Insane Levels of Leverage by the Too Big to Fail Banks – Not Deadbeat Borrowers – Caused the Financial Crisis

The Cause of the Financial Crisis: Fraudulent Creation of 3,000 Times Leverage On House Prices by the Big Banks

We’ve repeatedly noted that fraud by the big banks – more than anything done by the little guy – caused the financial crisis.

And we’ve repeatedly noted that excessive leverage helped cause the Great Depression and the current crisis.

Reader McFid – who has been a breach of fiduciary duty expert since 2003 – sent me the following article (edited slightly) which provides a new angle on both themes.

This article disabuses the notion that “deadbeat borrowers” caused the financial crisis. And offers an answer to the question that still lurks in the mind of every American; whether black, white, native American, asian or Hispanic; whether educated or not; whether English, Spanish, or Mandarin speaking.

Taking a big step back, and looking at it like a business process: “How could so many Americans ALL have made the same ill-advised mortgage borrowing decisions?” The answer lies in what did they ALL have in common…

It was all about leverageWhat is leverage?

Leverage is a way to control more of something when you can’t pay for it in full. We do it all the time; when we buy a car — except few of us actually buy the car, we finance it or lease it. We also do it when we buy a house — except almost no one pays cash for a house, we finance the purchase with a loan; it’s secured by a mortgage on the property.

Example of 5 times leverage:

When we buy a house and put 20% down, we buy a house worth 5 times as much as the down payment. If we put $100 thousand down we can buy a house worth $500 thousand. $500 thousand divided by the $100 thousand we put down equals 5 times leverage.

100 times leverage:

By the same calculation ZERO down mortgages were suffice it to say, 100 times leverage, it’s actually more but that’s a discussion for later. Repeat after me, no money down mortgages equal 100 times leverage.

***

Who controlled and approved EVERY leverage decision?

Leverage Approval #1 by:

TBTF Banks (ultimately) approved every one of these loans and bundled thousands of others like them initially into mortgage backed securities (MBS).

Leverage Approval #2 by: [the key, little known fact]

In the past, TBTF Banks used to sell them off (remember that word) to investors like mutual funds, insurance companies and pension plans. In the 2000′s TBTF banks issued almost $17 Trillion of MBS, but did not sell all of them OFF to 3rd parties. They held massive amounts of them to turbo-juice their bonus checks in a 2nd set of books (legally) in OFF balance sheet, special purpose entities. As a refresher Enron did the same type of thing. In the decades, make that for over 60 years before the 2000′s TBTF banks’ leverage was around 12 times; however when they concealed trillions worth of MBS — their leverage increased to over 30 times. Remember 5 times leverage? It was based on how much the house was worth right? And when TBTF banks add more leverage on top of the borrower’s leverage we don’t just add it — we ______? You guessed it — we multiply it.

3,000 times leverage on house prices:

100 times leverage on the borrowers side times 30 times leverage on the TBTF banks’ side is 3,000 times leverage ON house prices.

Lather, rinse and repeat — 100 times 30 equals 3,000 times leverage. Lather, rinse and repeat.

100 times 30 equals 3,000 times leverage.

Remember what I first told you about leverage?

Leverage lets you (or TBTF bank) control something that you can’t fully pay for. Well the TBTF banks’ way of financing them in the Asset Backed Commercial Paper market began to dry up in August 2008, so they couldn’t pay for these assets. This is the direct cause (but not the root) for the Fed and US Treasury to (have to) step in and pay CASH for them in the bailouts of 2008, and again in 2009, and again in 2010 and yet again 2011 via the Fed’s QE trifecta to the tune of over $20 Trillion dollars.

The interactive portion is about to begin:

Is it any surprise that the assets backing the commercial paper were ________? You may have guessed it — MBS.

Is it any surprise that the Fed created a new category to track ABCP in_______? You would be correct if you guessed 2006; just two swift months after Ben Bernanke was appointed chairman of the Federal Reserve by President Bush.

Is it just a random coincidence that almost $17 Trillion of Mortgage Securitieswere created by TBTF banks from 2001 to 2008?

What was that word I asked you to remember?

Oh, right it was OFF.

When TBTF banks’ CEOs, executives or prop traders got their year end bonus check did we hear reports that anyone said it was OFF (or that it was too much)? Nope.

***

The top 12 reasons + oneTBTF banks, before 2008 created a hidden, secret “market” for MBS:

1.As stated above TBTF banks changed from financial intermediaries into speculators via their proprietary (for the house only) trading desks;

2.Hiding (the FDIC used the word “concealed”) trillions of MBS off balance sheet;

3.Allowing their own internal prop traders to value #2 (legal under the SEC’s 2004 Consolidated Supervised Entity (CSE) program) despite the fact few if any, of #2 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, prudently underwritten 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, CDO, etc.;

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) shows almost all TBTF Banks were over 30 times, Citigroup at 68 times leverage; meant an adverse swing (in the value of the underlying collateral or obligations) of as little as 1.5% wiped them out completely — insolvent;

10.And we know that leverage worsened in 2008…and we know from Goldman Sach’s 2007 to 2008 collateral call dispute with AIG that MBS valuation marks (not even CDO’s) were south of 90;

11.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 fraud upon the other side to the mortgage — the borrowers. And it only went on as long as it did — BECAUSE they were hidden;

12.And we know it’s not about CRA as home ownership peaked in 2004 nor can we blame it on the variant of “homeownership for all” as just a few too many houses were not primary residences but 2nd, 3rd, 4th and 5th homes and condos — each time the loan was approved (ultimately) by TBTF banks;

13.Last, 3,000 times leverage on home prices represents a 50 fold increase over the 60 times historical norm; more importantly shows that TBTF Banks’ violated requirements of their banking charters; i.e. to operate according to “safety and soundness”.

[TBTF Banks on LSD indeed; massive amounts of Leverage, Swaps and Derivatives.]

Federal judge accuses SEC of misleading court

A federal judge who has accused the Securities and Exchange Commission of negotiating weak settlements in Wall Street cases on Thursday accused the agency of misleading a federal appeals court.

U.S. District Court Judge Jed S. Rakoff said the SEC also withheld from him important information that he needed to do his job.

Rakoff spelled out his allegations in an order that he said was intended to inform the appeals court and prevent anything similar from happening in the future.

Meanwhile, the SEC took the dramatic step of asking the U.S. Court of Appeals for the 2nd Circuit to overrule a recent Rakoff decision by issuing a special writ generally reserved for cases in which a judge has grossly overstepped his bounds. Called a writ of mandamus, such a direct and personal challenge to a judge is far from a routine gambit.

The judge and the SEC are locked in an extraordinary battle over how the government should police financial fraud, and just when it seemed that the conflict could not get more contentious, Thursday’s development added a dimension.

Rakoff, who presides over major Wall Street cases from his bench in Manhattan, has been pushing the SEC to stop negotiating settlements in which firms accused of securities fraud neither admit nor deny wrongdoing. In a recent case involving a Citigroup mortgage deal in which investors allegedly lost more than $700 million, he rejected a settlement under which Citigroup would pay $285 million, saying it was “neither fair, nor reasonable, nor adequate, nor in the public interest.”

Companies can look upon such settlements as “a cost of doing business,” he wrote.

The SEC says that instead of admitting wrongdoing, defendants would fight the agency all the way to trial, tying up resources that regulators need to investigate other cases. The SEC has asked an appeals court to throw out Rakoff’s ruling, and on Tuesday it filed an “emergency” motion asking the appeals court to freeze Rakoff’s hand in the Citigroup case while the appeal is pending.

In his order Thursday, Rakoff accused the SEC of misleading the appeals court and leaving him in the dark when it made its emergency request.

The SEC told the appeals court that Rakoff had given Citigroup until Jan. 3 to answer or move to dismiss the SEC’s complaint. If the appeals court did not intervene, the SEC said, the settlement could be torpedoed and the agency could be irreparably harmed because Citigroup could be prompted to deny the charges.

“This statement would seem to have been materially misleading in at least four respects,” Rakoff wrote Thursday.

First, Rakoff wrote, a motion by Citigroup to dismiss the case would focus on legal issues and would not involve an admission or denial of the allegations.

“Second, as a factual matter, the SEC was either already aware that Citigroup was planning to move to dismiss rather than to answer . . . or could have readily found this out by calling counsel for Citigroup,” Rakoff wrote.

Third, Rakoff said, in his court, neither the SEC nor Citigroup had argued that the Jan. 3 deadline was significant. And, fourth, Rakoff said, the SEC “was under a professional obligation to bring to the attention of the Court of Appeals” a Supreme Court ruling that undercut its arguments.

The SEC told the appeals court that it had asked Rakoff to put the case on hold but had not gotten an answer from the judge. Rakoff complained that the SEC knew his opinion was not due before Dec. 30, and he wrote that he spent the Christmas holiday working on it.

The judge said the SEC and Citigroup called him Monday afternoon to discuss Citigroup’s planned motion to dismiss, and during that conversation never mentioned that the SEC had asked the appeals court for the emergency stay hours earlier.

According to Rakoff’s statement on Thursday, he missed his chance to make his own views known to the appeals court before it granted the SEC a temporary stay late Tuesday. He also issued the opinion he had spent the holiday preparing “totally unaware of any of the filings in the Court of Appeals.”

By failing to put him on notice about the emergency request, Rakoff wrote, the SEC and Citigroup “held back from this Court material information it needed to do its job.”

In a statement, SEC spokesman John Nester said the agency “will respond as appropriate in the proceedings before the Court of Appeals.”

JP Morgan Just Told The MF Global Clients' Lawyer To Close His Bank Account

James Koutoulas, a co-founder of the Commodity Customer Coalition—which represents the interests of over 8,000 MF Global customers trying to be made whole in the wake of the brokerage's bankruptcy, has recently spearheaded a movement to boycott JP Morgan and its services.

Koutoulas has repeatedly criticized JP Morgan and its involvement in the MF Global bankruptcy, citing the bank's various conflicts of interests in its dealings with the MF Global estate.

Now, it seems like JP Morgan wants him off their back faster than he can close his accounts. Koutoulas has just publicized a letter JP Morgan Chase sent him, requesting that he move his bank accounts to another financial institutions.

Koutoulas, who runs a commodity trading advisory firm Typhon Capital, used JP Morgan Chase as the bank account for his trading firm and its holding company Khaos Enterprises. He told Business Insider he was already in the process of closing his accounts with JPM when he received the letter today.

