"End of Wall Street Boom" - Must-read history

[apologydue]

Good article jackriddler. Thanks for that. Isolated quotes from:

Losses related to credit default swap deepened in the second quarter of 2008, and nearly brought the company to its knees following Lehman Brothers' collapse on Sept. 15. On Sept. 16, the government gave AIG a bailout worth up to $85 billion, a total that has since risen to $182 billion.

If Cassano knew that the underlying value of those contracts was less than he made public to shareholders, that would be a criminal offense, said experts.

"There's a fine line between vigorous enforcement and excessive zeal," said Perlis. "AIG has made many management changes, so there's no point in proceeding against an entity in which any malfeasance, assuming there was some, is gone. The only victims would be innocent shareholders, innocent management, and the government itself."
.

When most of the population gets busted "ignorance of the law is no excuse."

E Corrupt management now see the error of its ways. Top tier share holders are sick over their gains. The gov. being these same pockets, is also now aware of its gains. Its all good.

Evidently there are exceptions to the rules of ignorance and the law.

[Wombaticus Rex]

I've just printed nearly 300 pages of articles from this single thread. Now I'll lock myself in the office with a pen and notebook for the rest of the night. This is an absolute goldmine, big thank you to everyone involved.

May Ganeshe smile upon all that you endeavor to do.

[Nordic]

I've just printed nearly 300 pages of articles from this single thread.

Treekiller.

[Wombaticus Rex]

Guilty as charged! Actually cut down a couple dozen of them firsthand. I'm a very proactive human.

Barn-burner of a comment tonight on Zero Hedge:

The Obama administration has been posturing this week about the life and death issue of Wall Street reform. Obama’s predicament is that of a Wall Street puppet who has been put into the White House thanks among other things to almost $1 million of contributions from the infamous Goldman Sachs – but who now needs to make a show of fighting his own Wall Street patrons for political reasons. Of course, Obama’s health-care reform was largely a bailout of insurance companies, which are themselves a key part of Wall Street. But Obama is now pretending to quarrel with Wall Street to shore up his waning credibility, partly because many House Democrats are desperately seeking anti-banker, economic populist street creds in order to avoid defeat in November. So far, the results have been largely feckless and inadequate.

The urgent problem raised by all this is the $1.5 quadrillion derivatives bubble. The financial crisis which struck the United States and the world in September and October 2008 was in fact a world a derivatives panic. This panic marked the first phase of a world economic depression caused by derivatives speculation. The second phase of this depression, which is now beginning, can also be attributed in large part to derivatives, since derivatives are the main tool being used in the speculative attacks on Greece, Spain, Portugal, Italy, Ireland, and other nations, building up towards a chaotic collapse of the euro.

Derivatives are the Cause of the World Depression of Our Time

Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.

Asset-Backed Securities

Derivatives can be defined as any financial paper which is based on other financial paper. In other words, they are financial instruments whose value depends upon or is derived from the value of other financial instruments. Any kind of securitization results in the creation of derivatives. If individual mortgages are wrapped up and packaged together as a mortgage-backed security (MBS), that is a derivative. Any asset-backed security (ABS), be it based on car loans, credit card debt, or anything else, also qualifies as a derivative.

Beyond this, there are generally speaking two kinds of derivatives. The first type includes the derivatives which are traded more or less openly on exchanges like the Chicago Board Options Exchange, etc. These include options, futures, and indices, plus all the combinations of these. These are what expire in each quadruple witching hour in the markets. This type of derivative has generally amounted to about $600 trillion of speculation in recent years.

OTC Derivatives

Then there are the so-called over-the-counter (OTC) derivatives, otherwise known as structured notes, counterparty derivatives, or designer derivatives. These often take the form of contracts which are kept secret by the counterparties, and which are often not included on the balance sheets of banks and other institutions which enter into these contracts. This type of derivative is currently not reportable to any regulatory agency. This secrecy is a result of the successful effort by Robert Rubin, Larry Summers, and Alan Greenspan to block the modest proposal of Brooksley Born of the Commodity Futures Trading Commission to bring the OTC derivatives into the sunlight during the second Clinton administration. Since these derivatives are not reportable at the present time, we must guess at their amount, and the best guess is that OTC derivatives make up almost $1 quadrillion of ultra-toxic speculation.

CDOs, CDS, and SIVs

OTC derivatives include collateralized debt obligations (CDOs),which often represent the packaging together of large numbers of mortgage backed securities, along with other debt instruments. A CDO can also be concocted out of other CDOs, in which case it qualifies as a synthetic CDO or CDO squared (CDO²). Notice that a synthetic CDO is not really an investment, but rather a form of gambling, in which a speculator in effect places a bet on the performance of some other financial instruments. This fact exposes the big lie inherent in the widespread reactionary myth that the current depression was caused by poor people taking out subprime mortgages on slum properties and then defaulting on these loans, thus bringing down the US and British banking systems. This fantastic story ignores the fact that derivatives were only a wager placed by speculative bettors from afar on mortgage backed securities which included some subprime notes.

Credit default swaps represent bets on whether a given asset or company will go bankrupt or not. As such, they can be used as insurance against such an eventuality, or else they can be used to make money on the insolvency. CDS are therefore a form of insurance, but they are issued by counterparties who have not registered as insurance companies and who have not met the legal and capital requirements which are necessary to function as an insurance company. It ought therefore to be clear that CDS have been totally illegal all along, and have flourished only because of an outrageous failure by state insurance regulators to enforce applicable laws against the privileged class of financiers.

Structured investment vehicles (SIVs) are another type of derivative, commonly used to wrap up masses of CDOs and synthetic CDOs and then to park them off-balance sheet, where they can be hidden from regulatory and public scrutiny.

All Derivatives Illegal under the New Deal, 1936-1982

All kinds of derivatives, be they exchange traded or over-the-counter, were strictly banned and outlawed in the United States between 1936 and 1982 thanks to a wise measure enacted under the New Deal of President Franklin D. Roosevelt. In the wake of several attempts by predatory and sociopathic speculators to manipulate the prices of wheat and corn during the First Great Depression, the Commodities Exchange Act of 1936 outlawed the selling of options on agricultural products. This law had the effect of blocking most derivative speculation, until the counterattack of free-market fanatics gathered steam under the presidency of Ronald Reagan, an ideological zealot of the Austrian and Chicago schools. The very existence of derivatives today and their resulting ability to bring on a new world depression are thus directly attributable to the reckless and irresponsible dismantling of the New Deal regulatory regime. It should be added that derivatives were also banned in many states as a result of laws prohibiting gambling or forbidding bucket shops, which were betting parlors in which side bets could be placed on stock market fluctuations.

If Obama wants to pretend to have something in common with Franklin D. Roosevelt, he ought to be proposing measures to ban at least the most poisonous types of derivatives, and to discourage the others. Notice that he does nothing of the kind. Obama’s Cooper Union speech of April 22, 2010 approvingly cites Warren Buffett’s remark that derivatives represent financial weapons of mass destruction. But Obama then says that derivatives nevertheless have an important and legitimate role to play. So which is it? Some years back, French President Jacques Chirac rightly referred to derivatives as “financial AIDS.” What useful purpose can these toxic instruments possibly serve?

Again: in his 1936 re-election speech in Madison Square Garden in New York City, Franklin D. Roosevelt famously noted that the forces of organized money hated him, and that he welcomed their hatred. Obama, in sharp contrast, called on the Wall Street predators to join him in his efforts, compounding this with the monstrous thesis that Wall Street and Main Street are in the same boat. Nothing could be farther from the truth. The recent Goldman Sachs scandal has underlined once again that the Wall Street investment houses serve no useful social purpose whatsoever. They exist solely for the purpose of pursuing speculative profits through a process of looting and pillaging the rest of the economy. The Wall Street zombie banks are monopolizing US credit, while Main Street goes broke.

Thanks no doubt to the efforts of certain House Democrats, the reform bill is likely to contain two points which can qualify as positive half measures.

