, in playing with oxidized light bulb filaments, I have noticed that it washes off easily with plain water. It isn't "sticky" like iron rust.

soundOfSilence said...

...part 2

Denningers post 'where's the doom?' does bring up some valid points...

Eh? Where? He puts that nonsense (sic) "to bed" in the "answer" to the The water is highly toxic! claim?

Where there problems with birth defects, people dropping dead in the early '50s when Hooker Chemical closed their "dump" in the Niagara area... or that didn't get "noticed" until the mid '70s?

He can't wrap his brain around the possibility of something (long term) like climate change so he's gone to manage low level chemical toxicity if people aren't dropping dead in the street like right now? Come now Karl - put your money where your mouth is and drag your boat out of the driveway and go fishing.

soundOfSilence said...

Gravity said:

...substantial portion of the oceanic foodchain has already been seriously disrupted and will take decades to recover at best, the damage to fishing industries cannot be reversed until the regions biointegrity is sufficiently recuperated. Tourism would only partially recover if the waters become clear again and dangers of poisoning are neutralised...

Oh bah on you :-). It's all recovered and better. I quote from a lead article over on Yahoo News (I would include a link but I give it a couple hours at best before they move the article and change the URL)

...In coastal Alabama, lounge chairs for rent outside of hotels were full and swimmers bobbed in emerald green water virtually oil-free, save for a few small tar balls.

Calls started flooding into the reservations switchboard at Kaiser Realty Inc. in Gulf Shores, Ala., almost as soon as BP confirmed Thursday that oil had stopped flowing into the Gulf, said marketing director Emily Gonzales.

"Are they what we want them to be? No, but it is far better than it was," she said.

People also were fishing again, off piers and in boats, after most of the recreational waters in Louisiana were reopened late this week.

Really -it's all better. If you're damn lucky (sic) maybe you'll find a tar ball to take home as a souvenir.


pasttense said...

Have you ever heard of the Teapot Dome scandal?

"The Teapot Dome Scandal was an unprecedented bribery scandal and investigation during the White House administration of United States President Warren G. Harding. Before the Watergate scandal, it was regarded as the "greatest and most sensational scandal in the history of American politics"."

Read the article; what's your reaction? Mine is how incredibly small the fraud was in comparison to the existing financial fraud in Washington. So while this country has always had fraud, we've never had it at anywhere near the extent we are currently suffering from.

Danny Strickland said...

I have been reading Automatic Earth for some time and have been blown away by some of the stories and analysis you guys have presented.

But tonight after reading VK's take on several stories particularly the Wachovia drug money laundering scandal, I was instantly teleported back 25 years in such a manner that it was nearly an out of body experience.

I could not finish that Wachovia story and cannot read it again without the technicolor video playing in my head of the first episode in Season 2 of Miami Vice entitled Prodigal Son where Crockett and Tubbs head to Tubb's ol' stomping grounds of Manhattan to track down a major drug dealer.

During this 2 hour masterpiece of 80's television, they meet Gene Simmons of Kiss as Newton Blade, a drug middleman, Penn Jillette of Penn & Teller as Jimmy Borges, a drug dealer, and the spookiest character of them all and the one I immediately thought of concerning the Wachovia story, namely J. J. Johnston a bank president played by Julian Beck.

Now, what's amazing about this character is that when Crockett and Tubbs finally realize that the drug money is funneling through his bank they schedule a meeting with him only to find out that he knows they were coming, he tells both of them their entire financial history, including bank account numbers and credit cards, and also tells them that he is not going to do anything about the money laundering because he would destroy his own bank in the process. The other thing that makes this character so creepy is that he actually looks like a walking cadaver. That's because the actor playing Johnston, Julian Beck, was dying of stomach cancer and indeed was dead just weeks after filming this episode. In fact, as a point of even creepier trivia, he had been dead for nearly a year before the release of Poltergeist II in which he plays the ghost of Reverend Kane, an evil leader of a Morman like utopian cult .

Beck's speech to Crockett and Tubbs was a real eye-opener for me as a 21 year old college senior. It disquieted me in a way that I could not put my finger on at the time. Now at 46 and having gone through financial hell the last 3 years, (bankruptcy, foreclosure, homelessness), this Wachovia story and indeed all the stories of the banks here at Automatic Earth make me think of that episode and also remember the wisdom of Thomas Jefferson who found banks and bankers to be more dangerous than standing armies.

Thanks guys, for giving me the creeps all over again.


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Mr. Kowalski said...

