THE END GAME

38 comments

Posted on 21st January 2013 by mary malone in Economy |Politics |Social Issues

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This is the end game guys. When we first uncovered evidence that the global credit crisis in 2008 was caused by acknowledgement among the cronies there are no mortgages in the mortgage backed securities, we sensed it was all part of a larger plan.

People have focused on the bailouts and are incredulous that the bad actors who stole $13 trillion in pensions and another $7 trillion from homeowners in equity and illegal foreclosures have not been indicted.

Well, I have a different point of view. I believe that the Federal Government is the driving force behind the seizure of private property and are using the banks as their agents. The banks get to keep their spoils and the Federal Government gets to keep the land.

As many of you who are investigating the identity of your true creditor now know, the Federal Government is buying up all of our mortgages, and burying the evidence.

The Federal Reserve KNOWS there are NO MORTGAGES to back the MBS. Why the hell are they buying $45 Billion in empty MBS per month?

Well, I’ll tell you why. The Federal Government plans to pay our sovereign creditors back with OUR property and public land.

Here’s an excerpt from a story in WND.com, “China Poised to Play Debt Card – for US Land

“Could real estate on American soil owned by China be set up as “development zones” in which the communist nation could establish Chinese-owned businesses and bring in its citizens to the U.S. to work?

That’s part of an evolving proposal Beijing has been developing quietly since 2009 to convert more than $1 trillion of U.S debt it owns into equity.

Under the plan, China would own U.S. businesses, U.S. infrastructure and U.S. high-value land, all with a U.S. government guarantee against loss.

Yu Qiao, a professor of economics in the School of Public Policy and Management at Tsighua University in Beijing, proposed in 2009 a plan for the U.S. government to guarantee foreign investments in the United States.

WND has reliable information that the Bank of China, China’s central bank, has continued to advance the plan to convert China’s holdings of U.S. debt into equity owned by China in the U.S.

The Obama administration, under the plan, would grant a financial guarantee as an inducement for China to convert U.S. debt into Chinese direct equity investment. China would take ownership of successful U.S. corporations, potentially profitable infrastructure projects and high-value U.S. real estate.”

Read more at http://www.wnd.com/2013/01/china-poised-to-play-debt-card-for-u-s-land/#ueiLySHQ19W9il2W.99

JP MORGAN ON THE HOOK FOR BILLIONS IN FRAUD – DOESN’T MENTION IT IN THEIR EARNINGS PRESS RELEASE

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Posted on 11th November 2012 by Administrator in Economy |Politics |Social Issues

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Jamie Dimon is one of the slimiest human beings on the planet and he runs a criminal enterprise.

Banks should fear ominous new rulings in Fannie/Freddie MBS cases

By: Alison Frankel

11/9/2012

JPMorgan Chase filed quite a remarkable quarterly report with the Securities and Exchange Commission on Thursday, crammed with far more details about its exposure to litigation and mortgage repurchase demands than the earnings report the bank issued in mid-October. Among the revelations: JPMorgan has reached an agreement in principle to settle two SEC investigations, one involving a single unidentified JPMorgan securitization, the other involving Bear Stearns’s crafty (alleged) trick of keeping put-back recoveries from mortgage originators for itself instead of passing them on to investors in mortgage-backed securities trusts. The SEC deal has been long rumored, and though we still don’t know any of its terms, the bank’s filing confirms it.

JPMorgan also disclosed that it is now facing put-back claims, in one form or another, on $140 billion in mortgage-backed notes. Yes, you read that right: $140 billion. That doesn’t mean there are $140 billion in claims, but it means that holders of $140 billion in MBS notes have asserted, in litigation or through contractual demands, that the bank must buy back deficient mortgages in their trusts. Given that MBS investors generally claim breach rates in excess of 50 percent, JPMorgan’s exposure to mortgage put-backs is tens of billions of dollars.

The bank, of course, thinks the put-back demands are meritless and its entire litigation exposure is a trifling matter. The SEC filing’s 10-page discussion of the various litigation headaches facing JPMorgan — which include really serious matters, such as the securities class action over its CIO losses, various Libor suits and the Federal Energy Commission’s market manipulation case — begins with the brash assertion that the bank’s “reasonable possible losses” in all of this litigation (aside from its litigation reserves) range from zero dollars to $6 billion.

Zero dollars? I think not. In fact, I’m prepared to say that based on two rulings this week by U.S. District Judge Denise Cote of Manhattan in the Federal Housing Finance Agency’s securities fraud litigation against MBS issuers and underwriters, JPMorgan has exceedingly low odds of getting out of the Fannie Mae and Freddie Mac conservator’s case — which involves claims on $33 billion in JPMorgan, Bear and Washington Mutual MBS — wit h out a settlement.