Force Derivatives Out in the Open

The first is the effort to end the secrecy of OTC derivatives by forcing these instruments to be traded on public exchanges or through clearing houses. This is a step in the right direction. But this provision needs to be strengthened by making all derivatives of any type whatsoever reportable to a central regulatory authority. This would include, for example, the derivatives held by hedge funds. In 1998, the Connecticut-based hedge fund Long-Term Capital Management went bankrupt with more than $1 trillion worth of derivatives, blowing a huge hole in the international banking system, and causing Greenspan to rush in with a crony bailout. Nobody has any idea of the amount of derivatives held by hedge funds today. Highly leveraged hedge funds are perfectly capable of causing a worldwide systemic crisis with derivatives, so they must emphatically be made to report their holdings.

This reporting requirement should also include the derivatives held by non-financial corporations, whose shareholders deserve to know if and when management is dabbling in these toxic instruments. Some years back, the Gibson Greeting Card Company took a huge loss on derivatives, so this is no theoretical danger.

In addition, all derivatives must henceforth be clearly listed ON the balance sheets of banks and all other financial institutions. The intolerable practice of hiding derivatives off-balance-sheet must be immediately brought to an end.

The other positive half measure which might survive Obama’s usual quest for a “bipartisan” sellout is the so-called Volcker Rule, which specifies that commercial banks with insured deposits are not allowed to engage in proprietary speculation with their own money. Depending on how this is worded, this may include a long overdue ban on derivatives speculation by commercial banks. Senator Blanche Lincoln of Arkansas, the chair of the Senate Agriculture committee—who is fighting for her political life against a primary challenge this spring—has been backing a provision that would explicitly prohibit commercial banks from engaging in derivatives speculation. These ideas go in the right direction. But we need to do much more. We need to go back to the full New Deal regulations embodied in the Glass-Steagall Act. This law stated that a financial institution could be either or a commercial bank, or an investment house, or an insurance company, but never more than one of these. In other words, the suicidal folly of the Gramm-Leach-Bliley Act of 1999, which repealed Glass-Steagall, must be rolled back.

Outlaw Credit Default Swaps

Beyond this, we must urgently address the catastrophic effects and obvious illegality of credit default swaps. More than a year ago, Senator Warner of Virginia asked Fed boss Bernanke about the advisability of creating a “bright line prohibition” against these CDS. Remember that CDS are already illegal, because they always involve an investor masquerading as an insurance company without having fulfilled the legal and capital requirements that would be demanded from a real insurance company. Credit default swaps have cost the US taxpayer almost $200 billion in the case of AIG alone, because of the bankruptcy of the AIG London-based hedge fund which had issued more than $3 trillion of derivatives – a total greater than the gross domestic product of France.

Credit default swaps are also a clear and present danger today, since they are the principal tool being used by wolf packs of banks and hedge funds against Greece and other nations, accelerating the arrival of the dreaded second wave of the world economic depression. Unless credit default swaps are banned now, they will be increasingly used for speculative attacks against the bonded debt of American states like California, New York, Illinois, and all the others. Before long, credit default swaps will be used by international speculators to attack the value and integrity of United States Treasury securities, threatening our country with the calamity of national bankruptcy. If the United States fails to shut down credit default swaps with timely legislation now, credit default swaps will be used to help destroy the United States and human civilization in general.

Ban Synthetic CDOs

The synthetic CDO or CDO² must also be outlawed. These are the toxic instruments which brought down Bear Stearns, Merrill Lynch, and Lehman Brothers in the great derivatives panic of 2008. What are we waiting for to ban this kind of highly destructive derivative? Such a ban is easy to formulate: “Any collateralized debt obligation which contains other collateralized debt obligations is hereby prohibited.” End of story. This language recalls the approach of the very successful Public Utility Holding Company Act of the New Deal. One layer of CDO is more than enough risk, and it must not be further compounded.

Another ban which is long overdue and which should be included in the current legislation is the outlawing of the Adjustable Rate Mortgage (ARM). The ARM is another catastrophic innovation of recent decades which inherently carries with it an intolerable risk for any homeowner. No American family should be deprived of a roof over their heads because of the unpredictable and volatile fluctuations of interest rates over the life of a mortgage. These ARMs shift an unacceptable risk to the mortgage buyer. Fixed-rate mortgages should be the only legal kind, and any reset or change in interest rates on a residential mortgage should be strictly outlawed. While we are at it, we also need to outlaw the high-interest payday loan, a type of devastating usury to which the poorest and most defenseless parts of our population are now exposed. The outlawing of payday loans should take the form of a de facto federal usury law establishing an upper limit of no more than 10% on any promissory note or credit card. This was the limit traditionally set by state usury laws before the coming of the Volcker 22% prime rate three decades ago, and it should be restored. This simple prohibition of adjustable rate mortgages and payday loans will be far more effective than the proposed creation of an inefficient and unwieldy consumer protection bureaucracy, especially one that is located inside the Federal Reserve. The Federal Reserve has repeatedly struck out when it comes to recognizing systemic risk, when it comes to preventing financial bubbles, and when it comes to protecting ordinary Americans. The Federal Reserve failed in the run-up to the crash of 1929, in the run-up to the banking crisis of 1933, in the run-up to the stock market crash of 1987, in preventing the dot com bubble of 1999-2000, and in regard to the financial derivatives which caused the banking panic of 2008. Locating any consumer protection bureaucracy inside the privately owned Federal Reserve is simply to guarantee that such a bureaucracy will be subject to regulatory capture by Wall Street at the earliest possible moment.

Wall Street Sales Tax of 1% on All Financial Transactions

Derivatives which escape prohibition under these blanket bans on credit default swaps and synthetic CDOs must then be subjected to their fair share of the tax burden. In a time when haircuts, bowling alleys, and restaurants are threatened with new taxation, it is simply inconceivable that the financial turnover of US financial markets should remain immune to all taxation, rather like the French aristocrats of the pre-1789 old regime. Rather than crush the US economy under an ill-advised and oppressive Value Added Tax (VAT) or national sales tax, we must institute a Wall Street sales tax of 1% on all financial transactions and turnover, including derivatives. This is the levy known as the Tobin tax, the Wall Street sales tax, the financial transactions tax, the trading tax, the securities transfer tax, or the Robin Hood tax. A low-ball conservative estimate of US financial turnover (including derivatives) in any given year might be about one quadrillion dollars. In that case, a 1% Wall Street sales tax would yield $10 trillion, $5 trillion of which could be used to confront the federal budget deficit, the costs of entitlements, and the various unfunded liabilities of the federal government. The other $5 trillion would be available for revenue sharing with the states, who could use these funds to deal with their own budget crises, which currently threaten police, firemen, health services, and other indispensable parts of the fabric of civilization itself. One of the main causes for budget deficits of all levels of government in the United States is the glaringly obvious exemption of financial turnover from all taxation, while financial speculators use various tricks to escape paying the corporate income tax. The proceeds from such a Wall Street sales tax would almost certainly decline as speculation became less attractive, but in the meantime they would provide much-needed relief for the public treasury. Needless to say, any idea of paying the proceeds of such a tax to the International Monetary Fund is out of the question. Many other countries are in the process of instituting a Tobin tax on financial turnover, so the inevitable objection that a Wall Street sales tax would represent a crippling competitive disadvantage for US financial markets is increasingly untenable.

Additional Safeguards: Bankruptcy Triage, Reserve Requirement, Hedge Fund Ban

Further safeguards against the derivatives plague are also in order. Current bankruptcy law gives special privileged treatment to derivatives. These poisonous instruments continue to exact their claims even when protection against other creditors has been provided by the federal courts. This abusive and unwarranted favoring of derivatives must be reversed. Derivatives must be made to wait their turn in bankruptcy court, and sent to the end of the line after all other creditors and claims have been satisfied. If bankruptcy triage becomes necessary, it should be at the expense of derivatives.

Another needed measure is the establishment of a reserve requirement for anyone issuing derivatives. We have seen how Goldman Sachs is accused of designing their notorious ABACUS 2007-AC1 CDO, colluding with hedge fund speculator John Paulson to load this CDO with all kinds of super-toxic paper with the intent of designing an instrument which would have the best possible chances of going bankrupt in the short run. A reserve requirement for those issuing derivatives would mean that they would have to buy and hold on their own books for the life of the investment at least 20% of any derivatives they issued. This would represent an additional deterrent against the deliberate concocting of toxic derivatives with the intention of then allowing a speculator to short them with the help of credit default swaps.

