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As If We Needed Any More Evidence

by rifek Tue Jul 12th, 2011 at 07:36:34 PM EST

Cross-posted from my blog.

To preface, for those of you who may think I was late to the bubble prediction bandwagon, I suggest you look here and see that I was predicting the train wreck in December 2005.  Beat that, Nouriel Roubini.

We know that the overwhelming majority of opinion makers in the US are just sock puppets for the Financial Overlords.  Ditto for our supposed intellectuals.  They don't need to rub our noses in it.  But along comes Roger Lowenstein in Bloomberg Businessweek to "explain" why there have been effectively no prosecutions resulting from the collapse.  It's because, simpletons, there were no crimes committed.  Demands to the contrary are just the result of our overheated, plebeian blood.


Well, Roger, here's the deal, and I'm speaking as a former prosecutor who's handled white-collar crimes, which is one more claim that you can make (Yes, I know Daddy was a Wall Street lawyer and Columbia law prof, but I have a shingle on the wall too, and my kids know that doesn't make them legal experts.): If this mess wasn't created by a tsunami of crime, we have glossed "criminal fraud" out of our legal system.

I'm no accountant, and if you want that kind of analysis, I recommend you go read Francine McKenna's column in Forbes, which is heavily linked.  I'll stick with what we know of facts and law.

In 2002, the Dot Com Bomb and 9/11 had deflated the preceding bubble (Anybody remember how outraged we were over LTCM?  Those were innocent times.), and investment houses and banks were sitting on cash with investors clamoring for it to go somewhere that produced a return.  Fortunately, "help" was at hand: real estate.

First, create a demand pool for the money.  This required bringing a pile of borrowers to the table who had no business being there.  No problem.  No-doc loans and "creative financing" (Read: Fake it 'til you break it.) bring everyone to the table.

Second, you need properties that "support" the loans.  Again, no problem.  You have everything from investment groups flipping properties internally to jack the prices to armies of in-house appraisers for whom "MAI" means "Made As Instructed."

Third, take that freshly inked paper, cut it up like paper dolls, and securitize it all over the place.  Get the ratings agencies to help by declaring that poo no longer stinks.

Fourth, the piece de resistance.  Cherry-pick the securitized pools and hedge.  Then buy credit default swaps on both the bets and the hedges.  And THEN sell the swaps upstream and downstream.  AIG and the monolines will be more than happy to help.

Oh, don't forget to make sure the regulators remain lapdogs by reminding them that if they do their jobs, the house of cards will collapse, and then there will be no place for them when they leave government and want to earn some serious scratch.

And at every one of those steps, the commissions and fees run hot and heavy.  And so do the fibs, the half-truths, the misrepresentations, the blind eyes, and the outright lies.  Countrywide lied systemically to produce the greatest pile of toxic, residential mortgages in history.  JP Morgan Chase wasn't any different on the commercial side.  Chase propped itself up with a forced take-over of Washington Mutual (No, kiddies, it wasn't really WaMu that needed the propping.).  Bank of America swallowed Countrywide with all the due diligence of a five-year-old dragging home a stray dog.  And Goldman Sachs got caught buried shoulder-deep in the cookie jar, selling products it had created so it could bet against them.  And on, and on, ad nauseam, ad absurdum.

And nothing.  Few meaningful investigations, fewer prosecutions, and business goes on as usual.  Except that it's right out in the open now; no one even bothers with back rooms.  And it all gets ignored.  So I guess you're right, Roger, in a sick way, because legally there is no crime without a conviction, and there can't be a conviction without a charge.  But who are you going to blame, Roger, when Joe Main Street starts treating the rule of law with the same contempt his lords and masters demonstrate?

Display:
I suggest you look here and see that I was predicting the train wreck in December 2005.

People predicting some type of train wreck before it happened were a dime a dozen. My wife and I started shedding debt as a conscious strategy I think it was in 2007. We had some idea that we were in a housing bubble a few years before then with massive real estate debt (rental) -  We actually managed to more or less finish the process of shedding debt a few months after the crash started in the US.

A little bit before the crash the professional association that pretends that it represents all landlords in Ontario came out with a report on the rental business:

Property taxes were up, vacancy rates were up, rents were not keeping pace with inflation, and rental units were selling for record amounts.

The details of what was going down were not necessary to figure out something was going down and it wasn't pretty.

I was talking about the crash with my mother - and if I remember rightly Greenspan's comment that nobody could have predicted...

Could he really have been that stupid, or was he lying?

