The Market Ticker - Corruption

FHLB San Francisco Goes Where The Cops Refuse To

nospam@example.com (Karl Denninger) — Wed, 17 Mar 2010 16:56:00 -0400

I'm sure you all remember how clearly I have stated that I believe that mortgage origination, securities packaging and dealing was fraudulent during the housing bubble, right?

I've been saying it now for three years - that credit quality was flatly ignored, appraisals were intentionally rigged and borrower lies were intentionally ignored.

Well now FHLB San Francisco has gone and done what no criminal prosecutor has had the balls to do - it has sued nine securities dealers. Among them are Credit Suisse, Deutsche Bank, JP Morgan and Bank of America. What is FHLB San Francisco alleging in its suit?

“The bank’s complaints allege that the dealers made untrue or misleading statements about the characteristics of the mortgage loans underlying the securities,” according to the statement.

The dealers made false statements or omitted important information about the loans that backed the securities they sold, the bank alleged in its complaints. The bank claims the dealers failed to disclose that appraisals were biased upward on properties that secured mortgage loans, that underwriting guidelines were ignored by originators and that loan to property value ratios were exaggerated.

Yep. Exactly what I have said for the last three years, and what should, in my opinion, had long since led to criminal charges for alleged fraudulent conduct.

This is the second such suit - as I reported earlier the same bank and the FHLB Pittsburgh bank sued Goldman, JP Morgan and Morgan Stanley last year.

The economic mess we are in will not be resolved until these securities are recognized on bank balance sheets at their true underlying value and, where appropriate, those who falsified credit quality and other information about these securities during their packaging and sale are held to account for what they have done.

Now exactly where are all these securities and at what marks are they being held in the banks across our land?

That's a question we all deserve an answer to.

Swap-writing Banks Charged With FRAUD?

nospam@example.com (Karl Denninger) — Wed, 17 Mar 2010 15:16:54 -0400

Now we're cooking:

March 17 (Bloomberg) -- Deutsche Bank AG, JPMorgan Chase & Co., UBS AG and Hypo Real Estate Holding AG’s Depfa Bank Plc unit were charged with fraud linked to the sale of derivatives to the city of Milan. Bloomberg's Elisa Martinuzzi reports. (Source: Bloomberg)

Oh wait - that's over in Italy, where the government isn't sufficiently bribed, er, bought off.

Now, let's see, where have we seen swaps written here in the US? Oh yeah, I remember - places like Jefferson County Alabama, where there have already been some guilty pleas on bribery related to those swaps!

I wonder if some State AGs could be persuaded to grow some brass between their legs and start bringing these institutions up on criminal charges?

(Yes, they should, and yes, I'd cheer.)

Senator Kaufman Throws Down The Gauntlet

nospam@example.com (Karl Denninger) — Tue, 16 Mar 2010 08:36:00 -0400

Is this just words? A glimmer of light flickers on in the dark halls of 535 fools....

Mr. President, last Thursday, the bankruptcy examiner for Lehman Brothers Holdings Inc. released a 2,200 page report about the demise of the firm and which included riveting detail on the firm’s accounting practices. That report has put in sharp relief what many of us have expected all along: that fraud and potential criminal conduct were at the heart of the financial crisis.

Exactly. I've been writing about this for three years; indeed, it was recognition of fraud in large financial firms that led me to begin writing The Market Ticker.

Lehman structured its repo agreements so that the collateral was worth 105 percent of the cash it received – hence, the name “Repo 105.” As explained by the New York Times' DealBook, “That meant that for a few days – and by the fourth quarter of 2007 that meant end-of-quarter – Lehman could shuffle off tens of billions of dollars in assets to appear more financially healthy than it really was.”

It was a little more than that. Lehman accounted for these transactions as a sale, when in fact they were a loan. There's a hell of a difference between the two - in one case you remove an asset from your balance sheet and replace it with cash (and that change is permanent) and in the other you exchange an asset for a liability, and the net impact on your balance sheet is in fact negative, not positive (since you must pay interest on a loan.)

First, we must undo the damage done by decades of deregulation. That damage includes financial institutions that are “too big to manage and too big to regulate” (as former FDIC Chairman Bill Isaac has called them), a “wild west” attitude on Wall Street, and colossal failures by accountants and lawyers who misunderstand or disregard their role as gatekeepers. The rule of law depends in part on manageably-sized institutions, participants interested in following the law, and gatekeepers motivated by more than a paycheck from their clients.

Second, we must concentrate law enforcement and regulatory resources on restoring the rule of law to Wall Street. We must treat financial crimes with the same gravity as other crimes, because the price of inaction and a failure to deter future misconduct is enormous.

Third, we must help regulators and other gatekeepers not only by demanding transparency but also by providing clear, enforceable “rules of the road” wherever possible. That includes studying conduct that may not be illegal now, but that we should nonetheless consider banning or curtailing because it provides too ready a cover for financial wrongdoing.

