In this study, the authors provide an exhaustive and invaluable aid, with plenty of charts and explanations of the mortgage meltdown, sub-prime and general credit crisis. This is MUST reading for anyone who is filing securities actions and foreclosure defense. With this paper, you can understand who the players are and what they were doing. This paper is thus far more inclusive than what we have written here which is designed to give you the information in bite-sized pieces.

harvard-paper-diagrams

Virtually ALL of the the decisions concerning money supply and “regulation” are being made in the private sector which is devoted to one thing by mission and by intent: transfer of wealth to the big dogs in the private sector. This clearly government function, as specifically expressed in the U.S. Constitution has been abandoned by government and usurped by the private sector.

By allowing tainted money into the political system, actions that had been plainly illegal, immoral and unethical have become a way of life, legalized by laws passed to satisfy legislator’s obligations to lobbyists. Obama’s call for reigning back the forces of money from the private sector is a call to arms and a call for alarms — to regulate and disclose the billions of dollars spent by credit/financial industries, oil and gas, coal, drugs, healthcare and crime (yes, crime because close examination shows that some private sectors will ONLY make money if the jails are full).

The purpose of government — to be the referree between capital and labor in a market allowing forces of supply, demand and innovation to determine outcome — has been abandoned and must be re-asserted. If not, we become a third world country where the rich live in electrified bunkers with their own security staff and the rest of the population remains hopeless poor and in debt. The risk of violent revolution, food riots and knee-jerk policies generated from fear or anger will be the rule rather than the exception. This is hardly the result intended by the framers of our constitution.

As the comments indicate, the Fed policy-making apparatus is in tatters.

• It lowers the Fed overnight rate and interest rates go up — something that was thought impossible by many people. 
• It confronts hyper-inflation with a mixture of mentioning how serious the issue is and then lowers rates again, which we all know means increasing the money supply and increasing inflation. But then lenders still refuse to give loans to small business, homeowners and other key parts of the credit cycle that spur the economy. 
• The plain fact is that the Fed is not having much effect at all on anything. 
• It missed the opportunity to regulate and increase its influence to thwart the bubble in housing because politically it was expedient to do so in a Repiublican administration. 

We all pay the price as the economy and our society commences the wrenching process of remaking itself with a solid foundation of productivity, more even distribution of purchasing power, less impulse purchasing, more saving, and the prospects of slower growth and recession here and abroad.

The FED is diminished, probably permanently. Up until now nobody has addressed the issue head-on that neither the Fed nor the U.. Treasury, nor the Bureau of Engraving and Printing are having much impact on money supply, interest rates, prices or economic growth.

Virtually ALL of the the decisions concerning money supply and “regulation” are being made in the private sector which is devoted to one thing by mission and by intent: transfer of wealth to the big dogs in the private sector. 

Pianalto: Fed’s strategy compatible with low inflation rate

By William L. Watts

Last update: 7:04 a.m. EDT May 13, 2008

LONDON (MarketWatch) — Cleveland Federal Reserve Bank President Sandra Pianalto said Tuesday that inflation remains a top risk to the economic outlook, but that the Federal Reserve’s rate-cutting strategy likely wouldn’t stoke inflationary pressures. In a speech prepared for delivery in Paris, Pianalto said she finds herself in a “challenging environment” as a policymaker. “While even the core price measures in the United States are rising somewhat faster than I would prefer, and inflation presents a key risk to my outlook, I believe that the Federal Reserve’s policy strategy remains compatible with a low and stable inflation rate,” she said. Pianalto said it was important to distinguish between inflation and relative-price pressures. 

I WANT YOUR STORIES!!!

HERE IS WHAT I JUST RECEIVED FROM A LAWYER I KNOW —

This one who I have been corresponding with sent me an e-mail describing the events of her “closing” where she was told by the Countrywide loan officer that her dad’s life estate did not need to go on the mortgage, and the “closing” took place at a little table in a Barnes & Noble bookstore with a line of people waiting to “close” in a frantic fashion.

 

Jesus! Assembly-line closings in bookstores, forged signatures on loan documents, etc. all obviously railroaded through to get the “bundle” together for resale to Bear Stearns or whoever. This is beyond ugly.

