Ponzis Resume

Just as the Ponzi housing finance schemes in the U. S. hardly missed a beat with FHA bellying up to the bar and Fannie and Freddie being made semi-official wards of the state, Ponzi auto finance is resuming, as reported by the LA Times:

General Motors Co. is getting back into the credit business, a move that will give its dealers more options to lease and finance car sales.

GM said Thursday that it would purchase AmeriCredit Corp. in an all-cash transaction valued at approximately $3.5 billion, or about $24.50 a share.

The acquisition gives GM what's known as a "captive finance unit" or lending division that allows it more flexibility to offer lease and finance deals. It would fill the role once played by GMAC; the automaker sold all but a minority interest of that company in 2006. . .

GM is already working with AmeriCredit to provide auto loans to customers with "non-prime" or poor credit ratings.

GMAC owned DiTech, one of the giant subprime housing finance entities. It is being resuscitated.

Now we have what we thought was European-style mixed economy stuff to complicate matters:

The automaker said it will continue to work with Ally Financial, the former GMAC finance company, for loans to customers with good credit and to provide inventory financing for dealers.

It would be both politically and financially untenable to sever the relationship with Ally to channel all of its financing business to AmeriCredit, said Kirk Ludtke, an analyst at CRT Capital Group in Stamford, Conn.

The federal government has approximately $57 billion of commitments -- including $17.9 billion of direct investment, $32 billion of federally insured consumer deposits and $7 billion of unsecured debt guarantees -- to Ally, he said.

"We continue to believe that the Obama administration is unlikely to allow either GM or Ally to pursue a strategy that would undermine the other," Ludtke said.

Statism is on the march. Anyone who continues to think that the U. S. still has a largely free market economy has another think coming. No less an authority on unfree markets than Hugo Chavez said after the shenanigans of the Bush administration in late 2008:

"Bush is to the left of me now. Comrade Bush announced he will buy shares in private banks."

Whether Senor Chavez was entirely accurate with that quote is not the point. The Federal government is almost everywhere now. Perhaps retail distribution of food and clothing remains free market-oriented; but with over 40 million Americans on food stamps and extensive welfare programs providing consumer "demand", even those bastions are indirectly socialized now.

Who knows, but today's strong up-move in stocks may owe more to hopes of zero interest rates forever than to anything else.

Under the aegis of Keynesianism, what is more certain than ZIRP is that money printing and government deficits will be used for political purposes in the U. S. indefinitely.

Gold has been a protection against that in the past. Is $1200 an ounce adequate protection? Since this is way up over one year ago, short term it may well be. In the long run . . . well, David Rosenberg stated recently that gold accounts for 0.05%of the financial assets of Americans.

Is that likely to increase or decrease?

Copyright (C) Long Lake LLC 2010

Dropping the Bull

Things are seldom what they seem;
Skim milk masquerades as cream . . .

Black sheep dwell in every fold;
All that glitters is not gold;
Storks turn out to be but logs;
Bulls are but inflated frogs . . .

Gild the farthing if you will;
Yet it is a farthing still.

- From "Things Are Seldom What They Seem", Gilbert and Sullivan, HMS Pinafore, 1878

Here are several bits of news either reported, or in one case seen by me in the past 48 hours alone:

Bank of America Accused in Ponzi Lawsuit

By LESLIE WAYNE
Published: March 27, 2009

Bank of America effectively set up a branch in a Long Island office that helped Nicholas Cosmo carry out a $380 million Ponzi scheme, according to a class-action lawsuit filed in federal court.

The lawsuit, filed in Federal District Court in Brooklyn late Thursday, contends that Bank of America “established, equipped and staffed” a branch office in the headquarters of Mr. Cosmo’s firm, Agape Merchant Advance. As a result, the lawsuit contends that the bank knowingly “assisted, facilitated and furthered” Mr. Cosmo’s fraudulent scheme.

“Bank of America was at the epicenter of this scheme,” said the lawsuit, which seeks $400 million in damages from the bank and other defendants. “Without Bank of America’s participation, the scheme would not have succeeded and grown to such an enormous size.”