Everything that went on leading up to the crisis, and most of what went on in "managing" it, was unlawful under already-established black-letter laws. Some examples should make this clear:

AIG sold credit-default swaps (a form of insurance, even though we don't call it that) with no capital behind them - that is, no ability to pay. Entering into a contract with full knowledge that you have no ability to perform is a fraudulent act - you are representing to someone that you have capacity to pay under the loss scenario, when you do not.
Purchasing "protection" of this sort at below the market rate of risk as determined by the spread is an uneconomic act. That is, the essential purpose of such a purchase is not to buy protection against the adverse event, but rather to intentionally misrepresent to regulators that your assets are "covered" and thus of better quality than they are, for the explicit purpose of not having to hold reserves against them. I argue that this is an act of fraud. The essential point is that nobody works for free - it is therefore impossible to buy a Bond that has a risk spread over Treasuries (of equivalent duration) of 3% plus a credit-default swap to cover it for less than the same spread. A seller of protection who does not charge at least the risk-adjusted spread will not have sufficient capital to pay, and a seller who does charge at least the risk-adjusted spread (and thus can pay) leaves you with a trade, in total, that yields less than the Treasury! If you desire a risk-free trade it makes no sense to purchase the more-risky bond and credit-default swap, as your total return will be lower than just buying the Treasuries!
Mortgage origination and rating was rife with fraud up and down the line. The breaches of representations and warranties are not accidents or oversights - they are frauds. The most-carefully-negotiated set of terms in any offering document (for anything) is always the reps and warranties; as a seller of a business in the past I can tell you with absolute certainty that this is the case, because it is the section by which you can be hung if you make false statements. The Securitizers represented to the buyers of these mortgage-backed securities that the credit quality was of a certain caliber in the loans that were made, when in fact post 2004 it was known that the majority of "ALT-A" loans contained some element of misrepresentation.
Carrying second lien loans on the books of a bank that are behind a 60+ delinquent first that is underwater at any material value is, in my opinion, a fraudulent act. By black-letter law these second-position liens are entitled to exactly nothing until the first mortgage is fully paid. In the case where such a loan is underwater and not performing they have no economic value whatsoever. Current statistics are that virtually all 60+ delinquent mortgages will ultimately foreclose or sell short. 80% of the dollar value of HELOCs are in the four bubble states (Nevada, Arizona, California and Florida) and the majority of these lines are behind an underwater first. ALL of the big banks are currently holding a massive number of these loans (tens of billions individually and hundreds of billions in aggregate) on their balance sheets at or near par value, that is, 100 cents on the dollar. I can come up with no reasonable argument for these claimed valuations, and yet they are allowed to persist. Packages of these loans currently trade on the second market for literal pennies on the dollar.

Why is this allowed to continue? I have, for the last three years, asked repeatedly "Where are the cops?"

I have also asked a more-serious question, and one with unpleasant implications for our society as a whole: Is the government a felon itself?

I believe these questions are fair. You speak in your letter of FERA, The Fraud Enforcement and Recovery Act. Well, if we're supposed to be enforcing the law against fraud, where are the cops sir? All I've seen FERA do thus far is fatten the officers at the local donut shop.

As I said more than a year ago: "At the end of the day, this is a test of whether we have one justice system in this country or two. If we don’t treat a Wall Street firm that defrauded investors of millions of dollars the same way we treat someone who stole 500 dollars from a cash register, then how can we expect our citizens to have faith in the rule of law? For our economy to work for all Americans, investors must have confidence in the honest and open functioning of our financial markets. Our markets can only flourish when Americans again trust that they are fair, transparent, and accountable to the laws."

The American people deserve no less.

We may deserve no less, but so far we the people have received zilch, all in the name of "not disturbing the so-called recovery."

But in point of fact we've not only refused to prosecute, we've allowed these financial institutions to try to cover the holes blown in their own balance sheets as a consequence of this fraudulent activity with fees and interest charges assessed on the people!

This is akin to not only looking the other way when the robbers show up and commit their heist, but then in addition assessing the victims a tax to pay for the robber's getaway car!

EXPLOSIVE: Lehman - Where Are The Cops?

nospam@example.com (Karl Denninger) — Thu, 11 Mar 2010 20:40:00 -0500

Sarbanes-Oxley was supposed to prevent crap like this:

From the paper:

Lehman employed off-balance sheet devices, known within Lehman as “Repo 105” and “Repo 108” transactions, to temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days, and to create a materially misleading picture of the firm’s financial condition in late 2007 and 2008.2847

Oh yeah, that's legal? It's not supposed to be!

