Finally, The Banksters Are Being Exposed By a Brave Member of the Senate

It is all too often easy to look at the political process and feel the deck is so stacked against the regular guy that we must resign ourselves to the fact our democratic process has been bought and sold to the highest bidder.  The Citizens United ruling by the Supreme Court seemed to “seal the deal” for the banksters. Now we get a breath of fresh air from at least one senator who has had the balls to call them out in the light.

Bernie Sanders from Vermont released this  roadmap of  how the banksters stole our money yesterday and it is a must read!  Here is the highlights.

“1. Jamie Dimon, the Chairman and CEO of JP Morgan Chase, has served on the Board of Directors at the Federal Reserve Bank of New York since 2007. During the financial crisis, the Fed provided JP Morgan Chase with $391 billion in total financial assistance. JP Morgan Chase was also used by the Fed as a clearinghouse for the Fed’s emergency lending programs. In March of 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns. During the financial crisis, the Fed provided JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. The Fed also agreed to take risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired this troubled investment bank.

2. Jeffrey Immelt, the CEO of General Electric, served on the New York Fed’s Board of Directors from 2006-2011. General Electric received $16 billion in low-interest financing from the Federal Reserve’s Commercial Paper Funding Facility during this time period.

3. Stephen Friedman. In 2008, the New York Fed approved an application from Goldman Sachs to become a bank holding company giving it access to cheap Fed loans. During the same period, Friedman, who was chairman of the New York Fed at the time, sat on the Goldman Sachs board of directors and owned Goldman stock, something the Fed’s rules prohibited. He received a waiver in late 2008 that was not made public. After Friedman received the waiver, he continued to purchase stock in Goldman from November 2008 through January of 2009 unbeknownst to the Fed, according to the GAO. During the financial crisis, Goldman Sachs received $814 billion in total financial assistance from the Fed.

4. Sanford Weill, the former CEO of Citigroup, served on the Fed’s Board of Directors in New York in 2006. During the financial crisis, Citigroup received over $2.5 trillion in total financial assistance from the Fed.

5. Richard Fuld, Jr, the former CEO of Lehman Brothers, served on the Fed’s Board of Directors in New York from 2006 to 2008. During the financial crisis, the Fed provided $183 billion in total financial assistance to Lehman before it collapsed.

6. James M. Wells, the Chairman and CEO of SunTrust Banks, has served on the Board of Directors at the Federal Reserve Bank in Atlanta since 2008. During the financial crisis, SunTrust received $7.5 billion in total financial assistance from the Fed.

7. Richard Carrion, the head of Popular Inc. in Puerto Rico, has served on the Board of Directors of the Federal Reserve Bank of New York since 2008. Popular received $1.2 billion in total financing from the Fed’s Term Auction Facility during the financial crisis.

8. James Smith, the Chairman and CEO of Webster Bank, served on the Federal Reserve’s Board of Directors in Boston from 2008-2010. Webster Bank received $550 million in total financing from the Federal Reserve’s Term Auction Facility during the financial crisis.

9. Ted Cecala, the former Chairman and CEO of Wilmington Trust, served on the Fed’s Board of Directors in Philadelphia from 2008-2010. Wilmington Trust received $3.2 billion in total financial assistance from the Federal Reserve during the financial crisis.

10. Robert Jones, the President and CEO of Old National Bancorp, has served on the Fed’s Board of Directors in St. Louis since 2008. Old National Bancorp received a total of $550 million in low-interest loans from the Federal Reserve’s Term Auction Facility during the financial crisis.

11. James Rohr, the Chairman and CEO of PNC Financial Services Group, served on the Fed’s Board of Directors in Cleveland from 2008-2010. PNC received $6.5 billion in low-interest loans from the Federal Reserve during the financial crisis.

12. George Fisk, the CEO of LegacyTexas Group, was a director at the Dallas Federal Reserve in 2009. During the financial crisis, his firm received a $5 million low-interest loan from the Federal Reserve’s Term Auction Facility.

13. Dennis Kuester, the former CEO of Marshall & Ilsley, served as a board director on the Chicago Federal Reserve from 2007-2008. During the financial crisis, his bank received over $21 billion in low-interest loans from the Fed.

14. George Jones, Jr., the CEO of Texas Capital Bank, has served as a board director at the Dallas Federal Reserve since 2009. During the financial crisis, his bank received $2.3 billion in total financing from the Fed’s Term Auction Facility.

15. Douglas Morrison, was the Chief Financial Officer at CitiBank in Sioux Falls, South Dakota, while he served as a board director at the Minneapolis Federal Reserve Bank in 2006. During the financial crisis, CitiBank in Sioux Falls, South Dakota received over $21 billion in total financing from the Federal Reserve.

16. L. Phillip Humann, the former CEO of SunTrust Banks, served on the Board of Directors at the Federal Reserve Bank in Atlanta from 2006-2008. During the financial crisis, SunTrust received $7.5 billion in total financial assistance from the Fed.

17. Henry Meyer, III, the former CEO of KeyCorp, served on the Board of Directors at the Federal Reserve Bank in Cleveland from 2006-2007. During the financial crisis, KeyBank (owned by KeyCorp) received over $40 billion in total financing from the Federal Reserve.

18. Ronald Logue, the former CEO of State Street Corporation, served as a board member of the Boston Federal Reserve Bank from 2006-2007. During the financial crisis, State Street Corporation received a total of $42 billion in financing from the Federal Reserve. ”

{end press release quote}

We need to support this courageous effort by being totally outraged and begin demanding that a criminal investigation begin immediately.  We should also demand that Congress does not renew the Federal Reserve Charter to “handle” the job the US Treasury should be doing.  That charter is up for a vote in 2013. Everyone who reads this should inform everyone they know about these facts and ask them not only to read it but to pass it on to everyone they know and then we all should put our representatives on notice that we absolutely want our financial system back.

There is no single issue more important to each and everyone of us, literally.  Get informed, wake up, and act. Forget the clown circus that is the presidential campaigns and get to the REAL Chains that bind us.  Let’s set ourselves free and here are the keys to the cuffs.

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The Fox is in the Henhouse Again, and We are not Watching!

We watched as the banks were bailed out after ripping off nearly $5 trillion dollars of America’s wealth.  We are on the hook for their loses.  They were too big to fail, we were told.  It would be a disaster for the world’s economy.  The same story was then foisted on our European brothers, and again with the same “chicken little” reasoning.

Well, here we are 3 years later and the economy is still in the dumpster and we have not done one thing to correct the major problem of banks being investment firms ponied up to the roulette table wildly playing with OUR money unchecked.  Now the drunken bankers are at it again.  I have written many articles concerning this crazy derivatives market that is the banker’s hedge for the downside of this slow motion crash of the world’s economy.

This WAS one market that the bankers were exposed and WE were not on the hook for bailouts.  Well, that was until last week.  No ONE is MSM National media is even reporting this.  If you aren’t mad as hell when you read this, you are certifiably in a COMA.

