Deposition Transcript of Deutsche Bank National Trust CO. VP Ronaldo Reyes

DBNT R R

"The Financial Industry Has Become So Politically Powerful That It Is Able To Inhibit the Normal Process of Justice And Law Enforcement"

by George Washington

In his acceptance speech for winner for best documentary at the Oscars, director Craig Ferguson said:

Three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that’s wrong.
But none of the mainstream, corporate networks covered it. Not CBS, ABC, NBC or MSNBC.

Ferguson told Reuters:

“The biggest surprise to me personally and biggest disappointment was that nobody in the Obama administration would speak with me even off the record — including people that I’ve known for many, many years,” Ferguson said backstage.

He believes Americans, who lost homes and jobs in the millions because of shady mortgage lending and bank collapses, are disappointed that “nothing has been done.”

“Unfortunately, I think that the reason is predominantly that the financial industry has become so politically powerful that it is able to inhibit the normal process of justice and law enforcement,” said Ferguson.

For background on the subversion of justice to the powers that be, see this.

Indeed, as I have repeatedly pointed out, fraud is one of the main causes of the financial crisis. See this and this.

Even Bernie Madoff tells New York Magazine:

“I realized from a very early stage that the market is a whole rigged job. There’s no chance that investors have in this market.”

“The SEC,” he says, “looks terrible in this thing.” And he doesn’t see himself as the only guilty party on Wall Street. “It’s unbelievable, Goldman … no one has any criminal convictions. The whole new regulatory reform is a joke. The whole government is a Ponzi scheme.”

The economy cannot stabilize unless fraud is prosecuted. But the folks in D.C. seem determined to turn a blind eye to Wall Street shenanigans, and is now moving to defund the enforcement agencies like the SEC and CFTC.

And yet the large corporate media never covers this issue. An October 2009 Pew Research Center study on the coverage of the financial crisis found that the media has largely parroted what the White House and Wall Street were saying. (The mainstream media is also pro-war.)

In fact, the financial industry has become so politically powerful that it is able to inhibit the normal process of justice and law enforcement, and the American press.

Further Proof Of The Worsening Of The Real Estate Depression

by Reggie Middleton

Yesterday I notified, In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse. Today I will show specifically how things will get much worse. The numbers came out for new home sales today, and they were atrocious – and that’s after a downward adjustment for the previous month’s numbers. Follow the chart with the pretty colors below, keeping in mind that many economists believe that new housing construction is a pre-cursor to economic recovery.

New building sales have nearly come to a relative standstill, and would look like even more so if adjusted for inflation and population growth. As you can see, the economic sales volume served as a strong indicator in the downturn in pricing a year later at the top of the bubble. New home sales growth has just dipped again, as has Case Shiller prices, which is in and of itself overly optimistic.

Why such a drop in new sales? Well, outside of the macro factors involving credit, income and employment, there is the big elephant in the room – Shadow Inventory.

Yes, toxic assets are taking up more activity than healthy assets. This is what it has come to. Again, I request subscribers reference the Shadow Inventory Analysis model for what I consider to be the elephant in the room. Go through the whole model, of course, but pay attention to the first chart, “Years to Clear Shadow Inventory Backlog’, then the tabbed chart Delinquency and Home sales, then move on to the back of the model to examine the date behind this chart. It is frightening. At this point, we are actually digging a deeper hole for ourselves while the media is portraying signs of a recovery!

Jump across the world, and you see middle east turmoil and EU nations pushing default. To wit:

•ECB Swallows Massive Portuguese Bond Losses As It Is Clear That The Third State Will Soon Join The Bailout Brigade – Haircuts, Here We Come!!!
•The Coming Interest Rate Volatility, Sovereign Contagion, Geo-political Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global Real Estate Through This Mess
For those of you who feel these global events are unrelated to your neighbors foreclosed house across the street on Johnson Street in Peoria, listen closely. This “Real Estate Depression” has occurred with the most favorable interest rate environment possible, due largely to significant manipulation via monetary and fiscal policy in order to suppress rates – see Buried Deep Within The Files That The Federal Reserve Released On Thier MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks! as well as FASB Appears to Have Bent Over For The Final Time & Accuracy In Financial Reporting Dies An Ignominious Death!!!

This fairy tale, Goldilocks rate environment cannot last forever and will spell very bad words if rates shoot up faster than income. Guess what… The Inevitable Has Finally Been Admitted In Europe: The Macro Experiment Has Ignited Inflation Without Commensurate Growth & Rates Will Spike.

There are a plethora of nations ready to default/restructure any minute now, kicking off a rate storm that will cause havoc and spike cap rates. I even detailed Portugal’s scenario and made it available for all to see, haircut analysis and NPV losses to investors and all. Anyone interested in seeing the entire scenario analysis for Portugal should look here, you will find it nowhere else: The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog

For graphical evidence of what will happen to the housing market when the fecal matter flips off the fan blades, let’s revisit a topic that the popular media has forgotten about – Adjustable Rate Mortgages.

Above you have the Case Shiller composite 10 city index superimposed against the Freddie Mac 30 year and 1 year adjustable ARM historical rates. Tell me, which has the tightest correlation to prices. You can see where they dipped and caused a massive bubble, they rose and that bubble popped, and they were artficially supported and that bubble was partially reblown. Yes, the bubble was purposefully reblown, reference Buried Deep Within The Files That The Federal Reserve Released On Thier MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks!:

We have conducted analysis on all MBS sale and purchase transactions conducted by the Fed whose data was recently released. Of the total 10,058 MBS transactions, 72% were done at a yield of less than 5% (5% below yield of 4.0%, 32% between 4.0%-4.5%, 35% between 4.5-5.0%) with an average yield of 4.75% on all MBS transaction. The table below presents the number of transactions under their respective yield category.

We have also analyzed the yield on MBS purchased and MBS sold, looking for price discrepancies between MBS purchased and MBS sold. The data points out that the average yield on MBS purchased was 4.71%, 29bps lower than average yield for MBS sold, thus implying MBS purchased were at a higher price than MBS sold. You know that old government adage, buy high and sell low!

Yield on sale: 5.00%
Yield on purchase: 4.71%
Difference in bps: 29.1

Now, imagine this artificial suppression, both in the form of MBS purchases (which are supposed to be over) and QE in the form of Treasury Ponzi purchases, are overpowered by the market driven rate storm brewing ahead. After, even sales volume is correlated to ARM rates.

For those who haven’t seen the video I went into this in detail during a recent presentation. Of course, this can all be encapsulated in a more concise form. You know what they say – a picture is worth a thousand word… How likely is it that we can have 20 more years of housing price declines?

Note: There is a typo in the chart below. The 74% figure is carried over from the CRE Japanese chart.

A Guided Tour of the Financial Collapse Director Charles Ferguson’s Inside Job delivers a step-by-step look at the global economic crisis

BY ANDREW FISH

Investment giant Lehman Brothers went bankrupt on September 15, 2008, and the federal government began its bailout of the world’s largest insurance conglomerate, AIG, a day later. Cut to 2010 and record numbers of Americans have lost their homes and our unemployment rate now flirts with 10% in the aftermath of an economic meltdown. Millions of investors had poured trillions of dollars into mortgage-backed securities — within bundles called CDOs — and then witnessed an unparalleled number of homeowners fall behind in their payments. Years of subprime home mortgages going to those who ultimately couldn’t afford them, coupled with a longtime trend of predatory lending, had come to a head. As the value of these bundled securities dropped steeply in parallel with the delinquent mortgages, both the investors and the former homeowners were left in the dust. And though Lehman Brothers had been allowed to fail, other financial conglomerates were bailed out by the taxpayers. In his new documentary, Inside Job, director Charles Ferguson lays bare the world of investment banking and guides us step by step through the events that have led to our current condition. Via uncompromising interviews with economic advisors, executives, government officials, journalists, authors, professors, a lobbyist, a psychologist, and even an escort madam, the filmmaker illuminates the missteps, misplaced trust, shortsightedness, corruption, and greed that continue to permeate our financial system.

With a Ph.D. in political science from M.I.T., Ferguson has authored several books including High Stakes, No Prisoners: A Winner’s Tale of Greed and Glory in the Internet Wars. During his postdoctoral research at MIT, he consulted with the White House, the office of the U.S. Trade Representative, and the Department of Defense. He also founded the software company, Vermeer Technologies, which developed FrontPage, a widely used website development tool which he sold to Microsoft in 1996. His previous screen effort was No End in Sight: The American Occupation of Iraq (2007), which was nominated for an Academy Award for Best Documentary. When we connect with Ferguson, we’re treated to a clear and instructive tutorial on the systemic problems within the financial sector. Read the interview, then go see Inside Job.