Lehman regularly increased its use of Repo 105 transactions in the days prior to reporting periods to reduce its publicly reported net leverage and balance sheet.2850 Lehman’s periodic reports did not disclose the cash borrowing from the Repo 105 transaction – i.e., although Lehman had in effect borrowed tens of billions of dollars in these transactions, Lehman did not disclose the known obligation to repay the debt.2851 Lehman used the cash from the Repo 105 transaction to pay down other liabilities, thereby reducing both the total liabilities and the total assets reported on its balance sheet and lowering its leverage ratios.

Isn't that special?

It gets better, as you might expect.

The Examiner concludes that colorable claims of breach of fiduciary duty exist against Richard Fuld, Chris O’Meara, Erin Callan, and Ian Lowitt, and that a colorable claim of professional malpractice exists against ~~Arthur Anderson~~ Ernst & Young.2915 (strikethrough mine, not in the original)

It is stated that Government Regulators (FRBNY and The SEC) had "no knowledge" of these practices. Perhaps true. But this calls into question why we're hearing of this just now, and whether other firms have or are at present doing the same sort of thing.

There also appears to be a colorable claim that Lehman Management was fully-aware of what was going on:

Although interview statements given to the Examiner were inconsistent at times, no reasonable dispute exists that each of Lehman’s Chief Financial Officers from late 2007 to September 2008 possessed some knowledge of and/or involvement with multiple aspects of Lehman’s Repo 105 program, including the existence of firm-wide Repo 105 limits, the volume of Repo 105 activity Lehman engaged in at quarter‐end, and Lehman’s efforts to manage its balance sheet using Repo 105 transactions.

Well that's special.

But we're just getting warmed up.

Remember, The Feral Reserve is supposed to by the "uber-regulator" and the "safety and soundness" manager for the financial system.

They did a great job, right? Well...

For example, when

the Examiner questioned Lehman executives and other witnesses about Lehman’s financial health and reporting, a recurrent theme in their responses was that Lehman gave full and complete financial information to Government agencies, and that the Government never raised significant objections or directed that Lehman take any corrective action.

True? Let's see what the Examiner had to say:

Although various Government agencies had information that raised serious questions about Lehman’s reported liquidity and about the sufficiency of its capital and liquidity to withstand stress scenarios, the agencies generally limited their activities to collecting data and monitoring.

Oh. They looked but didn't act. I see.

Indeed, they looked pretty closely....

After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress‐testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.

So let's see what we got here. They ran two sets of stress tests and the firm failed both. Not satisfied with the results they then designed a third set, which the firm also failed (we can reasonably presume the third had less stringent requirements than the other two!)

Instead of applying any of these three, FRBNY, which was run by one MR. TIMOTHY GEITHNER, NOW OUR TREASURY SECRETARY WHO REPORTED TO ONE BEN BERNANKE, instead took Lehman's word that all was ok and did nothing.

Wait a minute. In the spring of 2009 we were told that all the big banks ran "Stress Tests" of Geithner's design. But Treasury didn't actually run them and didn't actually get and process the data - they told the banks to do so.

Uh, that's exactly what Lehman did, right? And Lehman passed its own "internally computed" stress test but failed all three of the externally-computed ones.

Do you still accept that all these other banks are solvent? What about the facts we do know - such as the inconvenient fact that between them the "big banks" have something like $150 billion of Home Equity lines behind an underwater and delinquent first mortgage, which is, by the way, worth zero yet being carried at or near full value......

Nor did it end there.

The SEC inspection revealed significant problems at Lehman. The SEC found that Lehman’s Price Valuation Group was understaffed; and it found that Lehman’s asset pricing function was overly “process driven.”5761 But the SEC did not release its findings or formally present them to Lehman prior to Lehman’s demise.

So The SEC knew, and they too did nothing.

It's worse. While Geithner is implicated as being "concerned" about Lehman in the paper, the most-troubling part the narrative is here:

The challenge for the Government, and for troubled firms like Lehman, was to reduce risk exposure, and the act of reducing risk by selling assets could result in “collateral damage” by demonstrating weakness and exposing “air” in the marks.5823

Air?

Uh, that's an apparent admission that FRBNY and Tim Geithner specifically knew that the marks that these banks were taking on their assets was materially and intentionally false.

Where have we seen this of late? Oh yeah - in all those banks that have failed of late, with 25-40% discounts to their claimed balance sheet values when the marks are actually reduced to losses to the deposit fund by the FDIC!

So let's see here. We now have:

Geithner, and presumably everyone under him, knew the marks on these assets were fictions months before Lehman failed, yet they intentionally concealed this fact from the market and took no action (nor did the SEC) to disclose this intentional misdirection.
The misdirection and false claims in this regard are almost certainly continuing today, as evidenced by the FDIC seizures literally on an every-week basis.