Source: Washington’s Blog

Bloomberg reports that Bank of America is dumping derivatives onto a subsidiary which is insured by the government – i.e. taxpayers.

Yves Smith notes:

If you have any doubt that Bank of America is going down, this development should settle it …. Both [professor of economics and law, and former head S&L prosecutor] Bill Black (who I interviewed just now) and I see this as a desperate move by Bank of America’s management, a de facto admission that they know the bank is in serious trouble.

The short form via Bloomberg:

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…

Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

Now you would expect this move to be driven by adverse selection, that it, that BofA would move its WORST derivatives, that is, the ones that were riskiest or otherwise had high collateral posting requirements, to the sub. Bill Black confirmed that even though the details were sketchy, this is precisely what took place.

And remember, as we have indicated, there are some “derivatives” that should be eliminated, period. We’ve written repeatedly about credit default swaps, which have virtually no legitimate economic uses (no one was complaining about the illiquidity of corporate bonds prior to the introduction of CDS; this was not a perceived need among investors). They are an inherently defective product, since there is no way to margin adequately for “jump to default” risk and have the product be viable economically. CDS are systematically underpriced insurance, with insurers guaranteed to go bust periodically, as AIG and the monolines demonstrated. [Background.]

The reason that commentators like Chris Whalen were relatively sanguine about Bank of America likely becoming insolvent as a result of eventual mortgage and other litigation losses is that it would be a holding company bankruptcy. The operating units, most importantly, the banks, would not be affected and could be spun out to a new entity or sold. Shareholders would be wiped out and holding company creditors (most important, bondholders) would take a hit by having their debt haircut and partly converted to equity.

This changes the picture completely. This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. [Background.] So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.

The FDIC is understandably ripshit. Again from Bloomberg:

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Well OF COURSE BofA is gonna try to take the position this is kosher, but the FDIC can and must reject this brazen move. But this is a bit of a fait accompli,and I have NO doubt BofA and the craven, corrupt Fed will argue that moving the derivatives back will upset the markets. Well too bad, maybe it’s time banks learn they can no longer run roughshod over regulators. And if BofA is at that much risk that it can’t survive undoing this brazen move, that would seem to be prima facie evidence that a Dodd Frank resolution is in order.

Bill Black said that the Bloomberg editors toned down his remarks considerably. He said, “Any competent regulator would respond: “No, Hell NO!” It’s time that the public also say no, and loudly, to this new scheme to loot taxpayers and save a criminally destructive bank.

Professor Black provided a “bottom line” summary in a separate email:

1.The bank holding company (BAC) is moving troubled assets held by an entity not insured by the public (Merrill Lynch)  to the Bank of America, which is insured by the public
2. The banking rules are designed to prevent that because they are designed to protect the FDIC insurance fund (which the Treasury guarantees)
3. Any marginally competent regulator would say “No, Hell NO!”
4. The Fed, reportedly, is saying “Sure, no worries” by allowing the sale of an affiliate’s troubled assets to B of A
5. This is a really good “natural experiment” that allows us to test whether the Fed is protects the public or the uninsured and systemically dangerous institutions (the bank holding companies (BHCs))
6. We are all shocked, shocked [sarcasm] that Bernanke responded to the experiment by choosing to protect the BHC at the expense of the public.

Karl Denninger writes:

So let’s see what we have here.

Bank customer initiates a swap position with Bank.  In doing so they intentionally accept the credit risk of the institution they trade with.

Later they get antsy about perhaps not getting paid.  Bank then shifts that risk to a place where people who deposited their money and had no part of this transaction wind up backstopping it.

This effectively makes the depositor the “guarantor” of the swap ex-post-facto.

That the regulators are allowing this is an outrage.

If you’re a Bank of America customer and continue to be one you deserve whatever you get down the line, whether it comes in the form of higher fees and costs assessed upon you or something worse.

Stand Up to the Coup

Bank of America has repeatedly become insolvent due to fraud and risky bets, and repeatedly been bailed out by the government and American people. The government and banks are engineering an age of permanent bailouts for this insolvent, criminal bank (and the other too big to fails).  Remember, this is the same bank that is refusing to let people close their accounts.

This is yet another joint effort by Washington and Wall Street to screw the American people, and to trample on the rule of law.

The American people will be stuck in nightmare of a never-ending depression (yes, we are currently in a depression) and fascism (or socialism, if you prefer that term) unless we stand up to the overly-powerful Fed and the too big to fail banks.

This story from Bloomberg just hit the wires this week. Bank of America is shifting derivatives in its Merrill investment banking unit to its depository arm, which has access to the Fed discount window and is protected by the FDIC.

This means that the investment bank’s European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn’t get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to “give relief” to the bank holding company, which is under heavy pressure.

This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input. You will also read below that JP Morgan is apparently doing the same thing with $79 trillion of notional derivatives guaranteed by the FDIC and Federal Reserve.

What this means for you is that when Europe finally implodes and banks fail, U.S. taxpayers will hold the bag for trillions in CDS insurance contracts sold by Bank of America and JP Morgan. Even worse, the total exposure is unknown because Wall Street successfully lobbied during Dodd-Frank passage so that no central exchange would exist keeping track of net derivative exposure.

First folks, we are talking over $150 Trillion of exposure.  That is 10 times our GDP!  Would you give me 100% of your income for the next ten years because I need it to make up my gambling loses!  What would you say to me?  You know, the OWS call for a BANK TRANSFER DAY in early November is getting to be a really significant idea.  If the banks refuse to act in a responsible manner and the FED is refusing to discipline its children, then we have to just take their “toys” (our money) away from the bankers.  It is time for “time out” for our out of control children.  Check out your local credit unions, they are real functioning banking organizations owned and controlled by their depositors and members.  Congress will never vote our interest, so we have to vote with our bucks.

What Goes Up….! Where is the Down?

A lot of people lament the lack of upward mobility in the U.S. right now and I share those sentiments. However, equally important is downward mobility. What makes the concept of America unique is not merely the concept that the poor can become rich but that the rich can become poor. It is this second part that is the most dangerous to social cohesion when it disappears. Unfortunately, the system that we have today of an unholy alliance between Wall Street, Washington D.C. and the multi-national corporations (including the military industrial complex of course) stands there holding onto all the levers of power to serve as gatekeepers of their own empires.

Consider this when we think about how the game is “rigged” right now.  From Matthew Cardinale of the
Inter Press Service on  28 Aug 2011.

Atlanta, Georga: The first-ever audit of the U.S. Federal Reserve has revealed 16 trillion dollars in secret bank bailouts and has raised more questions about the quasi-private agency’s opaque operations.   “This is a clear case of socialism for the rich and rugged, you’re-on-your-own individualism for everyone else,” U.S. Senator Bernie Sanders, an Independent from Vermont, said in a statement.   The majority of loans were issues by the Federal Reserve Bank of New York (FRBNY).