Venice:

The term “financial innovation” sounds like a good thing. What does it mean and how does it relate to the current crisis?

Charles Ferguson:

In principle, financial innovation means any kind of design of new financial product, structure, or system, and there have been a number of good financial innovations over the last century. Over about the last 20 years, though, it has come to primarily refer to something much different and much more specific. What it refers to is the use of mathematics and statistics to design very complex financial products that enable various forms of speculation, gambling, and in some cases insurance — derivative products such as credit default swaps. So when securitization, when CDOs were invented [about 30 years ago], that was regarded as a financial innovation. And that whole class of innovations, mainly derivatives, have turned out to be very dangerous for several reasons. One reason is that they were, and still in large measure are, totally unregulated. They are a little bit more regulated now as a result of the financial reform bill that was just passed, but not much. And until that bill was passed they were completely unregulated. The second reason they were dangerous is that financial innovation over the last 30 years has come primarily to mean various ways to play tricks to “game” the system, as opposed to doing really productive things. A productive financial innovation — which is not a new one, it’s about 60 or 70 years old — is a venture capital partnership. Something that allows venture capital investments into startups; that was a productive financial innovation. But these things are mainly to enable people to gamble, to speculate, to avoid taxes, to avoid regulation, to avoid capital requirements. And the third reason that financial innovation has become so dangerous is that it was associated with compensation schemes whereby people get immediate cash bonuses when they sell complicated financial products, regardless of whether those products do well or not. The combination of those factors led to financial innovation turning out to be an incredibly dangerous thing, and rendering the financial system much more unstable and much more dangerous than it previously had been.

And that kind of gambling includes credit default swaps where a security can, technically, be insured by an infinite number of clients who don’t even own that security?

Yes. There are several dangerous things about credit default swaps, and one of them is that people who don’t own the security are able to purchase insurance on that security. And they can potentially purchase a very large quantity of insurance on that security, and that actually gives them an incentive to make that security fail. Or if they’re the ones who created it in the first place, to design one that fails. People in the traditional insurance business have known this for a long time. An insurance company will not let you insure your million-dollar house for a hundred million dollars because they know that if they allow you to do that, you have a very strong incentive to burn your house down. And for similar reasons, traditional insurance contracts have deductibles so if you have a million-dollar policy on your house, you have to pay the first two-hundred thousand dollars so you still have an incentive not to let your house burn down. In the derivatives world, that’s not true. So you get this situation as with Goldman Sachs, where Goldman Sachs has an incentive to design and sell bad securities, and it also has an incentive to purchase so much insurance on them that somebody selling the insurance could go bankrupt. In fact, what Goldman Sachs then did is it realized that it had purchased so much insurance from AIG that AIG could well go bankrupt, and it started purchasing insurance against an AIG bankruptcy so that it could continue to purchase yet more insurance from AIG.

Were they actually betting on the failure of AIG?

It didn’t seem as if they were going so far as to bet on the failure of AIG, but they were certainly insuring themselves against the possibility of an AIG failure, so that they could continue to purchase more insurance from AIG and could be confident that they would collect. In the end what happened was that the situation was so bad, because AIG had sold insurance to so many other people also, in such large quantities, that even that would not have protected Goldman Sachs if the government hadn’t bailed them out. But the government did bail AIG out, and when it did, it instructed AIG to pay a hundred cents on the dollar for all of the insurance contracts, the CDS [credit default swap] contracts, that it had sold.

According to the anti-regulation camp, derivatives help protect the market. What was the ideology behind that?

Well, in principle it would be irrational for AIG’s senior management to sell gigantic quantities of insurance on irrational or bad terms, so it would never happen. But what the free-market theory economists didn’t take into account ... they didn’t take into account many things, but one of them was that the compensation schemes inside these companies were such that people got immediate cash compensation for short-term sales events, for selling these things and booking them irrespective of whether they went bad five years later. And as a result, people had incentives to do dangerous things, even to the extent of ending up destroying their own companies. Another thing that economic theory didn’t take into account is that it was possible for people to conceal information from others, so Goldman Sachs could successfully conceal the fact that it was betting against the securities it was selling from the people that it was selling them to. So it sold these securities to people who had absolutely no idea that Goldman Sachs was simultaneously betting against either that individual security or that whole class of security. Those two conditions — these compensation structures and the ability to conceal information from people that you were selling things to — meant that, in fact, these derivatives turned out to be extraordinarily dangerous.

What were some of the other economic ideologies that were trusted during the events that led up to the crisis?

They were all kind of the same. There was this dominant view in the economics discipline that markets always gave you the right answer, and that they were always efficient, and that people would never do anything irrational or dangerous because the market would immediately punish them for it. So these economic theories all assumed that everybody has equal and perfect information and they all neglect, or don’t talk about, or don’t address the issue of compensation structures. That was the most important thing that [economics professor] Raghuram Rajan pointed out in the paper [“Has Financial Development Made the World Riskier?”] that he wrote and delivered in 2005, warning about the possibility of an economic crisis. Another thing to be said, though, is that the economics discipline didn’t just make an innocent mistake here. As I point out in the film, a lot of the economists who argued these theories and defended the financial services sector were in fact being paid large amounts of money by the financial services sector at the same time. So their objectivity is, to put it mildly, suspect.

How were all of these industry professionals, government officials, and academics so blinded to the inevitable outcome of all this? Or did they know and just not care as long as they could keep their winnings?

Oh, many of them clearly did know and didn’t care as long as they could keep their winnings, and there’s a lot of evidence of that. There have been several studies of the financial behavior of the senior executives at investment banking firms in the period leading up to the crisis. And both with Bear Stearns and with Lehman Brothers — and it was also true with a number of other firms— their senior executives took enormous amounts of cash out of the company in the years leading up to the crisis. In the case of Countrywide, [former CEO] Angelo Mozilo actually had Countrywide borrow billions of dollars from the open market and then Countrywide used that money to prop up its stock price, temporarily, by repurchasing its own stock on the open market at the same time as Angelo Mozilo and other senior executives at Countrywide were selling their personal stocks and turning it into cash — because it would appear they realized that their company was heading into serious trouble. So they cashed out. In the case of Mozilo, he took out a total of almost half a billion dollars in cash and over a hundred million of that he took out in the year before Countrywide collapsed. That’s a very extreme case but similar things were true of the senior management of Bear Stearns and Lehman Brothers. They took out very large quantities of cash in the years immediately before the collapse of their firms.


What is the underlying philosophy or psychology behind this behavior that would destroy their own companies?

Well, greed. [laughs] Amoral greed would certainly be part of it. Now, in some cases it seems as if they didn’t think that their companies were going to completely collapse. They probably were aware that the bubble was going to end and that there was going to betrouble, and that their company stock price would certainly decline, but in at least some cases they probably didn’t think their companies were going to collapse completely — for a combination of two reasons, I would say. One is that — and this is an interesting thing — there’s no single place where there’s a complete repository of data about the market positions of the investment banking industry. If you wanted to look globally at the total behavior and the total positions of the investment banking sector, you can’t do that right now because there’s nowhere that has all of the data in one place. One thing that many people have proposed as an important reform is that governments start collecting that data. That has not occurred. Another reason, and we go into this in the film, is that during the bubble these guys made so much money that they really became somewhat disconnected from reality. They were so wealthy that they were so far away from the concerns of ordinary people, even their own employees. They had private jets, they had private elevators, they had private helicopters, and gigantic mansions, and they really just lost touch with the rest of the economy and with the real world. They lived in a kind of bubble, and I think that that probably had something to do with it as well.

Do they still have those kinds of lives, or have the numbers of helicopters and mansions decreased?

There’s been a decrease, but by our standards, by the standards of the other 99.99% of the population, they’re still enormously wealthy and very disconnected from the rest of the population. Indeed because, as I said, they took out so much cash in the years leading up to the crisis that these people still have hundreds of millions of dollars each.

I was reading about the chair of the U.S. Commodity Futures Trading Commission who went to work for Enron after setting up an energy derivative anti-regulation policy. The line between government and Wall Street is really blurry. Has it always been this way or is this a new development?

It’s been getting worse. There has always been some element of it but it’s been getting much, much more extreme than it used to be. It’s a very disturbing development. And you’re absolutely right, the woman you’re referring to is Wendy Gramm, who — even worse — when she went on the Enron board after being at the Commodity Futures Trading Commission, she was married to Senator Phil Gramm, Republican of Texas, chairman of the Senate Banking Committee, who had a major role in banning the regulation of derivatives upon which Enron and its frauds heavily relied. So, yes, it’s a very bad situation.

