Rumours are circulating in the financial markets that a bunch of Hedge Funds are about to go belly up after losing between 50-75% of their assets.

What a delight it would be to see the greediest and most ruthless beggars in the known universe crumble like a house of cards. Highly significant is the fact debtors no longer are happy with pledged US Treasury securities as collateral.

Danger beckons...

More here:

http://www.smartbrief.com/news/cfa/videos....t%3D8%26wpid%3D

AND

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Hedge Funds Reel From Margin Calls Even on Treasuries (Update1)
By Tom Cahill and Katherine Burton

March 10 (Bloomberg) -- The hedge-fund industry is reeling from its worst crisis in a decade as banks are now demanding more money pledged to support outstanding loans even when the investment is backed by the full faith and credit of the United States.

Since Feb. 15, at least six hedge funds, totaling more than $5.4 billion, have been forced to liquidate or sell holdings because their lenders -- staggered by almost $190 billion of asset writedowns and credit losses caused by the collapse of the subprime-mortgage market -- raised borrowing rates by as much as 10-fold with new claims for extra collateral.

While lenders are most unsettled by credit consisting of real estate and consumer debt, bankers are now attempting to raise the rates they charge on Treasuries, considered the world's safest securities, because of the price fluctuations in the bond market.

``If you have leverage, you're stuffed,'' said Alex Allen, chief investment officer of London-based Eddington Capital Management Ltd., which has $195 million invested in hedge funds for clients. He likens the crisis to a bank panic turned upside down with bankers, not depositors, concerned they won't get their money back.

The lending crackdown is the worst to hit the $1.9 trillion hedge-fund industry since Russia's debt default in 1998 roiled global credit markets and required the U.S. Federal Reserve to pressure the securities industry to arrange a $3.6 billion bailout of Greenwich, Connecticut-based Long-Term Capital Management LP. Today, hedge funds are being forced to sell assets to meet banks' margin calls, resulting in the dissolution of the funds.

``There has to be more in the next weeks,'' Allen said. ``There are people who have been hanging on by their fingernails who can't hold on much, much longer.''

`Mercy of Counterparties'

Ivan Ross, founder of Westport, Connecticut-based hedge fund Tequesta Capital Advisors, received a call from his bankers on Feb. 22 demanding he put up more money or risk losing his loans. Ross was unable to meet the margin call as the market for mortgage- backed debt seized up, preventing him from selling securities to raise the cash. Four days later, lenders liquidated his $150 million fund.

``Because it's impossible in this environment to move among dealers, you're at the mercy of counterparties,'' said the 45-year- old Ross, who has managed hedge funds for 13 years, including a stint handling mortgage-backed debt for billionaire George Soros. ``To the extent they want to shut you down, they can.''

The demise of Tequesta revealed the deathtrap for hedge funds caught in the credit maelstrom of banks selling mortgage-backed bonds as fast as they can while demanding more collateral from clients who use the securities to back loans.

Carlyle Fund

On Feb. 24, London-based Peloton Partners LLP gave up a ``night and day'' effort to stave off demands from banks, including Goldman Sachs Group Inc. and UBS AG, for as much as 25 percent collateral for securities that once required 10 percent, according to investors in the fund. Peloton, run by former Goldman partners Ron Beller and Geoff Grant, liquidated the $1.8 billion ABS Fund, its largest.

The same day, about 5,000 miles (7,770 kilometers) away in Santa Fe, New Mexico, JPMorgan Chase & Co. told Thornburg Mortgage Inc. that it had defaulted on a $320 million loan because it couldn't meet a $28 million margin call, according to U.S. regulatory filings.

Thornburg, the home lender that lost 93 percent of its market value in the past year, was near collapse March 7 after it failed to meet $610 million of margin calls. Chief Executive Officer Larry Goldstone said in a statement the company fell victim to a ``panic that has gripped the mortgage financing industry.''

Repo Agreements

Carlyle Capital Corp., the debt-investment fund started by private-equity firm Carlyle Group of Washington, was suspended from trading in Amsterdam on March 7 after it couldn't meet margin calls, and its banks seized and sold assets.

``Banks are reducing exposure anywhere they can and the shortest way to do that is to cut leverage,'' said John Godden, chief executive officer of London-based hedge-fund consultant IGS AIS LLP.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

The managers that trade fixed-income securities generally borrow money through repurchase agreements, or repos. In a repo, the security itself is used as collateral, just as a homeowner puts up the house as collateral for a mortgage.

Collateral `Haircuts'

Banks usually limit their risk on repos by lending less than the value of the securities used as collateral. Tequesta was able to borrow $95 on $100 worth of AAA rated jumbo prime mortgages in early 2007, meaning the bank took a $5, or 5 percent so-called haircut. By last month, the amount required had risen to as much as 30 percent, Ross said. Jumbo mortgages are loans of more than $417,000, typically used to finance more expensive homes.

The losses started in mid-2007, when prices of subprime loans, those to homeowners with bad credit histories, started tumbling because of a surge in delinquencies. The contagion spread to other credit markets, including bonds backed by student loans and credit cards and now mortgages backed by federal agencies, which have an implied guarantee from the U.S. government.

Prices keep falling, with yields on mortgage-backed debt issued by agencies such as Fannie Mae rising last week to the highest level relative to U.S. Treasuries since 1986. Costs to protect corporate bonds from default are close to a record high.

Under such circumstances, lenders have no choice but to ask clients to put up more cash. For AAA rated residential mortgage backed securities, banks have raised haircuts 10-fold in the past year to 20 percent, according to estimates from Citigroup credit analyst Hans Peter Lorenzen in London.

Treasury Swings

On AAA asset-backed securities, banks are demanding a 15 percent haircut, up from 3 percent last summer. Corporate bond haircuts have gone to 10 percent from 5 percent, bankers said.

At least one bank has raised Treasury haircuts, which range from 0.25 percent to 3 percent, depending on the length of the loan and the creditworthiness of the borrower, said bankers, who declined to be identified. They said they wouldn't be surprised if the practice becomes more widespread, not because they expect the U.S. government to default, but rather because there have been bigger price swings in the Treasury market, which affects value.

Some banks may have been late to raise haircuts for their biggest hedge funds because they are lucrative clients, said Jochen Felsenheimer, head of credit strategy at Milan-based UniCredit SpA, Italy's biggest bank.

``Until now, hedge funds have been the big winners of the crisis and this could be as well due to banks not having yet drawn down their margin,'' Felsenheimer said.

Survival of Fittest

Carlyle said in a March 6 statement that margin prices requested for securities weren't ``representative of the underlying recoverable value'' of its securities. Lenders started to liquidate its portfolio of $22 billion of AAA rated mortgage debt issued by Fannie Mae and Freddie Mac.

``It's not a question of prime brokers deciding which firms live and which don't,'' said Odi Lahav, head of the European Alternate Investment Group at Moody's Investors Service in London. ``They're trying to manage their own risk. There's a Darwinian aspect to survivorship in this industry.''

Some managers set themselves up for a stumble by taking on too much leverage and not anticipating that terms could change, said Christopher Cruden, CEO of Lugano, Switzerland-based Insch Capital Management, which oversees $150 million for clients.

``If you're going to dance with the devil, there comes a time when your toes are going to be stepped on,'' Cruden said. ``Prime brokers are there to do business, not be your friend.''

To contact the reporter on this story: Tom Cahill in London at tcahill@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net

Last Updated: March 10, 2008 05:47 EDT

If you haven't seen the movie on Enron 'The Brightest Boys In The Room', do.It seems the 'ethics' [sic] of Enron was the rule and not the exception. The smoke is clearing and the mirrors cracking in the financial magic-show, it seems.

Listen and weep - no matter what your nationality or station in life....USA and Global Economic Meltdown has already begun,.....and ya 'ain't seen 'nothin' yet!......

http://www.kpfa.org/archives/index.php?arch=25261

Carlyle Capital Corp (CCC), the embattled hedge fund is on the brink of bankruptcy. It's parent Carlye Group, currently one of the largest private equity companies in the world, has apparently washed its hands of its subsidiary, saying it's a separate legal entity. Carlyle Group pumped approx. $150 million into CCC in recent days to help it pay increasing margin calls on its $16.6 billion debt.

CCC had leveraged borrowing of 31:1 -- in other words for every $1 it owned, it had borrowed $30. Large leverage entities in he past included the collapsed Long Term Capital Managment (LTCM) that ramped up a leverage ration in excess of 500:1.

Carlyle is sometimes known as the "Ex-Presidents Club" to reflect the power, clout and connections of its Board. Carlyle has a glittering array of ex-politicians and big league bankers on its board. Former secretary of state James Baker is managing director while ex-secretary of defence Frank Carlucci is chairman. George Bush senior is an adviser. John Major heads up its European operations. To give the conspiracy theorists plenty of ammunition, US newspapers have also highlighted the fact that current Defense Secretary Donald Rumsfeld was a wrestling partner of Carlucci's at Princeton and the two have remained close friends ever since. Add to this that former US President Poppy Bush is a Senior Advisor. Former Philippines president Fidel Ramos is an adviser, as is former Thai premier Anand Panyarachun - as well as former Bundesbank president Karl Otto Pohl, and Arthur Levitt, former chairman of the SEC, the US stock market regulator.