A final necessary change involves the grave risk inherent in the existence of hedge funds. Despite their name, the main business of hedge funds is pure predatory speculation. Hedge funds are currently allowed to fly below the radar of the Securities and Exchange Commission, escaping regulation because they have only a limited number of super-rich investors. It is high time that this loophole came to an end. Once a hedge fund is regulated, it is no longer a hedge fund, so the call to regulate hedge funds is for all practical purposes a call for their abolition. Hedge funds should have been subject to regulation no later than the immediate aftermath of the Long-Term Capital Management debacle of 1998. The hedge fund loophole in the SEC rules must be closed now.

Seize and Liquidate the Zombie Banks

Obama’s $50 billion resolution fund for bankrupt banks is unnecessary. What we need most of all is to have the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and other regulators enforce the applicable laws. Every Friday, Sheila Bair of the FDIC shuts down a number of small town banks because of insolvency. In her interview yesterday on CNBC, Ms. Bair blatantly admitted that she has no intention of enforcing these same public laws against the large Wall Street and other money center banks. She covers this malfeasance and nonfeasance with her opinion that bankruptcy does not work for the big banks. But there is little doubt that, if their massive derivatives holdings were priced according to mark to market rules, J.P. Morgan Chase, Citibank, and Bank of America would all be thoroughly insolvent candidates for Chapter 7 liquidation. Unless and until this is done, these zombie banks will continue to block any real economic recovery in the United States. Ms. Bair’s policies showed the destructive folly of the current administration’s illegal policies, which are all based in the final analysis on the discredited doctrine of Too Big to Fail.

Any Wall Street reform bill should also deal with the public scandal of the ratings agencies – Standard & Poor’s, Fitch, and Moody’s. These agencies enjoy a quasi-governmental status when it comes to certifying the quality of certain investments. But the failure of these agencies to provide timely warnings during the onset of the derivatives panic was nothing short of spectacular. During that crisis, the ratings agencies were certifying investments as AAA investment-grade until mere hours before they collapsed. Senator Carl Levin’s investigation of the ratings agencies has now unearthed horror stories of corruption and incompetence. The ratings agencies need to be stripped of any special role in relation to the United States government. Senator Levin’s findings merit criminal referrals to the Justice Department for prosecution of these agencies and their executives. In short, the United States government should take this opportunity to shut down these rating agencies, before these corrupt entities join in the looming speculative assault on the US Treasury, which is being prepared by George Soros and the other hedge funds.

Wall Street speculators will certainly howl that the measures outlined here represent a vindictive policy of discrimination against derivatives, which they will attempt to portray as a beneficial innovation serving the public interest. But no serious analysis of the banking panic of 2008 can ignore the obvious role of financial derivatives as one of the principal causes of this disaster. As for the charge of discrimination, it should be clear that the proposals made here generally represent nothing more than ending the privileged special treatment which has been granted to derivatives so far. Derivatives have been exempted from the gambling laws. Derivatives have been given special status in bankruptcy proceedings. Derivatives have been made non-reportable, and carrying them off balance sheet has been allowed. Derivatives have been exempted from the usual laws governing the operations of insurance companies. Hedge funds have been exempted from the scrutiny of the Securities and Exchange Commission. Wall Street derivatives banks have been exempted from the usual bankruptcy laws and probably from the antitrust laws as well. Finally, derivatives, like all financial instruments, have been exempted from state sales taxes. This distorted treatment amounts to a systematic pattern of facilitating and fostering derivatives speculation under US laws and regulations. This pattern might be defensible if derivatives represented a public good. But all experience shows that derivatives are just the opposite – they are a public menace which now threatens to destroy our civilization and way of life.

[Nordic]

Wombaticus, that's certainly a keeper. You got a link for that? I just went over there and looked around and couldn't find it.

[Wombaticus Rex]

Turns out to be by Webster Tarpley:

http://tarpley.net/2010/04/25/fight-the ... etic-cdos/

(Seemed way too cogent to be an off-the-cuff comment)

[elfismiles]

What is the "New World Order"?

Old World Odor!

US prepares to push for global capital rules
By Tom Braithwaite
Published: April 25 2010 17:24 | Last updated: April 25 2010 17:24
http://www.ft.com/cms/s/0/28959166-5082 ... ab49a.html

The US is preparing to pivot from domestic regulatory reform to a push for a tough new international capital regime after the weekend’s G20 and International Monetary Fund meetings glossed over differences between leading economies.

Tim Geithner, US Treasury secretary, met Mario Draghi, chairman of the Financial Stability Board, on Sunday to discuss the contours of a system that would decide the safety and profitability of banks for decades to come and could eclipse the arguments over bank taxes and regulation.

But the different positions of senior central bank and government officials from several countries expressed to the Financial Times on the sidelines of the G20 meetings in Washington suggested that a final international agreement remains a challenge.

The G20 communiqué on Friday said: “We recommitted to developing by end-2010 internationally agreed rules to improve both the quantity and quality of bank capital and to discourage excessive leverage.”

But participants said little time was spent on the issue and that officials were gearing up for a battle at the June meeting over the direction of the new standards, which would prevent banks from relying on short-term funding and disqualify some assets from counting towards core regulatory capital, the highest-quality loss-absorbing part of the capital structure.

The most important fault line runs between a bloc of countries that includes the US, the UK and Switzerland and one that includes Germany, France and Japan.

The first group is enthusiastically behind a substantial increase in capital ratios coupled with a more conservative assessment of what counts as capital, tough liquidity rules and a new simple leverage ratio.

The second group is more attached to the pre-eminence of the current risk-based approach and wants the leverage ratio to have a much less important role in governing banks’ balance sheets.

Officials in the US and Europe are now starting to discuss the quantity of an increase in ratios among themselves. Some want a dramatic increase in the minimum level of capital over risk-weighted assets – perhaps to as much as 25 per cent from 8 per cent today – to be on the table while others want a more modest revision of capital rules.

“In the US right now there’s an absolute paranoia about a future bail-out,” said Douglas Elliott, fellow at the Brookings Institution think-tank. “In Germany and France, where they haven’t had to do this to the same extent and there’s more of a feeling that the state should be involved in the banking system, they’re not as concerned. The more you’re comfortable with the public sector as the potential backstop, the less private capital you need.”

Initial proposals from the Basel committee that sets capital rules met a robust response from banks which complain – with the sympathy of some officials in France and Germany – that some proposals are too unsophisticated to take account of the real asset risk, and credit would become scarcer and more expensive as a result of a move towards tangible equity capital and an increase in capital ratios.

JPMorgan Chase, in a response to a request for consultation, said: “To maintain the same level of profitability, pricing on products would have to increase by 33 per cent.”

One participant at a US Federal Reserve meeting this month to discuss the new regime said “full and frank” did not do justice to the furious response from some industry delegates.

The reaction from capital hawks was that a blunt backstop might be better than an overreliance on the sophistication of risk models and regulators. They also said banks would be given plenty of time to adjust to the new system, perhaps several years, to minimise the immediate impact on credit provision.

Technocrats said they were stepping up the pace of their work, drawing up impact assessments for new regimes. But they were under contradictory pressures, not only over content but also timing, with countries including France recommending a slower, more deliberative approach while the US urges more speed.

For all the technical work, there is an increasing belief that governments and central banks will supersede the Basel officials in the next few months and engage in contentious meetings over the summer.

Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.

http://www.ft.com/cms/s/0/28959166-5082 ... ab49a.html

[American Dream]

http://www.counterpunch.org/whitney05032010.html

May 3, 2010

Was There a Plan to Blow Up the Economy?

The Subprime Conspiracy

By MIKE WHITNEY

Many people now believe that the financial crisis was not an accident. They think that the Bush administration and the Fed knew what Wall Street was up to and provided their support. This isn't as far fetched as it sounds. As we will show, it's clear that Bush, Greenspan and many other high-ranking officials understood the problem with subprime mortgages and knew that a huge asset bubble was emerging that threatened the economy. But while the housing bubble was more than just an innocent mistake, it doesn't rise to the level of "conspiracy" which Webster defines as "a secret agreement between two or more people to perform an unlawful act." It's actually worse than that, because bubblemaking is the dominant policy, and it's used to overcome structural problems in capitalism itself, mainly stagnation.