Bank earnings falling off, failures still a threat on the horizon.

Even with the phoney accounting rules allowed by the SEC and the FASB, the reported earnings of most banks are taking major hits. Hidden below the surface of this bad news is more bad news as the rate of delinquencies, foreclosures, evictions, and repossessions continue to skyrocket. 

We have said it before and it bears repeating: AMNESTY FOR ALL is the only approach that will defuse this bomb. By changing the rules of civil procedure and substantive law, stopping the foreclosures, stopping the evictions, and mediating payments terms that are within the means of the borrowers, the mortgages can remain on the books, balance sheets can be restored and claims for improper sales of CMO and CDO securities can be staunched. EVERYONE must benefit from the solution. Any effort aimed at only one segment of the marketplace will fail.

FROM FORBES:

Earnings Preview

Banking’s Mean Season

Liz Moyer, 04.14.08, 2:55 PM ET

Wachovia set the tone Monday for what is expected to be an especially bloody first-quarter earnings season, which starts this week. 

Posting a surprise 20 cent a share loss, the Charlotte, N.C., bank announced it would slash more jobs in its investment banking division, dramatically increase reserves for loan losses and return to the markets for the second time this year to raise new capital. Oh, and it’s cutting its dividend.

Across the banking industry, profits are slumping or swinging to losses as the credit crisis spreads from big Wall Street firms to the regional banks that depend more on traditional lending for their revenues. Especially hard hit: banks concentrated in areas of the country most sharply feeling the housing downturn.

Video: Citi And Banks

Washington Mutual, the largest U.S. thrift, already announced its greater than expected disappointment, saying last week it would lose $1.1 billion after setting aside billions for anticipated loan losses. It cut its dividend to 1 cent and went hat in hand to Texas Pacific Group, which agreed to give it a $7 billion investment.

The pressure on regional lenders will inevitably lead to another round of bank consolidation. National City, based in Cleveland, is seen having a 38% drop in earnings per share in the quarter. It already cut its dividend nearly in half and acknowledged it was looking for a buyer or other strategic alternatives. Two other Cleveland banking companies are also feeling the pressure, even though each is viewed as a potential bidder for National City. KeyCorp’s profits per share are expected to fall 48%, and Fifth Third Bancorp’s by 25%.

Elsewhere, analysts expect a 33% decline in profits per share at Dallas-based Comerica; a 30% drop at Birmingham, Ala.-based Regions Financial; and a 13% drop at San Francisco’s Wells Fargo.

Wall Street’s pain is also enduring for another quarter. Merrill Lynch and Citigroup are expected to post losses per share of $1.90 and 95 cents, respectively, and both are expected to have billions more in write-downs of mortgage securities and loan holdings. JPMorgan Chase, which rescued Bear Stearns last month, is expected to report a 50% drop in earnings per share.

Wachovia’s undoing was its ill-timed foray into mortgage banking in California. The bank bought San Francisco-based Golden West Financial in 2006 in what was then seen as a shrewd entry into a red-hot mortgage market. Golden West specializes in adjustable-rate mortgages and had a long track record of surviving real estate booms and busts because of its conservative lending philosophy.

But this is no ordinary bust. California’s real estate crisis is weighing on banks with a big lending presence there, including Wachovia, Bank of America, Citi and Wells Fargo.

Analysts had expected Wachovia to say it had profits of 40 cents a share for the period, and they expected that announcement to come several days from now. But Wachovia moved up its earnings report after a weekend negotiating a new way to shore up its sagging capital.

Non-performing assets of $8.3 billion rose 56% from the fourth quarter and were eight times the level of just a year ago. Wachovia said troubled loans in the Golden West portfolio deteriorated more quickly than expected.

“I’m deeply disappointed with our first-quarter results,” said G. Kennedy Thompson, Wachovia’s chief executive, on a conference call Monday. “I know these actions aren’t without cost. I wish they weren’t necessary, but they are.”

Wachovia cut its dividend by 41%, saving $2 billion in order “to build capital ratios and provide more operational flexibility.” It is also selling $7 billion in new shares, its second share offering of the year.

The company is bracing for continued loan losses into next year, saying it would set aside up to $1 billion in anticipation.