Mr. Cosmo surrendered to authorities at a Long Island train station in January in connection with a suspected Ponzi scheme involving what Mr. Cosmo called “private bridge loans” that promised investors returns of 48 percent to 80 percent a year. Many of his 1,500 investors were blue-collar workers and civil servants.

DoctoRx here. Could this be a nuisance suit? Could it be an Enron moment? We'll see. Next, from the Zero Hedge blog:

Merrill Traders Mismarked P&Ls By Up To $7 Billion To Game Bonus

We are surprised to have missed this the first time around. On page 4 of the Cuomo accusations against Merrill (and Lewis), the Attorney General raises a huge allegation against Merrill's trader employees: the AG claims that traders "willfully" manipulated their P&Ls, potentially by up to $7 billion, in order to make it seem they were more profitable in advance of the early mid-December bonus evaluation, knowing full well they would subsequently remark their books lower, having been already paid for the previous fake P&L number.


(From the complaint): The Office has also learned that, less than a week after Merrill voted its premature bonuses, Merrill determined that it would incur an unexpected additional $7 billion in losses for the fourth quarter of 2008, beyond the $8 billion it was already anticipating (Id. at Ex. D at 9-11 and Ex. H at 128-29). It appears that some of these losses may have been booked by Merrill employees who marked down their portfolios only after their 2008 bonuses were set (Id. at Ex. W). Despite the gargantuan unexpected losses, Merrill did not reconsider its bonus awards (which had been voted but not yet paid out) and Bank of America neither requested nor demanded that Merrill reduce its bonus pool (!d. at Ex. C at 106-07, Ex. D at 115-17, Ex. E at 86, and Ex. H at 28). Again, these material developments were undisclosed to the company's shareholders or to the legislators considering how to salvage the American banking system (!d. at Ex. C at 146-49).

(Back to Zero Hedge): As any derivatives trader will attest, this calendar "straddle" as it is lovingly called by some, is by far the oldest trick in the book, where multivariate models' inputs are jiggered in order to spew one number, only to have the correction subsequently "discovered" and fixed at the bank's expense while the bonus has already been pocketed. It is also a reason why many banks have pushed their bonus determination late into the subsequent year so that they are able to have at least semi-audited numbers serve as the basis for bonuses.

If Cuomo pursues this avenue successfully and obtains proof of malfeasance, the consequences would be much more dire than a mere slap on the wrist and bonus disgorgement, as mark manipulation does have criminal connotations associated with it, for both the perpetrator and the enabler/supervisor (emph added).

DoctoRx here. Is Attorney General Cuomo engaging in a frivolous pursuit? Next:

From Naked Capitalism:

We're not quite as healthy as we thought we were. Oops. (WSJ)

J.P. Morgan Chase Chief Executive James Dimon said...that March was a little tougher than the first two months of the year....Bank of America...CEO Kenneth Lewis also said that March had been a tougher month for his bank. [Convenient that they dumped this on Friday afternoon, and at the close of a very good week].Readers may recall that a few weeks ago, Dimon and Lewis---along with Citi's Vikram Pandit---said the first two months of the year had been very good:

Pandit, March 10th: “We are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007.”

Dimon, March 11th: "Jamie Dimon, the chief executive of JPMorgan Chase, said Wednesday that the bank was profitable in January and February..."

Lewis, March 12th: "We have been profitable for the first two months of the year,” Lewis told reporters after a speech in Boston today.

DoctoRx here. All investors recall that twice last year, the SEC arbitrarily squeezed the short-sellers by putting in selective restrictions on short sales of financial companies. The second of these was so blatant a form of market manipulation that such "financials" as IBM were included in the ban. What happened a few weeks ago was in relation to the Geithner bail-out and goosed the stocks big-time. Now, also in March, we get the real news. The truth is that banking is a poor business now, with the (important) exception that the Fed is doing everything it can to keep the banks enjoying a huge net interest margin. More stock market manipulation.

Next, more on the legal front, again from Zero Hedge:

Cuomo Pitting Thain vs. Lewis: One of Them Will be in Big (Legal) Trouble

Turns out NY AG Andrew Cuomo is pretty smart: he is seeking a court order that will force John Thain to testify as to what really happened in early December when Merrill bonuses were paid out ahead of posting a huge loss, or otherwise he will hold the former Merrill chief in contempt and possible further legal escalation.