See for more:

http://www.reuters.com/article/wtMostRead/...350338420080313

and

http://www.guardian.co.uk/world/2001/oct/31/september11.usa4

The cynic in me considers that providing support of $150 million for its troubled subsidiary is little more than a token action directed towards maintaining its PR image and was not realistically a move to save the subsidiary from extinction. As Carlyle Group is privately owned it is difficult to judge the profits its subsidiary has generated for the parent over its life. All that need be said is that the parent owned 99.5% of the subsidiary.

There is a sense that hat we are seeing in the collapse of the leveraged market, is the end-game of a historic pump and dump play spanning the last decade (perhaps longer still). The pending collapse is now beginning to be likened by market commentators to the 1930's Wal Street Crash.

But where the are losers there are winners. And where there is a massive loss there is a massive gain.

Yet another major bank seems to have 'bit the dust'.....it really is a house of cards in a windstorm now....only real assets will come out the other end of this...all the 'paper' is going to be just.....paper.....and not even worth that.....

A major Wall Street investment bank, Baer Stearns is floundering:

http://ap.google.com/article/ALeqM5hiVtV2z...SfPTRgD8VD8TAG0

Dollar Drops on Trouble at Bear Stearns
5 hours ago
BERLIN (AP) — Another stunner from Wall Street on Friday sent the dollar to a record low as a major U.S. banker, Bear Stearns Cos., acknowledged it was in dire financial straits.
The euro traded for an all-time high $1.5657 surpassing a previous peak of $1.5625 that it hit on Wednesday.
A slight retrenchment by the dollar after a report showed that euro-zone inflation reached a hefty 3.3 percent in February was lost on the news from Bear Stearns.
The U.S. government and JPMorgan Chase & Co. bailed out Bear Stearns Cos. Friday, a last-ditch effort to save the investment bank after a week of denials that it was in trouble. JPMorgan Chase is providing secured funding to Bear for 28 days, backstopped by the Federal Reserve Bank of New York.
Bear Stearns lost half of its value within 30 minutes of the market open.
This week the dollar has repeatedly hit record lows against the euro, dropped below 100 yen for the first time in 12 years, and on Friday, the dollar fell below the Swiss franc for the first time ever.
The dollar is currently valued at 0.9996 francs on the Zurich exchange. In 1971, the U.S. dollar was worth four francs.
Ashraf Laidi, chief foreign exchange strategist for CMC Markets in New York, pointed to "speculation that the world's major central banks will mount coordinated intervention to stabilize the rout of the dollar."
"Considerable talk of possible coordinated intervention ... is making the market somewhat jittery about putting on additional short dollar trades" versus other major currencies, said Greg Anderson, currency strategist at ABN Amro in Chicago.
The dollar, which on Thursday fell below 100 Japanese yen for the first time since late 1995, again dipped as low as 99.85 yen Friday, but clawed back some ground and traded at 100.11 before noon.
The British pound rose to $2.0344 from the $2.0292 it bought in New York late Thursday.
The dollar has been weighed down by worries about the outlook for the U.S. economy, which in turn have fed expectations that the Federal Reserve will continue to lower interest rates.
Lower interest rates can jump-start a nation's economy, but can also weigh on its currency as traders transfer funds to countries where they can earn higher returns.
The European Central Bank has taken a tough anti-inflation stance and has shown no inclination so far to cut rates for the 15-nation euro zone.

Gold prices:

A word to the wise --- major British banks have placed an across the board ban on corporate lending and are looking for customer deposits. Interbank lending has effectively ceased because the cost of borrowing is too prohibitive. Anyone with liquidity problems is going down unless the government/Old Lady steps in with direct support.

I hope everyone with savings and investments is with one of the top three or four UK banks, because below the top tier is now dodge city.

I don't have any money anywhere so I suppose I'll be safe, hey, David?

Me too. No money, no worries.

But there are people out there, not wealthy by any means, who may be facing problems in the near future. I also have concerns for my family, of course, because a general collapse will be disastrous for the ordinary people while the very wealthy will just trot over to Antigua etc and weather the storm in luxury.

The $200 billion bail-out for predator banks and Spitzer charges are intimately linked

by Greg Palast


Global Research, March 14, 2008
GregPalast.com

While New York Governor Eliot Spitzer was paying an "escort" $4,300 in a hotel room in Washington, just down the road, George Bush's new Federal Reserve Board Chairman, Ben Bernanke, was secretly handing over $200 billion in a tryst with mortgage bank industry speculators.

Both acts were wanton, wicked and lewd. But there's a BIG difference. The Governor was using his own checkbook. Bush's man Bernanke was using ours.

This week, Bernanke's Fed, for the first time in its history, loaned a selected coterie of banks one-fifth of a trillion dollars to guarantee these banks' mortgage-backed junk bonds. The deluge of public loot was an eye-popping windfall to the very banking predators who have brought two million families to the brink of foreclosure.

Up until Wednesday, there was one single, lonely politician who stood in the way of this creepy little assignation at the bankers' bordello: Eliot Spitzer.

Who are they kidding? Spitzer's lynching and the bankers' enriching are intimately tied.

How? Follow the money.

The press has swallowed Wall Street's line that millions of US families are about to lose their homes because they bought homes they couldn't afford or took loans too big for their wallets. Ba-LON-ey. That's blaming the victim.

Here's what happened. Since the Bush regime came to power, a new species of loan became the norm, the "sub-prime" mortgage and it's variants including loans with teeny "introductory" interest rates. From out of nowhere, a company called "Countrywide" became America's top mortgage lender, accounting for one in five home loans, a large chuck of these "sub-prime."

Here's how it worked: The Grinning Family, with US average household income, gets a $200,000 mortgage at 4% for two years. Their $955 a month payment is 25% of their income. No problem. Their banker promises them a new mortgage, again at the cheap rate, in two years. But in two years, the promise ain't worth a can of spam and the Grinnings are told to scram - because their house is now worth less than the mortgage. Now, the mortgage hits 9% or $1,609 plus fees to recover the "discount" they had for two years. Suddenly, payments equal 42% to 50% of pre-tax income. Grinnings move into their Toyota.

Now, what kind of American is "sub-prime." Guess. No peeking. Here's a hint: 73% of HIGH INCOME Black and Hispanic borrowers were given sub-prime loans versus 17% of similar-income Whites. Dark-skinned borrowers aren't stupid - they had no choice. They were "steered" as it's called in the mortgage sharking business.

"Steering," sub-prime loans with usurious kickers, fake inducements to over-borrow, called "fraudulent conveyance" or "predatory lending" under US law, were almost completely forbidden in the olden days (Clinton Administration and earlier) by federal regulators and state laws as nothing more than fancy loan-sharking.

But when the Bush regime took over, Countrywide and its banking brethren were told to party hardy - it was OK now to steer'm, fake'm, charge'm and take'm.

But there was this annoying party-pooper. The Attorney General of New York, Eliot Spitzer, who sued these guys to a fare-thee-well. Or tried to.

Instead of regulating the banks that had run amok, Bush's regulators went on the warpath against Spitzer and states attempting to stop predatory practices. Making an unprecedented use of the legal power of "federal pre-emption," Bush-bots ordered the states to NOT enforce their consumer protection laws.

Indeed, the feds actually filed a lawsuit to block Spitzer's investigation of ugly racial mortgage steering. Bush's banking buddies were especially steamed that Spitzer hammered bank practices across the nation using New York State laws.

Spitzer not only took on Countrywide, he took on their predatory enablers in the investment banking community. Behind Countrywide was the Mother Shark, its funder and now owner, Bank of America. Others joined the sharkfest: Goldman Sachs, Merrill Lynch and Citigroup's Citibank made mortgage usury their major profit centers. They did this through a bit of financial legerdemain called "securitization."

What that means is that they took a bunch of junk mortgages, like the Grinnings, loans about to go down the toilet and re-packaged them into "tranches" of bonds which were stamped "AAA" - top grade - by bond rating agencies. These gold-painted turds were sold as sparkling safe investments to US school district pension funds and town governments in Finland (really).

When the housing bubble burst and the paint flaked off, investors were left with the poop and the bankers were left with bonuses. Countrywide's top man, Angelo Mozilo, will "earn" a $77 million buy-out bonus this year on top of the $656 million - over half a billion dollars - he pulled in from 1998 through 2007.

But there were rumblings that the party would soon be over. Angry regulators, burned investors and the weight of millions of homes about to be boarded up were causing the sharks to sink. Countrywide's stock was down 50%, and Citigroup was off 38%, not pleasing to the Gulf sheiks who now control its biggest share blocks.

Then, on Wednesday of this week, the unthinkable happened. Carlyle Capital went bankrupt. Who? That's Carlyle as in Carlyle Group. James Baker, Senior Counsel. Notable partners, former and past: George Bush, the Bin Laden family and more dictators, potentates, pirates and presidents than you can count.

The Fed had to act. Bernanke opened the vault and dumped $200 billion on the poor little suffering bankers. They got the public treasure - and got to keep the Grinning's house. There was no "quid" of a foreclosure moratorium for the "pro quo" of public bail-out. Not one family was saved - but not one banker was left behind.

