From GMO’s Edward Chancellor

The Typical Characteristics of a Stock Market Mania

1. This-time-is-different mentality. Throughout history, successive market manias have been rationalized with the argument that history is no longer a reliable guide to the future. Both the “new era” of the 1920s and “new paradigm” of the 1990s were marked by a “this-time-is-different” mentality. The same mode of thinking is evident again today. U.S. profit margins are currently at peak levels and the profit share of GDP in the United States is more than two standard deviations above its long-term mean (based on data going back to the 1920s). The U.S. profits dataset is the most reliably mean-reverting financial series available, claims Andrew Smithers of Smithers & Co. Most commentary, however, assumes that U.S. profits have reached, in Irving Fisher’s immortal phrase, a “permanently high plateau.” As John Hussman of Hussman Funds comments, “Believing that historical tendencies have evolved into a new paradigm will likely have the same results as playing leapfrog with a unicorn.” Painful.

2. Moral hazard. Speculative bubbles tend to form when market participants believe that financial risk has been underwritten by the authorities. The “Greenspan Put” appeared in the late 1990s after it became clear that the Fed was prepared to support falling markets but wasn’t going to act against the bubble in  technology stocks. Fed policy hasn’t significantly changed since then. Monetary policy in the aftermath of the financial crisis has aimed to put a floor under asset prices, encouraging investors to take on more risk. As a consequence, U.S. household wealth – comprising largely of home equity and stocks – has rebounded to a near-record level of 472% of GDP, nearly 100% above its long-term mean. Whenever a cloud appears over Wall Street, market participants have come to expect more quantitative easing and guarantees of perpetually low interest rates. The personnel may change at the Fed, but the Greenspan Put remains in place.

3. Easy money. Great speculative bubbles have generally been accompanied by periods of low interest rates. Greenspan’s easy money policies in the last decade inflated the U.S. housing bubble, along with numerous other bubbles around the world. Bernanke’s cure for the economy in the wake of the financial crisis has been more of the same. For more than five years, U.S. real interest rates have been maintained at negative levels. An avowed aim of the Fed’s quantitative easing has been to push down long-term interest rates in order to boost both the stock market and home prices. In particular, lowering the long-term discount rate has boosted the valuation of growth stocks.

4. Overblown growth stories. Another common feature of a bubble is the overblown growth story. We witnessed this during the Dotcom bubble, ad nauseam. In the late 1990s we were told that tech stocks were experiencing “S-curve” growth (which posits very rapid growth in the near term); investors were also encouraged to value the “real options” of Internet stocks from future income streams yet to be conceived. Many of today’s high profile growth stocks – operating in fields such as social networking, electric cars, biotechnology, and, of course, the Internet – have been boosted by similar wishful thinking. Just as there were serial railway bubbles over the course of the 19th century, Internet stocks in the age of Dotcom 2.0 appear to be experiencing what my colleague James Montier has termed a “bubble echo.”

5. No valuation anchor. The most speculative markets – from the 17th century Dutch tulip mania onwards – have been marked by the absence of any valuation anchor; when there’s no income to tether the speculator’s imagination, asset prices can become unbounded. Our electronic age has even come up with a digital version of the Semper Augustus tulip. The fact that Bitcoin – the best known among the dozens of competing crypto-currencies – soared by 5,500% during the course of 2013 is testimony to the strength of the recent speculative tempo.

Needless to say, most of the recent stock market darlings – Netflix, Facebook, Tesla, and Twitter – have little or nothing in the way of profits. Internet retailer Amazon.com, whose margins have deteriorated in recent years yet whose stock soared nearly 60% in 2013, is the poster child for a market that is more obsessed with growth than profitability.

6. Conspicuous consumption. Asset price bubbles are associated with quick fortunes, rising inequality, and luxury spending booms. Since the spring of 2009, not only has the Fed engineered a strong rebound in the level of household wealth, but the richest part of the population has enjoyed the greatest share of the gains. Luxury spending has surged globally since the crisis.

The art market provides an excellent barometer of the speculative mood, given art prices depend entirely upon what other people are prepared to pay. A bubble in modern and contemporary art, which was evident before the financial crisis, has returned. Last November, a sculpture by Jeff Koons – Balloon Dog (Orange) – fetched $58 million at auction, a record sum for a work by a living artist. The contemporary collector apparently isn’t fazed by the fact that this dog was one of five “unique” versions or that Koons himself didn’t produce the work by his own hand but had it made in a factory. The same month, a painting by Francis Bacon sold for $142 million, the highest price ever paid for any work at auction.

