Monday, March 1, 2010

Kansas tax collections decline by 27 percent for February

TOPEKA | The Department of Revenue reported Friday that Kansas collected $71 million less in tax revenues than expected this month, leading one lawmaker to call for additional cuts to the current state budget.

Gov. Mark Parkinson called the numbers bad, and his spokesman, Seth Bundy, said the governor would outline a plan next week to deal with the shortfall. Bundy declined to speculate about its contents.

Other legislative leaders weren’t ready to join House Speaker Mike O’Neal in pushing for new spending cuts. They said they need to know how much of the shortfall is tied to the state’s soft economy and how much to Kansas paying income tax refunds earlier than expected.

Friday’s report complicated a difficult debate over the budget and tax policy. It came only hours after House members gave first-round approval to a bill aimed at creating jobs by expanding an existing business tax break.

The Democratic governor and the Republican-controlled Legislature keep the current budget in balance and eliminate a budget shortfall for fiscal 2011, which begins July 1. The 2011 gap is projected at $416 million, but this figure will rise next week after legislative researchers consider Friday’s report.

“This obviously is a game-changer,” said O’Neal, a Republican from Hutchinson. “These numbers are grim enough that we will have to make adjustments.”

The state expected to collect $266 million in taxes in February but took in $195 million, a difference of 27 percent.

It was the third consecutive month that collections fell short of expectations. The gap for the 2010 fiscal year through February is now $105 million, with total tax collections of $3.1 billion falling 3.3 percent short of expectations.

Officials said Kansans appeared to be filing for income tax refunds more quickly this year than last. This could mean fewer refunds than expected in March and April — causing a rebound in tax collections.

Senate President Steve Morris, a Hugoton Republican, rejected O’Neal’s call for new budget cuts.

“We don’t know what the March numbers are,” he said. “We don’t know what the April numbers will tell us.”

The state had five rounds of cuts and other adjustments last year to keep the 2010 budget balanced. If revenues met expectations for the entire fiscal year, the state would break even.

Parkinson said the state would overcome its financial problems by “not panicking.”

“None of the options are good, but we will keep our composure,” Parkinson said in his statement.

Previously, Parkinson said he opposed new spending cuts and had proposed raising sales and tobacco taxes.

Raising taxes has proven unpopular so far, and many Republican legislators haven’t given up on using tax breaks or incentives to stimulate the economy.

Property loans poised to fail

The Gateway at Aldridge in Murfreesboro looks like any other new apartment complex. It has a workout room, free Wi-Fi and cozy fireplaces.

What's not so obvious is that a bank owns it.

Like other apartments that have fallen into foreclosure in the Nashville area, Gateway is a reminder of a troubling and still growing problem for bankers — commercial real estate loans that have turned sour and could weigh on the economy for years.

The financial crisis over the past two years has brought consecutive waves of unpaid housing loans and a residential real estate slowdown. A third wave of misery — commercial real estate problems — has yet to peak in Tennessee or even nationally.

FDIC Chairwoman Sheila Bair predicted last week the number of banks failing this year will top last year's tally of 140. And smaller banks could be among the victims.

Many small and midsize banks in the state and nation are heavily invested in commercial real estate — projects such as retail centers or offices now going broke for a lack of tenants. But there's still a debate over how bad the situation is likely to get in the Nashville area.

The more than 300-unit Gateway was owned by New York-based real estate investor Tarragon Corp., which went bankrupt last year after investing in home building and apartments in places such as Florida, Texas and the Northeast. PNC Financial Services, one of the largest banks in the nation, bought the apartments last month for $18 million.

Bank of America now controls Fifth and Main, a condominium building near downtown Nashville, after the original developer defaulted on the loan. Roughly 10 to 12 other apartment buildings have been foreclosed upon in the Nashville area since the recession began.

'Underwater' loans

"We're expecting what's already a bad situation to get worse,'' said Janice McQuary, an assistant deputy comptroller in Dallas for federal banking regulator the Comptroller of the Currency. McQuary spoke at a Tennessee Bankers Association conference earlier this month in Nashville.

Katie Edge, a Nashville bank attorney, said she has more banks with problems than she's ever had. "Most of it is (the) borrower not being able to pay you back,'' she said.

A Congressional Oversight Panel that was created as part of the federal bailout of the banking system in 2008 wrote earlier this month of a "wave of real estate loan failures" that "could threaten America's already-weakened financial system."

The report noted that $1.4 trillion worth of commercial real estate loans will reach the end of their terms from this year into 2014 nationwide, and half of them currently are "underwater" — meaning the borrower owes more than the property is worth. Losses at U.S. banks could range from $200 billion to $300 billion.

The state of Tennessee is not immune. Federal regulators generally look closely at banks that have more than 300 percent of their capital in commercial real estate loans. And that figure is exceeded by more than one-third of the nearly 160 state-chartered banks in Tennessee, according to an analysis by Memphis-based banking consultants Mercer Capital.

It's not a sign that those banks will fail, just that the state's vast number of small, community banks are heavily exposed to a growing problem in the national economy. None of the three largest banks in the Nashville area, Regions, Bank of America or SunTrust Banks, exceed that commercial real estate threshold.

High numbers, low risk

Still, some banks with high percentages of commercial real estate loans on the books say their portfolios remain in good shape.

Nashville-based InsBank has just one office and no branches in Nashville. It has more than 480 percent of its capital in commercial real estate loans, one of the heaviest concentrations in the Nashville area.

But few of its loans have gone bad, and it remains well capitalized.

"We monitor our loan portfolio on a regular basis. Historically, we have been fairly conservative,'' said InsBank President and Chief Executive Officer Jim Rieniets.

Citizens Savings Bank & Trust, the state's oldest minority-owned bank, has the highest rate of commercial real estate loans in the Nashville area. But it, too, has few problem loans on the books and remains well capitalized. Chief Operating Officer Floyd Weekes attributes that to the fact that most of the bank's commercial real estate loans are to churches.

InsBank and other local banks have benefited so far from a relatively mild real estate downturn here compared with cities in harder-hit parts of the country.

Not one Tennessee bank has failed during the current recession, a fact partly attributed to the conservative nature of banking in the state, the lack of overheated real estate markets and a state banking commissioner, Greg Gonzales, who prefers to encourage quiet sales of institutions to interested buyers rather than public and embarrassing bank failures.

And a February report by New York research firm Real Capital Analytics found that of 10 cities in the Southeast, including Jacksonville, Charlotte and Miami, Nashville had the smallest portfolio of distressed commercial properties as measured in dollar terms.

Most of the $654.5 million in distressed loans were apartments, many of which were owned by New York investor Steven Green, who was convicted of fraud in Florida and then disabled in a car accident.

"Rent is flat, but occupancy is improving,'' said Bill Freeman, an owner of Freeman Webb Co. in Nashville, which manages about 12,000 apartment units. "We've gone through a couple of years where every quarter was declining. We feel like we've hit the bottom."

Dan Fasulo, the managing director at Real Capital Analytics, said the nature of the commercial real estate problem has been overblown. Investors are getting interested in doing real estate deals again and funding acquisitions, which could help take problem properties off banks' hands.

Plus, banking regulators are allowing banks to restructure loans to put off their problems until the economy improves, jokingly known as a "rolling loan gathers no loss."

"Some banks got a little too excited and invested in too many risky ventures, and some of them will fail,'' Fasulo said. "The failure of some of those local institutions will not have an ability to move the (financial) markets at this point. The market is starting to recover."

