Calling Out The Excuse-Makers

Let's start with Bill Gross:

"Still, while such a transformation is, to put it mildly, undesirable, the policies are necessary. As outlined in these pages, the U.S. and many of its G-7 counterparts over the past 25 years have become more and more dependent on asset appreciation. Under the policy-endorsed cover of technology and somewhat faux increases in financial productivity, we became a nation that specialized in the making of paper instead of things, and it fell to Wall Street to invent ever more clever ways to securitize assets, and the job of Main Street to “equitize” or, in reality, to borrow more and more money off of them. What was not well recognized was that these policies were hollowing, self-destructive, and ultimately destined to be exposed for what they always were: Ponzi schemes, whose ultimate payoffs were dependent on the inclusion of more and more players and the production of more and more paper. Bernie Madoff?

...

But Madoff’s scheme has a host of culpable look-alikes and one has only to begin with the mortgage market to understand the similarities. Option ARMs or Pick-A-Pay home loans allowed homeowners to make monthly payments that were so small they did not even cover their interest charges. Two million mortgagees either chose or were sold this Ponzi/Madoff form of skullduggery, believing that home prices never go down and that shoppers never drop. One can add to this the trillions in home equity/second mortgage loans that extracted “savings” in order to promote current instead of future consumption, and one begins to realize that Bernie Madoff and  our cartoon’s Wimpy had company all these years."

....

What about the shabby performance of the rating agencies? Were they not equally at fault for perpetrating a giant charade that was bound to end in tears? Of course: Aaa subprimes structured like a house of straw; Aaa monoline insurers built like a house of sticks; Aaa credits like AIG, FNMA, and FHLMC where only a huff and a puff could expose them for what they were – levered structures dependent upon asset price appreciation for their survival. Ponzi finance.

I will go on. Municipalities with begging bowls now extended for over a trillion of Federal taxpayer dollars, based their budgets and their own handouts on the perpetual rise in home prices, the inevitable upward slope of sales taxes, and the never-ending increase in employment and personal income taxes. To add injury to insult, they conveniently “balanced” their books with a host of accounting tricks that Bernie Madoff could never have come up with in his wildest imagination. Now, with cash flow insufficient to meet current outflows, they are proving my point that we have met Mr. Ponzi and he is us – all of us: auto companies that siphoned sales dollars to make labor peace instead of research and design expenditures; hedge funds that preposterously billed investors for 2% and 20% of nothing; a President and politicians who thought they could fight a phony war for free and distract the nation’s attention from $40 trillion of future social security and health care liabilities. Ponzi, Ponzi, Ponzi.

Ah.  Someone's been reading The Ticker, specifically "We're all Madoff".

But this begs the question - what does Bill Gross think we should do?  What, pray tell, should he do?

He answers that question:

"Still, future policymakers must confront the reality that is, not the one that should have been. And investors must do likewise, casting aside personal philosophies for a clear-headed view of the future horizon. PIMCO’s view is simple: shake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond. Anticipate, then buy what they buy, only do it first"

Find a way to cheat -n- bleat, then get in front and reap the profits of inside baseball?

Perhaps the point of "We're All Madoff" wasn't quite clear to Mr. Gross - or perhaps, he just doesn't give a damn.

But Bill, unlike many of the people on the street who are starting to make noise about this in public, really does get it. 

Read the full text.  Or just the highlighted sections.

Ponzi.

But what is "Ponzi" Mr. Gross?  It's a felony isn't it?  Indeed, such schemes are illegal.  And the indictments you level are wide-reaching, and, in my opinion, spot-on - if a bit late.

Nor is Mr. Gross alone today; we also have this from Comstock funds:

"By now it must be clear to everyone that the U.S. economy is dependent upon DEBT, and we believe we have reached the debt limit!!  It took the resurgence of the stock market bubble in 2003, just a few years after the late 1990s bubble, coupled with the housing bubble to get the private sector to feel wealthy or comfortable enough to generate the enormous debt relative to GDP that finally froze up the credit markets.  As soon as the credit markets froze up earlier this year the economy came to a screeching halt as the consumer "hit the wall" and even solid businesses could no longer borrow money. "

Sure they can - if they don't have too much debt.  The problem is that most of them are up to their eyeballs.

