October 12, 2010, 09:51
Will it fall on deaf ears - yep! but it should help any FalFilers still hazy on whats going on, it's an important read:
October 12, 2010, 10:35
An Open Letter To Our President, Congress, And The States The Market Ticker ® - Commentary on The Capital Markets Posted 2010-10-12 08:29
by Karl Denninger
in Editorial An Open Letter To Our President, Congress, And The States
Last week I penned an open letter to the Democratic Caucus of California in which I laid bare on the table many of the truths about Foreclosuregate and the injustices that it has exposed.
We now know, with a factual basis, that many of the beliefs and premises I put forward in 2007 and have maintained since are in fact true. The economic troubles that our nation finds itself in were no mistake, were not "unforeseeable" and in fact were not "unforeseen." They occurred as a consequence of deliberate, intentional conduct by those both in government and the financial industry.
As an entrepreneur during the 1990s "Internet boom" I saw these very same schemes and scams run during that time. Securities worth far less than their offering price were shoved through the pipeline, sold to investors on the back of knowingly-false claims. Chief among those claims of the time was that The Internet was doubling in size every three months. This, of course, meant that it would increase in size by a factor of 16 every year, of more than 65,000 times within five years, and of more than 687 billion times within ten.
Within eight years - from 1995 - the "reach" of The Internet would have exceeded the number of persons on the planet, and within ten it would have reached every human, dog, cat, and field mouse as well. In a few more it would reach, quite literally, every bacterium on the planet.
This was clearly impossible, yet this was what was sold to millions of investors. What's worse is that by the time most of these IPOs happened growth had already slowed dramatically and in fact by 1998, when I sold my firm, it was down to "mere" double-digits on an annual basis, with the major metropolitan markets experiencing almost no net subscriber growth - those who had computers and wanted connections, by that time, had them.
Virtually all of these firms collapsed and the losses were, for those investors, catastrophic.
The same "pump and dump" game was run with houses starting in 2003, orchestrated by the same banks and with the full support and complicity of government. The Realtors' own David Lereah - their chief economist of the time - published not one but two books urging people to buy homes as prices would only go up - for the indefinite future.
As with all manias the law became irrelevant. MERS is in fact at the core of this, as I have been writing about for more than a year. Indeed, in an article I published in 2009 I said:
The underlying issue is that many of these so-called "securities" (MBS, CDOs, etc) were issued "light" of the required legal mandates to keep the chain of assignments and actual consent signatures required for enforcement. Many people charge that the reason behind this was simple volume. I disagree.
I believe that a large part of the root cause of these "lost" documents is to cover up blatant and in many cases outrageous fraud. It is difficult to prove that a bank or other lender knew and ignored stated-income fraud (or allegedly "investigated" and "underwrote" a file when it did not) when the original file has been turned into ticker-tape confetti courtesy of the closest paper shredder!
MERS has thus given cover to a tremendous amount of fraudulent conduct - the very conduct that predatory lending statutes, "wet signature" and "chain of title" laws are supposed to prevent.
The real bottom line here is that securitized bondholders may in fact be holding worthless pieces of paper.
We have been treated through the last few weeks to repeated claims that the reported foreclosure problems are "just a technicality."
I believe this claim is not only false, it is knowingly false and maliciously intended to deflect attention from the actual scandal: a multi-year fraudfest that was absolutely essential to inflating the bubble in housing, and without which it would have been flatly impossible to do so.
These acts, in short, are both responsible for the bubble and for the economic crisis we find ourselves in today.
This has an exact parallel to Japan, which has suffered more than two decades of stunted growth, a terrible stock market that trades at one-third of its historical high more than twenty years on, and a crushing deflationary environment that has resisted all attempts to remedy.
The reason for the failure in Japan is both simple and instructive: The banks, which created the bad debts by issuing insoluble credit, were never forced to eat their losses. Instead they were allowed to hide them and pretend those debts were "money good." The result was a seizure of monetary velocity and balance sheets.
We face the same problem here in America. At the root of the issue is the $53 trillion of debt which was allowed to double during the 2000-2007 timeframe. Much of this debt was insoluble at the time it was originated, and the people who issued that credit knew that it could never be repaid as agreed.
There is a severe political problem here in that both Democrats and Republicans are beholden to the big banking interests in this nation. These institutions, who have skirted the law and in fact put together shell games such as MERS, are well-aware that should justice be served their enterprises have a negative net worth and in fact will cease to exist. This, in 2008, turned into a threat of literal "tanks in the streets" when Bernanke and Paulson held their infamous late-night meeting with Congress to demand the passage of TARP.
But TARP, while heralded politically and in the mainstream media as a "success", was no such thing. It was nothing other than a blanket placed over a rotting pile of dead fish on the banks' balance sheets to hide the stench. The fish continue to decompose and do damage to the subfloor as it rots away, and eventually will result in permeation of the entire structure, forcing its collapse, unless it is cleaned up first.
The underlying abuse in securitization is not that people were greedy. Greed is not unlawful, just stupid. But selling something you don't actually have, while representing you do, is fraud. Selling someone an alleged box of chocolates when you really have placed used dog food in the box, coated with a veneer of chocolate so as to make detection of your deception difficult, is a crime.
In the 1980s the S&Ls tried to pull the same scams, passing properties between themselves at ever-inflated values to allegedly establish "market prices." William Black, in his role, identified and referred more than 1,000 people for prosecution for their part in these scams and the over $100 billion of taxpayer cost that resulted from these criminal acts.