Foreclosure crisis hits affluent towns

DOVER - The foreclosure auction was still an hour away, but potential buyers were already circling the Baird home, snapping photos with their Blackberries.

Inside the 1,900-square-foot house they built in 1968 for $110,000, and recently assessed by the town at $915,700, G. Stewart Baird Jr., 80, and his wife, Martha, 77, were in despair.

Their home and the lovely spot where it sits - 3.9 acres of woods overlooking the Charles River in one of Boston’s nicest bedroom communities - was scheduled to be sold at auction that afternoon.

Perhaps most on edge on Feb. 12 was the couple’s 51-year-old daughter, Laurie, who has cerebral palsy and uses a wheelchair. The house was built primarily on one level with her disability in mind, the Bairds say, when she was 10 years old.

How did this suburban family get to the brink of losing their home?

“I guess we were just hoping things would turn around,’’ said Martha Baird, who is retired from teaching modern dance.

The state’s foreclosure crisis has slowly spread to its wealthier suburbs. Although the number of foreclosure auctions fell statewide last year, more suburban homes may be at risk as the number of foreclosure petitions - the first formal step of the complex legal process - continues to rise, according to analysts at the Warren Group, which tracks real estate data across New England.

In Norfolk County, foreclosure petitions jumped by 33.5 percent between 2008 and last year, although the number of auctions taking place dropped by 17.4 percent, from 1,293 in 2008 to 1,068 last year, the Warren Group reported. That means as more suburbanites were entering the foreclosure process, others who entered the process earlier had found ways to save their homes from an auction sale. Last year’s federal foreclosure-prevention program as well as individual loan renegotiations between homeowners and banks are most likely contributing factors to forestalling auctions, said Dave Turcotte, director of the Institute for Housing Sustainability at the University of Massachusetts Lowell.

The average Massachusetts foreclosure takes 330 days from initial petition to resolution, Turcotte said, so there can be many stops and starts in the process.

But the rise in foreclosure petitions is a sign that the foreclosure crisis has yet to abate. Turcotte predicted foreclosure auction levels in the region would likely rise in the coming year to reflect the jump in the numbers of homes just starting the foreclosure process.

Likewise, in Middlesex County, the petition filings rose by more than 23 percent during the same time period, while auctions dropped by nearly 10 percent, from 3,220 to 2,904.

Unemployment levels - reported by the state Office of Labor and Workforce Development to be 9.1 percent statewide in December - are directly related to the risk of foreclosure for homeowners because it puts them in greater financial jeopardy, according to Turcotte, who also is coeditor of the monthly Merrimack Valley Housing Report newsletter.Continued...

“What’s driving most of the foreclosures now is the economy, people losing jobs or people not able to meet their monthly expenses and can’t make their mortgage payments,’’ he said. People had used their homes as “piggy banks,’’ taking out larger and larger mortgages on their homes when it seemed housing values would always continue to grow, he said.

In Greater Lowell, foreclosure activity of all types is up 500 percent from January 2009 to last month, he said. “We have entire ZIP codes that have negative equity. In towns [like Dover] it tends to be people who are under water,’’ said Turcotte, referring to the state in which a mortgage is more than a property is worth in the current real estate market.

Foreclosure in Dover is a relatively unusual phenomenon, but it - like foreclosure activity across the region - has increased in the past year. There were only five foreclosure petitions filed by lenders in 2008, but that number more than tripled to 17 in 2009, according to the Warren Group.

Numbers also crept up in other affluent suburbs west of Boston.

In Concord, foreclosure petitions increased 20 percent, from 15 in 2008 to 18 in 2009. In Carlisle, they jumped 266 percent, from three in 2008 to 11 in 2009. The town of Lincoln saw no residential foreclosure petitions in 2008, but five were recorded in 2009, the Warren Group said.

Foreclosure auctions - the legal process by which a lender advertises its intention to sell a foreclosed property to the highest bidder - are on the downswing in some suburbs, but slightly up in others. Dover recorded five auction notices in 2008, and nine last year.

In Weston, lenders filed eight auction notices in 2008, and recorded 14 in 2009. Nearby Lincoln had two notices in 2008, and that number doubled to four in 2009, the Warren Group reported.

Those dry statistics have become a personal crisis for the Bairds, who took out a primary adjustable-rate mortgage for $999,950 in October 2005, and a second mortgage for $300,000 in March 2006, according to the Norfolk County Registry of Deeds.

The Bairds acknowledge they have not been able to pay their mortgage or property taxes since October 2008. According to Norfolk County public records, nearly $3,000 in 2009 property taxes owed to the town of Dover remains unpaid. The amount owed on the mortgages is not a matter of public record, but Stewart Baird said he believed the family owed close to $1 million on the home.

“It seems so pointless and grotesque to pull people out of their homes when nobody is buying,’’ his wife said. “We are very active members of the community. We’re very involved. Everyone knows us and they know Laurie.’’

The Bairds had been talking to bankers as recently as last week about their hardships, but were hoping for more leeway to keep their decade-old career management and coaching business, Aspire Associates, afloat in a tough economy, said Stewart Baird.

Stewart Baird, who worked for decades selling advertising for the publisher McGraw-Hill, said they heavily mortgaged their home to pay for living expenses and to support their business in the hopes it would meet what now seem like overly optimistic revenue projections.

“We thought we could do it,’’ he said.

Turcotte said there are no statistics about how many people facing foreclosure are senior citizens on limited incomes. Most studies of predatory lending have so far focused on minorities and immigrants, but senior citizens who have limited income projections and medical concerns were certainly vulnerable to over-borrowing at terms they could not afford, he said.

“Seniors were certainly susceptible as those other groups of people hurt by predatory lending, and the government programs out there are not much help to people who owe far more than their home is worth,’’ Turcotte said.

Instead of calling a lawyer the evening of Feb. 11 when they learned the house might finally be sold from under them the following day, the couple called their pastor, Max Olmstead, some neighbors, and friends from the Dover Church, which they’ve attended for decades.

“I came the same way I would have come if someone was dying. I came because I thought it would be a difficult day for them,’’ said Olmstead, a United Church of Christ minister who arrived six months ago to lead the 400-member Dover congregation.

He, along with several other family friends, came out to the Baird home on the day of the scheduled auction to offer sympathy and moral support.

It was the second pastoral foreclosure crisis of Olmstead’s career, he said.

The first, at his previous church in Connecticut, also had involved an older couple bested by the recession, and he said the community also struggled with how to respond to that situation. “Churches can help people pay a utility bill, or get back on their feet or even pay a mortgage bill. But we can’t pay a whole mortgage,’’ he said.

Dexter Donham, who helps Laurie Baird get to church in her wheelchair most Sundays, fellow church member Nancy Goodall, and a neighbor, Paul Wood, showed up as well.

Family friend and musician Peter Gefler of Boston also came out to Dover last week to offer moral support to Stewart Baird, with whom he plays in the local suburban swing band, The JAZZmakers. “This shouldn’t be happening,’’ he said.

With just 15 minutes to go before the 1 p.m. Friday auction, the Bairds and their friends were preparing to walk up the long, winding driveway at 28 Greystone Road when the Chelmsford law firm handling the auction offered a stay of execution. The bank had determined that the auction would be delayed for 30 days, until March 12.

“Glory, glory hallelujah!’’ moaned Martha Baird. “God bless you all.’’

Laurie Baird was too emotional to speak - she wept with relief in her mother’s embrace.

The auctioneer, Daniel P. McLaughlin, stood in front of the Baird home at 1 p.m. anyway to make the formal announcement that the auction would be delayed.