The whole idea of a conspiracy diverts attention from what really happened. It conjures up a comical vision of top-hat business tycoons gathered in a smoke-filled room stealthily mapping out the country's future. It ignores the fact, that the main stakeholders don't need to convene a meeting to know what they want. They already know what they want; they want a process that helps them to maintain profitability even while the "real" economy remains stuck in the mud. Historian Robert Brenner has written extensively on this topic and dispels the mistaken view that the economy is "fundamentally strong". (in the words of former Treasury secretary Henry Paulson) Here's Brenner :

"The current crisis is more serious than the worst previous recession of the postwar period, between 1979 and 1982, and could conceivably come to rival the Great Depression, though there is no way of really knowing. Economic forecasters have underestimated how bad it is because they have over-estimated the strength of the real economy and failed to take into account the extent of its dependence upon a buildup of debt that relied on asset price bubbles.

“In the U.S., during the recent business cycle of the years 2001-2007, GDP growth was by far the slowest of the postwar epoch. There was no increase in private sector employment. The increase in plants and equipment was about a third of the previous, a postwar low. Real wages were basically flat. There was no increase in median family income for the first time since World War II. Economic growth was driven entirely by personal consumption and residential investment, made possible by easy credit and rising house prices. Economic performance was weak, even despite the enormous stimulus from the housing bubble and the Bush administration's huge federal deficits. Housing by itself accounted for almost one-third of the growth of GDP and close to half of the increase in employment in the years 2001-2005. It was, therefore, to be expected that when the housing bubble burst, consumption and residential investment would fall, and the economy would plunge. " ("Overproduction not Financial Collapse is the Heart of the Crisis", Robert P. Brenner speaks with Jeong Seong-jin, Asia Pacific Journal)

What Brenner describes is an economy \that--despite unfunded tax cuts, massive military spending and gigantic asset bubbles--can barely produce positive growth. The pervasive lethargy of mature capitalist economies poses huge challenges for industry bosses who are judged solely on their ability to boost quarterly profits. Goldman's Lloyd Blankfein and JPM's Jamie Dimon could care less about economic theory, what they're interested in is making money; how to deploy their capital in a way that maximizes return on investment. "Profits", that's it. And that's much more difficult in a world that's beset by overcapacity and flagging demand. The world doesn't need more widgets or widget-makers. The only way to ensure profitability is to invent an alternate system altogether, a new universe of financial exotica (CDOs, MBSs, CDSs) that operates independent of the sluggish real economy. Financialization provides that opportunity. It allows the main players to pump-up the leverage, minimize capital-outlay, inflate asset prices, and skim off record profits even while the real economy endures severe stagnation.

Financialization provides a path to wealth creation, which is why the sector's portion of total corporate profits is now nearly 40 per cent. It's a way to bypass the pervasive inertia of the production-oriented economy. The Fed's role in this new paradigm is to create a hospitable environment (low interest rates) for bubble-making so the upward transfer of wealth can continue without interruption. Bubblemaking is policy.

As we've pointed out in earlier articles, scores of people knew what was going on during the subprime fiasco. But it's worth a quick review, because Robert Rubin, Alan Greenspan, Timothy Geithner, and others have been defending themselves saying, "Who could have known?".

The FBI knew ("In September 2004, the FBI began publicly warning that there was an "epidemic" of mortgage fraud, and it predicted that it would produce an economic crisis, if it were not dealt with.") The FDIC knew. ( In testimony before the Financial Crisis Inquiry Commission, FDIC chairman Sheila Bair confirmed that she not only warned the Fed of what was going on in 2001, but cited particular regulations (HOEPA) under which the Fed could stop the "unfair, abusive and deceptive practices" by the banks.) Also Fitch ratings knew, and even Alan Greenspan's good friend and former Fed governor Ed Gramlich knew. (Gramlich personally warned Greenspan of the surge in predatory lending that was apparent as early as 2000. Here's a bit of what Gramlich said in the Wall Street Journal:

"I would have liked the Fed to be a leader" in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial with Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board. "He was opposed to it, so I didn't really pursue it," says Mr. Gramlich. (Wall Street Journal)

So, Greenspan knew, too. And, according to Elizabeth MacDonald in an article titled "Housing Red flags Ignored":

"One of the nation’s biggest mortgage industry players repeatedly warned the Federal Reserve, the Federal Deposit Insurance Corp. and other bank regulators during the housing bubble that the U.S. faced an imminent housing crash....But bank regulators not only ignored the group's warnings, top Fed officials also went on the airwaves to say the economy was "building on a sturdy foundation" and a housing crash was "unlikely."

So, the Mortgage Insurance Companies of America [MICA] also knew. And, here's a clip from the Washington Post by former New York governor Eliot Spitzer who accused Bush of being a ‘partner in crime’ in the subprime fiasco. Spitzer says that the OCC launched “an unprecedented assault on state legislatures, as well as on state attorneys general just to make sure the looting would continue without interruption. Here's an except from Spitzer's article:

"In 2003, during the height of the predatory lending crisis....the OCC promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules. (Washington Post)

So, the Fed knew, the Treasury knew, the FBI knew, the OCC knew, the FDIC knew, Bush knew, the Mortgage Insurance Companies of America knew, Fitch ratings knew, all the states Attorneys General knew, and thousands, of traders, lenders, ratings agency executives, bankers, hedge fund managers, private equity bosses, regulators knew. Everyone knew, except the unlucky people who were victimized in the biggest looting operation of all time.

Once again, looking for conspiracy, just diverts attention from the nature of the crime itself. Here's a statement from former regulator and white collar criminologist William K. Black which helps to clarify the point:

"Fraudulent lenders produce exceptional short-term ‘profits’ through a four-part strategy: extreme growth (Ponzi), lending to uncreditworthy borrowers, extreme leverage, and minimal loss reserves. These exceptional ‘profits’ defeat regulatory restrictions and turn private market discipline perverse. The profits also allow the CEO to convert firm assets for personal benefit through seemingly normal compensation mechanisms. The short-term profits cause stock options to appreciate. Fraudulent CEOs following this strategy are guaranteed extraordinary income while minimizing risks of detection and prosecution." (William K. Black, "Epidemics of'Control Fraud' Lead to Recurrent, Intensifying Bubbles and Crises", University of Missouri at Kansas City - School of Law)

Black's definition of "control fraud" comes very close to describing what really took place during the subprime mortgage frenzy. The investment banks and other financial institutions bulked up on garbage loans and complex securities backed by dodgy mortgages so they could increase leverage and rake off large bonuses for themselves. Clearly, they knew the underlying collateral was junk, just as they knew that eventually the market would crash and millions of people would suffer.

But, while it’s true that Greenspan and Wall Street knew how the bubble-game was played; they had no intention of blowing up the whole system. They simply wanted to inflate the bubble, make their profits, and get out before the inevitable crash. But, then something went wrong. When Lehman collapsed, the entire financial system suffered a major heart attack. All of the so-called "experts" models turned out to be wrong.

Here's what happened: Before to the meltdown, the depository "regulated" banks got their funding through the repo market by exchanging collateral (mainly mortgage-backed securities) for short-term loans with the so-called "shadow banks" (investment banks, hedge funds, insurers) But after Lehman defaulted, the funding stream was severely impaired because the prices on mortgage-backed securities kept falling. When the bank-funding system went on the fritz, stocks went into a nosedive sending panicky investors fleeing for the exits. As unbelievable as it sounds, no one saw this coming.

The reason that no one anticipated a run on the shadow banking system is because the basic architecture of the financial markets has changed dramatically in the last decade due to deregulation. The fundamental structure is different and the traditional stopgaps have been removed. That's why no one knew what to do during the panic. The general assumption was that there would be a one-to-one relationship between defaulting subprime mortgages and defaulting mortgage-backed securities (MBS). That turned out to be a grave miscalculation. The subprimes were only failing at roughly 8 percent rate when the whole secondary market collapsed. Former Treasury Secretary Paul O'Neill explained it best using a clever analogy. He said, "It's like you have 8 bottles of water and just one of them has arsenic in it. It becomes impossible to sell any of the other bottles because no one knows which one contains the poison."

And that's exactly what happened. The market for structured debt crashed, stocks began to plummet, and the Fed had to step in to save the system. Unfortunately, that same deeply-flawed system is being rebuilt brick by brick without any substantive changes.. The Fed and Treasury support this effort, because--as agents of the banks--they are willing to sacrifice their own credibility to defend the primary profit-generating instruments of the industry leaders. (Goldman, JPM, etc) That means that Bernanke and Geithner will go to the mat to oppose any additional regulation on derivatives, securitization and off-balance sheet operations, the same lethal devices that triggered the financial crisis.