How about Bernanke? While he maintains (as did Geithner) that primary responsibility lay with the SEC, he also said:

Our concern was about the financial system, and we knew the implications for the greater financial system would be catastrophic, and it was.”

What does all this say about the stability of things now?

Yeah, I know, everyone's "too big to fail."

But what if the truth is that they're "too big to bail", for instance, if one of the "big four" was to get in trouble today due to a recognition in the marketplace that not only is this what blew up Bear Stearns and Lehman Brothers, but that the same chicanery with "asset values" is continuing even today, and as such one cannot be reasonably certain that liquidity provided today will be repaid tomorrow?

Why is it that if the implications would be catastrophic (and they were), both the SEC and FRBNY knew that Lehman had insufficient liquidity long before the collapse (and they did) neither the SEC, The Federal Reserve or FRBNY did a damn thing to blow the whistle on this crap and put a stop to it?

This report sets out a damning case against the pseudo-government and government actors, who it is alleged were well-aware of critical weaknesses in Lehman's risk controls and liquidity months before it collapsed, yet none of them did a damn thing about it until days before the bankruptcy filing.

Why should any of the clown-car riders who clearly knew that this situation existed for literal months before it blew up, yet did nothing, still retain their jobs and, in Geithner's case, obtain a promotion? These people are unqualified for supervisory positions involving anything more complicated than handing out towels in the men's room.

The key question facing the nation this evening is not, however, the past. It is the future. We have over 100 literal instances in which banks have been seized by the FDIC since Lehman blew up in which their balance sheet "asset values" have been shown by the FDIC's own DIF loss projections to be abject fictions, yet none of these institutions have been flagged to investors or the public, no indictments or civil complaints have been brought by the SEC or Department of Justice, and they have remained operating for months with these bogus values exhibited for bank examiners and regulators to see.

IF - and I stress IF - these fictions are also present in our large banking institutions, and there is NO REASON TO BELIEVE THEY ARE NOT, it is simply a matter of time before one or more of them detonates in a similar if not identical fashion. Since these firms are all much larger than Lehman and neither the FDIC or Treasury has a spare $500 billion laying around for the potential payout to depositors that might be necessary in such an instance, we cannot reasonably assume that the risk of financial Armageddon has in fact passed until we know for a fact that all fictional balance sheets are excised and all off-sheet exposures accounted for.

ADMISSION By FDIC: Massive Balance Sheet FRAUD

nospam@example.com (Karl Denninger) — Mon, 08 Mar 2010 13:02:00 -0500

Remember this Ticker from a few days ago?

I am constantly amused by those people who claim there is some vast "conspiracy" in this country when it comes to banks, balance sheets, and fraudulent lending and accounting.

There is no conspiracy.

It is, in fact, "in your face" fraud.

Well, one of the people on the forum emailed The FDIC to ask about what I had alleged. This was their response:

That’s the value the bank had them on their books on their year-end financials, but the true value is much less. It is similar to someone in Las Vegas saying that their house is worth $300,000 because that’s what they paid for it three years ago, but the reality is, if they had to sell it in today’s market, they’d only get $250,000 for it. The FDIC has to sell assets in today’s market.

--db

Or tomorrow's market.

The simple fact of the matter is that there it is, right in front of you.

A raw admission that the banks are carrying these loans at dramatically above their actual value.

Yes, this means that essentially all balance sheets must now be considered fraudulent, and thus the valuations assigned by the market to them are also fraudulent.

Extending this to the stock market as a whole you now have a market that is intentionally overvalued as a direct and proximate consequence of fraud, permitted and endorsed by the government, of somewhere between 25-40%.

Now you know why the market rallied off the SPX 666 lows to where it is now. 1139 (where we are now) * .60 (a 40% haircut) = 683.40, or awfully close to that 666 bottom.

Of course this "valuation" expressed in the market can only be maintained for as long as the fraud is. If the ability to maintain that fraud is lost for any reason then values will instantly collapse back to reflect reality.

Still sleeping well with your investments?

Heh, I Tawt I Taw A Jumpsuit!

nospam@example.com (Karl Denninger) — Fri, 05 Mar 2010 14:37:00 -0500

I did, I did tee a jumpsuit!

TUSCALOOSA, Ala.—Former Birmingham Mayor Larry Langford was sentenced Friday to 15 years in federal prison for taking some $235,000 in bribes in return for lucrative bond work.

But investment banker Bill Blount pleaded guilty to making the payments, and lobbyist Al LaPierre admitted being the middleman. Mr. Blount, the former state Democratic Party chairman, last week was sentenced to more than four years in prison. Mr. LaPierre, the former executive director of the state Democratic Party, got four years. Mr. Blount also was ordered to pay $1 million to the government, and LaPierre $470,000.

Wait a second....

How come Blount and LaPierre only got four years?

And how much did these guys - and these banks - get?

