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Saturday
Sep222012

Chris Whalen On QE3: "The Core Problem Is Fraud"

"A hedge fund on the floor of our offices in New York actually started dancing around like little children shouting 'QE3' after the Bernanke press conference."

---

This is a must read.

Guest post submitted by Chris Whalen.

QE3, Deflation And The Fed's Money Illusion

The announcement last week by the Federal Open Market Committee that the central bank would initiate additional, open-ended purchases of residential mortgage backed securities (RMBS) was more than a little sad.   Let us count the ways. 

The first reason for sadness was the idea that people here in New York and elsewhere in the global financial community were actually surprised by the Fed’s move.  The FOMC is fighting deflation.  Credit continues to contract globally as much of the western world goes on a pure cash budget.  So while I would like to see the Fed raise short term rates, the fact is that the central bank has little choice but to support the markets.  But buying RMBS will neither help housing nor reverse the current deflationary spiral on which we all ride. 

The second reason to be circumspect is the fact that the Fed’s leaders continue to pretend that driving down yields in the RMBS markets will have any impact on the housing sector or the economy.  The two thirds of the mortgage market that cannot refinance their homes will be unaffected by QE3.  In fact, the latest Fed purchases are a gift to Fannie Mae and Freddie Mac, the TBTF banks and the hedge fund community.  A fund on the floor of our offices in New York actually started dancing around like little children shouting “QE3” after the Bernanke press conference.  

The link below shows a great chart from Credit Suisse of par RMBS vs 10 year constant maturity swap or "CMS."  Just how much lower does the Fed expect RMBS yields to go? 

http://www.rcwhalen.com/pdf/qe3.pdf

“The entire move in MBS prices will go into profit margins,” one mortgage market veteran told the Berlin-New York-Los Angeles mortgage study group last week.  “FHFA has made sure that the mortgage market has oligopoly pricing and zero competition for the existing servicers.  QE3 is risk free profits for the unworthy.  And we wasted 40 years and Trillions of dollars fighting the USSR over the need for a free enterprise system?”

Unfortunately, since two thirds of the mortgage market cannot be refinanced, the effect of the Fed’s largesse will indeed go straight to the GSEs and Wall Street zombie banks.  This is the key, historical error being committed by Bernanke and the rest of the FOMC.  Instead of looking for ways to stoke consumer demand by restoring income and consumer demand, the Fed is simply feeding subsidies to Wall Street.  Since the Fed does not think that savers like grandparents and corporations spend money, the error is magnified several orders of magnitude. 

The basic problem with the people on the FOMC today is that they are all Obama appointees who are by and large neo-Keynesian socialists in terms of economic outlook.  By spending all of their time trying to prevent the 50% drop in GDP which occurred in the 1930s, the Fed forgets or never knew that this catastrophe was the result of the disappearance of private sector capital – not a lack of government spending.  And why did this happen?  One word: Fraud.  Bill Black has been talking about fraud for years,  So does Fred Feldkamp, the father of the good sale in RMBS.  And so have we at IRA and many others.  

The third sadness is that people still don’t understand that fraud is the core problem in the market economies.  Until you deal with fraud and start to restructure the trillions of dollars in bad assets now choking the US economy, no amount of Fed ease will reverse the contraction in credit.  This is not so much a monetary problem as much as a political issue.

Just as during the 1920s and 1930s it took years for our leaders to understand that securities fraud was the core issue menacing the US economy, today the same process of discovery and revelation grinds slowly forward.  Fear causes investors to withdraw from markets and save cash.  But because Chairman Bernanke and the Fed refuse to attack the source of the fraud – namely Bank of America and the other zombie banks – the US economy is destined for years of stagnation and eventual hyperinflation.  

Economists at the Fed think that the rising propensity to save is a function of interest rates, but no amount of financial repression is going to convince investors to take first loss on a private label RMBS until they trust the representations of the issuer.  Trust me on this since I am in the bank channel right now marketing a non-conforming RMBS offering.  