Every mortgage sharking operation shot up in value. Mozilo's Countrywide stock rose 17% in one day. The Citi sheiks saw their company's stock rise $10 billion in an afternoon.

And that very same day the bail-out was decided - what a coinkydink! - the man called, "The Sheriff of Wall Street" was cuffed. Spitzer was silenced.

Do I believe the banks called Justice and said, "Take him down today!" Naw, that's not how the system works. But the big players knew that unless Spitzer was taken out, he would create enough ruckus to spoil the party. Headlines in the financial press - one was "Wall Street Declares War on Spitzer" - made clear to Bush's enforcers at Justice who their number one target should be. And it wasn't Bin Laden.

It was the night of February 13 when Spitzer made the bone-headed choice to order take-out in his Washington Hotel room. He had just finished signing these words for the Washington Post about predatory loans:

"Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which he federal government was turning a blind eye."

Bush, said Spitzer right in the headline, was the "Predator Lenders" Partner in Crime." The President, said Spitzer, was a fugitive from justice. And Spitzer was in Washington to launch a campaign to take on the Bush regime and the biggest financial powers on the planet.

Spitzer wrote, "When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners the Bush administration will not be judged favorably."

But now, the Administration can rest assured that this love story - of Bush and his bankers - will not be told by history at all - now that the Sheriff of Wall Street has fallen on his own gun.

A note on "Prosecutorial Indiscretion."

Back in the day when I was an investigator of racketeers for government, the federal prosecutor I was assisting was deciding whether to launch a case based on his negotiations for airtime with 60 Minutes. I'm not allowed to tell you the prosecutor's name, but I want to mention he was recently seen shouting, "Florida is Rudi country! Florida is Rudi country!"

Not all crimes lead to federal bust or even public exposure. It's up to something called "prosecutorial discretion."

Funny thing, this "discretion." For example, Senator David Vitter, Republican of Louisiana, paid Washington DC prostitutes to put him diapers (ewww!), yet the Senator was not exposed by the US prosecutors busting the pimp-ring that pampered him.

Naming and shaming and ruining Spitzer - rarely done in these cases - was made at the "discretion" of Bush's Justice Department.

Or maybe we should say, 'indiscretion.'

Greg Palast, former investigator of financial fraud, is the author of the New York Times bestsellers Armed Madhouse and The Best Democracy Money Can Buy.

Fascinating. Interesting that it was a bank watching his financial transactions and thinking them odd that put him in to the authorities. Pity they didn't pay as much attention to the other odd transactions taking place around them.

As to the whole sub-prime thing why don't they let the market sort this out? So what if a few banks go under? Let the strong survive. Let those that can't compete go the way of the dinosaur. The system will be better for it. Isn't that how it works? Never again can the government say that there is not enough money for anything else like education, health, environment if they are prepared to throw billions/trillions into this black hole.

The Huffington Post

US Economy Beset By Problems

March 15, 2008 10:02 AM

From the fallout over the subprime disaster to the credit crisis to rising gas prices to unease on Wall Street, the US economy looks increasingly shaky and possibly on the brink of a recession.

Bear Stearns Bailout: On Friday the Federal Reserve, looking to head off a financial crisis, implemented a dramatic rescue of faltering Wall St. giant Bear Stearns. The Washington Post reports:
The Federal Reserve took the extraordinary step yesterday of providing emergency funding to one of Wall Street's venerable firms, Bear Stearns, after it ran out of cash to repay its lenders.


The Fed used a little-known power it last exercised in the 1960s to stem a run on Bear Stearns that could have sent multibillion-dollar losses cascading across the world financial system, causing more failures on Wall Street and threatening to choke off global economic growth.[...]

Critics characterized the Fed's move as a bailout that inappropriately intrudes on the free market and could lead banks to keep taking risks like those that imperiled Bear Stearns. Other analysts said the action was necessary, given the precarious state of world financial markets.

"We're on a knife's edge," said Eugene White, an economics professor at Rutgers University who studies financial crises. "The danger is if people's confidence is lost in a place like Bear Stearns, no one will lend to anybody."

Market Stumbles: The Bear Stearns bailout failed to stabilize Wall St., with the market tumbling Friday, the AP notes:
Wall Street plunged anew Friday after a near meltdown at Bear Stearns Cos. handed investors the unwelcome confirmation that the credit market's troubles are far from over. Word that the investment bank needed rescuing touched off a wave of selling that left each of the major indexes down more than 1.5 percent on the day; the Dow Jones industrial average fell nearly 200 points.

More Interest Rate Cuts Expected: The AP reports that Tuesday could see further action from the Federal Reserve:
Desperate to aid an economy in crisis, the Federal Reserve is ready to deliver yet another big interest rate cut.


How big? One-half of a percentage point, some economists say. Investors and others hope for even more, a three-quarters cut or perhaps a full point, given the turmoil on Wall Street. It will be a close call, Fed watchers say.

Gold Prices: On Thursday gold prices passed the $1,000 mark.
The metal peaked at $1,005 a troy ounce before noon. It fell back by day's end, with the June contract settling at $998.70, its highest nominal close, but below its inflation-adjusted peak, reached in the early 1980s after a series of wars, oil shocks and a deep domestic recession.

Gas, Diesel Prices Reach Record High: From the AP:
At the pump, gas prices set records for the fourth straight day, rising 1.3 cents Friday to a national average price of $3.28 a gallon, according to AAA and the Oil Price Information Service. Average prices are nearing $4 in some parts of Hawaii.


Diesel, meanwhile, rose 2.9 cents to a new record national average of $3.938 a gallon. Heating oil, a fellow distillate and close cousin of diesel, jumped to new records on the New York Mercantile Exchange.

Grocery Inflation: The New York Times reports that the price of food is surging:
Government figures released Friday showed that grocery costs had jumped 5.1 percent in 12 months, the latest in a string of increases. In fact, the nation is undergoing its worst grocery inflation since the early 1990s.


With a few exceptions, nearly every grocery category measured by the Labor Department, which compiles the official inflation numbers, has increased in the last year. Milk is up 17 percent, as are dried beans, peas and lentils. Cheese is up 15 percent, rice and pasta 13 percent, and bread 12 percent.

No food product has gone up as much as eggs, jumping 25 percent since February 2007 and 62 percent in the last two years.

n destruction?

A Vote for Clinton is a vote for more of the same. Vote for her at your peril.
Reply Favorite Flag as abusive Posted 10:22 PM on 03/15/2008
yappnmutt See Profile I'm a Fan of yappnmutt

think of it as the new europe as opposed to the old europe. the US has recreated the system that caused the revolution against the king. the USA is the new aristocracy. the president is a rotating king with his(her hasn't been there yet) court (and courtesans) administering his kingdom through his network of nobles and their vassals sharing the bounty of the merchant class while extorting taxes and profits from the peasant class while using the church and military to enforce the peoples' allegiance to god and king. every four years a charade of a parade of promises is spread across the land as a ritual exercise in hope for the people. somewhere around june of 09 we will realize we have been had again.
Reply Favorite Flag as abusive Posted 11:11 PM on 03/15/2008
bikerdude See Profile I'm a Fan of bikerdude

Look to that small band of "have mores" who support bush and his corporatist cronies. They are profiting and we are losing. The corporatist are the new welfare queens. And look what they have been permitted to do to us.
Reply Favorite Flag as abusive Posted 08:57 PM on 03/15/2008
CompashCat See Profile I'm a Fan of CompashCat

I'm having a very uncomfortable feeling about this, how 'bout you? This one feels different than the recessions we've had in recent decades. I don't know how the US is going to be able to rebound from an economic downturnnow, since we don't really produce or manufacture much anymore.

Plus, there is the whole reality that our modern way of life is without debate UNSUSTAINABLE, and the number of people on the planet is literally jaw-dropping when you think about it (scientists say that 2 billion people would be sustainable - we have over 7 billion). If you look at our situation from a distance, it would be hard to argue that human civilization on this planet is in for a mighty big shake up at some point. There simply is no way we can burn this much oil, extract this many resources at this speed, ship all these billions of goods all around the globe, and expect stability and affluence until the end of time. Soooo, maybe that mighty big shake up is starting to happen now?
Reply Favorite Flag as abusive Posted 08:40 PM on 03/15/2008
GrouchyJim See Profile I'm a Fan of GrouchyJim

This should be expected. The US is currently a gigantic Bear Stearns. A run on the US from foreign investors will ruin us. We can thank the profligate borrow and spenders in the Bush administration and their congressional enablers. We are hanging by a thread. The question is can we fail with grace or does some fool launch.
Reply Favorite Flag as abusive Posted 08:36 PM on 03/15/2008
iratior See Profile I'm a Fan of iratior