Mr. Langford was accused of telling major Wall Street banks J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp. and the now-bankrupt Lehman Brothers to include Blount's investment banking firm if they wanted to handle the county's bond work.

They just got sued, right?

Yep.

Just a "cost of doing business"?

Kinda like Pfizer and the Federal Reserve Board of NY?

No wonder these banksters keep at this crap - we prosecute and lock up the people they screw around with, but the banks themselves, just like the big drug companies, get fined in tiny amounts that amount to one percent or less of their market cap.

Yeah, that's a deterrent against criminality.

Now Seniors Get To Feel The Bezzle

nospam@example.com (Karl Denninger) — Thu, 04 Mar 2010 07:58:00 -0500

If you remember just a short while ago I reported on what certainly appears to be a very clumsy scam pulled by the BLS in their so-called "inflation" reading published on the 19th of February - where the numbers they presented simply didn't add up, and as a consequence put forward a false CPI, or inflation number.

Curiously, we haven't heard anything from the BLS on this "error".

This, of course, is only an "error" in that it is not the actual means by which the BLS is "supposed" to report "inflation."

But the BLS has twice in the last 30 years revised their methodology, both times with the intent of understating "inflation."

Why? Well, a big part of the reason is that the law says that various benefit programs are supposed to be indexed to inflation. By intentionally understating inflation Senior Citizens and others on various fixed-income entitlement programs funded by government get intentionally screwed.

The Senate yesterday rejected a $250 one-time check to Seniors and others who have been so-screwed for the last two decades:

President Barack Obama has called for Congress to approve the payments to make up for their benefits not increasing this year, but the Senate defeated it 50 to 47.

....

Social Security payments for the elderly and disabled will stay flat this year for the first time since 1975 because they are tied to consumer prices, which decreased amid the worst economic recession in 70 years.

Of course the real problem doesn't lie here. As is usually the case the media won't talk about the fact that the current inflation rate, if measured under the "old" methodology, never went anywhere near zero.

How much does this "count"? Tremendously so. Over a ten year time frame understating inflation by 7% results in your Social Security payments being half of what they would otherwise be. If the understatement is by just 3% you get a 35% underpayment at the end of a ten year period.

Of course what the media reports is the "one time" payment was rejected, but what they don't report is that seniors have been screwed for three decades by intentional book-cooking in the government.

And by the way - no, there is no possibility of the government "fixing this" and paying what the law says they should. The money doesn't exist.

But this scam, along with dozens of others, is how our fabulous government managed to run its Ponzi Scheme for as long as it has - a Ponzi that is now collapsing, irrespective of what you're being told by the vacuous bobbing heads on national television.

If you're a senior and been paying "membership dues" to AARP, you might want to ask them why their much-vaunted "lobbying" and "public education" campaigns haven't focused on this for the previous 20 years - and why they sold you down the river.

Hope you like your kids (and they like you) Seniors, because the government tit is rapidly running dry.

NOW Congress Wants To Investigate? (Greek Swaps)

nospam@example.com (Karl Denninger) — Tue, 02 Mar 2010 13:23:00 -0500

Gee, how come all this didn't happen a year ago - or two?

“News has surfaced that investment banks based in the United States have funded firms that created the financial indexes and other information needed to trade against the possibility of a sovereign default overseas—after selling debt to those countries in a way that kept that debt secret from the public,” Rep. Maloney said. “These reports, if true, are a shocking echo of the financial crisis that faced the U.S. in 2008—whose reverberations are still being felt today, in the worst recession in decades.”

No really?

You mean just like those wonderful "CDOs" that Goldman (and others) created that were in fact fully synthetic instruments and which came into being ONLY because someone wanted to SHORT your house?

Exactly why weren't these instruments banned when traded "in the dark"?

Off-balance sheet? ENRON didn't make clear what happens when people hide things? After all, nobody ever hides good news, right?

Carolyn, it's nice to hear you come out for this sort of hearing.

But this leaves open the question about the raw theft and blatant destruction that the fine "firms" headquartered and operating in New York - right up your back yard - are and have been promulgating, and why it is that there hasn't been any serious attempt to put a stop to it - until now.

Indeed, the same BS games are still going on today. Wells Fargo and Citibank both have well over one trillion dollars off balance sheet in "God knows whats", worth God knows even less, and investors have exactly no knowledge of precisely what sort of trash is in there.

Municipal governments? Jefferson County Alabama anyone? How many more Jefferson County's are there? We know these sorts of "deals" were written literally everywhere, and that in at least one case the underlying bond issue allegedly "protected" was never made, so this deal was nothing other than a raw bet on interest rates - made by a municipal government that was goaded into it by these very same banks.

“It’s like buying fire insurance on your neighbor’s house—you create an incentive to burn down the house.”

It's only insurance Carolyn if the person who wrote the policy can pay and the buyer has an insurable interest.