7. Ponzi finance. Manic markets are often marked by a decline in credit standards. In the last decade, subprime debt inflated the U.S. real estate bubble. The financial crisis may have had many unpleasant after-effects, but it hasn’t diminished the appetite for low quality U.S. credit. In fact, we have recently witnessed the lowest yields for junk bonds in history. The quality of debt issuance has been deteriorating. Last year, nearly two out of three corporate bond issues carried a junk rating. Last year, total issuance of high yield and leveraged loans exceeded $1 trillion. More than half of the 2013 vintage leveraged loans came without the traditional covenants to protect investors. The decline in the quality of credit has attracted the attention of Jeremy Stein, one of the more market-savvy Fed governors. Stein’s boss, Janet Yellen, has also expressed concern about the manic leveraged loan market.

8. Irrational exuberance. Valuation is the truest measure of speculative mood. There are other ways to take the market’s pulse, however. Most conventional measures of market sentiment have become very elevated over the past year. The IPO market in 2013 and into the first quarter of 2014 has become particularly speculative. New IPOs in 2013 rose on average by 20% on their first day’s trading (Twitter rose 74% on the day it came to the market last November). Nearly three-quarters of the IPOs, which were launched in the six months to March, produced no profits. A good portion of these profitless IPOs, in particular those of the biotech variety, hadn’t even got around to generating anything by way of revenue. They are story stocks, pure and simple.

Other sentiment measures have been telling the same story. The trading activity of corporate insiders is a reasonably good indicator of managements’ view on the intrinsic value of their companies. Recently, the ratio of insider sales to purchases has climbed to near record levels. Equity mutual fund flows – another commonly cited sentiment indicator – have also picked up lately, while household cash balances (as a share of total assets) have declined. Margin debt as a share of GDP is close to its peak level. Market volatility has been trending downwards, while the daily correlation of stocks – another useful gauge of the market’s fear level – has also come down.

* * *

And yes: we have all of the above right now, most of which in record amounts. So… buy, buy, buy.

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/news/2014-05-05/eight-characteristics-stock-market-mania

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From Mike Whitney of Counterpunch

The Greatest Propaganda Coup of Our Time?

There’s good propaganda and bad propaganda. Bad propaganda is generally crude, amateurish Judy Miller “mobile weapons lab-type” nonsense that figures that people are so stupid they’ll believe anything that appears in “the paper of record.” Good propaganda, on the other hand, uses factual, sometimes documented material in a coordinated campaign with the other major media to cobble-together a narrative that is credible, but false.

The so called Fed’s transcripts, which were released last week, fall into the latter category. The transcripts (1,865 pages) reveal the details of 14 emergency meetings of the Federal Open Market Committee (FOMC) in 2008, when the financial crisis was at its peak and the Fed braintrust was deliberating on how best to prevent a full-blown meltdown. But while the conversations between the members are accurately recorded, they don’t tell the gist of the story or provide the context that’s needed to grasp the bigger picture. Instead, they’re used to portray the members of the Fed as affable, well-meaning bunglers who did the best they could in ‘very trying circumstances’. While this is effective propaganda, it’s basically a lie, mainly because it diverts attention from the Fed’s role in crashing the financial system, preventing the remedies that were needed from being implemented (nationalizing the giant Wall Street banks), and coercing Congress into approving gigantic, economy-killing bailouts which shifted trillions of dollars to insolvent financial institutions that should have been euthanized.

What I’m saying is that the Fed’s transcripts are, perhaps, the greatest propaganda coup of our time. They take advantage of the fact that people simply forget a lot of what happened during the crisis and, as a result, absolve the Fed of any accountability for what is likely the crime of the century. It’s an accomplishment that PR-pioneer Edward Bernays would have applauded. After all, it was Bernays who argued that the sheeple need to be constantly bamboozled to keep them in line. Here’s a clip from his magnum opus “Propaganda”:

“The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country.”

Sound familiar? My guess is that Bernays’ maxim probably features prominently in editors offices across the country where “manufacturing consent” is Job 1 and where no story so trivial that it can’t be spun in a way that serves the financial interests of the MSM’s constituents. (Should I say “clients”?) The Fed’s transcripts are just a particularly egregious example. Just look at the coverage in the New York Times and judge for yourself. Here’s an excerpt from an article titled “Fed Misread Crisis in 2008, Records Show”:

“The hundreds of pages of transcripts, based on recordings made at the time, reveal the ignorance of Fed officials about economic conditions during the climactic months of the financial crisis. Officials repeatedly fretted about overstimulating the economy, only to realize time and again that they needed to redouble efforts to contain the crisis.” (“Fed Misread Crisis in 2008, Records Show”, New York Times)

This quote is so misleading on so many levels it’s hard to know where to begin.

First of all, the New York Times is the ideological wellspring of elite propaganda in the US. They set the tone and the others follow. That’s the way the system works. So it always pays to go to the source and try to figure out what really lies behind the words, that is, the motive behind the smokescreen of half-truths, distortions, and lies. How is the Times trying to bend perceptions and steer the public in their corporate-friendly direction, that’s the question. In this case, the Times wants its readers to believe that the Fed members “misread the crisis”; that they were ‘behind the curve’ and stressed-out, but–dad-gum-it–they were trying their level-best to make things work out for everybody.

