From Trap to Crunch to Assimilation - The Great American Power Lunch
September 12, 2008 — Stefan Fobes
by Stefan Fobes
Before I start with anything about the banks and the financial markets and this whole mess, I should start at the beginning of all this. On the news the words are flashed, subprime, subprime, mortgage, housing crisis. Crisis crisis crisis! Well just what the hell is the subprime mortgage crisis?
Let’s start with the financial definitions of prime and subprime. Loans to people with good incomes and credit records are classed as prime. Loans to people with low incomes and bad credit ratings are called subprime loans. By the law of the banking jungle, since there were many prime loans three years ago, recievers of these prime loans were allowed to start paying low and then later on pay higher rates. The jungle too, dictated that since home values were going up, people could just refinance their loans, which is basically getting a new loan to pay off the one they had already, replacing it with one with a better payment plan. Or they could just sell some property to cover their hind ends.
Those were the good old days. The problem is that big financial giants like Lehman Brothers, Citigroup, Goldman Sachs, IndyMac, Freddie Mac and Fannie Mae cook the books to make themselves look financially solid as routine business. And so they can stay in
business. William Engdahl of Globalresearch.ca elaborates
It is well known on Wall Street that some of the largest financial institutions have huge undeclared problems with Asset Backed Securities they have valued far above their worth to make their books look better than they are. The names Citigroup, Lehman Bros., Morgan Stanley, even Paulson’s old firm, Goldman Sachs and of course the inventor of sub-prime mortgage securitization, Merrill Lynch, all hold a huge percentage of what are called Level Three assets, these being assets where no one is willing to buy but the bank declares their worth based on “fantasy.” In short the value of those core financial institutions of the US financial system is massively overvalued compared with their value were they forced to sell into the open market today. In a sobering aside, readers should not expect any serious economic remedies for the crisis from a President Barack Obama. Obama’s National Campaign Finance Chairman is Chicago real estate billionaire, Penny Pritzker, who is heir to among other things the Hyatt Hotels. It was Pritzker together with Merrill Lynch ten years ago who first developed the model for securitizing “sub-prime” real estate, the trigger for the current Financial Tsunami crisis.
There are so many other factors involving these, as you will see, extremely predatory and disgusting people dishing out these, what turned out to be for so many, deathtrap loans to the unsuspecting.
The house value increases that helped greatly to create the climate for all the bad loans were financial institutions colluding with crooks who wrote up grossly inflated appraisals for the value of homes, which drew buyers, and made huge profits because of this. Details
Instances of outright mortgage fraud are also coming to light. Reports of suspected fraud from federally regulated institutions more than doubled between 2003 and 2006. Federal officials estimate mortgage fraud totaled from $1 billion to $6 billion in 2005 alone.
One strategy involved organized groups that sold several homes in a neighborhood based on inflated appraisals. An individual would buy a property, then sell it to a real or straw buyer at an inflated price and pocket the difference. Often, a ring of appraisers, mortgage brokers, real estate agents and closing attorneys colluded with the seller to push through the deal.
Such schemes temporarily drove up prices in neighborhoods, hurting other, earnest buyers who paid for homes that quickly lost their value.
Quicker processing times to accommodate the growth in mortgage volume made the system “abuser friendly,” says Robert Russell, counsel to the Office of Thrift Supervision, which regulates some lending institutions. Rewarding brokers for sale volume, rather than for loan repayment, also contributed.
This opened the way for lenders to set out attractive interest rates for homebuyers, thus increasing the potential and actual amount of homeowners, which moved up home values. After that, speculators came in looking to get their piece, which raised prices even more.
Adjustable Rate Mortgages were another straw on homeowners’ backs. And a damn big one. Two that seem to have been the most used are called interest-only loans or optional payment loans. Interest-only loans allowed homeowners to pay only the interest on the loan while optional payment plans let them pay off the initial loan amount and the interest, only the interest, or even less than the interest. This practice always screws over the reciever of the loan because it eventually means they will pay at least double the value of their home. Here’s some cuts from Counterpunch contributer Mike Whitney interviewing economist Michael Hudson, an advisor to several foriegn governments and Dennis Kucinich’s chief economic advisor during his presidential run.
Fannie and Freddie have been loading up on risky mortgages for ages, under-stating the risks largely to increase their stock price so that their CEOs can pay themselves tens of millions of dollars in salary and stock options. Now they are essentially insolvent, as the principal itself is in question. There was widespread criticism of this year after year after year. Why was nothing done?