Just as the grey market banking sector collapsed from the peak of $25 billion starting in 2007, the confidence of the great market economies is collapsing under the weight of socialist economic prescriptions and cowardly advice coming from the legions of economists who work for large banks.  Most economists have figured out that the old linkages between savings, consumption and debt have broken asunder.  Yet none of these captive seers dares to suggest that the banks themselves need to be restructured.

Jeff Zervos of Jeffries is one of the key Fed cheerleaders.  He writes in a research comment: “The bottom line is that the Fed is printing money, debasing the currency and devaluing debt. The policy is redistributive, regressive and reflationary.  It’s a nasty business for sure, and the truth must be obfuscated from the public.  But if we want to avoid a second great depression, it is the right thing to do. Good luck trading.”

Good luck indeed.  So long as the Fed refuses to become an advocate for restructuring and merely keeps interest rates low, there will be no progress on the economy or jobs because aggregate credit continues to contract.  The Fed’s actions are not really growing the money supply much less credit, it is merely trying to slow the decline.  Whether we talk about the run-off of the private label mortgage market or the wasting effect of low rates on savers, the US economy is being put into a no leverage, pure cash model by the happy Keynesians who run the Fed.  

The fourth sadness is that mainstream economists from Zervos to Bernanke to Richard Koo at Nomura refuse to even talk about rebuilding private sector wealth creation.  In a brilliant luncheon talk last week at the Bank Credit Analyst investment conference, Koo accurately described the breakdown in the relationships between major economic aggregates.  He also illustrated nicely the jump in savings in Japan and the other major industrial nations following market shocks.  

But Koo, like most of our former colleagues at the Fed, thinks that only increased debt and public sector spending are the answer to the deflation threat.  But the key lesson of the Great Depression was that government must avoid actions and policies that cause private sector investors to flee the markets.  This is precisely the result we now see from the Fed’s actions.  

Now you might argue that the Fed is merely following the advice of Irving Fisher, the great US economist, who wrote in 1933 that vigorous monetary policy is needed in the face of debt deflation.  One must wonder, though, if Fisher would not scold all of us today for failing to attack fraud and restructuring at the same time.  Like most Keynesians, Fisher believed that government could manipulate income and investment via monetary policy. 

Yet even Fisher was guilty of embracing the same fallacy or "money illusion" that government can print money without affecting negatively consumer behavior.  As Ludwig Von Mises wrote in the new preface to his classic book, The Theory of Money and Credit:

http://mises.org/books/Theory_Money_Credit/Contents.aspx

“There is need to realize the fact that the present state of the world and especially the present state of monetary affairs are the necessary consequences of the application of the doctrines that have got hold of the minds of our contemporaries. The great inflations of our age are not acts of God. They are man-made or, to say it bluntly, government-made. They are the off-shoots of doctrines that ascribe to governments the magic power of creating wealth out of nothing and of making people happy by raising the 'national income'.”

Could it be that the monetary actions of the Fed and other monetary authorities around the world are scaring investors, eroding confidence in private markets and worsening deflation? Most economists never consider that FDR’s anti-business rhetoric and policies helped to drive private capital formation to zero in the 1930s.  Likewise today, the Fed’s reckless and arguably illegal actions in terms of monetary policy are terrifying investors and members of the public around the world.  But all that Jeff Zervos, Richard Koo and their Keynesian/socialist pals that the Fed have to say is “good luck.” 

We need to take a new direction if the economic catastrophe predicted by luminaries like Paul Krugman does not come to pass.  The core principles are two: fight the fraud and restructure bad assets.  If we hold responsible those who have committed fraud against investors and at the same time move quickly to restructure and break up banks such as Bank America, we can restore public confidence in markets and reverse the deflation which is even now gaining momentum in the US economy.  Contrary to the assertions of Zervos and others, there is no need to hide government policy from the public view.