If the seller can't pay because they don't have the money or the buyer doesn't have an insurable interest, it's either a garden-variety scam or an inducement to commit financial arson. When the latter is done "off exchange" where the trades are not made public and accessible then the incentives for someone to run around with a can of gasoline become nearly insurmountable.

Perhaps the fine Congresswoman can explain why is it that nobody's in jail for this yet - and why our government still allows this BS to continue.

Bombshell In AIG 10Q: "Capital Relief"

nospam@example.com (Karl Denninger) — Fri, 26 Feb 2010 15:39:00 -0500

Now that I've had to time to read the entire AIG 10Q there's a nasty ditty in here that in my opinion goes materially beyond the "going concern" language. It's here:

A deterioration in the credit markets may cause AIG to recognize unrealized market valuation losses in AIGFP's regulatory capital super senior credit default swap portfolio in future periods which could have a material adverse effect on AIG's consolidated financial condition or consolidated results of operations. Moreover, depending on how the extension of the Basel I capital floors is implemented, the period of time that AIGFP remains at risk for such deterioration could be significantly longer than anticipated by AIGFP.

A total of $150.0 billion in net notional amount of the super senior credit default swap (CDS) portfolio of AIGFP as of December 31, 2009, represented derivatives written for financial institutions, principally in Europe, which AIG understands to have been originally written primarily for the purpose of providing regulatory capital relief rather than for arbitrage purposes. The net fair value of the net derivative asset for these CDS transactions was $116 million at December 31, 2009.

So AIG "understands" that $150 billion of credit-default swaps were written by AIGFP to European Institutions (no note by the way as to exactly what's in there - or who owns them) for the explicit purpose of getting around capital requirements - either by banking regulators or (possibly worse) EU sovereign regulations.

When did they come to "understand" this? Did they write these swaps originally knowing that their essential purpose was to evade capital requirements, or was this a "recent" revelation of some sort?

Indeed, the section goes on to say:

In addition, although AIGFP receives periodic reports on the underlying asset pools, virtually all of the regulatory capital CDS transactions contain confidentiality restrictions that preclude AIGFP's public disclosure of information relating to the underlying referenced assets.

Isn't that nice? So AIG insists that we trust them, and in addition, that everyone else trust them, as to the precise composition of these "assets", their performance, and who is on the other side of the transaction.

Oh, it gets better. The weighted average maturity of these transactions is 1.35 years, we can't tell what's left in there, and we also can't know who's on the other side of the transaction, but what we are told is that the essential financial purpose of these transactions was to evade regulatory capital requirements.

Net notional? Oh, that's nice. Since the claimed underlying "net derivative asset" is essentially nil against this "notional", one wonders what the real risk is on the table here in terms of the firm. Seeing as it's in the "risks" section of the 10Q, it has to be material to results, right?

Why do I smell sulfur?

Oh AIG, What Is That Up Your Sleeve?

nospam@example.com (Karl Denninger) — Tue, 23 Feb 2010 08:36:00 -0500

Heh, Bloomberg is blowing a whistle!

A potentially more important development slipped by with less notice, Bloomberg Markets reports in its April issue. Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.

Yeah. But that 62.1 billion is just part of the problem. See, we seem to be into these clowns for $180 billion. How come, if there was "just" $62 billion in bad paper out there?

“It’s almost too uncanny,” Calacci says. “If these banks had insight into the underlying loans because they had relationships with banks, originators or servicers, that’s at the least unethical.”

The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured -- more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.

I don't think there's anything uncanny about it. Look, this wasn't so simple as "someone placed a bet." That goes on every day, and there's nothing wrong with it.

No, this has more nefarious overtones.

They met with bankers at Bear Stearns, Deutsche Bank, Goldman Sachs, and other firms to ask if they would create securities—packages of mortgages called collateralized debt obligations, or CDOs—that Paulson & Co. could wager against.

The investment banks would sell the CDOs to clients who believed the value of the mortgages would hold up. Mr. Paulson would buy CDS insurance on the CDO mortgage investments—a bet that they would fall in value. This way, Mr. Paulson could wager against $1 billion or so of mortgage debt in one fell swoop.

At Bear Stearns, however, Scott Eichel, a senior trader, and others met with Mr. Paulson and later turned him down. Mr. Eichel said he felt it would look improper for his firm. "On the one hand, we'd be selling the deals" to investors, without telling them that a bearish hedge fund was the impetus for the transaction, Mr. Eichel told a colleague; on the other hand, Bear Stearns would be helping Mr. Paulson wager against the deals.

Some investors later would argue that Mr. Paulson's actions indirectly led to the creation of additional dangerous CDO investments, resulting in billions of dollars of additional losses for those who owned the CDO slices.