"History is replete with thousands of examples of financial fraud by the wealthy and powerful perpetrated upon the serfs. And each successive generation gets to have its face shoved in it one more time again"

What seems to have changed here in America anyways, as well as many other parts of the world, is the scale of it. Ferdinand Marcos' government in the Philippines borrowed billions for "development projects", scammed a healthy percentage of all trade in and out of Manila, taxed all land owners.. in other words, the man looted the entire nation six ways from sunday. Today, the banksters, lawyers, politicians & those who live off the Gov't will in the end destroy the goose that lays the egg and we're going to have a very nasty time.

Top Hat Cat said...

Part II

Herd-manity must 'think' that collective self destructive behavior, spearheaded by an endless supply of psychopathic, sociopathic individuals and always followed by predictably, willfully ignorant Herd members has worked out 'Great' so far, why change a 'good' thing.

After all, Herd-manity itself is still here on the planet, no matter how grotesque and cruel it acts towards it's own individual members and the rest of the creatures on the planet. It just keeps sailing along. Evolution apparently counts that as A Big Success, despite countless individual human lives being a never ending Hell on Earth. It sounds like collective sadomasochism, but honestly, who can argue with the perfection of Divine Free Market Evolution, who can argue with the living breathing magnificent awe inspiring Success of Herd-manity. What's not to like?

No time to reflect upon the past.

'Of all the words of mice and men, the saddest are 'It might have been.'

Top Hat Cat said...

Humanity (The Herd), what ever that is, apparently has no real effectively functioning collective memory or 'immune system'.

By 'immune system' I mean a collective equivalent of an individual's built in ability to detect and neutralize parasites and 'foreign bodies' that pose extreme danger to the individual's own body.

Collectively, those qualities or collective structures, a memory and an immune system, have never really evolved in Humanity (The Herd).

'Culture', Humanity's kind of sad, pitiful collective memory, isn't much better in the long run than that of say, small rodent's collective memory, in conferring survival benefits to 'the herd', be they mice or men. Mice have been 'around the block' many times and do quite well as a group with an itty-bitty tiny collective memory, thank you. I guess people follow the same template.

'Humanity', as a unit of evolution, does not remember the past, because it obviously just keeps allowing the same pattern of collective self destructive behavior to go on century after century, millennium after millennium.

'Humanity' also, as a unit of evolution, does not have any effective self policing mechanism to detect, recognize and terminate the psychopathic, sociopathic individuals that continuously, over history, keep reappearing in it's 'body politic' and 'culture' (cough,gag,cough).

Herd-manity obviously thinks this is a big fat evolutionary Plus. Great call.

john patrick said...

Orlov has a couple new posts up. The latest which I think contributes here has to do with the problem of thinking in straight lines.

What I got from it was "life does not occur in a straight line." And so, while it'd be nice to "predict" the things to come, most likely it will be a wandering path (through dark and light.) Our preparation should take this into account.

Thank you I&S, and contributors, for the TAE blog.

bluebird said...

@Danny and others - Here is the link for 2 videos to the 1985
Miami Vice The Prodigal Son

Top Hat Cat said...

good Mad Max interview with Dr. Paul Craig Roberts about Andy Grove’s opinion piece on Bloomberg, “How to Make an American Job Before It’s Too Late.”

Phlogiston Água de Beber said...


Those of us with autoimmune conditions are not amused by your two-part rant.

The immune system, which you imagine to be the model for a solution to all of humankind's misery, sometimes goes bad. Rather like the Navajo, "acting like he has no relatives." When it goes bad it becomes an agent posing extreme danger to the host.

Humankind has expended considerable effort designing and constructing collective systems to suppress bad behavior. Evolution happens to societies, just as it does to species. Rather more frequently than we would like, those systems evolve into the greatest threats to the society they were meant to protect.

Tero said it as plainly as it can be said. "Time to eat the shit sandwich." It's not a delicacy we ever wanted on the menu. But, those of us with autoimmune conditions know that sometimes what nobody wants just gets on the menu anyway. And when that happens, one may find it is best to not complain too loudly and try not to antagonize the beast.

To paraphrase the last line of a story by the late folk singer Utah Phillips, called Mooseturd Pie. "My god, that's a shit sandwich! Good though."

Greenpa said...

Top Hat Cat said...

"Herd-manity must 'think' that collective self destructive behavior, spearheaded by an endless supply of psychopathic, sociopathic individuals and always followed by predictably, willfully ignorant Herd members has worked out 'Great' so far, why change a 'good' thing."