"It's pretty clear why," he told Business Insider when asked about why JP Morgan may have sent the request.

Business Insider has reached out to JP Morgan for comment, and will update the post when the company responds.

The letter is signed by Ann Stankiewicz, a vice president within the Executive Office. Here's a copy of the letter: [PDF here]

Dear Mr. Koutoulas:

This is to inform you that JPMorgan Chase Bank, N.A. would like Typhon Capital Management LLC, Khaos Enterprises Inc (the "Companies") and you to move your respective banking relationships to another financial institution.

To ensure an orderly transition, we will maintain the existing deposit accounts and services related to the deposit accounts unti I February 28, 2012. If you and the Companies have not closed these accounts by February 28, 2012, the accounts wi II be automatically closed and all their related services terminated. If there is a positive balance in a deposit account after all outstanding transactions have cleared, we wi II send a check for the balance (less any outstanding fees and service charges) to the above address. Therefore, if you wish to avoid unnecessary disruption to cash flow and business, please act promptly to open accounts with another financial institution and transfer business before February 28, 2012.

Sincerely,

Bank Of America Dumps $75 Trillion In Derivatives On U.S. Taxpayers With Federal Approval

Bloomberg reports that Bank of America (BAC) has shifted about $22 trillion worth of derivative obligations from Merrill Lynch and the BAC holding company to the FDIC insured retail deposit division. Along with this information came the revelation that the FDIC insured unit was already stuffed with $53 trillion worth of these potentially toxic obligations, making a total of $75 trillion.

Derivatives are highly volatile financial instruments that are occasionally used to hedge risk, but mostly used for speculation. They are bets upon the value of stocks, bonds, mortgages, other loans, currencies, commodities, volatility of financial indexes, and even weather changes. Many big banks, including Bank of America, issue derivatives because, if they are not triggered, they are highly profitable to the issuer, and result in big bonus payments to the executives who administer them. If they are triggered, of course, the obligations fall upon the corporate entity, not the executives involved. Ultimately, by allowing existing gambling bets to remain in insured retail banks, and endorsing the shift of additional bets into the insured retail division, the obligation falls upon the U.S. taxpayers and dollar-denominated savers.

Even if we net out the notional value of the derivatives involved, down to the net potential obligation, the amount is so large that the United States could not hope to pay it off without a major dollar devaluation, if a major contingency actually occurred and a large part of the derivatives were triggered. But, if such an event ever occurs, Bank of America's derivatives counter-parties will, as usual, be made whole, while the American people suffer. This all has the blessing of the Federal Reserve, which approved the transfer of derivatives from Merrill Lynch to the insured retail unit of BAC before it was done.

Contrary to popular belief, which blames the global financial crisis on subprime borrowers, it was the derivatives, based upon the likelihood that those borrowers would pay their debts, that were the primary catalyst triggering the global economic crisis of 2008. Back then, the derivative obligations of AIG (AIG) imploded the insurer. Under the pressure of fear-mongering from the Federal Reserve and the financial industry, the U.S. government committed hundreds of billions of dollars to bail out AIG's counter-parties, including the biggest banks of Europe and America. Had the government not stepped in, virtually all the banks on Wall Street would have gone bankrupt. A host of European and Asian banks would have followed.

AIG was not FDIC insured. It could have been allowed to fail, and should have been allowed to fail. All the banks on Wall Street that would have failed should have failed. Their speculator counter-parties should have been bankrupted, and their retail depositors should have been made whole. The retail divisions could have been temporarily nationalized and sold off as soon as possible to more prudent management. Had this occurred, America would have experienced a deep but very temporary economic downturn, and, by now, the downturn would be over. But, with derivatives obligations tied intimately with FDIC insured depositary units, the debt will need to be paid by the government, as a matter of law. We will have no legal choice except to default, or pay them off.

In 2008, politicians in Washington D.C., and Trojan horse operatives within the financial organs of our government, bailed out imprudent managements of big casino-banks. Bank executives not only didn't need to go bankrupt, as they should have, but collected huge bonuses. Later, in response to the abuse, Congress passed the Dodd-Frank legislation and the Volcker rule. These were supposed to insure that such bailouts were not needed in the future. Supposedly, this would prevent further abuse of the American taxpayer.

The most recent abuse-event, involving BAC, illustrates the uselessness of such laws. Bank of America NA is FDIC insured, and has the blessing of the Federal Reserve, in spite of such a transaction being prohibited by Section 23A of the Federal Reserve Act. Specifically, the section reads in relevant part:

"A member bank and its subsidiaries may engage in a covered transaction with an affiliate only if--

1. in the case of any affiliate, the aggregate amount of covered transactions of the member bank and its subsidiaries will not exceed 10 per centum of the capital stock and surplus of the member bank; and

2. in the case of all affiliates, the aggregate amount of covered transactions of the member bank and its subsidiaries will not exceed 20 per centum of the capital stock and surplus of the member bank ..."

The Federal Reserve is an institution largely controlled by those who are probably the counter-parties to the Merrill Lynch derivatives. No doubt, its approval of the transaction, in spite of the prohibitions of section 23A arise out of a claim that Merrill is not a "bank" as defined under the Act, and, therefore, not an affiliate.

But, the Act also provides that:

For purposes of applying this section and section 23B, and notwithstanding subsection (b)(2) of this section or section 23B(d)(1), a financial subsidiary of a bank--

1. shall be deemed to be an affiliate of the bank; and

2. shall not be deemed to be a subsidiary of the bank.

So, Merrill Lynch is clearly an affiliate of Bank of America, and the Federal Reserve is clearly violating the law by approving this particular transaction. But, here is the kicker. Congress has given ultimate power to the Federal Reserve to ignore its own enabling Act legislation. The law also reads:

The Board may, at its discretion, by regulation or order exempt transactions or relationships from the requirements of this section if it finds such exemptions to be in the public interest

The FDIC opposed the move, but there is nothing the FDIC can do, except file a petition for a writ of mandamus in court, against the Federal Reserve, seeking a declaration that the approval was illegal. But, the FDIC would lose, because Congress has given the Federal Reserve Board ultimate power to do whatever it wishes.

So, the bottom line is this: When something bad happens, and the derivative obligations are triggered, the FDIC will be on the hook, thanks to the Federal Reserve. The counter-parties of Bank of America, both inside America and elsewhere around the world, will be safely bailed out by the full faith and credit of the USA. Meanwhile, the taxpayers and dollar denominated savers will be fleeced again. This latest example of misconduct illustrates the error of allowing a bank-controlled entity, like the Federal Reserve, complete power over the nation's monetary system. The so-called "reforms" enacted by Congress, in the wake of the 2008 crash, have vested more, and not less, power in the Federal Reserve, and supplied us with more, rather than less instability and problems.

This is not an isolated instance. JP Morgan Chase (JPM) is being allowed to house its unstable derivative obligations within its FDIC insured retail banking unit. Other big banks do the same. So long as the Federal Reserve exists and/or other financial regulatory agencies continue to be run by a revolving door staff that moves in and out of industry and government, crony capitalism will be alive and well in America. No amount of Dodd-Frank or Volcker rule legislation will ever protect savers, taxpayers or the American people. Profits will continue to be privatized and losses socialized.

SEC Ups Its Game to Identify Rogue Firms

It is the Securities and Exchange Commission's new "most-wanted" list: a chart covered with handwritten notes, yellow highlighter and the names of about 100 hedge funds.

The hedge funds have one thing in common: Their performance seems too good to be true, with some trouncing the overall market and others churning out modest results without ever suffering a down month. Some funds on the list stumble but still always outperform rival hedge funds.

"There is serious fraud in this space, and we have been attacking it," said Bruce Karpati, co-chief of the SEC's asset-management enforcement unit. The hedge-fund chart dominates a corner of his lower Manhattan office.

The list is the low-tech product of a high-tech effort by the SEC to crack down on fraud at hedge funds and other investment firms. After the agency failed to detect the $17.3 billion Ponzi scheme by Bernard L. Madoff, who wowed investors with steady returns over several decades, SEC officials decided they needed a way to trawl through performance data and look for red flags that might signal a possible fraud.

In 2009, the SEC began developing a computer-powered system that now analyzes monthly returns from thousands of hedge funds. Officials won't say exactly how it works or how much it cost to build, but the agency has announced four civil-fraud lawsuits filed as a result of what it calls the "aberrational performance initiative."

One hedge fund sued by the SEC reported annual returns of more than 25% by allegedly overvaluing its assets, including Nigerian warrants. A hedge fund of funds achieved its seemingly great returns by allegedly overriding internal controls on vetting outside funds, causing it to sink investor money into frauds.

Encouraged by the results so far, SEC officials are widening the computer-powered scrutiny to mutual funds and private-equity funds. That means data on more than 20,000 funds are being fed into the SEC's computers or soon will be.

The enforcement-by-the-numbers machine isn't popular on Wall Street, where some investment managers are worried they might get snagged in an investigation simply because their numbers look too good.

SEC enforcement chief Robert Khuzami rattled some people this year when he suggested that any fund with returns that steadily topped market indexes by 3% could catch the agency's eye. The SEC now says it doesn't set such thresholds.

"There are people out there who have been committing fraud, and we want to get them and get them out of the system," said Robert Leonard, a partner at law firm Bingham McCutchen LLP who represents hedge funds. "I'm concerned there probably will be some chilling effect for managers who are knocking the cover off the ball."

Robert Kaplan, the other co-chief of the SEC's asset-management enforcement unit, said it isn't so simple. After the SEC's machine spits out the name of a specific hedge fund, the SEC's 65-person asset-management enforcement unit starts looking for an explanation for the numbers.

Some of the hedge funds on the list in Mr. Karpati's office are "just very good" performers, Mr. Kaplan said, while others seemed suspicious but the activity wasn't clear-cut enough for the SEC to launch an investigation or file a civil lawsuit.

Mr. Kaplan wouldn't say how many hedge funds flagged by the "aberrational performance initiative" wind up as the target of an SEC probe. But the results were encouraging when the SEC tested the computer system in 2009, he said. "We spotted several cases that we'd recently filed and some others we were already investigating," Mr. Kaplan said.