A lot of the governmental officials responsible for quelling regulation are still in power.

Many of my friends and I were tremendously disappointed by the personnel appointments that President Obama made. He appointed to the senior economic and regulatory positions people who had been responsible for creating the crisis and the policies that led to the crisis, and that was a very disheartening and surprising thing to many of us. I had personally been a supporter of President Obama when he was campaigning. I contributed to his campaign, I supported him publicly, I helped raise money for him, and I know many other people who did as well and then were very disappointed when they saw his personnel appointments.

What are your thoughts on the reform bill that passed?

Well, it’s kind of a joke. Someone in the film’s response is, “Ha!” And, unfortunately, that’s correct. What the bill does for most of the critical issues is it sets up two-year long study periods after which the organizations and people conducting the studies will make recommendations for what regulators should then do, and it will then be up to the regulators to create whatever regulations they see fit. And that’s not the way this should be handled. We already know in many cases what should be done now, in the first place. In the second place, the people in charge of the regulatory organizations are unfortunately, for the most part, the people who created the problem so they’re not likely to turn around and solve the problem. And then finally, in several major areas the bill basically didn’t do anything at all. The bill basically has done nothing about the rating agencies, it’s basically done nothing about the structure of executive compensation in the financial services industry, so people are still free to pay very large quantities of cash for decisions that five years down the line could cause crisis.

And what about the problem of betting against the same securities you’re selling?

It is still legal to bet against the same securities that you’re selling. Depending again on what regulations are enacted, there probably will be some additional disclosure requirements [so] banks or financial institutions selling securities will now have to retain a portion of those securities — a small portion. Now it’s about five percent. So there has been a little bit of progress in that domain but not nearly enough. It still is a very bad situation and it still would be legal, for the most part, for people to behave the way that they did in the years leading up to this past crisis.

In your opinion, is there any credibility to the scores given by the credit rating agencies like Standard and Poor’s, Moody’s, and Fitch?

“No” would be the simple answer. Because of the crisis and because of the public attention focused on them, they probably are going to be more careful for another couple of years, but the basic problem that manifested itself during the bubble and during the crisis is still there. They are still paid by the issuers of the securities and they also still rate the issuers of the securities. And that is a very dangerous place to be. It’s not the way it used to be; it’s relatively new. Until about 30 years ago, rating agencies were paid by the purchasers of securities, not by the issuers — and that change is what led to the corruption of the ratings system.

According to your film, one of the other changes was when investment banks went public and became less concerned about their own funds, since they now had the stockholders to disconnect them from losses.

Yes, when the investment banks switched from being partnerships to being publicly held companies — and in principle a publicly held company can still have incentives to have people behave responsibly — but when they made that switch, gradually what also occurred was that they changed the way they handled their senior executives’ compensation. And gradually over time the senior executives of investment banks no longer had to invest as much of their own money in the company and a higher and higher fraction of their compensation was in short-term cash as opposed to long-term stock or deferred compensation. So yes, over the last 20 or 30 years, these compensation structures emerged where people are given very large quantities of cash every year for short-term performance, irrespective of its long-term consequences.

And there hasn’t been any move to rectify this?

In the United States it’s still perfectly legal and there has been no move to rectify it. Recently the European Parliament passed a law, and now in Europe financial industry compensation is much more heavily regulated and a substantial fraction of it has to be in long-term compensation and/or stock. So Europe has already taken very strong action on this. What the Europeans did, it’s not quite perfect but it certainly is a big, big step forward. And all the major European governments and finance ministries supported this. In contrast, the United States has done nothing whatsoever.

Your film also points out that the banking companies are now more consolidated and larger than ever. Which ones are left?

J.P. Morgan, for sure. Bank of America has become much larger because it purchased both Merrill Lynch and Countrywide. Wells Fargo has become larger, and then of course the remaining investment banks: Goldman Sachs and Morgan Stanley.

They’re the last ones standing and holding most of the cards?

Yes. The U.S. financial system is now more concentrated than it has ever been in its history.

In your opinion, what needs to be done in the U.S. in terms of regulation?

Several things. First of all, I think — many or most people think — that it should be illegal to purchase insurance on financial products in which you have no interest, that you don’t own. So-called “naked” credit default swaps. The derivatives industry and market in general should be much more heavily regulated. Secondly, the largest banks should be broken up and the U.S. financial system should become much less concentrated. Thirdly, there should be serious regulation of the structure of financial industry compensation, so that people can’t take out enormous quantities of cash for making decisions that destroy their own companies a few years down the line. And then — [although] this isn’t quite in the domain of regulation but it might even be the most important, single thing — many of us think, and I believe, that it’s very important to appoint an independent special prosecutor to investigate what happened during the bubble and the crisis and to prosecute people criminally where they in fact violated the law. And it’s clear that there had to have been massive violations of the law. It is just not credible to believe that all this could have occurred without people committing fraud.

Do you think there should be regulations or laws put in place in terms of who can serve in government with respect to their corporate interests?

Yes, and there are various ways to do that. Many Americans think that this is just something you have to put up with, that there is noway around this problem; it’s just an inevitable consequence of having a large, private economy. That is not true. There are other countries that deal with these questions in different ways and that do not have these problems. When I was traveling around the world looking at these questions and talking to people about these questions for the film, that was very striking. I remember very well, for example, my interviews in Singapore, where I asked people both in the government and in the private sector about lobbying and lobbyists and they kind of laughed at me and they said, “We don’t have lobbyists here. There’s just no space, no place, no respect for them, and we wouldn’t pay attention to them. And one reason they probably don’t exist is because they know that we wouldn’t pay attention to them.” So why don’t you pay attention to them? “Well, our senior regulators are paid over a million dollars a year. They don’t have to think about going to the private sector. They’re very happy where they are. They’re completely financially secure, they have no incentive to be corrupt, they have no incentive to leave for private industry after a few years in government. They’re extremely well-compensated for doing a good job.” So I think that would be important, to pay senior career civil-service regulators extremely well so that you could attract and retain good people who would not be tempted by private-sector salaries. And then of course there should be very tight disclosure requirements and there should be controls on what people do after they leave public life. I would say the same thing, analogously, of academia. There should be very strict disclosure requirements on what professors do, how they make money outside of their academic income, and there should be limits on income derived from the same industry that they’re studying in. If a professor wants to make money on the side by writing mystery novels, fine. But consulting to the banks that he’s doing research on and making policy statements about, first of all it should be completely required to disclose it, and secondly there should probably be limits on it.

With all of the changes that need to be made, what can we do to push them forward and what will happen if these regulations are not implemented? What’s the next crisis?

We don’t know what the next crisis is going to be, but we can be, unfortunately, pretty certain that unless we do something about the situation, there will be one. For almost half a century the United States did not have financial crises and then we started deregulating in the early 1980s, and since that time about every 10 years we’ve had a significant financial crisis — and they’ve been getting worse. That’s kind of a scary thing. As to what has to happen and how this will get fixed, for sure it’s not going to get fixed by the people in charge of economic policy in the current administration. It’s going to get fixed one of two ways. Either President Obama, personally, is going to realize that it’s important for him to do something about this, and the measure of his taking this seriously is whether he appoints an independent special prosecutor and whether he replaces his economic team. And if President Obama does not take action then it’s going to be up to the American people and I think that’s probably, unfortunately, what’s going to have to happen. It’s happened before. There have been plenty of other times in American history when the American people have finally gotten fed up with their leaders doing something bad and the people have forced their leaders to follow. I hope that that happens again and that’s part of why I made the film.

Principal Reduction Modification Math

A Report by Rick Rogers, JD/MBA

Lenders will receive far more value from Principal Reduction modifications than from other mortgage modifications.

Intuitively, that statement doesn’t sound right. How could a bank make more money by reducing a $250,000 mortgage to $200,000? Here’s how:

If enforcing a $250,000 mortgage is likely to result in foreclosure, the Lender will probably recover less than $100,000. If reducing the principal balance to $200,000 is likely to avoid foreclosure, the Lender will likely recover the entire new $200,000 balance, which is more than double what it might recover if it refuses to reduce the principal balance.

In order to calculate the Lender’s financial advantage or disadvantage of granting Principal Reduction modifications, numerical probabilities must be established for the likelihood of outcomes mentioned above.

This report will compare the Net Present Value (NPV), of standard Home Affordable Modification Program (HAMP), modifications with Principal Reduction Alternative HAMP (PRA HAMP) modifications. If the mortgage principal balance on a home exceeds 115% of its market value, PRA HAMP will reduce the principal balance by that difference over a three year period, if the borrower stays current on the mortgage during that time. PRA HAMP will also reduce interest rate, extend term, and include principal forbearance, if necessary, to reduce the monthly payment to 31% of gross income. Standard HAMP modification will do all but reduce principal balance.