Restructuring is the necessary condition for credit expansion and job growth.  Without private sector credit growth there can be no jobs. Without justice for investors, pension funds and banks defrauded to the tune of hundreds of billions of dollars, there can be no investor confidence to support private finance.  And unless the Fed and other regulators in Washington break the cartel in the US housing sector led by Fannie Mae, Freddie Mac and the top four banks, there will be no meaningful economic recovery in the US for years. Instead we will face hyperinflation and social upheaval, both care of the well-intentioned economists on the FOMC.

 

Recent videos from Whalen:

'Bank Of America Will Split Into Pieces Soon'

'What Did Bob Rubin Know About LIBOR Fixing?'

'Questionable Accounting At Wells Fargo'

Whalen & Ritholtz: "Big 4 Banks Have To Cheat To Hide Their Insolvency"

 

 

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Reader Comments (26)

IS BERNANK BUYING 40 BILLION WORTH OF MORTGAGE BACKED SECURITIES EVERY MONTH AT PAR, OR MARKET PRICES? WHAT IS THE MARGIN STAND (aka, fixed income brokers' commission) THE FED WILL HAVE US PAY TO ACQUIRE THOSE MORTGAGE BACKS? IS BERNANK's CREW BUYING BASED ON THE LIES THE BOND PACKAGERS (the fed's member banks) FUDGED IN THE BONDS' PROSPECTUSES, OR IS BERNANK"S CREW ASSURING THAT EACH UNDERLYING MORTGAGE IN THE BONDS MEETS THE REQUIRED UNDERWRITING STANDARDS?

It's important to understand the endgame, and it looks to be shaping up like this ,,,

1) Fiat currency will be replaced by gold. Not a "gold standard". Gold will be coined.

2) The crime families that compose the FED's "memembers" have been net buyers of gold. They're buying it all up. Shorting gold is a good way to keep it cheap.

3) The USD, is now, though not understood by the public, dog shit. At some point, the plan is to say "well Dr Paul was right all along, fiat currencies are crap - so executive order so and so will order gold coinage, and allow citizens to exchange their USDs for gold coins, at posted market rates.

4) By then gold will be so expensive, the allocation will distribute the gold based on how many USD's one has to exchange. Since FED member banks have loaded up on USD's from bailouts, theft of customer deposits and FED counterfeiting, those banks will have an almost absolute majority of the USD supply, they will have 99.9% of the gold,

... game set match ...
Sep 19, 2012 at 6:24 PM | Unregistered CommenterTHrob
Dream of gaming the stock market with derivatives and high velocity trading, Dream of being the 'select few' left after the rape and looting of the financial system of the U.S.. Then dream of that 50 pound weight motivating the razor blade of life coming down at your neck at an ever increasing speed. If you do not have to dream, then I guess you do not have to dream. Bernanke has earned hard time.
Sep 20, 2012 at 2:24 AM | Unregistered CommenterHoward T. Lewis III
You said: “The basic problem with the people on the FOMC today is that they are all Obama appointees who are by and large neo-Keynesian socialists in terms of economic outlook.”

Not completely true. Bernanke, a republican, was appointed by Bush. He is a Keynesian though.
Sep 20, 2012 at 12:26 PM | Unregistered CommenterGH
Bernanke is the bubonic plague infected rat under your bed. He is the 'rat bite fever' infected rat that you are watching destroy everything in your pantry because Obama(lobotomized) is watching him too. Bernanke was chosen to be at this particular post because he is a banker of mass destruction. He was chosen by the 9-11 cabal. Get a clue.

Tim Geithner used to be under the tutelage of Richard Perle. The economic destruction of the U.S. is going on while the competent sit and watch. If this crap is allowed to play out, Wall Street players will not be having tea with the mavens of the City of London. Queen lizard knows you can't be trusted, and to her you are expendable.

You all looted your own country (with many exceptions). That money was to be invested for the good of the investors AND the benefit of the nation. The old 'double-cross' like the bones on the 'Jolly Roger' flag. 300 years of treachery in the name of the British royal family should have been enough warning. You don't expect it because the queen lizard looks so clean. She is queen lizard because her two sisters were installed like cordwood in an asylum.

