The Market Ticker

Barney Frank (D, if you didn't know) opined:

"WASHINGTON (Reuters) - Companies receiving public money under a U.S. government financial rescue program must use it for lending or they will be violating the law, the chairman of the U.S. House of Representatives Financial Services Committee said on Friday.

"I am deeply disappointed that a number of financial institutions are distorting the legislation that Congress passed at the president's request to respond to the credit crisis by making funds available for increased lending," Rep. Barney Frank said in a statement.

"Any use of the these funds for any purpose other than lending -- for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc. -- is a violation of the terms of the Act," he added."

Liar.

The EESA says nothing about the uses to which the funds may (or may not) be put.  If you claim that such a restriction exists, show me the language where it is stated in the legislation that the funds provided must be used for lending.

You can't, because such language does not exist.

You voted for this law and advocated for it on the floor during debate, despite the fact that some such restrictions were offered in an amendment that Rules (which your party controls) refused to be allowed to be considered on the floor.

You also knew this would happen because I, along with many others, warned you explicitly via phone calls and faxes that you were being bamboozled and that this money would not be used to help the broader economy. 

The evidence and complete timeline of my actions in this regard, many of which were faxed directly to your office, are found at http://supportedthebailout.org

And make no mistake - you, Barney Fife, er, Frank did support handing $700 billion of taxpayer money to bankers so they could pay bonuses and dividends - exactly what I and others said would happen (and what was permitted in the bill) now has come to pass.

You're shameful Barney Fife, and now that your disgusting, bought-off support of this nonsense has been exposed as the mendacious pack of lies that it was and is, you're panicked as the people have wised up to the screwing you have served up upon them.

Oh, the election is on Tuesday. 

I think we the people can keep that straight.

CDS to be exchange-listed shortly; The NY Fed apparently has pulled their head out of the place where the sun doesn't shine and is going make sure this gets done. For once the jawboning comes with actual results.

Be warned - AIG is likely toast as soon as that's implemented, and if you think that was a "loan" they got from the NY Fed, well, no, it wasn't.

My prediction is that it won't be repaid and as soon as the exchange is up and running, and we have margin supervision on the other "important" companies, AIG will be cut loose and sink.

You, the taxpayer, will get the bill for this lie about AIG getting a "loan".

My view on this is that AIG was propped up to prevent a chain-reaction CDS explosion, and once that threat has been lifted......

I might be wrong on this.... but I doubt it.

If you want to bet on the "Karl's wrong" trade AIG's stock is trading $1.60 premarket.  Damn cheap lotto ticket if somehow the Hail Mary pass is caught - a potential 10-bagger (or more) for you!

Just don't place that bet with more money than you would blow on lottery tickets; hell, I'm tempted to buy a few, just like I do once in a while when the lotto jackpot is $130 million (money odds and all, 'ya know.)

Well that produced a furor ("Stop Paying Your Mortgage")

For those who haven't followed The Market Ticker for the last year and a half, explanation may be in order.

Most of the pique, where it was expressed, came down to "you gave your word when you signed the documents."

Indeed. 

But you were defrauded.  The entities on the other side of the table were engaged in counterfeiting of the money (credit) supply.

Literally, for the last 20 years, and most specifically, for the last five.

So the obvious question arises - if you go to the bank and get a loan but they give you fake dollars they printed on their color copier, are you then obligated to pay them back with real dollars you earn by working your fingers to the bone?

I argue the answer is not "no" - it's "HELL NO!"

Let me explain.

Let's start with monetary basics.  We will assume there is only one bank in the world, and some number of people.  We will also assume the world begins with $100, which is in possession of one of the individuals.  The other persons in the world have goods (e.g. food), but no money.

The person with the $100 goes and spends it on a basket of groceries.  The grocer deposits the $100 into the bank.  The bank must hold back the reserve ratio (10% in this simple case, or $10.)

Now some other person comes into the bank and wants a loan.  The bank can lend out $90, the deposit less the reserves.  That person gets his loan and goes to the store, spending the $90 there. 

That merchant deposits the $90 in the bank, which now can loan out $81.  And so it goes, until the cycle exhausts.