More importantly, Cote’s rulings this week make it clear that the judge, who is overseeing the FHFA’s cases against 16 banks that issued or underwrote mortgage-backed securities, does not intend to let any of them out of this litigation. I’ve already told you that the banks still have a slim chance of wiping out most of the FHFA’s claims on timeliness grounds, if the 2nd Circuit Court of Appeals overturns Cote’s holding that Congress intended to extend the obscure statute of repose, along with the statute of limitations, when it passed the law that created the FHFA. But unless the banks win a reprieve from the appeals court, it looks like Cote intends to send Fannie and Freddie’s claims to a jury.

Her rulings this week addressed motions to dismiss by JPMorgan and Merrill Lynch, which are represented by, respectively, Sullivan & Cromwell and Williams & Connolly. (The FHFA is represented in both cases by Quinn Emanuel Urquhart & Sullivan.) In both decisions, Cote dismissed FHFA fraud claims based on the banks’ representations of loan-to-value ratios and owner-occupancy rates in the pools of loans underlying the mortgage-backed notes they offered. But otherwise, she said that Fannie and Freddie’s conservator could proceed with state and federal securities and fraud claims. Cote’s one-two punch against JPMorgan and Merrill rejects just about every substantive argument any of the banks in the FHFA litigation can raise in a dismissal motion — and leaves open the terrifying prospect of rescission and punitive damages against the banks.

In the JPMorgan decision, issued Monday, Cote specifically addressed the adequacy of Fannie and Freddie’s evidence that the bank knowingly misrepresented underwriting standards on the loans underlying various mortgage-backed notes issued by JPMorgan, Bear and Washington Mutual. Cote pointed to the FHFA complaint’s 60-page discussion of deficient underwriting and said they were sufficient to permit the case to proceed. But she also said that the FHFA doesn’t have to show underwriting flaws marred each of the mortgage-backed offerings, just that “there was a systematic failure by the defendants in their packaging and sale of RMBS.” (MBS geeks should note that in explaining this point, Cote refers to the 2nd Circuit’s recent ruling on standing in MBS class actions, which has already hurt JPMorgan in another case.)

As she did in her previous ruling denying UBS’s motion to dismiss FHFA claims, Cote once again shrugged off arguments that Fannie and Freddie cannot reasonably claim to have relied on JPMorgan’s representations because they were the most sophisticated MBS investors in the market. That sophistication, Cote said, didn’t give Fannie and Freddie access to the specific information that established deficiencies in the securities they bought. “It is difficult to see how they could help but rely on the representations of defendants, who did have access to those materials,” Cote wrote. “And while (Fannie and Freddie) were certainly aware that they were purchasing securitizations backed by subprime loans, neither the amended complaint nor documents integral to it establish that they knew that the loans supporting these particular securitizations were so haphazardly originated as to put in jeopardy even the AAA-rated certificates they purchased.”

The banks, in other words, are not going to be able to persuade Cote that Fannie and Freddie knew what they were getting when they invested in subprime-backed MBS, so they shouldn’t be able to make claims against issuers. Cote said that the banks can try to persuade a jury otherwise. She also said JPMorgan can tell a jury that it didn’t knowingly deceive Fannie and Freddie. But you have to regard Cote’s references to a jury trial as code for encouraging settlement talks. She’s signaling that she’s not going to be receptive to bank arguments on summary judgment, and warning that if the case continues, the banks will have to defend their underwriting to a group of ordinary people who aren’t likely to be kindly disposed to them.

And if that’s not enough to scare the banks into settlement talks, consider Cote’s findings in Thursday’s decision upholding just about all of the FHFA’s claims against Merrill Lynch. In particular, Cote refused to rule out the possibility of rescission — which would require Merrill to buy back the FHFA’s holdings in Merrill MBS offerings — and punitive damages. Merrill argued that the FHFA waited too long to file claims to demand rescission under the Securities Act and the common law; Cote said there were plenty of legitimate reasons for the FHFA’s delay in filing. As for punitive damages, which are based on New York law, Merrill asserted that the FHFA hadn’t shown the requisite exceptional misconduct. Cote disagreed, in what has to be considered ominous language for the bank defendants.

“FHFA alleges that the defendants acted recklessly by seeking to profit from ever more risky mortgage lending while, at the same time, passing on the risk (and ultimately the losses) associated with these practices to the public via their sale of securities to Fannie Mae and Freddie Mac,” Cote said. The judge went on to turn the banks’ arguments that Fannie and Freddie’s MBS losses were due to a downturn in the housing market completely against the banks. They’re not the victims of the housing crisis, she wrote, but (at least according to FHFA) the cause of “the most severe economic downturn this country has experienced since the Great Depression.” And yes, she said, “These allegations are sufficient to support the plaintiff’s demand for punitive damages.”