As recently as last fall, Wachovia was seen as a potential savior, particularly for Merrill Lynch, which is said to have approached it about a merger as the losses mounted on its exposure to credit derivatives. Now, Wachovia, the fourth-largest U.S. bank, is seen as a target.

If mortgage losses go beyond already gloomy predictions, “they could succumb to more capital pressure, and their independent-company days may be numbered,” says David Hendler, an analyst at CreditSights.

Question the fees, and demand proof that they own the mortgage. If they don’t they might not have the right to collect from you. They have to show a proper assignment, not just tell you about it. If they don’t have the right to collect it because they sold it someone else, then they might not have the right to file foreclosure against you. Demand reduction in your mortgage balance and mortgage payments, demand payment of damages for participating in a fraud against you, upon which you reasonably relied, wherein the value of the home and therefore the amount of the mortgage you were willing to sign for, was artificially and fraudulently inflated. From Today’s New York Times: March 4, 2008

Bundled Mortgages and Dubious Fees Complicate Foreclosure Cases

The continuing decline of the U.S. dollar will only hurt you if you are holding U.S. dollars — NOT so much if you are holding real estate  — i.e, your home. Before you go overboard in panic mode, consider this, and hope…. 

The mortgage meltdown free money craze may have pulled the trigger, but the gun was decades of profligate spending on everything from congressional pork barrel to unnecessary “upgrades” to cell phones. Greenspan admits he missed the relevance of the housing boom in which prices rose at non-credible rates, but in his Republican ideology he believes that market forces will sort everything out. This is no better than evangelical rejection of science and no better than progressive spending programs. 

The U.S. dollar has been going down in value on world markets along with U.S. prestige and a precipitous decline in the trust of foreign investors in our financial markets and the players who perpetrated the largest fraud, so far, in currency, credit, and securities. 

Obviously foreclosures, defaults in all types of credit instruments and declines in consumer spending is going to slow the U.S. economy. Just as obviously, the dollar will continue its decline. Nobody knows where it will end up but it has already long since passed the point where a tidal wave of inflation will be felt here of such magnitude that it will receive attention in the economics textbooks, law books, and accounting standards. Yes, housing prices will have considerable downward pressure. And yes, those who point to the benefit to our “exports” from a weakening dollar sound like empty rhetoric.

Yet there is a grain of truth in what they say and it has a direct relevance to those sitting in houses that are lower in value, even upside down in equity. Buying has commenced from foreign investors. They are using currencies that did not decline, at least as much as the dollar has declined. So their buying power increased while our buying power has decreased. And the effect is magnified by the actual dollar decline in housing prices.  But don’t expect housing prices to stay down —unless inflation magically disappears. Right now all indications are that the Fed and the Bush administration are pushing dollars into the the U.S. economy. Like any other commodity, the more dollars are out there, the cheaper they become.

This translates for the lay person in an interesting turnabout. It if takes more dollars to buy milk and eggs than it did a month ago, so too will it take more dollars to buy real estate. So if your only major asset is your house, it might surprise you both as a hedge against inflation and as an investment. Put in simpler terms, the dollar cost of your home is going to go up as the value of the dollar declines. 

Let’s take an example. Suppose you bought a house for $400,000 in 2005. For the sake of argument, you put nothing down, so today in round numbers, you still owe $400,000. The fair market value of your home in our example here has declined by 20%, which means if you sold it you would get $320,000 less broker’s fees etc, leaving you with perhaps $300,000 in value. Thus you have a $300,000 asset with a $400,000 debt. This is the classic “upside down” reference — your equity is minus $100,000.  

And the situation seems even more bleak with projections of perhaps another 15% drop, which will bring you into the range of perhaps $250,000 on that $400,000 house. This leaves you with negative equity of $150,000. In other words, if you sold the house, you would have to come to the table with $150,000 to pay off the mortgage, just to be able to convey clear title. That’s pretty bleak. You could get some relief if your lender allowed a “short sale” and accepted the $250,000 as full payment and now under the new rules, that forgiveness of debt would no longer be income upon which you would be taxed, so that is good news. But how many lenders are going to accept the full $150,000 damage caused by this market. 