Please go read "The Audacity of Synthetics" again, which I wrote a couple of weeks ago. The problem with these things is simple - they existed only because someone wanted to make a bet that the person who bought them would lose all their money!

As I have repeatedly said I don't give a damn what people bet on or what they want to do in the markets. We have a huge casino here on Wall Street and always have, and trying to make that "go away" is a waste of time. It won't.

No, the problem is lack of disclosure and the "I'm just the bookkeeper" defense, which is the essence of the investment (and commercial) bank perspective.

Speaking of the latter, how's that work out for the bookie's "accountant" when the FBI comes in and raids a wire room that's running ponies or whatever? Not so good, right?

So how come the "bookkeepers" are still operating in this case?

Now there's something to think about.

CPI Number Reported INTENTIONALLY INCORRECT?

nospam@example.com (Karl Denninger) — Sat, 20 Feb 2010 13:04:00 -0500

Remember the market's "cheering" of the "-0.1%" CPI-U reading (core) yesterday?

There's a problem - it was wrong.

Look at the highlighted numbers. Let's multiply them up.

(5.966 x 0) + (.769 x -2.1) + (25.206 x -0.1) + (.347 x 0.4) / 32.288 = -0.12%, or -0.1%.

But it was reported as -0.5% in the line directly above (inverted tone.)

Oops.

I didn't re-run the weightings for the entire series but a quick "eyeball" of the table shows that this should result in a CORE reading of 0.1% (positive), not the negative number reported.

Will the BLS admit to this error? Who the hell knows, but if you have a calculator, you can verify that yet another game to "boost" the market was run, with desire effect - a roughly 1/2% spike in the S&P 500 futures right on the BOGUS data release.

Since this table is undoubtedly computed (indeed, if I was to dump the raw data into EXCEL I could have a spreadsheet do this literally in a fraction of a second) it calls into question whether this was an accident or an intentional distortion of the data at the BLS.

It also leads to a few other questions, none of which are very comfortable to consider, but all of which, unfortunately and in light of this report, we must.

For example, is the BLS simply publishing whatever the government wants it to, and then making up the numbers inside the report to hit that target? Even a simple high-school cheat knows that you must "fix" the constituent numbers that go into a cheated result in order to not get (easily) caught; in a world where people don't add things with calculators but instead have computers sum up columns and do the math it is essentially impossible that this sort of "mistake" is an error.

Rather, it is virtually certain that this "reported" value was in fact intentionally false, and the persons doing so were too clumsy to "fix" the evidence behind it so that it would "add up."

We now officially live in a world where intentionally-incorrect data is published by our government for the specific intention of misleading the markets.

PS: This will, of course, be used to screw Social Security recipients out of their lawfully-mandated cost-of-living increases. Count on that. Oh, and don't ask about the money you already got screwed out of from other similar "errors" that neither I or anyone else caught because they weren't so clumsy as to fail to cover it up.

Now The Game's Afoot (Greece and Goldman)

nospam@example.com (Karl Denninger) — Mon, 15 Feb 2010 19:55:00 -0500

This is amusing....

Greece turned to Goldman Sachs Group Inc. in 2002, just after adopting the euro, to get $1 billion in funding through a swap on $10 billion of debt, Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time, said in an interview last week. Eurostat, the EU’s statistics office, was aware of the plan, he said. Risk Magazine also reported on the swap in July 2003.

“Eurostat was not until recently aware of this alleged currency swap transaction made by Greece,” spokesman Johan Wullt said by e-mail yesterday.

Bloomberg goes on to opine about whether the EU's statistics office knew about the swaps and their purpose at the time of origination.

This is not the correct question, in my opinion, to be asking.

The question to be asking is what was the essential purpose of transactions in question?

It appears that:

EU regulators pressed Greece yesterday to disclose details of currency swaps after an inquiry by the country’s finance ministry uncovered a series of agreements with banks that it may have used to conceal mounting debt.

Now that is a problem.

If the essence of the transaction was to deceive Brussels, then everyone involved needs to face sanction for this.

Better yet - did Greece lie its way into the EU? If so would anyone care to tell the class for extra credit what fraud in the inducement means to a contractual agreement? (hint: odds on Greece being expelled anyone?)

Simon Johnson of MIT raises an even more provocative possibility: That the EU may ban Goldman from dealing in EU government debt markets altogether!

Instead, Goldman will probably be blacklisted from working with eurozone governments for the foreseeable future; as was the case with Salomon Brothers 20 years ago, Goldman may be on its way to be banned from some government securities markets altogether. If it is to be allowed back into this arena, it will have to address the inherent conflicts of interest between advising a government on how to put (deceptive levels of) lipstick on a pig and cajoling investors into buying livestock at inflated prices.

And the US government, at the highest levels, has to ask a fundamental question: For how long does it wish to be intimately associated with Goldman Sachs and this kind of destabilizing action? What is the priority here - a sustainable recovery and a viable financial system, or one particular set of investment bankers?