At least Comstock gets the "how to get out" part - they say let the market force the defaults and the cleaning - in house prices, in assets generally.

They're right.

Now, for those of you who I know are reading this, and are managing money but haven't been part of pushing "The Great Ponzi", I call upon you to do the right thing.

Let us all agree on the following facts:

Ponzi schemes are illegal.  They are in fact felonies, and the people who engage in and profit from them are felons.  Not-yet-prosecuted, perhaps, but the fact remains that none of these schemes are legal.  None.

The law is clear in this regard.  18 USC 1341, for example, says:

"Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, or to sell, dispose of, loan, exchange, alter, give away, distribute, supply, or furnish or procure for unlawful use any counterfeit or spurious coin, obligation, security, or other article, or anything represented to be or intimated or held out to be such counterfeit or spurious article, for the purpose of executing such scheme or artifice or attempting so to do, places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Postal Service, or deposits or causes to be deposited any matter or thing whatever to be sent or delivered by any private or commercial interstate carrier, or takes or receives therefrom, any such matter or thing, or knowingly causes to be delivered by mail or such carrier according to the direction thereon, or at the place at which it is directed to be delivered by the person to whom it is addressed, any such matter or thing, shall be fined under this title or imprisoned not more than 20 years, or both. If the violation affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both."

Got it?  False or fraudulent pretenses, representations, or promises.  I wonder if claims about "Aaa" securities that are not true would fall under this statute?  CEOs on CNBC claiming that they have "no liqudity issues" and similar nonsense - days before they collapse? 

What do you think a jury of Americans would think about this, given what has happened?  Were the representations of the ratings agencies, CEOs and investment banks false?

18 USC 1343 says the same thing, but extends the penalty to any communication by wire, radio or television, if the communication crosses a state or national boundary. 

18 USC 1344 extends this to anyone who screws a financial institution through any false or fraudulent representation, scheme or promise.

18 USC 1346 extends the definition of "scheme or artifice to defraud" to "a scheme or artifice to deprive another of the intangible right of honest services."

And finally, 18 USC 1349 extends the penalty to anyone who conspires with another party to do any of the above.

So let's ask these "difficult" questions:

• Is "pressuring" a ratings agency to give you an "Aaa" rating, including the inducement of future cash flows for future deals (or the threat of going to a competitor), such that the ratings offered do not fairly model real, known risks, constitute an offense?
• Is "shorting" a security that you originate, while at the same time peddling that same security to customers without disclosing to them that your own internal analysis shows it to be overvalued, and thus something you should consider shorting, an offense?
• Is appearing on a national cable TV network and claiming that you have "no liquidity problems" and are "well-capitalized", when you are frantically negotiating behind the scenes to try to obtain loans or consummate a merger to save your company - days or weeks before your firm implodes - an offense?
• Is marketing mortgages to people who you know, or have reason to know, cannot possibly make the amortized payments to term, thereby guaranteeing that the customer will have to come back to "refinance" in the future, while not disclosing this fact to them, an offense?
• Is it an offense if as a mortgage originator or bank you peddle to the GSEs mortgages that you know, or should have known, contain materially false statements as to the borrower's income and/or assets?
• Is it an offense to repeatedly submit data for one customer to an automated underwriting system containing either intentional omissions or "different scenarios", some of which may not be entirely honest, in order to find "the corner" where such a system will accept the loan after originally being rejected?
• Is it an offense, as a ratings agency, to assume values for income, debt and/or assets when they are not provided, making computation of critical ratios upon which the rating depends, such as debt-to-income (DTI) based on nothing other than a guess, and then publishing a rating on that security without disclosing to the consumers of said rating that your model literally made up some of the input data?
• Is it an offense to ask for the removal of leverage limits when you, as a skilled banking executive, are well-aware of how the exponential function works in compounding interest and debt, and thus have to know for a fact that what you are asking for is simply a way to keep the music playing for a short while longer - so you can extract hundreds of millions of dollars before the music (inevitably) stops?
• Is it an offense to run someone's money through a "fund of funds", extracting a "management fee", while in fact doing exactly no due dilligence of any sort - that is, not actually managing anything other than skimming $100s into your own wallet, which turns out to be the proximate and direct cause of your investors losing billions of dollars?
• Is it an offense to issue pronouncements to The American Public on the health of the economy and various markets (whether you're a government official or working for a specific industry or group of industries) when you are well-aware of the exponential nature of debt, price and income, are inducing the public to act in a fashion that will cause them to lose money, and you are, as a consequence of the underlying math, fully-aware that your "projections" and "statements" are materially false and misleading?
• And finally, is it an offense under 18 USC 1962 (Racketeer Influenced and Corrupt Organizations, or "RICO") to conspire as two or more persons or entities to do any of the above?