The system is designed partly to detect returns that barely budge when markets are volatile. That might have set off alarms inside the SEC about Mr. Madoff. The SEC has been criticized for failing to identify the Ponzi scheme and for its failure to respond to whistleblowers and their warnings that Mr. Madoff's operations were a fraud. Mr. Madoff's firm collapsed in December 2008, and he is serving a 150-year prison sentence.

Among the civil-fraud suits that have resulted from the initiative is one filed against ThinkStrategy Capital Management LLP, which attracted SEC attention partly because it seemed able to defy stock-market gravity.

In 2008, ThinkStrategy reported a 4.6% return on its Capital Fund-A hedge fund. It was the sixth year in a row that Chetan Kapur, a 36-year-old New Yorker, seemed to have a Midas touch. In contrast, the average hedge fund fell roughly 19% in 2008, with losses in eight of the year's 12 months, according to data from Hedge Fund Research Inc.

The SEC alleged in its civil-fraud suit against Mr. Kapur that the 4.6% return figure was faked. The hedge fund actually had a 90% loss in 2008, according to the SEC's lawsuit.

The SEC accused Mr. Kapur of continuing to report positive returns for the hedge fund even after it was liquidated and ceased trading, as a way of attracting investors to his other funds. Mr. Kapur also repeatedly inflated his firm's assets under management in investor reports and invented a nonexistent management team, the SEC alleged in its civil-fraud suit.

Without admitting or denying wrongdoing, Mr. Kapur agreed to a lifetime ban from the investment industry. A federal court soon will rule on penalties in the case. Mr. Kapur's lawyer, Sam Lieberman of Sadis & Goldberg LLP, said the settlement is a "favorable development that will allow him to focus on his new business outside the securities industry."

Messrs. Karpati and Kaplan said the data crunching has helped trigger a number of investigations. For private-equity funds, SEC enforcement officials are zooming in on excessive valuations of funds' holdings.

Mr. Kaplan said the number crunching on mutual funds has led to an unspecified number of probes "we're doing that come from similar analysis of outliers."

World's Second And Third Largest Economies To Bypass Dollar, Engage In Direct Currency Trade

To all who still think that in the war of attrition between the USD and the EUR (because contrary to what some have "discovered" only recently, currency wars have been going on for a long, long time and will continue to do so, before morphing into trade and real wars), in which both currencies are doomed, and where the winner takes it all, if only for a few minutes, we bring to your attention the following most recent update out of the Pacific Rim (where incidentally the Shanghai Composite has resumed its relentless track lower with the obvious intention of closing 2011 at its 52 week low) in which we find i) that the dollar's hegemonic control over the world is ending, and ii) that the mercantilist relationship so long sustained between China and the US, may be shifting and reversing, and in its next metamorphosis will see Japan buying the bonds of... China (although probably not for long - see next post). As Bloomberg reports, "Japan and China will promote direct trading of yen and yuan without using dollars and will encourage the development of a market for the exchange, to cut costs for companies, the Japanese government said. Japan will also apply to buy Chinese bonds next year, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday." And before someone blows it off as merely more foreign relations posturing, "“Given the huge size of the trade volume between the Asia’s two biggest economies, this agreement is much more significant than any other pacts China has signed with other nations,” said Ren Xianfang, a Beijing-based economist with IHS Global Insight Ltd." As for China's reverse mercantilist move, one which will stun anyone who believes that Yuan is still undervalued, "Finance Minister Jun Azumi said Dec. 20 buying of Chinese bonds would be beneficial for Japan because it would help reveal more information about financial markets in China, the world’s largest holder of foreign currency reserves." Speaking of, has Albert Edwards gloated yet that given enough time, he always ends up being proven right, in this case about the CNY's upcoming devaluation?

Some more on the direct FX bypass, something which should piss of USD traders quite a bit, from Bloomberg:

Encouraging direct yen-yuan trades will aim to reduce currency risks and trading costs, Japan’s government said. Currently, about 60 percent of trade transactions between the two nations are settled in dollars, according to Japan’s Finance Ministry. China is Japan’s biggest trading partner.

Then-finance minister Noda said in September 2010 that Japan should be able to invest in China’s market given that China buys Japanese debt. Japan holds $1.3 trillion of foreign- currency reserves, the world’s second largest.

Austria has already been granted the eligibility to buy Chinese bonds, according to the Japanese government official. Central banks from Thailand to Nigeria plan to start buying yuan assets as slowing global growth has capped interest rates in the U.S. and Europe.

Investing in Chinese debt has become easier for central banks as issuance of yuan-denominated bonds in Hong Kong more than tripled to 112 billion yuan ($18 billion) this year and institutions were granted quotas to invest onshore.

So while the US and Europe bicker over just who it is that will first end up bailing out one then the other, those who are supposedly doing the bailing, have decided to gradually move away from the interminable financial sink hole that is the developed world. All that needs to happen next is for Russia and India to join this compact, and Jim O'Neill will be proven 'right', although with a 100% inverse outcome to the one desired by the Goldmanite, as globalization proceeds merrily on its way... just without the US and Europe.

A Very Scary Christmas And An Incredibly Frightening New Year

Can you hear that? It almost sounds like a little bit of peace and quiet. This year, the holiday season has been fairly uneventful, and for that we should be very grateful. But it isn't going to last long. 2012 is going to be a much more difficult year for the U.S. economy and the global financial system than 2011 has been. So if things are going well for you right now, enjoy this little bubble of peace and tranquility while you can. Because while things may look calm on the surface right now, the truth is that this is a very scary Christmas for financial professionals and world leaders. Most of them know how fragile the global financial system is at the moment. Most of them know that we are living in the greatest bubble of debt, leverage and financial risk that the world has ever seen. As I wrote about the other day, world leaders would not be throwing huge bailouts around like crazy if everything was going to be just fine. The truth is that we are rapidly approaching another financial crisis that may end up being even worse than the horrific crash of 2008.

Despite unprecedented efforts by the European Central Bank, the yield on 10 year Italian bonds is nearly up to 7 percent again.

Keep an eye on the yield on 10 year Italian bonds. That is going to be one of the most important financial numbers in the world in the coming months.

But Italy is not the only problem. The reality is that several European governments are teetering on the verge of default right now. Meanwhile, confidence in the European financial system has been absolutely shattered and a devastating credit crunch has set in. Nobody (other than the ECB) wants to loan money to the banks and the banks are massively cutting back on loans to businesses and consumers. This is causing the money supply to fall. The ECB is trying to hold things together with chicken wire and duct tape, but it isn't going to work.

In major financial centers such as the City of London, this is a very scary Christmas and the outlook for the new year looks very frightening. Because financial activity has dried up so dramatically, a number of firms are already shutting down. The following comes from a recent Bloomberg article....

London’s stockbrokers are shrinking as Europe’s sovereign debt crisis and competition from international firms squeezes revenue and fees.

“This isn’t just a blip, this is much worse,” said Tim Linacre, who is stepping down as chief executive officer of Panmure (PMR) Gordon & Co., a 135-year-old brokerage. “It’s a desert for activity, which is why you are seeing some firms throw in the towel.”

In the past month, Altium Capital closed its securities unit. Evolution Group Plc (EVG), Merchant Securities Group Plc, Arbuthnot Securities Ltd. and Collins Stewart Hawkpoint Plc have all accepted takeover offers from larger competitors.

“It feels worse than any other time,” said Lorna Tilbian, an executive director at Numis Corp. who began her career in 1984. “All I hear about is people putting up a white flag.”

Many out there are wondering if we are about to face another crisis like the one we saw back in 2008.

Unfortunately, none of the underlying problems that caused that crisis were ever really fixed.

We did not learn from history so now we are in for another round of pain.

In fact, Chris Martenson believes that this next crisis will be even worse than 2008....

There are clear signs of a liquidity crunch in the asset markets right now, and the question I keep hearing is, Is this 2008 all over again?

No, it’s worse. Much worse.

In 2008 there was a lot more faith and optimism upon which to draw. But both have been squandered to significant degrees by feckless regulators and authorities who failed to properly address any of the root causes of the first crisis even as they slathered layer after layer of thin-air money over many of the symptoms.

Anyone who has paid attention knows that those "magic potions" proved to be anything but. Not only are the root causes still with us (too much debt, vast regional financial imbalances, and high energy prices), but they have actually grown worse the entire time.

Frightening stuff.

A couple of months ago, I wrote about the coming derivatives crisis that could potentially wipe out the entire global financial system.

When the next great financial crisis strikes, there is going to be a lot of focus on derivatives once again.

Top global financial authorities such as Ben Bernanke continue to insist that derivatives are perfectly safe.

But there are other voices in the financial world that are warning that we are heading for financial armageddon. For example,just check out what Mark Faber is saying....

"I am convinced the whole derivatives market will cease to exit. Will become zero. And when it happens I don't know: you can postpone the problems with monetary measures for a long time but you can't solve them... Greece should have defaulted - it would have sent a message that not all derivatives are equal because it depends on the counterparty."

That is very strong language.

Faber also believes that the stock market is going to get hit really, really hard during the coming crisis....

"I am ultra bearish. I think most people will be lucky if they still have 50% of their money in 5 years time. You have to have diversification - some real estate in the countryside, some gold and some equities because if you think it through, say Germany 1900 to today, we had WWI, we had hyperinflation, WWII, cash holders and bondholders they lost everything 3 times, but if you owned equities you'd be ok. In equities in general you will not lose it all, it may not be a good investment, unless you put it all in one company and it goes bankrupt."

Some of the top financial officials in the entire world have also used some very scary language in recent weeks.

The head of the International Monetary Fund, Christian Lagarde, recently stated that we could soon see conditions "reminiscent of the 1930s depression" and that no country on earth "will be immune to the crisis"....

"There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating"

But most people are so busy opening up the cheap plastic presents under their Christmas trees (that were mostly made overseas) that they aren't even paying attention to these warnings.

Look, when the money supply falls significantly it is almost impossible to avoid a recession. Just look at the historical numbers.

Unfortunately, money supply numbers all over Europe are falling dramatically right now as an article in the Telegraph recently noted....

All key measures of the money supply in the eurozone contracted in October with drastic falls across parts of southern Europe, raising the risk of severe recession over coming months.

Confidence in the banking system in Europe has never been this low in the post-World War II era. Sadly, most people simply do not understand how bad things have gotten for major European banks. One Australian news source recently put it this way....