As far as criminal activity goes, the US is now fairly clearly a two tier justice system.

aspiring to genteel poverty

by edwin (eeeeeeee222222rrrrreeeeeaaaaadddddd@@@@yyyyaaaaaaa) on Tue Jul 12th, 2011 at 09:01:57 PM EST
As far as criminal activity goes, the US is now fairly clearly a two tier justice system.

Dimitry Orlov:

Orlov advises staying as far as possible from the U.S. justice system, since it "offers a fine luxury model, but its budget model is manifestly unsafe." Already grossly tipped in favor of the rich, it may drop any pretense of serving justice and become simply a tool for social control. Orlov provides some Soviet examples of this, including the Gulag policy of political imprisonment, and describes America's use of secret jails, torture and indefinite detention as steps in the same direction.


Schengen is toast!
by epochepoque on Wed Jul 13th, 2011 at 09:18:48 AM EST
[ Parent ]
The white middle class is learning what minorities have known forever: It isn't a "justice" system, it's a "just us" system.
by rifek on Thu Jul 14th, 2011 at 09:16:25 AM EST
[ Parent ]
I referred to that merely to show that I am not pulling a Greenspan.
by rifek on Wed Jul 13th, 2011 at 03:40:05 PM EST
[ Parent ]
... the unfettered market temple could have predicted. Even within the Economics profession, plenty of nobodies actually predicted it.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Jul 13th, 2011 at 10:34:48 PM EST
[ Parent ]
Nice link, and it provides context for both the Dot Com Bomb and the Credit Crash.
by rifek on Thu Jul 14th, 2011 at 09:14:51 AM EST
[ Parent ]
I chose the summer of 2005 to sell my house in Northridge, CA, which had almost tripled in "value" since purchase in May, 1999. I was self employed and work had dried up and I could not believe real estate could keep going up after what I was seeing in LA: first time buyers were largely frozen out by pricing unless they had access to family money or had two incomes over ~$80K/yr; and the offers I was getting via phone for re-fi deals smelled very fishy and sounded like boiler room operations. The LA Times was running stories about fraudulent apprasials, ets.

We sold in November and moved to Arkansas, which had not had a bubble in real estate. I bought a larger house on a larger lot in a city with about 38% of the sale price of my LA house. Prices in LA continued to drift higher for about another year, but I was glad we were out, even if I had to live in motel and SRO hotels when I returned to LA to work. I just did not want to be trying to sell a house that represented the majority of my net worth into the teeth of a collapsing housing market, which I fully expected.

The real trick for me was getting the confidence to buy the home in 1999, as every US financial policy since the election of Reagan seemed to me to be based on fraud and lies, which, as it turned out, was indeed the case. But my income had jumped and I was being eaten alive by taxes without the homeowner's exemption.

I agree with the whole of your analysis above. The real challenge is cutting through the evil spell that passes for reality in the contemporary USA. This included what passes for the "mainstream" economics that is taught in universities, presented in the "mainstream" media and used in public policy. The general public has sold their soul to finance based on the bought and paid for propaganda of self interested billionaires through their "think tanks" and campaign contributions.

Functionally, it is not fraud if no one is willing to prosecute it. We need a moment in the USA like just happened in the U.K. with News Of The World. If Murdoch's whole empire collapsed, including Fox News, that would help, but not be sufficient. The whole framework of people's thinking must change significantly in order to make the necessary changes.

Having experience former prosecutors such as yourself and William K. Black forcefully make the case is important, but has not yet been sufficient. I keep hoping that some case will blow the system open and bring it crashing down. The consequences will be severe, but we as a nation are dying of gangrene and the rot is in high finance, especially the TBTFs and their hirelings in Washington D.C. and various state capitals. Both the Republicans and Democrats, as parties are fatally compromised. We need a reform movement driven by a wave of popular revulsion. Let it come in 2012.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jul 12th, 2011 at 11:50:24 PM EST
We sold then, too.
by rifek on Wed Jul 13th, 2011 at 03:28:45 PM EST
[ Parent ]
Blessed are those who sold before 2007.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 13th, 2011 at 08:35:21 PM EST
[ Parent ]
Black, unfortunately, remains a voice crying in the wilderness.  I don't like a crash, but I believe that proceeding with a thoroughly corrupted system is worse.  We have marginalized our entire civilization to the point where every significant choice is between two evils.  But without prosecutions, we can suffer through a crash and gain nothing, because the same folks will be in control coming out as were going in.
by rifek on Thu Jul 14th, 2011 at 09:11:49 AM EST
[ Parent ]
Having the heads of Jamie Dimon, Lloyd Blankfein, Tim Giethner, Hank Paulson, Ben Bernanke and over half of our elected representatives displayed on spikes attached to light posts or buildings might substitute for appropriate prosecution. Yves Smith reported over a year ago on conversations amongst some knowledgeable New Yorker's as to whose head was likely to be the first to be on a pike.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jul 14th, 2011 at 10:24:35 AM EST
[ Parent ]
But who are you going to blame, Roger, when Joe Main Street starts treating the rule of law with the same contempt his lords and masters demonstrate?