Note that no money was created, as some people claim.  Money was, however, recycled with each "turn" (that is, as a consequence of velocity), each time with the fraction required being reserved.

There is of course more to the system than this.  Among other things the amount of money must be increased at a rate that roughly corresponds to the increase in the total output of goods and services in the economy.  If it is less, you get deflation (fewer dollars in total for a given amount of good or service), if it is more, you get inflation (more dollars for a given amount of good or service), but this will do to explain how it is that credit is granted - and regulated - in the banking system.

But in the real world it's not quite so simple, you see, because in the real world banks don't just make loans - they also buy and sell loans that both they and other people have made, either "whole" or bundled up into complicated securities of various sorts (the infamous "subprime" mortgage-backed securities, or MBSs.)  Each of these types of investment that a bank might hold has a reserve requirement because there is always some risk (however small) of default, and the amount of reserves that must be held depend on the quality of the asset.  So for a Treasury Bond a bank might be required to hold no money in reserve, since there is assumed to be zero risk of default.  But against a mortgage security that has "ho-hum" credit quality, the bank may be required to hold quite a bit of reserves, because if something goes wrong the losses could be significant.

And here is where the problem begins.

The "shadow banking system", including ratings agencies, investment banks and hedge funds, were engaged for years in the intentional misrepresentation of credit quality.  In conjunction with those who were bought and paid for to provide these grossly-inflated "ratings" (the famous "we'll rate a deal securitized by cows" quote in sworn testimony before Congress), the banks, issuers and traders of this debt gamed the ratings (and reserve) system so they would not have to hold back as much in reserves as would have been required on the actual underlying credit quality.  That is, they said that there was less risk in these loans than really existed.

Why is this important?

Because by under-reserving on purpose these entities obtained a capacity to loan (and for you to borrow) that did not exist, and as a result, there was more money available to lend - lots more and at a much cheaper interest rate - than should have been the case.

In addition this deception radically accelerated the velocity of money (credit) in circulation, which in combination with the fraudulently-created credit created a classic asset inflation.

Since money and credit are fungible - that is, they both spend exactly the same (your credit card and $100 in 20 dollar bills spend the same way at the store; they both buy exactly the same amount of goods or services) this had precisely the same effect in the economy - and on you as a consumer - as the banker literally walking over to his color copier and running off $100 bills by the truckload.

Now if you see "money" flying around the economy and it looks easy to access, you'll be inclined to go after it with far less concern than if there is little money (or it is expensive), right?

Let's take an analogy - a corn silo.

You're a farmer and you rely on the corn to get you through the winter.  You have a silo on your property with sight glasses on the side, so you can easily see how much corn is in there.

Unknown to you, the guys filling your silo (your workers) claim that you have had a "bumper crop" when in fact this is not true.  To complete the deception they tampered with the sight glasses so they show "full" when in fact there's no corn behind them!

Fall turns to winter and you've been eating it up, quite sure you have plenty of food.  Until one day you pull the chute and nothing comes out - in February

This is, effectively, what has happened here.  The so-called "credit" ("money" to you, as they both spend the same) available was a chimera and a fraud.  You believed that it was plentiful and would continue to be so, because the ratings of these securities, improperly inflated, allowed the bankers to hold artificially low amounts of reserve against their credit book.

In order to properly leverage against risk you must be required to hold commensurately more reserves against higher risk instruments otherwise the effect of your operation is to allow you to create credit without a proper capital backing, and when the bet goes wrong, you (and potentially the entire banking system!) blow up.

This not only was not a mistake it is still going on:

"In essence, then, Goldman thinks it could lower its overall leverage without having to significantly reduce risk (and the prospects of high returns) from its investments. That’s because the government’s gross leverage calculation does not discriminate between low-risk and high-risk leverage."

There is the essence of what was done, in two sentences: The government explicitly has not and still isn't requiring more reserves to be held against high-risk leverage.

When there is lots of money (credit) in a monetary system, the equilibrium (or "fair") price for an asset is much higher than it is when money (credit) in a monetary system is in short supply.  Further, when you deceive people as to credit quality and thus inflate the amount of credit (money) available you increase the velocity (turnover) of that credit (money); since banks and other merchants of money derive a lot of their revenue from fees, they get a disproportionate benefit from this deception.  You (and every other consumer/buyer of those assets and items), on the other hand, get screwed.