“From late 2007 through mid-2010, Reserve Banks provided more than a trillion dollars… in emergency loans to the financial sector to address strains in credit markets and to avert failures of individual institutions believed to be a threat to the stability of the financial system,” the audit report states.  “The scale and nature of this assistance amounted to an unprecedented expansion of the Federal Reserve System’s traditional role as lender-of-last-resort to depository institutions,” according to the report.   The report notes that all the short-term, emergency loans were repaid, or are expected to be repaid.

The emergency loans included eight broad-based programs, and also provided assistance for certain individual financial institutions. The Fed provided loans to JP Morgan Chase bank to acquire Bear Stearns, a failed investment firm; provided loans to keep American International Group (AIG), a multinational insurance corporation, afloat; extended lending commitments to Bank of America and Citigroup; and purchased risky mortgage-backed securities to get them off private banks’ books.

Overall, the greatest borrowing was done by a small number of institutions. Over the three years, Citigroup borrowed a total of 2.5 trillion dollars, Morgan Stanley borrowed two trillion; Merryll Lynch, which was acquired by Bank of America, borrowed 1.9 trillion; and Bank of America borrowed 1.3 trillion.  Banks based in counties other than the U.S. also received money from the Fed, including Barclays of the United Kingdom, the Royal Bank of Scotland Group (UK), Deutsche Bank (Germany), UBS (Switzerland), Credit Suisse Group (Switzerland), Bank of Scotland (UK), BNP Paribas (France), Dexia (Belgium), Dresdner Bank (Germany), and Societe General (France).

“No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the President,” Sanders wrote.   In recent days, Bloomberg News obtained 29,346 pages of documentation from the Federal Reserve about some of these secret loans, after months of fighting in court for access to the records under the Freedom of Information Act.  Some of the financial institutions secretly receiving loans were meanwhile claiming in their public reports to have ample cash reserves, Bloomberg noted.   The Federal Reserve has neither explained how they legally justified several of the emergency loans, nor how they decided to provide assistance to certain firms but not others.

“The main problem is the lack of Congressional oversight, and the way the Fed seemed to pick winners who would be protected at any cost,” Randall Wray, professor of economics at University of Missouri- Kansas City, told IPS.   “If such lending is not illegal, it should be. Our nation really did go through a liquidity crisis – a run on the short-term liabilities of financial institutions. There is only one way to stop a run: lend reserves without limit to all qualifying institutions. The Fed bumbled around before it finally sort of did that,” Wray said.

“But then it turned to phase two, which was to try to resolve problems of insolvency by increasing Uncle Sam’s stake in the banksters’ fiasco. That never should have been done. You close down fraudsters, period. The Fed and FDIC (Federal Deposit Insurance Commission) should have gone into the biggest banks immediately, replaced all top management, and should have started to resolve them,” Wray said.

For many years conventional wisdom has said that the whole world is controlled by the monied elite, or more recently by the huge multi-national corporations that seem to sometime control the very air we breathe. Now, new research by a team based in ETH-Zurich, Switzerland, has shown that what we’ve suspected all along, is apparently true. The team has uploaded their results onto the preprint server arXiv.

Using data obtained (circa 2007) from the Orbis database (a global database containing financial information on public and private companies) the team, in what is being heralded as the first of its kind, analyzed data from over 43,000 corporations, looking at both upstream and downstream connections between them all and found that when graphed, the data represented a bowtie of sorts, with the knot, or core representing just 147 entities who control nearly 40 percent of all of monetary value of transnational corporations (TNCs).

When we look to the East and watch our Arab brothers struggle against tyranny, I don’t think we connect their struggle to us.  However, I assure you that the roots of that struggle was economic slavery, not unlike we, both in the US and the EU, are rapidly marching (or is it being herded?) toward at this very minute.

As we awaken to these facts, it is apparent that the PTB, who wish to continue their “project”, are having more and more of a difficult time unfolding “their solutions” to our problems.  You know “solutions’ like raiding retirement and pension funds, eliminating worker’s unions, ending any “social programs” of any kind.

Probably the most important news story of September 7th won’t be reported by International MSM.  No, it won’t be Obama’s speech on Jobs, nor will it be the outcome of the first games in the NFL.  It will be this.

Seething discontent in Germany over Europe’s debt crisis has spread to all the key institutions.  German Chancellor Angela Merkel no longer has enough coalition votes in the Bundestag to secure backing for Europe’s revamped rescue machinery, threatening a constitutional crisis in Germany and a fresh eruption of the euro debt saga.

Mrs. Merkel has cancelled a high-profile trip to Russia on September 7, the crucial day when the package goes to the Bundestag and the country’s constitutional court rules on the legality of the EU’s bail-out machinery.   If the court rules that the €440bn rescue fund (EFSF) breaches Treaty law or undermines German fiscal sovereignty, it risks setting off an instant brushfire across monetary union.

The seething discontent in Germany over Europe’s debt crisis has spread to all the key institutions of the state. “Hysteria is sweeping Germany ” said Klaus Regling, the EFSF’s director.  German media reported that the latest tally of votes in the Bundestag shows that 23 members from Mrs Merkel’s own coalition plan to vote against the package, including twelve of the 44 members of Bavaria’s Social Christians (CSU). This may force the Chancellor to rely on opposition votes, risking a government collapse.

Christian Wulff, Germany’s president, stunned the country last week by accusing the European Central Bank of going “far beyond its mandate” with mass purchases of Spanish and Italian debt, and warning that the Europe’s headlong rush towards fiscal union strikes at the “very core” of democracy. “Decisions have to be made in parliament in a liberal democracy. That is where legitimacy lies,” he said.

A day earlier the Bundesbank had fired its own volley, condemning the ECB’s bond purchases and warning the EU is drifting towards debt union without “democratic legitimacy” or treaty backing.  Joahannes Singhammer, leader of the CSU’s Bundestag group, accused the ECB of acting “dangerously” by jumping the gun before parliaments had voted. The ECB is implicitly acting on behalf of the rescue fund until it is ratified.

Mrs. Merkel faces mutiny even within her own Christian Democrat (CDU) family. Wolfgang Bossbach, the spokesman for internal affairs, said he would oppose the package. “I can’t vote against my own conviction,” he said.   The Bundestag is expected to decide late next month on the package, which empowers the EFSF to buy bonds pre-emptively and recapitalize banks. While the bill is likely to pass, the furious debate leaves no doubt that Germany will resist moves to boost the EFSF’s firepower yet further. Most City banks say the fund needs €2 trillion to stop the crisis engulfing Spain and Italy.   Mrs. Merkel’s aides say she is facing “war on every front”. The next month will decide her future, Germany’s destiny, and the fate of monetary union.