How believable is that? Not very believable at all.

Keep in mind, the crisis had been going on for a full year before the discussions in these transcripts took place, so it’s not like the members were plopped in a room the day before Lehman blew up and had to decide what to do. No. They had plenty of time to figure out the lay of the land, get their bearings and do what was in the best interests of the country. Here’s more from the Times:

”My initial takeaway from these voluminous transcripts is that they paint a disturbing picture of a central bank that was in the dark about each looming disaster throughout 2008. That meant that the nation’s top bank regulators were unprepared to deal with the consequences of each new event.”

Have you ever read such nonsense in your life? Of course, the Fed knew what was going on. How could they NOT know? Their buddies on Wall Street were taking it in the stern sheets every time their dingy asset pile was downgraded which was every damn day. It was costing them a bundle which means they were probably on the phone 24-7 to (Treasury Secretary) Henry Paulson whining for help. “You gotta give us a hand here, Hank. The whole Street is going toes-up. Please.”

Here’s more from the NYT:

“Some Fed officials have argued that the Fed was blind in 2008 because it relied, like everyone else, on a standard set of economic indicators. As late as August 2008, “there were no clear signs that many financial firms were about to fail catastrophically,” Mr. Bullard said in a November presentation in Arkansas that the St. Louis Fed recirculated on Friday. “There was a reasonable case that the U.S. could continue to ‘muddle through.’ (“Fed Misread Crisis in 2008, Records Show”, New York Times)

There’s that same refrain again, “Blind”, “In the dark”, “Behind the curve”, “Misread the crisis”.

Notice how the Times only invokes terminology that implies the Fed is blameless. But it’s all baloney. Everyone knew what was going on. Check out this excerpt from a post by Nouriel Roubini that was written nearly a full year before Lehman failed:

“The United States has now effectively entered into a serious and painful recession. The debate is not anymore on whether the economy will experience a soft landing or a hard landing; it is rather on how hard the hard landing recession will be. The factors that make the recession inevitable include the nation’s worst-ever housing recession, which is still getting worse; a severe liquidity and credit crunch in financial markets that is getting worse than when it started last summer; high oil and gasoline prices; falling capital spending by the corporate sector; a slackening labor market where few jobs are being created and the unemployment rate is sharply up; and shopped-out, savings-less and debt-burdened American consumers who — thanks to falling home prices — can no longer use their homes as ATM machines to allow them to spend more than their income. As private consumption in the US is over 70% of GDP the US consumer now retrenching and cutting spending ensures that a recession is now underway.

 

On top of this recession there are now serious risks of a systemic financial crisis in the US as the financial losses are spreading from subprime to near prime and prime mortgages, consumer debt (credit cards, auto loans, student loans), commercial real estate loans, leveraged loans and postponed/restructured/canceled LBO and, soon enough, sharply rising default rates on corporate bonds that will lead to a second round of large losses in credit default swaps. The total of all of these financial losses could be above $1 trillion thus triggering a massive credit crunch and a systemic financial sector crisis.” ( Nouriel Roubini Global EconoMonitor)

Roubini didn’t have some secret source for data that wasn’t available to the Fed. The financial system was collapsing and it had been collapsing for a full year. Everyone who followed the markets knew it. Hell, the Fed had already opened its Discount Window and the Term Auction Facility (TAF) in 2007 to prop up the ailing banks–something they’d never done before– so they certainly knew the system was cratering. So, why’s the Times prattling this silly fairytale that “the Fed was in the dark” in 2008?

I’ll tell you why: It’s because this whole transcript business is a big, freaking whitewash to absolve the shysters at the Fed of any legal accountability, that’s why. That’s why they’re stitching together this comical fable that the Fed was simply an innocent victim of circumstances beyond its control. And that’s why they want to focus attention on the members of the FOMC quibbling over meaningless technicalities –like non-existent inflation or interest rates–so people think they’re just kind-hearted buffoons who bumbled-along as best as they could. It’s all designed to deflect blame.

Don’t get me wrong; I’m not saying these conversations didn’t happen. They did, at least I think they did. I just think that the revisionist media is being employed to spin the facts in a way that minimizes the culpability of the central bank in its dodgy, collaborationist engineering of the bailouts. (You don’t hear the Times talking about Hank Paulson’s 50 or 60 phone calls to G-Sax headquarters in the week before Lehman kicked the bucket, do you? But, that’s where a real reporter would look for the truth.)