Seems to me that’s a pretty clear warning to the banks, which are now facing a trial date in June 2014. JPMorgan’s zero-dollar prediction aside, I bet we’ll see some FHFA settlements before then.

JPMorgan didn’t respond to Reuters’ request for comment, and a representative of Merrill Lynch parent Bank of Americadeclined comment.

(Reporting by Alison Frankel)

MBS-M=BS

66 comments

Posted on 18th November 2011 by mary malone in Economy |Politics |Social Issues

I’m cutting to the chase.  This is no time to bury the lead.

There are no mortgages to back Mortgage Backed Securities.  Investors are holding pools of unsecured debt. This debt is not backed by liens against real property. 

What does that mean?

For investors – pension funds, insurance companies, sovereign wealth funds, towns in Norway – it means you have been swindled.  The investment products you purchased (Special Purpose Vehicles, converted to Trusts and later Bonds) don’t exist.  And it looks like they never did.

For homeowners – it means that your largest asset is worth far less than market value. If you had a securitized mortgage at any time – the chain of title was broken. Your home has clouded title. It doesn’t matter what the terms of your mortgage were – conventional, ARM – how responsible or irresponsible you were. All those issues are irrelevant. In the future, you will only be able to sell your home to a cash buyer, because title companies will refuse to insure your property.

There’s also a very high probability that you are not paying your true creditor each month. You’ve kept your end of the bargain, honored your contract. But the lender is not going to honor their contract with you by providing you with clear title at the end of the schedule. They can’t.

How did this happen?

The creation and sale of Mortgage Backed Securities is governed by New York State Security Law. It is a very stringent and tough set of laws intended to protect investors from fraud. Only it didn’t protect investors.

Why?

President Clinton’s ramp up of The Community Reinvestment Act is partially to blame. It destroyed a banks’ incentive to write a quality mortgage that it would keep on the books for 30 years and replaced it with the incentive to write bad loans and move them off balance sheet as soon as possible.

I say CRA is partially to blame, because it created an environment for people in financial services and GSE’s to commit fraud. The executives at investment banks and the fly-by-night originators did not have to adhere to CRA regulations. Their behavior was clearly motived by unrelenting, enormous greed. The government did not force these individuals and organizations to commit massive control fraud. They made a conscious decision to plunder homeowners and investors all by their lonesome.

CRA set the table for a ramp up in issuance and sale of Mortgage Backed Securities (MBS). These products have been around since 1977 and were considered sound investments. The problems arose when the sheer volume of MBS increased after CRA regulations kicked in.

Bond indentures have basic representations and warranties that must be honored. They weren’t.  NY Security Law protects investors against fraud by requiring the banks to return all of their clients’ money if it was discovered that one loan in the pool did not follow the terms of the agreement.

Well, have you noticed an avalanche of lawsuits in the last three years? Every day, a new lawsuit is filed, charging Bank of America, Goldman Sachs, JP Morgan Chase, Citibank, Deutch, UBS, et al with security fraud. One of the largest was the Blackrock lawsuit against Bank of America. A judge just scuttled the $8.5 billion settlement.

The headline MBS-M=BS is missing. They bury the lede.

Numerous government agencies have sued and settled security fraud cases too.

The truth is hiding in plain sight. It’s high time we acknowledge that global investors have been bamboozled. Yes, the smartest, most sophisticated investment professionals in the world were fleeced.  William K Black, the economist and criminologist says it was an $11 trillion heist.

You would see more lawsuits against the banks and financial firms that created, packaged, rated, and sold MBS if the managers who invested in MBS on behalf of their clients had a scintilla of integrity. But they don’t. So they won’t.  

If they reveal the fraud to their senior managers, stock-holders and customers they will be fired. They would not collect that nice seven figure bonus they rely on to make their nut. So, they pretend and extend. They kick the can down the road. MBS fraud? “Nothing to see here people, move along…”

Why are there no mortgages to back MBS?

The NY Security Law requires that the original Mortgage/Deed (lien on the property) and the Promissory Note (promise to pay) be deposited into the Trust within 90 days of the loan origination. This is a very strict guideline. The 90 day window was to ensure that the trust held no assets that could be ‘clawed back’ if one of the contributing parties (like the originator) filed for bankruptcy. No exceptions allowed.

In addition, state property law often requires that the Note and the Mortgage/Deed travel together. When these two documents are separated, many state and Federal judges rule the chain of title has been broken, there is an imperfect lien. Clouded title is the outcome.

What’s the problem?

I mean, how hard can it be to keep the original Mortgage and Note together and lock the documents down into the Trust before the 90-day deadline expires? Apparently, it was very hard. In fact, we’re learning through discovery and analysis of loans, that it was downright impossible.

The parties who originated the loans, created the MBS, and/or ‘purchased’ the loans on the secondary market, kept the mortgages. They didn’t submit them into the Trust.

Why would they hold onto the mortgages?