I make all these points because we must think clearly and precisely now.  No politics, nor economic religion, just fix this now, and we can.  We start by taking some people DOWN.  Start to put some balance back into the equation.  I think the audit of the FED would be an excellent place to start that quest.

Secondly, we must be informed voters and place candidates that understand clearly the goals of restoring balance into our global economy through prudent but thorough regulatory changes.  That must, by its nature, start with the political process elements of our societies.   I cannot think of anything more important to you on a personal basis than this.

 

An Update on the Continuing Bank Failures

On October 4th,2009 I wrote that the FDIC had laid out over $55 Billion in insurance funds to cover bank loses, and that I felt the FDIC would go red in January or February of 2010, just based on the math and the rate of bank failures, coupled with the number of banks that were still in trouble.  My concern was the bigger banks still in trouble like Citi.  In December 2009, one of the major shareholders of Citi, Kuwait Investment Fund sold their stake in Citi.  There is also a lot of money moving in the EU after the announcement that Greece is essentially bankrupt.  In my October article, I personally thought that the FDIC might go red sooner than January or February, “much sooner” is what I said exactly.

While many readers commented that I may be too pessimistic about the situation, it actually turned out to be worse than even I thought.  Bank failures for 2009 set a record and FDIC went red in December 2009.  As losses have mounted on loans made for commercial property and development, the growing bank failures have sapped billions of dollars out of the deposit insurance fund, and its deficit stood at $20.7 billion as of March 31.

282 banks have failed since the beginning of 2008. 400 of the remaining 800 “troubled” banks may be in trouble. George G. Kaufman is the John F. Smith Professor of Finance and Economics at Loyola University Chicago and a consultant at the Federal Reserve Bank of Chicago has this to say about it. “ Bank (depository institutions) failures are widely perceived to have greater adverse effects on the economy and thus are considered more important than the failure of other types of business firms. In part, bank failures are viewed to be more damaging than other failures because of a fear that they may spread in domino fashion throughout the banking system, felling solvent as well as insolvent banks.  Thus, the failure of an individual bank introduces the possibility of system wide failures or systemic risk. This perception is widespread.  It appears to exist in almost every country at almost every point in time regardless of the existing economic or political structure. As a result, bank failures have been and continue to be a major public policy concern in all countries and a major reason that banks are regulated more rigorously than other firms.  Unfortunately, whether bank failures are or are not in fact more important than other failures, and I will argue in this paper that they are not, the prudential regulations imposed to prevent or mitigate the impact of such failures are frequently inefficient and counterproductive.

A little background: Most failed banks are essentially sold to other banks and some go into receivership. The common maneuver here is to transfer the assets and liabilities to another bank with some level of guarantee from the FDIC to help support those liabilities. This is typically done on a Friday evening and causes the bank to be closed perhaps the next day (Saturday) and then the bank opens, business as usual, on Monday. So far, there has been little panic or problems with this modus operandi.

Now however, the FDIC is finding it more and more difficult to find banks that want to help out. That is, the banks that formerly had wanted to purchase other banks have done so and are not interested in buying any more banks. To put it bluntly, the FDIC is running out of buyers.  Often times they are literally coming down to the wire to get all the transactions and contracts, etc. pertaining to the purchase completed in time to seamlessly make the transition, as it is taking longer and longer to secure a buyer.  A recent example is Ideal Federal Savings Bank of Baltimore Maryland with $6.3 M in assets, but will cost the FDIC $2.1M because the FDIC could not find a buyer.

The number of bank failures is expected to peak this year and be slightly higher than the 140 that fell in 2009. That was the highest annual tally since 1992, at the height of the savings and loan crisis. The 2009 failures cost the insurance fund more than $30 billion. Twenty-five banks failed in 2008, the year the financial crisis struck with force, and only three succumbed in 2007.

The number of banks on the FDIC’s confidential “problem” list has jumped to 775 in the first quarter of 2010 from 702 three months earlier, even as the industry as a whole had its best quarter in two years. A majority of institutions posted profit gains in the January-March quarter. But many small and midsized banks are likely to continue to suffer distress in the coming months and years, especially from soured loans for office buildings and development projects.

The FDIC expects the cost of resolving failed banks to grow to about $100 billion over the next four years.  The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.  While depositors’ money — insured up to $250,000 per account — is not at risk, with the FDIC backed by the government, the concern is competition and more importantly the loss of local community banks that invest locally.

James Wesley Rawles at survivalblog.com suggests we should be forewarned: 1.) The pace of bank failures in the U.S. is likely to increase. 2.) The number of banks that will have to be directly bailed out (rather than conglomerated with little fuss) will increase. 3.) The risk of bank runs will also increase. The point at which bank runs occur is difficult to predict, since it is based upon subtle psychological tipping points.

What is really disconcerting about these facts is that there are several other facts that just don’t jive with the reality of what is going on. Fact One- The FED is sitting on the largest excess cash reserves in its history (over $1 trillion). Fact Two- collectively corporate America is sitting on their largest cash reserves. Fact Three- banks are recalling record numbers of credit lines from small businesses that ARE NOT in default and have no adverse issues.  So while overall the economy is the main cause of the failures, there also seems to be some hidden agendas working as well.  It will be very interesting to read the independent examiner’s report concerning the WAMU closure last year.  Maybe we can find a “smoking gun” from this report that would indicate if there is some hidden agenda in the FDIC’s aggressive actions.  All I know is that there will be little hope of recovery if the “Big Five” are the only ones standing when the “Fat Lady” sings.

The Storm, THE Emphasized, Is Approaching

The recent stock market upswing has no relationship to reality.  I repeat, no relation to reality.  Dismal numbers came out all week and the market racked up over 400 points of gain. HUH?  That golden horizon is really the dusk of a very dark economic period in the world, fast approaching.  There is no more time left, no FED maneuver can set it right, and the only hope, our congress and world bankers are absolutely devoid of the will to act.

According to Asia News Federal Reserve Chairman Bernanke issues the warning.  Asian nations, China and India first, are no longer willing to purchase securities issued by the US Treasury, which this year the Treasury has about US$ two trillion short-term debt to refinance and the FED has no buyers for their paper.  Beijing is buying gold instead.

Milan (AsiaNews) – For at least four years, AsiaNews has sounded the alarm bells against the risks due to the huge size reached by speculative finance.  In 2008, we said that the attempt to save US banks could push the US debt beyond the point of solvency (see Maurizio d’Orlando, “US debt approaches insolvency . . .,” in AsiaNews 19 December 2008) Back then it could appear a bit overblown, but now even US Federal Reserve Chairman Ben S Bernanke is warning the US Congress about the danger. In a statement before the House Financial Services Committee, he said that the US public debt might no longer be sustainable very soon. Financial jargon aside, the subtitle of an article by The Washington Times—Stage is set in U.S. for a Greek tragedy—says it all. Interviewed for the article, Bernanke says the United States is likely to face a debt crisis like the one in Greece sooner than later, “not something that is 10 years away”.

