Thursday, September 29, 2011

Guest Post: 3,000 TIMES LEVERAGE...HIDDEN - the single handed cause of the housing (price and overbuilding) bubbles and financial crisis...

This was an email sent to me by Chris McConnell of Fiduciary Forensics in which he gives his views on how the economy and financial system arrived at the point we find ourselves now.

Saturday, September 24, 2011

Hi Martin, Hi Mike,

Please disabuse your readers of anything else as THE root cause of the current economic and or financial crisis.

TBTF banks kept a massive secret from other market players, and regulators. In academic circles it’s called an “information advantage”

Joseph Stiglitz won a Nobel Prize for it in 2001.

"Market economies are characterized by a high degree of imperfections," Stiglitz said during a press conference held at Columbia. "Older models assumed perfect information, but even small degrees of information imperfections can have large economic consequences. Our models took into account asymmetries of information, which is another way of saying 'Some people know more than others.'

The following saying is not intended to be subtle, “if you want to play on the varsity team you work at Goldman or Morgan Stanley; underachievers take jobs at ratings agencies…(and the bankers know this - as they once competed with them in grad / business school)”

TBTF banks – step one was, due to rapidly declining profits from traditional revenues streams like commissions, M&A and investment banking changed their business model, as Morgan Stanley’s John Mack stated to Stanley Druckenmiller in 2003 “the agency business model is dead” from one of financial intermediation to non-intermediation: meaning proprietary trading - THE destination for Morgan Stanley and others:

Let’s call a spade a shovel because that’s what it is. I’ve determined that based on an end-to-end analysis of the housing and mortgage finance markets, spanning mortgage origination to securitization and distribution, that before 2008 a real, real estate market did not exist. As “market” is defined as a transaction among arms length, different and informed buyers and sellers.

TBTF banks, before 2008 created a hidden, secret “market” for MBS:

  1. As stated above TBTF banks changed from financial intermediaries to non-intermediaries via their prop trading units into speculators;
  2. Hiding (the FDIC used the word concealed) trillions of MBS off balance sheet;
  3. Allowing their own internal prop traders to value #1 (legal under the SEC’s 2004 CSE program) despite the fact few if any, of #1 had EVER seen the light of any “market” trade as one between arms-length parties;
  4. Why? To maximize SAME prop traders’, managers’ and CEOs’ cash bonus checks;
  5. All based on the assumption (almost a religious belief) that national median home prices had NEVER gone down – true, as you may recall;
  6. But the past was under a 60 times house finance leverage regime (20% down payments, verified job, income assets and 12 times bank balance sheet leverage)
  7. TBTF Banks’ single handedly created 3,000 times leverage on house prices, the underlying collateral of any MBS and or further derivative
  8. 3,000 times leverage is the product of Zero down loans; 100 times leverage for the borrower and 30 or more times TBTF bank on and off balance sheet leverage;
  9. Mr Bass testified to the FCIC in January 2010 that TBTF banks’ leverage at the end of 2007 – yes end of 2007 (see page 13 of pdf attached) – almost all over 30 times, Citigroup at 68 times leverage; meant an adverse swing (in the value of the underlying collateral) of 1.5% wiped them out – insolvent.
  10. And we know that leverage worsened IN 2008…and we know from Goldman’s collateral call dispute with AIG (attached) that MBS marks (not even CDO’s) were south of 90…
  11. Martin, it’s not about Fannie or Freddie either; they were downstream of information from the TBTF banks – again TBTF banks held trillions of MBS, in secret OFF balance sheet; I’m not saying it was necessarily illegal – but it was fraudulent; as it was knowing, willful and intentional. It only went on as long as it did – BECAUSE they were hidden.

Along the way EVERY mortgage borrower was defrauded due to the concealment of #1 and every other party connected to mortgage borrowers (including real estate agents, appraisers, mortgage brokers, some originators, home builders, developers, cities, states, and I believe the ratings agencies.)

[Ask your neighbors, mortgage borrowers and their agents, appraisers, title insures what leverage means; ask them if they know that putting 20% down is 5 times leverage and ZERO down is 100 times leverage. It’s my belief that the overwhelming, if not nearly all mortgage borrowers do not understand their own leverage let alone how banks leverage their balance sheets. This points to the root information (really education) advantage and TBTF banks knew who they were dealing with – all along.]

Who knew what and when did they know it?

Watergate, and now at certain if not all TBTF banks.

There’s more but that’s probably enough for now.

Again – Before 2008, a real, Real Estate market did not exist; lather, rinse, repeat…

Please join me in reporting the REAL indispensable reason; it’s not that difficult; in fact it’s obvious given the Fed’s direct and indirect support; bailouts, QE trifecta now amounting to nearly $20T. Is there perhaps a small connection to the fact that from 2001 to 2008 $17 Trillion (not a typo) of MBS were issued? I’m not even counting the hundreds billions or trillions of CDOs and knock on derivatives

If you want further evidence that TBTF banks hoodwinked even from the Federal Reserve chairman, world’s chief banking regulator – see link:

“One year, One Trillion Dollars – the education of Ben Bernanke 2007 to 2008…”



Ps: Martin, you’re not dreaming – we just continue to enable it and allow it to happen; and Mike, no it’s not the Roman empire; correct analysis and resulting information will trump all else; sunlight (the dawn of information) disinfects all markets; and it’s always darkest before the dawn regarding dream, nightmare feelings.

Pps: 3,000 times leverage is an estimate as not all mortgages were zero down; just several million too many; not to mention “every app was approved” underwriting. But we do know that 60 times leverage (on house price) was the norm for decades; also called safety and soundness; and we also know that TBTF banks’ leverage, assuming their year end 2007 marks were accurate, when the Goldman AIG dispute timeline suggests otherwise, are understated, correct understated. Again, the pressing need for CASH infusions from the Fed, UST in 2008/9, and kinder, gentler accounting treatment courtesy of SEC/FASB.

Chris McConnell, FiduciaryForensics

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  1. If you know anything about math you would know that 0% down is not 100 times leverage, Leverage is the ratio of money you put up over the amount Borrowed. Zero over any amount is infinite leverage . It might also be called 100% leverage.

    Your point remains valid.

  2. Thanks for the feedback and the math lesson.