He said the region’s foreclosure crisis was obvious: His Boston-based auction company oversees between four and 20 such proceedings daily.

He shook Martha and Stewart Baird’s hands. “I hope I never see you again,’’ he said. “I hope everything works out.’’

Jumana Bauwens, a New York-based spokeswoman for Bank of America, which services the Bairds’ mortgage, stated last week that the family’s account would be “reviewed for workout options’’ over the next 30 days.

The Bairds hugged their friends and headed back inside the house - still theirs, for now. They must consider bankruptcy, and “all options’’ to alleviate their financial burdens, Stewart Baird said.

Olmstead said the close call prompted him to rework his sermon for the following Sunday - originally slated to be an upbeat Fat Tuesday ode - to reflect upon the economic crisis that hit so close to home, with the Bairds.

“We have to pray for everyone going through something like this,’’ he said.

Late last week, Stewart Baird said his family has begun to accept the idea it may be too late to save their house. The debt may simply be too overwhelming. They don’t know where they would go if they do lose their home, however, and still hope they won’t have to move.

“We can now admit to being optimistic [when we asked] for the additional money we hoped and planned would put us over the line with our business,’’ he said, considering the situation in retrospect. “We are very positive thinkers. We believe that can affect what actually happens.’’

Erica Noonan can be reached at

Foreclosure crisis deepens, despite earlier optimism

Local, state and national foreclosure statistics back up what many of us could sense about the number of homes falling to foreclosure last year: The problem got worse.

2006 was the worst year the Mahoning Valley has had for foreclosures, with the rate rising more than 30 percent in Mahoning and Trumbull counties.

There were hopeful signs in 2007 and 2008, as the foreclosure numbers eased.

All that changed, however, when the national economy soured part way through 2008, setting up a 2009 that forced foreclosure rates to rise 4 percent in Ohio, 9 percent in Trumbull County, 10 percent in Columbiana County and 21 percent across the nation.

Mahoning County’s foreclosure rate was the exception, dropping 5 percent.

Richard Cordray, Ohio attorney general, came to the Mahoning Valley in late 2007 when he was Ohio treasurer and the foreclosure rate was on its way down.

He even predicted that the foreclosure crisis would abate by 2009 or 2010.

“Without the recession, we would have seen it decline,” he said in a recent interview.

Cordray now says Ohio’s foreclosure problems are likely to continue, with Ohio’s record number of foreclosures in 2009 — 3.8 percent higher than in 2008 — likely to grow even more in 2010.

Read more in Sunday’s Vindicator and

Abandoned foreclosures a mounting crisis in Manatee (with video)

MANATEE — A mounting crisis created by the record number of foreclosures in Manatee County has hit Jeannette Traylor right where she lives: An abandoned foreclosed home has brought blight, crime and fear into her neighborhood.

For Traylor, it is becoming harder and harder each day to remember what the home used to be: a quaint three-bedroom, two-bath house nestled in a Northwest Bradenton neighborhood filled with similar homes and families living the quiet life. But the home at 5504 Fourth Ave. NW now stands out.

And not in a good way.

On the outside, a side door that has been repeatedly ripped out has plywood covering broken windows; a wooden fence around the backyard sits on its side, leaving an exposed pool filled with black, filthy water.

Inside is worse.

A stench of mold and signs of intruders are everywhere, a realization that has Traylor both scared and angry that she is losing the neighborhood where she has lived for 13 years.

“This is Northwest Bradenton, would you ever think this could happen here?” she asks. “I mean, I raised my kids here.”

Traylor easily gains access into the foreclosed home through the busted side door and walks through the house. Beer cans, cigarette butts and dirt litter the rugs in every room. Since she was last inside three days ago, two pallets made up of sheets and pillows have appeared in two bedrooms, obvious signs that intruders have been sleeping there.

In one bedroom, a metal spoon sits on the floor next to spent packages of cold medicine, often used to make methamphetamine. In another bedroom, next to a pallet, a bag of marijuana lies on the carpet.

“Pretty deplorable, isn’t it?” Traylor said, shaking her head.

Deplorable, but common in a county where 6,390 homes were foreclosed on last year, compared with 592 in 2005, when the same home on Traylor’s block was purchased for $282,400. Once-valuable homes throughout the county are becoming headaches for neighbors, county officials and law enforcement alike.

No one knows exactly how many homes have been abandoned in Manatee County, but it is hard to find a neighborhood without at least one, according to Manatee County Housing Director John Barnott.

“They are everywhere,” Barnott said. “It is a problem in the best neighborhoods, and the worst. I have people walking away from million-dollar homes because they have lost everything.”

And when that happens, a vicious cycle ensues. Owners of homes disappear and become hard to find, and banks burdened with a landslide of foreclosures are increasingly taking little interest in the properties.

It makes for a situation ripe for vandalism and squatting, as well as a haven for teens to party, and drug addicts to get high.

Law’s hands are tied

There is little law enforcement can do when concerned homeowners call for help, unless an owner can be found and seeks to have the intruders trespassed from a particular site. But for properties that nobody cares about anymore, that can be tough, according to Manatee Sheriff Brad Steube.

Foreclosure wave ahead? Plus: 'Bloom Box' arrives

Today: Freddie Mac's CEO expects a "potential large wave of foreclosures." Silicon Valley startup Bloom Energy promises a new day for cheaper, cleaner power.

'Large wave of foreclosures' ahead?

Mortgage financier Freddie Mac reported today that a record 4 percent of its borrowers are at least three months behind on their loans and in danger of foreclosure.

CEO Charles Haldeman warned of a "potential large wave of foreclosures," according to our friends at The Associated Press.

Freddie Mac's warning came as the company reported a $7.8 billion loss for its most recent quarter, including a $13

billion dividend payment to the U.S. Treasury. It also came along with more grim news today for the real estate market:

New homes: Sales dropped 11.2 percent in January to a record low seasonally adjusted rate of 309,000, the Commerce Department reported.

"This disappointing report highlights just how fragile the economic and housing recovery is right now, and the uncertainties that continue to weigh on consumers, particularly with regard to concerns about job security," Bob Jones, chairman of the National Association of Home Builders, said in a statement.

Brothers: The luxury-home builder reported a $41 million loss for its most recent quarter. The good news: That was much better than the $88.9 million loss Toll Brothers reported a year earlier.

Bloom Energy's new fuel cell

Sunnyvale clean-energy upstart Bloom Energy today showed off its new Bloom Energy Server, a solid oxide fuel cell that uses natural gas or other fuels to provide what the company describes as "a cleaner, more reliable, and more affordable alternative to both today's electric grid as well as traditional renewable energy sources."

Customers including Google, eBay and Walmart are using the much-hyped fuel cell, nicknamed the "Bloom Box," to generate electricity on site.

"Whether a customer wants to reduce its carbon footprint or its energy bills, or both, the Bloom Energy Server provides the solution," Bloom Energy CEO and co-founder KR Sridhar said in a statement. "Our foundation customers are industry leaders in their businesses as well as in environmental sustainability, representing companies who understand that responsible energy consumption and healthy profit margins need not be mutually exclusive."

According to the Merc's report, Sridhar was joined by Gov. Arnold Schwarzenegger, former Secretary of State Colin Powell and other big names at the unveiling at eBay offices in San Jose, where the Bloom Box was unveiled. EBay is using a 500-kilowatt system from Bloom Energy at its PayPal campus in North San Jose.

"We're meeting financial and environmental goals with the project while fueling a more energy efficient global marketplace. That's good for us, our customers and the planet," eBay CEO John Donahoe said in a statement.