In 2008, the size of the debt was such that it was quite clear that it was not sustainable. Now we have a timeframe to measure the likelihood of insolvency for the US public debt, and it is this year. The reason for that is described in an article whose title needs no explanation: “The bankruptcy of the United States is now certain”.

By the end of 2010, the US Treasury will have to refinance US$ 2 trillion in short-term debt, plus additional deficit spending for this year, estimated to be around US$ 1.6 trillion. Together, the US Treasury will need to borrow US$ 3.5 trillion (US$ 3.6 according to this writer) in just one year.

In 1999, two well-known economists—Alan Greenspan and Pablo Guidotti—published a formula in an academic paper. Kept secret for a long time, it is designed to predict with precision when a country’s public debt will lead it to be insolvent. Called the Greenspan-Guidotti rule, it says that to avoid a default, countries should maintain hard currency reserves equal to at least 100 per cent of their short-term foreign debt maturities.

According to the author, the United States holds 8,133.5 metric tonnes of gold (the world’s largest holder).  At November 2009 dollar values, that is about U$ 300 billion. The US strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that is roughly US$ 58 billion worth of oil.  According to the IMF, the US has US$ 136 billion in foreign currency reserves. Altogether, that is some US$ 500 billion in reserves (US$ 455.5 billion according to AsiaNews).

Foreigners hold 44 per cent of US$ two trillion short-term US debt; that is US$ 880 billion. Total domestic savings in the United States are only around US$ 600 billion annually. If the United States needs to sell US$ 3.5 trillion (or US$ 3.6 trillion) in Treasury bills, and all domestic savings combined are put into US Treasury debt, the United States will still fall short by nearly US$ 3 trillion. Where is the rest of the money going to come from?

Not China, nor India or any other Asian countries. Last year, China has in fact proportionately reduced its holdings in US Treasury bills in relation to rest of its reserves.  Recently, the International Monetary Fund (IMF) put up 191.3 tonnes of gold for sale. Some analysts had earlier suggested that China might be interested in buying it. Assets in dollars are estimated to represent over 70 per cent of China’s US$ 2.4 trillion foreign exchange reserves. As of April 2009, China held 1,054 tonnes of gold or 1.2 per cent of its GDP. That falls well below the world average. Indeed, gold represents less than 10 per cent of China’s total reserves.

According to the China Daily, a semi-official mouthpiece for the Communist Party of China, China is not likely to buy IMF gold because it might upset the market. However, some Chinese commentators believe that Beijing should increase its gold reserves to 1,800 tonnes. Sources told AsiaNews that China’s real goal is 4,000 tonnes.  The same is true for other Asian countries. For instance, India, Mauritius and Sri Lanka have bought 212 tonnes sold by the IMF.

As for Japan, it is likely to continue avoiding open confrontation with the United States; but the real intentions of its top financial circles might be inferred from a mysterious and unsolved incident that occurred last summer when two officials from Japan’s central bank were caught at the Italian-Swiss border town of Chiasso carrying US Treasury bills with a nominal value of US$ 134.5 billion.

Since 1945, the US dollar has been the main international reserve currency. In theory, this gave the US Federal Reserve the power to issue debt securities at will, with the value of international trading assets. However, the Greenspan-Guidotti rule restricts this power.  Whenever US insolvency becomes self-evident, no one dare say they did not know. The Greenspan who came up with the aforementioned formula is the same Alan Greenspan who chaired the Federal Reserve for 18 years and allowed speculative. i.e. “structured” finance to expand (based on poorly tested mathematical algorithms).

One has to wonder just what is really going on.  Big banks and investment firms are the beneficiaries of nearly $1 Trillion taxpayer dollars, 40% of which found its way to foreign banks and the remainder is just that. It remains in the vaults of the banks and the FED.  I had reported earlier here that the excess reserves in the FED have exceeded $1 Trillion! In addition, major corporations are sitting on the largest collective cash reserve in history.  The top 25 hedge fund managers in 2009 received a collective $25 Billion in bonuses.  I didn’t stutter, that was Billion.

At the same time we are seeing foreclosures continuing at record paces, small businesses have loans recalled and no new credit is available.  Not even in severely distressed areas like Detroit and New Orleans.

We must see things as they are and not how they are being spun.  We are really entering the event horizon and once we past that point, which is optimistically only months away, there is no capacity to recover.  If we don’t collectively demand action I worry we are doomed for 10-15 years of severe depression, much worse than D1.

The Housing Market is Still a Minefield

Despite the efforts of the government the foreclosure crisis hit a new peak in the first quarter, as banks took back the largest number of properties to date. The number of homes entering REO status (short for “real estate owned” by a bank) climbed 35% to 257,944 — the highest quarterly total ever — from 190,543 in the first quarter of last year and 9% from the previous quarter, according to real-estate data firm RealtyTrac. The increase comes as lenders seized more property that couldn’t qualify under the Obama administration’s Home Affordable Modification Program (HAMP).

The real question here is a rough one.  Should the government intervene or let foreclosures take their own course.  Obviously many people were falsely led into mortgages they could not afford and therefore the banksters and brokers are culpable for the dilemma that so many families now find themselves.  Losing their homes to foreclosure brings with it total destruction of their credit rating which they will likely never be able to restore. However, the other side of the coin is that these easy loans also falsely inflated the value of homes and if the government intervenes, those prices will stay inflated locking out a whole new generation of home buyers and therefore the market will never return to a stable normal situation.

It can also be argued that the government intervention programs had not been that effective and indeed the HAMP program has only helped about 20% of those who are in serious jeopardy of foreclosure. Also “There have been delays throughout the system, and it has taken longer for properties to go from delinquency to default,” says Rick Sharga, senior vice president at RealtyTrac. Once rejected for HAMP, however, these properties are now moving to foreclosure at an accelerated pace, Sharga says.

More properties moving through pipeline

Foreclosure filings — from notices of default to bank repossessions — were reported on 932,234 homes in the first quarter of this year, a 16% increase from the same period last year and a 7% jump from the previous quarter, according to RealtyTrac. And the pace accelerated near the end of the quarter, with foreclosure filings reported on 367,056 properties in March, an increase of 19% from the previous month and the highest monthly total since RealtyTrac began issuing its report in January 2005.

Foreclosure auctions were scheduled on 369,491 properties during the quarter, the highest quarterly total since RealtyTrac began compiling its report.

“There have not been a lot of households that have been successful under HAMP,” says Gary Painter, director of research at the University of Southern California’s Lusk Center for Real Estate. “It’s likely that many of the people who could be helped have been helped.”

The good news is there doesn’t appear to be a huge wave of properties entering default.  In the first quarter, 304,799 properties received default notices, an increase of just 1% from the previous quarter and a decrease of 1% from the same time last year. Default notices have dropped 11% from their peak in last year’s third quarter.