Participating HAMP Lenders and Servicers, herein collectively referred to as Lenders, were required to start evaluating cases for PRA HAMP in the last quarter of 2010. Regardless of the outcome of those evaluations, no PRA HAMP modification would ever be required of the Lender. PRA HAMP modification is strictly optional. A Lender could reject the application for any reason or for no reason at all.

It’s encouraging that some Lenders have issued PRA HAMP modifications with large principal reductions. That suggests those few Lenders understand the economic advantage of PRA HAMP, but it’s too early to tell how many will embrace the concept and actively participate.

Re-default Rate: As it relates to mortgage modifications, this is the rate at which homeowners default after receiving a modification. Unless otherwise noted, re-default rate refers to the rate during the 12 months immediately following the modification. The impact of a re-default will have the same financial result for HAMP and PRA HAMP modifications.

Re-default rate is the single most important factor when comparing the NPV of a PRA HAMP with that of a standard HAMP modification. A lower re-default rate for Principal Reduction modification provides the Lender savings to offset the reduction in principal balance. The key question when comparing PRA HAMP to standard HAMP modification is whether the savings from a reduction in re-default rate will be more or less than the amount of the principal reduction. For the answer to that question, one can look to The Federal Reserve Bank of New York Staff Report:

Second Chances: Subprime Mortgage Modification and Re-Default by Andrew Haughwout, Ebiere Okah, and Joseph Tracy, Federal Reserve Bank of New York Staff Reports, no.417, December 2009; revised August 2010

This report, referred to herein as the FRB Report, was the result of no small effort. It is a 46-page, well researched and crafted report utilizing a sample of tens of thousands of mortgage modifications on which to draw conclusions. Principal reduction modifications were included in a sufficient number for the authors to state the following conclusion in the Abstract: “… the re-default rate declines relatively more when the payment reduction is achieved through principal forgiveness as opposed to lower interest rates.”

On page 30, the report states “restoring the borrower’s incentive to pay in this way (referring to principal reduction) nearly quadruples the reduction in re-default rates achieved by payment reductions through interest rate modifications and term extensions alone.” It goes on to state the conclusions “confirm the findings from previous research that borrower equity is a critical determinant of loan performance…” The report concludes modifications will be more effective if program designs are more attentive to borrower incentives to pay, i.e., principal reduction.

HAMP vs. PRA HAMP: While the FRB Report does not specifically compare PRA HAMP with HAMP, it does provide an applicable estimate of the difference in re-default rates for principal reduction and non-principal reduction modifications.

Attached are NPV Test results with parameters of the above referenced typical case, comparing a HAMP to a PRA HAMP modification, utilizing the re-default rate differential used in the FRB Report. Following are the inputs used for the test:

Mortgage Balance $250,000 Market Value $175,000

Gross Income $ 4,000 Current House Payment $ 1,966

Re-default Rate Principal Reduction $ 48,750

HAMP 40.0%

PRA HAMP 10.7%

The NPV of a single, successful standard HAMP modification ($224,112 in the above case) will always be greater than the NPV of a single, successful PRA HAMP modification ($188,955 in the above case), due to the PRA HAMP principal reduction. However, the FRB Report suggests 4 of every 10 standard HAMP modifications will fail, while only about 1 in 10 PRA HAMP modifications will fail. Due to low Lender recovery rates in foreclosure ($69,043 in the above case), the average NPV for PRA HAMP modifications will exceed that of standard HAMP modifications.

Based on the above values, below is a simple calculation of the NPV of 10 standard HAMP modifications and that of 10 PRA HAMP modifications.

NPV Comparison of HAMP vs. PRA HAMP Modifications


NPV of 10 Standard HAMP Modifications:

6 successful modifications 6 x $224,112 = $1,344,674

4 re-defaults with foreclosure 4 x $ 69,043 = $ 276,172

Total NPV for 10 modifications $1,620,846


NPV of 10 PRA HAMP Modifications:

9 successful modifications 9 x $188,955 = $1,700,598

1 re-default with foreclosure 1 x $ 69,043 = $ 69,043

Total NPV for 10 modifications $1,769,641

NPV Advantage of 10 PRA HAMPs over 10 Standard HAMPs = $ 148,794

NPV Average PRA HAMP Advantage per individual modification = $ 14,879*

* Inflated estimate due to rounding. Actual advantage based on FRB Report re-default rate is $14,164 in this case.

There are also significant Lender tax benefits of PRA HAMP. In this case, the tax savings could amount to almost $20,000 in the first three years following the modification. Without tax benefits, the PRA HAMP NPV advantage over standard HAMP is more than $14,000 per typical modification. With tax savings, that Lender NPV advantage could double to over $30,000. Tax benefits may vary widely among Lenders, and may provide no benefit at all for those with no profit to shelter. With or without tax savings, the financial gains from PRA HAMP modifications are considerable.

Even if PRA HAMP re-default rates were twice that indicated in the FRB Report, or if the Lender received no tax savings, or if both of those unlikely events transpired, the NPV for PRA HAMP modifications would still exceed the NPV for standard HAMP.

Reserve Requirements: A PRA HAMP will give rise to an increase in Lender cash reserve requirements. One could argue reserve requirements should be lowered by PRA HAMP, since those modifications are four times less likely to suffer re-default. Reserve requirements may be of little or no concern to large Lenders, but it should be recognized as a by-product of PRA HAMP.

Accounting Treatment and Reserve Requirements are “paper” issues, if Lenders believe they are issues at all. The solutions to these problems do not require Lender sacrifice of revenue, federal funding, jobs creation, or cutbacks in spending. A couple of waves of the appropriate federal wands could nicely resolve these issues, if they are important to Lenders. Principal Reduction modifications are far too important to the economic resurgence of this country to allow “accounting and administrative” issues to block the way.

Conclusion: The FRB Report demonstrates Principal Reduction modifications will significantly reduce re-defaults, thereby creating substantially more value to Lenders than other modifications. When considering the Lender’s potential tax benefits, the already significant benefit of PRA HAMP is further increased. In the unlikely event the Lender receives no tax savings and the re-default rate for PRA HAMP is double that projected in the FRB Report, the NPV for PRA HAMP modifications will still be greater than the NPV for standard HAMP modifications.

Under HAMP, a participating Lender is required to modify when doing so generates the most value for itself. Consistent with the HAMP concept, a PRA HAMP modification should be mandatory for participating Lenders whenever its NPV exceeds that of both the standard HAMP modification and the “No Modification” alternatives.

For purposes of NPV calculation, the estimated PRA HAMP re-default rate should be 29.3 percentage points less than the standard HAMP re-default rate, as in the FRB Report. Over time, historical re-default rates should replace this proposed initial rate.

Under PRA HAMP, Lenders will achieve far greater financial benefits than with any current modification program, and borrowers will have a fighting chance to regain equity and security in their home. Even if prices remain flat and borrowers make no improvements to their homes, HAMP Principal Reductions combined with scheduled payments will reduce mortgage balances to within 5% of home values in just three years. That fact will reinvigorate homeowners and provide inspiration to stay current on mortgage payments for the many who today have no incentive nor rational hope to save the home they once cherished.


About the Author: Rick Rogers, JD/MBA is Executive Director of the Rogers Law Group, NFP, a firm dedicated exclusively to Home Preservation. For over 20 years, he has composed, utilized, and trained others in the use of NPV Tests for the purpose of comparing real estate alternatives nationally and internationally. For the last 10 years, his practice has been devoted to foreclosure, mortgage default, and related matters. He may be contacted at rrogers@therogerslawgroup.com or through www.therogerslawgroup.com .

Attachment: PRA HAMP Standard Waterfall Process with Summary of HAMP and PRA HAMP NPV Results Based on Re-Default Rate Differential in FRB Report

Comparison of PRA HAMP vs Standard HAMP

NPV for PRA HAMP Loan Modification $176,354
NPV for Standard HAMP Loan Modification $162,190

PRA HAMP Advantage (Disadvantage) over HAMP $14,164

NPV for No Loan Modification $65,922

NPV Test Recommendation:

Modify using PRA HAMP

Current Desired

Mortgage Balance $250,000 $201,250
Principal Forbearance converted to Reduction $48,750
Additional Forbearance Necessary to reach 31% PITIA $0
Estimated Market Value $175,000 $175,000
Loan-to-Value Ratio 143% 115%
Borrower Total Gross Income $4,000 $4,000
Target PITIA – 31% $1,240
Principal + Interest $1,499 $774
Taxes $417 $417
Insurance $50 $50
Assessments & Other $0 $0
PITIA $1,966 $1,241
DTI 49% 31.02%
Loan Interest Rate 6.000% 2.000%
Months Remaining on Mortgage 330 341

For an affordable, sustainable mortgage, the following modified terms are requested:

- Loan re-amortized to 341 months

- $0 Principal Forbearance w/out interest, end of loan or pay-off Principal

- $48,750 Forgiveness

- Initial rate years 1 – 5 2.000% with P&I of $774
- Interest rate in year 6 3.000% with P&I of $840
- Interest rate in year 7 4.000% with P&I of $920
- Interest rate in year 8 4.740% with P&I of $984
- Interest rate in years 9 – 40 4.740% with P&I of $984

Will banksters get away with it?