Your "herd-manity" is perhaps the same as the "superorganism" we were discussing here a few days back.

Truly? I think, as a biologist, that the human superorganism is not a metaphor, but a reality. One that can be discussed for all eternity without us ever getting very close to comprehending it, I fear. Does your liver cell comprehend "you"?

Having thought about this and watched us with that perspective for 40 years, I'm convinced Earth has at least 6, and maybe 20, different major human superorganisms living and competing at the moment. I think they're pretty crude, organizationally; about the same as an amoeba is, compared to advanced multicellular organisms. Certainly no brain, anywhere. On a good day, our own superorganism might reach the level of a jellyfish. Predatory, you notice. We eat whatever we can reach.

And, one other thing to remember; many folks think/expect/believe that evolution tends to optimize. Even a lot of biologists. The truth is: evolution selects only for "adequacy" in the present circumstance. (Long hard competition can make that LOOK like optimization; but where the rubber hits the road, it's just adequacy.)

Ok, shutting up. This whole thing is like my favorite bull-session topic. :-)

Anonymous said...

hija de papi said...

@ Ahimsa

Any thoughts?

Fidel Castro is probably right in thinking that there will probably be a nuclear war in the near future. He has been correct in his assessment of the US Empire for the last 50 plus years. In fact, the US Empire has turned out to be a lot worse than even he anticipated and articulated long ago.

My grandfather, a sage of a man who supported the revolution and died in Cuba in 1966, said that Fidel will be vindicated by history. He probably has already been vindicated.

The Source of Wars
"Today, everything hangs by a thread".... An incident could set in motion an all out nuclear war

by Fidel Castro Ruz

Greenpa said...

Ventriloquist said...

" 'Twas ever thus.'

Wm. Shakespeare, Twelfth Night".

"There is nothing new under the sun"

Attributed to Solomen, mostly; a few years earlier.


I'm pretty sure the same concept can be found in hieroglyphics and cuneiform, too. Seriously.

"The only surprising thing about financial criminal malfeasance, is each new generation's discovery of it . . . as if this was something completely new."

EXACTLY! You've hit the nub of the question for me. I actually went back to one of my high school teachers and berated him for not preparing us for all this shit. But thinking about it more; you know, they really didn't try to hide it. We were taught about Teapot Dome, and Jefferson's slaves, and Washington's expense accounts, and Ali Baba and the Forty Rockefellers, and Franklin's skirt chasing.

But I don't know anybody, certainly including myself, who thought that stuff applies to us/me/everyone, all the time. I was surprised. With really superlative teachers, and an interested mind of my own, I didn't get it.

If we could find a way to truly convey this information to the next generation- now that could be a really big deal, when rebuilding. (continued)

Greenpa said...


"This rigged crap game has been a part of human DNA since we dropped out of the trees, and probably before."

Ah, well, you've outdone me there, and you can scratch the "probably".

I've been using "It's been this way since Babylon was two mud huts." I've tried "It's been this way since Sumer was one mud hut and a tent." but it just gets blank stares.

On some serious thinking, based on broader experience in my advanced age; the pattern of the elite "taking" from the masses is a basic fact of life for any social vertebrate.

The low status critters are on the outside of the herd/school/flock; elites inside. And the predators are much more likely to pick off the stragglers.

We're an ablative shield, to switch metaphors entirely.

Equality- Justice - and "freedom", look like an even bigger uphill battle than we thought.

Greenpa said...


"John Greenleaf Whittier (1807-1892) wrote, "For of all sad words of tongue or pen, the saddest are these: 'It might have been ..."

I only post this because I had it wrong, too; I've been saying "of book or pen", for decades. Google is great.

Phlogiston Água de Beber said...

Those Dmitry Orlov fans that have not yet seen his new post dated yesterday, might wish to click the link below and go read it. It's a good one.

Greenpa said...

A little tiny hopeful thingy.

Multiple Asian economists are thinking of dumping GDP and standard "growth" as measures of "success." Apparently thinking seriously about it.

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Ilargi said...

Tom, Hija,

I'd say enough of the both of you for now.

See you later.


Top Hat Cat said...


My maligned version of 'mice & men' was from Kurt Vonnegut's "Cat's Cradle"

Being a fan of Bokononism, I thought I'd throw that in.

Bokononism is based on the concept of Foma (a distant corollary to Karma), which are defined as harmless untruths.

This is held in sharp contrast to the current gusher of BP's HBMLs (Harmful Big Monster Lies).

Ric said...

