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PAX, LUX ET VERITAS SINCE 1965
Post Mortgage Rules to be Loosened?
Created by John Eipper on 10/22/14 4:04 PM

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Mortgage Rules to be Loosened? (Tor Guimaraes, USA, 10/22/14 4:04 pm)

Regarding the internal financial terrorism that we Americans experience every few years, it is rather tiresome to hear some people say that massive financial fraud is a matter of perspective, too hard to prosecute, so we should accept it as part of our lives. Also, many times misinformed people, deliberately or not, reach the same conclusion but for another reason: it is the big government's fault; so dismantle more government regulations and the problem will disappear. Both positions are very wrong and detrimental to our society.

As I have documented and published more than ten years ago, our financial system grew to control our economic system, our media/information system, and our government. Whatever financial government regulations existed before 2000 were made ineffective under the powerful influence of the financial industry. That, in turn, enabled the future massive increase in financial risk, which produced quickly privatized profits with the knowledge that great losses would be socialized. And by God, the huge corporate losses were socialized in 2008 and beyond.

We all know that financial fraud produces enormous (trillions of dollars) wealth to the perpetrators. It is a well-defined crime, not difficult to detect and measure: just follow the money/profits. What is missing is the will to follow the law and punish the wealthy perpetrators. All lending financial institutions have loan officers whose primary function is to ensure that money is lent only to qualified customers, specifically to make sure customers are not faking their capacity to repay loans. Why would suddenly any financial institution disregard common practice, play dumb and lend to unqualified customers? Only if they know they can make higher profits fraudulently. Only if they know for sure that they can bundle the garbage loans they are making and have the bundle rated as AAA securities by a third party, and then for sure sell these "AAA securities" to a fourth party.

Where is the direct big government participation in this fraud? How difficult is it to calculate the profit each party made once the fraud was exposed? Very easy: find the very obvious direct criminal behavior by the lending banks and the securities rating firms. It is more difficult to define the fourth party helping to distribute the fraudulent securities worldwide. This party may or may not show direct fraudulent behavior, so jail time and penalties are more difficult to justify, thus just returning the profits derived from "innocent" participation is probably enough. Instead, the Obama administration kept the same government officials in charge when the fraudsters were at work during the Bush/Cheney administration, and most of the obvious criminals remain unmolested.

Now Bienvenido Macario (22 October) is worried about "the government, either because of incessant calls from affected industries and consumers, and strangely enough from politicians who fathered and sponsored the crisis..." No need to worry about this, because if the Obama administration proposes anything, the "do-nothing" Congress will automatically block it.

Even if Bienvenido is correct that "the Federal Housing Finance Agency is planning to loosen the rules on mortgages," the only real threat would be a repeat of the massive fraudulent behavior by the financial industry. Not enough time has passed to heal past wounds.

John Eipper commented, "the Fed is warning Wall Street that it is sliding back into its risky ways of yore. I don't see the connection here with a loosening of mortgage standards." Perhaps now you see the connection. Adding insult to injury, John asked: "Can the Big Banks pitch the establishment of an industry-led body to set ethical standards and keep a straight face?" Absolutely! They have no shame, only thirst for profit.

The proposal from William Dudley, President of the Federal Reserve Bank of New York, making senior bank executives personally responsible for regulatory fines imposed on their institutions, would be a very powerful solution to future financial terrorism by too-big-to-jail financiers. The problem is we know who is in charge. These guys already own the government, the media, as well as a major part of the markets and economy.

JE comments: Tor Guimaraes is Mad as Hell, and he is not alone. I'm pretty irked, too, but less so since I managed to refinance my house last year. That puts me ahead of Ben Bernanke!  And now, if only Adrian housing prices recover to where they were, say, 15 years ago.

My question for Tor: there are legions of hungry lawyers who would love to find wealth and fame by bringing down the banking Fat Cats. Why have they been unable to do so? The existence of a "vast conspiracy" just doesn't convince me.