Thain has claimed he is worried he would be sued by BofA (BAC) if he does talk to Cuomo, so the fan of gold-plated commodes is between a rock and very angry attorney general. Cuomo's strategy is likely to catch Lewis in perjury, since the BofA boss claimed in congress - on the record - that he had no control over the whole Merrill bonus fiasco.

Gasparino reports that BofA HR chief Andrew Smith in fact had full supervision and control over who gets what among the top 15 people at Merrill, meaning that Lewis could be in very hot water here.


Back to DoctoRx. We will see. Next, the biggest banking recipients of bailouts apparently are carrying securitized mortgages at very high prices on their balance sheets (courtesy of a recent analysis by Goldman, Sachs) while simultaneously buying similar securities at much lower prices. Assuming this is true, it is doubly galling, because the cover story for all these bailouts is that taxpayers need to give these companies money so the companies can turn around and lend us back that money. Why are they buying securities at all; don't they have enough? (The truth is that in a poor economy, banks mostly want to lend to people or companies who are financially strong enough that they do not need to borrow.) From the New York Post:


DOUBLE-DIPPERS
CITI, BOFA BUYING BACK LAUNDERED LOANS AT LOWER RATES

. . . the banks' purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.

DoctoRx again. Next, commentary from the $80 Billion hedge fund, Bridgewater, which admits that the latest bank bailout plan is a rip-off:

Hedge fund Bridgewater mulls U.S toxic asset plan

NEW YORK (Reuters) - Bridgewater Associates Inc, one of the world's biggest hedge-fund managers, said on Tuesday it might be interested in participating in the U.S. Treasury's public-private investment program, calling it a "big transfer of money from the government to the banks and to the buyers."

. . . Bridgewater said: "From a macro perspective, this is a big transfer of money from the government to the banks (who are getting the higher prices for their assets) and to the buyers (who are probably going to get a heck of a deal because of the non-recourse loan and the easy access to leverage).

"If the government was operating in an economic way, it would not do this deal -- it would deal with the banks' finances separately and sell this insurance (i.e. the implied put arising from the non-recourse loan) for what it's worth," Bridgewater said in the letter.

DoctoRx here. Finally, just in case you were under any illusion that anything material is changing for the better anywhere in the financial system, comes this news from the WSJ:

Risk Officers Remain at Insurer's Helm

Inside American International Group Inc., a group of top executives called the Credit Risk Committee oversaw some of the company's biggest bets, such as the insurer's foray into credit-default swaps.

But even after a $173 billion government bailout, this group, which reviewed and approved risk-taking decisions, remains largely unchanged. At least five of the 10 committee members have served for years, according to internal company documents. Some served as far back as 2003 and 2004, the documents show.

Even amid change at AIG, much of the company's day-to-day infrastructure remains in place.


DoctoRx with final comments. There's an unending stream now of this sort of stuff. Not to forget that Bernard Madoff was one of the founders of NASDAQ, which for years has existed almost solely to transfer money from investors and speculators to corporate insiders and the financial community writ large.

World trade is collapsing, perhaps faster than in the Great Depression. The net worth of individuals is down 20% year on year, also rivaling that of the Depression (when fewer people owned stocks or homes). At least four experts on financial/economic crises in emerging nations liken the U. S. to these countries. These experts are:

Ken Rogoff, former Chief Economist to the IMF; now Professor at Harvard;
Simon Johnson, former Chief Economist to the IMF; now Professor at MIT;
Nouriel Roubini, former adviser to U. S. Treasury Department under Clinton/Summers; now (as before) Professor at NYU Stern School of Business;
and Desmond Lachman, with prior senior roles at IMF and then investment banking.

Looking at the current news items, how can these serious people easily be rebutted?


Copyright (C) Long Lake LLC 2009

Listen to Sweden

SWEDISH PRIME MINISTER FREDRIK REINFELDT:

'You can't think you can solve everything with taxpayers' money. Stimulus packages are already in place and taking us through this challenging time. We already have done a lot.'