The purpose of the NYT article is to create plausible deniability for the perpetrators of the biggest ripoff in world history, a ripoff which continues to this very day since the same policies are in place, the same thieving fraudsters are being protected from prosecution, and the same boundless chasm of private debt is being concealed through accounting flim-flam to prevent losses to the insatiable bondholders who have the country by the balls and who set policy on everything from capital requirements on complex derivatives to toppling democratically-elected governments in Ukraine. These are the big money guys behind the vacillating-hologram poseurs like Obama and Bernanke, who are nothing more than kowtowing sock puppets who jump whenever they’re told. Here’s more bunkum from the Gray Lady:

”By early March, the Fed was moving to replace investors as a source of funding for Wall Street.

 

Financial firms, particularly in the mortgage business, were beginning to fail because they could not borrow money. Investors had lost confidence in their ability to predict which loans would be repaid. Countrywide Financial, the nation’s largest mortgage lender, sold itself for a relative pittance to Bank of America. Bear Stearns, one of the largest packagers and sellers of mortgage-backed securities, was teetering toward collapse.

 

On March 7, the Fed offered companies up to $200 billion in funding. Three days later, Mr. Bernanke secured the Fed policy-making committee’s approval to double that amount to $400 billion, telling his colleagues, “We live in a very special time.”

 

Finally, on March 16, the Fed effectively removed any limit on Wall Street funding even as it arranged the Bear Stearns rescue.” (“Fed Misread Crisis in 2008, Records Show”, New York Times)

This part deserves a little more explanation. The author says “the Fed was moving to replace investors as a source of funding for Wall Street.” Uh, yeah; because the whole flimsy house of cards came crashing down when investors figured out Wall Street was peddling toxic assets. So the money dried up. No one buys crap assets after they find out they’re crap; it’s a simple fact of life. The Times makes this sound like this was some kind of unavoidable natural disaster, like an earthquake or a tornado. It wasn’t. It was a crime, a crime for which no one has been indicted or sent to prison. That might have been worth mentioning, don’t you think?

More from the NYT: “…on March 16, the Fed effectively removed any limit on Wall Street funding even as it arranged the Bear Stearns rescue.”

Yipee! Free money for all the crooks who blew up the financial system and plunged the economy into recession. The Fed assumed blatantly-illegal powers it was never provided under its charter and used them to reward the people who were responsible for the crash, namely, the Fed’s moneybags constituents on Wall Street. It was a straightforward transfer of wealth to the Bank Mafia. Don’t you think the author should have mentioned something about that, just for the sake of context, maybe?

Again, the Times wants us to believe that the men who made these extraordinary decisions were just ordinary guys like you and me trying to muddle through a rough patch doing the best they could.

Right. I mean, c’mon, this is some pretty impressive propaganda, don’t you think? It takes a real talent to come up with this stuff, which is why most of these NYT guys probably got their sheepskin at Harvard or Yale, the establishment’s petri-dish for serial liars.

By September 2008, Bernanke and Paulson knew the game was over. The crisis had been raging for more than a year and the nation’s biggest banks were broke. (Bernanke even admitted as much in testimony before the Financial Crisis Inquiry Commission in 2011 when he said “only one ….out of maybe the 13 of the most important financial institutions in the United States…was not at serious risk of failure within a period of a week or two.” He knew the banks were busted, and so did Paulson.) Their only chance to save their buddies was a Hail Mary pass in the form of Lehman Brothers. In other words, they had to create a “Financial 9-11?, a big enough crisis to blackmail congress into $700 no-strings-attached bailout called the TARP. And it worked too. They pushed Lehman to its death, scared the bejesus out of congress, and walked away with 700 billion smackers for their shifty gangster friends on Wall Street. Chalk up one for Hank and Bennie.

The only good thing to emerge from the Fed’s transcripts is that it proves that the people who’ve been saying all along that Lehman was deliberately snuffed-out in order to swindle money out of congress were right. Here’s how economist Dean Baker summed it up the other day on his blog:

“Gretchen Morgensen (NYT financial reporter) picks up an important point in the Fed transcripts from 2008. The discussion around the decision to allow Lehman to go bankrupt makes it very clear that it was a decision. In other words the Fed did not rescue Lehman because it chose not to.

 

This is important because the key regulators involved in this decision, Ben Bernanke, Hank Paulson, and Timothy Geithner, have been allowed to rewrite history and claim that they didn’t rescue Lehman because they lacked the legal authority to rescue it. This is transparent tripe, which should be evident to any knowledgeable observer.” (“The Decision to Let Lehman Fail”, Dean Baker, CEPR)

Here’s the quote from Morgenson’s piece to which Baker is alluding:

“In public statements since that time, the Fed has maintained that the government didn’t have the tools to save Lehman. These documents appear to tell a different story. Some comments made at the Sept. 16 meeting, directly after Lehman filed for bankruptcy, indicate that letting Lehman fail was more of a policy decision than a passive one.” (“A New Light on Regulators in the Dark”, Gretchen Morgenson, New York Times)

Ah ha! So it was a planned demolition after all. At least that’s settled.