IMF chief pushes for more power, new global currency

The International Monetary Fund wants more power to police the global financial system and a bigger role in emergency financing, managing director Dominique Strauss-Kahn said Friday.

In a speech to the Bretton Woods Committee, a finance reform think tank in Washington, D.C., he claimed that a stronger IMF also warrants a new global reserve currency that would serve as an alternative to the U.S. dollar.

"Strauss-Kahn said such an asset could be similar to but distinctly different from the IMF's special drawing rights, or SDRs, the accounting unit that countries use to hold funds within the IMF," ABC News reported. "It is based on a basket of major currencies."

"One day, the Fund might even be called upon to provide a globally issued reserve asset, similar to -- but in important respects different from -- the SDR," he said.

Strauss-Kahn added that "having several suppliers of reserve assets would limit the extent to which the international monetary system as a whole depends on the policies and conditions of a single, albeit dominant, country."

IMF chief pushes for more power, new global currency

By Stephen C. Webster
Saturday, February 27th, 2010 -- 11:16 am

imfchief IMF chief pushes for more power, new global currencyThe International Monetary Fund wants more power to police the global financial system and a bigger role in emergency financing, managing director Dominique Strauss-Kahn said Friday.

In a speech to the Bretton Woods Committee, a finance reform think tank in Washington, D.C., he claimed that a stronger IMF also warrants a new global reserve currency that would serve as an alternative to the U.S. dollar.

"Strauss-Kahn said such an asset could be similar to but distinctly different from the IMF's special drawing rights, or SDRs, the accounting unit that countries use to hold funds within the IMF," ABC News reported. "It is based on a basket of major currencies."

"One day, the Fund might even be called upon to provide a globally issued reserve asset, similar to -- but in important respects different from -- the SDR," he said.

Strauss-Kahn added that "having several suppliers of reserve assets would limit the extent to which the international monetary system as a whole depends on the policies and conditions of a single, albeit dominant, country."

Story continues below...

"The challenge ahead is to find ways to limit the tension arising from the high demand for precautionary reserves on the one hand and the narrow supply of reserves on the other," he also said, according to ABC.

Both China and Moscow support such a plan, but U.S. leaders have vehemently insisted that empowering the IMF's special drawing rights, or establishing another fund with a global pull similar to the dollar, is not necessary.

The United Nations Conference on Trade and Development has also offered its support to the idea, suggesting that an as-yet-unformed regulatory committee oversee the new currency, which would be traded almost exclusively by governments.

European leaders such as British Prime Minister Gordon Brown and French President Nicolas Sarkozy have also called for an expanded role for the IMF in the emerging global economy.

The IMF's special drawing rights were created in 1969 as a way of supplementing countries' currency reserves. Their value is determined by a formula based on the values of the US dollar, the British pound, the Japanese yen and the Euro. The IMF has been using SDRs to help shore up the finances of poorer nations amid recent economic uncertainty.

"There may be a need for a clearer mandate to pursue risks for global economic stability, but also -- I stress -- for financial stability," Strauss-Kahn said.

"During the crisis, the Fund proved its worth to the world."

But Strauss-Kahn said that as the world slowly emerges from the worst financial crisis since the Great Depression, "we must build on this positive momentum: to transform the Fund into an institution even better equipped to meet the challenges of the post-crisis era."

The bulk of the IMF's efforts today are conducted on a country-specific basis, but this will not be sufficient to avoid or even dampen a major crisis in the future.

The 186-nation IMF already provides economic assessments of individual member countries and publishes reports on the world economic outlook and the stability of the global financial system.

But in the years preceding the crisis, the Fund did not foresee the risk from a US housing meltdown that led to a credit crisis and a financial firestorm that engulfed the globe.

"We are floating the idea of a new multilateral surveillance procedure. This would allow -- indeed require -- the Fund to assess the broader and systemic effects of country-level policies, and the associated risks, in a fundamentally different way," Strauss-Kahn said.

The role of guardian of systemic stability would be backed up by new financial firepower.

The IMF has tripled its lending capacity over the past year, to 850 billion dollars, thanks to loans from member countries. The expanded financial resources "should be sufficient to meet demand in the coming period," he said.

Strauss-Kahn recalled that in the global crisis, key emerging market economies seeking financial lifelines had not turned to the Fund as the "first responder," but instead approached the US Federal Reserve and other central banks for currency swaps.

"In this context, we are currently exploring various options -- including for short-term, multi-country credit lines that the Fund might extend in a systemic crisis," he said.

Strauss-Kahn proposed increasing the flexibility and accessibility of the new Flexible Credit Line that the IMF created last March.

Available to any member country whose economy is deemed well-managed by the Washington-based institution, the facility currently allows Mexico, Colombia and Poland to tap credit as needed.

Strauss-Kahn also suggested the IMF could work with "regional reserve pools" which he said "can be a positive and stabilizing force in international financing."

He cited the IMF's recent cooperation with European Union lending to help three EU members: Hungary, Latvia and Romania.

With AFP.

FDIC closes bank in Nevada for year's 21st closure

NEW YORK — Regulators have shut down Carson River Community Bank in Nevada, marking the 21st failure this year of a federally insured bank.

The Federal Deposit Insurance Corp. has been appointed receiver of the bank, based in Carson City, Nev. It had $51.1 million in assets and $50 million in deposits as of Dec. 31.

The FDIC said Friday that the bank's deposits will be assumed by Heritage Bank of Nevada, based in Reno, Nev. Carson River's lone branch will reopen Monday as offices of Heritage Bank.

Stock market update, VIX indicator, Robert Prechter

Click this link .....

FDIC Auctions $610.5 Million in Loans From Failed U.S. Lenders

Feb. 27 (Bloomberg) -- The Federal Deposit Insurance Corp. is seeking bids for $610.5 million of unpaid loans it’s holding from failed U.S. lenders including IndyMac Bank, Silverton Bank and New Frontier Bank.

The loans are backed in part by land, developed lots and condominium construction projects, said Peter Tobin, managing director of New York-based Mission Capital Advisors LLC, the FDIC’s marketing agent and financial adviser for the offering. Most of the properties are in Colorado, California, Utah and Idaho, and about 78 percent of the debt is 90 days or more past due, according to a description on Mission Capital’s Web site.

The FDIC is disposing of real estate, soured mortgages and personal property ranging from tour buses to palm trees that once belonged to failed banks. More than 160 lenders collapsed since the start of 2009, and the tally may grow this year, with 702 firms on the FDIC’s “problem bank” list as of Dec. 31.

The sale ”is going to appeal to a broader investor class,” Tobin said. The winning bidder will take an interest in a limited liability company owning the assets in partnership with the FDIC. The auction may attract more bidders than previous sales because the portfolio is smaller, Tobin said.

The biggest piece of the package is from New Frontier, the Greeley, Colorado-based lender that failed in April. The portfolio lists $220.2 million in Frontier debt from 187 loans, with 91 percent at least 90 days overdue.

Silverton, IndyMac

The second-biggest component is from Silverton, the Atlanta-based lender that serviced about 1,400 banks in 44 states until it failed in May. The offering includes 23 Silverton loans showing balances of $85.3 million, with 81 percent behind by 90 days or more.

IndyMac’s share of the FDIC offering is a single overdue loan of $48,000, according to Mission Capital’s listing. Regulators seized Pasadena, California-based IndyMac in July 2008.

Bids for the latest FDIC auction are due April 6, Mission Capital said. David Barr, an FDIC spokesman, declined to comment.