So, there was no conspiracy to blow up the financial system, but there is an implicit understanding that the Fed will serve the interests of Wall Street by facilitating asset bubbles through "accommodative" monetary policy and by opposing regulation. It's just "business as usual", but it's far more damaging than any conspiracy, because it ensures that the economy will continue to stagnate, that inequality will continue to grow, and that the gigantic upward transfer of wealth will continue without pause.

Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com

[JackRiddler]

Thanks AD!

Of course there was a plan to blow up the economy, because the system has always functioned that way: growth to stagnation to bubble to crash. The big players act accordingly. This is old stuff. I think the Whitney article is a good summary of the dynamics that must operate in a capitalist system requiring annual growth. He shouldn't use the C-word, which triggers reactions even when it's being dismissed.

Marx gave a name to the dynamic that always brings stagnation, and with it crisis, as the "tendency of the rate of profit growth to decline in the long run." Aside from his theoretical understanding of it, it's simply an empirical observation, one that classical economics also accepted and that modern economists wrap in the euphemism of the "business cycle."

Sooner or later, it gets hard for any business to make more money. My own view attributes this to a mix of causes that add up differently in each phase of development, sector and place, but always achieve the force of overdetermination. These factors include the size of markets for any given new good, standardization and its adoption by competitors, efficiency gains (these are actually bad for overall profit) and overproduction, weight of prior capitalization (e.g., debt accumulated in building a business), workers demanding a share of growth.

Growth stopping always means immediate crisis. It is an intolerable situation under capitalism. Most of the economy is on a perpetual treadmill of payments and oncoming liabilities, one that has accelerated constantly with the growth of the system as a whole. There must always be growth! When enticement via advertising and fashion fail, there are many solutions that economic actors depending on their position can try: enter new markets, squeeze the workers, enclose new fields, commodify previously non-commercial activities, invade new territories if available. All of these have the quality that they are also subject to the same dynamics that ultimately limit growth. Also, they've been done. The planet's covered. Water's being commodified. Each new field of profit through enclosure, conquest or commodification represents an increasingly tiny fraction of the matured economies of the advanced capitalist states.

Hit up the government for more subsidies to your industry or stimulus through tax cuts: that's a big one. Contrary to market ideology, government intervention at each stage of development is a requirement of industrial capitalism. Governments and public sector arrangements pay the initial expenses of a technology, build the infrastructure, protect key markets from competition, provide market as buyers, leave the profitable parts to private ownership that can be hailed as the sole creator of all this invested value, absorb social and ecological costs, and step in with bailouts when failure comes.

There are two cannibalistic strategies that rely on the strength of one sector to extract value by force from others. First are the forced-profit industries: war, the perceived need of "defense" and security, policing, food, energy and seemingly life-giving drugs or the drug war industries around highly addictive illegal ones are all examples of indusries where suppliers may at times gain, and have often gained, the possibility to force consumption. These can go beyond cannibalism to clear-cutting and "creative destruction." Level some cities, destroy some countries. The bombing and the rebuilding are both stimulus. This is a specialty in which the Bush mob has made its niche.

The related strategy is to raise rentier income, which usually requires taking over a piece of the state for enforcement or what's today called regulatory capture. Rentier income = such as derives from rents, interest, or premiums that are inescapable to those who must pay them. The abusive elements of the new health plan are an example (forcing people to buy from private for-profit corporations).

There's also the possibility of faking the numbers, which has become more common as the numbers have become more sophisticated in recent decades. Fake numbers when you can get away with them confer real advantages - the country that appears to be growing is likelier to attract capital. This is also strategy for the strong. Latvia doesn't have much room to fake numbers and have these accepted by the world market. The United States does, and has had a lot of success with it since the 1990s. (I'm referring to the work of John Williams in exposing canards like the "hedonic deflator.")

But the biggest thing that always happens whenever a productive economy hits growth limits due to maturity of given industries or stagnation in demand is the resort to massive financial speculation: asset inflation powers a game I like to call Fixed Ponzi Chicken.

Fixed Ponzi Chicken: The Rules

The state or the financial sector generates credit and directs as much loose investment capital as possible into a casino-like inflation in a sector (usually one) that is declared Super Sexy (tulips, Louisiana and the South Sea, carpetbagging after the Civil War, IT in the 1990s, housing after 9/11). This is the ultimate in cannibalistic rentier strategies. The end product is to create unimaginable fortunes for a few and a mountain of new debt for everyone else.

Visionaries declare that the Sexy Sector is The Future. Economists make up fancy formulae to prove it. Pollyanna pundits hold sermons about why it's the latest manifestation of Our Destiny and Greatness. Beneath the bullshit, the real rules of the game are simple: Each gambler, large and small, has the goal of seeing how high he can ride the inflation of assets in the Sexy Sector. The goal is to sell at peak and watch the crash from the safety of a cash haven.

It's Fixed because the big players have many more means with which to play, such as hedge funds, derivatives and leverage. They directly affect markets through their actions; every move they make is in a sense an insider trade, because its impact will be predictable. They have incomparably greater access to knowledge than the little players. They also hang out with each other at the same clubs. Of course, they also compete with each other, and some of them will be among the losers.

It's Ponzi because at some point, long after unsustainable price levels have been reached, the inflow of new investment in the Sexy Sector is guaranteed to run out, inducing a crash.

It's Chicken because almost no one wants to get off before peak, and this drives the peak to ever higher and more irrational heights, beyond what almost anyone seriously expects. Selling too soon, even at a gain, is considered a loss and a shame - you're a coward! Many sell only to take their gains and go right back in to the market.

Any bears in the game are at first isolated. During the rise, the sensible people who point out that gravity will inevitably apply and take up short or bearish positions are trampled by the rush of others who just want to watch the numbers go up and up and up because that's how absurd fortunes might be made. Long as the money is there to be attracted, the game will keep going contrary to any realistic view of the Sexy Sector's actual value. Even smart bears will like a wild rising market for the volatility that increases chances of very short-term gains. When the asset inflation threatens to slow down, as we've seen, banks will devise ways to artificially stimulate further investment. Governments will step in to provide new stimulants. But the crash will come, and those who can predict it (or induce it) with the greatest accuracy and set themselves up on the short side just as it arrives are the ones who will make the greatest, most outrageous fortunes.

The game has been the same for centuries! When one bullshits enough, the mind has a way of making it seem real. Even major players can delude themselves that "this time is different" and ride the wave just past peak into a crash. Nevertheless, most of them know exactly what they are participating in. They MUST bullshit on the upswing, because bullshit is the driving force of the upswing. They must bullshit after the crash, to protect themselves. The post-crash bullshit holds that they believed the upswing bullshit and were caught entirely by surprise when the market crashed.

Like class society in general, Fixed Ponzi Chicken relies on group think, extreme compartmentalization, dispersed responsibility, and a revolving door of roles. The system gets better at it with each round. In 1720, everyone in Paris wanted John Law's head on a pike because they knew he was the most responsible party for the Louisiana crash. Right now, there really is no such person, unless it's Greenspan, but he merely gave monetary impulse at a time when it was supposedly demanded by nothing less than a national emergency. He didn't design the various schemes.

In this sense, even Goldman Sachs is a scapegoat, because present laws don't allow the prosecution of a class. Goldman was criminal on a grand scale, but since the laws were written to their favor it's not clear that their crimes were also illegal; and they were merely among those who were best at it.

It's like a mob of looters. Being a mob enables them to do it, and being a mob helps them get away with it. After the store is emptied out, there's no way to reconstruct the mob: Who pointed them at the store? Who brought the liquor that steeled their nerves? Who broke the lock, who smashed the window? Who was the look-out? Who carried out which part of the loot? Who fenced it? Who paid the cop to look the other way?

Was it the policy makers, the deregulators? The popes who dispensed the Randian ideology? The vultures who looked for the subprime suckers at the bottom? The market-makers who ate the meat and bundled together the bones? The ratings agency priests who read the blessing over a pile of rotten bones? The guys who got bonuses on both sides of fixed deals? All of the above, obviously, but almost none culpably under the law, and within a process that was conveniently complex and organic, such that one's own role usually suggested itself at each point as a function of the reigning logic.