It's very simple: if the Bush administration's economic policies were as wonderful as its defenders maintain, we wouldn't be hearing all this bad news. I suspect that there are plenty of economists out there who could give very good explanations of what is going wrong and very good prescriptions for correcting it, but they can't speak out because their analysis is not, as it were, "ideologically correct". I fault the Bush administration for 1) failing to encourage the development of alternative energy sources so we wouldn't be so dependent on foreign oil, 2) changing the bankruptcy laws in ways that favored creditors so much it's no wonder there are so many mortgage foreclosures, 3) running up the government debt by the war in Iraq, 4) failing to keep the infrastructure in good repair, so we wind up with disasters such as the collapse of the bridge in Minnesota, and 5) letting New Orleans be vulnerable to a natural disaster such as Hurricane Katrina. I'm not an expert on economics but it stands to reason that these failures couldn't have done the economy any good.
Reply Favorite Flag as abusive Posted 08:35 PM on 03/15/2008
liveandlearn See Profile I'm a Fan of liveandlearn

right on!
Reply Favorite Flag as abusive Posted 09:33 PM on 03/15/2008
helonias See Profile I'm a Fan of helonias

The house of cards is falling and the chimpster tells us everything is hunky dory
Reply Favorite Flag as abusive Posted 08:18 PM on 03/15/2008
SmootyBooty See Profile I'm a Fan of SmootyBooty

Me too...
Reply Favorite Flag as abusive Posted 08:12 PM on 03/15/2008
andyg See Profile I'm a Fan of andyg

is this a news story or commentory.
Reply Favorite Flag as abusive Posted 08:10 PM on 03/15/2008
Impeachthechimp See Profile I'm a Fan of Impeachthechimp

One thing you won't hear in the news media is the reason for all this. At the end of the day this was a FAILURE TO REGULATE. Is there any doubt why? Republicans don't believe in regulation. They sure do seem to like corruption and financial disasters, though. Is there any doubt gangsters don't want anyone looking over their shoulders why they commit crimes?
Reply Favorite Flag as abusive Posted 07:49 PM on 03/15/2008
babyboomerorig See Profile I'm a Fan of babyboomerorig

I've been waiting for this economy to tank for the past 4 years or so. Bush cut taxes when he took us to war. All my friends and neighbors are working 2 jobs each to stay above water.

Since gas and food were taken out of the inflation rate, nobody seems to realize that our food prices have doubled over the past 2 years. I know a lot of that is due to rising gas prices and with diesel being 50 cents higher than regular gas, it's just made matters worse. Last fall I paid $0.99 for an item and yesterday the same item was $1.67

This President hasn't even noticed that people were working 2 jobs at less pay, didn't care that many had given up on even looking for work outside the home, took credit for the housing boom 4 years ago that anyone with a brain knew would go south faster than melted butter and now blames the housing industry for the recession...definitely not the lending institutions who took advantage of the system or those who bought homes never intending to live in them, just walked away. Oh, yeah, there's the health care system, which really has gotten totally out of hand. This is another area that those of us who were insured before the HMO's of the world existed, knew we'd be in this situation one day.

In many European countries, citizens pay 50% taxes on their income. Sounds outrageous, doesn't it? Well, they have free education through college (how much do you pay for your kidnergarten student to go to school?) There is free medical coverage from birth to grave. They pay less than half what we do for medication that comes from this country. Why?? Because those "old European" countries were smart enough to make deals with the pharmecuticals when buying in massive quantities. We can pay up to 5000x what it costs to make a medication. How much would you save if you didn't have to pay for medical coverage? I know it used to cost me a week's salary.

We are driving ourselves to early graves with all this stuff. Nobody really has time off to relax. The rest of the world laughs at us and we think we're the greatest thing since sliced bread.

Our companies have moved overseas and blame countries like China for sending back leaded painted toys...where were OUR management people who were supposed to be looking after their tax free companies? Many European countries are now considering out sourcing their plant facilities to the US because it's cheaper to do business over here. How's that for a turn-around?

Like Grandma said...what goes around comes around.
Reply Favorite Flag as abusive Posted 07:38 PM on 03/15/2008
shaefromTn See Profile I'm a Fan of shaefromTn

And I see our idiot an chief doing a tap dance in front of the white house!!!!
Showing his pain for the American people I suppose!
Reply Favorite Flag as abusive Posted 07:33 PM on 03/15/2008
gonnuts See Profile I'm a Fan of gonnuts

Get ready folks the implosion is here. By this time next year we'll be so deep into a depression that all the current problems you have now will seem trite.
Reply Favorite Flag as abusive Posted 06:47 PM on 03/15/2008
Harrier See Profile I'm a Fan of Harrier

I believe this economy is in a far worse situation than earlier when his President originally took office. i say this because I doen't see anything the fed does an all the tools it has seems to be to little too late. This needs to years to shake out
Reply Favorite Flag as abusive Posted 06:44 PM on 03/15/2008
eagleva See Profile I'm a Fan of eagleva

This is most definetely a REPUBLICON led recession. Their needless war in Iraq has cost and will cost needless generations of Americans (if such a country exists in 100 years) trillions in taxes. Many promised programs will have to be cut, gutted, scrapped. But again, maybe a meltdown is what this country needs. Maybe this country does need a 'do over'.

After the UK government baled out Northern Rock to the tune of almost £60 billion, they set out to enact legislation to "rescue" other banks in trouble in secret -- thus avoiding the public interest from watching their hard earned tax pounds being pumped into the coffers of the already wealthy.

This is how the system works. That is why we have the sham of democracy. To make it seem that we are being served when, in reality, we are being raped.

It thought Pallast bang on when he said that:

Quote:

The press has swallowed Wall Street's line that millions of US families are about to lose their homes because they bought homes they couldn't afford or took loans too big for their wallets. Ba-LON-ey. That's blaming the victim.

Unquote

Blaming the victim. Ergo, the prisons of the US and Uk are overflowing with drug users and those bust for drug related crimes --- but the global narcotics industry remains in superb fettle. As always. That's punishing the victim. And this formulae can be see in action across the board.

Please move if off topic but what ever happened to the legal heroin available by prescription in the UK at one time? Or is it no longer available? What about the status other drugs - cocaine, amphetamines etc?

But THAT is the underlying game of the Oligarcy: To lie, and to blame the victim; in a sick game to rob those who work hard of their little funds and posessions so that those who don't work at all can have more.....Basta! I'd like to see real democracy and a progressive tax that makes it impossible for the ultra-rich!
That will take a revolution in thinking, and a bottom-up struggle. We have little time, but we now  have all the information we ever coul

want - the top-down models have all failed - as they only could have for the majority, as they were control systems for the Elites to exploit the Demos. New models are called for. They exist - thought the Oligarchy won't let you know that. Read [as one example] the book The Great Turning. There are others. Those stuck in the old system are supporting it, whether you realize it or not. We need not to change the direction of the ships of state..but to sink them and replace them with new ones that provide safe passage for all...not just the Elites. I'm so disgusted with my species. Yes, a few have created the horrors - throughout time - but the many have all too often gone along with it. Those educated and somewhat affluent who go along with this are IMO the most guilty of the blame....'house slaves' glad they are not in the 'field' - but still slaves and appologists for the fascist elite robbing all blind and taking away their Natural Rights and possibilites.

Maybe we should just trot over there and bring them home on the business end of a pitchfork. I'm up for it.

Radical view of the fictive money meltdown and the Corporate and Banking Soupline with 'Public Risk - Private Gain = Socializing Risk & Privitizing Gain'
http://takingaimradio.com/m3u/takingaim080318.m3u

Speculative Onslaught. Crisis of the World Financial System: The Financial Predators had a Ball
Financial Tsunami, Part V

by F. William Engdahl


Global Research, February 23, 2008


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Colossal Collateral Damage

The multi-trillion dollar US-centered securitization debacle began to unravel in June 2007 with the liquidity crisis in two hedge funds owned by Bear Stearns, one of the world’s largest and most successful investment banks. The funds were heavily invested in sub-prime mortgage securities. The damage soon spread across the Atlantic to a little-known German state-owned bank, IKB. In July 2007, IKB’s wholly-owned conduit, Rhineland Funding, had approximately €20 billion of Asset Backed Commercial Paper (ABCP). In mid-July, investors refused to rollover part of Rhineland Funding’s ABCP. That forced the European Central Bank to inject record volumes of liquidity into the market to keep the banking system liquid.

Rhineland Funding asked IKB to provide a credit line. IKB revealed it didn’t have enough cash or liquid assets to meet the request of its conduit, and was only saved by an emergency €8 billion credit facility provided by its state-owned major shareholder bank, the Kreditanstalt für Wiederaufbau, ironically the bank which led the Marshall Plan reconstruction of war-torn Germany in the late 1940’s. It was soon to become evident to the world that a new Marshall Plan, or some financial equivalent, was urgently needed for the United States economy; however, there were no likely donors stepping up to the plate this time.

The intervention of KfW, rather than stopping the panic, led to reserve hoarding and to a run on all commercial paper issued by international banks’ off-books Structured Investment Vehicles (SIVs).

Asset Backed Commercial Paper was one of the big products of the asset securitization revolution fostered by Greenspan and the US financial establishment. They were the stand-alone creations of the major banks, set up to get risk off the bank’s balance sheet.

The SIV would typically issue Commercial Paper securities backed by a flow of payments from the cash collections received from the conduit’s underlying asset portfolio. The ABCP was a short-term debt, generally no more than 270 days. Crucially, they were exempt from the registration requirements of the US Securities Act of 1933. ABCPs were typically issued from pools of trade receivables, credit card receivables, auto and equipment loans and leases, and collateralized debt obligations.