But like all deceptions this one cannot go on forever.  Eventually these bad loans begin to default, just like the farmer who pulls the handle and nothing comes out.  You are now finding that it is difficult to get credit to buy a house, a car, or for business purposes. The reason for this is simple - everyone from homeowners to the banks themselves have too much debt (credit) outstanding compared to the maximum amount that would be allowed under reasonable standards of safety as a result of the previous distortion.

Banks and other institutions know this; they are akin to the workers on your farm that intentionally tampered with the sight glass on your silo.

You are the farmer who is now starving, its February, and your remaining tools are a BBQ Grill, some wood, matches and an axe.  Oh, and you know where your "workers" live.  What did you say you were going to eat again, now that you figured out what happened and who did it?

Your 201k (formerly a 401k) shrunk as a direct and proximate cause of this deception, which has now been discovered.  Note that your 401k also inflated as a direct and proximate cause of this deception too, causing you to rely on perceived wealth that did not exist, and if you paid up for those assets (stocks, etc) during the bubble years, this deception caused you to overpay.

Ditto for the price of your house.  You had every reason to believe that price in 2005 was reasonable because of the supply of cheap and easy money (credit), but in fact that credit was literally counterfeited into existence by the people who gave you the loan!

This, by the way, was NOT a "zero sum" game.  You paid (and still are if you're paying your credit cards and mortgage bills) for those inflated assets with real money (NOT credit) - money that you brought into existence with your blood, sweat and tears.  Your purchase of these assets (or debt payments) were not made with counterfeit money (credit); they were made with real funds generated from real work on your part. 

But the price you paid was jacked up as a consequence of all the counterfeit credit (money) flying around in the economy.

Counterfeiting $100 bills is a serious federal offense.  The US Secret Service will come haul you off and toss you in the hoosegow for cranking up your color copier and printing off a truckload or three of fake Benjamins.

Remember - credit and money are fungible - they spend identically in the economy. 

You cannot tell the difference between $100 of credit and a paper $100 bill at the store.  That's because a $100 bill is in fact credit (debt); it is a bond of indefinite duration carrying zero interest written against the aggregate wealth and production of The United States.

So if counterfeiting paper money (which is in fact credit) results in a 20 year date with Bubba, why aren't the bankers, ratings agencies and even government officials involved in counterfeiting credit in the economy wearing orange jumpsuits, picking up trash alongside the road, and concerned about dropping the soap in the shower?

Instead these same folks got a bailout from your REAL money (future tax receipts) via the Treasury - more than $163 billion so far - and are going to pay more than half of that out in dividends to shareholders.

There is some notice (finally) being paid to this swindle by Paulson and friends, as shown in this article in The Nation:

"The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson's transaction, the taxpayers were taken for a ride--a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public's money was a straight-out gift to Wall Street, for which taxpayers got nothing in return.

These are dynamite facts that demand immediate action to halt the bailout deal and correct its giveaway terms. Stop payment on the Treasury checks before the bankers can cash them."

That's a good start.

But it belies the underlying reality of the swindle; from the get-go the entire credit bubble was an outrageous and intentionally engineered counterfeiting operation that should have long ago landed all of the participants a nice long prison sentence.

Worse, instead of forcing all those who committed these acts into the open and thereby causing the default of the bad debt (resulting in both consumers and lenders who did imprudent things going bankrupt) we continue to try to "hide the problem" by transferring the risk (leverage) to The Fed!  As of the latest data release this evening The Fed is now running roughly a 50:1 leverage ratio, and its leverage is increasing at an astronomical rate (it was 40:1 just a couple of weeks ago!) as Bernanke furiously attempts to hide both the fact that all this counterfeiting of credit took place and prevent the impact of same from being fully recognized on the economy.

Should Bernanke's gambit fail the consequence could be the failure of the United States monetary system and government.

All this to prevent having to admit the truth, force the guilty into bankruptcy and, where applicable, punish them under the law.