I can tell you one party that really is innocent: the mortgage suckers. They're always there. They will always be willing to take easy money at some unpayable future interest rate. But they don't decide when it's offered to them.

The current crisis came with the stagnation of the 1970s. The postwar US consumer society first hit its limits to easy growth at that time. The major competitors had rebuilt since the war and challenged the US in all markets. Growth through imperialism had suffered two major setbacks: Vietnam and the rise of OPEC. The reaction was everything we associate with neoliberal economics and neo-imperialist foreign policy, but at the same time capital demanded its unleashing in every way. This was why financial deregulation was demanded - they could no longer make money under the rules that had been set up to prevent crashes. This is an unresolvable conflict of capitalism. The mechanisms for preventing its periodic economic and financial catastrophes only exacerbate its eternal difficulties with achieving cumulative net profit ("growth").

So there was a massive shift to financial speculation as the new field within which profits could always be made. Since then you've had wave after wave of banking deregulation and easy credit to allow the generation of bubbles. Finally, boom. And then boom. And coming soon: boom.

[seemslikeadream]

Pelosi: Bush Admin Barred Officials From Briefing Congress On Impending Financial Crisis in Fall 2008
Brian Beutler | May 3, 2010, 2:39PM

Nearly two years after the Wall Street meltdown drove the U.S. economy to the brink of collapse, and forced the U.S. government to prop up major financial institutions with hundreds of billions of dollars, House Speaker Nancy Pelosi now claims that the Bush Administration prohibited its own top officials who were handling the emerging crisis from briefing Congress until a complete financial collapse was only hours away.

In little-noticed statements to reporters over the last few weeks, Pelosi has alleged that the Bush administration knew well in advance of its intervention that the financial crisis would hit, and that Congress would need to authorize a historic and unpopular bailout - but that top officials, including then-Treasury Secretary Henry Paulson, told her that they had been barred from briefing Congress about true extent of the crisis.

If accurate, the allegation could constitute a major indictment of the Bush administration, which may have worsened the crisis and resulting economic fallout by delaying the call for congressional action. Pelosi says the admissions from Bush administration officials that they had kept Congress in the dark came in private conversations between her and those officials in person and by phone. None of the other parties to those conversations would comment for this story. Nor is it clear if the Administration's alleged decision not to brief Congress earlier was a calculated strategy to avoid spooking the already shaky financial markets thus hastening the crisis or, as Pelosi suggests, a political calculation in advance of the 2008 presidential elections, or a combination of the two.

During her weekly press conference on April 15, a reporter asked Pelosi a seemingly innocuous question about taxes. Pelosi prefaced her response with a fairly standard litany: explaining the dire state of the U.S. economy inherited by President Obama and setting the blame at the foot of the Bush administration. But she also added this: "When [then-Senator Obama] accepted the nomination in Colorado, the [Bush] Administration had kept from the public the idea that, in a matter of weeks, the financial community would be in crisis, and we would need to pass the TARP legislation."

Much has been written about the days, weeks, and months leading up to the financial crisis, which culminated with Lehman Brothers declaring bankruptcy on September 14, 2008. We know, for instance, that Treasury officials in the Bush administration had conceived of a contingency plan along the lines of the TARP bailout months before they actually called for one: a "break the glass" Bank Recapitalization Plan. And it was no secret to anybody paying attention that the financial system had suffered major shocks throughout 2008. But Pelosi appeared to be saying that Paulson and others knew that the glass would have to be broken weeks before they begged her and other congressional leaders to step in.

To clarify, I followed up with her after that press conference.

Pelosi affirmed my interpretation of what she'd said.

She recounted to me the events of September 18, 2008 - some two weeks, she reminded me, after Barack Obama accepted the Democratic Presidential nomination in Denver. Lehman Brothers had just filed for bankruptcy four days earlier and the Federal Reserve had authorized the New York Fed to lend up to $85 billion to insurance giant AIG. That afternoon, she called Paulson to ask for a full briefing the next morning.

"They said, 'That will be too late. That will be too late. Tomorrow morning, 9 o'clock will be too late,'" Pelosi recalled.

In a meeting that evening with Congressional leaders and staff, Paulson, Fed Chairman Ben Bernanke, and others offered a dire assessment, and made an appeal for intervention that ultimately resulted in TARP. Bernanke and Paulson beseeched the legislators to act quickly, warning that, the entire U.S. economy might collapse in days without rapid intervention. But Pelosi had a question. "I asked them, and said, 'Why am I calling you - why didn't you call me?," Pelosi said.

In our initial conversation, that's where Pelosi stopped: "You go ask them what their response was to that question."

I reached out to Paulson multiple times over the last two weeks, but received no response. Phil Swagel, who served as assistant secretary for economic policy at the Treasury department during the crisis, didn't have an answer to the question Pelosi says she asked. But he insisted that the department made the call on TARP based on the shocks that hit Wall Street that week of the Lehman Brothers bankruptcy and no earlier. "From my perspective, the TARP proposal was put forward as a result of the events of the week of September 14, notably the stresses in money markets (money market mutual funds and commercial paper)," Swagel told me via email.

Unable to reach Paulson, I circled back to Pelosi last week. This time she agreed to elaborate: "Here's what they said. They said, 'We were not allowed to tell Congress, but since you called, we're going to answer your questions.'"

Pelosi offered no hints as to why the Bush administration would prohibit its top lieutenants from speaking up about the need for federal intervention. Among their concerns might have been sowing panic that would have added further strains to financial markets already close to the breaking point. But Pelosi's comments suggest, though she declines to go farther, that election year politics played into the equation.

In his book, On The Brink, Paulson recounts the events of September 18th and the days leading up to TARP. Paulson notes that, hours prior to the meeting, Pelosi sought to include fiscal stimulus in any recapitalization plan, and that during the meeting, House Financial Services Committee Chairman Barney Frank pushed to include pay restrictions for participating executives, but that he resisted both ideas.

Paulson acknowledges that Pelosi did indeed place the phone call that resulted in the briefing that evening.

"On my way to the White House, Nancy Pelosi called to ask about the market. She had wanted me to come up the following morn with Ben [Bernanke] to brief the Democratic leadership. I related just how bad things were and told her we would have to go to the Hill that night to ask for emergency powers. She asked why it couldn't wait until the morning, and I replied it might be too late by then.
He does not, however, explain why the administration didn't approach Congress unprompted.

A spokesman for former President George W. Bush had no comment on this story.

I asked Senate Banking Committee Chairman Chris Dodd last week about Pelosi's charges and he said this is the first time he's heard such an allegation raised. But he seemed mostly unsurprised. "I said to Hank Paulson, 'Be Hank Paulson.'" Dodd told me. "If you listen to the White House, you're going to mess this up."

Two days after the September 18 meeting, the Treasury Department presented what came to be known as TARP to Congress. The original, three-page draft, would have ceded the Bush administration extraordinary authority to purchase assets from the private sector, barring oversight or judicial review. Congressional principals agreed to push ahead with a bailout, but refused to grant the executive branch all of the powers they were seeking. On September 29, House Republicans blocked the Emergency Economic Stabilization Act of 2008, pushing markets over a cliff and sending shudders through the White House and Wall Street. Days before, Paulson famously dropped to one knee and begged Pelosi to round up enough Democrats to pass the bill. But the Republicans ultimately delivered the votes they promised and TARP passed on round two, and was signed into law on October 3.

[stefano]

Great stuff, Jack, thanks.

[elfismiles]

I'm not reading all 28 pages of this thread so if someone else has already made this discovery, oh well.

I think I've finally figured out the problem...

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http://www.youtube.com/watch?v=KLRPGJ8sDbU

[seemslikeadream]

3rd UPDATE: NY AG Subpoenas 8 Banks In Mortgage Ratings Probe -Source

(Updates with Moody's cooperating with probe.)

By Chad Bray Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--New York Attorney General Andrew Cuomo has subpoenaed eight banks in a probe into whether misrepresentations were made about some securities backed by mortgages in order to improve their credit ratings, a person familiar with the investigation said Thursday.