The planned sale was reported earlier by Commercial Real Estate Direct on its Web site.

--With assistance from Jonathan Keehner and Jody Shenn in New York. Editors: Sharon L. Lynch, Rick Green

Canada's Biggest Scandal?

The Grand Plan To Steal Canada's Water Resource Wealth:
9 Judges Associated with Scandal Die Suddenly!

(Paul's Note: This article was submitted by the author as a direct result of my "Calling All Whistle Blowers". This is what happens when Fascists in High-level Government conspire against the marketplace. They have done everything to destroy this whistleblower, who will tell his story on my Monday Radio Program 12 PM Eastern. The show is recorded so, to listen, click on the LINK)

For decades, political and business insiders, with Canadian and British Columbian governments, have known that the water resources in the American southwest and Mexico were dwindling in the face of an increasing population. A small group of Canadian political insiders saw the opportunity to earn massive profits for themselves from the export of Canada's fresh water and set about on a fraudulent and corrupt scheme to capture for themselves an illegal water export monopoly so they could line their pockets with revenues from the sale of Canadian public assests and gouge American consumers.

In the process these corrupt political insiders in Canada violated the Free Trade Agreement, the NAFTA, the domestic laws of Canada and tried to rig or fix the outcome of a public tender process that took place in California where the small community of Goleta was looking for alternate water sources in the midst of the most severe drought in its history.

In British Columbia, in the 1980's, public opinion and political opinion favored the development of a water export industry from coastal streams and rivers. There was ample water and, as long as fish stocks were protected, there was no apparent environmental or other concern with extracting a moderate amount of water from the abundance or water resources that flowed into the ocean annually. The Government of British Columbia estimated that about 400 million acre feet of water flows annually into the Pacific Ocean from the coast of British Columbia. This estimate excludes the Fraser river and rivers or streams flowing south, east and north.

In short, the quantities of water and sources of water available for export in British Columbia are so huge and so varied that they far outstrip any conceivable demand. These issues of supply and demand presented a practical business problem because free market competition would invariably lower prices and, therefore, lower profits.

The solution was a monopoly.

Monopolies are highly sensitive political issues. Typically, governments and the public resist monopolies because they know that the business people involved will gouge them with higher and ever higher prices.

So, the investors behind the bulk water export business hatched a bold and devious two step plan:

1. Obtain a source of abundant water for export from the British Columbia Government.

2. Use the environmental movement and the public media in Canada to persuade policy makers in the Governments of Canada and British Columbia to impose a ban on their competition.

The investors went to work, set up a company called W.C.W. Western Canada Water Enterprises Ltd., persuaded the British Columbia government to give it a source of water. Then they hired public relations firms and environmentalists to induce the fear in the general public that by permitting water exports Canada woud be drained dry and that the only solution was a ban or moratorium on bulk water exports. The scare mongering began. Canadians were told that fresh water was Canada's most precious resource, that glaciers were melting, that lakes and rivers were drying up, that Canada could not risk selling any water to the USA and that the only solution was a prohibition on bulk water exports. Of course, the prohibition would not affect rights already acquired and WCW would then have a monopoly.

The plan was so brilliant that, to this very day, many Canadians actually believe that water or snow is Canada's most precious resource when, in market terms, water is next to worthless - in most parts of Canada.

The plan was so brilliant that, to this very day, many Canadians believe that water comes from glaciers lakes and rivers when, in truth, it originates in the ocean.

That plan was so brilliant that, to this very day, most Canadians believe that water is a non-renewable resource like oil and that every drop of water exported is gone forever when, in fact, it pretty well returns every year in the form of snow and rain.

The plan was so brilliant that, to this very day, most Canadians believe that the creation of a few pipelines or aqueducts to deliver water to the United Sates and Mexico will forever destroy Canada's environment.

The plan was brilliant, it was devious, and it would have been hugely profitable and, incidentally, tax free for many of the insiders who held their interests offshore.

The political and business insiders in Canada had selected their vehicle to make fabulous proifits, W.C.W. Western Canada Water Enterprises Ltd., but they had two viable competitors that needed to be destroyed. These were the joint venture project of two small companies, one American, Sun Belt Water Inc. based in Santa Barbara, California, and one Canadian, Snowcap Waters Ltd. based in Fanny Bay, B.C., and the small Vancouver based company, Aquasource Ltd.

As an ally of W.C.W. Western Canada Water Enterprises Ltd., that had bribed the governing political Social Credit Party with political donations, the British Columbia Government under the leadership of Bill Vander Zalm threw a multitude of regulatory hurdles in the path of the competitors that slowed them down but did not completely kill them so, eventually the Government used brute force to destroy the competition to W.C.W. Western Canada Water Enterprise Ltd. and broke the Canada US Free Trade Aggeement, the GATT and the Water Act and imposed the illegal moratorium on bulk water exports that denied all competitors the ability to get an bulk water export licence

Despite its brilliance the plans by the insiders did not work and they did not work for THREE fundamental reasons,

First, the plans were illegal. The plans were illegal because they violated the Water Act, a domestic law of the Province of British Columbia, they violated the Free Trade Agreement, an international trade treaty between Canada and the USA that was approved by the Province of British Columbia and binding on the Province, and they violated the General Agreement on Trade and Tariffs, an agreement that British Columbia and Canada were required to follow.

Because the plan was illegal, it was a well guarded secret and the Canadian public have been left with an incomplete understanding of the fraud that was foisted upon them while the nation was left with an ill-conceived and ill-thought out bulk water export policy that originated as part of a fraudulent conspiracy.
Secondly, WCW Western Canada Water Enterprises Ltd. were greedy and attempted to gouge the first US customer, the Goleta Water District, by pricing its water at 50% more than the American competitor, Sun Belt Water Inc.

In March 1991, the Goleta Water District selected Sun Belt Water Inc., after an open public competitive process, to supply approximately 7,500 acre feet of per year. The competing bid of W.C.W. Western Canada Water Enterprises Ltd. was rejected because of grossly over inflated pricing. Sun Belt Water Inc. and its Canadian partner, Snowcap Waters Ltd., were poised to become the first players in the emerging bulk water export import business.
Third, when the politicians and insiders in Canada saw that their plans had gone sideways, they went crazy, broke the Canada US Free Trade Agreement and announced that Sun Belt Water Ltd. would not be permitted to have access to fresh water from Canada and that only WCW could supply the water Goleta wanted.

The Government of British Columbia moved quickly and imposed its first moratorium, a moratorium it knew was illegal, on bulk water exports in order to prevent Sun Belt from getting water for export thereby attempting to force the Americans to do business with WCW at exorbitant prices in order to line the pockets of their friends.

With no fresh water to serve its customers, the Sun Belt venture, a small business, collapsed. Goleta refused to do business with WCW and WCW carried on for a few more years before collapsing into bankruptcy although it had raised over $100 million to finance its business

A few years later, Sun Belt Water Inc. retained a lawyer in Canada who started to move a claim forward in the Canada's courts that would expose the criminals. The insiders moved quickly, manipulated the Canadian judiciary and shut down the Sun Belt case in Canada's courts and financially and professionally destroyed the Sun Belt lawyer.

Having committed no crimes, the lawyer was jailed twice by the Governments of Canada and British Columbia, his business was destroyed by Government actions, he is effectively barred from practising law in British Columbia, where he successfully practised for 22 years from 1977 to 1999.

