Banks Bundled Bad Debt, Bet Against It and Won

[nismaratwork]

maybe it is the wrong term, but what i mean by it is simply the amount of money flowing through the system. which in this case is $1.8 quadrillion/year. but how much of that is just the same money changing hands over and over?

I have no idea, I wasn't being Socratic... I'm baffled.

 

[OmCheeto]

maybe it is the wrong term, but what i mean by it is simply the amount of money flowing through the system. which in this case is $1.8 quadrillion/year. but how much of that is just the same money changing hands over and over?

If that's true, then that comes out to about $7.2 trillion per day.

Odd.

http://en.wikipedia.org/wiki/New_York_Stock_Exchange"
The New York Stock Exchange (NYSE) is a stock exchange located at 11 Wall Street in lower Manhattan, New York City, USA. It is the world's largest stock exchange by market capitalization of its listed companies at US$13.39 trillion as of Dec 2010. Average daily trading value was approximately US$153 billion in 2008.

That means in less than two days, the equivalent of the entire market cap of the NYSE is being traded.

I wonder if this is where DeFazio got the idea for his http://en.wikipedia.org/wiki/Let_Wall_Street_Pay_for_the_Restoration_of_Main_Street_Bill" .
hmmm...
$1.8 quadrillion x 0.0025 = $4.5 trillion dollars a year.
2011 Budget of the United States federal government = $3.82 trillion
giving us a surplus of $680 billion a year, and no more federal income tax!

gads I love not knowing what any of these numbers really mean.

 

[Astronuc]

Sometimes I wish people wouldn't point this stuff out to me.

How about this - http://www.chainofblame.com/

 

[nismaratwork]

How about this - http://www.chainofblame.com/

Now that's just mean to do...

 

[talk2glenn]

I have no idea, I wasn't being Socratic... I'm baffled.

It really shouldn't be so surprising. People get preoccupied with GDP figures, but GDP is a flow, not a stock. The actual value of the United States is (quite obviously) substantially more than GDP. These are approximates, so bear with me.

The asset value of the US is ~$160 trillion dollars, and the liability value is approximately $100 trillion. These assets and liabilities are transitory - people are constantly buying and selling them. Today's asset is tomorrows liability, and vice versa. Whenever these transactions occur, a bookkeeper needs to make the appropriate accounting record. That's DTCC. Given the numbers above, and given transaction and monetary velocities (variable, but let's say about averages about 20x over time), your quickly talking about quadrillions of dollars worth of transactions. Factor in the rest of the world, and all of a sudden its real money.

And this isn't even entirely accurate; there is a great deal of value that is not accurately accounted for in the asset and liability categories, like off-the-books value (handymen, housewives, etcetera), and the exotics like derivatives (technically this is because derivatives have no value on their own; they trade based on the expected value of the underlying asset - but they're marketable). Point here is twofold: economists have a hard time defining "wealth" and tracking it reliably, and the United States is tremendously wealthy (GDP numbers fail to capture the scale of it appropriately).

 

[edward]

How about this - http://www.chainofblame.com/

Great link Astronuc. I doubt if one in ten people really knows how this all went down.

As for former Country Wide loans (Now Owned by BOA) the rate of foreclosures has increased during the last year. The foreclosure process is handled by a former division of Country Wide.

Just to get an idea of how bad the foreclosure rate is go to:

Http://www.recontrust.com[/URL]

The website lists the numbers addresses and auction dates by state and county. And these are all just former Country Wide mortgages.

The numbers are staggering. I have followed a number of local foreclosures though the County Assessors Office and the County Recorders Office.

This gives me the current owner of the properties after the foreclosure auctions. 99% of the homes are now owned by Freddie Mac? It looks like BOA got a big break from the government.

The loans are being removed from BOA's books when they are bought by Freddie Mac.

The stats for current forclosure action on former Country Wide mortages in Arizona:

County / Number of Properties
Pinal 1490
Yuma 207
Coconino 165
Gila 77
Mohave 598
Navajo 122
Yavapai 504
Apache 19
Cochise 114
Pima 1885
Graham 21
Santa Cruz 72
La Paz 16
Maricopa 13256

 

[edward]

maybe it is the wrong term, but what i mean by it is simply the amount of money flowing through the system. which in this case is $1.8 quadrillion/year. but how much of that is just the same money changing hands over and over?

Stocks are being churned at an astonishing rate. I have a nephew who works for a Market Builder They buy millions of shares of stock which drives up the price and then they dump them and take the profit.

They never hold a stock for more than three days.