Troubled states
Nevada continued to have the highest foreclosure rate in the quarter — four times the national average — with one in every 33 households receiving a foreclosure filing, followed by Arizona, Florida, California and states where employment has plummeted, such as Utah, Michigan, Georgia, Idaho and Illinois. Foreclosure filings were reported on 34,557 properties in Nevada during the first quarter, a 15% increase from the previous quarter but a 16% drop from the first quarter of 2009.

Foreclosure filings in Arizona were reported on 55,686 properties — one in every 49 households — a 22% increase from the previous quarter and a 13% increase from the same time last year. Florida posted the third-highest foreclosure rate, with filings recorded on 153,540 properties — one in every 57 households — a 7% increase from the fourth quarter and a 29% increase from the same time last year.

Sitting on delinquencies
Just how many foreclosures move through the foreclosure process and when banks sell them will be key factors in how much more real-estate prices could fall before they recover. Most of these bank-owned properties are not making it onto multiple listing services, analysts and brokers say, despite banks having more of them to contend with. “We have about 860,000 REOs in our database, and only about 30% of them are available for sale on the MLS,” Sharga says. “That means you have another 550,000 to 600,000 that have yet to hit the market.

By keeping this “shadow inventory” off the market, banks are keeping prices unnaturally high in this soft economy, says Leo Nordine, a Los Angeles-area broker specializing in REO properties. “Lenders want to keep postponing them for as long as they can,” Nordine says. “Prices have stabilized” in many areas because banks have kept these properties off the market, he says, adding that banks will likely continue to do so until the economy picks up again.

A long, painful recovery
Meanwhile, foreclosure prevention efforts don’t appear to be helping a significant number of borrowers. While 1.4 million homeowners were offered trial modifications under HAMP through the end of March, just 230,000 homeowners had their modifications made permanent. That’s a drop in the bucket compared with the 5.5 million delinquent loans Sharga says are on the books.

Acknowledging this poor progress, the government revamped HAMP last month to provide additional mortgage assistance for unemployed job seekers, increase payments to second-lien holders and give some underwater homeowners the chance to refinance into loans backed by the Federal Housing Administration. This could slow the number of homes entering foreclosure, but it probably won’t make a huge dent in the number of properties being taken back by the banks.

“Many people are so far upside down in their home’s value they are not even eligible,” says Helene Raynaud, vice president of housing for the National Foundation for Credit Counseling. And since HAMP is voluntary, lenders and investors are still deciding which properties they want to take back. “The government is really trying, but there are some issues of accountability and enforcement with servicers.”

And, Raynaud says, there are some questions about how many of these modifications will end in re-default, given borrowers’ still-high levels of debt. Very few servicers are requiring these borrowers to get debt counseling, she says.

Given these factors, economists expect a steady stream of foreclosures to hit the market for the next several years. But they don’t think it will derail a recovery. “I think we are very close to a recovering housing market,” says Celia Chen, senior director in charge of housing at Moody’s Economy.com. “We expect a slight decline and then flat prices until 2011.” However, Painter says you might want to brace yourself for a bit of a bumpy ride.  “I think we are going to see upticks and downticks as the process happens,” he says. “But generally we are going to be stuck in place for a while.”

In 2008, it looked as if Paradise Valley, the wealthiest, most exclusive community in Arizona, had neatly side-stepped the foreclosure crisis. Only 38 foreclosures were recorded in this 16-square-mile town that year. Indeed, the median home price for resale detached homes reached an all-time high of $2 million in mid-2008, according to MDA DataQuick, even as values plummeted elsewhere. “People were buying up million-dollar homes, tearing them down and rebuilding them,” says Jay Butler, director of the Arizona Real Estate Center at Arizona State University’s W.P. Carey School of Business.

The fall
Last year, the bottom dropped out. Like many other luxury-home markets, Paradise Valley joined the foreclosure crisis late: As the economy worsened, companies lost clients and executives lost bonuses or jobs. Affluent residents ran through their savings and credit. And banks, once reluctant to foreclose on major depositors, started taking estates back. People began talking of “simplifying their lifestyle.”

By the end of 2009, the number of foreclosures had tripled to 114, with an additional 315 notices of trustee sale filed, according to the Information Market, a data provider.  In most cities, this paltry number wouldn’t even cause a ripple in the real-estate market. But in this tiny town of about 7,700 homes — owned by celebrities, politicians and businessmen such as Muhammad Ali, Alice Cooper, Dan Quayle, Mike Tyson and Peter Sperling — these foreclosures landed with a thud. Broker sale signs, once considered too gauche for this tony enclave, with its 12 high-end resorts, began sprouting like weeds, as overstretched borrowers began seeking short sales or letting their underwater custom homes go.

The excess
Forget Beverly Hills. Some of the priciest foreclosures in RealtyTrac’s database were in tiny Paradise Valley, and all were recorded last year — such as this palatial property with private theater, walk-in wine cellar, indoor sport court and separate guest house with two-car garage, which was taken back by the bank when its owner defaulted on a $6.5 million note.  It’s now listed at $3.5 million.

“We’ve seen examples of where something that was listed for $10 million sold for $2 million,” says luxury real-estate agent Walt Danley, who has sold homes in the area for nearly three decades. “The run-up did get a little out of control. It needed a correction, but this is an overcorrection.”

A continued correction
Bargains like these should be around for a while, agents and economists say. Even as local economists are predicting that the Phoenix market will bottom out this spring and that prices will start ticking back up, no one knows exactly when the price reductions will stop in Paradise Valley.

The number of sales of distressed properties has grown, as many business owners who took out a credit line against their homes to try to save their businesses got deeper underwater and could no longer afford to keep making those payments. “Short sales will continue to dominate the market for the foreseeable future,” Danley says.

Well is short sale the answer? Consider this:

By Sally Herigstad

MSN Money

Steve and Debbie Martin are losing their home. That’s for sure. The only question is whether it will be in a short sale or a foreclosure. They’ve found a buyer, who is offering less than what they owe. The Martins just have to get the bank to accept the offer.

In the past, that’s been a tall order. Since the housing meltdown began, short-sale offers have often taken months to get a response from overwhelmed lenders. Even then, there have been no clear guidelines about what kinds of offers are acceptable or about how to handle second mortgages that could easily derail the process. Industry experts estimate that less than half of short-sale offers have been accepted, and many real-estate agents have avoided showing these properties altogether. But if the Martins can hold on until April, a new federal program might help.

Starting April 5, lenders in the Home Affordable Modification Program must offer borrowers the option of a short sale, including the minimum amount needed for an acceptable offer, if their mortgage doesn’t qualify for a modification.

Once a homeowner applies to list his home as a short sale, lenders must respond to offers within 10 days. The program also offers $1,500 to homeowners to help them move, $1,000 to loan servicers to cover the cost of paperwork and up to $3,000 in incentives to secondary lenders who might otherwise reject an offer.