For 43 years, I have told people that there were nukes installed under the WTCs to accommodate the demolished material when the preset demolition system went off. Yahoo search "craters under the WTCs" and see the craters after they were cleaned out, polished molten glass pits and all. Now I am telling you that if the military does not get in there and throw the Obama administration in prison, we are screwed. Romney will expedite this destruction and the nation will be saying "God bless the queen!" while that Adelson swine from Las Vegas has his feet up on the desk in the Oval Office. Not a pretty picture. Romney is getting big money from the very domestic cabal that helped Bush41 and company pull off the Molloch Tribe human sacrifice on 9-11-2001. Time to clean house.
Sep 20, 2012 at 1:04 PM | Unregistered CommenterHoward T. Lewis III
Howard, please tell us how YOU really feel. (Not that I disagree.)
Sep 20, 2012 at 1:16 PM | Unregistered CommenterGH
With my hands. I process and relate data and relate conclusions, etc.,with my mind.
Sep 20, 2012 at 4:00 PM | Unregistered CommenterHoward T. Lewis III
Chris,

I'm a big fan, and I agree 100% regarding the fraud. However, I take exception to calling what the Fed is doing "socialist Keynesianism" resulting from Obama appointments:

1) The Fed is overwhelmingly under the control of the highly partisan and Republican Bush appointee, Ben Bernanke. In fairness to Ben, I don't think that QE3 is partisan, but if Ben didn't want QE3 to go forward, it wouldn't have happened.

2) The "Market Monetarists" school of economic thought (Scott Sumner, Lars Christiansen, etc) who view themselves as the TRUE successors to Milton Friedman and his "Monetarist" "pro-free-market" Chicago School, are ABSOLUTELY thrilled with what the Fed has done with QE3! This group would be HIGHLY offended to hear someone calling them "socialist Keynesians" since that is anti-thetical to their beliefs. In addition, the Market Monetarists don't think that Ben has really gone FAR ENOUGH with QE3.

3) While I understand that Keynsianism was about Monetary policy, it's is also about fiscal policy, which there's NONE of in QE3. So how can you really call it Keynesian w/o the fiscal part?

4) While I think that fraud is a HUGE problem (I too am a big fan of Bill Black), and one of the major causes of the financial crisis, I don't think that fixing fraud itself is going to cause the market to turn around. I believe that we won't start to turn around until private (not public!) debt levels have been substantially reduced. They reached a high of 303% of GDP in 2009 and have since dropped to about 250% of GDP, but they are still above the previous all time high of 240% right at the depth of the Great Depression in 1933:

http://cdn.debtdeflation.com/blogs/wp-content/uploads/2012/01/010212_2140_TheDebtwatc1.png

Two things got us out of the Depression: Seriously addressing fraud in the 1930s (as you mention) and massive deleveraging of the private debt levels all the way through the end of WWII. This de-leveraging was brought about by bankruptcy, debt paydowns, and the biggest fiscal stimulus package ever by the Federal Government (WWII). As you can see from the above chart, the PUBLIC debt to GDP ratio steadily climbed from 1941 until 1945 to about 125% of GDP (at the same time that the private debt ratio reached an all time low of 45%). This set us up for 30 years of unprecedented growth from 1945 - 1975.

Here are a couple of right wing "Market Monetarist" blogs in which they are trying to contain their glee at Bernanke FINALLY having (at least partially) starting to do what they've been telling him to do for years:

http://marketmonetarist.com/

http://www.themoneyillusion.com/

It's especially ironic to me that Scott Sumner's blog is called "The Money Illusion" ... the same phrase used in the title to your piece here! Please please go to the Market Monetarist blogs and tell them why QE3 is a "socialist Keynesian" plan... I'd love to see the reaction!

I'm going to post a link to your comments over at those two blogs.
Sep 20, 2012 at 7:30 PM | Unregistered CommenterTom Brown
Who says we EVER got out of the 30's depression? Where, exactly is that recovery, now?