In the case of IKB in Germany, the cash flow was supposed to come from its portfolio of sub-prime US home mortgages, mortgage backed Collateralized Debt Obligations (CDOs). The main risk faced by ABCP investors was asset deterioration—that the individual loans making up the security default—precisely what began to cascade through the US mortgage markets during the summer of 2007.

The problem with CDOs was that once issued, they were rarely traded. Their value, rather than being market-driven, were based on complicated theoretical models.

When CDO holders around the world last summer suddenly and urgently needed liquidity to face the market sell-off, they found the market value of their CDOs was far below book value. So, instead of generating liquidity by selling CDOs, they sold high-quality liquid blue chip stocks, government bonds, precious metals.

That simply meant the CDO crisis led to a loss of value in both CDOs and stocks. The drop in price of equities triggered contagion to hedge funds. That dramatic price collapse wasn’t predicted by the theoretical models built into quantitative hedge funds and led to large losses in that part of the market, led by Bear Stearns’ two in-house hedge funds. Major losses by leading hedge funds further fed increasing uncertainty and amplified the crisis.

That was the beginning of colossal collateral damage. The models all broke down.

Lack of transparency was at the root of the crisis that had finally and inevitably erupted in mid-2007. That lack of transparency was due to the fact that instead of spreading risk in a transparent way as foreseen by accepted economic theory, market operators chose ways to "securitize" risky assets by promoting high-yielding, high-risk assets, without clearly marking their risk. Additionally, credit-rating agencies turned a blind eye to the inherent risks of the products. The fact that they were rarely traded meant even the approximate value of these structured financial products was not known.

Ignoring lessons from LTCM

With that collapse of confidence among banks in the international inter-bank market, the heart of global banking and which trades in Asset Backed Commercial Paper, the banking system stared a systemic crisis in the face. A crisis now threatened of a domino collapse of banks akin to that in Europe in 1931, when the French banks for political reasons pulled the plug on the Austrian Creditanstalt. Greenspan’s New Finance was at the heart of the new instability. It was his Age of Turbulence, to parody the title of his ghost-written autobiography.

The world financial system had faced a systemic crisis threat as recently as the September 1998 collapse of the Long-Term Capital Management (LTCM) hedge fund in Greenwich, Connecticut. Only extraordinary coordinated central bank intervention then, led by Greenspan’s US Federal Reserve, prevented a global meltdown.

That LTCM crisis contained the seed crystal of all that is going wrong with the multi-trillion dollar asset securitization markets today. Curiously, Greenspan and others in positions of responsibility systematically refused to take those lessons to heart.

The nominal trigger of the LTCM crisis was an event not foreseen in the hedge fund’s risk model. Its investment strategies were based on what they felt was a predictable mild range of volatility in foreign currencies and bonds based on data from historical trading experience. When Russia declared it was devaluing its rouble currency and defaulting on its Russian state bonds, the risk parameters of LTCM’s risk models were literally blown out of the water, and LTCM with it. Sovereign debt default was an event that was not "normal."

Unlike the risk assumptions of every risk model used by Wall Street, the real world was also not normal, but rather highly unpredictable.

To cover their losses LTCM and its banks began a panic sell-off of anything it could liquidate, triggering panic selling by other hedge funds and banks to cover exposed positions. In response, the US stock market dropped 20%, while European markets fell 35%. Investors sought safety in US Treasury bonds, causing interest rates to drop by over a full point. As a result, LTCM’s highly leveraged investments started to crumble. By the end of August 1998, it lost 50% of the value of its capital investments.

In the summer of 1997 amid the hedge fund-led attacks on the vulnerable currencies of Thailand, Indonesia, Malaysia and other Asian high-growth "Tiger" economies, Malaysia’s Prime Minister Mahathir Mohamad openly called for greater international control on the murky speculation of hedge funds. He named the name of one of the largest involved in the Asian attacks, George Soros’ Quantum Fund. Because of US pressure from the Treasury Department by Secretary Robert Rubin, the former head of Goldman Sachs, and from the Greenspan Fed, no oversight of opaque offshore hedge funds was ever undertaken. Instead they were let to grow into funds holding more than $1.4 trillion in assets by 2007.

Fatally flawed risk models

The point about that LTCM crisis that rocked the foundations of the global finance system, was who was involved and what economic assumptions they used—the very same fundamental assumptions used to construct the deadly-flawed risk models of the asset securitization debacle.

At the beginning of 1998, LTCM had capital of $4.8 billion, a portfolio of $200 billion, built from its borrowing capacity or credit lines loaned from all the major US and European banks hungry for untold gains from the successful fund. LTCM held derivatives with a notional value of $1,250 billion. That is one unregulated, offshore hedge fund held a portfolio of options and other financial derivatives nominally worth one and a quarter trillion dollars. Nothing of that scale had ever before been dreamed of. The dream rapidly turned into a nightmare.

In the argot of Wall Street, LTCM was a highly geared fund, unbelievably high. One of its investors was the Italian central bank, so awesome was the fund’s reputation. The major global banks who had poured their money into LTCM hoping to coattail the success and staggering profits included Bankers Trust, Barclays, Chase, Deutsche Bank, Union Bank of Switzerland, Salomon Smith Barney, J.P.Morgan, Goldman Sachs, Merrill Lynch, Crédit Suisse, First Boston, Morgan Stanley Dean Witter; Société Générale; Crédit Agricole; Paribas, Lehman Brothers. Those were the very banks that were to emerge less than a decade later at the heart of the securitization crisis in 2007.

Speaking to press at the time, US Treasury Secretary Rubin declared, "LTCM was a single isolated instance in which the judgment was made by the Federal Reserve Bank of New York that there were possible systemic implications of a failure, and what they did was to organize or bring together a group of private sector institutions which then made a judgment of what was in their economic self interest."

The source of the awe over LTCM was the "dream team" who ran it. The fund’s CEO and founder was John Meriwether, a legendary trader who had left Salomon Brothers following a scandal over purchase of US Treasury bonds. That hadn’t dented his confidence. Asked whether he believed in efficient markets, he once modestly replied, "I MAKE them efficient." The fund’s principal shareholders included the two eminent experts in the "science" of risk, Myron Scholes and Robert Merton. Scholes and Merton had been awarded the Nobel Prize for economics in 1997 for their work on derivatives by the Swedish Academy of Sciences. LTCM also had a dazzling array of professors of finance, doctors of mathematics and physics and other "rocket scientists" capable of inventing extremely complex, daring and profitable financial schemes.

Black-Scholes, fundamental flaws and risk models


The Federal Reserve

There was only one flaw. Scholes’ and Mertons’ fundamental axioms of risk, the assumptions on which all their models were built, were wrong. They had been built on sand, fundamentally and catastrophically wrong. Their mathematical options pricing model assumed that there were Perfect Markets, markets so extremely deep that traders' actions could not affect prices. They assumed that markets and players were rational. Reality suggested the opposite—markets were fundamentally irrational in the long-term. But the risk pricing models of Black, Scholes and others over the past two or more decades had allowed banks and financial institutions to argue that traditional lending prudence was old fashioned. With suitable options insurance, risk was no longer a worry. Eat, drink and be merry...

That, of course, ignored actual market conditions in every major market panic since Black-Scholes model was introduced on the Chicago Board Options Exchange. It ignored the fundamental role of options and ‘portfolio insurance’ in the Crash of 1987; it ignored the causes of the panic that in 1998 brought down Long Term Capital Management – of which Scholes and Merton were both partners. Wall Street blissfully ignored the obvious along with the economists and governors in the Greenspan Fed.

Financial markets, contrary to the religious dogma taught at every business school since decades, were not smooth, well-behaved models following the Gaussian Bell-shaped Curve as if it were a law of the universe. The fact that the main architects of modern theories of financial engineering—now given the serious-sounding name ‘financial economics’—all got Nobel prizes, gave the flawed models the aura of Papal infallibility. Only three years after the 1987 crash the Nobel Committee in Sweden gave Harry Markowitz and Merton Miller the prize. In 1997 amid the Asia crisis, it gave the award to Robert Merton and Myron Scholes.

The most remarkable aspect of the incompetent risk models in use since the origins of financial derivatives in the 1980’s, through to the explosive growth of asset securitization in the last decade, was how little they were questioned.

LTCM had ace Wall Street investment bankers, two Nobel Prize economists who literally invented the theory of pricing derivatives on everything from stocks to currencies. To top its all-star LTCM lineup, David Mullins, the former vice-chairman of the Federal Reserve Board under Alan Greenspan quit his job with the Maestro to become a partner at LTCM. Despite all this, the traders at LTCM and those who followed them to the edge of the financial abyss in August 1998 did not have a hedge against the one thing they now confronted—systemic risk. Systemic risk was precisely what they confronted once an "impossible event," the Russian state default, had occurred.

Despite the clear lessons from the harrowing LTCM debacle—there is no derivative that insures against systemic risk—Greenspan, Rubin and the New York banks continued to build their risk models as if nothing had taken place. The Russian sovereign default was dismissed as a "once in a Century event." They were moving on to build the dot.com bubble and, in the aftermath, the greatest financial bubble in human history—the asset securitization bubble of 2002-2007.