The Martins bought their home in 2003, when they needed a larger house for themselves, their three grown children and one grandchild. Steve and Debbie made the down payment, and all five adults signed on the loan. Everyone chipped in on the mortgage payments. The Martins figured that when their kids moved away, they would sell the house and all would share the profits. Then property values in the Pacific Northwest plummeted. As the nest emptied, Steve and Debbie started having trouble paying the mortgage.

Now the Martins can no longer sell the house even for the amount they owe on it. But they don’t want to just walk away. They feel a moral obligation to try to pay back their loan, and they don’t want to trash their and their children’s credit scores. The Martins tried everything before asking the bank to accept a short sale. Steve started taking one of his pensions early in an effort to make ends meet, but it wasn’t enough.

“We tried to refinance,” he said. “We tried that with three institutions, and they all said no because there were too many people on the mortgage. We tried loan modification and had the same issue.” Millions of people like the Martins are finding it hard to hang on to their homes as the Great Recession squeezes both household income and housing values. And many others who owe a lot more than their houses are worth may just want out.

Walking away, however, is a terrible choice — one you could regret for years. Here’s why:

You could get hit with a deficiency judgment. It’s common to assume that if you walk away from your home, the bank can’t come after you for more money, because the loan was attached to the house. But that’s not always true. In some states, lenders can obtain a deficiency judgment for the difference between what you owed and what they got from selling your house.

Florida is one of those states. “No homeowner should walk away,” says Rashmi Airan-Pace, a Florida attorney who specializes in mortgage modifications and foreclosure defense. “Deficiency judgments are very damaging.” Airan-Pace points out that lenders, for example, can seek to garnish wages or place liens on other properties.

Other states, including California and Arizona, are nonrecourse states, which means that laws there prohibit such judgments. You still have to be careful, though; some lenders get borrowers to sign papers obligating them to pay deficiencies anyway.

Foreclosure can ruin your credit scores for up to 10 years. When it comes to the effect on your credit scores, having a few late bills is to foreclosure what having a leaky faucet is to burning down the house. “When a foreclosure is filed against a property owner, that person’s credit will go down 100 points,” Airan-Pace says. “At the foreclosure sale, it goes down another 100.”

She estimates that a short sale would do about one-quarter as much damage to your scores. And though you can start pulling up your credit scores substantially from a short sale or a spate of late payments within a couple of years, a foreclosure can affect your credit history for a decade.

First, do all you can to keep the house

Before you think about letting your home go, make sure you’ve exhausted every other possibility. If you can save your home by working extra hours, staying on a strict budget or taking money out of savings, you should consider it. (In general, don’t touch your retirement accounts, however.) If you just want out because the value is down, remember that a house is still a place to live, regardless of what the market says it’s worth.

You would also be wise to consult a credit counseling organization, such as the National Foundation for Credit Counseling, or hire an attorney. According to the nonpartisan Urban Institute, borrowers facing foreclosure are 60% more likely to hold on to their homes if they receive counseling.

When you hit trouble, the first step is to see whether you qualify for federal programs that help you refinance your home at a lower rate or reduce your mortgage balance. Be patient. And be prepared for lots of paperwork. The Martins say they have faxed more than 80 pages at a time to their lender.

Sam Hussain of ClearPoint Credit Counseling Solutions in Modesto, Calif., says that people often get frustrated when they have to fax the same paperwork more than once. “That’s reality,” he says. “Ask for the mailing address, and use certified mail.” Hussain also recommends you use a notebook to make a conversation log through the process. Write down the name of every person you talk to, the date you spoke and what was said.

It should go without saying that getting your legal advice from scam outfits that advertise in spam e-mails or on utility poles is a bad strategy. As Lee Jones, a spokesman for the Department of Housing and Urban Development in the Northwest, says: “They fold up in the night like a lawn chair and take your money with them.”

It’s also good practice to steer clear of well-intentioned people who are out of their field. Taking advice from friends, relatives and even your real-estate agent can be a costly mistake. A credit counselor or attorney can be helpful if saving your home proves impossible and you seek to complete a short sale or deed in lieu of foreclosure. Keep in mind that banks will want to know that you tried every other avenue first.

One of the tragedies of D2 is how badly it has devastated so many families.  Even D1 did not do so much damage to a emerging middle class. D2 however is basically wiping out the middle class in America.  There are no simple answers or solutions to this current dilemma.  What is clear that this is criminal and there are many banksters that should go to jail. Period. In recent testimony that emerged from the WAMU trial was that some WAMU bankers had fraudulently changed up to 85% of the loan applications they were processing! 85%! These are the guys that should go to jail.  I am deeply saddened by the families that have been devastated by these actions, but we should also learn from this experience that ultimately you are on the hook.  If you know instinctively that you can’t afford it, you can’t! A good rule of thumb is that your home should cost no more than 3 times your income.  I know that in most areas that wouldn’t buy a fixer upper, but that is the point. We need to have the discipline to wait.  It is a consumer’s market and ultimately we determine home prices by the demand we create.

The Clowns and The Circus

The good Senator Dodd is trying to get his “banking regulatory” reform bill passed.  But do we really understand what is going on.  The answer is more of the same old game that got us in this mess in the first place.  The key element of this bill is that “the Fed” will be the regulatory oversight for the largest 40 banking institutions.  Let’s examine that just for a moment.  To do so let’s look at how well the Fed and for that matter the SEC and the Treasury department did in conducting oversight functions at Lehman Brothers.

The court examiner, Anton R. Valukas laid out what the report characterized as “materially misleading” accounting gimmicks that Lehman used to mask the perilous state of its finances. Lehman executives engaged in what the report characterized as “actionable balance sheet manipulation”.

A large portion of the [examiner’s] nine-volume report centers on the accounting maneuvers, known inside Lehman as “Repo 105″. First used in 2001, long before the crisis struck, Repo 105 involved transactions that secretly moved billions of dollars off Lehman’s books at a time when the bank was under heavy scrutiny.

In a legal case against Lehman Brothers, The examiner said in a report publicly released that senior officials failed to disclose key practices, opening them up to legal claims . The report concludes that the firm’s auditor, Ernst & Young, failed to meet “professional standards. The exhaustive report was unsealed by Judge James M. Peck, who said the report reads “like a best-seller.”

The examiner, Anton Valukas, also found that parties have claims to pursue against JPMorgan Chase and Citibank in connection with their behavior regarding the modification of agreements with Lehman and their increasing collateral demands in Lehman’s final days. These demands had a “direct impact” on Lehman’s diminishing liquidity — its cash on hand — which was a prime reason behind the firm’s demise.

The examiner’s report notes:

The business decisions that brought Lehman to its crisis of confidence may have been in error but were largely within the business judgment rule. But the decision not to disclose the effects of those judgments does give rise to colorable claims [i.e. valid legal claims] against the senior officers who oversaw and certified misleading financial statements — Lehman’s CEO Richard S. Fuld, Jr., and its CFOs Christopher O’Meara, Erin M. Callan and Ian T. Lowitt.