The fraud started in 1913 with the creation of Fed "money," and the so-called income tax. The rest of the mess is just sludge that has built up due to neglect for our own economy.

Time to hold all politicians and corporate officers responsible for the slime we're living in.

If you think higher interest rates will somehow save you, you are a damned fool. That's exactly how we arrived in this hole.
Sep 22, 2012 at 10:52 AM | Unregistered Commenterusurykills
QE = Quantitative Embezzlement
Sep 22, 2012 at 11:40 AM | Unregistered Commentermmckinl
Ok, I'll bite. Here's my version:

QE = Quantitative Assing
Sep 22, 2012 at 12:53 PM | Registered CommenterDailyBail
We can boil it for days and in the end its even more simple, the real reason for this montary policy is not working, never has and never will, the printing of money, backed by thin air.

This IS the reason for infaltion/deflation or aka whatevertheycallallthis, and then the so caled economics comes ruching along with their "remedys".
Quantitave easying, a nice word for throwing in toilettpaper.

So there you have it, the same banks that created the housing bobble, to make them capable to, and by the massive amount of cash, thrue Bailout, used all of it to by Gold/Silver/minerals in general.
So in essense they are Back,johoo, and the lessons that sould have been learned, never apeared.

We may even change the monetary policy, to gold standard, but the reality will be the same after because the root of all this, usury and intress is not dealt with. This is critical, and even the dollard is crashing, it would not help at all, the settup for the next bobble is allready in place, an interlude, yes, some years, jupp, but nothing have changed.

America needs a different monetary policy, not merlt changing the layout.

peace
Sep 22, 2012 at 2:37 PM | Unregistered Commentermikael
Sep 22, 2012 at 4:15 PM | Unregistered CommenterLiberatedCitizen
I wish more people would man up like Whalen and talk candidly about fraud.

Why is it so Goddamn hard to understand that letting criminals in charge of enormous banks steal with impunity will rot out the system in short order, killing the republic itself? The answer is it's not hard to understand, it's easy. The hard part is talking about it. It's a lot easier to hide behind a bunch of horseshit, issue-ducking, egghead-coddling language like deflation, income inequality, and any number of any bogeymen that are at best proxies for the real problem, than it is to say that a shitload of so-called luminaries should be tried for criminal fraud and sent to prison.

Moreover, no one seems to know exactly what the remedy for deflation, etc., while the remedy for fraud--long prison sentences--is again quite easy to undestand. It's likewise easy to understand how long prison sentences act as a deterrent to the problem.

With that, I'd like to nominate the following people for first-ballot inclusion in the Anti-Fraud Hall of Fame:

BILL BLACK
WilliamBanzai7
Neil Barofsky
Karl Denninger
Max Keiser
Yves Smith
Dylan Ratigan
Matt Taibbi
Janet Tavakoli
George Washington
Chris Whalen

There are many others, of course, but the Honor Roll is breathtakingly short given the enormity ($12 trillon and counting, per Wm. Black's latest).
Sep 23, 2012 at 12:18 PM | Unregistered CommenterCheyenne
Got a question Cheyenne.

With all the heavy hitters mentioned and the massive exposure all bring to the table, would it be too far fetched to form a group or organization that would be able to raise the funding necessary to hire William Black and others (if they were willing to do so) to finally go after these MFers and get some results? I know the cost would be millions but with the awakening going on, I would think that there are enough of us out there to pull this off
Sep 23, 2012 at 1:24 PM | Unregistered Commenterjohn
Criminal prosecutions lie exclusively within the province of state and federal government, which currently functions as the spineless handmaiden of financial criminals. Any illusions as to integrity within the ranks of state attorneys general were annihilated by the mortgage fraud settlement, which rewarded perpetrators of criminal fraud with yet another bailout, which characterizes most formal efforts these days (QE, etc.).

More people are waking up because the system of fraud is crushing its way upward, even as our formal leaders perpetrate and enable ever-greater frauds on the very people they answer to--and answer they will, one way or the other.