We believe, and it is conjecture and opinion, that they made a conscious decision to hold the mortgage which is the lien on the property, to redeem in the future. You see, they expected that the MBS would be paid off and closed in 7-10 years, given normal rates of housing turn-over. Why not hold onto the mortgage, and when/if the home-owner defaults, seize the property?

What about the Promissory Note?

Unlike the Mortgage/Deed, the Promissory Note has real immediate value and can be sold to many parties over an extended period of time.  So it was.  They often scanned the Note, filed it in their electronic internal database and sold the original Note over and over and over again.

That’s why home-owners are often unable to secure their original Promissory Note. The real deal would reveal the identities and number of parties who purchased it. That would provide evidence to the home-owner that their contract was broken and fraud was committed. When the original Note does appear, it is covered in black boxes that redact its trail.

The sale of the Note is the reason why attorneys for ‘lenders’ submitted Lost Note Affidavits to the court in foreclosure proceedings. It’s why they paid a firm called DOCX to ‘recreate’ lost Notes and entire files for a fee, of course. The original Notes reveal the fraud. Can’t have that, now can we? Better option is to commit fraud upon the court and suborn perjury.

It begs the question – why on earth would officers of the court and banking executives risk criminal prosecutions and disbarment by proffering fraudulent documents upon the court? Why would they recreate evidence that supports their claim of loan ownership?

The answer is simple. They created evidence because they didn’t possess evidence that proves they are the true creditors. Why don’t they have evidence? Answer – because they are not the true creditors.

The fraud is revealed in foreclosure, when the need to produce documents authenticating true creditor status and legal standing is required. We don’t have a foreclosure crisis. We have an MBS fraud and property title crisis.

How prevalent was the practice of separating the Note and the Deed?

It was standard operating procedure which became glaringly apparent when the number of foreclosures sky-rocketed and homeowners could not locate their original closing documents. The Note and Deed were separated after origination when the property was recorded on MERS.

MERS, the Mortgage Electronic Registration System (which deserves a stand-alone post) separated the Note from the Mortgage/Deed, immediately clouding title on 60-100 million properties. MERS business model violates 400 years of settled state property law and the Federal Uniform Commercial Code.

MERS is billed as a joint venture between banks, title companies and GSE’s. But we’ve uncovered evidence that Fannie, Freddie, ands Ginnie leaned heavily on banks to adopt MERS as its primary recording system. All parties are implicated. However, blame for the creation of MERS rests squarely on the Federal Government.

So we have ample evidence the Note was separated from the Mortgage/Deed, and never submitted into the Trust. NY Security Laws were violated. Investors were defrauded. Title was clouded on 60-100 million homes. Four million homes were seized in illegal foreclosures. Four hundred years of state property laws were trashed.

Is that it?

Nope. There’s more – lots more.

Evidence is mounting that fraud was committed through-out the securitization chain.

The scheme resembles the plot of “The Producers.”

We believe that the salesmen for the MBS went to the investor community with an offer they couldn’t refuse. They promised an existing pool full of mortgages from Ozzy and Harriett homeowners who always paid on time and would provide steady income stream for institutional investors. The salesmen took the investors’ money.

Then they went to the originators and told them to go out into the market and find the Ozzy and Harriett homeowners they promised to the investor. The originators ‘found’ customers, closed the loans and collected the fees.  All parties in the chain had 90 days to find the promised customer, close the loan and process it through the securitization channel.  On Wall Street, 90 days is an eternity. They’d make the deadline – no sweat.

When the MBS market hit full stride and serious money started flowing in, the pace picked up and they were unable to even provide the appearance of following the law. So they didn’t even try. They just took the money.

We believe that once Attorneys General like NY’s Eric Schneiderman, or Delaware’s Beau Biden dig into discovery, they will uncover evidence that substantiates our theory. But right now it is just a theory.

What we do know is, the regulators didn’t regulate. The investigators didn’t investigate. They chose not to protect the public from the malfeasance.  Instead, they accepted lucrative job offers from banks and their white shoe law firms. They just took the money.

Investors and homeowners have been defrauded. Investors have the resources to protect themselves.

Homeowners don’t. They need government’s protection.

Beating home-owners into submission with the moral hazard club must end. It’s time to set the record straight.

The global credit markets did not collapse in September 2008 because homeowners bought too much house, or insisted on granite counter-tops and walk-in closets they didn’t deserve.

The crisis erupted when it became public knowledge among elites in global banking and government that there were no mortgages to back Mortgage Backed Securities. Zip, zero, nada.

When the s@#$ hit the fan, the crony capitalists did what crony capitalists always do…they covered up the crime – which was committed by their peer group – and facilitated a billionaire bail-out of epic proportions in the US and around the globe.

How do I know this? Why should you believe me?