The latter question is easier to answer: For as long as our so-called "regulators" and "Congressfolk" are willing to allow pension funds and others to be royally screwed blind through hinky derivatives transactions, there will be no effective anything coming out of Washington.

The Goldman revolving door between Washington DC and Wall Street is alive and well, and until we the people demand that it be slammed closed and bricked over forever, along with those who perpetrated these games investigated and, where appropriate, prosecuted, you will see no effective change coming from Washington DC.

As a consequence a viable and true economic recovery is not going to happen because we lack the leadership in either major political party to utilize a few thousand pair of handcuffs and instead excuse and even reward the sort of game-playing that I have been writing about for the last three years.

Indeed, that's all "the so-called stock market" (never mind the economy as a whole and our various forms of government) are running on right now - games, concealment and outright lies.

The truth of this statement is instantly clear when one thinks back to the malignant swaps "deals" made with Jefferson County Alabama along with many other municipal governments. In these cases there were allegations of outright bribery and yet investigation, indictment and prosecution of banking industry executives for public corruption has yet to be seen. Instead "a little fine" has been negotiated and paid, where if you or I screwed some little old lady out of 1/1000th as much money we'd be doing 20 years of hard time right now.

We are no longer a nation of laws - we're a nation of despots and, thus far, we the people are tolerating it.

It is time for every American to reflect on one simple question:

Why do I sit still for this?

How Far Does It Go Before Indictments Issue?

nospam@example.com (Karl Denninger) — Thu, 11 Feb 2010 08:22:00 -0500

"Gee, look over there!" says the mortgage industry.

In a rather-stunning posting on 4closurefraud.com we have a recorded assignment to BOGUS ASSIGNEE FOR INTERVENING ASMTS!

Yes, really.

Foreclosures are being prosecuted and people tossed out of their homes on the basis of a defective assignment?

Gee, who'd-a-thought?

You don't think that the clerks of these counties were recording anything that comes in the door, in proper form or not, simply to generate the fee income, do you?

Sharon Bock, County Clerk and Comptroller, were you SLEEPING when you accepted and recorded this document in PALM BEACH COUNTY or WERE YOU COMPLICIT IN A SCHEME TO RECORD BOGUS AND PERHAPS EVEN FRAUDULENT DOCUMENTS OF ASSIGNMENT OF PROPERTIES IN YOUR COUNTY?

WHERE THE HELL ARE THE DAMN COPS?

Bernanke And Paulson Are Free?

nospam@example.com (Karl Denninger) — Sun, 07 Feb 2010 18:08:00 -0500

Lewis' "legal team" (maybe Ken Lewis himself) has apparently said:

"If this thing goes to trial you can expect both Paulson and Bernanke to be on the witness list." If he's going down, he's bringing them down, too.

Please?

Paulson and Bernanke in the dock? That's worth a Youtube. Or a dozen Youtubes, especially if they get fitted for orange jumpsuits.

And let me be clear: I believe they should be. Arm-twisting is one thing, but I suspect there's more than enough dirt to fit these guys (and probably Geithner too) for an "orange blossom special."

If this is Cuomo's strategy - charge Lewis and roll him to get to people higher up - it works for me, irrespective of whether it happens by Lewis rolling over or whether we do it the old-fashioned way - Lewis subpoenas them as hostile witnesses.

Either way I'll take it, and if that's what we have to do to find some justice in this whole sordid mess all I can say is "it's about damn time."

"A Good Start" - Cuomo Charges BAC

nospam@example.com (Karl Denninger) — Thu, 04 Feb 2010 12:27:00 -0500

Well well well... I SEE A COP!

The attorney general’s accusations, detailed in a 90-page complaint, focus on two decisions that bank executives made in December 2008, as Merrill Lynch suffered growing losses. The complaint was filed under the Martin Act, a New York state law that gives the attorney general broad latitude to pursue financial wrongdoing.

“Throughout this episode, the conduct of Bank of America, through its top management, wasmotivated by self-interest, greed, hubris, and a palpable sense that the normal rules of fair play did not apply to them,” Mr. Cuomo said. “Bank of America’s management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth.”

Well Mr. Cuomo, you could say that about all the big boyz in your district and state. How about all those "RMBS" and "CDOs" and "CDO^s" and other similar instruments that were comprised of residential mortgages with no disclosure that The FBI, HUD and private credit analysts had been warning for YEARS about rampant fraud in the underlying loans?

I applaud this as a first step but until and unless this is expanded to include all those securities created with bought-and-paid-for ratings - and zero disclosure of facts either known or "should have been known if you bothered to look" to investors this will remain only "a good start."

C'mon Mr. Cuomo, make us all proud and go after the root of The Bezzle.