"If anyone thinks things are getting better, they simply don't understand how severe the problems are," a London executive at a global bank said. "A major bank could fail within weeks."

Others said many continental banks, including French, Italian and Spanish lenders, were close to running out of the acceptable forms of collateral, such as US Treasury bonds, that could be used to finance short-term loans.

Some have been forced to lend out their gold reserves to maintain access to US dollar funding.

The outlook is very ominous.

Financial professionals all over the globe are telling us what is coming if we are willing to listen.

The following comes from a report recently produced by Credit Suisse's Fixed Income Research unit....

"We seem to have entered the last days of the euro as we currently know it. That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks."

The first six months of 2012 are going to be a very key time. National governments and big European banks are scheduled to roll over huge mountains of debt. But if they can't find any takers that could bring the global financial system to a moment of great crisis very quickly.

The following is how former hedge fund manager Bruce Krasting recently described the problem that Italy is facing....

At this point there is zero possibility that Italy can refinance any portion of its $300b of 2012 maturing debt. If there is anyone at the table who still thinks that Italy can pull off a miracle, they are wrong. I’m certain that the finance guys at the ECB and Italian CB understand this. I repeat, there is a zero chance for a market solution for Italy.

But even if we don't see a formal default by a major European nation such a Italy, that doesn't mean that major European banks are going to make it through the crippling recession that has now begun in Europe.

Charles Wyplosz, a professor of international economics at Geneva's Graduate Institute, is absolutely convinced that we are going to see some major European banks collapse....

"Banks will collapse, including possibly a number of French banks that are very exposed to Greece, Portugal, Italy and Spain."
Authorities in Europe are saying the "right things" publicly, but privately they are preparing for the worst.

As the Telegraph recently reported, the British government is now making plans based on the assumption that a collapse of the euro is only "just a matter of time"....

A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time.

Yes, we are heading for a huge financial collapse and massive economic trouble.

So enjoy the good times while we still have them.

They are not going to last too much longer.

A Christmas Message From America's Rich

It seems America’s bankers are tired of all the abuse. They’ve decided to speak out.

True, they’re doing it from behind the ropeline, in front of friendly crowds at industry conferences and country clubs, meaning they don’t have to look the rest of America in the eye when they call us all imbeciles and complain that they shouldn’t have to apologize for being so successful.

But while they haven’t yet deigned to talk to protesting America face to face, they are willing to scribble out some complaints on notes and send them downstairs on silver trays. Courtesy of a remarkable story by Max Abelson at Bloomberg, we now get to hear some of those choice comments.

Home Depot co-founder Bernard Marcus, for instance, is not worried about OWS:

“Who gives a crap about some imbecile?” Marcus said. “Are you kidding me?”

Former New York gurbernatorial candidate Tom Golisano, the billionaire owner of the billing firm Paychex, offered his wisdom while his half-his-age tennis champion girlfriend hung on his arm:

“If I hear a politician use the term ‘paying your fair share’ one more time, I’m going to vomit,” said Golisano, who turned 70 last month, celebrating the birthday with girlfriend Monica Seles, the former tennis star who won nine Grand Slam singles titles.

Then there’s Leon Cooperman, the former chief of Goldman Sachs’s money-management unit, who said he was urged to speak out by his fellow golfers. His message was a version of Wall Street’s increasingly popular If-you-people-want-a-job, then-you’ll-shut-the-fuck-up rhetorical line:

Cooperman, 68, said in an interview that he can’t walk through the dining room of St. Andrews Country Club in Boca Raton, Florida, without being thanked for speaking up. At least four people expressed their gratitude on Dec. 5 while he was eating an egg-white omelet, he said.

“You’ll get more out of me,” the billionaire said, “if you treat me with respect.”

Finally, there is this from Blackstone CEO Steven Schwartzman:

Asked if he were willing to pay more taxes in a Nov. 30 interview with Bloomberg Television, Blackstone Group LP CEO Stephen Schwarzman spoke about lower-income U.S. families who pay no income tax.

“You have to have skin in the game,” said Schwarzman, 64. “I’m not saying how much people should do. But we should all be part of the system.”

There are obviously a great many things that one could say about this remarkable collection of quotes. One could even, if one wanted, simply savor them alone, without commentary, like lumps of fresh caviar, or raw oysters.

But out of Abelson’s collection of doleful woe-is-us complaints from the offended rich, the one that deserves the most attention is Schwarzman’s line about lower-income folks lacking “skin in the game.” This incredible statement gets right to the heart of why these people suck.

Why? It's not because Schwarzman is factually wrong about lower-income people having no “skin in the game,” ignoring the fact that everyone pays sales taxes, and most everyone pays payroll taxes, and of course there are property taxes for even the lowliest subprime mortgage holders, and so on.

It’s not even because Schwarzman probably himself pays close to zero in income tax – as a private equity chief, he doesn’t pay income tax but tax on carried interest, which carries a maximum 15% tax rate, half the rate of a New York City firefighter.

The real issue has to do with the context of Schwarzman’s quote. The Blackstone billionaire, remember, is one of the more uniquely abhorrent, self-congratulating jerks in the entire world – a man who famously symbolized the excesses of the crisis era when, just as the rest of America was heading into a recession, he threw himself a $5 million birthday party, featuring private performances by Rod Stewart and Patti Labelle, to celebrate an IPO that made him $677 million in a matter of days (within a year, incidentally, the investors who bought that stock would lose three-fourths of their investments).

So that IPO birthday boy is now standing up and insisting, with a straight face, that America’s problem is that compared to taxpaying billionaires like himself, poor people are not invested enough in our society’s future. Apparently, we’d all be in much better shape if the poor were as motivated as Steven Schwarzman is to make America a better place.

But it seems to me that if you’re broke enough that you’re not paying any income tax, you’ve got nothing but skin in the game. You've got it all riding on how well America works.

You can’t afford private security: you need to depend on the police. You can’t afford private health care: Medicare is all you have. You get arrested, you’re not hiring Davis, Polk to get you out of jail: you rely on a public defender to negotiate a court system you'd better pray deals with everyone from the same deck. And you can’t hire landscapers to manicure your lawn and trim your trees: you need the garbage man to come on time and you need the city to patch the potholes in your street.

And in the bigger picture, of course, you need the state and the private sector both to be functioning well enough to provide you with regular work, and a safe place to raise your children, and clean water and clean air.

The entire ethos of modern Wall Street, on the other hand, is complete indifference to all of these matters. The very rich on today’s Wall Street are now so rich that they buy their own social infrastructure. They hire private security, they live on gated mansions on islands and other tax havens, and most notably, they buy their own justice and their own government.

An ordinary person who has a problem that needs fixing puts a letter in the mail to his congressman and sends it to stand in a line in some DC mailroom with thousands of others, waiting for a response.

But citizens of the stateless archipelago where people like Schwarzman live spend millions a year lobbying and donating to political campaigns so that they can jump the line. They don’t need to make sure the government is fulfilling its customer-service obligations, because they buy special access to the government, and get the special service and the metaphorical comped bottle of VIP-room Cristal afforded to select customers.

Want to lower the capital reserve requirements for investment banks? Then-Goldman CEO Hank Paulson takes a meeting with SEC chief Bill Donaldson, and gets it done. Want to kill an attempt to erase the carried interest tax break? Guys like Schwarzman, and Apollo’s Leon Black, and Carlyle’s David Rubenstein, they just show up in Washington at Max Baucus’s doorstep, and they get it killed.

Some of these people take that VIP-room idea a step further. J.P. Morgan Chase CEO Jamie Dimon – the man the New York Times once called “Obama’s favorite banker” – had an excellent method of guaranteeing that the Federal Reserve system’s doors would always be open to him. What he did was, he served as the Chairman of the Board of the New York Fed.

And in 2008, in that moonlighting capacity, he orchestrated a deal in which the Fed provided $29 billion in assistance to help his own bank, Chase, buy up the teetering investment firm Bear Stearns. You read that right: Jamie Dimon helped give himself a bailout. Who needs to worry about good government, when you are the government?

Dimon, incidentally, is another one of those bankers who’s complaining now about the unfair criticism. “Acting like everyone who’s been successful is bad and because you’re rich you’re bad, I don’t understand it,” he recently said, at an investor’s conference.

Hmm. Is Dimon right? Do people hate him just because he’s rich and successful? That really would be unfair. Maybe we should ask the people of Jefferson County, Alabama, what they think.

That particular locality is now in bankruptcy proceedings primarily because Dimon’s bank, Chase, used middlemen to bribe local officials – literally bribe, with cash and watches and new suits – to sign on to a series of onerous interest-rate swap deals that vastly expanded the county’s debt burden.

Essentially, Jamie Dimon handed Birmingham, Alabama a Chase credit card and then bribed its local officials to run up a gigantic balance, leaving future residents and those residents’ children with the bill. As a result, the citizens of Jefferson County will now be making payments to Chase until the end of time.

Do you think Jamie Dimon would have done that deal if he lived in Jefferson County? Put it this way: if he was trying to support two kids on $30,000 a year, and lived in a Birmingham neighborhood full of people in the same boat, would he sign off on a deal that jacked up everyone’s sewer bills 400% for the next thirty years?

Doubtful. But then again, people like Jamie Dimon aren’t really citizens of any country. They live in their own gated archipelago, and the rest of the world is a dumping ground.

Just look at how Chase behaved in Greece, for example.

Having seen how well interest-rate swaps worked for Jefferson County, Alabama, Chase “helped” Greece mask its debt problem for years by selling a similar series of swaps to the Greek government. The bank then turned around and worked with banks like Goldman, Sachs to create a thing called the iTraxx SovX Western Europe index, which allowed investors to bet against Greek debt.

In other words, Chase knowingly larded up the nation of Greece with a crippling future debt burden, then turned around and helped the world bet against Greek debt.

Does a citizen of Greece do that deal? Forget that: does a human being do that deal?

Operations like the Greek swap/short index maneuver were easy money for banks like Goldman and Chase – hell, it’s a no-lose play, like cutting a car’s brake lines and then betting on the driver to crash – but they helped create the monstrous European debt problem that this very minute is threatening to send the entire world economy into collapse, which would result in who knows what horrors. At minimum, millions might lose their jobs and benefits and homes. Millions more will be ruined financially.

But why should Chase and Goldman care what happens to those people? Do they have any skin in that game?