In September 2008, when the world as we know it almost ended and the credit crisis was in full swing, I honestly did not understand how sub-prime loans could bring down the global economy. I mean they were calling many of these dubious products, liar’s loans for years, weren’t they? Clearly everyone knew about the risk. How could it be that investment banks like Lehman and Bear Stearns could make bets against the pooled loans – and not have been regulated or sanctioned for their risky behavior? What exactly constitutes ‘bad paper’? Why was the US government buying it? What exactly will TARP accomplish?

So I started to investigate. IBD readers know William O’Neil’s advice was to follow the Big Money. So I did. I logged on and attended their conferences. I read their chat room and message board posts. I studied their white papers and analyzed their investment advice.

I was shocked at what I learned.

 In 2008 and early 2009, the institutional investors, fund managers and banking elites were openly saying, “There were no mortgages to back Mortgage Backed Securities.” They called it the Black Swann. Many worried that people would start rioting in the streets once they learned the truth.

Did these financial gurus bother to tell you what they knew?

Hell, no.

Instead, they recommended their clients purchase gold and farmland in developing nations.

I poured over mainstream financial news sites and publications. There was nary a word – not a peep – on MBS fraud. Nobody was covering the story or telling the whole truth.

So I started to dig and began a 3+-year odyssey studying MBS. I read original documents, Congressional testimony, case law, academic white papers, and more. It took me two years to fully comprehend what I had learned. It took another six months for me to be able to explain it to other people.

In December 2010, I outlined the elements of the MBS fraud to a trusted friend who works in the capital markets. He was incredulous at the news and said, “We assumed in the end that there were crappy loans in the MBS, (that’s why we got out early) but nobody thinks that there are no mortgages at all. Let me check it out with senior level executives whose opinion I trust. I’ll get back to you.”

 He studied my research, spoke with his contacts and confirmed the story. There are no mortgages to back Mortgage Backed Securities.

In the ensuing months, we have had conversations with many people who work in finance, law, government and media. Nobody has told us we are wrong.

Our primary focus is to educate homeowners about the MBS fraud and help them understand how it impacts them.  We are volunteering our time and energy because homeowners have been severely damaged and nobody in power is helping them.

We’re not anarchists, or anti-business zealots. We’re ordinary people who have worked in business for over 30 years. We are capitalists – not crony capitalists. We believe in free markets, small efficient government and most of all, the Rule of Law.

It is not our intention to collapse the system. We don’t think people who haven’t paid their mortgages should get a free house. We do believe that homeowners have the right to know the identity of their true creditor.  In America, no one’s home should be seized and sold by a party that has no legal standing to foreclose.

Due Process is not reserved for Americans with FICO scores of 750+.

The Founding Fathers didn’t grant property rights just for those who pay their bills on time.

At its core, the MBS fraud represents a breakdown in the Rule of Law.

A number of us on TBP lament that America is no longer a nation of laws, but of men.

That is true today, but it doesn’t mean that it will be true tomorrow. We can fix this – it is not too late.

Everyday Americans need to learn the elements of MBS fraud and demand that the elites in Big Government and Big Business who committed these crimes face criminal prosecutions.

It is hard, tedious, frustrating work. Learning the details of the fraud will make your head explode and your heart break.

Securing our freedom and property rights is a burden. In my humble opinion, it is a burden we all must share. Blanket cries of ‘arrest the bankers’ will not do. We need to be specific. It is imperative that we name names, list specific crimes and present actionable intelligence to the public and law enforcement agencies.

I believed that a narrative of MBS fraud that everyday people can understand was needed. So I wrote one. The glaring headline, “There are No Mortgages to Back Mortgage-Backed Securities” was missing – so I supplied it.

It is a beginning – a broad template that can be filled in with corresponding facts and evidence obtained from public records, case law and depositions/discovery.

The details of the fraud are very intricate and tend to bog down the narrative, so I am providing you with access to my library of documentation that will help you gain a deeper understanding of the fraud. The document dump can be accessed at: https://skydrive.live.com/?cid=0aa1f8ea3d902284&Bsrc=EMSHGM&Bpub=SN.Notifications&id=AA1F8EA3D902284%21103

I will focus on MERS, destruction of property title and county land records, illegal foreclosures, CRA – inflated property appraisals and more in future posts.

In the meantime, if you have gained value from this post, please make a contribution to The Burning Platform. We believe in free markets here at TBP, so feel free to hit the contribute button with abandon.

Something Evil This Way Comes — Real Soon Now!

30 comments

Posted on 12th April 2011 by MuckAbout in Economy

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You may now stop singing and dancing and playing around. The party is about to be over and I’ll be glad to be a party pooper and tell you why.

The Federal Reserve is about to pull the plug on money pumping. The signs of this non-action (when one stops doing something, it’s a non-action, right?) have been laid out in plain text tablets from on high and even plainer actions everywhere this week and last.