Hudson: Fannie and Freddie were notorious for their heavy Washington lobbying. They bought the support of Congressmen and Senators who managed to get onto the financial oversight committees so that they would be in a position to collect campaign financing from Wall Street that wanted to make sure that no real regulation would take place.
Ah yes. Nothing gets Congress working faster than love of those little green, white and black flags. Some more.
The CEOs claimed to pay themselves for “innovation.” In today’s Orwellian vocabulary financial “innovation” means the creation of special rent-extracting privilege. The privilege was being able to get the proverbial “free ride” (that is, economic rent) by borrowing at low-interest government rates to buy and repackage mortgages to sell at a high-interest markup. Their “innovation” lies in the ambiguity that enabled them to pose as public-sector borrowers when they wanted to borrow at low rates, and private-sector arbitrageurs when they wanted to get a rake-off from higher margins.
The government’s auditors are now finding out that their other innovation was to cook the accounting books, Enron-style. As mortgage arrears and defaults mounted up, Fannie and Freddie did not mark down their mortgage holdings to realistic prices. They said they would do this in a year or so – by 2009, after the Bush Administration’s deregulators have left office. The idea was to blame it all on Obama when they finally failed.
If that was the idea it certainly wasn’t a good one. Many of these adjustable rate mortgages were taken out at the peak of the loan frenzy two to three years ago. Now these loans’ interest rate increases have kicked in and they are increasing and increasing and the monthly payments are exceeding the amounts homeowners are earning. Not much point in selling the house to pay off the debt because what’s owed to the bank is more than the house’s value. Financial institutions have gone strict on credit standards due to the skyrocketing default rates from nonability to pay off the loans, so there is pretty much a bleak future for them unless they can think something up to get themselves out of that situation. Which is certainly highly possible. Necessity is the mother of invention. Another part of this sick joke from a shit financial system. “Nearly all real estate experts are in agreement that for the next year or two, many of today’s homeowners will find themselves locked into where they are now living. Their situation is much like medieval serfs were tied to their land. They can’t sell, because the market price won’t cover the mortgage they owe, and they don’t have the savings to pay the difference.”
Chase is being a greedy punk, not even willing to work with homeowners and give them even the pittance of lower interest rates.
All the banks are loaded up with debt from an avalanche of loan defaults and what you are seeing, is the result of what I’ve laid out above. Lehman Brothers is already on the auction block, its stock down 90% in nearly a month’s time over investors lack of confidence in their future viability. Which, as you can see from the actual status of these companies vs their previous popularity, is all that financial institutions stand on. Confidence. It’s all a house of cards. Lehman’s not the end of the story either. A number of other companies are also showing signs of the Stearns Syndrome.
- Due to all the loan defaults, Washington Mutual has set aside for this three month quarter $4.5 billion to cover their losses, down from 5.9 in the one before that. Their stock price dropped 46% this week. Their credit rating has been downgraded by two big rating agencies, and news broke a couple of days ago about Washington Mutual being unlikely to get new profits till 2010, further downgrading their status in the stock markets. They’ve told investors everything’s all right, even giving notice that their new CEO Allen Fishman could recieve a max of $20 million total starting pay at 2009’s end.
- Merill Lynch not doing too good either, their stock falling 17% on Sept 11, it being the company’s lowest in ten years, and analysts agreeing that of all the investment banks, after Lehman Brothers, it would be the next to go. Credit raters Fitch Ratings has placed Lynch and its businesses on something called Ratings Watch Negative, which will lower them even more in the market’s eyes.
- Wachovia has a staggering $30 billion of debt it’s holding. JP Morgan Chase CEO Jamie Dimon has indicated that he’s shopping around for banks, and JP insiders have said that Wachovia is high up on the list, despite its financial condition.
But is all this just another Enron type example of corporate greed gone wild, or a coldly planned design in the works? David Icke, researcher/investigator into the criminal activities of the global elite, known popularly as the Illuminati, New World Order, etc, brings up in his books and talks a technique that they use that he calls problem-reaction-solution. Create a problem, or knowingly allow an existing one to fester, wait for the cue from the people “something must be done!”, and then introduce the “solutions” that they want as policy in the public arena. Lesley Stahl of 60 Minutes interviewed Alan Greenspan on the housing storm. Here’s what was said
One of his former Fed governors, Ed Gramlich, said that he proposed that the Fed examine these lending practices and look into them to see if something could be done. Greenspan rejected that idea.
Why did he reject it?