On the Federal Housing Finance Agency's plan to loosen mortgage requirements, Bienvenido Macario wrote that in this morning's post I forgot to include one of his links.  Sorry about that, Bienvenido.  Here it is:

http://www.nytimes.com/2014/10/21/business/economy/federal-housing-finance-agency-unveils-plan-to-loosen-mortgage-rules.html?partner=yahoofinance&_r=0


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  • Conspiracy or "Partners in Crime"? (Tor Guimaraes, USA 10/23/14 8:58 AM)
    Among other specific statements about the creation of 2008 financial crisis (22 October), I wrote: "All lending financial institutions have loan officers whose primary function is to ensure that money is lent only to qualified customers... Why would suddenly any financial institution disregard common practice, play dumb and lend to unqualified customers? Only if they know they can make higher profits fraudulently. Only if they know for sure that they can bundle the garbage loans they are making and have the bundle rated as AAA securities by a third party, and then for sure sell these 'AAA securities' to a fourth party."

    To that John Eipper replied: "there are legions of hungry lawyers who would love to find wealth and fame by bringing down the banking Fat Cats. Why have they been unable to do so? The existence of a 'vast conspiracy' just doesn't convince me."


    Is John aware of all the hundreds of lawsuits going on all over the world directly related to the 2008 financial crisis? So don't worry, the "legions of hungry lawyers" are being well fed. Many are class-action suits involving thousands of people. Furthermore, John thinks I am imagining a "vast conspiracy." Once again I believe John is in denial mode by invoking the dirty C word. Let's use the expression "partners in crime."


    Is it not true that to create the 2008 financial crisis the loan officers whose primary function is to ensure that money is lent only to qualified customers suddenly stopped checking the borrowers' capacity to repay loans? Why would they suddenly disregard common practice, and in many cases push loans on unqualified borrowers? Next, is it not true that the big banks bundled all these garbage loans into securities that could be declared AAA by the widely trusted rating institutions like Fitch and Standard & Poor's? These institutions suddenly stopped doing their jobs and conveniently neglected to check the quality of the bundled loans. Finally, securities dealers (such as Merrill Lynch, Goldman Sachs) sold the garbage AAA securities to unsuspecting customers all over the world while shorting the appropriate stock of companies they knew were going to take a huge loss. Now, does that seem like a humongous conspiracy? Clearly not; it is just a business as usual, a temporary crime partnership.


    JE comments: "Partners in crime" is the same thing as conspiracy, although maybe a little less, well, conspiratorial.


    Can anyone give us more information on this 2013 Justice Department suit against S & P? Was it ever resolved or settled?


    http://www.huffingtonpost.com/2013/02/05/sp-lawsuit_n_2621561.html



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    • Justice Dept. Suit against S & P; from Ric Mauricio (John Eipper, USA 10/24/14 1:41 AM)
      Ric Mauricio sends this comment:

      When commenting Tor Guimaraes's post of 23 October, John E asked about the Justice Department's suit against Standard & Poor's. According to the attached article, the trial is not scheduled to start until September 2015. Of course, the attorneys will try to delay that date to accumulate more billable hours. But what is interesting is that S&P is utilizing a strong offense in order to create a strong defense. They are accusing the US Government of retaliation for an S&P downgrade of US government securities as their defense. Tim Geithner's timing in accusing S&P of not doing their job in being the watchdog for securities came only after S&P downgraded US government securities. Good going, Tim. No wonder the Chinese university students laughed at you.



      http://online.wsj.com/articles/SB10001424052702303887804579503930635334084



      But in addressing Tor's comments, in the famous words of former president Bill Clinton, "It depends how you define 'sex'." In the case of mortgage lenders, the ones I spoke to all said they lent to "qualified borrowers." Ah, but here's the rub. They changed the definition of a "qualified borrower." In the quest for greater profits, the banks, with the blessing of the government, loosened the purse strings, citing the goal of everyone owning a piece of the American dream. That's everyone, folks. So, OK, now you can borrow with no money down, with stated income, and with negative amortization tied to the LIBOR. It was only years later that it was revealed that the stated income was manipulated as well as the LIBOR interest rate.