Of course not. We’re talking about banks that not only didn’t warn the citizens of Greece about their future debt disaster, they actively traded on that information, to make money for themselves.

People like Dimon, and Schwarzman, and John Paulson, and all of the rest of them who think the “imbeciles” on the streets are simply full of reasonless class anger, they don’t get it. Nobody hates them for being successful. And not that this needs repeating, but nobody even minds that they are rich.

What makes people furious is that they have stopped being citizens.

Most of us 99-percenters couldn’t even let our dogs leave a dump on the sidewalk without feeling ashamed before our neighbors. It's called having a conscience: even though there are plenty of things most of us could get away with doing, we just don’t do them, because, well, we live here. Most of us wouldn’t take a million dollars to swindle the local school system, or put our next door neighbors out on the street with a robosigned foreclosure, or steal the life’s savings of some old pensioner down the block by selling him a bunch of worthless securities.

But our Too-Big-To-Fail banks unhesitatingly take billions in bailout money and then turn right around and finance the export of jobs to new locations in China and India. They defraud the pension funds of state workers into buying billions of their crap mortgage assets. They take zero-interest loans from the state and then lend that same money back to us at interest. Or, like Chase, they bribe the politicians serving countries and states and cities and even school boards to take on crippling debt deals.

Nobody with real skin in the game, who had any kind of stake in our collective future, would do any of those things. Or, if a person did do those things, you’d at least expect him to have enough shame not to whine to a Bloomberg reporter when the rest of us complained about it.

But these people don’t have shame. What they have, in the place where most of us have shame, are extra sets of balls. Just listen to Cooperman, the former Goldman exec from that country club in Boca. According to Cooperman, the rich do contribute to society:

Capitalists “are not the scourge that they are too often made out to be” and the wealthy aren’t “a monolithic, selfish and unfeeling lot,” Cooperman wrote. They make products that “fill store shelves at Christmas…”

Unbelievable. Merry Christmas, bankers. And good luck getting that message out.

EU Courts Force Airlines into Carbon Trading Market

International carriers will have to pay for polluting rights ... Top EU court upholds carbon cost on international airlines ... The EU's top court has dismissed a challenge to Europe's carbon market brought by US airlines, upholding a law that will force foreign carriers to comply with rules that extend emissions trading to aviation in 2012. – AP

Dominant Social Theme: The world is warming and thank goodness for the EU courts that are trying to protect everyone – and fauna and flora as well.

Free-Market Analysis: It is not enough that there is likely no such thing as global warming or that, even if there was, humans could do anything about it. Now, thanks to a lunatic ruling by the top EU courts, airlines around the world will have to pay a "carbon tax" and participate in a brand new EU "carbon market."

While the ruling may somehow be appealed successfully, it is indicative of the lunacy that now reigns supreme not just in Europe but around the world. Human beings have gone mad collectively, not because they are prone to madness but because Western elites are leading them there.

It begins with the Anglosphere power elite that uses dominant social themes – fear-based promotions – to frighten Western middle classes into giving up power and wealth to previously created globalist solutions. These dominant social themes, in our view, have been promoted more and more aggressively in this "era of the Internet."

The reason for this seems clear to us. There is a sea-change in the way people acquire and share information. The first time this happened, in our view, was when the Gutenberg Press was invented. Now, with the Internet, the same thing is happening. Information is causing new ways of thinking and breaking the power elite stranglehold on what we have called "directed history."

Because things are changing so rapidly, the powers-that-be are using more force and less persuasion. They are turning to laws and courts and even military force to ensure that momentum for their one-world order continues.

Global warming (climate change) is just one more dominant social theme designed to raise revenue for a small group of people – intergenerational families and their corporate, religious and military associates and enablers – that want to run the world in an official capacity.

It is no surprise that the top European court would rule in favor of the fear-based meme of climate change. The EU is a power-elite project, in our view, designed to serve as a building block of world government. Here is some more from the article:

The European Union's top court has upheld the bloc's right to make foreign airlines participate in the EU carbon market, which is to be extended to aviation from January 1, 2012. The European Court of Justice (ECJ) in Luxembourg dismissed a challenge by US airlines and ruled that the EU's law was valid. It requires all airlines that use European airports to offset their carbon emissions. "Application of the emissions trading scheme (ETS) to aviation infringes neither the principles of customary international law at issue nor the open-skies agreement," the court said in a statement.

Germany's BUND environmental protection organisation said it was "a victory of common sense." Though aviation accounts for only 5 percent of humans' carbon emissions, it is the fastest-growing source of the greenhouse gases blamed for climate change.

While the ECJ ruling is final, there is some flexibility in how the regulations may be applied. Airlines initially would only be required to pay for 15 percent of the carbon they emit. The law also allows for "equivalent measures," meaning incoming flights to Europe would be exempt if the nation from which they came had measures in place to offset the international emissions of the route. The US trade group Airlines for America said its members would comply with the EU directive "under protest," while reviewing legal options.

The initial lawsuit regarding climate change was brought by US and Canadian airlines acting through Airlines for America. It was, according to the article, a protest supported by China, India and other countries with international carriers. So the chances are that the EU ruling will not be the last word on the subject. There is too much controversy.

There is apparently considerable push-back against the EU court's decisions. Critics of the EU rules have argued that under the 1997 Kyoto climate pact, countries agreed to address emissions from aviation via the UN. But the Kyoto talks are stalled and Eurocrats have decided to take "unilateral" action. "Emitters exceeding their quotas must buy carbon permits, while those within their limits can sell any unused allowances."

In the US, administration officials have written to the EU threatening some sort of retaliation. We see this as somewhat hypocritical, as the US is no less enmeshed in the global warming promotion than Europe. It is a power elite theme – and these elites control US and European (and Israeli) policy from behind the scenes via mercantilism.

Global warming is a badly failing meme now. It is a victim of what we might call the Internet Reformation. The chances of it being propped up simply through legislation or court decisions are not so good, in our view.

It is, in fact, part of a larger trend and one that does not bode well for elite memes, as such themes cannot simply be forced into existence. That is the reason that the Anglosphere elite utilized dominant social themes in the first place.

Conclusion: Substituting the force of the state for the gentler (and more effective) suasion of promotional propaganda is by no means a triumph for those promoting global governance. In this sense, the "victory" that the EU court has given to supporters of carbon trading may also be seen as defeat.

Justice Department Reaches $335 Million Settlement to Resolve Allegations of Lending Discrimination by Countrywide Financial Corporation

More than 200,000 African-American and Hispanic Borrowers who Qualified for Loans were Charged Higher Fees or Placed into Subprime Loans

The Department of Justice today filed its largest residential fair lending settlement in history to resolve allegations that Countrywide Financial Corporation and its subsidiaries engaged in a widespread pattern or practice of discrimination against qualified African-American and Hispanic borrowers in their mortgage lending from 2004 through 2008.

The settlement provides $335 million in compensation for victims of Countrywide’s discrimination during a period when Countrywide originated millions of residential mortgage loans as one of the nation’s largest single-family mortgage lenders.

The settlement, which is subject to court approval, was filed today in the U.S. District Court for the Central District of California in conjunction with the department’s complaint which alleges that Countrywide discriminated by charging more than 200,000 African-American and Hispanic borrowers higher fees and interest rates than non-Hispanic white borrowers in both its retail and wholesale lending. The complaint alleges that these borrowers were charged higher fees and interest rates because of their race or national origin, and not because of the borrowers’ creditworthiness or other objective criteria related to borrower risk.

The United States also alleges that Countrywide discriminated by steering thousands of African-American and Hispanic borrowers into subprime mortgages when non-Hispanic white borrowers with similar credit profiles received prime loans. All the borrowers who were discriminated against were qualified for Countrywide mortgage loans according to Countrywide’s own underwriting criteria.

“The department’s action against Countrywide makes clear that we will not hesitate to hold financial institutions accountable, including one of the nation’s largest, for lending discrimination,” said Attorney General Eric Holder. “These institutions should make judgments based on applicants’ creditworthiness, not on the color of their skin. With today’s settlement, the federal government will ensure that the more than 200,000 African-American and Hispanic borrowers who were discriminated against by Countrywide will be entitled to compensation.”

The settlement resolves the United States’ pricing and steering claims against Countrywide for its discrimination against African Americans and Hispanics.

The United States’ complaint alleges that African-American and Hispanic borrowers paid more than non-Hispanic white borrowers, not based on borrower risk, but because of their race or national origin. Countrywide’s business practice allowed its loan officers and mortgage brokers to vary a loan’s interest rate and other fees from the price it set based on the borrower’s objective credit-related factors . This subjective and unguided pricing discretion resulted in African American and Hispanic borrowers paying more. The complaint further alleges that Countrywide was aware the fees and interest rates it was charging discriminated against African-American and Hispanic borrowers, but failed to impose meaningful limits or guidelines to stop it.

“Countrywide’s actions contributed to the housing crisis, hurt entire communities, and denied families access to the American dream,” said Thomas E. Perez, Assistant Attorney General for the Civil Rights Division. “We are using every tool in our law enforcement arsenal, including some that were dormant for years, to go after institutions of all sizes that discriminated against families solely because of their race or national origin.”

The United States’ complaint also alleges that, as a result of Countrywide’s policies and practices, qualified African-American and Hispanic borrowers were placed in subprime loans rather than prime loans even when similarly-qualified non-Hispanic white borrowers were placed in prime loans. The discriminatory placement of borrowers in subprime loans, also known as “steering,” occurred because it was Countrywide’s business practice to allow mortgage brokers and employees to place a loan applicant in a subprime loan even when the applicant qualified for a prime loan . In addition, Countrywide gave mortgage brokers discretion to request exceptions to the underwriting guidelines, and Countrywide’s employees had discretion to grant these exceptions.

This is the first time that the Justice Department has alleged and obtained relief for borrowers who were steered into loans based on race or national origin, a practice that systematically placed borrowers of color into subprime mortgage loan products while placing non-Hispanic white borrowers with similar creditworthiness in prime loans. By steering borrowers into subprime loans from 2004 to 2007, the complaint alleges, Countrywide harmed those qualified African-American and Hispanic borrowers. Subprime loans generally carried higher-cost terms, such as prepayment penalties and exploding adjustable interest rates that increased suddenly after two or three years, making the payments unaffordable and leaving the borrowers at a much higher risk of foreclosure.