Until "we the people" understand how money and credit work (they don't teach this in "government schools" - gee, I wonder why not?) we will get upset over the Treasury-backed bailout, but we will also continue to ask the wrong questions and only jail a small fraction of those who deserve to spend the rest of their days in orange jumpsuits picking up trash and being afraid of what goes "bump" in the shower.

Seriously.

Assuming your home is worth equal or less on the market today than your outstanding mortgage balance, of course.

You deserve to live free for a year, and you deserve to have your home price come way down so you can buy it back in a few years for much less.

You've already been taxed to the tune of $700 billion for a bailout for the bankers, even though you told Congress "no".

Now the FDIC and Treasury are "working on a plan to curb foreclosures."

In return I recommend that every American with a mortgage immediately stop paying.

Today.

Whether you can afford it or not.

Consult with an attorney and CPA, in the same room before you act to make sure your specific mortgage (and the state in which you live) is a "non-recourse" loan and to understand exactly what impact this will have on you (it will come with a significant impact, most specifically to your credit rating!  Hear me out - you may find that this course of action makes perfectly good sense.) 

See, in many states purchase-money first mortgages are "non-recourse", meaning that all they can do is ruin your credit and foreclose on your house.

That's it. 

They cannot force you into bankruptcy, they cannot garnish your wages.

And from the time you stop paying until the time you get evicted, you get to live there for free.

Finally, after you have been foreclosed upon, your house (and lots like it if your friends and neighbors do likewise) will drop dramatically in price.  Presto!  In a year or two you will be able to buy it back at half what you paid for it in 2004 or 2005.  Now that's a bargain.

So give the government and the banks back what they're trying to give to you - a royal screw job.

After all, they intend to give your neighbor who behaved imprudently a bailout, and if you were prudent, unless you suddenly become imprudent, you're going to get screwed in the form of being taxed to buy his home for him:

"The program, which might help several million homeowners refinance into affordable loans, would require lenders to restructure mortgages based on a borrower's ability to repay. Under one option, the industry would keep lower monthly payments for five years before raising interest rates, the people said. "

Got that?

If your next door neighbor lied about their income to get their house, or took out an exotic "Option ARM" mortgage and can't afford their payments, they will get a big fat bailout.

You will, in fact, get his mortgage bill.

Unless you intentionally default, in which case you will still get to pay taxes, but you won't pay your mortgage, and thus, you won't pay twice.

Your neighbor who goes for the government's "deal"?  He gets it in both eye sockets.  See, a refinance, which this is, converts your mortgage into a recourse loan.  That means if you take their "great deal" and then default later on (e.g. you lose your job in the upcoming Depression) your wages can be garnished forever and, if you earn more than the median income, you can't even get rid of the debt in bankruptcy.

So if you were a prudent homeowner, you want to intentionally default so you will at least get a lower house price, and therefore lower mortgage payment, plus a year or more of free living between when you stop paying and the bank completes foreclosure.  Oh, there's a chance the bank never bothered with the paperwork, they won't be able to prove you actually owe them the money in court, and if that's the case there is a small (but non-zero) chance you might get a free house out of the deal.

If you're imprudent you definitely want to intentionally default right now because the absolute last thing you ever want to do is convert a mortgage into a recourse loan, and that is precisely what taking the government's "help" will do - it will bend you over the table.  You too will get a lower house price and lower house payment, plus a year or more of free living between when you stop paying and they complete foreclosure.

Oh, and it gets better.  Today, the Federal Reserve (without an act of Congress appropriating foreign aid) decided that extending its "swap lines" to South Korea wasn't enough.  No, they now are going to funnel $120 billion (of your money, again, without an appropriation by Congress) into not only South Korea but also Brazil, Singapore and our lovely "neighbor" who has sent us 20 million illegal aliens, Mexico.

That's right, The Fed has decided to back debt they may have (who knows how good it is) with currency swap lines, backing that $120 billion line with the Treasury's ability to extort money from you at gunpoint through taxation for the entirety of your, your children's and your grandchildren's lives.

Nor does it stop there.  We now have reports that two industry groups - the Regional Bond Dealers Association and The Education Finance Council - have requested that Treasury back yet another $600 billion in auction-rate and demand notes.  Yes, another $600 billion (I'm losing count here guys and dolls!)

