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A nation of deadbeats…but swindlers, con artists and crooks comes closer to the mark.

9:33 am in Uncategorized by cmaukonen

I came across the following video after searching a bit after reading this interview in Mother Jones.

“Deadbeat Nation” sounds like a great name for book. And as it turns out, it is a book. In A Nation of Deadbeats: An Uncommon History of America’s Financial Disasters, William & Mary professor Scott Reynolds Nelson argues that American history consists of a never-ending string of defaults at the individual, municipal, and state levels. Credit bubbles alternately finance transformative policies like westward expansion and infrastructure improvements, and then remake the nation’s political landscape when they invariably pop. Economist Tyler Cowen, in a New York Times Magazinereview last July, needed just one sentence to summarize the book: “We have hardly ever had a well-functioning banking system.”

What this means is that from the very beginning the finances of this country were based on fraud. Watch the video here.

In this he shows how nearly all the financial disasters and crisis can be traced back to bank and financier investments that were dodgy at best and fraudulent at worst. What Nelson I think does not realize is that in this he also shows how capitalism itself is at it’s very core is based on fraud, swindling and corruption. And at the head are the bankers.

I have watched a number of these types of videos and read a number of articles and online books of this sort by various economic and financial historians etc. all with the stated or unstated premiss that there is nothing wrong with capitalism providing it is done honestly.

Then each one without exception goes on to show unequivocally that there is no such thing as honest capitalism.  There never has been and probably never will be.

Legislating for the unthinkable…..

9:17 am in Uncategorized by cmaukonen

Detroit

Flicker Creative Commons
With the economy looking worse and worse. Both here and in Europe.   There has been more than a little talk of another financial disaster in the making.

Congress seems unlikely to take any actions to prevent it. In fact at least one publication has some details on this and why it is so.

Not too long ago, it occurred to Nelson Polsby, a notable scholar of Congress, to explore why the institution had become so polarized. The University of California (Berkeley) professor, now deceased, took the long walk back through American political history, and he ended on the doorstep of Willis Haviland Carrier.

In 1902, freshly graduated from Cornell University, Carrier was in a fog-cloaked station, waiting for a train. The gloom spurred him to contemplate the properties of temperature and moisture. By the time his train arrived, the young engineer had invented air conditioning. The physics of cooling had been understood since ancient Romans piped water through their villa walls, but it was Carrier’s 1906 patent for an “Apparatus for Treating Air” that led to today’s near-ubiquitous climate-control systems, earning him the sobriquet, “the Father of Cool.”

Carrier’s invention, Polsby concluded, is the footing for the nation’s current political polarization. By stoking the historic migration of Republican voters from Rust Belt cities to Sun Belt refuges such as Scottsdale, Ariz., and St. Petersburg, Fla., “air conditioning caused the population of the Southern states to change,” he wrote in his 2002 essay, How Congress Evolves. “That change in the pop­ulation of the South changed the political parties of the South,” he argued, and ultimately transformed Congress “into an arena of sharp partisanship.”

Indeed. And not just the south but the north and central and western states as well.   The tech boom changed to composition of California and the northwest.  And he goes on to show how congress (and I would add the country as a whole) is becoming more divided.

Believe it or not, it wasn’t always so. In 1982, when National Journal published its first set of voting ratings, 58 senators—a majority of the 100-member chamber—compiled records that fell between the most conservative Democrat (Edward Zorinsky of Nebraska) and the most liberal Republican (Lowell Weicker of Connecticut). Now it’s zero, zip, nada.

The House in 1982 was chock-full of “Boll Weevils” (conservative Democrats) and “Gypsy Moths” (liberal Republicans). That year’s National Journal ratings found 344 House members whose voting records fell between the most liberal Republican and the most conservative Democrat. Today, the number is 16, up slightly from the seven in that category in 2010 but virtually the same as the 15 “betweeners” in both 2008 and 2009. As recently as 2006, when moderate Republican Jim Leach represented a House district in Iowa, the number was 42. The NJ ratings reflect an ideological sorting of Americans into communities that suit their political tastes: the average scores of members of Congress closely tracked how their districts voted in the 2008 presidential election.