By Danny Schechter

Hats off to Matt Taibbi for staying on the Wall Street crime beat, asking in his most recent report in Rolling Stone: "Why Isn't Wall Street in Jail?"

"Financial crooks," he argues, "brought down the world's economy — but the feds are doing more to protect them than to prosecute them."

True enough, but that’s only part of the story. The Daily Kos called his investigation a "depressing read" perhaps because it suggests that the Obama Administration is not doing what it should to reign in financial crime. Many of the lawyers he calls on to act come from big corporate law firms and buy into their worldview.

Kos should be more depressed by the failure of the progressive community to focus on these issues, and not pressing the government to do the right thing.

There is much more to this story. It's also more about institutions than individuals, more about a captured system that enables and covers up crime and, then, deflects attention away from the deeper problem.

Ten problems

You could see that when television host Bill Mahrer pressed Taibbi to name the biggest Wall Street crooks, on his weekly political comedy show, he didn't fully understand what we are really up against.

Here are ten of well-planned but flawed factors that help explain the procrastination and rationalisation for inaction. The government is not just to blame either. Several industries working together, through their firms associations, and well-paid operatives, collaborated over years to financialise the economy to their own benefit.

Personalising bad guys makes for good TV without offering a real explanation.

When financial institutions and services became the dominant economic sector, they, effectively, took over the political system to fortify their power. It was a done incrementally, over years, with savvy, foresight and malice.

First, many of those who might be charged with financial crimes and fraud invested in lobbying and political donations to insure that tough regulations and enforcement were neutered before the housing bubble they promoted took off.

After hundreds of bankers were jailed in the wake of the Savings and Loan crisis, financial fraudsters pushed for weakened regulations, guaranteeing that their colleagues wouldn't be jailed in when the next crisis hit.

In effect, their deregulation strategy also deliberately "decriminalised" the environment to make sure that practices that led to high profits and low accountability would be permissible and permitted. What was once illegal soon became "legal".

No enforcement

The cops and watchdogs were taken off the beat. Anticipating and then dissolving restraints, they engineered a low-risk crime scene in the way the Pentagon systematically prepares its battlefields. This permitted illicit practices, to be encouraged by CEOs in a variety of control frauds to keep profits up so that the executives could extract more revenue.

Today’s proposed Republican cutbacks of the funding of regulatory bodies aims to undercut recently passed financial reforms. One Commissioner of the Commodity Futures Trading Commission said if the budget is slashed, "there would essentially be no cop on the beat...we could once again risk another calamitous disintegration." He added, according to a New York Times report, "the process will mean nothing, squat, diddley … if we get cut we're going to be in a world of hurt."

Second, the industry invented, advertised and rationalised exotic financial instruments as forward looking "innovation" and "modernisation" to disguise their intent while enhancing their field to maneuver.

This was part of creating a shadow banking system operating below the radar of effective monitoring and regulation. Where is the focus on controlling the out of control power of the leverage-hungry gamblers at unregulated hedge funds?

Third, the industry promulgated economic theories and ideologies that won the backing of the economics profession which largely did not see the crisis coming, making those who favored a crackdown on fraud appear unfashionable and out of date.

As economist James Galbraith testified to Congress: "…the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft-pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now."

Fourth, prominent members of the financial services industry were appointed to top positions in the government agencies that should have cracked down on financial crime, but instead looked the other way. The foxes were indeed guarding the chicken coop guiding institutions that tolerated if not enabled an environment of criminality.

Alan Greenspan and Ben Bernanke were repeatedly warned by underlings at the Federal Reserve Bank about pervasive predatory practices in the mortgage and Subprime markets and they chose to do nothing. Now Greenspan acknowledges pervasive fraud but decries the lack of enforcement while Bernanke wants to run a Consumer Protection Agency after ignoring consumer complaints for years. Even as the FBI denounced "an epidemic of mortgage fraud" in 2004, their white-collar crime units were downsized.

Fifth, the media has been complicit, seduced, bought off and compromised. The housing bubble mushroomed in the very period that the media was forced to downsize. Dodgy lenders and credit card companies pumped billions into advertising in radio, television and the internet almost insuring that there would no undue media investigations.

Financial journalists increasingly embedded themselves in the culture and narrative of Wall Street by hyping stocks and CEOs. The "guests" routinely chosen by media outlets to explain the crisis were often part of it.

Foxes guarding the chicken coop

"Many of the ‘experts' whom I read or see on TV seem clueless, [and] full of hot air. Many of their predictions turn out wrong even when they seem so self-assured and well-informed in making them," writes Jim Hightower,

His advice: "Don’t be deterred by the finance industry’s jargon (which is intended to numb your brain and keep regular folks from even trying to figure out what’s going on)."

Sixth, politicians and corporate lawyers fashioned settlements of abuses that were exposed rather than prosecutions. The government benefited by getting large fines while businessmen avoided jail.

Financial executives were often rewarded with bonuses and huge compensation for practices that skirted or crossed the line of criminality.

Intentional violations of the spirit and letter of laws were justified because "everyone does it" by high priced legal firms that often doubled as lobbyists. Conflicts of interest were sneered at. Judges, dependent on industry donations for reelection looked the other way.

Seventh, as the economy changed and industries that were once separated began working together, laws were not updates. Financial institutions worked closely with Insurance companies and real estate firms. Yet law enforcement did not recognised this new reality.

Financial crime was still seen almost entirely under the framework of securities laws that are designed to protect investors, not workers or homeowners who suffered far more in the collapse. Cases are framed against individuals with a high standard of proving intent, not under other kinds of laws used to prosecute organised crime and conspiracies.

By defining crimes narrowly, prosecutions became few and far between.

"Cases against Wall Street executives can be difficult to prove to the satisfaction of a jury because of the mind-numbing volume of emails, prospectuses, and memos involved in documenting a case," Reuters news agency reported.

Criminal minds

Convicted financial criminal Sam Antar who appears in my film Plunder is contemptuous of how government tends to proceed in these cases, in part because they don’t seem to understand how calculated these crimes and their cover-ups are. "Our laws—innocent until proven guilty, the codes of ethics that journalists like you abide by limit your behavior and give the white-collar criminal freedom to commit their crimes, and also to cover up their crimes," he said.

"We have no respect for the laws. We consider your codes of ethics, and your laws, weaknesses to be exploited in the execution of our crimes. So the prosecutors, hopefully most prosecutors, are honest if they're playing by the set of the rules; they're hampered by the illegal constraints. The white-collar criminal has no legal constraints. You subpoena documents, we destroy documents; you subpoena witnesses, we lie. So you are at a disadvantage when it comes to the white-collared criminal. In effect, we're economic predators. We're serial economic predators; we impose a collective harm on society, time is always on our side, not on, not on the side of justice, unfortunately."

Eighth, even as the economy globalises, and US financial firms spread their footprint worldwide, there was little internationalisation of financial rules and regulations.

Today, even as the French and the Germans propose such rules, Washington still opposes a tough global regime of codes of conduct.

Overseas, in Greece and England, and other parts of Europe, there has been an indictment of American corporate predators, especially Goldman Sachs. They are being denounced as "financial terrorists" and discussed in terms of their links to various elite business formations like the Bilderberg Group.

Ninth, With the exception of softball inquiries by a financial crisis inquiry commission, there has been no intensive investigations in the United States even like the tepid 9/11 Commission.

While Senator Carl Levin of Michigan did spend a day aggressively grilling Goldman Sachs on one deceptive practice, their defense was more telling about the real nature of the problem: "everyone did it".

The case for criminality has still not achieved critical mass as an issue to become a dominant explanation for why the economy collapsed. In fact, it is still being sneered at or ignored.

Finally, tenth, a big problem in my countdown, are the progressive critics of the crisis who also largely ignore criminality as a key factor and possible focus for an organizing effort.