      On top of this was the role of Fannie Mae and Ginnie Mae, both quasi-government companies, in buying up these mortgages from the banks, thus the banks could just continue writing loans at will. FNMA and GNMA in turn bundled the mortgages and sold them to the mutual funds, which in turn was sold to the public through the brokerage firms. Easy sale for stockbrokers, as I recall, having been there. I recall attending the very first presentation on derivatives on University Avenue in Palo Alto. What Wall St. came up with was taking the GNMA bundles, using a quant devised algorithm to forecast the maturities of each mortgage, and then divided them into bundles of tranches, then sold them to the brokerage firms, who sold them to their clients. It was funny watching the faces of those in attendance as they went blank. After the meeting, brokers and mutual fund managers from some of the largest financial institutions in the world asked me if I understood what they were doing. My answer: "Unfortunately, I do." The next question was should I invest in this. My answer was a question: "Do you understand it?" Of course, since I did understand it, would I invest in it? I smiled and shook my head emphatically from side to side.


      So was this a conspiracy? Well, it depends how you define "conspiracy." If you define conspiracy as a group of people getting together in one room and discussing how they are going to do this, then you would be hard pressed to find evidence of this. But if you define conspiracy as a group of people or companies adapting their lending practices to take advantage of loosened rules changes, then yes, I believe you can make a case of conspiracy. I imagine one could make a case that the Federal Reserve, Treasury Department, the banks, and Wall Street are all in this together. After all, the shareholders of the Federal Reserve are (ahem) the banks and brokerage firms, and Tim Geithner was a graduate of Goldman Sachs.


      When I was a Controller of a fuel distribution company, people used to ask me how we adjusted our prices. Of course, if our pricing director had communicated with others in our business, it would be anti-trust and RICO big time. But it was simpler than that. We simply looked at the prices the other guys had on their gas station boards. Was this a conspiracy?


      JE comments: "Unfortunately, I do understand": that's wisdom for the ages. Thank you, Ric, for your lucid explanation. And now, I wonder how many tens (hundreds?) of millions the lawyers are going to bill S & P.


      As a child, I recall Dad receiving mailings from a mysterious "Standard & Poor's." I assumed the junk mail was for people like us ("standard" middle-class folks), as well as for the less fortunate. When you're seven or eight you don't understand investment at all, much less the idea that the Poor don't keep portfolios.



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      • Clinton, Sex, and What is "Is"? (David Duggan, USA 10/25/14 4:01 AM)
        Ric Mauricio's comment (24 October) brought to mind Bill Clinton's existential definitions as to having sexual relations with Monica Lewinsky:

        "It depends upon what the meaning of the word 'is' is. If 'is' means 'is and never has been' that's one thing--if it means 'there is none,' that was a completely true statement."


        Q: If Monica Lewinsky has stated that her affidavit that she didn't have a sexual relationship with you is, in fact, a lie, I take it you disagree with that?


        President Clinton: "No. I told you before what I thought the issue was there, I think the issue is how do you define sexual relationship. And there was no definition imposed on her at the time she executed the affidavit. Therefore, she was free to give it any reasonable meaning." (From his grand jury testimony).


        As bad as the last two presidents have been, we haven't had to dance around definitions of "is" and "sex."


        JE comments: One of history's great reflections on semantics!  Ready for a "time flies" reality check?  Most undergraduate students, of the '93-'96 vintage, have no idea who Monica Lewinsky was--or is.  I've asked.


        In the last year, "is" can now mean IS--or ISIS.   The media prefers the "so-called Islamic State."  So what about SCIS?


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      • More Thoughts on Conspiracy and the 2008 Financial Crisis (Tor Guimaraes, USA 10/25/14 4:29 AM)
        My gratitude for Ric Mauricio's expansion (24 October) on my reply to John Eipper's denial that a major conspiracy underlies the 2008 financial crisis. A formal definition: "A criminal conspiracy exists when two or more people agree to commit almost any unlawful act, then take some action toward its completion. The action taken need not itself be a crime, but it must indicate that those involved in the conspiracy knew of the plan and intended to break the law."