You might also ask, how any of this could have happened? The answer is simple, you were sold a $250,000 home for $400,000. And a whole bunch of people were involved in a tacit conspiracy to defraud you and the eventual buyer of your mortgage note. And of course you lost whatever money you put into your new house when you moved in — landscaping, furnishings, improvements etc.  You did get screwed, and there is nothing I can say that will change that. But the scenery might change and you might be sitting in a better position than you think — if you have the staying power.

The reason is that in round numbers, people in other countries have seen the value of their currency rise. A deposit of $1,000 worth of Euro or other currency a couple of years ago is worth 50% more than it was then.  Our loss is their gain. So that house that cost $400,000 in 2005 might only cost them $275,000 in their own currency. Let’s go further. That house that is now worth only $320,000 dollars in U.S. dollars, will cost the foreign investor around $225,000 in his own currency. it doesn’t get much better than that. But it will get better for these foreign buyers of U.S. real estate. The U.S. dollar will continue its decline. So these prices which are temporarily depressed, will get into “sillyville” when you factor in foreign exchange. 

This will result in at least a flattening of the decline in declining demand for U.S. real estate. And the continuing decline of the U.S. dollar will only hurt you if you are holding U.S. dollar — NOT if you are holding real estate.  

The likelihood is that foreign exchange induced inflation alone will increase the dollar price of your house at least another 15% over the next year. Add to that a modest increase in prices caused by increasing demand both from foreign investors picking up bargains and domestic buyers who still have cash and need to place the cash in some asset that will hedge against dollar inflation and you have a better picture than what is appearing from the pundits. It might not be all roses and good times. But the bleak picture might change to break-even or better, given 2-5 years.

This opens up the very real opportunity for lenders to get together with the buyers they screwed, the investment bankers that created the fraud, and the investors who got screwed holding collateralized debt obligations (CDO’s). If instead of foreclosing, they reach an agreement on sharing the losses and sharing the potential benefits, the inventory of foreclosed properties will cease to expand, thus providing a more stable marketplace for real estate sales and investment.

This in turn will magnify the effects outlined above and quite possibly provide a profit to all concerned.

Unfortunately the likelihood is that the players who caused this mess are more interested in blaming the victims and overing their tracks than in fixing the problem.

But the fact remains, that the undercutting of the U.S. economy and the U.S. dollar might produce results that [a] allow your personal financial situation to recover and [b] give you a decided advantage in paying off a mortgage later which far cheaper dollars than the ones you borrowed. You could still end up ahead of the game.

The reason the Federal Reserve is having so little effect is that virtually all of the “bad money” was created out of its reach. People create their own money in many types of transactions, and even if some portion goes through the Federal Reserve, for purposes of accounting between banks, the creation and existence of the “bad” money exists apart from any action taken or not taken by the Federal Reserve. Greenspan might have had it wrong, but he isn’t to blame for the actions of people who were operating outside the scope of his authority or responsibility.

The Glass Seagal Act kept banks and securities firms apart. The simple logic was that neither banks nor securities firms have any direct interest in serving or protecting the public. That can only be achieved by regulation from government. Put them together and you have a recipe for disaster. Banks and securities firms have as their primary goal to make money.  And if they get an idea to make a ton of it, no matter how stupid it is, (see Mortgage Meltdown), they will do it. Because in the end, the people who make these decisions do so in a bubble of their own — small wonder they create financial bubbles and crises. 

If I agree to lend you $500,000 to buy a house worth $300,000, that is or was a perfectly legal transaction. It also is completely out of reach of the Fed.  If you in turn sign papers acquiring the house and I pay the seller the $500,000, the transaction goes through the Fed for accounting purposes in determining the balances at financial institutions. But it is not money created by the Fed nor is it subject to regulation by the Fed. The “money supply” was increased by $500,000 and all the Fed could do is see it but not touch it. Insiders know that $200,000 of “value” is completely fake, but this is carefully scripted to create “plausible deniability.”

If I sell shares in your loan to other people as “derivative mortgage-backed” securities, they sound like pretty good investments to most people and they buy it for perhaps $600,000. Again, money exchanged hands and all the Fed can do is watch.  And by the way the “money supply” was just increased by another $100,000 or $600,000 depending upon which theory of econometrics you subscribe to. Again only the insiders know that an additional $100,000 had been added to the completely fake valuation of the original transaction from which the mortgage backed security “derives” its value. 