They treat the crisis as if they are at a financial seminar at Harvard, focusing on the complexities of derivatives, credit default swaps and structured financial products in language that ordinary people rarely can penetrate. They argue that banks should not be too big to fail, but rarely they are not too big to jail.

Few progressive activist groups stress the immorality of these practices, much less their criminality after all these years! There is little active solidarity even in the progressive community with the newly homeless or jobless.

Where is the active empathy, compassion and the caring for the victims of the financial crimes?

A populist response to the crisis has been muted. There is little pressure from below on the Administration and Justice Department—which has now created a financial crimes task force—to take real action. It is as if this crime crisis within the financial crisis does not exist.

Curiously, as they refuse to discuss the pervasive fraud that did occur, the Obama administration is considering a "global settlement" of all housing fraud to get the issue off the table. They a proposing a $20bn dollar deal to bury the problem.

By all means, workers should rally to protect their jobs and pensions as they have in Wisconsin, but they should realise that it is the banks who are ultimately to blame for the financial pressures behind the attack on them. Pension funds have lost billions because of Wall Street scams. State governments have taken a big hit.

Why have the unions and leftist groups been mostly silent on these issues?

Even after the markets melted down, even after Wall Street bonus scandals and bailout disgraces, Wall Street has hardly been humbled. It is still spending a fortune on PR and political gun slinging with 25 lobbyists shadowing every member of Congress to scuttle real reform.

Its arrogance is evident in an email the Financial Times reported was "pinging around" trading desks. It reads in part:
“We are Wall Street: It’s our job to make money. Whether it’s a commodity, stock, bond, or some hypothetical piece of fake paper, it doesn’t matter. We would trade baseball cards if it were profitable… Go ahead and continue to take us down, but you’re only going to hurt yourselves. What’s going to happen when we can’t find jobs on the Street anymore? Guess what: We’re going to take yours... We aren’t dinosaurs. We are smarter and more vicious than that, and we are going to survive."

Perhaps it’s not surprising, that in an act of preemptive anticipation, some years ago, Wall Street firms began financing the construction and administration of privatised jails. They know how to profit from incarceration too.

When will we call a crime a crime? When will we demand a jail-out, not just more bail-outs. Unless we do, and until we do, the people who created the worst crisis in our time will, in effect, get away with the biggest rip-off in history

"Out of Every Dollar that Funds Wisconsin' s Pension and Health Insurance Plans for State Workers, 100 Cents Comes from the State Workers"

By Washington's Blog

Nobel prize winning journalist David Cay Johnston - who has written several books on taxes - reports at Tax.com:


Accepting Gov. Walker' s assertions as fact, and failing to check, created the impression that somehow the workers are getting something extra, a gift from taxpayers. They are not.

Out of every dollar that funds Wisconsin' s pension and health insurance plans for state workers, 100 cents comes from the state workers.

How can that be? Because the "contributions" consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash. The same is true with the health care plan. If this were not so a serious crime would be taking place, the gift of public funds rather than payment for services.

Thus, state workers are not being asked to simply "contribute more" to Wisconsin' s retirement system (or as the argument goes, "pay their fair share" of retirement costs as do employees in Wisconsin' s private sector who still have pensions and health insurance). They are being asked to accept a cut in their salaries so that the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in Wisconsin.

The labor agreements show that the pension plan money is part of the total negotiated compensation. The key phrase, in those agreements I read (emphasis added), is: "The Employer shall contribute on behalf of the employee." This shows that this is just divvying up the total compensation package, so much for cash wages, so much for paid vacations, so much for retirement, etc.

The collective bargaining agreements for prosecutors, cops and scientists are all on-line.

Reporters should sit down, get a cup of coffee and read them. And then they could take what they learn, and what the state website says about fringe benefits, to Gov. Walker and challenge his assumptions.

And they should point out the very first words the state has posted at a web page on careers as a state employee (emphasis added):

The fringe benefits offered to State of Wisconsin employees are significant, and are a valuable part of an individual's compensation package.

***

But the mainstream press is not even getting basic labor economics right, a much simpler matter.

As Forbes' Rick Ungar notes, the taxpayers do not contribute to the pensions, but do guarantee payment of the pensions if the state makes bad investments:



Many commenters have made the point that, while it is true that it is state employees’ own money that funds the pension plan, when the pension plan comes up short it is up to the taxpayer to make up the difference.

There is some truth in this – but not as much as many seem to think. Because the pension plan is a defined benefit plan – requiring the state to pay the agreed benefit for however long the employee may live in retirement- if the employee lives longer than the actuarial plan anticipated, the taxpayer is on the hook for the pay-outs during the longer life.

But is this the fault of the state employees? The pension agreements are the result of collective bargaining. That means that the state has every opportunity to properly calculate the anticipated lifespan and then add on some margin for error. What’s more, the losses taken by the pension funds over the past few years can hardly be blamed on the employees.

Take a look at what Sue Urahn, an expert on the subject at the Pew Center on the States, has to say about this when describing the $1 trillion gap that existed between the $2.35 trillion states had set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those promises.at the end of 2008-

To a significant degree, the $1 trillion reflects states’ own policy choices and lack of discipline:

•• failing to make annual payments for pension systems at the levels recommended by their own actuaries;
•• expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and
•• providing retiree health care without adequately funding it

Via Pew Center on the States

That is the point. While the governor of Wisconsin is busy trying to shift the blame to the workers in an effort to put an end to collective bargaining, the reality is that it was the state who punted on this – not the employees.

Further, by the state employee unions agreeing to the deal proposed by Walker on their benefits (as they have despite Walker’s refusal to accept it) they are taking on much - and possibly all – of the obligation out of their own pockets.

As a result, the taxpayers do not contribute to the public employee pension programs so much as serve as insurers. If their elected officials have been sloppy , the taxpayers must stand behind it. But if the market continues to perform as it has been performing this past year, don’t be surprised if the funding crisis begins to recede. If it does, what will you say then?

Of course, if you are bearish on the economy - as I am - then this last sentence may seem moot. But Ungar's points that this was bargained-for insurance, and that the state - and not the employees - was responsible for the shortfall, remains.

And as I've previously noted, the little guy shouldn't be asked to sacrifice unless the biggest banks, giant corporations, and top 1% of wealthiest Americans are simultaneously asked to sacrifice

'Pillar of the American Economy'?

by Michael Panzner

One thing I found hard to grasp in the lead-up to the financial crisis was the widespread and seemingly nonchalant acceptance of economic imbalances, financial excesses, and patterns of behavior that were out of whack with economic reality and which were clearly unsustainable in the long run.

Whether you were talking about overall indebtedness, the trajectory of house prices, the proportion of the economy devoted to finance, insurance and real estate (FIRE), the low levels of risk spreads, assumptions about markets, liquidity, and worst-case scenarios, etc., etc., people seemed to think that things could somehow carry on as they were with no real reason for concern.

In the end, of course, that confidence proved horribly misplaced, and what couldn't possibly last, didn't.

Well, I'm not sure if it's quite the same thing, but I must admit I had similar feelings of incomprehension when I read the following Atlanta Journal-Constitution report, "Non-Employee Labor a Growing Trend in Work Force," which more or less implies that people are going to quietly acquiesce to corporate America's relentless efforts to strip them of everything but a basic paycheck in the name of profit.

Recovering from the Great Recession won't mean a return to business as usual. Fundamental changes are taking place in the American work force.

“Staffing companies have traditionally been the shock absorbers of the economy,” said Dan Campbell, CEO and founder of Hire Dynamics, an industry leader in staffing and recruitment with offices in Atlanta and Reno, Nev. “They take the first hits at the start of a recession, but they are also the first to benefit in a recovery.”

2009 was a terrible year for staffing, but Campbell has seen his business grow by 25 percent in the past 12 months. “This January was 30 percent better last January, and we expect business to be vibrant for the next several years.” The Bureau of Labor Statistics has projected staffing to be one of the top 10 industries for the next 10 years, he added.

Normally, Campbell would see his temporary job postings level off as companies increased their permanent hiring of employees, but after this recession, things have been different. “We’re seeing a new reality in the work force. Just-in-time labor is a growing trend,” he said.

According to Yoh’s 2010 Annual Workforce Trends Study, 80 percent of employers said that they expected the size of their non-employee work force (consultants, independent contractors, temporary employees and project teams) to stay the same or increase in the next year. Sixty-three percent of business leaders reported working on better ways to manage their non-employee work-force segment.

“Employers are saying that the recent recession has fundamentally changed their employment strategies and led to a ‘just-in-time’ hiring strategy that will make temporary employees an even greater pillar of the American economy,” said Lori Schultz, president of Yoh, a work-force solutions company.