Life is no Bell Curve

Risk and its pricing did not behave like a bell-shaped curve, not in financial markets any more than in oilfield exploitation. In 1900 an obscure French mathematician and financial speculator, Louis Bachelier, argued that price changes in bonds or stocks followed the bell-shaped curve that the German mathematician, Carl Friedrich Gauss, devised as a model to map statistical probabilities for various events. Bell curves assumed a mild form of randomness in price fluctuations, just as the standard I.Q. test by design defines 100 as "average," the center of the bell. It was a kind of useful alchemy, but still alchemy.

That assumption that financial price variations behaved fundamentally like the bell curve allowed Wall Street Rocket Scientists to roll out an unending stream of new financial products each more arcane and complex than the previous. The theories were modified. The "Law of Large Numbers" was added to say that when the number of events becomes sufficiently large, like flips of a coin or rolls of die, the value converges on a stable value over the long term. The Law of Large Numbers, which in reality was no scientific law at all, allowed banks like Citigroup or Chase to issue hundreds of millions of Visa cards without so much as a credit check, based on data showing that in "normal" times defaults on credit cards were so rare as not to be worth considering.

The problems with models based on bell curve distributions or laws of large numbers arose when times were not normal, such as a steep economic recession of the sort the United States economy today is beginning to experience, a recession comparable perhaps only to that of 1931-1939.

The remarkable thing was that America’s academic economists and Wall Street investment bankers, Federal Reserve governors, Treasury secretaries, Sweden’s Nobel Economics Prize judges, England’s Chancellors of the Exchequer, her High Street bankers, her Court of the Bank of England, to name just the leading names, all were willing to turn a blind eye to the fact that economic theory, theories of market behavior, theories of derivative risk pricing, were incapable of predicting, let alone preventing, non-linear surprises. It was incapable of predicting bursting of speculative bubbles, not in October 1987, not in February 1994, in March 2002, and most emphatically not since June 2007. It couldn’t because the very model created the conditions that led to the ever larger and more destructive bubbles in the first place. Financial Economics was but another word for unbridled speculative excess.

A theory incapable of explaining such major, defining surprise events, despite Nobel prizes, was not worth the paper it was written on. Yet the US Federal Reserve Governors—above all Alan Greenspan, US Treasury secretaries, above all Robert Rubin and Lawrence Summers and Henry Paulsen—prevailed to make sure that Congress never lay a legislative or regulatory hand on the exotic financial instruments that were being created, created based on a theory that was utterly irrelevant to reality.

On September 29, 1998, Reuters reported, "any attempt to regulate derivatives, even after the collapse—and rescue—of LTCM have not met with success. The CFTC (the government agency with nominal oversight over derivatives trading-w.e.) was barred from expanding its regulation of derivatives under language approved late on Monday by the US House and Senate negotiators. Earlier this month the Republican chairmen of the House and Senate Agriculture Committees asked for the language to limit the CFTC's regulatory authority over over-the-counter derivatives echoing industry concerns." Industry of course meant the big banks.

Reuters added that "when the initial subject of regulation was broached by the CFTC both Fed chairman, Alan Greenspan, and Treasury Secretary Rubin leapt to the defense of the industry claiming that the industry did not need regulation and that to do so would drive business overseas."

The combination of relentless refusal to allow regulatory oversight of the explosive new financial instruments from Credit Default Swaps to Mortgage Backed Securities and the myriad of similar exotic "risk-diffusing" financial innovations and the 1999 final repeal of the Glass-Steagall Act strictly separating securities dealing banks from commercial lending banks opened the way for what in June 2007 began as the second Great Depression in less than a century. It began what future historians will describe as the final demise of the United States as the dominant global financial power.

Liars’ Loans and NINA: Banks in an orgy of fraud

The lessons of the 1998 Russia default and the LTCM systemic crisis were forgotten within weeks by the major players of the New York financial establishment. Flanked by MBA whiz kid ‘rocket scientist’ analysts, bell curve models and fatally flawed risk models, the financial giants of the US banking world launched a wave of mega-mergers and began to create ingenious ways of getting lending risk off their books. That opened the doors to the greatest era of corporate and financial fraud in world history, the asset securitization bonanza.

With Glass-Steagall finally repealed in late 1999, at the urgings of Greenspan and Rubin, banks were now free to snatch up rivals across the spectrum from insurance companies to consumer credit or finance houses. The landscape of American banking underwent a drastic change. The asset securitization revolution was ready to be launched.

With Glass-Steagall gone, now only bank holding companies and subsidiary pure lending banks were directly monitored by the Federal Reserve. If Citigroup opted to close its Citibank branch in a sub-prime neighborhood and instead have a new wholly-owned subsidiary, CitiFinancial, which specialized in sub-prime lending, work the area, CitiFinancial could operate under entirely different and lax regulation.

CitiFinancial issued mortgages separately from Citibank. Consumer groups accused CitiFinancial of specializing in "predator loans" in which unscrupulous mortgage brokers or salesmen would push a loan on a family or person far beyond his comprehension or capacity to handle the risks. And Citigroup was only typical of most big banks.

On January 8, 2008 Citigroup announced with great fanfare publication of its consolidated "US residential mortgage business," including mortgage origination, servicing and securitization. Curiously, the statement omitted CitiFinancial, the subsidiary with the most risk.


Basle I loopholes

The driver pushing the banks towards securitization and the proliferation of off-balance-sheet risks including highly leveraged derivatives positions was the 1987 Basle Bank for International Settlements Capital Adequacy Accord, known today as Basle I. That agreement among the central banks of the world’s largest economies required banks to set aside 8% of a normal commercial loan as reserve against possible future default. The then-new innovation of financial derivatives were not mentioned in Basle I on US insistence.

The Accord originally had been intended by Germany’s ultra-conservative Bundesbank and other European central banks to rein in the more speculative Japanese and US bank lending which had led to the worst banking crisis since the 1930’s. The original intent of the Basle Accord was to force banks to reduce lending risk. The actual effect for US banks was just the opposite. They soon discovered a gaping loophole—off-balance-sheet transactions, notably derivatives positions and securitization. Because they were left out of Basle I banks need not set aside any capital to cover potential losses.

The elegance of securitization of loans such as home mortgages for the issuing bank was that they could take the loan or mortgage and immediately sell it on to a securitizer or underwriter who bundled hundreds of such loans into a new Asset Backed Security. This seemingly genial innovation was far more dangerous than it sounded. Lending banks no longer needed to carry a mortgage loan on its books for 20-30 years as was traditional. They sold it on at a discount and used the cash to turn the next round of credit issuing.

That meant as well that the lending bank now no longer had to worry if the loan would ever be repaid.

Fraud a la mode

It didn’t take long before lending banks across the United States realized they were sitting on a bonanza bigger than the California gold rush. With no worry about whether a borrower of a home mortgage, say, would be able to service the debt for the next decades, banks realized they made money on pure loan volume and resell to securitizers.

Soon it became commonplace for banks to outsource their mortgage lending to free-lance brokers. Instead of doing their own credit checks they relied, often exclusively, on various online credit questionnaires, similar to the Visa card application where no follow-up was done. It became common practice for mortgage lenders to offer brokers bonus incentives to bring in more signed mortgage loan volume, another opportunity for massive fraud. The banks got more gain from making high volumes of loans then selling for securitization. The world of traditional banking was being turned on its head.

As the bank no longer had an incentive to assure the solidity of a borrower through minimum cash down payments and exhaustive background credit checks, many US banks, simply to churn loan volume and returns, gave what they cynically called "Liars’ Loans." They knew the person was lying about his credit and income to get that dream home. They simply didn’t care. They sold the risk once the ink was dry on the mortgage.

A new terminology arose after 2002 for such loans, such as "NINA" mortgages—No Income, No Assets. "No problem, Mister Jones. Here’s $400,000 for your new home, enjoy."

With Glass-Steagall no longer an obstacle, banks could set up myriad wholly-owned separate entities to process the booming home mortgage business. The giant of the process was Citigroup, the largest US bank group with over $2.4 trillion of group assets.

Citigroup included Travelers Insurance, a state-regulated insurer. It included the old Citibank, a huge retail lending bank. It included the investment bank, Smith Barney. And it included the aggressive sub-prime lender, CitiFinancial, according to numerous consumer reports, one of the most aggressive predatory lenders pushing sub-prime mortgages on often ignorant or insolvent borrowers, often in poor black or Hispanic neighborhoods. It included the Universal Financial Corp. one of the nation’s largest credit card issuers, who used the so-called Law of Large Numbers to grow its customer base among more and more dodgy credit risks.

Citigroup also included Banamex, Mexico’s second largest bank and Banco Cuscatlan, El Salvador’s largest bank. Banamex was one of the major indicted money laundering banks in Mexico. That was nothing foreign to Citigroup. In 1999 the US Congress and GAO investigated Citigroup for illicitly laundering $100 million in drug money for Raul Salinas, brother of the then-Mexican President. The investigations also found the bank had laundered money for corrupt officials from Pakistan to Gabon to Nigeria.

