Winter Patriot Community Blog

INTO THE VALLEY OF DEBT (Shorter Version)

Everyone is suffering from the economic slowdown. Many have lost their jobs and houses because of bankers selling questionable financial “rabbits out of hats” such as Collateralised Debt Obligations (CDOs) and the positively fraudulent use of Credit Default Swaps (CDSs) otherwise knowm as derivatives.
Many privately wealthy people have lost much of their capital by buying these Collateralised Debt Obligations (CDOs) or by investing in companies that got caught with them.
Many people of more modest means have lost investments, too, and seen the value of their superannuation plummet, as well. Their Mutual Funds have been caught with CDOs and also hold shares that have lost value through the same process.
And lastly, everybody will suffer from the coming inflation and from future increased taxes caused by government debts incurred to pay off the fraudsters and so make the filthy rich obscenely rich.
And all this through a simple scam. From James Lieber's excellent article in the Village Voice (Jan 27th '09), “What Cooked the World's Economy” -
“The bottom line in this scandal is that fantastically wealthy entities positioned themselves to make unfathomable fortunes by betting that average Americans - Joe Six-Packs and hockey moms - would fail.“
In short, with AIG and JP Morgan in the lead, insurers, investment houses and banks created subprime loan assets by selling loans to people who couldn't afford them and had the rating agencies give them prime rating. These subprime assets had higher subprime returns with apparent prime safety. This was irresistable bait for the greedy. The anonymous “counterparties” behind the AIG/JP Morgan push insured these subprime loans (CDOs) with derivatives (CDSs or Credit Default Swaps aka derivatives) betting that the loans would fall over and thus collecting handsomely. And in the process, bleeding the above companies and others dry and then bleeding the whole nation dry through the government and its bailouts which was the real and ultimate "mark" all along.

The concept was simple. However, the implementation took some doing over many years including dismantling the regulatory provisions and hobbling the oversight bodies.
With this information, looking back over those years makes it plain that it was all deliberatly engineered. The same cast of characters are present at every step; building, priming, selling and detonating the charges and then lobbying excitedly and making threats for the compensation or more correctly, the payoff.
The situation is no different (except in scale) to a man (counterparty) renting a house to pyromaniacs (sub-prime borrowers) then selling the house complete with tenants to an investor (mutual funds, some banks etc) and subsequently insuring the now unloaded house (CDS's) with an insurance company (AIG) multiple times, say twenty times, against burning down which it promptly does. The original seller, (counterparty) collects on his twenty insurance policies twenty times even though he doesn't own the house and then goes looking for another house to buy and rent to more pyromaniacs and on sell and so repeat the process. He keeps doing this until he bankrupts every insurance company he can find and then demands that the government pay up on the fraudulent policies the insurers can't cover now .
That's pretty much it except that the people talked into the subprime mortgages which were designed to be defaulted on were not criminal pyromaniacs but rather gullible or naively hopeful workers. All the other parties, including the complicit senior executives of the insurance companies were and are guilty of criminal behaviour.
The solution to this mess is also simple – declare the Credit Default Swaps (deritatives) invalid legally, no more payouts, and instead provide government funds to assist the people struggling with their mortgages so that not only do they retain a roof over their heads but also to stop the triggering of these fraudulent insurance policies against their default. These derivatives are nothing short of a scam.
The scam is still being worked through because the “bailouts” are an integral part of it and the criminals are directing it all. This is how come the likes of Joseph Cassano of AIG Financial Products are not only not in jail but are still in employment and, unbelievably, also receiving huge bonuses.

To understand in more detail how it all worked, this from James Lieber's article may help,
'“Derivatives weren't initially evil. They began as insurance policies on large loans. A bank that wished to lend money to a big, but shaky, venture, like what Ford or GM have become, could hedge its bet by buying a credit derivative (insurance policy) to cover losses if the debtor defaulted.”
A market or trading forum was needed to facilitate the selling of these loan insurance policies (a.k.a. Credit Derivatives or CDs or just “derivatives”) on a large scale and thereby create a new financial services industry (and new profit centre) and was duly supplied in the form of a computer network. From Leiber again,
“the company that put the basic hardware and software together for pricing and clearing derivatives was Bloomberg. It was quite expensive for a financial institution - say, a bank - to get a Bloomberg machine and receive the specialized training required to certify analysts who would figure out the terms of the insurance. These Bloomberg terminals, originally called Market Masters, were first installed at Merrill Lynch in the late 1980s.
Subsequently, thousands of units have been placed in trading and financial institutions; they became the cornerstone of Michael Bloomberg's wealth, marrying his skills as a securities trader and an electrical engineer.
It's an open question when or if he or his company knew how they would be misused over time to devastate the world's economy.”
How did legitimate insurance on a loan mutate so badly? Well, it soon became apparent (if it wasn't the purpose from the begining) that with the insurance (derivative) in place, there was more money to be made from a loan going bad and collecting on the insurance than if the loan was secure and paid off in due course. Particularly if the loan could be insured for more than it was worth or was purchased for. Coupled with the fact that the loan could be insured multiple times and the fact that you didn't even need to own the loan yourself. So if you insure a loan twenty times over so that when it falls over, you are paid its full book value twenty times. This is more than a “goldmine”; this is an exponential formula to unlimited wealth if the fabulous profits are parlayed a few times. Imagine betting on the winning number on a roulette table and letting the winnings ride and having the number come up again . . . and then keep on repeating this process with no pit-boss (or regulator) to shut the table down!
Now think in trillions!