Here’s something else you’ll want to know: It was always within Bernanke’s power to stop the bank run and end to the panic, but if he relieved the pressure in the markets too soon (he figured), then Congress wouldn’t cave in to his demands and approve the TARP. Because, at the time, a solid majority of Republicans and Democrats in congress were adamantly opposed to the TARP and even voted it down on the first ballot. Here’s a clip from a speech by, Rep Dennis Kucinich (D-Ohio) in September 2008 which sums up the grassroots opposition to the bailouts:

“The $700 bailout bill is being driven by fear not fact. This is too much money, in too short of time, going to too few people, while too many questions remain unanswered. Why aren’t we having hearings…Why aren’t we considering any other alternatives other than giving $700 billion to Wall Street? Why aren’t we passing new laws to stop the speculation which triggered this? Why aren’t we putting up new regulatory structures to protect the investors? Why aren’t we directly helping homeowners with their debt burdens? Why aren’t we helping American families faced with bankruptcy? Isn’t time for fundamental change to our debt-based monetary system so we can free ourselves from the manipulation of the Federal Reserve and the banks? Is this the US Congress or the Board of Directors of Goldman Sachs?”

But despite overwhelming public resistance, the TARP was pushed through and Wall Street prevailed. mainly by sabotaging the democratic process the way they always do when it doesn’t suit their objectives.)

Of course, as we said earlier, Bernanke never really needed the money from TARP to stop the panic anyway. (Not one penny of the $700 bil was used to shore up the money markets or commercial paper markets where the bank run took place.) All Bernanke needed to do was to provide backstops for those two markets and, Voila, the problem was solved. Here’s Dean Baker with the details:

“Bernanke deliberately misled Congress to help pass the Troubled Asset Relief Program (TARP). He told them that the commercial paper market was shutting down, raising the prospect that most of corporate America would be unable to get the short-term credit needed to meet its payroll and pay other bills. Bernanke neglected to mention that he could singlehandedly keep the commercial paper market operating by setting up a special Fed lending facility for this purpose. He announced the establishment of a lending facility to buy commercial paper the weekend after Congress approved TARP.” (“Ben Bernanke; Wall Street’s Servant”, Dean Baker, Guardian)

So, there you have it. The American people were fleeced in broad daylight by the same dissembling cutthroats the NYT is now trying to characterize as well-meaning bunglers who were just trying to save the country from another Great Depression.

I could be wrong, but I think we’ve reached Peak Propaganda on this one.

(Note: By “good” propaganda, I mean “effective” propaganda. From an ethical point of view, propaganda can never be good because its objective is to intentionally mislead people…..which is bad.)

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/news/2014-03-01/greatest-propaganda-coup-our-time

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Over the weekend, I met with John Titus, Executive Producer of the new documentary film “Bailout: The Dukes of Moral Hazard,” which tells the story of individual Americans affected by the financial bust.  Myself, Yves Smith and other members of the blogerati are featured in the film.

We talked about why the film seems to connect with people at a viseral level.  Our conclusion is that the clarity and hilarity comes from the choice of our late friend John Fox as narrator. 

http://thecomicscomic.com/2012/05/31/r-i-p-john-fox-1957-2012/

The next screening of “Bailout” will be in Philadelphia later this month:

http://usabailout.com/content/screening-philadelphia-june-20-and-june-23

The subject matter of “Bailout” had to pass through the keen, irreverant perspective that John Fox, a veteran television writer and later stand up commedian, brought to all of his work.  When the man who opened for Rodney Dangerfield for eight years tells you about the subprime crisis, it somehow makes sense.

But even though Bailout Director Sean Patrick Fahey vividly presents the impact of the crisis on home owners, there is another part of the story that remains untold, namely the hundreds of billions of dollars in losses borne by investors.  Incredibly, the vast majority of the losses on residential mortgage backed securities (RMBS) and toxic derivatives like collateralized debt obligations (CDO) have been left on the table. 

Consumer and legal advocates, and politicians, focus most of their attention on the impact of the crisis on home owners and communities.  No surprise since this is where the heat is politically.  Likewise for the media, back to the point about John Fox in the role of interlocutor, the most easily understood and conveyed part of the crisis is found in the world of consumer real estate and foreclosures.  Talking about the role of a trustee in an RMBS trust quickly causes the eyes to glaze, but that same complexity and unattractiveness creates vast opportunities for fraud. 

I had an interesting conversation last week with a several consumer advocates who also understand the world of loan servicing in an intimate fashion.  These advocates have been successfully defeating foreclosure petitions in states such as New Jersey because the servicers lack the ability to prove their right to proceed to foreclosure.  That is, the party attempting to foreclose does not have the mortgage note and often cannot even document precisely who is supposed to own the note.