All we can do is keep up the good fight in order to hasten the tipping point.

"It does not require a majority to prevail, but rather an irate, tireless minority keen to set brushfires in people's minds."
--Samuel Adams
Sep 23, 2012 at 4:32 PM | Unregistered CommenterCheyenne
Excellent post Cheyenne!

Sure does feel like we are beating a dead horse but you nailed down the reality of it all. I would suggest people try to get involved a little at the local level many of those folks end up Nationally later on.

Here is kind of a feel good story (btw Singer the author I believe is a Libertarian writes a lot about Fraud http://blogs.forbes.com/billsinger/)

Paulson & Co. Victimized By Copy Cat Fraudsters

http://www.forbes.com/sites/billsinger/2012/09/21/paulson-co-victimized-by-copy-cat-fraudsters/

Wasendorf Jr. (Peregrine) sues US Bank (Na a bank would never help the fraud would it?)

http://www.futuresmag.com/2012/09/21/wasendorf-jr-sues-us-bank?ref=hp

Sheila Bair and the bailout bank titans (don't you just love how this all comes out afterwards)

http://finance.fortune.cnn.com/2012/09/20/bair-bull-horns/?iid=SF_F_River

What Business is Wall Street In ? (The business of screwing people :) sorry couldn't help myself)

http://blogmaverick.com/2012/09/21/what-business-is-wall-street-in-3/

Guess Which President Has Been Best for Stocks?

http://www.cnbc.com/id/48940520/Guess_Which_President_Has_Been_Best_for_Stocks

Federal Reserve policies favor the rich

http://money.cnn.com/2012/09/20/news/economy/federal-reserve-rich/index.html?iid=Lead

Even MORE of the same bad medicine

Lockhart: More Fed Easing May Be Needed if Jobs Market Stalls

http://www.moneynews.com/StreetTalk/Fed-Easing-Jobs-lockhart/2012/09/21/id/457162
Sep 23, 2012 at 4:57 PM | Unregistered CommenterLiberatedCitizen
Is it really fraud when it is government endorsed, protected, and financed, or is it "good ole boy business"?
Sep 24, 2012 at 1:12 AM | Unregistered CommenterS. Gompers
It's the Bush41 trout farm for all the greedy people who 'want to score the big one ' by helping themselves to hard working peoples' savings and investments. All they have to do is forget their country and their clients and go for themselves. High velocity trading, derivatives, and 'financial instruments galore' keep the wheels turning as clients' money becomes theirs and financial collapse occurs. Jobs and products and economy come from persistence and creative THOUGHTFUL investment. Not the obsession with collecting commissions.
Sep 24, 2012 at 3:05 AM | Unregistered CommenterHoward T. Lewis III
It's black letter fraud, Gomp, meaning MBS sellers satisfy all 5 elements of the crime:

(1) A misrepresentation,
(2) Made to another party,
(3) Knowing the representation was false,
(4) Reasonably relied on by the other party,
(5) To the other party's detriment.

MBS sellers are guilty of at least 3 separate frauds that I've counted so far: (a) selling securities rated AAA knowing they were garbage, (b) selling MBS knowing that they were not in fact backed by any mortgages (that is, the trusts are bereft of promissory notes, and (c) selling the same MBS package to multiple investors.

There is no defense whatsoever to (c), and next to none for (b). Even as to (a), the only real question is element (2)--knowledge of the false rating. Yet even here, Citi's chief risk officer testified before the FCIC that as of 2007, upper management KNEW that 60+ % of MBS packages didn't meet Citi's own specs.

The only government officials who can legally condone such behavior are judges, via acquittal, and that presumes prosecutions in the first place, which as we all know hasn't happened. To the extent other government officials were involved in these crimes, the list of defendants should grow.
Sep 24, 2012 at 12:27 PM | Unregistered CommenterCheyenne
Excellent response Cheyenne.