“I thought that…we would not be capable of doing what he was suggesting,” Greenspan says.
“But if sitting on them, taking some regula-what…” Stahl asks.
“Well, I think not,” Greenspan replies.
“Even looking into it?” Stahl asks.
“It’s nothing to look in to particularly because we knew there was a number of such practices going on, but it’s very difficult for banking regulators to deal with that,” Greenspan says.
He insists there’s nothing he could’ve done to prevent today’s plummeting home prices and the fact that a million families have lost their homes, and many more could. But some economists now say Greenspan actually created the housing bubble and the credit crunch by keeping interest rates too low for too long.
Does anyone really believe that nothing could be done? This is the Federal Reserve, the king kahuna of all banks in the USA, not some corner pit stop in Ditchville, Alaska. Look at the guy’s eyes and his perpetual smirk that looks like it was welded onto him whenever he says just about anything. He knew damn well what would happen. More.
“Just remember we raised interest rates at every meeting from June of 2004 till I got out of office,” he says.
“You raised rates in 2004. But only after you held interest rates at historically low level for three years, while the bubble, the housing bubble was forming,” Stahl points out. “And that you had 13 rate cuts in that period of time.”
“It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low,” Greenspan explains.
Not. This blogger who says he was a stock and mortgage broker writes
Either way, if the Chairman raises rates furiously for over a year and as a result then needs to drop the rates just as furiously, it is safe to say they didn’t act appropriately in managing rates.
By the end of 2001, the recession was perpetuated not only by 9/11, but by the plethora of accounting scandals headed up by Enron. Chairman Greenspan continued to lower rates to absolutely no avail all the way deep into 2002. He lowered rates so much that eventually the Federal Funds Rate (three points below prime and the rate at which banks borrow from the fed) dropped below one percent. At that point, he could lower it no longer since it really couldn’t go any lower.
So he just threw open the doors to the castle and let the barbarians go to town. This is what gave the banks the go ahead and the encouragement for all this. All need to understand that the less sophisticated dictator’s old-hat way of attacking populations is to go at them with bullets. The smart man’s way, especially if he is in a position of control, anything that will hurt you or inconvenience you, he finds miraculously easy to do, no matter what the challenges or consequences. Anything to help you, no matter how easy, it will always be too difficult, too expensive, or too challenging. This is what goes on every day with Bush & Co. yet the people rationalize it as ineptness because most would go to pieces if the truth were ever consciously acknowleged because they also subcsonciously believe they don’t have the strength to stand up and say no to it all. The above situation includes the people who have access to this type of material who also soak up info every day and don’t spread it around. Bush gives word to my thoughts here.
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“Capital must protect itself in every way… Debts must be collected and loans and mortgages foreclosed as soon as possible. When through a process of law the common people have lost their homes, they will be more tractable and more easily governed by the strong arm of the law applied by the central power of leading financiers. People without homes will not quarrel with their leaders. This is well known among our principle men now engaged in forming an imperialism of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the common herd.” - JP Morgan</p> These are the principles by which the smart dictator operates. Another quote from World Food Prize winner and former Undersecretary-General of the UN Catherine Bertini, which is on the World Food Prize’s site itself
“Food is power! We use it to change behavior. Some may call that bribery. We do not apologize.”
This whole plan here, that so many Americans are suffering because of, is to bring about nothing less than the combining of or consolidation of control of all banks worldwide under a single world bank, with America the alpha version for it. Another part of the agenda is to create a starving underclass that will do anything for their daily meals. In Britain last week there was a series of measures introduced
that allows 30% down payment, interest free loans to first time buyers of homes less than 175,000 pounds with moderate incomes. A direct mirroring of how America got into the mess it did. There is no excuse for this now, because of the state of the British housing market, homes costing as much as five times as much as earnings, and the American example right there for the world to see, and this will end up, if allowed to continue, being the British housing crisis. And you know what? This centrally dictated plan will keep on being introduced in country after country unless this is exposed for the blatant scam that it is.
Every year, at a luxurious hotel at a different city each year, the top dogs in banking, politics, industry, media, and the military meet to discuss what they want done with the world. They used to be very shy about their activities, but no more. This year, due to intense pressure due to international exposure, most widely by the Canadian mainstream
media, they have issued a press release
to all the major news agencies announcing their gathering. The USA, heavily censored as always, keeps its mouth shut and won’t report on it. Here’s the attendee list, which includes Timothy Geithner
, the New York Federal Reserve Bank president, who in a Financial Times article
, called for a global banking regulatory framework. “The institutions that play a central role in money and funding markets - including the main globally active banks and investment banks - need to operate under a unified framework that provides a stronger form of consolidated supervision, with appropriate requirements for capital and liquidity.”