The larger investment banks, such as Goldman Sachs, are doing it at an even faster rate using super computers. They can buy sell or trade thousands of shares per second.

Google: Quants The Alchemists of Wall Street.

Edit.

http://www.midasoracle.org/2010/09/24/quants-the-alchemists-of-wall-street/

 

[nismaratwork]

It really shouldn't be so surprising. People get preoccupied with GDP figures, but GDP is a flow, not a stock. The actual value of the United States is (quite obviously) substantially more than GDP. These are approximates, so bear with me.

The asset value of the US is ~$160 trillion dollars, and the liability value is approximately $100 trillion. These assets and liabilities are transitory - people are constantly buying and selling them. Today's asset is tomorrows liability, and vice versa. Whenever these transactions occur, a bookkeeper needs to make the appropriate accounting record. That's DTCC. Given the numbers above, and given transaction and monetary velocities (variable, but let's say about averages about 20x over time), your quickly talking about quadrillions of dollars worth of transactions. Factor in the rest of the world, and all of a sudden its real money.

And this isn't even entirely accurate; there is a great deal of value that is not accurately accounted for in the asset and liability categories, like off-the-books value (handymen, housewives, etcetera), and the exotics like derivatives (technically this is because derivatives have no value on their own; they trade based on the expected value of the underlying asset - but they're marketable). Point here is twofold: economists have a hard time defining "wealth" and tracking it reliably, and the United States is tremendously wealthy (GDP numbers fail to capture the scale of it appropriately).

OK, so this is like the flux of all assets through the system at any given moment?

 

[OmCheeto]

Now that's just mean to do...

I agree.

And that's why when shortly after I started reading that, I said to myself; "**** it all!", and went to the movies...

 

[chiro]

Great thread Astronuc, I've been waiting for a thread like this.

I find it unbelievable that these banks haven't been busted. Its pure fraud, that's all it is.

If a took out an insurance policy on a house and I torched it till nothing was left and collected compensation and the facts were found out, I would go to jail. In fact any normal person who did this would go to jail.

But here we have major financial entities doing basically the same thing and what happens? Nothing, nada, zip.

And then as a result what happens? The US taxpayers bail them out! I don't know about you guys in the states, but if the government did that to me I would be pretty pissed off.

In a so called "capitalist free market", these guys would have gone under and people would have gotten over it and started again.

So after everyone losing their wealth and everyone losing confidence in the system, not only is the public wealth's wiped out, but they then got a cheque from the government saying "here's the bill for the banks!". So they took your wealth and now their billing you for the bailout!

Personally I think the legality of certain "insurance products" has to be reviewed and some of them need to be banned. Back in the day when a farmer hedged his bet against a poor crop due to the drought, it was done so that he and his family wouldn't go hungry.

Now there are such bastardized versions of insurance products such that people can benefit on things that they don't even own!

Also the algorithmic trading that goes on should be banned. It provides no use to society whatsoever. Programming computers to make massive trades that move the markets in deterministic ways is in my view a form of "antitrust gone wild", the market is being dictated by thousands of computers.

The banking system has way too much power. Power corrupts. Absolute power corrupts absolutely.

 

[WhoWee]

Stocks are being churned at an astonishing rate. I have a nephew who works for a Market Builder They buy millions of shares of stock which drives up the price and then they dump them and take the profit.

They never hold a stock for more than three days.

The larger investment banks, such as Goldman Sachs, are doing it at an even faster rate using super computers. They can buy sell or trade thousands of shares per second.

Google: Quants The Alchemists of Wall Street.

Edit.

http://www.midasoracle.org/2010/09/24/quants-the-alchemists-of-wall-street/

I posted (a few threads and a apparently few years ago) that the market needs a correction (that we still haven't seen). IMO - the Dow belongs in the 5,000 to 8,000 range, not the 10,000 to 13,000 range - again IMO.

 

[WhoWee]

Cash is king! IMO - if you have cash - look for distressed properties and OFFER 2002 values - don't exceed 2003 prices.

http://www.zillow.com/local-info/#m...t=14&r=102001%2C394913%2C394806%2C394463&el=0

 

[OmCheeto]

I posted (a few threads and a apparently few years ago) that the market needs a correction (that we still haven't seen). IMO - the Dow belongs in the 5,000 to 8,000 range, not the 10,000 to 13,000 range - again IMO.

(bolding mine, of course)



What do you call that thing we saw in March of 2009, where it dropped to around 7000? Are you saying we should have stayed there?