But it seems that in the 1990s this very same scam - selling worthless paper to people through the deceptions and frauds in representation, became an art form that was beyond prosecution. Other than ENRON and MCI, two high-profile cases where a handful of executives were placed in the dock, nobody was indicted, and specifically, none of the bankers were indicted, prosecuted and imprisoned, and not one dollar has been clawed back from these institutions and their executives.
They were thus emboldened, and in the 2000s, this manifested in the scams and schemes that led to our current situation. These schemes were not limited to housing - they permeated municipal finance as well, including the poster child in Jefferson County, Alabama where these schemes resulted in a four hundred percent increase in sewer bills in just a few short years, along with zero indictments of the banks and officers involved.
As the Executive and Legislative branches of our government, you have a solemn and constitutional duty to put a stop to this lawlessness. You have a duty, not an option, to prosecute the wrong-doing. You have a duty, not an option, to uncover the fraud, to force an unwind of the transactions that were proffered under fraudulent pretense, and to bring to justice those who engaged in these scams - irrespective of their alleged power.
Not only is this duty yours by virtue of The Constitution, it is your mandate if you ever expect our economy to recover. If this duty is shirked, and there is plenty of evidence at hand to this point that you intend to do exactly that, our economy cannot and will not recover, as the very same inhibitory factors that prevented Japan from exiting their morass for more than 20 years will continue to fester here in The United States.
There are many who claim otherwise. They're wrong. Their claims over the last five years have been repeatedly proven incorrect in the fullness of time. Ben Bernanke himself said there would both be no recession and that housing would not collapse. Henry Paulson claimed the economy was "fundamentally sound" just months before it collapsed. The various pundits have all repeatedly claimed that the problems facing our nation would be brief and of limited impact, and yet they have all been proved wrong. Unemployment remains near 10%, job growth has been negative accounting for population growth since 2007 and remains so today, and the only reason for a positive GDP print is that government is literally borrowing and spending 12% of GDP - producing a false economic signal of "2% growth" that in reality is a double-digit contraction.
There are a handful of people who identified the root cause of this problem either before the collapse came or as soon as it was apparent we were in serious trouble. I cannot point to my own publications before 2007, because that's when I started writing publicly, but I was telling people in 2001 and 2002 here in Florida that the solution begin taken then in housing would not work and was nothing more than a repeat of the fraud visited upon investors in the 1990s. Others began hollering in 2004, 2005 and 2006 as the housing bubble inflated.
All of us have been ignored in favor of the banking lobby - the very people who have stolen the wealth and future of the entirety of the American People.
The longer we wait to do the right thing the more pain the nation must endure. Incessant attempts to present growth figures that do not reflect reality simply pile more debt upon debt. Any consumer who has attempted this in their own personal life knows that it will only lead to an inevitable bankruptcy.
Such it will be for The United States if our course is not changed.
We have an election coming in approximately four weeks. The American People are tired of broken political promises and simply don't believe you any more. Our markets have become a charade and scam, with high-frequency traders putting up perfect trading records - a statistical impossibility unless one is cheating. There is myriad evidence compiled and presented by Nanex that these firms have figured out how to induce mini "flash crashes" and profit from intentionally-caused arbitrage - market manipulation that, by black-letter law, is illegal. Yet they continue to operate and instead of being called thieves are considered "innovators."
Quantitative Easing and the myriad threats of "action" by The Fed are yet another fraud. The apparent levitation of the stock market is in fact not real at all. Priced in Euros, Gold, or any one of a number of basic commodities such as corn the market is going down, not up, and this levitation act is coming at the very real expense of the common man who is seeing insane amounts of inflation in his food and fuel expense exactly as occurred in 2007 and early 2008 when the same scheme was attempted to prevent the market from clearing - and which failed spectacularly with a market collapse not seen since 1929. If this insanity is not stopped it will happen again just as certainly as it did the last time and in fact in each and every case where this manipulation has been attempted in the history of The United States.
It is time for action, not promises, and you have one month to demonstrate that you mean what you say, disassembling these edifices of fraud, bringing indictments, and in the housing sector, calling a full-stop to all foreclosure and REO resale activity until the provenance of each and every note contained in these securitized deals, including those at Fannie and Freddie, can be proved up.
It is highly likely that such a program will discern that conveyance simply never happened, and that this underlies much of the reason that HAMP and its related policies not only didn't work, it never could.
In that case the proper and only response is to force these structures to unwind and place the paper back where it belongs - on the party who failed to convey it (and who attempted to "sell" it even though it never met the representations and warranties put forward to the final investors.) This will land most of this paper on the big banks, who then can either modify or foreclose as they see fit, as they will have both a proper security interest and consideration - the two necessary elements to bring suit - or foreclose. It will clear the land title system in our nation's counties, a task that must happen.
At the same time we must insist that the actual value of these defaulted notes be recognized by these banks. We have irrefutable proof from the failed banks that they are carrying these loans at 90 or 95 cents on the dollar, when in fact they're fetching 50 cents - before resale and legal expenses - in the market. This too is pervasive and outrageous fraud, and it must stop.
If that blows up the banks, then so be it. We have Dodd-Frank resolution authority and we must use it.
We cannot exit our economic malaise until the bad debt that is being hidden is flushed from the system and the losses recognized. No amount of political sound-and-fury will solve these problems, nor can we return to economic health until this process takes place.
It's your move, and we the people will decide in less than one month if you have taken decisive steps - not words, actions - to resolve our economic problems.
If you fail to do so prior to the election then The American People must eject all incumbents from office, without regard to their political party affiliation.
It's that simple.
October 12, 2010, 17:13
The MSM has reported only part of this story. Karl has brought the rest of the story to light.
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