While I agree with your theoretical argument 100%, the world operates under quite different rules on the us and them scales that are outside of the written in stone realm. In the real world judges and prosecutors alike have expensive campaigns to run for re election just like the beloved Con-gress persons and every other sort of "politician". As such their is a higher power behind determining what law is enforced, and against whom, when, and why.

Is it right, no, is it fair, no, but the real question to ask ourselves is "is it so"...

In their world everything is grey and very justifiable, the only hinderance at all is cost verses risk, and when you have the magic get out of jail free pass and the fines for being bad and getting caught are always less than what you stole, the fines become merely a tax or acceptable cost of doing "business".

I had posted a link to a story a while back hoping to incite some debate on a local news story involving these same sort of issues but with a different background (drugs verses financial institutions). Nobody bit, I was in particular looking for your input given your background as to why the same crimes of illegally structuring financial transactions ( which I believe qualifies for what you are talking about) and money laundering (which some of these institutions have also done), have different apparent penalty for two classes of people, i.e. drug dealer verses financial sector.

I will offer the link again and look forward to your input on both this response and the question posted in the link;

http://dailybail.com/home/inside-the-hsbc-money-laundering-machine.html#comment18897481

If you drove home from work doing 100 mph and did not get caught, did you really break the law?...

I guess I have always looked at things differently since Rubbergate back in 1992 and the S&L crisis and the erosion of protections that the masses called victories ever since.

I have good reasons to be hypocritical, I have been on the outside looking in a long time.
Sep 25, 2012 at 9:25 AM | Unregistered CommenterS. Gompers
Gomp, well stated and here is something that happened here very recently regarding misconduct at a lab which now jeopardizes over 34,000 drug cases.

http://www.lawofficer.com/article/news/special-consul-begins-reviewin

That said, the head of the institution resigned and get this... Got a cushy new job at a university.

http://www.necn.com/09/13/12/Lab-director-resigns-supervisor-fired-at/landing.html?blockID=772811
Sep 25, 2012 at 5:12 PM | Unregistered Commenterjohn
"In the real world judges and prosecutors alike have expensive campaigns to run for re election just like the beloved Con-gress persons and every other sort of 'politician'."

Not so for federal judges and prosecutors, who are appointed, the former for life per Article III of the constitution. The lack of prosecutions is a purely political decision.

As for disparate penalties, I guess I don't understand the question. If you wanna know why criminal penalties under one statute differ with respect to another, I'd have to look at the legislative history of the statute in question. If, on the other hand, you're interested in differences in sentencing, that's a matter largely within the discretion of the judge.

But make no mistake about the severity of penalties for fraud, which is what I want to see prosecuted like Madoff, who got 150 years.

You mentioned the S&L crisis. I'm reading Inside Job now, by PIzzo et al. It is completely insane how much corruption the fraudsters got away with. What's incredible is the ability of transparent scumbags to secure multimillion dollar loans. More disturbingly, the book serves as an excellent template for much of the current financial crisis, only this time no one has gone to jail precisely because the crimes are so much bigger this time, i.e., the crime canopy embraces much of the government. There is NO WAY the current crisis (a) is over or (b) doesn't send the U.S. into Great Depression 2.
Sep 25, 2012 at 11:37 PM | Unregistered CommenterCheyenne
Cheyenne,

I am referring to the illegally structuring financial transactions ( which I believe the fraudulently rated MBS are, granted, I am not a lawyer so if there is a difference I would love to know why) and money laundering (which the financial institutions have also been caught doing) as these two instances would apply to the drug dealer verses the financial cartels. If at the Federal level doesn't believe in applying the law, then whose "political decision" decides these avenues, keep in mind this is not the first time and these decisions have been made in the past by both parties. I see the same crimes, just different players, maybe I am wrong, but I would love to know the difference.

Maddoff was a little fish apparently without much protection from whatever hand passes the glory and divine right of kings to the chosen few. If you have been following the little fish have been getting clipped while the big fish get fatter.

Aesop had a saying about this...