The settlement also resolves the department’s claim that Countrywide violated the Equal Credit Opportunity Act by discriminating on the basis of marital status against non-applicant spouses of borrowers by encouraging them to sign away their home ownership rights . The law allows married individuals to apply for credit either in their own name or jointly with their spouse, even when the property is owned by both spouses. For applications made by married individuals applying solely in their own name between 2004 and 2008, Countrywide encouraged non-applicant spouses to sign quitclaim deeds or other documents transferring their legal rights and interests in jointly-held property to the borrowing spouse. Non-applicant spouses who execute a quitclaim deed risk substantial uncertainty and financial loss by losing all their rights and interests in the property securing the loan.

In addition, the settlement requires Countrywide to implement policies and practices to prevent discrimination if it returns to the lending business during the next four years. Countrywide currently operates as a subsidiary of Bank of America but does not originate new loans.

The department’s investigation into Countrywide’s lending practices began after referrals by the Board of Governors of the Federal Reserve and the Office of Thrift Supervision to the Justice Department’s Civil Rights Division in 2007 and 2008 for potential patterns or practices of discrimination by Countrywide.

Today’s announcement is part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF). President Obama established the interagency FFETF to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes. For more information on the task force, visit www.StopFraud.gov .

A copy of the complaint and proposed settlement order, as well as additional information about fair lending enforcement by the Justice Department, can be obtained from the Justice Department website at www.justice.gov/fairhousing .

The proposed settlement provides for an independent administrator to contact and distribute payments of compensation at no cost to borrowers whom the Justice Department identifies as victims of Countrywide’s discrimination. The department will make a public announcement and post contact information on its website once an administrator is chosen. Borrowers who are eligible for compensation from the settlement will then be contacted by the administrator. Individuals who believe that they may have been victims of lending discrimination by Countrywide and have questions about the settlement may email the department at countrywide.settlement@usdoj.gov .

Getting Worse: 40 Undeniable Pieces Of Evidence That Show That America Is In Decline

Is America in decline? That is a very provocative question. I have found that most people that hate the United States are very eager to agree that America is in decline, while a lot of those that love the United States are very hesitant to admit that America is in decline. Well, I am proud to be an American, but I cannot lie and tell you that America is doing just fine. The pieces of evidence compiled below are undeniable. Our economy is deathly ill and is rapidly getting worse. We were handed the keys to the greatest economic machine in the history of the world and we have wrecked it. But until we are willing to look in the mirror and admit how bad things have gotten, we won't be ready for the solutions that are necessary. The truth is that there are things that we can do to reverse the decline. It does not have to be permanent. We have gotten away from the things that made America great, and we need to admit that we are on the wrong path and start fixing this country. But if we choose to continue down the road that we are currently on, it will lead us into the darkest chapters in American history.

The following are 40 undeniable pieces of evidence that show that America is in decline....

#1 Back in 1985, 11 million vehicles were sold in America. In 2009, only 5.4 million vehicles were sold in America.

#2 In 1990, the median age of a vehicle in the United States was just 6.5 years. Today, the median age of a vehicle in the United States is approximately 10 years.

#3 The average price of a gallon of gasoline in 2011 has been $3.50. That is a new all-time record. The previous record was $3.24 in 2008.

#4 The average American household will have spent an astounding $4,155 on gasoline by the time the year is over.

#5 The number of children in the United States without a permanent home has increased by 38 percent since 2007.

#6 A decade ago, the United States was ranked number one in average wealth per adult. By 2010, the United States had fallen to seventh.

#7 The U.S. tax code is now more than 50,000 pages longer than it used to be.

#8 American 15-year-olds do not even rank in the top half of all advanced nations when it comes to math or science literacy.

#9 The United States once had the highest proportion of young adults with post-secondary degrees in the world. Today, the U.S. has fallen to 12th.

#10 After adjusting for inflation, U.S. college students are borrowing about twice as much money as they did a decade ago.

#11 The student loan default rate has nearly doubled since 2005.

#12 Our economy is not producing nearly enough jobs for our college graduates. The percentage of mail carriers with a college degree is now 4 times higher than it was back in 1970.

#13 Our infrastructure was once the envy of the world. Today, U.S. infrastructure is ranked 23rd.

#14 Since December 2007, median household income in the United States has declined by a total of 6.8% once you account for inflation.

#15 Since the year 2000, incomes for U.S. households led by someone between the ages of 25 and 34 have fallen by about 12 percent after you adjust for inflation.

#16 According to U.S. Representative Betty Sutton, America has lost an average of 15 manufacturing facilities a day over the last 10 years. During 2010 it got even worse. Last year, an average of 23 manufacturing facilities a day shut down in the United States.

#17 In all, more than 56,000 manufacturing facilities in the United States have shut down since 2001.

#18 The United States has lost a staggering 32 percent of its manufacturing jobs since the year 2000.

#19 Manufacturing employment in the U.S. computer industry was actually lower in 2010 than it was in 1975.

#20 In 1959, manufacturing represented 28 percent of all U.S. economic output. In 2008, it represented only 11.5 percent.

#21 The television manufacturing industry began in the United States. So how many televisions are manufactured in the United States today? According to Princeton University economist Alan S. Blinder, the grand total is zero.

#22 The U.S. trade deficit with China in 2010 was 27 times larger than it was back in 1990.

#23 The Economic Policy Institute says that since 2001 America has lost approximately 2.8 million jobs due to our trade deficit with China alone.

#24 According to one study, between 1969 and 2009 the median wages earned by American men between the ages of 30 and 50 dropped by 27 percent after you account for inflation.

#25 Back in 1980, less than 30% of all jobs in the United States were low income jobs. Today, more than 40% of all jobs in the United States are low income jobs.

#26 The size of the economy in India is projected to surpass the size of the U.S. economy by the year 2050.

#27 One prominent economist believes that the Chinese economy will be three times larger than the U.S. economy by the year 2040.

#28 In 2001, the United States ranked fourth in the world in per capita broadband Internet use. Today it ranks 15th.

#29 Back in the year 2000, 11.3% of all Americans were living in poverty. Today, 15.1% of all Americans are living in poverty.

#30 Last year, 2.6 million more Americans dropped into poverty. That was the largest increase that we have seen since the U.S. government began keeping statistics on this back in 1959.

#31 According to the U.S. Census Bureau, 6.7% of all Americans are living in "extreme poverty", and that is the highest level that has ever been recorded before.

#32 The percentage of children living in poverty in the United States increased from 16.9 percent in 2006 to nearly 22 percent in 2010. In the UK and in France the child poverty rate is well under 10 percent.

#33 As I wrote about the other day, since 2007 the number of children living in poverty in the state of California has increased by 30 percent.

#34 A staggering 48.5% of all Americans live in a household that receives some form of government benefits. Back in 1983, that number was below 30 percent.

#35 Back in 1965, only one out of every 50 Americans was on Medicaid. Today, one out of every 6 Americans is on Medicaid.

#36 Between 1991 and 2007 the number of Americans between the ages of 65 and 74 that filed for bankruptcy rose by a staggering 178 percent.

#37 Today, the "too big to fail" banks are larger than ever. The total assets of the six largest U.S. banks increased by 39 percent between September 30, 2006 and September 30, 2011.

#38 Since the Federal Reserve was created in 1913, the U.S. dollar has lost over 95 percent of its purchasing power.

#39 During the Obama administration, the U.S. government has accumulated more debt than it did from the time that George Washington took office to the time that Bill Clinton took office.

#40 The U.S. national debt is now nearly 15 times larger than it was just 30 years ago.

Sadly, most Americans are not fired up about turning this country around. Way too many of them realize that things are getting worse, but they have "checked out" and are just going through the motions of life.

A perfect example is posted below. In this video, a FedEx delivery guy just chucks a computer monitor over somebody's fence....


Can you believe he did that?

The sad thing is that the guy was actually home at the time and all the FedEx employee needed to do was ring the bell.

This is the kind of attitude that is killing America.

We all need to start caring again. We all need to start taking pride in what we do. We all need to start working hard again. We all need to make sure that we are living with a sense of personal integrity.

When a nation simply does not care anymore, even a con man can become president.

During a recent 60 Minutes interview, Barack Obama said that only 3 presidents in U.S. history accomplished more than he did during the first two years of his presidency....

“The issue here is not going be a list of accomplishments. As you said yourself, Steve, you know, I would put our legislative and foreign policy accomplishments in our first two years against any president — with the possible exceptions of Johnson, F.D.R., and Lincoln — just in terms of what we’ve gotten done in modern history. But, you know, but when it comes to the economy, we’ve got a lot more work to do.”
He had to be joking, right?

Sadly, he was not joking.

But it is not just Barack Obama. The truth is that both political parties are absolutely littered with con men, charlatans and corrupt politicians.

It is going to be up to the American people to get educated about how bad things have really gotten, to start demanding solutions, and to start voting much better people into positions of authority.

If dramatic changes are not made, our economy will continue to get worse and the decline of America will continue to accelerate.

We cannot stay on this road my friends.

It is only going to lead to a total nightmare.

Please share this information as widely as possible, and please try to wake up as many of your fellow Americans as you can while there is still time.

Global Savings Glut or Global Banking Glut?

Yves here. It has been striking how little commentary a BIS paper by Claudio Borio and Piti Disyatat, “Global imbalances and the financial crisis: Link or no link?” has gotten in the econoblogosphere, at least relative to its importance.

As most readers probably know, Ben Bernanke has developed and promoted the thesis that the crisis was the result of a “global savings glut,” which is shorthand for the Chinese are to blame for the US and other countries going on a primarily housing debt party. This theory has the convenient effect of exonerating the Fed. It has more than a few wee defects. As we noted in ECONNED:

The average global savings rate over the last 24 years has been 23%. It rose in 2004 to 24.9%. and fell to 23% the following year. It seems a bit of a stretch to call a one-year blip a “global savings glut,” but that view has a following. Similarly, if you look at the level of global savings and try deduce from it the level of worldwide securities issuance in 2006, the two are difficult to reconcile, again suggesting that the explanation does not lie in the level of savings per se, but in changes within securities markets.

Similarly, the global savings glut thesis cannot explain why banks created synthetic and hybrid CDOs (composed entirely or largely of credit default swaps, which means the AAA investors did not lay out cash for their position) which as we explained at some length, were the reason that supposedly dispersed risks in fact wound up concentrated in highly leveraged financial firms.