Straws in the Wind:

Bill Gross, an extremely smart fellow and boss of PIMCO, the largest bond fund in the world has cast two votes against U.S. Treasury debt. First, a few weeks ago, in his weekly newsletter, he plainly stated that PIMCO was not going to hang around with a “wait and see” attitude as far as QEII ending, maybe QEIII, maybe not. So he sold every last Treasury Bond he had in his voluminous inventory. Boom.. Just like that.

This week, we got the second vote against U.S. Treasury debt. Looking critically at PIMCO’s positions, we now find that that the position in U.S. Treasury debt is over -3%. PIMCO is short 3%+ of assets in Treasury debt. There can be no doubt that Mr. Gross is putting his money right smack where his mouth is. I, for one, feel Mr. Gross is at a considerably higher pay grade than yours truly and would not care to bet against him.

Another straw blowing around is the fact that interest on U.S.Treasury debt is beginning to crawl higher – not rapidly – but 30 Year T-Bonds have moved from 4.48% to 4.64% since April first and 10 Year T-Bonds have moved from 3.46% to 3.59% in the same time frame. Fact of the matter is that the entire long bond yield rates from 5 years out has risen about the same percentage amount and that change is about 3.6% over two weeks or 93.6% at an annual rate if things don’t change.

For those who are not bond investors, I feel I need to interject a tiny bit of background here. Bond value (i.e. sales price) varies inversely with bond yield. If you buy a 10 year, $1,000 face value T-Bond at an interest rate of 2%, in addition to earning negative return on it (inflation eats the purchasing power of the bond faster than the interest adds to the return) you also run a possibility of capital gain or loss depending on open market bid/sell prices on the bond. If interest rates drop to 1%, the value (and price on the market) of the bond doubles to $2,000 so that at the end of ten years, the interest paid will be the same. By the same token, if interest rates increase to 4 percent, the face value of the bond is cut in half to $500 so that, at the end of ten years, the interest paid on the bond remains the same. ($200 in either case). When the bonds are sold on the open market, this back and forth movement goes on throughout the life of the bond. (I exclude TIPS here for simplicity – for TIPS, see .

The point of the story is that rising interest rates are absolute poison to the fixed income interest dependent markets (Treasury bonds, corporate bonds, mortgage securities – any debt instrument that has a issue face value, a fixed maturity date and a fixed opening interest rate). Also, all variable interest rate loans (ALT-A, adjustable rate mortgages, et al) as interest rates increase, so will payments increase on the loan to insure the new interest rate is reflected in payments.

Now that we’ve got that wee background out of the way, we’ll take a look at a silver stake that was just driven through the Heart of the FOMC at the Federal Reserve and just bloody guarantees that Bill Gross is absolutely correct in his bet that interest rates are going up “real soon now”.

The Federal Reserve Changes Accounting Rules so it Can’t Go Broke!

Way back on January 6, 2011, (Hat tip to John Hussman for bringing this to light), in a mostly forgettable Federal Reserve Weekly Report, very quietly and in small print that escaped the notice of the media and just about everyone else, was inserted a note to the effect that the Fed had changed its own accounting rules which, frankly, looks illegal as Hell to me. Will whom ever oversees the Federal Reserve please stand up?

More background:

The Fed, as a bank, must hold asset reserves to back up the credit it issues, just like a real bank, right? Well not so fast. If a bank has a leverage level of 1:1, then it would have to have its’ entire loan portfolio default before it would be in trouble, a very unlikely thing. A bank that is leveraged 10:1 would come out fine until 10% of it’s loan portfolio defaulted and then it would go bust because its’ reserve capital drops to zero. This is why there is a loan window at the Federal Reserve that will loan banks money when they need it, should they run into trouble with reserve requirements and need a helping hand. This is all well and good for the banks as it stabilizes the system and smooths out the flow of funds. But there is a limit, by law, as to the limits of leverage a bank can have. Apparently the TBTF banks have no limit on either the reserve requirement or leverage because if they “technically” go broke, the Federal Reserve merely purchases the bad mortgages, loans, whatever at full face value, tucks it into the Federal Reserve’s vault – valued at full face value even if they are truly valued at zero – gives the banks fresh money in exchange and just like magic – all’s well. For a little while.

Now these rotten assets that caused the TBTF banks to “technically” fail and be bailed out are subject to the same mathematical rules to which every other debt instrument is subject. If interest rates go up, the face value of the debt goes down. If interest rates go up, the value of the “phantom” assets the Fed holds goes down as well (regards of the real value).

But we have a problem. Several problems in fact. Problem #1 is that the Federal Reserve, if it were an ordinary bank would be shut down in a heartbeat by regulators because it’s already busted. The fed’s leverage approaches 50:1, it’s vaults are stuffed with rotten garbage that isn’t worth burning, valued at full value in the old extend and pretend game. Now, if it takes 50% of assets to default to put a bank with a leverage of 2:1 out of business, how much loss of value can the Federal Reserve handle before it’s totally busted?