Invest in Owens Corning. Very Boring. They make fiberglass. Useful stuff. Current p/e is 5.15. This after the stock jumped 17.27% in the last 30 days.

Buy low, sell high. Do not invest in banks that are [a whole ****load of expletives deleted], regardless of their dividends.

Remember South Africa! http://en.wikipedia.org/wiki/Disinvestment_from_South_Africa" from tyrannical [more expletives deleted]!

And please, to anyone who might be listening, for the sake of your children's children's children, invest in the future.



ps. every time I or my stock club friends make a recommendation on a stock, the stock usually drops 20%. ie. wait for it... wait for it...

 

[talk2glenn]

OK, so this is like the flux of all assets through the system at any given moment?

Sure, but I believe flux is a physical term; the language in economics is velocity.

But, yes, the $1.86 quadrillion number is a function of asset value times asset velocity. It's a rate per year (a flow), while the value of the underlying assets is the stock of interest.

 

[nismaratwork]

Sure, but I believe flux is a physical term; the language in economics is velocity.

But, yes, the $1.86 quadrillion number is a function of asset value times asset velocity. It's a rate per year (a flow), while the value of the underlying assets is the stock of interest.

Gotcha, thanks very much, because I have to say that seemed extreme otherwise. What you describe is what I mean by flux, but I'm glad to know the proper term... economics, not a strong suit of mine. Heck, I'd venture to say it's downright weak tea.

 

[WhoWee]

(bolding mine, of course)



What do you call that thing we saw in March of 2009, where it dropped to around 7000?

Incomplete? Inefficient? Less than adequate? Artificially supported from collapse by external forces?

The rapid rise in oil prices (Middle East events) - if sustained for more than 6 months - will force a true market correction - Dow will bottom at $5,000 and recover to under $8,000 with the components that existed in 2009 - IMO.

 

[nismaratwork]

Incomplete? Inefficient? Less than adequate? Artificially supported from collapse by external forces?

The rapid rise in oil prices (Middle East events) - if sustained for more than 6 months - will force a true market correction - Dow will bottom at $5,000 and recover to under $8,000 with the components that existed in 2009 - IMO.

Yeah... well that would be a new thing for the world... and we'd have a new Great Depression.

 

[WhoWee]

Yeah... well that would be a new thing for the world... and we'd have a new Great Depression.

Sometimes it's better to take the correction and re-build - unemployed for 2 years is bad - unemployed for a cumulative 5 out of 6 years is much worse.

I think it is much worse to prolong the inevitable for an additional 3 to 5 years (possibly longer?). If real estate had been allowed to collapse 2 years ago - the values MIGHT have recovered to the same as now - instead of dropping (further now).

I feel the same way about the stimulus. I honestly believe most everyone took a wait and see approach to the results. There are no majic bullets.

Do you know anyone that vacationed (or at least took a summer off) on unemployment benefits (because of the extensions) or decided they would rather undergo career re-training than take an undesireable job?

 

[nismaratwork]

Sometimes it's better to take the correction and re-build - unemployed for 2 years is bad - unemployed for a cumulative 5 out of 6 years is much worse.

I think it is much worse to prolong the inevitable for an additional 3 to 5 years (possibly longer?). If real estate had been allowed to collapse 2 years ago - the values MIGHT have recovered to the same as now - instead of dropping (further now).

I feel the same way about the stimulus. I honestly believe most everyone took a wait and see approach to the results. There are no majic bullets.

Do you know anyone that vacationed (or at least took a summer off) on unemployment benefits (because of the extensions) or decided they would rather undergo career re-training than take an undesireable job?

Sound reasoning, but I think that kind of global depression would lead to war, especially India and Pakistan.

 

[WhoWee]

Sound reasoning, but I think that kind of global depression would lead to war, especially India and Pakistan.

I really don't think a market correction of US real estate values and the stock markets would cause a global depression. It would clearly hurt investment value - but speculative trading always has risk. Anyone that invests based on asset value and dividend/returns would recover - as long as they don't panic and sell.

On the other hand - futures and derivatives are quite risky.

 

[nismaratwork]

I really don't think a market correction of US real estate values and the stock markets would cause a global depression. It would clearly hurt investment value - but speculative trading always has risk. Anyone that invests based on asset value and dividend/returns would recover - as long as they don't panic and sell.

On the other hand - futures and derivatives are quite risky.

...And now that Qaddafi has decided to try and bomb oil fields... the very fact that he's TRIED is going to have a profound effect.

I don't WhoWee... this is getting more than ugly; too much at once. This is how "bad things happen."