But this jackpot payoff is dependent on the insured loan going bad. So now there is a market for bad or high risk loans and it is an exponentially ever-growing market because once a derivative buyer or “counterparty” (as he is known in the business) has collected big time on his “investment” he naturally wants to plough it all back into the same glorious, no risk, bonanza. But our counterparty's capital has grown like Topsy and he needs a hundred bad loans this time. How many bad loans will he need after a few circuits on this magic merry-go-round? Clearly the “Bad Loan” business needs to go “bigtime” and to do that the financial regulations and supervision need to be eradicated. Bye-bye Glass-Steagall Act. Hello Commodity Futures Modernization Act (CFMA). And thank you, Bill Clinton.
This need for loans to be defaulted on is one of the reasons why Obama and his backers on Wall Street will not help rescue, in any meaningful way, ordinar, but over committed people struggling to stay in their homes or pay off their credit cards. There are still derivatives in play to be collected on.
Lieber again, “By plunking down millions of dollars, a hedge fund could reap billions once these fatally constructed securities plunged. Again, the funds did not need to own the securities; they just needed to pay for the derivatives - the insurance policies for the securities. And they could pay for them again and again. This was known as replicating. It became an addiction. “
It's not over, either. To repeat, its still in play and there are still loans to fall over and there are still payoffs to collect for the mysterious counterparties whom the Fed and everyone else involved refuse to identify.

But let me backtrack a little to how the first half of the scam operated before the government intervention and the second half began.
The challenge was how to do it on a mass scale. It needed to pull most of the financial industry in because the object was to firstly, loot and crash whole economies and secondly, set the stage for a one world currency which would give the issuers of this currency a de facto world government. .
So they needed a respectable and respected front to lead the way for others to follow; to assure the nervous Nellies that success lay in joining “The Charge of the Blight Brigade into the Valley of Debt”.
What better vehicle than AIG, the biggest insurance company in the world? You are probably protesting that this company is “one of their own”. Yes, but many a fortune has been made from bankrupting a company, particularly, one's own. Maurice Greenburg, the head of AIG, established the demolition team in London, AIG Financial Products by name. I suggest this was not only to escape the rather non-existent regulatory control but also to escape internal detection and intervention from senior executives at the parent company who might not be too exicted about the prospect of their careers, status and livelihoods going up in smoke and so "out" the operation before its time is due.
Lieber points out, “In 2000, AIG asked the New York State Insurance Department to decide if it wanted to regulate them, but the department's superintendent, Neil Levin, said no. The question was not posed by AIGFP, but by the company's main office through its general counsel”.
Perhaps head office was trying to get the regulator to do what it ironically couldn't i.e. audit its own subsiduary because Maurice Greenberg placed the sellers of these grenades, the Credit Default Swaps, in London and refused head office access to their books.
With the solid looking facade of AIG in place all that's needed now is an outside “seal of good housekeeping” for the bait which was provided by Standard & Poors and the other rating agencies. The bait made up of mortgages, credit card debt and sundry other things and otherwise known as CDOs (Collateralised Debt Obligations) was sold to,
“Banks like Wachovia, National City, Washington Mutual, and Lehman Brothers (who) loaded up on this financial trash, which soon proved to be practically worthless. Today, those banks are extinct” (unlike the ratings agencies).
Either these institutions were kept in ignorance and were set up by their fellow bankers to fail with the view to taking out the competition;
or, they were gutted and offered up as sacrificial lambs; that the derivatives were, indeed, taken out on the bad loans (CDOs) by the principals of these firms but held in other companies away from the creditors and eventual liquidators and the wholesale looting put down to incompetence instead of larceny.
I think it likely that both these scenarios were in play with different individual companies and for both the reasons outlined above.
But this bomb is a time bomb and these institutions (and also private investors) are loaded up with these explosive bad loans, we need a trigger to set the chain reaction off. This was supplied by the banks tightening up consumer credit causing an economic slowdown and with it increased unemployment which then caused the CDOs to start popping off and then . . .
“the raters rushed to downgrade them to junk status. This occurred suddenly with more than 4,000 CDOs in the first quarter of 2008 - the financial community now regards them as "toxic waste."
To top it all off, JP MorganChase and others delivered the “coup de grace” by freezing interbank lending with instantaneous catastrophic results.

Part one of the scam was complete by this stage. The fiasco had now entered the public arena through the media coverage. And Part Two was about to start.
The Fed went to Congress to appeal for funds to ease the “credit crisis” which had been deliberately created, of course. After initially baulking, Congress handed over the funds and the Fed promptly gave it to the insurers such as AIG who almost certainly turned this money over to the derivative holders, the anonymous “counterparties” i.e. the scammers and builders of this massive operation. This has to be be part of the original plot because AIG and other insurers simply had nowhere near the capital to pay out on the derivatives and the whole operation only makes sense if the scammers can collect which means the government was meant to pay and pay big right from the beginning. This was the prize, the goal of the whole exercise And the government did pay up and is continuing to pay up, what's more. The scam is still in operation.
In the tight monetary conditions i.e. tight lending practices of the banks to average people, loans are continuing to fall over and derivatives are continuing to be triggered and are continuing to be payed out and Congress, via the Fed, is continuing to fund it all. The strugglers out there in mortgageland will not be helped in any meaningful way because that would lessen the number of subprime loans going into default and this would stop this process that provides the continuing shower of funds down on the pigs at the trough. All this is to say that the bailouts give massive dollar amounts to the already wealthy and every one pays for it because, for one, the value of the dollars everyone else is holding goes down through inflation and two, the taxes that will inevitably follow to cover the government “bialout” to accommodate and facilitate this shift of wealth.

The US Federal Government together with Wall Street (which includes the Federal Reserve Bank) are engaged in a conspiracy to massively defraud the American public.