By contrast, the Borio/Disyatat paper tidily dispatches the savings glut story, and develops a more persuasive argument, that the crisis was due to what they call excess financial elasticity, which means it was way too able to accommodate bubbles. From Andrew Dittmer’s translation of the paper from economese to English:

The idea of “national savings” or “current account surplus” refers to the total amount of exports sold minus the total amount of imports sold (more or less). The “excess savings” theory holds that this excess had to have been financed somehow, and so presumably by countries in surplus, like China.

However, for the US in 2010, the total amount of financial flows into the US was at least 60 times the current account deficit (9), counting only securities transactions. If this number were correct, then inflows would be 61 times the current account deficit, and outflows would be 60 times the current account deficit. The current account deficit is a drop in the bucket. Why would anyone assume it had anything to do with the picture at all?

Moreover, if the “savings glut” theory was correct, we would expect there to be certain historical correlations between the following variables: (a) current account deficits of the US, (b) US and world long-term interest rates, (c) value of the US dollar, (d) the global savings rate, (e) world GDP. There aren’t (4-6, see graphs).

You would also expect credit crises to occur mainly in countries with current account deficits. They don’t (6).

Suppose we look at a more reasonable variables: gross capital flows (13-14). What do we learn about the causes of the crisis?

Financial flows exploded from 1998 to 2007, expanding by a factor of four RELATIVE to world GDP (13), and then fell by 75% in 2008 (15). The most important source of financial flows was Europe, dwarfing the contributions of Asia and the Middle East (15). The bulk of inflows originated in the private sector (15).

If we look instead at foreign holdings of US securities (15-16), Europe is still dominant, but China and Japan are a little more prominent due to their large accumulations of foreign exchange reserves (15). Still, the Caribbean financial centers alone account for roughly the same proportion as either China or Japan (16). Other statistics provide a similar picture (17-19).

So what caused the crisis? Clearly, the shadow banking system (mainly based around US and European financial institutions) succeeding in generating huge amounts of leverage and financing all by itself (24, 28). Banks can expand credit independently of their reserve requirements (30) – the central bank’s role is limited to setting short-term interest rates (30). European banks deliberately levered themselves up so they could take advantage of opportunities to use ABS in strategies (11), many of which were ultimately aimed at looting these same banks for the benefit of bank employees. These activities pushed long-term interest rates down. Short-term rates remained low because the Fed didn’t raise them as long as inflation didn’t appear to be an issue (25, 27).

The Asian countries played a small role as well. They didn’t want US/European-driven asset price inflation to spill over into distortions in their economies, and so they protected themselves by accumulating foreign exchange reserves (26 and 26 note). That was mean of them. If they had allowed more spillover, then the costs of the shadow banking system would have been partly borne by them, and that would have made the credit crisis less severe in the advanced countries (26).

Keep in mind that this is not a mere aesthetic argument. If you believe the Bernanke argument, you’ll argue that China needs to let the renminbi appreciate faster and provide more safety nets to its populace so they can shop almost as much as Americans do. If you accept the Borio/Disystat analysis, it means you need to regulate financial players and markets far more aggressively.

This VoxEU article by Hyun Song Shin provides further support for the Borio/Disytat thesis, as well as providing the additional benefit of providing a clear and simple explanation of some of the issues it raises.

By Hyun Song Shin, Professor of Economics at Princeton. Cross posted from VoxEU

It has become commonplace to assert that current-account imbalances were a key factor in stoking subprime lending in the US. This column says the ‘global banking glut’, i.e. the rise in cross-border lending, may have been more culpable for the crisis than the ‘global savings glut’. As the European banking crisis deepens, the deleveraging of the European global banks will have far-reaching implications not only for the Eurozone, but also for credit supply conditions in the US and capital flows to the emerging economies.

The ‘global savings glut’ is what Ben Bernanke called it. This phrase provided a powerful linguistic focal point for thinking about the surge in net external claims on the US on the part of emerging economies. The biggest worries concern the financial stability implications of these large and persistent current-account imbalances.

Since Bernanke’s 2005 speech (Bernanke 2005), it has become commonplace to assert that current-account imbalances were a key factor in stoking the permissive financial conditions that led to subprime lending in the US.

But maybe the finger is being pointed the wrong way. My recent research suggests that the ‘global banking glut’ may have been more culpable for the crisis than the ‘global savings glut’ (Shin 2011).

What is the ‘global banking glut’?

To introduce the distinction, it is instructive to start with the financial crisis in Europe. What role did current-account imbalances play there? There are some superficial parallels with the US in the run-up to the crisis.
The current-account deficits of Ireland and Spain widened dramatically before the crisis (Figure 1). This despite the fact that Spain and Ireland were paragons of fiscal rectitude – with budget surpluses and low debt ratios (much lower than Germany’s and the Eurozone average in 2006, see Figure 2).

Figure 1. Current account of Ireland and Spain (% of GDP)



Figure 2. Government budget balance and debt-to-GDP ratios of Ireland, Spain and Germany



To push the analogy with the US further, imagine for a moment that the Eurozone is a self-contained miniature model of the global financial system. In this miniature model, Germany plays the role of China, while Spain and Ireland play the US.

According to the analogy, excess savings in Germany find their way to Spain and Ireland where they inflate the property bubbles there. The bubbles subsequently burst, resulting in the socialisation of private debt through bank bailouts and precipitating the sovereign-debt crisis.

However, the further we push the analogy, the stranger it gets. According to the ‘global savings glut’ hypothesis, Chinese savers favour US Treasuries because China lacks deep financial markets that could cater to demands for safe assets. In the miniature model of the savings glut for the Eurozone, Spanish and Irish bank deposits play the role of US Treasuries, since current-account imbalances in the Eurozone were financed through capital flows in the banking sector. To sustain the analogy, we would need to argue somehow that German savers shunned bank deposits in Germany to favour bank deposits in Ireland and Spain. Why would German savers believe that deposits in Spain and Ireland are safer than those in Germany? At this point, the savings glut analogy strains credulity and breaks down.

A more plausible narrative is a banking glut associated with the explosive growth of cross-border lending in Europe, as illustrated by Figure 3 which plots the cross-border domestic currency lending and borrowing by EZ banks.

Figure 3. Cross-border domestic currency assets and liabilities of EZ banks



There is a mechanical jump in the two series at the start of 1999 with the launch of the euro, as previously foreign-currency lending and borrowing are reclassified as being in domestic currency (i.e. euros). But from 2002, cross-border bank lending saw explosive growth as the property booms in Ireland and Spain took off and as European banks expanded their operations in central and Eastern Europe.

What drove European banks to do this? By eliminating currency mismatch on banks’ balance sheets, the introduction of the euro enabled banks to draw deposits from surplus countries in their headlong expansion. Meanwhile, the permissive bank-capital rules under Basel II removed any regulatory constraints that stood in the way of the rapid expansion. To be fair, the permissive bank risk-management practices epitomised by Basel II were already widely practised within Europe before the formal introduction, as banks became more adept at circumventing the spirit of the initial 1988 Basel Capital Accord.

Compared to other dimensions of economic integration within the Eurozone, cross-border mergers in the European banking sector remained the exception rather than the rule. Herein lies one of the paradoxes of Eurozone integration. The introduction of the euro meant that “money” (i.e. bank liabilities) was free-flowing across borders, but the asset side remained stubbornly local and immobile. As bubbles were local but money was fluid, the European banking system was vulnerable to massive runs once banks started deleveraging.

Europe’s crisis: A banking crisis first, a sovereign-debt crisis second

The banking glut hypothesis is a better perspective on the current European financial crisis than the savings glut hypothesis. The crisis in Europe is a banking crisis first, and a sovereign-debt crisis second. It carries all the hallmarks of a classic “twin crisis” that combines a banking crisis with an asset-market decline that amplifies banking distress. In the emerging-market twin crises of the 1990s, the banking crisis was intertwined with a currency crisis. In the European crisis of 2011, the twin crisis combines a banking crisis with a sovereign-debt crisis, where the mark-to-market amplification of financial distress worsens the banking crisis.

The banking glut in Europe was part of a global phenomenon, as documented in a recent paper delivered as this year’s Mundell-Fleming lecture at the IMF (Shin 2011). Effectively, European global banks sustained the “shadow banking system” in the US by drawing on dollar funding in the wholesale market to lend to US residents through the purchase of securitised claims on US borrowers, as depicted in Figure 4.

Figure 4. European banks in the US shadow banking system



Although European banks’ presence in the domestic US commercial banking sector is small, their impact on overall credit conditions looms much larger through the shadow banking system. The role of European global banks in determining US financial conditions highlights the importance of tracking gross capital flows in influencing credit conditions, as emphasised recently by Borio and Disyatat (2011). In Figure 4, the large gross flows driven by European banks net out, and are not reflected in the current account that tracks only the net flows.

The netting of gross flows shows up in Figure 5, which plots US gross capital flows by category. While official gross flows from current-account surplus countries are large (grey bars), we see that private-sector gross flows are much larger.

Figure 5. Gross capital flows to/from the US



The downward-pointing bars before 2008 indicate large outflows of capital from the US through the banking sector, which then re-enter the US through the purchases of non-Treasury securities. The schematic in Figure 4 is useful to make sense of the gross flows. European banks’ US branches and subsidiaries drove the gross capital outflows through the banking sector by raising wholesale funding from US money-market funds and then shipping it to headquarters. Remember that foreign banks’ branches and subsidiaries in the US are treated as US banks in the balance of payments, as the balance-of-payments accounts are based on residence, not nationality.

European banks: Gross flows and US pre-crisis credit conditions

The gross capital flows into the US in the form of lending by European banks via the shadow banking system will have played a pivotal role in influencing credit conditions in the US in the run-up to the subprime crisis. However, since the Eurozone has a roughly balanced current account while the UK is actually a deficit country, their collective net capital flows vis-à-vis the US do not reflect the influence of their banks in setting overall credit conditions in the US.

The distinction between net and gross flows is a classic theme in international finance, but deserves renewed attention given the new patterns of international capital flows (see, e.g., Borio and Disyatat 2011). Focusing on the current account and the global savings glut obscures the role of gross capital flows and the global banking glut.