Citigroup, the financial behemoth was merely typical of what happened to American banking after 1999. It was a different world entirely from anything before with the possible exception of the excesses of the Roaring ‘20’s. The degree of lending fraud and abuse that ensued in the new era of asset securitization was staggering to the imagination.

The Predators had a ball

One US consumer organization documented some of the most common predatory lending practices during the real estate boom:

"In the United States in the first decade of the 21st century there are many storefronts offering such loans. Some are old -- Household Finance and its sister Beneficial, for example -- and some are newer-fangled, like CitiFinancial. Both offer credit at rates over thirty percent. The business is booming: the spreads, Wall Street says, are too good to pass up. Citibank pays under five percent interest on the deposits it collects. Its affiliated loan sharks charge four times that rate, even for loans secured by the borrower's home. It's a can't-miss proposition. Even if the economy goes South they can take and resell the collateral. The business is global: the Hong Kong & Shanghai Banking Corporation, now HSBC, wants to export it to the eighty-plus countries in which it has a retail presence. Institutional investors love the business model and investment banks securitize the loans. These fancy terms will be defined as we proceed. The root, however, the fodder on which the whole pyramid rests, is the solitary customer at what's called the point of sale… points and fees can be added to the money that's lent. CitiFinancial and Household Finance both suggest that insurance is needed. This they serve in a number of flavors -- credit life and credit disability, credit unemployment and property insurance -- but in almost all cases, it is included in the loans and interest is charged on it. It's called "single premium" -- instead of paying each month for coverage, you pay in advance with money on which you pay interest. If you choose to refinance, you will not get a refund. It is money down the drain, but at the point-of-sale it often goes unnoticed.

Take, for example, the purchase of furniture. A bedroom set might cost two thousand dollars. The sign says Easy Credit, sometimes spelled E-Z. The furniture man does not manage these accounts. For this he turns to CitiFinancial, to HFC or perhaps to Wells Fargo. While the Federal Reserve lends money to banks at below five percent, these bank-affiliates charge twenty or thirty or forty percent. You will have insurance on your furniture: to protect you, they say, from having it repossessed if you die or become unemployed. Before the debt is discharged, dead or alive, you will have paid more than the list-price of a luxury car or a crypt with a doorman.

Midway you'll be approached with a sweet-sounding offer: if you'll put up your home as collateral, your rate can be lowered and the term be extended. A twenty-year mortgage, fixed or adjustable. The rate will be high and the rules not disclosed. For example: if you satisfy the loan too quickly, you'll be charged a pre-payment penalty. Or, you'll pay slowly and then be asked to pay more, in what's called a balloon. If you can't, that's okay: they knew you couldn't. The goal is to refinance your loan and charge you yet more points and fees.

In prior centuries, this was called debt peonage. Today it is the fate of the so-called sub-prime serf. Fully twenty percent of American households are described as sub-prime. But half of the people who get sub-prime loans could have paid normal rates, according to Fannie Mae and Beltway authorities. Outside it's the law of the jungle; the only rule is Buyer Beware. But this is easier for some people than others.

Why would a person overpay by so much? In the nation's low-income neighborhoods, sometimes called ghettos or, in a more poetic euphemism, the inner city, there's a lack of bank branches. In the late 20th century, many financial institutions left the 'hood in the lurch. They refused to lend money; they refused to write insurance policies.

In the 1980’s this author interviewed a senior Wall Street banker, at the time recovering from some kind of burnout. I asked about his bank’s business in Cali, Colombia during the heyday of the Cali cocaine cartel. Speaking not for attribution, he related, "Banks would literally kill to get a slice of this business, it’s so lucrative." Clearly they moved on to sub-prime lending with similar goals in mind, and profits as huge as in money laundering drug gains.

Alan Greenspan openly backed the extension of bank lending to the poorest ghetto residents. Edward M. Gramlich, a Federal Reserve governor who died in September 2007, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford. When Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan. Greenspan ruled the Fed with nearly the power of an absolute monarch.

Revealing what was most certainly the tip of a very extensive iceberg of fraud, the FBI recently announced it was investigating 14 companies for possible accounting fraud, insider trading or other violations in connection with home loans made to risky borrowers. The FBI announced that the probe involved companies across the financial services industry, from mortgage lenders to investment banks that bundle home loans into securities sold to investors.

At the same time, authorities in New York and Connecticut were investigating whether Wall Street banks hid crucial information about high-risk loans bundled into securities sold to investors. Connecticut Attorney General Richard Blumenthal said he and New York Attorney General Andrew Cuomo were looking whether banks properly disclosed the high risk of default on so-called "exception" loans — considered even riskier than sub-prime loans — when selling those securities to investors. Last November, Cuomo issued subpoenas to government-sponsored mortgage companies, Fannie Mae and Freddie Mac, in his investigation into what he claimed were conflicts of interest in the mortgage industry. He said he wanted to know about billions of dollars of home loans they bought from banks, including the largest US savings and loan, Washington Mutual Inc., and how appraisals were handled.

The FBI said it was looking into the practices of sub-prime lenders, as well as potential accounting fraud committed by financial firms that hold these loans on their books or securitize them and sell them to other investors. Morgan Stanley, Goldman Sachs Group Inc. and Bear Stearns Cos. all disclosed in regulatory filings that they were cooperating with requests for information from various unspecified, regulatory and government agencies.

One former real estate broker from the Pacific Northwest, who quit the business in disgust at the pressures to push mortgages on unqualified borrowers, described some of the more typical practices of predatory brokers in a memo to this author:

The sub-prime fiasco is a nightmare alright, but the prime ARMs hold potential for overwhelming disaster. The first "hiccup" occurred in July/August 2007 - this was the "Sub-prime Fiasco," but in November 2007 the hiccup was more than that. It was in November 2007, that the prime ARMs adjusted upwards.

What this means is that upon the "anniversary date of the loan" the Adjustable Rate Mortgage adjusts up into a higher payment. This happens because the ARM was "purchased" at a teaser rate, usually one or one and one half percent. Payments made at that rate, while very attractive, do nothing to reduce principal and even generate some unpaid interest which is tacked onto the loan. Borrowers are permitted to make the teaser rate payments for the entire first year, even though the rate is good only for the first month.

Concerns about "negative amortization," whereby the indebtedness on the loan becomes more than the market value of the property, were allayed by reference to the growth in property values due to the bank-created bubble, which it was said was normal and could be relied upon to continue. All that was promoted by the lenders who sent armies of account executives, i.e., salesmen, around to the mortgage brokers to explain how it would work.

Adjustable interest rates on home loans were the sum of the bank’s profit - the margin - and some objective predictor of the cost of the borrowed funds to the bank, known as the index. Indexes generated by various economic activities - what the banks around the country were paying for 90 day CD’s or what the banks in the London Interbank Exchange (LIBOR) were paying for dollars - were used. Adding the margin to the index produces the true interest rate on the loan - the rate at which, after 30 years of payments, the loan will be completely paid off ("amortized"). It is called the "fully indexed rate."

I am going to pick an arbitrary 6% as the "real" interest rate (3% margin + 3% index). With a loan amount of $250,000.00 the monthly payment at 1% would be $804.10; that is the "teaser rate" payment, exclusive of taxes and insurance. This would adjust with changes in the index, but the margin remains static for the life of the loan.

This loan is structured so that payment adjustments only occur once per year and are capped at 7.5 % of the previous year’s payment. That can go on, stair stepping, for a period of 5 years (or 10 years in the case of one lender) without regard to what is happening in the real world. Then, at the end of the 5 years, the caps come off and everything adjusts to payments under the "fully indexed rate."

If the borrower has been making only the minimum required payments the whole time, this can result in a payment shock in the thousands. If the value of the home has decreased twenty-five percent, the borrower, this time someone with stellar credit, is encouraged to give it back to the bank, which devalues it at least another twenty-five percent and that spreads to the surrounding properties.


According to a Chicago banking insider, during the first week of February 2008, bankers in the U.S. were made aware of the following:
Chase Manhattan Bank ("CMB") has sent out an unlimited number of statements to its customers about Lines of Credit ("LOC’s". The terms of its LOC’s, which, have been popular in the past, are now being manipulated and the values of the properties securing them are being unilaterally adjusted down, sometimes as much as 50 percent. This means homeowners are faced with making payments on a loan to buy an asset that is apparently worth half of the principal amount of the loan and paying interest on top of that. The only sensible thing to do in many cases is walk away, which results in a major loss in equity, reducing the value of all surrounding properties and adding to the avalanche of foreclosures.
This is especially aggravated in cases of "Creative Financing" LOCs - those that were drawn on equal to between ninety and one hundred percent of the value of the property before the bubble burst…
CMB has automatically closed credit lines that have "open" credit on them - meaning that the borrower left some money in the LOC for the future - over an 80% ratio of the amount of the loan to the value ("LTV") of the property. This has been done on a mass basis without any reference to the "property owners."

Loan to Value limits mean that the amount of money which the lender is willing to loan cannot exceed the stated percentage of the property value. In common practice, an appraiser would be hired to assess the value of the property. The appraisal is informed by comparable sales of other properties which have sold in an area that, with a few exceptions, must be no more than one mile away from the subject property. That was merely the tip of the mortgage fraud bonanza that preceded the present unfolding Tsunami.