There are colorable claims against Lehman’s external auditor Ernst & Young for, among other things, its failure to question and challenge improper or inadequate disclosures in those financial statements. The examiner notes that the issue giving rise to these potential claims was Lehman’s creative use of repurchase agreements, otherwise known as repo. These are agreements between financial firms that essentially act as loans for cash — one firm pledges collateral to another in exchange for cash with a promise that they’ll buy back that collateral.

The examiner said the sole function of Lehman’s use of repo was “balance sheet manipulation,” according to the report. Although Repo 105 transactions may not have been inherently improper, there is a colorable claim that their sole function as employed by Lehman was balance sheet manipulation. Lehman’s own accounting personnel described Repo 105 transactions as an “accounting gimmick” and a “lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter end.” Lehman used Repo 105 to reduce balance sheet at the quarter‐end. The reason for that, the report notes, was to lower Lehman’s leverage — a critical component of the firm’s credit rating.

In May 2008, a Lehman Senior Vice President, Matthew Lee, wrote a letter to management alleging accounting improprieties; in the course of investigating the allegations, Ernst & Young was advised by Lee on June 12, 2008 that Lehman used $50 billion of Repo 105 transactions to temporarily move assets off balance sheet at quarter end.

The next day ‐- on June 13, 2008 ‐- Ernst & Young met with the Lehman Board Audit Committee but did not advise it about Lee’s assertions, despite an express direction from the Committee to advise on all allegations raised by Lee. Ernst & Young took virtually no action to investigate the Repo 105 allegations. Ernst & Young took no steps to question or challenge the non‐disclosure by Lehman of its use of $50 billion of temporary, off‐balance sheet transactions.

For example, when the examiner questioned Lehman executives and other witnesses about Lehman’s financial health and reporting, a recurrent theme in their responses was that Lehman gave full and complete financial information to Government agencies, and that the Government never raised significant objections or directed that Lehman take any corrective action.

True? Let’s see what the examiner had to say: “although various Government agencies had information that raised serious questions about Lehman’s reported liquidity and about the sufficiency of its capital and liquidity to withstand stress scenarios, the agencies generally limited their activities to collecting data and monitoring.”

After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress-testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank. The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.” Lehman failed both tests. The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed. However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed. It does not appear that any agency required any action of Lehman in response to the results of the stress testing.

So let’s see what we got here. They ran two sets of stress tests and the firm failed both. Not satisfied with the results they then designed a third set, which the firm also failed (we can reasonably presume the third had less stringent requirements than the other two!)

Instead of applying any of these three, FRBNY, which was run by TIMOTHY GEITHNER, NOW OUR TREASURY SECRETARY, WHO REPORTED TO BEN BERNANKE, instead took Lehman’s word that all was ok and did nothing.

Further, The SEC inspection revealed significant problems at Lehman. The SEC found that Lehman’s Price Valuation Group was understaffed; and it found that Lehman’s asset pricing function was overly “process driven.” But the SEC did not release its findings or formally present them to Lehman prior to Lehman’s demise.

Now this last week, Ben Bernanke testifies before the senate to raise support for the Fed being the regulatory agency over big banks and he says the following:

On the regulatory side, we have played a key role in international efforts to ensure that systemically critical financial institutions hold more and higher-quality capital, have enough liquidity to survive highly stressed conditions, and meet demanding standards for company-wide risk management. We have also been taking the lead in addressing flawed compensation practices by issuing proposed guidance to help ensure that compensation structures at banking organizations provide appropriate incentives without encouraging excessive risk-taking.6 Less formally, but equally important, since 2005 the Federal Reserve has been leading cooperative efforts by market participants and regulators to strengthen the infrastructure of a number of key markets, including the market for securities repurchase agreements and the markets for credit derivatives and other over-the-counter derivative instruments.

To improve both our consolidated supervision and our ability to identify potential risks to the financial system, we have made substantial changes to our supervisory framework. So that we can better understand linkages among firms and markets that have the potential to undermine the stability of the financial system, we have adopted a more explicitly multidisciplinary approach, making use of the Federal Reserve’s broad expertise in economics, financial markets, payment systems, and bank supervision to which I alluded earlier. We are also augmenting our traditional supervisory approach that focuses on firm-by-firm examinations with greater use of horizontal reviews that look across a group of firms to identify common sources of risks and best practices for managing those risks. To supplement information from examiners in the field, we are developing an off-site, enhanced quantitative surveillance program for large bank holding companies that will use data analysis and formal modeling to help identify vulnerabilities at both the firm level and for the financial sector as a whole. This analysis will be supported by the collection of more timely, detailed, and consistent data from regulated firms.

Many of these changes draw on the successful experience of the Supervisory Capital Assessment Program (SCAP), also known as the banking stress test, which the Federal Reserve led last year. As in the SCAP, representatives of primary and functional supervisors will be fully integrated in the process, participating in the planning and execution of horizontal exams and consolidated supervisory activities.

Improvements in the supervisory framework will lead to better outcomes only if day-to-day supervision is well executed, with risks identified early and promptly remediated. Our internal reviews have identified a number of directions for improvement. In the future, to facilitate swifter, more-effective supervisory responses, the oversight and control of our supervisory function will be more centralized, with shared accountability by senior Board and Reserve Bank supervisory staff and active oversight by the Board of Governors. Supervisory concerns will be communicated to firms promptly and at a high level, with more-frequent involvement of senior bank managers and boards of directors and senior Federal Reserve officials. Greater involvement of senior Federal Reserve officials and strong, systematic follow-through will facilitate more vigorous remediation by firms. Where necessary, we will increase the use of formal and informal enforcement actions to ensure prompt and effective remediation of serious issues.”

When you understand what really has gone on.  When you realize in real terms nothing has changed.  When you realize the fox is guarding the hen house.  Then and only then you can see how “rigged: the whole situation is and that this so called regulatory reform bill is a total shame. It is like threatening the banking industry with a severe lashing with a wet noodle! OOOOHHHHH!

But Senator Dodd, Bernanke, Geithner et al are counting on two things.  One, we are totally ignorant and won’t understand anything and secondly, the CONgress is bought and paid for, lock stock and barrel!  Some of the Republican harlots are even protesting this shame of a regulation as too much!!!

How bold I say is guilt! How insulting to our intelligence. I remember the lines from the Moody Blues.  “It riles them to believe you perceive the web they weave.” We need real reform. What we don’t need is a PRIVATE CORPORATION, the Fed, acting as a regulatory agency.  Think about this just for a moment.  Where in the constitution or the history of the republic have we allowed a private corporation to regulate other corporations?  We need a real governmental agency that has at its core a responsibility to insure the safety and security of the investment public.  This is the only way to restore the confidence to be investors and consumers again.  This is the real engine to get the economy off of dead bottom.