Net capital flows are of concern to policymakers, and rightly so. Persistent current-account imbalances hinder the rebalancing of global demand. Current-account imbalances also hold implications for the long-run sustainability of the net external asset position. For the US, however, the current account may be of limited use in gauging overall credit conditions. Rather than the global savings glut, a more plausible culprit for subprime lending in the US is the global banking glut.

As the European banking crisis deepens, the deleveraging of the European global banks will have far-reaching implications not only for the Eurozone, but also for credit supply conditions in the US and capital flows to the emerging economies. Just as the expansion stage of the global banking glut relaxed credit conditions in the US and elsewhere, its reversal will tighten US credit conditions. Its impact in the emerging economies (especially in emerging Europe) could be devastating. In this sense, there is a huge amount at stake in the successful resolution of the European crisis, not only for Europe but for the rest of the world.

The Fed as the New Global Aristocracy: Walker Todd

In this issue of The Institutional Risk Analyst, we ask a question that ought to be top of mind for all Americans - namely whether the US government and particularly the Federal Reserve System should be bailing out the Old Man of Europe once again. And to help us answer that question, we went to the nation's leading expert on the constitutionality of the role currently being played by the Fed, Walker Todd.

A resident of Cleveland, OH, Walker served as counsel to the discount window at the Federal Reserve Bank of New York in the 1980s when IRA co-founder Chris Whalen worked as an applications analyst in the same institution. Todd later fled the moral vacuum created inside the central bank by then NY Fed President E. Gerald Corrigan to work at the Cleveland Fed. He was eventually driven out of the central bank entirely by the forces of relativism that have controlled the Fed ever since. Todd now works as a scholar at the American Institute for Economic Research (AIER).

But before we dive into this important discussion, we need to announce a couple of changes at IRA. First we held our annual shareholders meeting last week and Dennis Santiago was elected Chairman & CEO of Lord Whalen LLC, the parent of Institutional Risk Analytics. If you need information about any IRA tools and services, please contact Dennis or Diana Waters.

IRA co-founder Chris Whalen was elected Vice Chairman of Lord, Whalen LLC. He is leaving his duties as head of sales and business development at IRA to take a position as Senior Managing Director of Tangent Capital Partners in New York. Chris will be focusing on investment management and advisory opportunities at Tangent, as described by Bill Alden in the New York Times, but he will continue to edit The Institutional Risk Analyst. Suffice to say it is time to put some of IRA's analytics tools to work in a live risk environment.

Many readers of The IRA have asked us in the past several months if we despair for the future of the United States and the economic system built upon the much abused dollar. The short answer is no; we at IRA are bullish on the United States, in part because the very democratic freedom that allows Americans to commit acts of libertine stupidity is also our greatest strength.

No matter how much gold is stored in the central banks of the nations of the old world such as China, Russia and the European Union, these nations are not democratic. No amount of monetary rectitude will offset the fact that the peoples of the old world are not free to act, either in political or economic terms. In this regard, see the critical review of the new book by Jim Rickards, "Currency Wars: The Making of the Next Global Crisis," written by Chris Whalen on The Big Picture.

The key point to be made about the Fed swaps lines to EU central banks is not financial but rather political. Phil Izzo of The Wall Street Journal noted on November 30, 2011 that "since the Fed isn't lending to banks directly, the risk is essentially nonexistent," a point that is only true if the central banks on the other side of the swap still exist a year from now. But hold that thought.

The US government has bailed out Old Man Europe three times in the past century and more. Prior to the start of WWI in 1913, the allied nations led by the UK borrowed heavily from the US, both directly from banks and through commercial credits underwritten by the new federal reserve system. At the end of the conflict, the victorious European nations defaulted on their debts to the US government even as they extracted unfair financial reparations from defeated Germany, extortionate outflows that would eventually create the macabre path for the political rise of Adolph Hitler.

In WWII the allied nations of Europe again led by the UK borrowed heavily from the US government. And again the victorious nations of western Europe defaulted on their financial obligations to the people of the US. This avoidance of the financial obligations by the nations of Europe to the US is on top of the vast human sacrifice made by American soldiers and their families in that conflict.

After WWII, the allied nations of Europe were broke and the US once again subsidized them via the Marshall Plan and various related mechanisms intended to rebuild Europe and, later, engage in a Cold War against the Soviet Union. One of the key points that needs to be made is that in neither WWI nor WWII were the entrenched economic and political elites in Western Europe disturbed. After WWII the leadership of the US military actively organized the very same corporations and business leaders that had financed and supplied Hitler's blitzkrieg to fight the war against godless communism.

With no turning of the economic soil in Europe after the two great wars and Cold War, it should be no surprise that growth and employment in what is today the Eurozone has slowly ebbed. Keep in mind that while the US required the nations of Europe to undertake the experiment we now call the EU as a condition of financial support under the Marshall Plan, the Americans did not require significant restructuring nor the breakup of the old industrial groups. There are still numbers tattooed into the leather seats of every Mercedes Benz that rolls off the assembly line.

Thus our earlier comment about the chief effect of the Fed's generosity via the swap lines being political. By providing financing to the bankrupt nations of Europe, the Fed is interfering in the internal political affairs of foreign nations. Whether the Fed is repaid or not is a minor issue compared to the political and social damage done to the people of Europe by depriving them of the democratic opportunity to "throw the rascals out," to use the well-worn American phrase.

Like most economists, the people who run the Fed today have no more sense about the political impact of foreign intervention than they do about the domestic political impact of bailing out large banks. In each case, the Fed's economic decision to leave existing corporate and political structures in place has tremendously damaging effects on the political life of all the nations concerned.

In the case of the US, does anyone think that Barack Obama would be seeking a second term as POTUS had the largest banks been restructured by free market forces? The US housing sector would already be recovering, in part because the political shock wave of restructuring would have forced Congress to act long ago. Bank America and Citigroup would have been broken up and sold to new investors, and the US economy would be growing again without fiscal stimulus.

Likewise without the Fed's swap lines, Angela Merkel in Germany and Nicholas Sarkozy in France would have preceded Italian premier Silvio Berlusconi out the political door more than a year ago. Instead the very same entrenched corporate elites that have led Europe down the road to economic hell for the past half century are now clients of Ben Bernanke and the Federal Reserve Board.

When Bernanke, Treasury Secretary Tim Geithner and their trained puppet Mitt Romney talk about how the Fed just had to save the financial system via bailouts for zombie banks, they never admit that the chief beneficiaries of these actions were American politicians. This all brings us to our discussion with Walker Todd.

The IRA: A House committee is planning hearings this week on the legality of the Fed swap lines. What is your view of this issue?

Todd: First you should see my Superior Court brief in the Four Farmers' Case (2001).

The IRA: This was an interesting case that of course the media ignored. The petitioners, a group of four farmers residing in Colorado, New Mexico, and Kansas, brought an action against the United States for an injunction against farm foreclosures until parity pricing principles, declared to be the underlying law of U.S. agriculture in 1933 and never repealed or suspended, were enforced in the United States.

Todd: Precisely. Similar issues are at stake in the case of the Fed swap lines to the EU. The Constitution clearly and squarely prohibits a congressional delegation of the power to create monetary claims against the United States. What else is a swap agreement, after all? The Congress cannot allow claims to be created permanently to an entity not subject to congressional (a) appropriations or (b) review. Now tell me about the ECB and other central banks.

The IRA: No, you tell us. Are the Fed swap lines a violation of the US Constitution?

Todd: Yes. The Fed, whose liabilities have the explicit full faith and credit of the United States and thus should be subject to congressional review, currently is letting the ECB create "unlimited amount" claims against the Fed. What happened to the long-established principle of 50-50 sharing of swap liabilities between the Fed and the Treasury/ESF?

The IRA: Once upon the time, the Treasury did pretend to care about the distinction between fiscal expenditures and monetary emissions from the central bank.

Todd: The term of the loans at least is limited, although the Fed now is extending the stuff out a little more than a year.

The IRA: So what is the basic issue? Accountability?

Todd: Yes. When you report back to me that Congress is willing to haul a European banker, let alone a senior Fed or Treasury official, before a hearing and to ask him or her reaming-out questions about how the swap line credits were used, then and only then will I believe that Congress is serious about getting on top of this issue.

The IRA: Has Congress or the Supreme Court ever addressed this issue?

Todd: The Supreme Court case that should be reviewed is Hampton v. US (1928). Beyond that, I currently have no reason to believe that anyone in Congress is serious about taking on or reforming the Federal Reserve Board. Why should anyone volunteer to be guillotined in defense of a principle that no one in Congress will defend?

The IRA: Why indeed. But we do suspect that there is a rising tide of Americans who do care about such issues. The success of Newt Gingrich in attacking the better financed and organized Romney campaign certainly suggests that Americans do care about such distinctions. How should Congress impeach Bernanke and the other Fed governors for their reckless foreign intervention?

Todd: The principle is roughly as follows and it's all constitutional; the contrary is not. Claims against the full faith and credit of the United States have to be approved by Congress. Otherwise, the people are subjected to whatever noble class Congress deigns to enshrine. Tocqueville wrote, in his "Old Regime and the Revolution" (1851), that the fatal wound to the French constitutional body politic was administered when Charles VII (15th century) agreed with the nobles that he would have the right to impose direct taxation on the people unilaterally as long as he did not tax the nobles.

The IRA: So Bernanke and company are the new nobility, imposing a tax on US taxpayers via an illegal expenditure and, indirectly via inflation?

Todd: Don't unlimited Fed swap lines for Europe and general favoritism toward corporations (especially banks, and foreign banks at that) smack mightily of that tone and flavor?

The IRA: Yes they do.

Todd: Bankers and corporations generally, constitutionally are supposed to have no better standing before Congress, the Supreme Court, or God Almighty than the average Joe taxpayer from Peoria, Illinois. A clause in the Constitution explicitly prohibits the creation of a noble class.

The IRA: So by bailing out the large banks and foreign governments of the EU, Bernanke is elevating these corporate entities to the level of "too big to fail" and thus above that of the US citizens?

Todd: Yes. Until and unless Congress and/or the Supreme Court manage to behave accordingly, I have no reason to gainsay Robert Heilbroner's great summary of the US economy: "Imagine a series of tribute trains moving slowly from the Heartland toward Washington and New York." In the question you have posed, I would add, "And toward Frankfurt."