“It’s a huge shift and it’s been coming on for the past four or five years. The recession and slow recovery have probably just accelerated it,” said Bill Kahnweiler, associate professor and human resource expert at Georgia State University’s Department of Public Management and Policy.

In the big picture, Kahnweiler sees a shift from an Industrial Age model of doing business, where organizations hired, nurtured and trained employees for the long haul; to a Knowledge Age model that is leaner and more adaptable to a fast-changing global market.

“It’s about money. Companies want more flexibility and less risk moving forward. They want to hire talent as they need it and not be burdened with full-time employment costs. It’s cheaper to hire contingent workers,” he said.

Bankster Economist Heralds Third World Hellholes

Kurt Nimmo
Prison Planet.com

The banksters are making it known. You’re going to be a pauper. The mega-bank Citigroup has trotted out its prime economist to send the message.

“China should overtake the US to become the largest economy in the world by 2020, then be overtaken by India by 2050,” said Willem Buiter, chief economist. He also sat on the Bank of England’s Monetary Policy Committee

In order to accomplish this, the banksters will whipsaw the global economy. “Expect booms and busts. Occasionally, there will be growth disasters, driven by poor policy, conflicts, or natural disasters,” warned the economist.

It has little to do with the weather. Central banksters create monetary inflation and credit expansion and thus engineer artificial booms and inevitably busts that work like a sledgehammer on humanity.

“Just as the boom builds outward from banks to the rest of the economy, with banks benefitting the most, the bust collapses inward to banks from the rest of the economy, with banks suffering the most,” writes Jeffrey M. Herbener. “Now the balance sheets of fractional-reserve banks, swollen with loans and checkable deposits during the boom, suddenly collapse. Or rather, the value of their loans collapses initially, as the projects they lent to turn out to be unprofitable, leaving them with negative net worth…. The monetary inflation and credit expansion of the boom are now reversed in the bust.”

Buiter and Citigroup have created a neat little index to explain all of this. It’s called the “3G index” to measure economic progress – or progress as gauged by banksters. “Using that index the nations to watch over the coming years are Bangladesh, China, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, the Philippines, Sri Lanka and Vietnam,” reports CNBC.

“They are our 3G countries,” Buiter boasted.

It is no mistake they are third world hellholes ruled by authoritarian dictatorships.

Banks and transnational corporations love place like Vietnam where slave laborers work seven days a week for six cents an hour. In Bangladesh, factory workers earn about $38 US per month. Indonesia factory workers make about $2 per day. In the Philippines, sweatshop workers earn less than half of the cost of living. In China’s electronics factories, run like military dictatorships, the suicide rate among workers is staggering. Drones work 15-hour days for $50 per month.


Egypt just underwent a revolution, in large part precipitated by high unemployment and poverty. It was shamelessly exploited by AT&T, Google, Facebook, NBC, ABC, CBS, CNN, MSNBC, and MTV. Google exec Wael Ghonim was designated as an impromptu leader of the revolt by the corporate media.

The third world slave labor hellhole model is what the banksters and their soulless corporations have in mind for the entire planet. Revolutions and rebellions in response to intolerable conditions – half the world, over 3 billion people, live on less than $2.50 a day – will henceforth be micromanaged by financial elitists and turned into harmless (for the elite) televised entertainment super events that do nothing to address the needs of billions of people.

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China and India overtaking the United States as the economic dynamos of the future is no mistake. It has nothing to do with hurricanes or mudslides.

Globalism demands a prison planet ruled over ruthlessly by a small hereditary elite. In a few short years, the American people will suffer like the factory workers of China’s sprawling electronics factories and Vietnam’s garment shops run by Nike and Adidas.

2011 Tipping Points

By Gordon T. Long of Tipping Points


Throughout my 2010 article series "Extend & Pretend" and "Sultans of Swap" I stressed that we were rapidly moving from the Financial Crisis of 2008, through the Economic Fallout of 2009 -2010, towards a Political Crisis in 2011 -2012. We are now clearly beginning to see the early emergence of the final part of this continuum. From North Africa to Wisconsin all are fundamentally based on the single insidious underlying problem - excessive global debt and credit levels.

The global macroeconomic environment appears to be rapidly unraveling. The situations in North Africa through the Middle East are blatant proof of social unrest and accelerating political instability. Food shortages and inflation pressures are now driving people into the streets. When you feel the hunger in your stomach and see it in the eyes of your children, it quickly erupts and motivates people to action.

It is now time to revisit our Tipping Points framework to see where this is leading. A framework that is clearly pointing to a global fiat currency failure and an emerging new world order which is detailed in our "2011 Thesis - Beggar-thy-Neighbor".

Our Tipping Points which are outlined below are adjusted continuously based on daily news flow analysis. Through a proprietary 'Process of Abstraction' news is tracked and consolidated around these potentially critical flash points.

CHANGES OF SIGNIFICANCE THIS QUARTER

INCREASES IS WAS CHANGE

1) Oil Price Pressures 14 30 +16
2) China Bubble 9 22 +13
3) Food Price Pressures 5 15 +10
4) Rising Inflation Pressures &
Interest Rate Pressures 6 14 + 8
5) Geo-Political Event Risk New
6) Social Unrest New

DECREASES

1) North & Southern Korea 30 12 -18
2) Financial Crisis Programs
Expiration Impact 34 24 -10

The Tectonic Shifts from 2007 to 2013 are best shown in the following illustration which is closely tracking our expectations and projections from the early stage of the financial crisis.

CONCLUSIONS

We need to carefully watch:

1) The increasing & accelerated contagion of social tensions. Watch for Asia demonstrations in places such as North Korea.
2) How and if the Central Banks actually do unwind their crisis ‘triage’ programs or are they realistically now permanent and necessary to maintain the illusion of financial stability?
3) New government public policy initiatives to combat growing inflation and price pressures
4) The financial sectors abilities to continue to hide massive nonperforming commercial and residential real estate loans through Federal Reserve endorsed accounting gimmickry.

These events will allow us to determine if our roadmap is still valid or if we are going to see even sooner and possibly poorer financial outcomes than we predict in our free Monthly Market Commentary and Market Analytics reports.

The public will soon wake up to the magnitude of money printing that is going on to support the economic recovery fallacy. When the public does become aware, “Money Velocity” will accelerate. When this happens, the likelihood is that the markets will dramatically rise, not because economic conditions are improving, but rather because of a depreciating US dollar. We believe this expectation is presently being priced into the market. We are truly exposed to the potential of a “Minsky Melt-Up” or more correctly from an Austrian perspective, a Von Mises “Crack-up Boom”.

The risks are presently towards a SHORT TERM corrective consolidation. The Intermediate Term calls for higher market highs into June 2011 - then it gets ugly - fast!

“The Federal Reserve historically was the lender of last resort in a crisis;
Today, the Federal Reserve is the buyer of first resort in a crisis
..... and every day for that matter”

Politicians Slash Budget of Watchdog Agencies ... Guaranteeing that Financial Fraud Won't Be Investigated or Prosecuted

by George Washington

As I noted last year, you can tell how interested Congress and the White House are in uncovering the truth by looking at how much money is actually budgeted for investigation:

The government spent $175 million investigating the Challenger space shuttle disaster.

It spent $152 million on the the Columbia disaster investigation.

It spent $30 million investigating the Monica Lewinsky scandal.

The government only authorized $15 million for the 9/11 Commission.

And how much has the government authorized for the Financial Crisis Inquiry Commission? You know, the commission charged with getting to the bottom of what caused the financial crisis?

ust $8 million.

These figures don't account for inflation. For example, the Challenger investigation cost over $300 million in today's dollars.

You can tell alot about the questions which the government is truly interested in finding answers to by the amount of money it authorizes for the various investigations.

The lack of any real interest in uncovering - let alone prosecuting - financial fraud is again on display.

Specifically, as the Wall Street Journal reports today (via MarketWatch):

The Commodity Futures Trading Commission has halted development of a technology program used to flag suspicious trading because of an $11 million cut in its technology budget, increasing rancor within the small agency about how it should spend its money.

The tensions offer a taste of spending battles to come at the CFTC and Securities and Exchange Commission if, as seems increasingly likely, Congress refuses to increase the agencies' funding to deal with new mandates created by the Dodd-Frank financial-reform act.

These squabbles have a long history, and often involve budget-process bluffing and gamesmanship between Congress and regulators. The regulators say it's different this time because of the extensive new responsibilities they have been handed under last year's Dodd-Frank legislation. The two agencies say they need another 1,200 staff in total to implement and enforce the sweeping financial overhaul.