What many consumer advocates and politicians don’t seem to want to understand is that the chaos in the courts with respect to the robo signing mess is a big hint about a whole other area of criminality: securities fraud.  The same systemic inefficiency that makes it difficult for servicers to foreclose on a mortgage with defects in the chain of possesion of the note also enables fraud.  Wall Street firms such as Countrywide, Lehman Brothers and Bear Stearns reportedly double-pledged tens of billions of dollars worth of real and ficticious mortgages. And there has been zero interest from the Obama Administration or state attorneys general in pursuing these claims.

Back in February I wrote a comment for Housing Wire, Eric Schneiderman delves into housing, outlining some of the areas where the NY AG could act to address systemic fraud on Wall Street. 

http://www.housingwire.com/news/eric-schneiderman-delves-housing

But the trouble is that Scheiderman has done nothing.  It seems that the entire system of government in the US has been compromised by the TBTF banks.  From the Federal Reserve Board in Washington to the office of the US Attorney to the various state AGs to the world of Buy Side managers, nobody has any interest in asking difficult questions about the provenance of the collateral underlying a significant — as in double digit percentages of some RMBS and CDOs.

Based upon my discussions with managers and also Sell Side firms involved in the liquidation of asset classes like CDOs, for example, loss rates are running close to 60% on the total $700 billion plus in securities issued.  And something like 2/3rds or more of the principal amount of loss to investors remains on the table, with no claims filed in the courts.  We are talking about tens of billions of dollars in losses, mostly to Buy Side end investors like pension funds, insurers and funds.  Mad now?

The claims here have effectively been abandoned by the supposed managers and advisors.  These orphan claims could be pursued by either public sector or private parties, yet nothing is done.  Why?  Let’s go through the casual chain of complicity and inaction.

First we start with the Fed, OCC, FDIC and other regulators.  From the acquisition of Countrywide Financial by Bank of America, to the acquisition of Bear Stearns and Washington Mutual by JPMorgan, the objective has always been to preserve primary dealers at all cost.  This means the Fed must keep the lid on disclosure of the true asset quality of these TBTF originator/servicr banks, both on balance sheet and in the trillions of dollars in off-balance sheet RMBS securitizations and CDOs sponsored by these banks.  This also means that my friends at the FDIC are sometimes unknowingly on the wrong side of disputes involving the chain of title on collateral.  

Likewise in the case of Lehman Brothers, the bankruptcy process served to obscure the issue with respect to fraud.  As I noted in earlier posts, the trustee in a bankruptcy does not have the power to pursue fraud by third parties.  Only a receiver appointed by a federal district court a la The Stanford Group fraud has this power.  See the evergreen copy of  The IRA Institutional Risk Analyst comment on ZH: “The IRA | It’s All About the Fraud: Madoff, MF Global & Antonin Scalia.

http://www.zerohedge.com/contributed/2012-19-13/ira-its-all-about-fraud-madoff-mf-global-antonin-scalia

Thus when a financial institution files for bankruptcy, unless the creditors understand their right to ask to the appropriate federal district court for the appointment of a receiver, the chances of recoveries and equity fall dramatically.  In a bankruptcy, the officers and directors will almost always walk away scott free — unless a loss to an insured depository allows the FDIC to sue under US banking laws.  FDIC has power to protect the Deposit Insurance Fund (DIF) from loss and, more important, to be advocate for uninsured depositors and other bank creditors as well. 

Note that the payout waterfall in an FDIC insured bank in liquidation is different because the uninsured depositors are next in line after the insured deposits covered by the DIF.  Note too that in the case of a bank failure the FDIC is not merely trustee of the dead bank, but rather receiver with quasi judicial, Article I powers to protect the interests of third party creditors, including depositors, vendors, etc.  FDIC also has expedited access to the federal, Article III courts to compell obedience with its findings as receiver. 

Think of the appointment of an equitable reciever in a bankrtupcy like MF Global as a more general way to apply the same power weilded by FDIC as receiver to all types of fraud.  The unfortunate situation with MF Global illustrates the dilema facing the trustee in that case.  I will write a more detailed post on ZH regarding MF Global to discuss the actions of the trustee. If anybody out there can get me on the phone withe the counsel for the MF Global Bankruptcy Trustee I will put them in touch with my mentors on this issue.

Ask yourself a question:  Just why did BAC have to buy Countrywide?  Was the driver of that transaction merely that BAC was the warehouse lender to Countrywide?  Or was the issue more complex, namely that the target had billions of dollars in ficiticious assets on its balance sheet, bogus securities that were in some cases used as collateral in repurchase transactions.  It can be argued that BAC’s warehouse for Countrywide was the engine for vast fraud.  