Governments in Canada have slandered and libelled his reputation. He is prevented from filing legal claims on his own behalf in the British Columbia courts. When summoned to court, in British Columbia, he is prevented from calling witnesses and denied the right to present evidence. Judges in British Columbia have fixed cases against him and his clients in order to undermine his economic survival.

In addition, Governments in Canada attached the woman who gave him some assistance. A mother of five children, a legal secretary and a nurse. She has been followed, spied on, her telephones have been monitored, her assets stolen by Canadian government agents. She and her young family were traumatized and thrown into chaos by the deliberate attacks of agents of the Governments of Canada and British Columbia acting through Canada's politically controlled court system.

Buy, Buy American Pie

Click this link ......

Wall Street's Bailout Hustle

Goldman Sachs and other big banks aren't just pocketing the trillions we gave them to rescue the economy - they're re-creating the conditions for another crash

On January 21st, Lloyd Blankfein left a peculiar voicemail message on the work phones of his employees at Goldman Sachs. Fast becoming America's pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his secret weapon: a pair of giant, nuclear-powered testicles. In his message, Blankfein addressed his plan to pay out gigantic year-end bonuses amid widespread controversy over Goldman's role in precipitating the global financial crisis.

The bank had already set aside a tidy $16.2 billion for salaries and bonuses — meaning that Goldman employees were each set to take home an average of $498,246, a number roughly commensurate with what they received during the bubble years. Still, the troops were worried: There were rumors that Dr. Ballsachs, bowing to political pressure, might be forced to scale the number back. After all, the country was broke, 14.8 million Americans were stranded on the unemployment line, and Barack Obama and the Democrats were trying to recover the populist high ground after their bitch-whipping in Massachusetts by calling for a "bailout tax" on banks. Maybe this wasn't the right time for Goldman to be throwing its annual Roman bonus orgy.

Not to worry, Blankfein reassured employees. "In a year that proved to have no shortage of story lines," he said, "I believe very strongly that performance is the ultimate narrative."

Translation: We made a shitload of money last year because we're so amazing at our jobs, so fuck all those people who want us to reduce our bonuses.

Goldman wasn't alone. The nation's six largest banks — all committed to this balls-out, I drink your milkshake! strategy of flagrantly gorging themselves as America goes hungry — set aside a whopping $140 billion for executive compensation last year, a sum only slightly less than the $164 billion they paid themselves in the pre-crash year of 2007. In a gesture of self-sacrifice, Blankfein himself took a humiliatingly low bonus of $9 million, less than the 2009 pay of elephantine New York Knicks washout Eddy Curry. But in reality, not much had changed. "What is the state of our moral being when Lloyd Blankfein taking a $9 million bonus is viewed as this great act of contrition, when every penny of it was a direct transfer from the taxpayer?" asks Eliot Spitzer, who tried to hold Wall Street accountable during his own ill-fated stint as governor of New York.

Beyond a few such bleats of outrage, however, the huge payout was met, by and large, with a collective sigh of resignation. Because beneath America's populist veneer, on a more subtle strata of the national psyche, there remains a strong temptation to not really give a shit. The rich, after all, have always made way too much money; what's the difference if some fat cat in New York pockets $20 million instead of $10 million?

The only reason such apathy exists, however, is because there's still a widespread misunderstanding of how exactly Wall Street "earns" its money, with emphasis on the quotation marks around "earns." The question everyone should be asking, as one bailout recipient after another posts massive profits — Goldman reported $13.4 billion in profits last year, after paying out that $16.2 billion in bonuses and compensation — is this: In an economy as horrible as ours, with every factory town between New York and Los Angeles looking like those hollowed-out ghost ships we see on History Channel documentaries like Shipwrecks of the Great Lakes, where in the hell did Wall Street's eye-popping profits come from, exactly? Did Goldman go from bailout city to $13.4 billion in the black because, as Blankfein suggests, its "performance" was just that awesome? A year and a half after they were minutes away from bankruptcy, how are these assholes not only back on their feet again, but hauling in bonuses at the same rate they were during the bubble?

The answer to that question is basically twofold: They raped the taxpayer, and they raped their clients.

The bottom line is that banks like Goldman have learned absolutely nothing from the global economic meltdown. In fact, they're back conniving and playing speculative long shots in force — only this time with the full financial support of the U.S. government. In the process, they're rapidly re-creating the conditions for another crash, with the same actors once again playing the same crazy games of financial chicken with the same toxic assets as before.

That's why this bonus business isn't merely a matter of getting upset about whether or not Lloyd Blankfein buys himself one tropical island or two on his next birthday. The reality is that the post-bailout era in which Goldman thrived has turned out to be a chaotic frenzy of high-stakes con-artistry, with taxpayers and clients bilked out of billions using a dizzying array of old-school hustles that, but for their ponderous complexity, would have fit well in slick grifter movies like The Sting and Matchstick Men. There's even a term in con-man lingo for what some of the banks are doing right now, with all their cosmetic gestures of scaling back bonuses and giving to charities. In the grifter world, calming down a mark so he doesn't call the cops is known as the "Cool Off."

To appreciate how all of these (sometimes brilliant) schemes work is to understand the difference between earning money and taking scores, and to realize that the profits these banks are posting don't so much represent national growth and recovery, but something closer to the losses one would report after a theft or a car crash. Many Americans instinctively understand this to be true — but, much like when your wife does it with your 300-pound plumber in the kids' playroom, knowing it and actually watching the whole scene from start to finish are two very different things. In that spirit, a brief history of the best 18 months of grifting this country has ever seen:


By now, most people who have followed the financial crisis know that the bailout of AIG was actually a bailout of AIG's "counterparties" — the big banks like Goldman to whom the insurance giant owed billions when it went belly up.

What is less understood is that the bailout of AIG counter-parties like Goldman and Société Générale, a French bank, actually began before the collapse of AIG, before the Federal Reserve paid them so much as a dollar. Nor is it understood that these counterparties actually accelerated the wreck of AIG in what was, ironically, something very like the old insurance scam known as "Swoop and Squat," in which a target car is trapped between two perpetrator vehicles and wrecked, with the mark in the game being the target's insurance company — in this case, the government.

This may sound far-fetched, but the financial crisis of 2008 was very much caused by a perverse series of legal incentives that often made failed investments worth more than thriving ones. Our economy was like a town where everyone has juicy insurance policies on their neighbors' cars and houses. In such a town, the driving will be suspiciously bad, and there will be a lot of fires.

AIG was the ultimate example of this dynamic. At the height of the housing boom, Goldman was selling billions in bundled mortgage-backed securities — often toxic crap of the no-money-down, no-identification-needed variety of home loan — to various institutional suckers like pensions and insurance companies, who frequently thought they were buying investment-grade instruments. At the same time, in a glaring example of the perverse incentives that existed and still exist, Goldman was also betting against those same sorts of securities — a practice that one government investigator compared to "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars."

Goldman often "insured" some of this garbage with AIG, using a virtually unregulated form of pseudo-insurance called credit-default swaps. Thanks in large part to deregulation pushed by Bob Rubin, former chairman of Goldman, and Treasury secretary under Bill Clinton, AIG wasn't required to actually have the capital to pay off the deals. As a result, banks like Goldman bought more than $440 billion worth of this bogus insurance from AIG, a huge blind bet that the taxpayer ended up having to eat.

Thus, when the housing bubble went crazy, Goldman made money coming and going. They made money selling the crap mortgages, and they made money by collecting on the bogus insurance from AIG when the crap mortgages flopped.