David Brooks here in the NY Times has a relvent take on inflation, er... self-esteem inflation:

In their book, “The Narcissism Epidemic,” Jean M. Twenge and W. Keith Campbell cite data to suggest that at least since the 1970s, we have suffered from national self-esteem inflation. They cite my favorite piece of sociological data: In 1950, thousands of teenagers were asked if they considered themselves an “important person.” Twelve percent said yes. In the late 1980s, another few thousand were asked. This time, 80 percent of girls and 77 percent of boys said yes.

Wonder what it would be in 2010? We need a way to measure the difference between a healthy, strong sense of self and narcissism.

Greenpa--great paragaph:

But I don't know anybody, certainly including myself, who thought that stuff applies to us/me/everyone, all the time. I was surprised. With really superlative teachers, and an interested mind of my own, I didn't get it.

But you did get it, eventually. Good education is a time-release formula. :-)

memphis said...

Ahimsa said:

My grandfather, a sage of a man who supported the revolution and died in Cuba in 1966, said that Fidel will be vindicated by history. He probably has already been vindicated.

I once worked with a Mexican who was in the cantina where the Castro boys plotted the revolution. Everyone has their own experiences of course, but he did not hold Raul or Fidel in high esteem. There is no classy term for "dictator."

Regardless of the individual or governing body, I'm always reluctant to grasp onto the concept of someone who's willing to do my thinking for me.

Greenpa said...

quite a painful illustration of how very very thin people's margins are now-

Gravity said...

Yeah, the tourism, guess I was mistakenly envisioning a rational and informed public that realises the dangers don't all disappear as soon as the flow is stopped. But they certainly do require relatively pristine beaches, give or take a few tarballs. The fishing activities won't resume on a commercial basis just yet, not safe to eat, y'know. The very same week Obama announced the fish was still safe, a huge area was declared off-limits to commercial fishing, likely for reasons of public health, not just cleanup logistics.

Denninger's post serves as insight into discounting mechanisms and specific ignorance of facts that would also allow those tourists to disregard or be oblivious to any lingering dangers. I've been progressively discounting best-case scenario's as they've successively become unlikely or impossible, leaving only the moderate and worst-case scenario's within the space of probability as confined by observations. But if there are ways to dismiss those observations, by questioning their validity or verifiability, one can cast into doubt the overarching elements of widespread anoxification and toxic danger as indicated by measurements and anecdotal evidence, and come up with unrealistic best-case outcomes for the region that should have been rendered impossible.

scandia said...

Memphis said, " I'm always reluctant to grasp onto the concept of someone who's willing to do my thinking for me."
Ha! You'd make a terrible foot soldier!
And your Myers Briggs score is?

PineappleCoward said...

Recent events may indicate that China is trying to push up US interest rates. I think they will continue buying treasuries but will be moving more toward the short end of the curve. The only counter the FED has that I can see is more Q.E. by proxy. They'll continue to monetize confidence and trust until there is nothing left.

jal said...

Am I seeing a trend? ... Is there a train that is coming?

Holding Bankers’ Feet to the Fire

The agency announced last Monday that it had issued 64 subpoenas to a throng of unidentified financial services institutions, seeking documents related to mortgage securities that Fannie and Freddie bought from Wall Street during the boom years.
The subpoenas are designed to tell the agency what many of us want to know: How did Wall Street package and sell private-label mortgage securities to investors, even though the nature and quality of some of the loans crammed inside those tidy little packages were, at best, suspect?
Once that question has been answered, Fannie and Freddie can force the institutions that sold the securities to repurchase the improper loans, allowing taxpayers to recover some of the losses they’ve swallowed on Fannie’s and Freddie’s federal bailout.
Investigating this aspect of the mortgage mess seems a pretty logical step for a regulator. But in the topsy-turvy world of Washington, the housing finance agency’s move is unusually aggressive. Edward J. DeMarco, its acting director, seems to be that rarity — a regulator who not only talks about looking out for the taxpayer, but actually does something about it.
The subpoenas went to companies that act as trustees for mortgage pools or that service the loans in them. The housing finance agency wants to see loan files and transaction documents related to those pools, including mortgage applications and property appraisals. Recipients of the subpoenas have 30 days to produce the requested documents. Additional subpoenas may follow, it said.
The agency had to resort to subpoenas, it said, because when it asked the institutions for the records it got nowhere for many months. “Difficulty in obtaining the loan documents has presented a challenge to the enterprises’ efforts” to ascertain whether losses at the companies are the responsibility of others, its press release said.