Continued polarization could lead to awful consequences. “The country is in dire straits, and … we are tied down like Gulliver by the Lilliputians .… We can’t do squat,” said Keith Poole, an expert on political polarization from the University of Georgia. “The tea party whack jobs are right: We’re bankrupt.… But we’re just drifting, drifting toward the falls.”

It has been postulated by Dmitri Orlov and others that another major crisis may result in the breakup of the United States into several distinct autonomous regions. Link Link

Well at least one State now is working on passing legislation to contend with the very real possibility of having to go it alone. Wyoming is about to pass a bill just for this contingency.

State representatives on Friday advanced legislation to launch a study into what Wyoming should do in the event of a complete economic or political collapse in the United States.

House Bill 85 passed on first reading by a voice vote. It would create a state-run government continuity task force, which would study and prepare Wyoming for potential catastrophes, from disruptions in food and energy supplies to a complete meltdown of the federal government.

The task force would look at the feasibility of

Wyoming issuing its own alternative currency, if needed. And House members approved an amendment Friday by state Rep. Kermit Brown, R-Laramie, to have the task force also examine conditions under which Wyoming would need to implement its own military draft, raise a standing army, and acquire strike aircraft and an aircraft carrier.

It wasn’t that long ago when such a thing seemed impossible and insane.   I myself wrote a blog on this very subject a few years ago and had it panned. Now to me it not only seems reasonable but maybe even necessary to consider.  And I wonder how many other states are taking – or will take in the near future – a serious look at this as well.

The BoA Perfect Storm. Where the CEOs and Counterparties get the life boats and the depositors drown.

6:04 pm in Uncategorized by cmaukonen

David Dayen did a good blog on how BoA moved it’s risky derivatives to a subsidiary with deposits insured by the FDIC. Now here is a break down of the how and why of it by Bill Back of the S&L investigations fame. I am going to jump around here a bit and give you first some background info on BoA. It’s not your grandfathers BoA.

B of A is really “Nations Bank” (formerly named NCNB).  When Nations Bank acquired B of A (the San Francisco based bank), the North Carolina management took complete control.  The North Carolina management decided that “Bank of America” was the better brand name, so it adopted that name.  The key point to understand is that Nations/NCNB was created through a large series of aggressive mergers…..

Now here is the nitty gritty of it all.

During this crisis, Ken Lewis went on a buying spree designed to allow him to brag that his was not simply bigger, but the biggest.  Bank of America’s holding company – BAC – became the acquirer of last resort.  Lewis began his war on BAC’s shareholders by ordering an artillery salvo on BAC’s own position.  What better way was there to destroy shareholder value than purchasing the most notorious lender in the world – Countrywide.  Countrywide was in the midst of a death spiral.  The FDIC would soon have been forced to pay an acquirer tens of billions of dollars to induce it to take on Countrywide’s nearly limitless contingent liabilities and toxic assets.  Even an FDIC-assisted acquisition would have been a grave mistake.  Acquiring thousands of Countrywide employees whose primary mission was to make fraudulent and toxic loans was an inelegant form of financial suicide.  It also revealed the negligible value Lewis placed on ethics and reputation.

But Lewis did not wait to acquire Countrywide with FDIC assistance.  He feared that a rival would acquire it first and win the CEO bragging contest about who had the biggest, baddest bank.  His acquisition of Countrywide destroyed hundreds of billions of dollars of shareholder value and led to massive foreclosure fraud by what were now B of A employees.

What this all means is that BoA’s problems began with it’s acquisition of Countrywide whose financial deals or mis-dealings and fraud were much worse than what anyone was lead to believe at the time. And that the acquisition was driven by ego as much as greed.

But there are two truly scary parts of the story of B of A’s acquisition of Countrywide that have received far too little attention.  B of A claims that it conducted extensive due diligence before acquiring Countrywide and discovered only minor problems.  If that claim is true, then B of A has been doomed for years regardless of whether it acquired Countrywide.  The proposed acquisition of Countrywide was huge and exceptionally controversial even within B of A.  Countrywide was notorious for its fraudulent loans. There were numerous lawsuits and former employees explaining how these frauds worked. [emphasis mine]

………..