Aren't all of these actions part and parcel of why we're here?  Insanely-inflated "projections" for appreciation in the price of assets which were mathematically impossible to be correct over time, claims of "Aaa" for mortgages that negatively-amortized and for which there was no possible way for the borrower to avoid default within a few years except to come back and refinance (where such a refinance could not be guaranteed), tendering mortgages to the GSEs (along with other banks and investors) that contained outright falsehoods for income, occupation and/or assets and more?  Appraisers who were pressured to "hit the number" or be blackballed?  So-called "title insurers" who outsourced their work to a contract shop in India that performed only electronic searches, failing to find defects yet not disclosing that a full search had not been performed?

Does not all of the above involve defrauding investors and indeed The American Public by making false representations as to the quality of the borrower, the structure of the debt itself, and/or its value?  In some cases Wall Street firms went so far as to be shorting what they were selling to customers - the most-clear declaration you can find that they knew what they were doing, and it was not an accident, and the ratings agencies have disclosed that in some cases they knew of errors in their models yet did not disclose them for months - or years.

So folks, if you're in this space - selling, trading, buying debt - or if you're a member of a law enforcement agency at the Federal level - why aren't you raising hell about this?

Everyone says "we need re-regulation" but from where I sit we have plenty of laws to punish these acts right now!  In fact, the above look pretty good - fines of up to one million dollars per count, where each separate security (e.g. each mortgage, bond, etc) can constitute a separate offense?  That ought be plenty of existing law to confiscate all of the assets of the people who actually caused this mess.

Isn't it time that we see justice with regards to what has gone on over the last decade?  And for those of you in the marketplace - how can you justify dealing with people who are complicit in these offenses?

If you are wondering why the market refuses to "unlock", why trust has been lost and refused to come back into the market, and why people are hiding their money under the mattress while stocking back tubular steel, lead, brass and canned goods, this is the reason - both investors and the public have come to the conclusion that the government is the felon in that it has not only looked the other way while people committed these crimes, it has actively participated in them!

Finally, if you're an ordinary citizen and/or investor - why are you doing business of any sort with people who were either involved in this sort of nonsense or complicit in it?  It's not necessary for someone to be indicted, prosecuted and convicted before you have a right to come to your own personal conclusion about whether they're guilty - that right is always reserved to you, as is your right to refuse to do business with people who you judge to have acted in a disgusting and outrageous fashion.  That means essentially all of the investment and big commercial banks in this country, it means firms involved in the "Credit Default Swap" game and more.  A quick way to check - if they took TARP money or some other sort of Federal Bailout, are they not probably involved in one form or another?

Yes, we need to re-instate leverage limits along with reserve requirements in an airtight fashion and police them vigorously.  We need to remove The Federal Reserve from all aspects of policing these matters and put that in the hands of an agency that is fully-transparent, has subpoena power and the ability to refer alleged offenses to the Justice Department, as The Federal Reserve has proved over time that it will conspire with the banking industry to circumvent and remove reserve requirements and leverage limits from institutions it is allegedly regulating.  We need to make "bank examinations" (along with the regulatory examinations of all other financial institutions) public information and visible online so anyone and everyone can verify that the law with regards to leverage is not being violated.

But at the same time it is my opinion that the underlying acts that were necessary for this mess to get to where it is are already illegal.  As such we have the ability to impose severe punishments, including impoverishing everyone who profited from the creation of the mess along with decades-long prison terms, upon those who are responsible.

It is time for America to stand up at all levels, demand justice, and stop making excuses.