Likewise with Lehman Brothers, nobody could buy the firm in its totality because nobody could or would attest to the assets, on or off balance sheet.  There was literally nobody who could or would sign off on representations and warranties needed to sell the company.  And the proverbial bodies were then burried in bankruptcy without the benefit of a receiver, allowing former CEO Dick Fuld and his cohorts to walk away without any criminal sanctions for what seem like obvious, dliberate acts of accounting and securities fraud.

With Bear Stearns and Washington Mutual, JPM CEO Jamie Dimin likewise provided the cover to keep these two rancid situtations under wraps and away from close scrutiny.  Recall when during the last US presidential campaign, Senator John McCain (R-AZ) famously said that we would go through the subprime mess “loan by loan?”  That was the end of John McCain’s presidential run as far as Wall Street was concerned, says one industry insider.

President Obama, by comparison, has been very accommodating to the TBTF banks and their agenda to hide the ball when it comes to systemic securities fraud on Wall Street.  Remember we are talking about loss rates about 50% for production from Bear Stearns, for example, yet none of the responsible parties in the creation of these toxic securities have been indicted. 

Now you will notice there has been no discussion fo the SEC in this tirade.  The SEC has done nothing, squat, buptkus with respect to systemic fraud on Wall Street.  And as we have noted afore this, the Fed and other regulators are complicit in allowing these hideous zombies to merge to avoid resolution and bankruptcy.  The Merrill transaction with BAC, for example, brings along $30 billion in existing litigation due to CDOs.  But this number is still a fraction of the totality of the losses on this asset class.

So if the politicians and supposed officers of the federal and state courts have been bought off when it comes to pursuing criminal and even civil claims related to various flavors of fraud involved with the origination and sale of mortgages, what about the managers, trustees and custodians of RMBS trusts?  Sadly, there are no advocates real or imagine in this group either, except in those rare exceptions where managers have been willing to go to war with some of the biggest firms on Wall Street. 

The simple fact is that the nominee trust of today’s financial markets is a sham.  The trustee appointed by the sponsor of the deal is essentially ministerial in function, with neither the funding nor the mandate to act as an advocate for investor interests. The custodians of these trusts have likewise not historically acted as advocates for investors, although there are some notable exceptions. 

Bank of New York’s DE chancelery court  litigation against BAC behalf of Countrywide bond holders is one rare example.  And the moves by US Bancorp and Deutsche Bank to sue sponsors of deals where they acted as custodian to ingratiate themselves with NY AG Schneiderman is another example.  But of course the two biggest players in the market, BAC and BK, have yet to sue themselves for the deals in which they were involved together.        

Unlike an FDIC bank resolution where the receivership can pursue officers and directors for acts of fraud, in cases such as Maddoff and MF Global, the trustee is hamstrung in pursuing third party claims.  Likewise the investors in an RMBS trust or CDO must organize themselves to pursue claims. They must pay and indemnify the trustee, who then hires counsel and sues the sponsor.  But only in a small minority of deals has a claim been filed.

Aside from the legal and operational issues facing investors who want to sue deal sponsors for fraud, the fact is that managers don’t want to sue because, during discovery, it will be shown that they made bad investmnt choices.  That is a generous description.  Less generous is to say that the manager does to want admit publicly buying a “bag of shells” in terms of diligence on deals. 

Nobody on the Buy Side wants to sue JPM, Goldman Sachs, Morgan Stanley et al for securities fraud on the more problematic deals of the past decade.  Buy Side asset managers who sue the largest Sell Side sponsors become pariah, excluded from the flow of deals and information.  But you have to wonder if the damage these passive managers are doing to investors and the US markets by not zealously pursuing legal claims against the sponsors of RMBS and CDOs is not a worse outcome at the end of the day.

If we take Schneiderman’s statement that nothing is “off the table” in terms of prosecuting acts of fraud, an ideal outcome here, IMHO, would be the following:

1)  NY AG Schneiderman goes into federal court next week and files a motion removing BK as custodian with respect to all RMBS trusts governed by NY law.  Schneiderman should ask the court to appoint a receiver with respect to all of the trusts where BK was custodian and immediately investigate whether fraud and professional malfeasance occurred.

2)  Schneiderman asks the court to appoint a receiver with respect to BAC because of ongoing acts of fraud and the recalcitrance shown to the court. Several federal courts have already found BAC to be engaging in “deliberate delay,” discovery abuse and other acts of bad faith in the various lawsuits now underway.  These acts of contempt of court alone are sufficient reason to apppoint a receiver with respect to BAC.    

3)  And come to think of it, while Schneiderman is in the court house, he can file an emergency motion to intervene in the MF Global bankruptcy and ask the court to appoint James W. Giddens as receiver in that matter.  Schneiderman has standing to bring this motion and could ask the IL AG and US attorney to join him in making the representations to the court.  Then we wipe that grin off Jon Corzine’s face and start to make some real progress on MF Global.  More tomorrow.