The acquisition of Countrywide did not have to be consummated exceptionally quickly.  Indeed, the deal had an “out” that allowed B of A to back out of the deal if conditions changed in an adverse manner (which they obviously did).  If B of A employees conducted extensive due diligence of Countrywide and could not discover its obvious, endemic frauds, abuses, and subverted systems then they are incompetent.  Indeed, that word is too bloodless a term to describe how worthless the due diligence team would have had to have been.  Given the many acquisitions the due diligence team vetted, B of A would have been doomed because it would have routinely been taken to the cleaners in those earlier deals.

That scenario, the one B of A presents, is not credible.  It is far more likely that B of A’s senior management made it clear to the head of the due diligence review that the deal was going to be done and that his or her report should support that conclusion.  This alternative explanation fits well with B of A’s actual decision-making.  Countrywide’s (and B of A’s) reported financial condition fell sharply after the deal was signed.  Lewis certainly knew that B of A’s actual financial condition was much worse than its reported financial condition and had every reason to believe that this difference would be even worse at Countrywide given its reputation for making fraudulent loans.  B of A could have exercised its option to withdraw from the deal and saved vast amounts of money.  Lewis, however, refused to do so.  CEOs do not care only about money.  Ego is a powerful driver of conduct, and CEOs can be obsessed with status, hierarchy, and power.  Of course, Lewis knew he could walk away wealthy after becoming a engine of mass destruction of B of A shareholder value, so he could indulge his ego in a manner common to adolescent males.
In other words Lewis and the top management knew all along that they were getting crap but did it anyway for some big ego strokes. Now enter Merrill Lynch.
Merrill Lynch is the quintessential example of why it was common for the investment banks to hold in portfolio large amounts of collateralized debt obligations (CDOs).  Some observers have jumped to the naïve assumption that this indicates that the senior managers thought the CDOs were safe investments.  The “recipe” for an investor maximizing reported income differs only slightly from the recipe for lenders.

1. Grow rapidly by

2 .Holding poor quality assets that provide a premium nominal yield while

3. Employing extreme leverage, and

4. Providing only grossly inadequate allowances for future losses on the poor quality assets

Investment banks that followed this recipe (and most large U.S. investment banks did), were guaranteed to report record (albeit fictional) short-term income.  That income was certain to produce extreme compensation for the controlling officers.  The strategy was also certain to produce extensive losses in the longer term – unless the investment bank could sell its losing position to another entity that would then bear the loss.

The optimal means of committing this form of accounting control fraud was with the AAA-rated top tranche of CDOs.  Investment banks frequently purport to base compensation on risk-adjusted return.  If they really did so investment bankers would receive far less compensation.  The art, of course, is to vastly understate the risk one is taking and attribute short-term reported gains to the officer’s brilliance in achieving supra-normal returns that are not attributable to increased risk (“alpha”).  Some of the authors of Guaranteed to Fail call this process manufacturing “fake alpha.

…………….

Merrill Lynch was known for the particularly large CDO positions it retained in portfolio.  These CDO positions doomed Merrill Lynch.  B of A knew that Merrill Lynch had tremendous losses in its derivatives positions when it chose to acquire Merrill Lynch.

Given this context, only the Fed, and BAC (Bank of America’s holding company), could favor the derivatives deal

Lewis and his successor, Brian Moynihan, have destroyed nearly one-half trillion dollars in BAC shareholder value.  (See my prior post on the “Divine Right of Bank Profits…”)  BAC continues to deteriorate and the credit rating agencies have been downgrading it because of its bad assets, particularly its derivatives.  BAC’s answer is to “transfer” the bad derivatives to the insured bank – transforming (ala Ireland) a private debt into a public debt.

So what we have here is a case where BoA knows that sooner or later they will go belly up and so they are making damn sure the investors will get the life boats first and damn the depositors.   With BoA in this situation, it kind of makes you wonder about the others. Like the saying goes. “Like picking up a hay stack and having three needles drop at your feet, it’s a pretty safe bet that the thing is stiff with needles.”

Isn’t it any wonder that these banks are going ape shit over people closing their accounts ? The same accounts they are planning to use to cover their asses.