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jal said...

Part III

Why are bloggers and MSM having articles about Elizabeth Warren?
Maybe its because she is fighting back against the establishment that is trying to mussel her.
Read the following.’m-drawing-the-line/

Elizabeth Warren or Bust, I’m Drawing the Line

jal said...
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jal said...

Part III…-the-pain-is-not-over-yet/

For Bankers of Failed Financial Institutions… the Pain Is Not Over Yet

The Federal Deposit Insurance Corp. (“FDIC”) has started laying a foundation for lawsuits against the senior executives and directors that the agency claims were responsible for their bank failing.  Apparently, the FDIC has already sent out hundreds of demand letters that warn officers and directors about the possibility of civil charges, and announce formal investigations into individuals and subpoenaed directors’ financial statements, among other documents.
Shiela!  There you are!  Where the heck have you been girl?  Last I heard, Hank Paulson sent you for coffee, and you’ve been standing in Geithner’s shadow ever since.  It’s about damn time, girl!
FDIC says they want to assess accountability for the multitude of bank failures and perhaps take shot at replenishing the Deposit Insurance Fund while they’re at it, and the letters set the stage for civil lawsuits and monetary settlements, if appropriate.  Some industry people say the FDIC is only targeting the bankers with the most money, including those with insurance policies that will pay damages, but I couldn’t figure out for sure if they meant that doing so was a bad thing.  Because as far as I’m concerned, that’s exactly what the FDIC should do… target away, Ms. Bair.

jal said...

Talk about hiding your head in the sand... the depression ... where the middle class is heading

The scandal of child labour in US farming

The false representation of immigrants 'stealing' farm jobs paints out the reality that children are being exploited to do the work.

HRW estimates that at least 9% of farm workers are children, and this number may be significantly higher. What this means is that a very big percentage of the actual people doing the "stealing" are kids rather than grown men, and those kids, more often than not, may actually be citizens, having been born in the US after their parents immigrated.

sumacarol said...

Regarding the connection between organized crime and the banks. Here's a thought: Given the real possibility that banks could collapse, it seems that organized crime, with their cash-based systems, will be very capable of continuing to flourish under these conditions. Does this make sense?

ogardener said...

Blogger Greenpa said...

Ventriloquist said...

" 'Twas ever thus.'

Wm. Shakespeare, Twelfth Night".


Damn! I always thought the above was attributed to R. Crumb.

NZSanctuary said...

THC said...
'Humanity' also, as a unit of evolution, does not have any effective self policing mechanism to detect, recognize and terminate the psychopathic, sociopathic individuals that continuously, over history, keep reappearing in it's 'body politic' and 'culture' (cough,gag,cough).

I suspect this is what some rituals, customs and religions were originally used for. Over time such things become institutionalised or invaded by the every people they seek to weed out, however, and alas, original meaning is lost and they become cultish followings with people acting out the traditional motions in zombie-like fashion.

Glennjeff said...


No academic information here but;

I can relate to you something my father told me - " during the great depression and WWII you could not buy much from stores etc and had to go to the black market for anything other than basic goods."

If TSHTF we may end up depending on criminals for any sort of goods that are not related to everyday survival.

I should imagine that in really hard times black market operatives will accept certain difficult to obtain items as barter.

Cash is only king in this hyper-controlled modern financial system. In the real world it's "usefull stuff" that retains wealth value.

A few examples off the top of my head of stuff that MAY retain wealth value;

Copper pipe for instance, so people can fix their plumbing. Plumbing and building repair supplies generally

.22 LR or .22 Magnum bullets in rural regions for food gathering. (They are nealry always factory made, not reloaded, so one can be reasonably well assured that they are correctly engineered. Dad did metion that some .303 bullets that he purchased during WWII had virtually no powder in them and the projectiles just fell out of the end of the barell, they were dodgy reloads.

Storable fuel of any description.

Fertilizers, agricultural supplies. This is my pick, I have ordered 1 tonne of slow release NPKT pellets, to add to my current holdings of 200 kg.

Given the state of play in the world perhaps one should make friends with a drug lord sooner rather than later :)

snuffy said...

A word or six on elder care in the present...and future.

When My grandmother finally accepted that she could no longer live by herself,My brother calmly told her to load up,and move in with him.His wife is Thai,and considers it a duty of younger family,to care for the elderly,[the same way we were raised.]I know it is not fashionible in some circles to feel the obligation to care for your own, but,we am a little old fashioned about such things.