Here we had the perfect storm. The repeal of Glass Seagal which allowed financial institutions (regulated by the Fed) and securities firms (not regulated by the Fed) to become one institution provided they (the banks and securities firms) protect the public from scoundrels. This is akin to delegating the job of creating peace in the Middle East to Saddam Hussein.  

Or if you like, it can be compared with the FDA and other agencies that have come under the direct influence and control of corporate America serving the profit motive, shoving aside the duty to serve and protect the people, leaving the citizenry with no protection. 

Like the FDA, the law provided shields from the appearance of stupidity. In this case, even though banking and securities were under the roof of one house, it was OK as long as there was a chinese wall between the two functions. Right. I worked in both the banking and securities sectors. There is no wall but they all understand how to create plausible deniability.

The Fed alone is not going to stop the crash that is coming. But these behemoth two-headed monstrosities will probably be allowed to defer the crash with more funny money. This will compound the devaluation of the dollar but give the appearance, for a while, that everything is under control. Most people don’t remember what happened to the value of the dollar in the 1980’s. Few know or remember the 2500% inflation in Germany in one month. It doesn’t take much to crash because money is only an idea, a belief, a confidence in the system. If those ephemeral subjective perceptions of the public change, money is gone — all of it. 

If we really want to allow the country to go into recession and not a crash we have to convince ourselves and convince people in other parts of the world that we are again a nations of laws, regulating currency, monetary policy, securities trading, in a sane reasonable manner. An economy based upon getting consumers to go deeper and deeper into debt buying things they don’t need and probably won’t want soon after purchase is not a valid premise. 

Economic stimulus is a good thing in theory. But if it consists of getting more money into the hands of consumers and then pressuring them to part with it on objects of doubtful added value, then this plan is no better than the behemoth plan of creating more funny money to cover the old funny money. 

The party is over. We are going to have to take the hit on our own nose to show that we are a stand-up crowd and not a rowdy group of criminal greedy myth-sellers. The fundamental premise driving the economy must include consumer spending only in relation to growth in other fundamental areas of commerce and society — innovation, production of products that people in other countries want, and the discovery of intellectual property that is useful in adding sustained value in the perception of consumers.

The answer is neither deregulation nor more regulation. It is changed regulation keeping the long-term viability of the country and its people as the top priority. Anything less will reduce the United States to a third world country that has adopted China as its lender of last resort — a country with no vested interest in doing anything other than using us for economic leverage, and who is now producing the control systems for our weapons, along with sponsoring the migration of Chinese nationals to the U.S. , while they build their own military capability at an alarming rate. 

Something has to give folks. Is anyone out there listening? 

Unfair Competition by Large Banks Created the Infrastructure for this Mess

A few people have asked: Why not do a story on the alternative to the cash-dispensing ATM? After considering the research, and seeing a connection with the mortgage meltdown crisis because this situation is the single greatest marketing tool used by  large financial institutions to decentralize banking deposits (sucking local deposits out of the places they were earned and placed for safe keeping and putting them all over the country, if not the world) and to attract banking customers away from their small local bank or credit union who can and does service their needs far better and far more safely than any large company could with its headquarters and decision makers located thousands of miles away.

If you look at this week’s Economist, you will find on Page 86 that countries in Africa (“third world?”) have discovered a far more elegant and inexpensive solution: The customer activated Point of Banking ATM. In fact, if you look hard enough you will find that more than 25,000 ATM’s are already running in this country. If we used that system as extensively here, crime would be reduced to zero at the site of an ATM, ATM fees paid by consumers would be slashed by at least 2/3, more locations and more convenient locations would provide ATM access, and local bankers and credit unions would start getting their share of the business stolen from them by the oppressive tactics used by large financial institutions to undermine the ability of the small financial institution to compete on a fair and level playing field. 

The Point of Banking ATM is what it sounds like. You perform any of the transactions that are currently available on those monstrosities you see attached to banks, in malls, or in large merchant locations. However instead of an “automated” (which frequently does not work) cash drawer and “vault” (which is fairly easy to penetrate), the customer must go to the cashier to receive their cash. Anonymity and embarrassment of NSF works the same way as all ATMs. But in 21 years of use all over the world there has not been a single criminal act against the user of such a machine, the merchant who maintains the store in his location, or the machine itself. Te concept was started by two ex-American Express managers who had been downsized out of their jobs in the 1980’s.