This insane debt bubble's creation in the first place was fully sanctioned by Treasury, The Fed, and The Banks.  All of it.  The entire thing has been and is intentional, and these people are and will continue to screw you and your children blind as a taxpayer in a vapid and outrageous attempt to keep those who wrote all this bad paper from having to eat it.

Of course there is no way to prevent someone from eating it, and that "someone" has just been designated as you, the taxpayer.

That's right - the bankers, with full knowledge of The Fed and Treasury, raped, robbed and pillaged America, making loans they knew there was no way to pay back, and now, having paid zero attention to credit quality for a decade, our government has decided that instead of those imprudent people (on both sides of the table) going bankrupt they're going to stick all of America, including and especially those who did nothing wrong, with the bill.

This hasn't gone unnoticed by the credit default swap folks.  The cost of insuring Treasury Debt - that's right, United States Treasuries - is forty times as expensive as it was in early 2007.  Of course if that risk of default is ever realized, our way of life in America ends. 

Literally.

There appears to be exactly one way you can make sure that this idiocy either is stopped or you are not disadvantaged compared to your speculating neighbor across the street, around the corner or down the block.

The only way to do that is to intentionally default on your mortgage.

I am tired of the being told that I, and my daughter when she grows up, should pay taxes so that bankers can get $70 billion in bonuses, so banks can use my tax money to buy other banks up like vultures feasting on roadkill and so that the guy down the street from me who took out an exotic mortgage to buy a house he couldn't afford can extract $200,000 or more from me and the rest of us in this nation - and keep his house.

That is outrageous, it is unjust, and in fact it is nothing other than raw theft, literally at gunpoint.

And yet it is what both Presidential candidates intend to do and what our current President is doing, along with the FDIC, Federal Reserve and Treasury, instead of forcing those who imprudently purchased, along with those who imprudently lent money to absorb the defaults themselves and go through bankruptcy - which is what is supposed to happen when you do imprudent things.

Since our government continues to pursue the idea that everyone from the imprudent speculator and even the fraudulent buyer who overstated his income, along with the bankers who literally stole billions, can and will be allowed to rip off the public treasury, creating tax burdens forever for ourselves and our children in a futile attempt to prop up home prices along with screwing future buyers by keeping homes unaffordable, I am forced to advocate that you, The Prudent American, do back to the bankers and your neighbor what the bankers and your neighbor did.

Let's look at the math.

Assume your mortgage payment is $2,000/month.  If you stop paying and it takes a year to foreclose and toss 'ya on the street, that's $24,000 you keep in your bank account (again, assuming we're talking about a non-recourse situation - you DO NEED TO CHECK FIRST.)

One criticism is that people have said "but nobody will rent to you with trashed credit."  Bull.  First, last and security on the table for a $2k/month rental leaves you $18,000 in cash still in your account from your bit of "give it to 'em." That's the offset to your trashed credit.  Yes, future credit access will be severely impacted (for as long as 7 years, and in some cases longer), but when your credit card company tries to jack your rate, close the card.  They can't impose the new rate on existing balances in most cases and you still have the $18,000.

As a renter you also only need contents insurance - no structure insurance and property taxes are part of your rent, so no escrow for that either.  How long does $18,000 last as a "replacement" for your credit cards?

Again - this is situational and not everyone will benefit from this strategy.  But a lot of people will, and the banked cash during the year-ish time you don't pay until you're kicked out is not small potatoes.

I repeat: Make sure you "get yours" by intentionally defaulting on your mortgage, but before doing so, consult with competent accounting and legal advisers.  This only "works" in the situation where the mortgage is non-recourse, and you are effectively trading your credit score for the money you don't pay in mortgage between when you stop paying and are ejected from the house.

I know, its a radical step.  And one more time, you need to consult with both a CPA and attorney before taking any such step - spend the couple hundred bucks to get both in the same room and go over exactly what this entails and what sort of impact it may have on you.

But it would appear to me, at this time, that this is the only way you can recover at least some of the tax burden that you have been thus far and will be in the future assessed for our government's idiocy and pernicious theft of taxpayer dollars.

Hattip Foxymoron on the forum for the quickie Photoshop, Tesla for the idea.