The Tsumani is only beginning

The nature of the fatally flawed risk models used by Wall Street, by Moody’s, by the securities Monoline insurers and by the economists of the US Government and Federal Reserve was such that they all assumed recessions were no longer possible, as risk could be indefinitely diffused and spread across the globe.

All the securitized assets, the trillions of dollars worth, were priced on such flawed assumption. All the trillions of dollars of Credit Default Swaps—the illusion that loan default could be cheaply insured against with derivatives—all these were set to explode in a cascading series of domino-like crises as the crisis in the US housing market unraveled. The more home prices fell, the more mortgages facing sharply higher interest rate resets, the more unemployment spread across America from Ohio to Michigan to California to Pennsylvania to Colorado and Arizona. That process set off a vicious self-feeding spiral of asset price deflation.

The sub-prime sector was merely the first manifestation of what was to unravel. The process will take years to wind down. The damaged products of Asset Backed Securities were used in turn as collateral for yet further bank loans, for leveraged buyouts by private equity firms, by corporations, even by municipalities. The pyramid of debt built on assets securitized began to go into reverse leverage as reality dawned in global markets that no one knew the worth of the securitized paper they held.

In what would be a laughable admission were the consequences of their criminal negligence not so tragic for millions of Americans, Standard & Poors, the second largest rating agency in the world stated in October 2007 that they "underestimated the extent of fraud in the US mortgage industry." Alan Greenspan feebly tried to exonerate himself by claiming that lending to sub-prime borrowers was not wrong, only the later securitization of the loans. The very system they worked over decades to create was premised on fraud and non-transparency.

Credit Default Swap crisis next

As of this writing, the next ratchet down in the US financial Tsunami was the monocline insurers where, short of a US government nationalization, no solution was feasible as the unknown risks were so staggering. That problem was discussed in the previous Part IV.

Next to explode will be the imminent probability of meltdown in the $45 trillion market in Over-the-Counter Credit Default Swaps (CDS), the brainchild of J.P. Morgan.

As Greenspan made certain, the CDS market remained unregulated and opaque, so that no one knew what the scale of the risks in a falling economy were. Because it is unregulated it often was the case that one party to a CDS resold to another financial institution without informing the original counterparty. That means it is not obvious that were an investor to try to cash in his CDS he could track down its payer of the claim. The CDS market was overwhelmingly concentrated in New York banks who held swaps at the end of 2007 worth nominally $14 trillion. The most exposed were J.P. Morgan Chase with $7.8 trillion and Citigroup and Bank of America with $3 trillion each.

The problem had been exacerbated by the fact that of the $45 trillions of credit default swaps, some 16% or $7.2 trillion worth were written to protect holders of Collateralized Debt Obligations where the mortgage collateral problems were concentrated. The CDS market was a ticking time bomb with an atomic detonator. As the credit crisis spreads in coming months, corporations will be forced to default on their bonds and writers of CDS insurance will face exploding claims and non-transparent rules. A claims settlement procedure for a market nominally worth $45 trillion did not exist as of February 2008.

As hundreds of thousands of Americans over the coming months find their monthly mortgage payments dramatically reset according to their Adjustable Rate Mortgage terms, another $690 billion in home mortgage debt will become prime candidates for default. That in turn will lead to a snowball effect in terms of job losses, credit card defaults and another wave of securitization crisis in the huge market for securitized credit card debt. The remarkable thing about this crisis is that so much of the sinews of the entire American financial system were tied in to it. There has never been a crisis of this magnitude in American history.

At the end of February the Financial Times of London revealed that US banks had "quietly" borrowed $50 billion in funds from a special new Fed credit facility to ease their cash crisis. Losses at all the major banks from Citigroup to J.P.Morgan Chase to most other major US bank groups continued to mount as the economy sank deeper into a recession that clearly would turn in coming months into a genuine depression. No Presidential candidate had dared utter a serious word about their proposals to deal with what was becoming the greatest financial and economic meltdown in American history.

By the early days of 2008 it was becoming clear that Financial Securitization would be the Last Tango for the United States as the global financial superpower.

The question now was posed what new center or centers of financial power could conceivably replace New York as the global nexus. That we will examine in Part VI.


Endnotes:


1.UNCTAD Secretariat, Recent developments on global financial markets: Note by the UNCTAD secretariat,

TD/B/54/CRP.2, Geneva, 28 September 2007.

2.For a treatment of the little-known political background to the 1931 Creditanstalt crisis that led to a domino collapse of German banks, see Engdahl, F. William, A Century of War: Anglo-American Oil Politics and the New World Order, 2004, London, Pluto Press, Chapter 6.

3. Schroy, John Oswin, Fallacies of the Nobel Gods: Essay on Financial Economics and Nobel Laureates, in http://www.capital-flow-analysis.com/inves...nobel_gods.html.

4. For a fascinating treatment of the fundamental theoretical flaws of economic and financial market models used today, and what he calls the high odds of catastrophic price changes, I recommend the book by the Yale mathematician and inventor of fractal geometry, Benoit Mandelbrot, in Mandelbrot, Benoit and Hudson, Richard L., The (mis) Behavior of Markets: A Fractal View of Risk, Ruin and Reward, Profile Books Ltd, London, 2004.

5. Cited by Inner City Press, The Citigroup Watch, January 28, 2008, in www.innercitypress.org.citi.html.

6. Rainforest Action Network, Citigroup Becomes Mexico’s Largest Bank after Banamex Merger, August 10, 2001, in http://forests.org/archive/samerica/cibemexi.htm.

7. Lee, Matthew, Predatory Lending: Toxic Credit in the Inner City, 2003, InnerCityPress.org.

8. Andrews, Edmund L., Fed Shrugged as Sub-prime Crisis Spread, The New York Times, Dec.18, 2007.

9.Zibel, Alan, FBI Probes 14 Companies Over Home Loans, AP, January 29, 2008.

10 Private communication to the author.

F. William Engdahl is a frequent contributor to Global Research.

Part 2 of Tarpley's talk on the Economic Crisis...and why it will likely lead to Wars and Martial Law in U.S.

http://www.kpfa.org/archives/index.php?arch=25366

If you missed it, here is part 1 http://www.kpfa.org/archives/index.php?arch=25261

This all seems very real and very frightening....the end game of the kind of Killer-Canabalistic Capitalism the US and other Oligarchs have been practicing.

It likely will all collapse very quickly now......guess who will get hurt?!
It is the 'Enronization' of the whole economy - about to collapse en toto!

There are ways to stop the collapse, but there is no awareness, generally in the Public and those in control of the society will never voluntarily put themselves out of the business of theft of your and my money. All multi-millionaires and billionares should be taxed out of existance - they are just parasites sucking the life out of the rest of us. They do nothing. 'Trickle-down' was brought to us by the same people who pulled-off the Dallas Magic Show and so many other Big Lies. The absurd notion that the rich getting richer would help anyone else was the biggest of the Big Lies ever invented, and so many Americans 'bought it'...what they actually 'bought' was 'the farm'. Americans are not all stupid, but they are amazingly passive and naive. They have let themselves be suckered in exchange for smoke and mirrors. The smoke is clearing and the mirrors all broken and there is nothing left of our Country. People like those in the current Administration and most on Wall Street et al. all belong in prison for theft of our Nation, agressive wars for their profit, genocide, racketteering, ecoside, etc. Lock 'em all up and throw the keys away.

My own guess is this Planet has a few years [tops] to change direction completely or see the destruction of the Planet's ecosystem, including humans - who caused all this - as well as total collapse of the phony economy the Oligarchy have given us, for their benefit only.

Tarpley lays it out in those talks and in his book and recent essay. He is not the only one. Freedman and the Chicago School Economists who are the Prophets of the NeoCons brought the world Chile and Pinochet (and a hell of a lot of other such!) and will do the same to the USA [are NOW doing the same to the USA!] and the World.....dictatorships, wars, and economic collapse funneled into their bank accounts. Now, they are using OUR money to bail THEMSELVES out and still the Sheeple only bleat.

AMY GOODMAN: We are seeing some of the worst crises we have seen in decades, whether we’re talking about the economy, whether we’re talking about the war, and those two issues, we’re going to take on today.

JUAN GONZALEZ: Yes, we are. Well, Wall Street and the nation’s economy is in a state of crisis. The nation’s fifth largest investment bank Bear Stearns nearly collapsed last week. It was saved only after the Federal Reserve took extraordinary measures to help JPMorgan purchase the eighty-five-year-old firm.

As part of the deal, the Fed put up $30 billion to guarantee Bear Stearns’s riskiest investments. For the first time ever, the Federal Reserve has become the lender of last resort for other investment banks in an effort to prevent firms from going under. It is a move that marks one of the broadest expansions of the Fed’s lending authority since the 1930s. At least ten investment funds, including the fund Carlyle Capital run by the Carlyle Group, have recently collapsed or been forced to sell assets.

Consumers are feeling the effects of the economic crisis everywhere. Food prices are rising. Gas prices have reached all-time highs. The dollar is weakening. Credit card debt is expand