The standard ATM in this country quite successfully invites all sort of criminal behavior ranging from banging a customer on the head for the cash to using construction equipment to break the machine out of the wall. Only in the United States is the far smaller, far less expensive (in cost and operating expenses) Point of Banking terminal in “disfavor”. 

The reason is the usual — those who disfavor it, do so because it would increase competition, lower consumer fees for access to their money, require virtually no maintenance, require no increase in insurance, and require no extra cash on premises because the Point of Banking terminals produce an astonishing rate of 72% sales. In other words, for every $1 taken out of their account, they spend 72 cents of it on average. Thus the unfair hold that these large institutions and large merchants have over others offering or who would offer the same services, is stifled.

Thus competition generated by ATM convenience would be leveled out between small merchants and large ones if merchants could spend a few hundred dollars (there are even Independent Sales Organizations that will install them for free), and receive interchange revenue from the banking system as well as providing their customers with greater flexibility in their payment options and the convenience of going home both with the groceries (or whatever) PLUS the cash. and most of all, enable small banks to effectively compete against large banks.  

Like all ATM’s the Point of Banking terminal gives a receipt. With the cashless ATM the customer presents the receipt to the store operator or cashier and the customer receives his cash, less any purchases he made (if any). The merchants gets the withdrawal electronically deposited to his designated depository account at his choice of financial institution, just like the use of credit and debit transactions — but in this case the merchant makes money rather than loses it to fee charged to him by MasterCard, Visa, STAR etc.

The odd thing about all this is that the machine used to drive Cashless ATM machines is that not only is it readily available, it already exists (by the millions) in almost every merchant location, large and small. It is the exact same terminal you see in every merchant location that accepts credit and debit for payments. It is programmed over the phone to do ATM transactions instead of or in addition to the “Point of Sale” debit and credit. The card is swiped, the PIN inserted and the choices appear on screen as to what you want to do.

So why wouldn’t small merchants, community banks and credit unions demand access to Point of Banking? The reason it turns out is that the banking associations (or the “networks” as they are commonly called), have passed regulations either banning Point of Banking terminals or severely restricting their usefulness or their ability to generate revenue to anyone who installs one. It seems that to small fearful community bankers and credit unions and small merchants these behemoth data processing centers known as MasterCard and Visa, have taken on the aura of a quasi-governmental entity. 

Thus when the networks say the rules are changed, nobody challenges the rules because “you can’t fight city hall.” The networks have deftly positioned themselves as “city Hall” when in fact they are simply private data processing centers controlled by the largest banks in the country — and clearly doing so against the fair trade and practices statutes of every state, against the rules of the Federal Reserve and against the federal and state antitrust laws. The networks have gone even further by publishing information that associates the Point of Banking ATM with strip clubs, gambling prostitution and other vices, whereas the cash dispensing ATM the largest banks use, are genuine banking machines. it is the same tactic being employed in reverse by the ‘Community Association for responsible Lending” which is trying desperately to legitimize the practice of payday predatory lending charging interest upwards of 500% per year. 

The reason is simple. In economic terms it is called “barriers to entry.” There are 6,000 financial institutions in the Untied States alone. About 1% of these banks control the rules, and have in the recent mortgage meltdown, reduced the Federal Reserve to a whimpering ineffective vehicle for monetary policy. The 1% cannel all the fees, perks from deposits and the customers by offering conveniences that the small bank presumably cannot. 

The small bank or credit union cannot create a network of ATM locations that has convenient locations all over the its own marketing area, let alone the region, the country or foreign countries. But they could do so if they only had to pay a few hundred dollars per location and receive a revenue return on that investment. And the merchants whose daily foot traffic can’t justify the large ATM (with all its insurance, cash loading, armored car, security, maintenance and repair problems, not to mention its sheer size) could benefit along with the small friendly community banker or credit union that “installed” his ATM allowing him to put a sign in his window like “ATM 99 cents”, which is about one-third (1/3) the price charged by Bank of America and other banks at their ATM’s.