I will not have that support in my old age...but I have a feeling that
as things such as health care and a steady food supply deteriorate,It will be the norm.For most.I don't know how my "tribal structure" will end up,as my crystal ball is in for repairs and upgrades,But I understand from the time spent studying history that elderly usually died from starvation.This is why I have spent so much time on my orchards,perennial food bearing plants,study of local wild food plants,and such.As long as I can totter out and gather fruit to dry and sticks for the fire,I should be good.My uncle,when he got older had a habit of always taking a medium chunk of wood back with him from his steelhead fishing trips on the Nesttuca river.By the end of the summer,he would have 2-3 cords neatly stacked at the end of the cabin,having by a small ,constant habit,saving himself several days of heavy labor.Mrs snuffy has explained to me she expects as close to 100% of our veggys to come from the garden after to big greehouse is complete and I retire.[Retiring is a relative term in the future I thing....more like change the type of work I do...
Greenpa,I like you Ideas about 5-20 "Human super-organisms"It make sense on many levels..
I hope Mr Castro is wrong.I fear he is dead right,as the links story,and reasoning,Makes good sleep this night a question..

Time for some sleep I think.
I hope

Bee good or
Bee careful


lautturi said...

Business Insider: 60 years old bubble deflating, everything leveraged 60 to 1 (with simple pic). LOL this story is getting old...

zander said...

It's being reported over here this morning that there is still leaking from the seafloor at deepwater.
I'm at the point where I don't know WTF to believe.


Caith said...

Not only child labour but *citizen* child labour? That is the real scandal?

NZSanctuary said...

The Orlov piece is excellent.

One of my favourite Zen writers, Alan Watts was linked there, too. This (part 3) seems particularly relevant to the times...

jal said...

Locally ... I've noticed, (for years), that the child labor is being done by those in their second childhood.


Anonymous said...

" memphis said...

Ahimsa said:

My grandfather, a sage of a man who supported the revolution and died in Cuba in 1966, said that Fidel will be vindicated by history. He probably has already been vindicated.

I once worked with a Mexican who was in the cantina where the Castro boys plotted the revolution. Everyone has their own experiences of course, but he did not hold Raul or Fidel in high esteem. There is no classy term for "dictator."

Regardless of the individual or governing body, I'm always reluctant to grasp onto the concept of someone who's willing to do my thinking for me."

Sounds like your Mexican acquaintance did the "thinking" about Castro for you. Makes no sense with all the research and information we have today. Fidel Castro is one of the few souls who successfully stood up to American imperialism, if that seems to irk you. Please do acquaint yourself with Cuba's excellent health care, kindergarten to Ph.D. education for all who want it, 80% organic agriculture, etc. Recommended viewing of documentary films: Salud, The Power of Community, Fidel: The Untold Story.

Why was Cuba so militant and authoritarian? Because a democratic socialist republic in Cuba would have gone the way the Chilean democratic revolution went under Allende: CIA overthrowal.

snuffy said...

They didn't give the spooks a chance to trash their dreams,and destroy their intelligentsia like Chile...and made Cuba the largest exporter of doctors in the world.Lets see where Cuba is in 25 years,and where we are,and you might see Castro laughing from his grave...

"Herd think"is what keep the average human super-organism the same intelligence as a jellyfish I think
Bee good or
Bee careful


scandia said...

Just read a story confirming the leak several miles away that Matt Simmons has been talking about. Saw the story in the Tampa Bay Examiner. Anyone else seeing this admission for BP?
If it is accurate what now folks?

scandia said...

More on the oil leak on ZeroHedge. Doesn't get more Orwellian than this. BP calls the leak a " seep"!

soundOfSilence said...


Top story over on Yahoo News... yeah it's leaking but we're not taking the cap off just yet (not a major concern), that leak a couple miles away is probably not related... nothing to see folks, start your outboards and move along (or will charge you with a felony).

I guess lower pressure doesn't cause damage. That and what's he going to say... "yeah that seep a couple mile away might be related." If so at that point what's left - start hyperventilating and yelling "game over man, game over man!!"

The whole thing is like some surreal dreamscape.

WASHINGTON – Oil is leaking from the cap on BP's ruptured oil well, but federal officials intend to leave it in place for now.

Retired Coast Guard Adm. Thad Allen says Monday afternoon that the leaks are so far not a major concern.

He also says seepage about two miles away is likely not related to the ruptured well.

Allen says if there was a quick rise in pressure, they would open the well immediately to keep from creating leaks deep underground.

Ilargi said...

New post up.

The Rise and Fall of Trade