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Original source at: zero hedge - on a long enough timeline, the survival rate for everyone drops to zero | http://www.zerohedge.com/contributed/2012-06-10/its-all-about-fraud-silence-buy-side

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Remember 2008?  The market decline was precipitated by the collapse of Real Estate.  The ripple effects of declining Real Estate were (and are) widespread. 

– Homeowners lose equity (and their Home Equity ATM)
– Defaults rise
– Foreclosures increase
– Banks balance sheets get hit
– Banks fail- Distressed Real Estate sales crowds out legitimate sellers;

Stock investors need to pay attention to Real Estate.  Forget about R/E getting back to the 2000 – 2004 levels or activity for years.

The impact of a double dip, or continuation of Real Estate’s decline, could be more than just economic.  It can bring investor/consumer confidence down.  Declining confidence has been the downfall of many markets. 

Robert Shiller (of the Case Shiller Housing price index) has stated that he expects to see housing fall an additional 25%.

Once real estate bottoms, whenever that is, it does not mean a return to the housing heyday of 2005.  Many of the factors that contributed to the housing bubble are no longer available.  Easy credit, cooperative appraisers, and loose application rules no longer exist. 

So even if, and when, the housing market stabilizes, don’t expect to see a boom.  It just isn’t going to happen.                 

This means that one of the forces that drove the stock market from the low in 2002 to its peak in 2007 will be missing. 

So far we attribute the stock market’s bear market rally from the low in 2009 to the liquidity that the Fed is pumping into the system.  Housing is not there to take the baton from the Fed and keep the stock market going.

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Original source at: Money Game | http://feedproxy.google.com/~r/TheMoneyGame/~3/PdMLtDYueoU/the-ripple-effect-of-declining-real-estate-2011-7

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cold oranges freeze frozen ice

The NAR is panicking. That should tell you what you need to know. As we’ve argued, there’s no silver lining for housing in the plan to freeze foreclosures.

Their full release below:

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Thousands of first-time and move-up buyers who hoped to make a foreclosed property their new home now face uncertainty, anxiety and possibly remorse as they worry that closing on their desired property could be in jeopardy.

For many, the dream of homeownership could turn into agony if their home purchase is indefinitely delayed by a moratorium on foreclosures declared by some banks, the National Association of Realtors® said today. The moratoriums are needed, banks say, to review all of the foreclosures in their portfolios to make sure they’re in compliance with the law and that titles are clear.

NAR warned that a prolonged review process would have a damaging impact on many communities and hinder the nation’s economic recovery.

“As the leading advocate for homeownership issues, we understand that many lenders need a time-out to review their actions to ensure that homeowners are not improperly foreclosed on and that the lenders are following regulations and state laws. After that, the foreclosure process must resume quickly to return stability to families, the housing market and the economy,” said NAR President Vicki Cox Golder, owner of Vicki L. Cox & Associates, Tucson, Ariz.

Over the past few months NAR has met with officials of top banks to discuss market issues. NAR urged banking leaders to seek resolution quickly through loan modifications and the short-sale process rather than through foreclosure. “We stand ready to help lenders develop better short-sale procedures,” Golder said.

“There are valid foreclosures that should move ahead quickly, and we shouldn’t lump them in with mortgages that are suspect. That would cause deep problems in an already fragile market and throw many families into uncertainty,” Golder said.

Golder said that she is receiving reports from Realtors® that the moratorium is already creating some anxiety among purchasers as transactions are being delayed and that some foreclosure listings are being removed from the market.

Compounding the problem is that the requirements for foreclosure vary by state, and practices to meet these requirements vary by firm. NAR is working with regulators, such as the Federal Housing Finance Agency; and encouraging them to identify and quickly address process problems.

In a letter today to the U.S Treasury Department, the U.S Department of Housing and Urban Development, and the Federal Housing Finance Agency, NAR stated the hope that banks would complete their foreclosure review expeditiously to assure that the rights of borrowers are protected and remove doubt that buyers will receive clear title to their purchase.

“NAR has long urged the lending industry to take every feasible action to keep families in their homes with a loan modification and, if that is not possible, to give them a ‘graceful exit’ through a short sale. These options are far better than a foreclosure, and nothing has driven this point home more clearly than the questions being raised about foreclosures. Lenders should place additional resources into processing loan modifications and short sales,” NAR wrote.

A year ago, NAR instituted a special short sale training program for its Realtor® members to work more closely with banks in expediting mortgages at risk by resolving them through short sales and loan modifications. More than 51,000 Realtors® have been certified in the program.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.

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Original source at: Money Game | http://feedproxy.google.com/~r/TheMoneyGame/~3/2vnwyON5wFg/still-wondering-if-the-foreclosure-freeze-will-hurt-the-housing-market-ask-the-nar-2010-10

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