 

[WhoWee]

...And now that Qaddafi has decided to try and bomb oil fields... the very fact that he's TRIED is going to have a profound effect.

I don't WhoWee... this is getting more than ugly; too much at once. This is how "bad things happen."

Once again, keep an eye on Russia.

http://community.nasdaq.com/News/2011-02/putin-looking-to-do-deals-for-gazprom.aspx?storyid=58852

http://www.ynetnews.com/articles/0,7340,L-4033132,00.html

 

[nismaratwork]

Once again, keep an eye on Russia.

http://community.nasdaq.com/News/2011-02/putin-looking-to-do-deals-for-gazprom.aspx?storyid=58852

http://www.ynetnews.com/articles/0,7340,L-4033132,00.html

And this third time, for a change, I agree here. Russia HAS to be thinking that if the west and China are going to sit around holding our ***** they might as well annex 2% of the world's oil.

 

[edward]

I really don't think a market correction of US real estate values and the stock markets would cause a global depression. It would clearly hurt investment value - but speculative trading always has risk. Anyone that invests based on asset value and dividend/returns would recover - as long as they don't panic and sell.

On the other hand - futures and derivatives are quite risky.

The real estate values are still dropping and are actually below what could be called a market correction.

With so many foreclosures hitting the market it seems to be a self sustaining phenomena.

According to ZILLOW almost 70% of homes mortgages in phoenix are now underwater, with a 27% national average.

http://www.bizjournals.com/phoenix/morning_call/2011/02/zillow-70-percent-of-homes-underwater.html

 

[WhoWee]

The real estate values are still dropping and are actually below what could be called a market correction.

With so many foreclosures hitting the market it seems to be a self sustaining phenomena.

According to ZILLOW almost 70% of homes mortgages in phoenix are now underwater, with a 27% national average.

http://www.bizjournals.com/phoenix/morning_call/2011/02/zillow-70-percent-of-homes-underwater.html

I posted ZILLOW link top of this page - just insert location. The values have to bottom before the entire market can rebound.

 

[StevieTNZ]

Is there a book available that talks about the main points raised in this thread?

 

[WhoWee]

Is there a book available that talks about the main points raised in this thread?

I'm afraid our focus has wandered a bit - anything in particular?

 

[Amp1]

SteveTNZ,

check post #38 "Chain of Blame", Astronuc posted the link - I'm sure there are other books on the topic

 

[nismaratwork]

I'd add... if you want a look at fiscal and geographical folly: 'Cadillac Desert' is a great book. It doesn't touch on this exact issue, but I find it illuminates this kind of behaviour in general.

Oh... and I just got a Kindle, so if anyone has more books beyond Chain of Blame... list 'em. I have Kindling, now I need to make a fire... wait, that sounded creepy!

 

[russ_watters]

But the companies did illegal things, overseen by 'those people'.

bolding mine.

I agree that Raines should probably be in jail. That said, the article glosses over or ignores the legal actions taken against the people in that quote: Raines and three others settled a civil suit for a total of about $3 million -- they didn't get off completely scott free, not that that's anywhere near enough to cover the profits from the alleged fraud.

That's a big problem with a 5 year statue of limitations.

Agreed.

That same year [2006], AIG paid $1.6 billion after it was caught in a major accounting scandal that would indirectly lead to its collapse two years later, but no executives at the insurance giant were prosecuted.

Not true:

The case of five former executives, four from General reinsurance Corp. and one from American International Group Inc., who were sentenced to jail for a sham finite reinsurance transaction heads to an appeals court today.

Tom Carson, a spokesman in the Connecticut’s U.S. Attorney’s Office, said U.S. vs. Ronald Ferguson, et al, will be argued before the U.S. Court of Appeals for the Second Circuit in New York.

The executives were convicted after a six-week jury trial in 2008. They’ve all been free on bond while the appeal is pending, Carson said.

Ronald Ferguson, former Gen Re chief executive, was sentenced to two years in prison plus ordered to pay a $200,000 fine. Christian Milton, former AIG vice president of reinsurance, was sentenced to four years in jail and ordered to pay a $200,000 fine. Elizabeth Monrad, former Gen Re chief financial officer, was sentenced to 18 months in prison and ordered to pay a $250,000 fine. Christopher Garand, former Gen Re head of finite reinsurance operations in the United States, was sentenced to one year in prison and ordered to pay a $150,000 fine. Robert Graham, former assistant general counsel at Gen Re, was sentenced to one year in prison and ordered to pay a $100,000 fine.