See Migeru's diary, The Great Unraveling, for a prior discussion of the consequences of contempt for the rule of law.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Jul 13th, 2011 at 09:01:19 AM EST
  You mean the markets are a racket?

  A con game?

  And, though there are laws-- contract law ,for example,  and courts and attorneys and judges, and there's (supposed to be) a Constitution with rights and obligations-- those aren't being respected and enforced?

  Sounds like corruption going on somewhere.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Wed Jul 13th, 2011 at 09:15:02 AM EST
When I quit practicing law (after only @ 10 years), mostly as a prosecutor, people asked why, and wouldn't I miss it? Sure, I'd miss the trials, they were challenging, but my primary answer was "I'm tired of just helping rich people keep poor people at bay."

White collar crime? You'd think there wasn't any, based on how infrequently it gets looked into. And when it IS investigated, the law firm of the prospective defendant makes a big contribution to (for example) the Attorney General's campaign fund and the investigation is allowed to wither and die.

It could make one cynical.

'tis strange I should be old and neither wise nor valiant. From "The Maid's Tragedy" by Beaumont & Fletcher

by Wife of Bath (kareninaustin at g mail dot com) on Thu Jul 14th, 2011 at 01:41:27 AM EST
Bingo.  And cops HATE investigating white collar crime.  Way outside their expertise, and no sexy photo ops with piles of guns and drugs.
by rifek on Thu Jul 14th, 2011 at 09:18:35 AM EST
[ Parent ]
Let's just cut straight to it: If there are that many people partying like rock stars on OPM (Other People's Money), you have a crime wave.
by rifek on Thu Jul 14th, 2011 at 09:21:14 AM EST
 A good time to re-visit Migeru's post,

  here: http://www.eurotrib.com/story/2011/5/9/12132/04443#92

  Follow the link to The Appalled Economists' site.

   See their manifesto with its point-by-point recommendations on the mess and how to get out of it.  English version available (as he noted).

 

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Sun Jul 17th, 2011 at 08:26:33 AM EST
And these are consequencies...

http://www.unemployed-friends2.org/t3134p15-has-anyone-lost-all-support-of-people-and-do-you-isolate #37172

htiek123 wrote:I isolate, I have stayed in my house since 9/2008. I have gained over 75lbs. I have not seen some of my neighbors in over 3 years. They all think I have moved. I have about 1 months living expenses left before I must go to a shelter, I turned 50 in June. it's hard not to think of ending it everyday.......

Maybe you could go for walks early in the am, when it's quiet, and the air is cooler. Just a change of scenery & some fresh air and the feeling that you're doing "something" minus the horror of neighbor-encounters might give you a second wind. I'm glad you found us. I've gained weight too. Stress & sedentary hiding will do that, without overeating. On the other hand, our situations have made us very food insecure, and that doesn't help (foods we can afford tend to be bad for us, too). I don't know what's ahead either. Fight back while you can- tweet!

My friend from LA is leaving USA for Serbia in August...Suddenly unemployed (exhausted all government help/dol) , 56 years old, after spending last 23 years in USA ( working hard all the time), he is going back to Belgrade with some savings ( of what he can live there longer and better then in LA , having the possibility to live in his deceased parents apartment together with his sister).There he'll need to wait until 62/65 to get USA aged pension (if there will be any by that time . His marriage to an American women disintegrated after 22 years, his daughters still studying Uni took mothers side and are not very warm towards father that can't provide them with lifestyle they have been used to...Sad story...
How many million sad stories in USA and who cares...


Science without religion is lame, religion without science is blind...Albert Einstein

by vbo on Tue Jul 19th, 2011 at 12:09:39 AM EST
As Luna Lovegood said to Harry Potter, "Well if I were You-Know-Who, I'd want you to feel cut off from everyone else, because if it's just you alone, you're not as much of a threat."
by rifek on Wed Jul 20th, 2011 at 10:51:36 AM EST
[ Parent ]
I have found this and I like it, so I'll share:

"Our society is run by insane people for insane objectives. I think we're being run by maniacs for maniacal ends and I think I'm liable to be put away as insane for expressing that. That's what's insane about it." ~ John Lennon



Science without religion is lame, religion without science is blind...Albert Einstein
by vbo on Tue Jul 19th, 2011 at 12:20:45 AM EST


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