"If the requested budget increases are not granted, we will manage within our allocated resources but we'll face a lot of bad choices," Luis Aguilar, a Democrat SEC commissioner, said in an interview.

Such tough choices are already being faced by the CFTC, which has cut $11 million from this year's technology budget, some of which was supposed to help the agency expand an automated surveillance system to examine trades in the futures market.

The system is used to scan millions of trades, looking for patterns that suggest potentially illegal activity. It has only a "handful of alerts, when we need dozens of them," according to someone familiar with the situation.

"It's something we should already have had," Mr. O'Malia, the Republican, said in an interview. "Technology is important in every investigation. We need to look at massive amounts of data, millions of trades."

Enforcement work at the SEC is also suffering from an austerity drive, say SEC officials. A ban on nonessential travel has left a number of investigations "in limbo," according to a person familiar with the situation. The person said that foreign bribery cases are being hit particularly hard, because of the need for overseas travel to investigate the allegations.

Complex accounting-fraud cases are also being affected by curbs on the use of expert witnesses, the person said.

"We've had budget freezes before. But this level of clampdown, with every nickel being flyspecked before we can spend it, is unprecedented in my experience," the person said.

Mr. Aguilar warned that the current funding squeeze was "debilitating" for the SEC. "The adverse impact that it has cannot be overstated," he said.

Rep. Scott Garrett (R., N.J.) a top member of the House Financial Services Committee, last month argued that the big spending increases being sought by the agencies "would further the mindset that our nation's problems can be solved with more spending, not more efficiency."

Both the CFTC and SEC took on extra staff last year, in anticipation of budget increases pledged—but not guaranteed—by Congress to meet their new responsibilities under the Dodd-Frank law. Now they are being forced to cut other spending to meet their higher staffing costs.

The CFTC on Thursday discussed rules to curb "disruptive trading" required by the Dodd-Frank Act. But the agency says it will be unable to use new powers it has under the act to tackle fraud and manipulation unless it is given more funding.

"We've had this terrible track record [on prosecuting manipulation cases] because the law has not been strong enough," said Bart Chilton, a Democratic CFTC commissioner.

"We finally got the authority we needed and now we're not going to be able to use it," Mr. Chilton said.
It is very telling that we have enough money to extend the Bush tax cuts, to throw boatloads of cash at the big banks so that they can give lavish bonuses, and to continue fighting never-ending wars on multiple fronts giving no-bid contracts to favored contractors, but we can't scrape together a little spare change to fund the regulators and prosecutors.

The economy cannot stabilize unless fraud is prosecuted. But the folks in D.C. seem determined to turn a blind eye to Wall Street shenanigans.

Collective Bankrupting

LetThemFail

Since all the attention these days is gravitating toward the spectacle of Wisconsin and Indiana, I thought I’d search the archives for a few choice quotes:

When power shifts to the unholy alliance between labor unions and big government, that version of socialism is the Trojan horse of corporatism, or corporate fascism, as characterized by the likes of Mussolini back when military coups were in vogue. Today we have the IMF, Rohatyn, Soros, Bernanke, Geithner …

They are supporting an aggrandized welfare state of limited opportunity, limited freedom and liberty, social apathy, the death of individualism and exceptionalism.
Hypocrasy Blinds, Letthemfail 10-05-10

Of course, we see that military coups are indeed still in vogue lately.

But here in America, public service union workers who are out in the streets “getting bloody” are doing so for their own personal, financial self-interests–nothing more. It is highly unlikely that the majority they claim to represent understands that their mandatory dues funds a global power grab, and a special interest initiative to incite class warfare (now being fought by fiscal conservatives) to be resolved by the new Global economic order.

Some may in fact understand and agree with the unholy alliance of the aggrandized State, but how do they expect to sustain it? Hopefully not with more idiotic, grandiose schemes, like the ones cooked up by crony corporatist Andy Stern.

Oh wait, I almost forgot. These Keynesian devotees all believe that wealth springs from the bowels of a printing press, and that you can spend your way to prosperity in our new “intangible” economy.

Government intervention, as you hopefully can see through the veneer of Stern’s misguided arrogance, only prevents the natural order of the free market system.

It lowers the bar, creates uncertainty and artificially distorts the free-market’s intrinsic reward system, artificially altering the outcome of competition, hindering the natural process of job creation – even preventing it due to the uncertainty of more intervention and more artficial tampering with the system.

Government intervention – choosing winners and losers based on unnatural or distorted outcomes has accelerated the problem of unemployment in America we face today.
Sterns Crony Corporatism – Letthemfail, 9-28-10

Let’s face it, this is all about America’s coming lifestyle correction. Many of us have already been slapped in the face with it. Public sector unions, who helped get Obama elected, are desperately trying to cling to their jobs, their dues and their pension funds, and they will continue to make untenable promises to their members, to retain them–just as the politicians they elect trade untenable promises for votes.

The members want to hold on to their inflated salaries and unsustainable pensions, which are far, far better than what the private sector can possibly offer, and if their Union tells them they can’t give up collective bargaining rights, they’ll fight to the end, as their political beneficiaries stage a disgraceful labor union style “walkout”.

When a Wisconsin elementary school teacher (who works nine months a year and makes over $50,000) displays a sign protesting, “Teachers make EVERY profession possible, including YOURS”, I wonder if she appreciates that the tax revenues from private sector professions (which earn on the average 33% less than their public sector counterparts) pay for the salaries and pensions and benefits of teachers, including HERS.

I’m sorry to have to point out that the coming correction is in large part due to the workforce imbalance of public sector collective bargaining. The protected class of public service elites cannot hope to maintain their average salary of $75,000 per year against a private sector average salary of $40,000 per year which is taxed to pay their salaries. Not when nearly every state in the Union is dealing with a fiscal crisis as a result. A ten year old can do the math, as long as he is not corrupted by Keynesian psuedonomics, or by the newly adopted educational mandate of constructivism (does 2 + 2 really equal 4).

The eerie dumbing down of American schoolchildren, this UNESCO mantra that “attitude is more important than knowledge and that too much knowledge threatens sustainability” really throws fuel on the fire of contempt against an arrogant ruling class trying to indoctrinate our children into their vision of the coming New World Order.



Though they may not admit it, or see it, that is the true value of public service education to the ruling class. To groom our young citizens to be complacent, dependent, propagandized wards of the aggrandized Global Economic Union. To teach them that it is the role of government to “create” jobs and to fairly “distribute” wealth under the shining light of global citizenship. Can we not see that grooming our children to become dependent debt serfs of the aggrandized state fails them? Must we continue to reward failure in all its manifestations? I applaud any and every effort to BREAK this unholy alliance, and to realign our priorities.

While there are many great teachers in America who are dedicated and hard working, any teacher and any union representative who willingly condones force-feeding the agenda of global fascism down our childrens throats, under the guise of social sustainability, deserves a lot worse than just losing collective bargaining “rights”. But their collective power structure prevents us from evaluating the merit of such a campaign – that must change.

So to summarize … Keynesian progressives, both in the political sphere, and in the taxpayer-funded government service union workforce, continue to resist the belt tightening that all post credit binge corrections bring. They either sit-in, or walk-out to avoid reality, confident that the power they represent as a special interest group will buy them what it always has in the past.

As union workers receive their layoff notices, they should understand that the disgraceful “losers” in the senate that staged a statist / labor union “walkout” really walked out on them. Each player in this class war shall eventually reap their just reward.

Jon Stewart On Wisconsin Protests

The Daily Show - Crisis in Dairyland - Revenge of the Curds
Tags: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

Taxpayer Owned Freddie Mac Loses $19.8 Billion In 2010

The total bailout of Fannie and Freddie is likely to cost at least $260 billion (Robert Shiller says $1 trillion - CBO says $400b) by the time the government is done using them as landfills for the banks' fraudulently created assets. Of course, by the way that Tim Geithner does math, that amounts to a "profit" for taxpayers on the bank bailouts. Maybe he can explain how this works when he testifies before Congress next week.

FHFA Projections for Freddic Mac Losses...

Freddie Mac's Q4 and 2010 Earnings Report...


freddie mac 4q10

Source - Daily Finance

Freddie Mac posts $1.7B loss for Q4

By Marcy Gordon

WASHINGTON - Government-controlled mortgage buyer Freddie Mac managed a narrower loss of $1.7 billion for the October-December quarter of last year. But it has asked for an additional $500 million in federal aid - up from the $100 million it sought in the previous quarter.

Freddie Mac also posted a $19.8 billion loss for all of 2010.

The government rescued Freddie Mac and sibling company Fannie Mae in September 2008 to cover their losses on soured mortgage loans. It estimates the bailouts will cost taxpayers as much as $259 billion.