Ratings Extortion? Maybe. And Yet More Fraud

Oh boy.

The NY Times has published a bombshell that should, if markets are rational, cause both a huge selloff (due to allegations of extortion) and lead directly to Congressional and FBI investigations and, if the allegations true, indictments.

Indictments?

Yes.

"And the banks pay only if Moody’s delivers the desired rating. Tom McGuire, the Jesuit theologian who ran Moody’s through the mid-'90s, says this arrangement is unhealthy. If Moody’s and a client bank don’t see eye to eye, the bank can either tweak the numbers or try its luck with a competitor like S.&P., a process known as 'ratings shopping.' "

Read that a couple of times.

They don't pay if they don't get the desired rating?

This isn't from some observer or random commentator - its from the former head of the firm!

There is no rating going on at all; these organizations are "captive" to the banks and act as the banks wish, or they're out of business. This is exactly the same "business model" that appraisers found themselves operating with during the housing bubble, where they'd get an order for an appraisal and then if they didn't hit the "desired number" the Realtor who ordered it would refuse to pay them.

If this isn't a near-textbook definition of fraud I don't know what is.

This charade has gone beyond ridiculous. It is one thing to go shopping at your competitor for the next deal if you don't like the outcome, but to refuse to pay for services performed if you don't get the desired outcome?

Independent ratings agencies? Claims of "ethics" that all of the agencies put on their web pages and disseminate to the public? Who are these people trying to fool and more importantly, why are lawmakers and law enforcement allowing this to continue?

I guess I should not be surprised at the lack of prosecution. After all independent appraisers sent in a petition with 10,000 signatures on it in 2001 to Congress and it was ignored, pointing out the same "business practices" in the property appraisal industry.

The obvious next question is where are the lawsuits? The losses thus far are in the hundreds of billions - and not all of those losses have been taken by banks. The NSRSOs (Moody, etc) claim "free speech" but that doesn't extend to false claims of ethical conduct and lack of bias!

I'm not quite certain what that is I see laying on the carpet, but it looks kinda like a gun and it sure as hell is smoking!

S&P lowered CDO assumptions (again); if you're one of the KoolAid drinkers who think that "its all over and there will be write ups" then you need to read this:

"The affected CDOs are at least 40 percent invested in certain U.S. residential mortgage bonds created since Sept. 30, 2005, or pieces of CDOs with such holdings, New York-based S&P said in a statement today. The most-senior bonds from the CDOs originally rated AAA should recover 60 percent of principal owed, while securities rated A or lower will get nothing, S&P said.
....
Investors should recover 35 percent of principal after defaults on securities from the CDOs junior to their so-called super-senior classes but also originally rated AAA, S&P said. Originally rated AA classes should recover 5 percent, it said."

Write-ups eh? AAA super-senior will get 60 cents on the dollar, AAAs will get 35 cents, AAs will get a nickel on the dollar and anything under it will get zero.

Got it?

Zero.

Oh, and I think its fair to assume that you'll lose your entire coupon stream up to the point that the zero happens too.

This was all originally "AAA" rated debt, now returning somewhere between 35 and 60 cents, and none of this stuff has been marked to zero - or for that matter, to 35 cents - on bank balance sheets.

Nor will it be until The Fed and Congress stop allowing the blatant fraud in our banking system to continue.

Our capital markets have become one gigantic scam. The SEC won't investigate, the FBI won't prosecute and both political parties claim to be "concerned" about the impact this has had on Americans, but neither will get off their duffs and start insisting that existing law be enforced.

Every day I am treated to a new disclosure on the utter depravity of these people on Wall Street, Congress and The Federal Reserve who have taken truly extraordinary steps to rob every American, up and down Main Street.

And we wonder why the market "goes up" when the economic news "goes down"? I'm not surprised at all. Wall Street has become convinced that so long as a greater bagholder can be found, no matter what has to be done to make it happen, legal or not, nothing evil can occur in the markets. Therefore, there is no risk. We thus must buy, because prices will rise since we'll never be held to account for our lies, fraud and rape of the American public.

Meanwhile Main Street is consigned to deal with reality.

2 million foreclosures, rocketing oil and food prices, ramping unemployment.

The crush of the American Middle Class.

All intentionally-engineered, and The Middle Class sits idly by and lets it happen, instead of showing up to protest on Wall Street - or in Washington DC.