Still, the trick for Goldman was: how to collect the insurance money. As AIG headed into a tailspin that fateful summer of 2008, it looked like the beleaguered firm wasn't going to have the money to pay off the bogus insurance. So Goldman and other banks began demanding that AIG provide them with cash collateral. In the 15 months leading up to the collapse of AIG, Goldman received $5.9 billion in collateral. Société Générale, a bank holding lots of mortgage-backed crap originally underwritten by Goldman, received $5.5 billion. These collateral demands squeezing AIG from two sides were the "Swoop and Squat" that ultimately crashed the firm. "It put the company into a liquidity crisis," says Eric Dinallo, who was intimately involved in the AIG bailout as head of the New York State Insurance Department.

It was a brilliant move. When a company like AIG is about to die, it isn't supposed to hand over big hunks of assets to a single creditor like Goldman; it's supposed to equitably distribute whatever assets it has left among all its creditors. Had AIG gone bankrupt, Goldman would have likely lost much of the $5.9 billion that it pocketed as collateral. "Any bankruptcy court that saw those collateral payments would have declined that transaction as a fraudulent conveyance," says Barry Ritholtz, the author of Bailout Nation. Instead, Goldman and the other counterparties got their money out in advance — putting a torch to what was left of AIG. Fans of the movie Goodfellas will recall Henry Hill and Tommy DeVito taking the same approach to the Bamboo Lounge nightclub they'd been gouging. Roll the Ray Liotta narration: "Finally, when there's nothing left, when you can't borrow another buck . . . you bust the joint out. You light a match."

And why not? After all, according to the terms of the bailout deal struck when AIG was taken over by the state in September 2008, Goldman was paid 100 cents on the dollar on an additional $12.9 billion it was owed by AIG — again, money it almost certainly would not have seen a fraction of had AIG proceeded to a normal bankruptcy. Along with the collateral it pocketed, that's $19 billion in pure cash that Goldman would not have "earned" without massive state intervention. How's that $13.4 billion in 2009 profits looking now? And that doesn't even include the direct bailouts of Goldman Sachs and other big banks, which began in earnest after the collapse of AIG.


In the usual "DollarStore" or "Big Store" scam — popularized in movies like The Sting — a huge cast of con artists is hired to create a whole fake environment into which the unsuspecting mark walks and gets robbed over and over again. A warehouse is converted into a makeshift casino or off-track betting parlor, the fool walks in with money, leaves without it.

The two key elements to the Dollar Store scam are the whiz-bang theatrical redecorating job and the fact that everyone is in on it except the mark. In this case, a pair of investment banks were dressed up to look like commercial banks overnight, and it was the taxpayer who walked in and lost his shirt, confused by the appearance of what looked like real Federal Reserve officials minding the store.

Less than a week after the AIG bailout, Goldman and another investment bank, Morgan Stanley, applied for, and received, federal permission to become bank holding companies — a move that would make them eligible for much greater federal support. The stock prices of both firms were cratering, and there was talk that either or both might go the way of Lehman Brothers, another once-mighty investment bank that just a week earlier had disappeared from the face of the earth under the weight of its toxic assets. By law, a five-day waiting period was required for such a conversion — but the two banks got them overnight, with final approval actually coming only five days after the AIG bailout.

Why did they need those federal bank charters? This question is the key to understanding the entire bailout era — because this Dollar Store scam was the big one. Institutions that were, in reality, high-risk gambling houses were allowed to masquerade as conservative commercial banks. As a result of this new designation, they were given access to a virtually endless tap of "free money" by unsuspecting taxpayers. The $10 billion that Goldman received under the better-known TARP bailout was chump change in comparison to the smorgasbord of direct and indirect aid it qualified for as a commercial bank.

When Goldman Sachs and Morgan Stanley got their federal bank charters, they joined Bank of America, Citigroup, J.P. Morgan Chase and the other banking titans who could go to the Fed and borrow massive amounts of money at interest rates that, thanks to the aggressive rate-cutting policies of Fed chief Ben Bernanke during the crisis, soon sank to zero percent. The ability to go to the Fed and borrow big at next to no interest was what saved Goldman, Morgan Stanley and other banks from death in the fall of 2008. "They had no other way to raise capital at that moment, meaning they were on the brink of insolvency," says Nomi Prins, a former managing director at Goldman Sachs. "The Fed was the only shot."

In fact, the Fed became not just a source of emergency borrowing that enabled Goldman and Morgan Stanley to stave off disaster — it became a source of long-term guaranteed income. Borrowing at zero percent interest, banks like Goldman now had virtually infinite ways to make money. In one of the most common maneuvers, they simply took the money they borrowed from the government at zero percent and lent it back to the government by buying Treasury bills that paid interest of three or four percent. It was basically a license to print money — no different than attaching an ATM to the side of the Federal Reserve.

"You're borrowing at zero, putting it out there at two or three percent, with hundreds of billions of dollars — man, you can make a lot of money that way," says the manager of one prominent hedge fund. "It's free money." Which goes a long way to explaining Goldman's enormous profits last year. But all that free money was amplified by another scam:


At one point or another, pretty much everyone who takes drugs has been burned by this one, also known as the "Rocks in the Box" scam or, in its more elaborate variations, the "Jamaican Switch." Someone sells you what looks like an eightball of coke in a baggie, you get home and, you dumbass, it's baby powder.

The scam's name comes from the Middle Ages, when some fool would be sold a bound and gagged pig that he would see being put into a bag; he'd miss the switch, then get home and find a tied-up cat in there instead. Hence the expression "Don't let the cat out of the bag."

The "Pig in the Poke" scam is another key to the entire bailout era. After the crash of the housing bubble — the largest asset bubble in history — the economy was suddenly flooded with securities backed by failing or near-failing home loans. In the cleanup phase after that bubble burst, the whole game was to get taxpayers, clients and shareholders to buy these worthless cats, but at pig prices.

One of the first times we saw the scam appear was in September 2008, right around the time that AIG was imploding. That was when the Fed changed some of its collateral rules, meaning banks that could once borrow only against sound collateral, like Treasury bills or AAA-rated corporate bonds, could now borrow against pretty much anything — including some of the mortgage-backed sewage that got us into this mess in the first place. In other words, banks that once had to show a real pig to borrow from the Fed could now show up with a cat and get pig money. "All of a sudden, banks were allowed to post absolute shit to the Fed's balance sheet," says the manager of the prominent hedge fund.

The Fed spelled it out on September 14th, 2008, when it changed the collateral rules for one of its first bailout facilities — the Primary Dealer Credit Facility, or PDCF. The Fed's own write-up described the changes: "With the Fed's action, all the kinds of collateral then in use . . . including non-investment-grade securities and equities . . . became eligible for pledge in the PDCF."

Translation: We now accept cats.

The Pig in the Poke also came into play in April of last year, when Congress pushed a little-known agency called the Financial Accounting Standards Board, or FASB, to change the so-called "mark-to-market" accounting rules. Until this rule change, banks had to assign a real-market price to all of their assets. If they had a balance sheet full of securities they had bought at $3 that were now only worth $1, they had to figure their year-end accounting using that $1 value. In other words, if you were the dope who bought a cat instead of a pig, you couldn't invite your shareholders to a slate of pork dinners come year-end accounting time.

But last April, FASB changed all that. From now on, it announced, banks could avoid reporting losses on some of their crappy cat investments simply by declaring that they would "more likely than not" hold on to them until they recovered their pig value. In short, the banks didn't even have to actually hold on to the toxic shit they owned — they just had to sort of promise to hold on to it.

