Just another Reality-based bubble in the foam of the multiverse.

Saturday, November 10, 2007

Ponzi Scheme Sanction with Extreme Prejudice

hell's handmaiden points to an excellent financial analysis by Market Ticker:

...The Bulls on The Street subscribe to this thing called "magical thinking", in that they believe that people can commit fraud and get away with it by shoving off the cost on someone else, attaching a very short "warranty period" which will expire before the bomb goes off.

The Law says that it doesn't work that way.

Fraud voids all contracts and what's worse, the Statute of Limitations doesn't start to run until the fraud is "outed"!

It took six months for the media to figure this out?

Or is the truth that the media simply doesn't want to talk about reality? "The Street" doesn't want to talk about it either, never mind that they have plenty of $1,000 per hour lawyers who do understand it.

Why not?

Because once this is clearly out in the public eye and in their mind, this entire house of cards comes crashing down as all these bad loans are put back as far up the line as there remains money!

This will sink originating banks and mortgage companies. It will sink securitizers (which are the big Wall Street "boyz") and raises all sorts of interesting SarBox issues.

It will also wipe out every broker and real estate agent who participated in these schemes.

The second order effect is even worse - it will precipitate a full-on consumer confidence collapse; a collapse that no longer can be avoided...

And just before Christmas, at that. Somewhere, the Grinch smiles.

...the fraud has become embedded in all elements of the housing bubble:

* "Grade inflation" in the claimed credit quality of securitized mortgages.
* Appraisal fraud - if the recent suit proves up, this was systematic, and if you ask Real Estate agents (and can find an honest one) they will tell you that appraisers were frequently given the "sale price" - a clear violation of their intended neutrality and, in some states, a violation of the law. The number of appraisers who found themselves "blacklisted" for failing to hit desired target prices is the stuff of legends as well.
* Mortgage fraud - an example related to me on the phone over the weekend was of a hairdresser at CostCutters who claimed $8,000 a month in income. How does this get through underwriting - say much less past the broker who is given that information? It doesn't, unless its being done completely by computer and no human looks at it - or they just don't care.

In short, the entire "Real Estate boom" that "powered our economy" over the last five years is one giant ball of fraud.

A ball of fraud that turns out to have a nuclear core, and it is now starting to "rapidly disassemble."

If you're a "Bull" in the market today you have to be willfully ignoring this.

Is that smart?

How well does magical thinking work in general?

...The "recovery" from the 2003 lows has not been driven by "solid earnings", "a solid economy" and "a solid consumer."

It has been driven by organized fraud in the housing market, from appraisals to "subprime" mortgages to pumping "interest only" and "negative amortization" loans (which brokers knew where unaffordable once they reset or recast) to outright false claims of phantom income by borrowers.

All of this produced phantom economic activity which fueled the export business - China's making things we consume but our consumption is unsustainable!

By best estimates, 6.5 trillion dollars worth has been withdrawn from their "household ATM" by US consumers in the last four years and spent.

To put perspective on this the US GDP last year was about $13 trillion dollars.

Let's presume that 20% house price appreciation over the last four years is "about right" given 3-4% real wage growth. So the rest - 80% - is the product, direct and indirect, of fraud.

That makes roughly $5 trillion over four years of phantom money that wasn't real wealth created by real economic activity.

That's 9.6%, roughly, of our GDP on an annualized basis!

But for this fraud we would have been in a deep and long recession for the last FOUR YEARS.

Now this has to be unwound. To the tune of five trillion dollars.

People talk about how the "subprime problem" is "contained" and then they put a number on it - $100 billion, $50 billion, even $200 billion.

That too is a Chimera.

The real issue is the $5 trillion in so-called "wealth" that was spent but unearned, and as a consequence was been replaced by DEBT on consumer balance sheets.

That debt now requires service and will for years if not decades to come, unless it is written-down en-masse!

Obviously, to try to unwind this "all at once" would crash our economy instantly.

50% losses in the stock market? Try 75% and an almost-certain deflationary depression.

Of course that's unrealistic.

We're not going to take the medicine in "one gulp" any more than we got the benefit from the fraud in "one gulp".

But it is beyond question that we will take the pain and cost of unwinding this mess.

It cannot be avoided.

To the extent that "The Media" refuses to address this they are complicit. To the extent that "analysts" keep spouting "buy buy buy" they are complicit in robbing your wealth. To the extent that investment banks and others on "The Street" continue to hold so-called "Level 3" assets which they claim whatever mark they can get a computer to spit out, they too are complicit.

The entire premise of this "expansion" over the last four years has been fraudulent.

There was no actual expansion. No real wealth created. No real economic activity advance.

Instead, the truth is that our "price/earnings" ratios in the market have been propped up by consumer spending that was wholly built upon a fraudulent foundation. It has been a Chimera; the idea that you can create something from nothing.

I'm tired of it. You should be tired of it. You should not tolerate this from the media, from the regulators and from the politicians.

Politicians will pander to their donors and try to pander to you, yet those donors are why we are here.

But for the "cooking" of financial instruments there was no market for these securities as there was no profit to be made!

But look, over there! Isn't that Brittney? Or Jennifer Anniston?

Market Tickler links to a site for a petition to Congress to expose this and do something, anything, about the fraud.

The problem I have is that I'm not real sure anything can be done about it, nor do I understand the situation well enough to suggest intelligent solutions. Other than to buy gold and guns, and sit on top of the gold with your guns.

Until the Feds send the Blackwater goons to confiscate it, your house, and your internal organs too.

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