In contrast, the Feds have decided to double down on their incoherent pretense that they love the banks but hate the bankers. Despite the diversionary witch hunt about AIG bonuses while not questioning the vastly greater giveaway to AIG, and imposing salary limits to a small number of executives under the TARP bailout plan, Treasury plans to expand the already trillion-dollar Federal Reserve TALF (Term Asset-Backed Securities Loan Facility) program.

The Fed, however, has conveniently exempted TALF from compensation limits.

All these Treasury and Fed programs represent employment for financial types.

We can learn a lot from the Swedes, who have been all over the place in their voyage into and somewhat out of socialism.

More precious than any given level of expenditures for cellphones, WIIs, movies, restaurant meals, two-five bathroom homes, etc., is the preservation of liberty and democracy as envisioned in the Declaration of Independence and the Constitution, as amended. Thus the greatest imperative is to protect the financial strength of the U. S. Government itself, while dealing directly with the growing homeless epidemic and the fiscal strains/crises at the state and local level.

One additional point.

The alacrity with which Congress imposed a 90% tax rate on these individuals at large financial companies is surprising and disquieting. Why no hearings? What's the rush?

This ginned-up AIG bonus "scandal", the payments for which were, a month ago, specifically allowed by the same "shocked" crowd that now is imposing this penalty tax rate, is so contrived that the suspicion has to be entertained that a la Hoover and then Roosevelt, much higher tax rates, perhaps at the same level, are going to be imposed on other "undeserving rich".

As more and more Ponzi schemes are uncovered all over the U. S. and the U. K., as Europe tries to have less of an increase in government involvement in the economy than does America, as the party in power in the U. S. points fingers within itself over the AIG flap, as Republicans join in the lynch mob, as corporatism continues to be official governmental policy, and as the economic Banana continues to inevitably worsen in the months ahead, all the geniuses who look to the great majority of post-Great Depression economic cycles to guide their decisions and recommendations are making a big mistake. The current crisis is more like the really bad scenes:

The stock market kept going down despite tremendous public angst all throughout 1973 and 1974, bottoming a full 24 months from the peak in December 1972 only after the Watergate and OPEC crises were completely decided and the Viet Nam crisis was almost completely over.
The about 32 month waterfall decline in 1929-32 and the 1973-4 stock market and economic fiascoes strike this observer as better historical examples.

The public's anger at the Big Government/Big Finance alliance is palpable and growing. This does not bode well for the markets in the short term.


Copyright (C) Long Lake LLC 2009

Housing, Subsidies and Ponzi Schemes

With the vast amounts of money the Bush Administration and now the Obama Administration have been pouring into housing, there has been no discussion from the pooh-bahs in Washington of why all this is appropriate.

Vast amounts of Federal debt and guarantees are going into the asset class in America of least value to our long-term competitiveness in an increasingly competitive world.  The idea that hard-working Asians and Brazilians will endlessly lend Americans money so that we can live in fantastically superior dwellings borders on insanity.  The American empire and its military superiority is not that durable or even that important, especially to countries such as India, China and Brazil that currently have no serious national security worries.

The more the Feds ruin the Federal finances and America's international competitiveness by plowing vast amounts of money into housing, the more the scheme called Social Security will be perceived as what it always has been:  an inter-generational Ponzi scheme.

Baby-boomers and current workers of retiree age, finances battered, cannot expect even the current level of Social Security payments to be there for them.  The money has been spent.  

Foreigners will not provide that money cheaply forever, and current workers are having too much trouble making ends meet to willingly pay higher and higher taxes on their labor to support the upper generations.

A simple first step is to phase out the tax deductibility for mortgages.  If home ownership is the goal, then all home owners could receive a modest subsidy, whether they owned their homes in full or had a mortgage.

A first step toward fiscal sanity would be for official Washington to tell the truth:  as a nation, we are over-housed.  Large houses do not add to economic productivity.  Factories, career-oriented education, R&D:  all those things do.  The housing bubble is bursting.  Let it burst and let housing compete for people's money on an even footing with other desirable goods and services, such as automobiles, cell phones and medical services.