Since the Federal Reserve is currently at a 50:1 leverage (honest!), it’s 2%. If 2% of the Federal Reserve asset base disappears, the Fed is well and truly bankrupt on paper. (I know the Fed is bankrupt now, but we’re talking “broke” so the whole world has it rubbed in their faces!).

How the Federal Reserve fixed it own problem in advance and insures it will never go broke!

So, back on January 6, 2011, the Feds changed the rules (same as TEPCO changing the rules to allow more radioactivity perfectly ok and rendering it harmless at the stroke of a pen) so that should any assets held by the Fed take a hit from higher interest rates, the value lost, instead of being deducted from the value of the asset base itself, it recorded carefully and in my opinion, illegally in a new account called, “Liabilities of the U.S.Treasury”.

I include here a segment of an article from the CNBC web site (posted on 21 January and never again mentioned by the MSM) on which you may come to your own conclusions.

“The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability. This enhances transparency (!!!) by providing clearer, more frequent, snapshots of the central bank’s finances, analysts say. The bonus: the number can now turn negative without affecting the central bank’s underlying financial condition.
“Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible,” said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.
“The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed ‘insolvency’ in a scenario where interest rates rise significantly,” Smedley and his colleague Priya Misra wrote in a research note.” (various emphasis mine)..(source here: http://www.cnbc.com/id/41198789)
Now what I really want to know is how does the Federal Reserve get to change its’ own accounting rules with no oversight, no permission, no notification of Congress – NO NOTHING.
It makes me feel so much more secure to know that “technically”, the Federal Reserve can no longer go broke regardless of how interest rates rise or how much money they loan the Treasury or foreign banks or how much money they flood the world with! They are now literally living in a fantasy world of make believe where they must assume everyone else in the entire world is totally adrift mentally and incapable of seeing the plain truth. The Federal Reserve has gone berserk, insane and completely unable and unwilling to use rational thought for any level of activity.

Summary (or put all the BS in one box):

The actions of the Federal Reserve and Bill Gross of PIMCO plus all the propaganda put out by the Presidents of several Regional Federal Reserve Banks add up to one thing.

At least temporarily (i.e. until total panic and discontent rule inside the beltway), further QE is toast. What exactly comes next is anyones’ guess but this is not all of the story. It goes deeper and scarier as you examine just how thin a line has been drawn between depression and hyper-inflation+depression the Federal Reserve has managed to doodle into the picture.

Once again, I will borrow from an excellent analysis of John Hussman who draws some
startling conclusions. If interest rates increase a mere 0.25%, it would require one of two things; draw down the money supply by an immediate $600 billion (i.e all of QEII) or accept a 40% increase in inflation. To allow interest to rise to a mere 2%, all the QE to date would have to be withdrawn from the money supply or they would have to accept a 70% inflation in price levels. It normally takes 6-8 months from a change in the money supply to reflect itself in the inflationary front. Hence, the run up in food, gas, commodities, etc. we see around us today are from QE1 and QEII will make itself felt real soon now.
(source here: http://www.hussmanfunds.com/wmc/wmc110411.htm)

All in all, there is no doubt that the Federal Reserve is on the path to higher interest rates which will kick the markets end over end. Stocks markets will take a hit (including PMs), the bond bull will die a kicking screaming death and volatility and instability in all things from industrials to financials to commodities will be the order of the day.

I am standing aside for a time, except for my core holdings in precious metal and commodities and a very modest chunk of a permanent portfolio fund. I maintain holdings in short term CDs of several foreign countries currencies but keep them all on a very short string.

I would recommend you adopt an extreme defensive posture in your investments and short term planning. I’d maintain this outlook until the dust settles, the volatility drops back into the atmosphere and we get a feeling whether or not the Federal Government has the cojones to wring out the excessive funds they stuffed into the banks pockets at the expense of taxpayers. If they do, fine, it’ll hurt, GDP will wither, unemployment will climb sharply, there will be defaults and bleeding in the streets here an there. If they do not and reverse stance and go to QEIII, QEIV, etc, etc then we just drag that dry powder out of storage and back we go into PMs and commodities and anything end everything except the dollar and things dollar denominated.

For now, be very conservative and very careful. There are Evil Things on the Prowl and it may take a while to make them go away – if they do at all.

END

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The MRO (Market Reversal Oscillator) and its associated trend trading system was developed and is sold by Mike Endres and MRO Trading Systems.  Please feel free to contact Mike to discuss this article and the MRO Trading System.
 