Another attendee, former Chase Manhattan Bank Chairman, David Rockefeller boldly admits in his autobiography, Memoirs on p.405:
For more than a century, ideological extremists at either end of the political spectrum have seized upon well-publicized incidents such as my encounter with Castro to attack the Rockefeller family for the inordinate influence they claim we wield over American political and economic institutions. Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as ‘internationalists’ and of conspiring with others around the world to build a more integrated global political and economic structure - one world, if you will. If that is the charge, I stand guilty, and I am proud of it.
This is why Greenspan, another previous Bildeberg attendee, allowed the banks to do what they did. And why Bear Stearns was deliberately broken via Goldman Sachs, as Fortune Magazine reports
Still, momentum was turning against the firm. That morning Goldman Sachs’s credit derivatives group sent its hedge fund clients an e-mail announcing another blow. In previous weeks, banks such as Goldman had done a brisk business (for a handsome fee, of course) agreeing to stand in for institutions nervous, say, that Bear wouldn’t be able to cough up its obligations on an interest rate swap. But on March 11, Goldman told clients it would no longer step in for them on Bear derivatives deals. (A Goldman spokesman asserts that the e-mail was not a categorical refusal.)
“I was astounded when I got the [Goldman] e-mail,” says Kyle Bass of Hayman Capital. He had a colleague call Goldman to see if it was a mistake. “It wasn’t,” says Bass, who is a former Bear salesman. “Goldman told Wall Street that they were done with Bear, that there was [effectively] too much risk. That was the end for them.”
Why would they go and do that out of the blue thing when they didn’t even throw out a bid afterwards to buy Bear Stearns? Anyone who reads the Fortune article can see plain and clear that this was a corporate hit to the nines. The problem was created, soon more banks will fall after Lehman, the people will cry never again, and the solution put forth will be either a government agency to control or regulate the banks, or more dictatorial powers given to the Federal Reserve to do the same. We see the dawn of this
with the Freddie Mac and Fannie Mae federal government takeovers.
Mark Zandi, chief economist at Moody’s Economy.com predicted that 30-year mortgage rates, currently averaging 6.35 percent nationwide, could dip to close to 5.5 percent. That’s because investors will be more willing to buy the debt issued by Fannie and Freddie - and at lower rates - since the federal government is now explicitly standing behind that debt.
“Effectively, the federal government has now become the nation’s mortgage lender,” he said. “This takes a major financial threat off the table.”
In this University of Wisconsin lecture
, the topic of the Great Depression is brought up. “After the Great Crash, the American public sought a scapegoat for the economic collapse. Some held President Hoover responsible, others targeted the “three B’s”–brokers, bankers, and businessmen.”
This certainly correlates with the history, chronicled by Ralph Epperson in his The Unseen Hand, A Conspiratorial View of History. He notes that in 1920, the Federal Reserve expanded the money supply from $31.7 to $45.7 billion. The banks moved the increase into America at large by brrowing from the Federal Reserve, and this move was supported by corporations like Standard oil making their surplus cash available to Wall Street. The media encouraged the people to buy stock, and the stockbrokers encountering this wave of new business started up a system called buying on margin where the buyer put up 10% of their own money and borrowed the other 90% from a corporation via the broker. This came with strings attached. At any time, a broker could call the stock buyer up and demand repayment of the loan within 24 hours. At the peak of the stock craze of the 1920s, the brokers called in all their loans at once, people sold en masse to get money to pay, most couldn’t, and the banks, which were heavily involved in the broker call loan business were exhausted by people all wanting their money at once, and they closed. All the selling drove down stock prices to nothing and it collapsed the stock market. The elites of the time who were “smart enough” to sell their stock and get out early, then came back and bought up all the small banks and stock for pennies on the dollar.
And to top it all off, a unique admission
by Ben Bernanke (Bilderberg attendee) in 2002, then a Federal Reserve Governor.
For practical central bankers, among which I now count myself, Friedman and Schwartz’s analysis leaves many lessons. What I take from their work is the idea that monetary forces, particularly if unleashed in a destabilizing direction, can be extremely powerful. The best thing that central bankers can do for the world is to avoid such crises by providing the economy with, in Milton Friedman’s words, a “stable monetary background”–for example as reflected in low and stable inflation.
Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.
Oh, I disagree.