The three major rating agencies--McGraw-Hill Cos.' (MHP) Standard & Poor's, Moody's Corp.'s (MCO) Moody's Investor Service and Fimalac SA's (FIM.FR) Fitch Inc.--also have received subpoenas in the probe, the person said. The subpoenas were issued late Wednesday, the person said.

The investigation is in its early stages and it's unclear if it could ultimately result in criminal or civil charges.

The subpoenas, which seek a broad range of documents, are focused on the banks' interactions with the rating agencies regarding a variety of structured finance products, including collateralized debt obligations and other asset-backed securities. CDOs are securities which can include pools of mortgage bonds as part of their underlying assets.

The banks are Bank of America Corp.'s (BAC) Merrill Lynch & Co., Morgan Stanley Inc. (MS), Citigroup Inc. (C), Deutsche Bank AG (DB, DBK.XE), Goldman Sachs Group Inc. (GS), UBS AG (UBS, UBSN.VX), Credit Suisse Group (CS, CSGN.VX) and Credit Agricole (CRARY, ACA.FR).

The New York Times reported the Cuomo subpoenas in its editions Thursday.

Merrill Lynch, Deutsche Bank, UBS, Moody's and Fitch said they would comply with the subpoenas and cooperate with the probe. Goldman Sachs, Credit Suisse, Morgan Stanley, Citigroup and Credit Agricole declined comment. S&P didn't immediately respond to a request for comment.

The Cuomo probe comes as federal prosecutors in Manhattan and the U.S. Securities & Exchange Commission are looking into whether several banks made misrepresentations to investors about CDOs.

The Wall Street Journal reported Thursday that the U.S. Attorney's office in Manhattan is conducting a preliminary criminal probe of J.P. Morgan Chase & Co. (JPM), Citigroup, Deutsche Bank and UBS, citing a person familiar with the matter. The Journal has reported Goldman Sachs and Morgan Stanley are under preliminary criminal scrutiny.

The U.S. Securities & Exchange Commission also has issued civil subpoenas to the banks in a probe of mortgage-backed securities, the Journal reported, citing a person familiar with the matter.

[seemslikeadream]

Greek leader considers action against US banks
By DEMETRIS NELLAS (AP) – 3 hours ago
ATHENS, Greece — Greek Prime Minister George Papandreou declared he is not ruling out taking legal action against U.S. investment banks for their role in creating the spiraling Greek debt crisis.
Both the Greek government and its citizens have blamed international banks for fanning the flames of the debt crisis with comments about Greece's likely default, actions that are causing the country's borrowing costs to soar.
"I wouldn't rule out that (legal action) might be a recourse. But we need to let due process (take its course) and then make our judgments once we get the results from the investigations," Papandreou said in a CNN interview broadcast Sunday.
He did not elaborate further on any actions against U.S. banks.
Papandreou also said a parliamentary investigation will examine the rapid swelling of Greece's debt and international banking practices to examine whether the financial sector engaged in "fraud and lack of transparency."
The European Union and the International Monetary fund have approved a euro110 billion ($136 billion) bailout package for Greece. In addition, European nations have created a euro750 billion ($1 trillion) rescue package to protect the euro, the common currency of 16 European nations, including Greece.
The Greek leader also urged more regulation of the markets which, in his view, are now betting against the European governments that have poured billions into them since the global financial crisis began in 2008.
Some European governments plan to push for tighter regulation of hedge funds this week — a move opposed by Britain, home to the financial hub of London.
Papandreou also tried to counter criticism, expressed mainly in Germany, that Greeks are getting a free ride and rejected widespread international skepticism about Greece's ability to pay back its loans. Greek debt is scheduled to exceed 140 percent of its economic output in 2012.
"We are paying back the loans we are getting ... this saying that 'we are handing out money to Greece' is not true," he told the CNN show "Fareed Zakaria GPS." "It is very easy to scapegoat Greece and Greece bashing very often gets entangled in regional politics."
He insisted his government has made the unpopular but necessary decision to implement austerity measures.
"We are ready to make the changes ... we have made our mistakes. We are living up to this responsibility. But at the same time, give us a chance," Papandreou said.
Still, another top German economist expressed doubts Sunday about Greece's ability to repay.
Deutsche Bank AG's Chief Executive Josef Ackermann created an uproar Thursday for mentioning the possibility that Greece might have to restructure its debt — but Dekabank's chief economist, Ulrich Kater, was quoted as agreeing with him Sunday in the German news website Handelsblatt.
"It will be very, very difficult for Greece to orderly repay its debt," Kater was quoted as saying, adding that Greece's new austerity measures and its lack of competitiveness were dooming the country's prospects for economic growth, making debt reduction difficult.
Despite widespread anger about tax hikes and other austerity measures imposed by Papandreou's Socialist government, his party still enjoys more support than its predecessor, the discredited conservative party.
According to a poll published Sunday in conservative-leaning newspaper Kathimerini, Papandreou's popularity has plunged from 53 percent in January to 43 percent in May. The same poll showed that opposition leader Antonis Samaras has sunk from 26 percent approval in February to 18 percent in May.
On the other hand, 76 percent of respondents also say they are unsatisfied with the Socialist government's performance.
The poll was conducted May 6-10 with a sample of 1,006. Its margin of error was plus or minus 3.2 percent.
(This version CORRECTS that loan package for Greece is separate from $1 trillion euro rescue package. )

[seemslikeadream]

A CounterPunch Special Report

Trader's Harrowing Tape of Market Plunge Reveals Big Name Sellers

SEC Admits to Inadequate Tools to Conduct Investigation

By PAM MARTENS

SEC Chair Mary Schapiro made a stunning admission during House subcommittee hearings last week seeking answers to the May 6 hit and run in the stock market which briefly trimmed 998 points off the Dow and caused massive losses to small investors who had placed stop loss orders on individual stocks.

According to Ms. Schapiro, the SEC has no consolidated audit trail that captures time and sales in a chronological order among the 40 or more electronic trading platforms and exchanges that constitute today’s deeply fragmented U.S. stock market.

Ms. Schapiro said in her testimony before the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises that there were 66 million trades on May 6, coming from the 40 or more stock trading venues. The SEC has requested the individual trading records and must figure out how to review all the disparate trading in sequential time order. Some trading records reside at unregulated entities like hedge funds. Other trades are done by dark pools, internal matching of buys and sells inside brokerage firms (benignly called internalization) and over the counter derivative trades that could impact the stock market but have no oversight by anyone. Ms. Schapiro said she has issued subpoenas but didn’t say to whom.

Ms. Schapiro’s testimony raises the question as to whether the SEC has been properly monitoring potentially rigged trading in real time up to this point.

As far back as five months ago, the SEC was gently coaxing Wall Street to let it police it with proper tools. Below is an excerpt from a speech delivered by James Brigagliano, Deputy Director of the SEC’s Division of Trading and Markets on January 21, 2010 to the Securities Industry and Financial Markets Association (SIFMA), the heavy handed trade and lobby association of Wall Street:

“Chairman Schapiro has expressed her commitment to improving intermarket surveillance. As a step towards fulfilling that commitment, she created an inter-division task force to work with markets to explore ways to establish a comprehensive consolidated audit trail for orders and executions across all markets. While we recognize that such a proposal would require a substantial effort by the SROs [Self Regulatory Organizations] and their members, a consolidated audit trail could be an invaluable regulatory tool to enhance the ability of the SROs and the Commission to detect illegal activity across multiple markets, and would greatly benefit investors and help to restore trust in the securities markets.”

Since when do real cops ask the perps for permission to police them?
Many eyebrows were raised among Wall Street skeptics when President Obama appointed Ms. Schapiro to head the SEC on January 20, 2009. Ms. Schapiro came to the SEC from the Financial Industry Regulatory Authority (FINRA), the self regulatory watchdog of Wall Street, where she served as CEO. Prior to that, she was the Chairman and CEO of the predecessor self regulator, NASD Regulation, which carried the stigma of running a private justice system for Wall Street that investors, industry employees and lawyers felt was rigged in favor of the industry. Why Ms. Schapiro did not insist on creating a consolidated audit trail in her prior regulatory roles or after the four-decade Madoff swindle was revealed remains a nagging question.