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BANK OF AMERICA HAVING A BAD DAY

19 comments

Posted on 19th October 2010 by avalon in Economy |Politics |Social Issues

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Bank of America reported a $7.3 BILLION loss today. The MSM somehow chose to say that Bank of America had beaten expectations. What were expectations? ARMAGEDDON? This piece of shit bank did the same thing the other piece of shit banks did. They made an accounting entry saying that their losses in the future will be much lower, so their current earnings went up. I’m so glad I became an Accountant. You have so much power.

Well this just across the wires. It seems that institutions which bought the toxic mortgages that Angelo Mozilo and Countrywide were peddling think they were defrauded. Shocking!!!!!

I bet Bank of America sure is glad they paid off Mozilo’s SEC fine. They are going to have to eat $47 billion of fraudulent mortgages. I wonder how many more billions are out there? It would be a beautiful thing to watch Wall Street turn on itself and go down in flames like the Hindenberg. DIE SCUM!!!!!!   Zero Hedge has the latest below.

Pimco, Blackrock And New York Fed Said To Seek Bank Of America Mortgage Putbacks

Tyler Durden's picture

Submitted by Tyler Durden on 10/19/2010 12:55 -0500

Putbacks, bitches! This headline that has just flashed, can not be right. Otherwise it would mean the New York Fed (and Bill Gross) is preparing to sink Bank of America with hundreds of billions of par MBS putbacks. It would however explain why PIMCO has been gobbling up MBS on margin in the past month as we highlighted. We will bring you more as we see it, because this could be a groundbreaking development.

Update: Blackrock joins too! The “soured mortgages” in question amount to $47 billion (to start). We are now just waiting for BofA to next demand TARP 2 and the circle jerk will be complete.

Update 2: Full Bloomberg story attached.

Reminder: Here is JPM’s presentation on what the total putback risk is for the Big Banks. As the lawsuit seeks to putback $47 billion one wonders just how accurate JPM’s estimate of a $55 billion max pain truly is…

Reminder 2: As our whistleblower pointed out earlier today, the issue of misrepresentation of all mortgage related items (not just titles) is precisely what would destroy the mortgage originators and servicers. Today, Countrywide, its former orange CEO, and Bank of America are the first to realize just how correct he or she was.

 

Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said.

The bondholders wrote a letter to Bank of America and Bank of New York Mellon Corp., the debt’s trustee, citing alleged failures by Countrywide to service the loans properly, their lawyer said yesterday in a statement that didn’t name the firms.

Investors are stepping up efforts to recoup losses on mortgage bonds, which plummeted in value amid the worst slump in home prices since the 1930s. Last month, BNY Mellon declined to investigate mortgage files in response to a demand from the bondholder group, which has since expanded. Countrywide’s servicing failures, including insufficient record keeping, may open the door for investors to seek repurchases by bypassing the trustee, said Kathy Patrick, their lawyer at Gibbs & Bruns LLP.

“We now are in a position where we have to start a clock ticking,” Patrick, who is based in Houston, said today in a telephone interview.

MetLife Inc., the biggest U.S. life insurer, is part of the group represented by Gibbs & Bruns, said the people, who declined to be identified because the discussions aren’t public. TCW Group Inc., the manager of $110 billion in assets, expects to join BlackRock, the world’s largest money manager, and Pimco, which runs the biggest bond fund, in the group, the people said.

Countrywide also hasn’t met its contractual obligations as a servicer because it hasn’t asked for repurchases itself and is taking too long with foreclosures, either because of document or process mistakes or because it doesn’t have enough staff to evaluate borrowers for loan modifications, Patrick said. If the issues aren’t fixed within 60 days, BNY Mellon should declare Countrywide in default of its contracts, she said.

Trustee Duties

“The letter states a demand directed to Countrywide to cure the defaults,” said Kevin Heine, a spokesman for BNY Mellon. “It does not ask BNY Mellon to take any action. BNY Mellon will continue to perform its duties as trustee.”

Charlotte, North Carolina-based Bank of America will “defend our shareholders” by disputing any unjustified demands it buy back defective mortgages, Chief Executive Officer Brian T. Moynihan said today.

Most claims “don’t have the defects that people allege,” Moynihan said on Bloomberg Television, referring to so-called putbacks, in which guarantors or investors in mortgage-backed securities ask to return bad loans. “We end up restoring them, and they go back in the pools.”

Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, Brian Beades, a spokesman for New York- based BlackRock, and Peter Viles, a spokesman for Los Angeles- based TCW, declined to comment.

John Calagna, a spokesman for New York-based MetLife, didn’t immediately return messages seeking comments. Jeffrey V. Smith, a spokesman for the New York Fed, declined immediate comment.

“We continue to review and assess the letter, and have a number of question about its content, including whether these investors have standing to bring these claims,” Bank of America Chief Financial Officer Charles H. Noski said today on a conference call with analysts. “We continue to believe the servicer is in compliance with the servicing obligations.”

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