        I believe the requirements were fully met by the players, who due to their great job experience knew exactly they should or should not do and decided to screw everyone for a huge profit. Therefore, I don't understand Ric's equivocation that "if you define conspiracy as a group of people getting together in one room and discussing how they are going to do this, then you would be hard pressed to find evidence of" a conspiracy.


        On the other hand, Ric's statement, "if you define conspiracy as a group of people or companies adapting their lending practices to take advantage of loosened rules changes, then yes, I believe you can make a case of conspiracy. I imagine one could make a case that the Federal Reserve, Treasury Department, the banks, and Wall Street are all in this together," takes this conspiracy beyond my imagination. Nevertheless, Ric is probably correct.


        Perhaps the government people were too far removed from the front lines to know what a financial disaster they would create for the world in general and the US specifically. Even though the security dealers and many individual players knew a disaster was coming and shorted appropriate securities in expectation of their collapse, other parasites such as Mr. Madoff were caught flatfooted with their Ponzi schemes revealed.


        Nevertheless, when we take into consideration the depth of the fraud, the gravitas and sheer number of many of the institutional players, and the too-big-to-fail aspect of the debacle (the results from AIG failure are unimaginable), very likely we may have a case of major conspiratorial fraud generously laced with extreme stupidity. It is mind-boggling that a man like Tim Geithner was taken from the middle of the action (after his boss quit) and put in charge of managing the results. Is that part of the conspiracy?


        JE comments: It's semantics day on WAIS: "denial" in the US, where self-help and pop psychology reign supreme, has come to mean more than merely claiming something does not exist. Now "denial" refers to the primitive defense mechanism of refusing to accept reality.  I'm not sure which definition Tor Guimaraes has in mind here.

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        • About "Denial," and Some Announcements... (Tor Guimaraes, USA 10/27/14 5:51 AM)
          John Eipper had commented on my 22 October post with "there are legions of hungry lawyers who would love to find wealth and fame by bringing down the banking Fat Cats. Why have they been unable to do so? The existence of a 'vast conspiracy' just doesn't convince me."

          After I elaborated (23 October) on why I thought a conspiracy (perhaps too sarcastically, sorry) must be obvious, John dismissively commented: "'Partners in crime' is the same thing as conspiracy, although maybe a little less, well, conspiratorial."


          In his comment to my most recent post (25 October), John Eipper asked: "'denial' in the US, ... has come to mean more than merely claiming something does not exist. Now 'denial' refers to the primitive defense mechanism of refusing to accept reality. I'm not sure which definition Tor Guimaraes has in mind here."


          Given our exchange, I think both definitions are applicable.


          Just to make sure, I unequivocally state my complete confidence in John's intellectual integrity, his pursuit of truth and fairness in the exchange of facts and opinions in this Forum. Such confidence at first was assumed due to John's appointment to the Editor position by Ronald Hilton, a man of impeccable stature. Over the years, John has earned my confidence by his behavior as Editor.


          JE comments: I appreciate your kind words, Tor.


          WAIS has been in somewhat of a lull of late, so how about taking this opportunity for a couple of announcements? First, Roman Zhovtulya and his team are working tirelessly on remodeling the WAISworld.org website. Users of hand-held gizmos will be especially pleased that WAIS will soon automatically "scale" to fit your device.  We'll debut the "beta" version in the next week or two.


          Second, it's almost time to announce our next conference, to be held at Stanford University in October 2015. This will be a biggie: the WAIS Golden Jubilee!  That's fifty years of Pax, Lux, et Veritas.  During this week I'll give the specific dates and more details. But for now, please keep next October open, and plan to attend.  


          Third, why have we been silent about China? Please send your thoughts on the Hong Kong protests, and whether they portend any significant changes for the world's largest nation.

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