The real disturbing part is the timeline from the S&L crisis forward where the problems were recognized, and the subsequent protections were systematically removed in order to clear the field of pesky rules and regulations to make our current fiasco that much more profitable and risk free (for them) for the chosen. Meanwhile the doom and gloom gets worse for the rest of us.



Interesting John...
Sep 26, 2012 at 12:18 AM | Unregistered CommenterS. Gompers
Gomp--

You mention two acts. First, "illegally structuring financial transactions ( which I believe the fraudulently rated MBS are)." Securititization and mortgage-backed securities are not illegal per se. To the extent such transactions cross the line, they are pushed there by bankers who sell products through misrepresentation (it's AAA; it includes all promissory notes; I haven't sold it at least one time already). Separately, I don't see how drug dealers could replicate the securitization model, and, if they did, you can bet dollars to donuts Bank of America and Goldman would have beat them to it by offering cocaine-backed securities to customers and clients.

Second is money-laundering. And here the banks have been caught repeatedly. However, as you suggest, the banks are treated differently than drug dealers. Drug dealers go to jail. Banks, by contrast, make a deal with the prosecution that keeps them out of jail for a fine (which sounds an awful lot like bribery). http://www.bloomberg.com/news/2010-06-29/banks-financing-mexico-s-drug-cartels-admitted-in-wells-fargo-s-u-s-deal.html

So the preferential treatment of bankers originates with prosecutors and ends with the judge, who must sign off on any deals reached (if the case had been prosecuted).

"subsequent protections were systematically removed in order to clear the field of pesky rules and regulations"

I think the biggest breakdown followed the FBI's 2004 warning that an "epidemic" of fraud by mortgage lenders would, if left unchecked, set off another financial crisis (which is exactly what happened). Bush saw that and promptly reassigned 1000 FBI agents from their mortgage investigations onto anti-terrorism detail. That didn't involve the repeal of any statutes, it was simply removing cops from their beat. This fact seems to get lost in the regulation-deregulation debates, which generate more heat than light.

Likewise, the debates over Glass-Steagall never seem to mention the Bank Holding Company Act of 1956, which got repealed at the urging of Bill Clinton (who'd made that deal before taking office). The repeal of BHCA56 is what permitted banks to get territorially huge, not the repeal of GS (which dealt with subject matter, not physical territory).

I mention this because the debates over "regulation" (1) never define the term, (2) never mention enforcement of laws, and (3) never force participants to take a stand on whether bankers who break EXISTING laws should be prosecuted. These debates, in other words, are just another distraction from the real issues.
Sep 26, 2012 at 10:02 AM | Unregistered CommenterCheyenne
Cheyenne,

I am thinking on the first issue of the investment banks facilitating and participating in complex financial transactions with security rating agencies despite knowing that the intent of the transactions was to manipulate and obscure the true financial condition of these securities. As I said I am not a lawyer so please humor me in my attempt to gain understanding of these matters. I am thinking back to the crooked E scandal and the ensuing investigation, I remember the Sarbanes-Oxley Act mandated that the GAO study the involvement of investment banks with two companies for what seems to me as a layman similar patterns of collusion as the financial institutions and the ratings agencies in order to mask real worth and sell empty bags of air to John Q. Public.

http://www.gao.gov/assets/240/237563.pdf

I am stretching, as I said, I don't have your background. Nor was I referring to the exact type of financial shenanigans as the drug dealers, but it is shenanigans none the less.

I was thinking that these types of shenanigans fall under the definition of illegally structured financial transactions, unless this is just an IRS thing?

I remember that FBI warning and thought the response was odd, and yes, most don't realize there was more than the Gramm Leach Biley act going down in that period of time.
Sep 26, 2012 at 11:49 AM | Unregistered CommenterS. Gompers
The problem is the fact that the money machine could theoretically produce paper money endlessly!
If anyone else would do that outside the Fed, that would be fake money printing and would be illegal!
Oct 19, 2012 at 12:06 PM | Unregistered CommenterLongHaul

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