Wall Street has always been a snakepit, but this is a new low, even for those firms.

I am simply stunned that this has been allowed to continue year after year, although perhaps I shouldn't be, given that the Appraisers tried to stop it in their profession and found deaf ears in Washington DC.

So what, realistically, can Joe Average do about it?

Other than making this the issue in the campaign this year?

But let's face facts here folks - will this become the single-issue matter you vote on in November? Will you call your Congressman or woman every single day or fax him or her every single day until this garbage is stopped and perp walks occur up and down Wall Street?

Forget about The War, Abortion, or whether you hate (or love) George W. Bush.

Forget about the party on your voter registration card.

The key question for you is whether you give a damn about this nation and its economy.

The folks on Wall Street are betting you will get wound up over whether the candidate you're going to vote for is a man, a woman, or black. Whether they are pro or anti-abortion. Whether they will pull our troops from Iraq, keep them there, or send more. Whether they will raise your taxes a bit, some, or a lot.

Fact is all of these candidates are explicitly supporting these firms stealing from you each and every day. All of them. Hillary, Obama, McCain.

Each and every one of them, George Bush, and all of the Congressional Inhabitants currently are sitting back and letting these folks rob you. On purpose.

The proof is right there in front of you in the NY Times.

So which card do you wish to play, Dear Reader?

Is it the "its all Bush's fault" card? Then explain how it is that Chris Dodd, chair of the Banking Committee, won't do anything about the pernicious fraud that has robbed America of $10 trillion in wealth and will result in 2 million foreclosures?

Want to play the "its all The Democrats fault" card? Then explain how it is that Bush hasn't ordered the FBI to go out and arrest all these brokers, lenders, and Realtors who cooked appraisals, not to mention going after the ratings agencies and banks who are intentionally hiding their exploded CDOs?

Hmmm.... you don't like those questions, do you?

Oh, OPEC has put us on notice folks. They've said that for every 1% we allow our dollar to devalue, oil will rise $4 in price.

Got it? Good.

Now guess why the dollar has devalued.

Yep - lack of trust. Fraud. Theft. Scams. Crooked balance sheets.

All of which lead foreign investors to believe that our government might have a problem collecting taxes from the citizens in coming months and years, which of course means we can't make their debt service payments.

That doubt - no matter how small - is enough to drive down our currency.

This is a direct (and unlawful, since it didn't originate in the House of Representatives) tax on every American, but it is especially cruel to the poor and those in the middle class, who have less ability to absorb the impact of $4/gallon gasoline and eggs that double in price in six months' time.

There is no fix for these problems until the cheating, fraud and theft stops.

When you prepare to "vote for a living" (and you know you do and will!) keep this in mind.

Your standard of living is being intentionally destroyed by the charlatans on Wall Street and in Washington DC, with the worst offenders being Ben Bernanke and our Congress.

Both The Fed and Congress could stop this in literally one hour, but they refuse.

In fact, it is rumored that one of Barney Frank's staff members actually likes the idea of direct and indirect house price support, because it will help the value of his home.

Even as it destroys your standard of living.

It is up to you, I, and everyone else to do something about it.

As for "The Market is Cheap" claims, the WSJ's Data Page says otherwise. It shows negative 20% earnings growth. That's right - down 20% annualized.

What sectors are doing well? Basic Materials, Oil and Gas, Health Care and Telecommunications. Who's doing poorly? Utilities, Industrial (barely green), Financial (in the toilet), Consumer Goods (solidly negative) and Consumer Services (in the toilet).

Strong economy? Resilient? Ha!

If you're an exporter, so far, you're doing ok. If your customer base is in the US, you ain't doing well at all, and if your customer base is the consumer or you're in the financial space, you're doing horribly.

And the latter is with all the financial cheating.

How nice would these "earnings" reports be if there was truth in our nation's banks?

Gee, S&P seems to think that essentially everything under "AA" is a zero on those CDOs referenced up above.

How many of those are on the "Level 3" and "Held for Sale" books at our banks?

We can't look, nor are we allowed to know how much of that garbage - worth zero - is at The Fed.

I wonder what Treasury investors think about all this if and when they start to contemplate the implications of a destroyed middle class in America, which of course means destruction of the ability to to collect taxes from that very same middle class.

Taxes that are necessary to pay the coupon payments on that debt, not to mention insure the return of principal.

Something to think about eh?