Another person to provide Congressional testimony on May 11 was Chief Operating Officer of the New York Stock Exchange, Larry Leibowitz, who was also unable to explain what caused the crash on May 6. Mr. Leibowitz’ younger brother, Comedy Central’s Jon Stewart, had upstaged the hearings the day before on his program “The Daily Show” with his own apt diagnosis. Showing an endless stream of news anchors characterizing everything from the GM bailout to the mortgage crisis to the rescue of AIG as caused by the “perfect storm,” Stewart said: “I’m beginning to think these are not perfect storms. I’m beginning to think these are regular storms and we have a sh*tty boat.”

My only quibble with Stewart’s analysis is that it’s not just that we have a sh*tty boat. It’s that the pirates have a souped up speedboat with computers run by algorithms and have infiltrated the water patrol.

The Congressional testimony of Terry Duffy, Executive Chairman of the Chicago and New York based futures exchanges, known as the CME Group, Inc., raised more alarm bells. Mr. Duffy told the House hearing that “The CME [Chicago Mercantile Exchange] markets functioned properly on May 6, 2010.” “Functioned properly” is clearly a subjective term as his market came within 3 points of being locked limit down. Locked limit down is when the futures market hits a preset percentage decline that automatically halts trading. Without the S&P 500 trading, the cash stock market would have had even less price transparency and this would have accelerated panic selling.

Speaking of the popular futures contract on the Standard and Poor’s 500 called the E-Mini, Mr. Duffy reported that “the market traded in a largely orderly manner…the bid/ask spread momentarily widened to 6.5 points…Market Regulation staff ultimately concluded that there were no anomalies represented by the level of activity or the trading strategies employed by market participants.”

Mr. Duffy’s testimony stands in stark contrast to a harrowing audio tape of the bungee jump in the Standard and Poor’s 500 futures pit between 2:42 and 2:51 p.m. New York time; 1:42 and 1:51 Central time. The tape was made by Ben Lichtenstein, who has worked on the trading floor of the Chicago Mercantile Exchange (CME) for 17 years. Starting out as a runner, then member, then trader, Mr. Lichtenstein launched a savvy service for private investors, traders and asset management companies who need to take the pulse of the futures market in real time. Called TradersAudio.com, the service provides a live audio feed directly from the trading pit in Chicago with Mr. Lichtenstein calling out the play by play as trades occur. He says it’s “like being in the pits without all the pushing and shoving.”

Mr. Lichtenstein has confirmed that this is an authentic tape of his broadcast during the plunge.

At several points on the tape, Mr. Lichtenstein clearly indicates that there is a 10 point spread between the bid and the ask. Mr. Duffy told the House hearing that the spread reached a maximum of 6.5 points. A 10 point spread shows a seriously illiquid market where big players have pulled their support.

At one point on the tape Mr. Lichtenstein yells out: “This is probably the craziest I’ve seen it down here ever.” At another point he says the move through the figure was “just nuts,” meaning when the S&P 500 broke its support level of 1100 no buying support came in; a highly unusual occurrence.

Mr. Lichtenstein calls out the names of Salomon and Morgan Stanley as sellers as the plunge worsens. Both of these firms received taxpayer bailouts and Salomon, a unit of Citigroup, is currently a ward of the taxpayer. If these firms were shorting the market for their own in-house casinos, (their proprietary trading desks), the American people have a right to know and so does Congress. It goes to the very heart of legislative proposals to ban proprietary trading at banks holding insured deposits.

In the brief morning comments that are broadcast in the audio, Mr. Lichtenstein calls out that Pru Bache is selling. Stockbrokers I checked with were shocked to learn Prudential Bache has miraculously arisen from the dead. The company was depicted in Kurt Eichenwald’s epic tome, “Serpent on the Rock,” regarding its massive securities fraud in limited partnerships in the 1980s and 90s. The jacket cover reads: “Backstabbing. Lying. Embezzling. Coverups. Just another day on Wall Street in history’s biggest corporate swindle.” It’s less than comforting to know that the name Pru Bache is being called out on a day that looks like serious manipulation at work.

Nor is it comforting to hear that Salomon is selling. Citigroup uses many monikers to trade around the world. Salomon is one of them. Here’s how Bloomberg described a trade Citigroup code named “Dr. Evil” in 2004:

“On Aug. 2, 2004, between 10:28 and 10:29 a.m., Citigroup traders sold 11.3 billion euros of government bonds in 18 seconds using MTS, according to the Financial Services Authority. A further 1.5 billion euros of bonds were sold on other markets. At the time, an average 13.5 billion euros of bonds traded each day on MTS. The traders had planned to sell only 8 billion euros to 9 billion euros of bonds and weren't expecting the system to work as well as it did, the FSA said. About seven minutes later, they started buying back 3.8 billion euros of bonds after the securities dropped in price. The Citigroup team also bought 66,214 futures contracts and booked an $18.5 million profit on the day, the FSA said.”

I asked the CME if they would aggregate all the trades done by Citigroup and its affiliates and subsidiaries (Citigroup, Citibank, Salomon, Smith Barney, etc.) to see if Mr. Duffy’s statement would hold up that there “were no anomalies represented by the level of activity or the trading strategies employed by market participants.” The CME’s spokesperson, Allan Schoenberg, responded:

“Per your request for access to client trading information we do not provide access to that. As for your question about Citigroup and access to their information specifically you would have to discuss that with Citigroup. As CFTC Chairman Gensler noted, data that he and his staff have reviewed shows that the trades he referred to in his testimony appeared to be a bona fide hedging strategy.”

I took and passed the commodities licensing exam in 1986. At that time, a bona fide hedger was a party like an oil company hedging the price of oil; or a farmer in the Midwest hedging the price of corn. I don’t think securities laws intended that a Wall Street firm could trade for its own account, against the interest of its customers, and call it bona fide hedging. Until we know just what account these big firms were trading for and the aggregated volume of these trades by firm, we know nothing useful about their May 6 conduct. And let’s remember that these firms are already under investigation for potential rigging of the credit default swap and collateralized debt obligation markets.

According to Mr. Duffy, there were 1.6 million (yes, million) contracts traded in the E-Mini S&P 500 in the pivotal hour of 2:00 to 3:00 p.m. New York time. Each E-Mini trades at 50 times the level of the S&P 500 futures price. At 1100 on the S&P, that would be $55,000 per contract or about $88 billion (yes, billion) in one hour, an astonishing amount.

Last week Reuters leaked an internal document from the CME showing that Waddell & Reed has sold 75,000 contracts during that period with the suggestion that it might have triggered the plunge. The idea that this tiny Midwest mutual fund firm pulled something over on the Wall Street bad boys is specious at best and an intentional distraction at worst. If the report is correct, Waddell & Reed’s contracts represented 4.7 percent of those traded in that hour.

The Senate Banking Committee’s Subcommittee on Securities, Insurance and Investment is slated to pick up where the House left off this coming Thursday from 10:00 a.m. to 12:30 p.m. Hopefully, the Senate will probe the issues raised above, along with the following:

During the House hearings, no mention was made of the fact that three of the largest market cap stocks in the S&P 500 suffered losses far in excess of the overall market decline on May 6, raising a strong warning sign of potential manipulation.

The S&P 500 is weighted by the market capitalization of the individual stocks. Market capitalization is the share price times the number of shares outstanding. The impact of a price change in the S&P 500 index is proportional to significant price changes in the stocks ranking highest in market cap weighting. (Big price declines in a handful of the top tier stocks can crater the market index.) Apple Computer, GE and Procter and Gamble all fall within the top 10 component stocks of the S&P 500 and each of these stocks appears to have been targeted for excessive selling by some entity or algorithmic program on May 6. Sharp price declines in these pivotal stocks in the cash stock market quickly transmuted into selling in the futures market, creating a frenzy in the highly leveraged Chicago futures pits.

According to Standard and Poor’s website on May 14, 2010, Apple Computer ranks number 2 in importance in the S&P 500; GE ranks 4th; Procter and Gamble ranks 5th. At the worst point in the market, Apple had declined by 21.5 percent; GE by 16.6 percent; and Procter and Gamble by a whopping 36 percent. The overall market at its worst level had declined by only 9.2 percent. (3M dropped by 21 percent at its worst point but does not rank in the top 10 of the S&P by market cap.)

Before our so-called fair and efficient markets become the brunt of jokes on more comedy shows around the globe, the Senate needs to stop trying to legislate reforms in the dark and get to the bottom of just how rigged Wall Street really is.