The five executives were convicted on charges that included conspiracy, securities fraud, making false statements to the U.S. Securities and Exchange Commission and mail fraud.

http://www.programbusiness.com/news...rance-Transaction-Case-Heads-to-Appeals-Court

Again, the point isn't that no one went to jail, it's that 'no one high enough to suit my taste went to jail, so I'll just ignore the people who actually DID go to jail.'

That's not the only example of something similarly misleading/wrong. I didn't get very far in the article because it is a tough read, but on page 2, I found this:

In the late 1990s, the agency had an open-and-shut case against the Rite Aid drugstore chain, which was using diabolical accounting tricks to cook their books. But instead of moving swiftly to crack down on such scams, the SEC shoved the case into the "deal with it later" file. "The Philadelphia office literally did nothing with the case for a year," Turner recalls. "Very much like the New York office with Madoff." The Rite Aid case dragged on for years — and by the time it was finished, similar accounting fiascoes at Enron and WorldCom had exploded into a full-blown financial crisis.

Given the thesis of the article, you might conclude from this that "nobody went to jail", but actually, the top brass did go to jail:

Rite Aid also had a major accounting scandal that led to the departure (and subsequent jail time) of several top ranking executives, including the CEO, Martin Grass, son of company founder Alexander Grass. Former Rite Aid vice chairman Franklin C. Brown is serving a 10-year sentence in a medium-security facility at Butner Federal Correctional Complex in Raleigh, North Carolina.[10] After serving six years in prison Grass was released on Jan. 18 2010.

http://en.wikipedia.org/wiki/Rite_Aid#Company_troubles
The example actually argues against the article's point, but they present it in a misleading way - only actually lamenting that it took a long time to resolve - that implies it supports their point.

 

[russ_watters]

One of the reasons I asked is that I remembered an NPR piece from back in the early days when the spit was hitting the fan, that discussed this very issue of whether people might see jail-time for what went down, and the speculation was that yes there would probably be people going to jail, but that in general it would be very hard to make a criminal case against most of the people that we have a bad feeling about, and that it would take a pretty long time for any comprehensive investigation to come up with anything conclusive anyway, so odds are, no one's going to jail in the next couple years, and after that, it comes down to how much interest there remains in proceeding with expensive investigations and trials.

Yes.

 

[nismaratwork]

I'm a fan of justice, and even the occasional bloody revenge, but spending money to put people in jail who are already banned from trading seems like... a waste of money.

 

[russ_watters]

I find it unbelievable that these banks haven't been busted. Its pure fraud, that's all it is.

What banks are you referring to and what do you mean by "busted"? Besides the institutions that have been fined or bought-out, here's a list of roughly 400 banks that were taken over by the government in the past 3 years: http://www.fdic.gov/bank/individual/failed/banklist.html

But here we have major financial entities doing basically the same thing and what happens? Nothing, nada, zip.

I'll echo my previous point: hyperbole doesn't make for a convincing point here. It simply isn't true that "Nothing, nada, zip" happened.

 

[russ_watters]

I'm a fan of justice, and even the occasional bloody revenge, but spending money to put people in jail who are already banned from trading seems like... a waste of money.

Whether the actions are worth it depends on the goal of the action. In the Madoff case, there is a lot of money out there that can be recopued for a moderate effort so it is worthwhile to fight to recover it. On the flip-side, spending $10 million to get a rich guy into a minimum security prison for 4 years when he has no chance of ever committing the same crime again does seem like a pretty mediocre deal. Nevertheless, while I may be mostly arguing the other side, I have a pretty strong sense of justice and a bloodlust that would love to see more people jailed just on general principle.

My main point here actually isn't about the CEOs that aren't in jail, it's that I hate shoddy journalism and propaganda.

 

[nismaratwork]

Whether the actions are worth it depends on the goal of the action. In the Madoff case, there is a lot of money out there that can be recopued for a moderate effort so it is worthwhile to fight to recover it. On the flip-side, spending $10 million to get a rich guy into a minimum security prison for 4 years when he has no chance of ever committing the same crime again does seem like a pretty mediocre deal. Nevertheless, while I may be mostly arguing the other side, I have a pretty strong sense of justice and a bloodlust that would love to see more people jailed just on general principle.

My main point here actually isn't about the CEOs that aren't in jail, it's that I hate shoddy journalism and propaganda.

Well, I see no problem in simply letting the public at them... or maybe banishment from the country?

Anyway, the kind of justice I'd want would never occur (BlutRache) in the form of bloody revenge, so... forget it. Still, it would be a lot of fun to use Enhanced Interrogation to get money out of them! Classify them as economic terrorists...