That's why the "profit" numbers of a lot of these banks are really a joke. In many cases, we have absolutely no idea how many cats are in their proverbial bag. What they call "profits" might really be profits, only minus undeclared millions or billions in losses.

"They're hiding all this stuff from their shareholders," says Ritholtz, who was disgusted that the banks lobbied for the rule changes. "Now, suddenly banks that were happy to mark to market on the way up don't have to mark to market on the way down."


One of the great innovations of Victor Lustig, the legendary Depression-era con man who wrote the famous "Ten Commandments for Con Men," was a thing called the "Rumanian Box." This was a little machine that a mark would put a blank piece of paper into, only to see real currency come out the other side. The brilliant Lustig sold this Rumanian Box over and over again for vast sums — but he's been outdone by the modern barons of Wall Street, who managed to get themselves a real Rumanian Box.

How they accomplished this is a story that by itself highlights the challenge of placing this era in any kind of historical context of known financial crime. What the banks did was something that was never — and never could have been — thought of before. They took so much money from the government, and then did so little with it, that the state was forced to start printing new cash to throw at them. Even the great Lustig in his wildest, horniest dreams could never have dreamed up this one.

The setup: By early 2009, the banks had already replenished themselves with billions if not trillions in bailout money. It wasn't just the $700 billion in TARP cash, the free money provided by the Fed, and the untold losses obscured by accounting tricks. Another new rule allowed banks to collect interest on the cash they were required by law to keep in reserve accounts at the Fed — meaning the state was now compensating the banks simply for guaranteeing their own solvency. And a new federal operation called the Temporary Liquidity Guarantee Program let insolvent and near-insolvent banks dispense with their deservedly ruined credit profiles and borrow on a clean slate, with FDIC backing. Goldman borrowed $29 billion on the government's good name, J.P. Morgan Chase $38 billion, and Bank of America $44 billion. "TLGP," says Prins, the former Goldman manager, "was a big one."

Collectively, all this largesse was worth trillions. The idea behind the flood of money, from the government's standpoint, was to spark a national recovery: We refill the banks' balance sheets, and they, in turn, start to lend money again, recharging the economy and producing jobs. "The banks were fast approaching insolvency," says Rep. Paul Kanjorski, a vocal critic of Wall Street who nevertheless defends the initial decision to bail out the banks. "It was vitally important that we recapitalize these institutions."

But here's the thing. Despite all these trillions in government rescues, despite the Fed slashing interest rates down to nothing and showering the banks with mountains of guarantees, Goldman and its friends had still not jump-started lending again by the first quarter of 2009. That's where those nuclear-powered balls of Lloyd Blankfein came into play, as Goldman and other banks basically threatened to pick up their bailout billions and go home if the government didn't fork over more cash — a lot more. "Even if the Fed could make interest rates negative, that wouldn't necessarily help," warned Goldman's chief domestic economist, Jan Hatzius. "We're in a deep recession mainly because the private sector, for a variety of reasons, has decided to save a lot more."

Translation: You can lower interest rates all you want, but we're still not fucking lending the bailout money to anyone in this economy. Until the government agreed to hand over even more goodies, the banks opted to join the rest of the "private sector" and "save" the taxpayer aid they had received — in the form of bonuses and compensation.

The ploy worked. In March of last year, the Fed sharply expanded a radical new program called quantitative easing, which effectively operated as a real-live Rumanian Box. The government put stacks of paper in one side, and out came $1.2 trillion "real" dollars.

The government used some of that freshly printed money to prop itself up by purchasing Treasury bonds — a desperation move, since Washington's demand for cash was so great post-Clusterfuck '08 that even the Chinese couldn't buy U.S. debt fast enough to keep America afloat. But the Fed used most of the new cash to buy mortgage-backed securities in an effort to spur home lending — instantly creating a massive market for major banks.

And what did the banks do with the proceeds? Among other things, they bought Treasury bonds, essentially lending the money back to the government, at interest. The money that came out of the magic Rumanian Box went from the government back to the government, with Wall Street stepping into the circle just long enough to get paid. And once quantitative easing ends, as it is scheduled to do in March, the flow of money for home loans will once again grind to a halt. The Mortgage Bankers Association expects the number of new residential mortgages to plunge by 40 percent this year.


All of that Rumanian box paper was made even more valuable by running it through the next stage of the grift. Michael Masters, one of the country's leading experts on commodities trading, compares this part of the scam to the poker game in the Bill Murray comedy Stripes. "It's like that scene where John Candy leans over to the guy who's new at poker and says, 'Let me see your cards,' then starts giving him advice," Masters says. "He looks at the hand, and the guy has bad cards, and he's like, 'Bluff me, come on! If it were me, I'd bet everything!' That's what it's like. It's like they're looking at your cards as they give you advice."

In more ways than one can count, the economy in the bailout era turned into a "Big Mitt," the con man's name for a rigged poker game. Everybody was indeed looking at everyone else's cards, in many cases with state sanction. Only taxpayers and clients were left out of the loop.

At the same time the Fed and the Treasury were making massive, earthshaking moves like quantitative easing and TARP, they were also consulting regularly with private advisory boards that include every major player on Wall Street. The Treasury Borrowing Advisory Committee has a J.P. Morgan executive as its chairman and a Goldman executive as its vice chairman, while the board advising the Fed includes bankers from Capital One and Bank of New York Mellon. That means that, in addition to getting great gobs of free money, the banks were also getting clear signals about when they were getting that money, making it possible to position themselves to make the appropriate investments.

One of the best examples of the banks blatantly gambling, and winning, on government moves was the Public-Private Investment Program, or PPIP. In this bizarre scheme cooked up by goofball-geek Treasury Secretary Tim Geithner, the government loaned money to hedge funds and other private investors to buy up the absolutely most toxic horseshit on the market — the same kind of high-risk, high-yield mortgages that were most responsible for triggering the financial chain reaction in the fall of 2008. These satanic deals were the basic currency of the bubble: Jobless dope fiends bought houses with no money down, and the big banks wrapped those mortgages into securities and then sold them off to pensions and other suckers as investment-grade deals. The whole point of the PPIP was to get private investors to relieve the banks of these dangerous assets before they hurt any more innocent bystanders.

But what did the banks do instead, once they got wind of the PPIP? They started buying that worthless crap again, presumably to sell back to the government at inflated prices! In the third quarter of last year, Goldman, Morgan Stanley, Citigroup and Bank of America combined to add $3.36 billion of exactly this horseshit to their balance sheets.

This brazen decision to gouge the taxpayer startled even hardened market observers. According to Michael Schlachter of the investment firm Wilshire Associates, it was "absolutely ridiculous" that the banks that were supposed to be reducing their exposure to these volatile instruments were instead loading up on them in order to make a quick buck. "Some of them created this mess," he said, "and they are making a killing undoing it."


Here's the thing about our current economy. When Goldman and Morgan Stanley transformed overnight from investment banks into commercial banks, we were told this would mean a new era of "significantly tighter regulations and much closer supervision by bank examiners," as The New York Times put it the very next day. In reality, however, the conversion of Goldman and Morgan Stanley simply completed the dangerous concentration of power and wealth that began in 1999, when Congress repealed the Glass-Steagall Act — the Depression-era law that had prevented the merger of insurance firms, commercial banks and investment houses. Wall Street and the government became one giant dope house, where a few major players share valuable information between conflicted departments the way junkies share needles.

One of the most common practices is a thing called front-running, which is really no different from the old "Wire" con, another scam popularized in The Sting. But instead of intercepting a telegraph wire in order to bet on racetrack results ahead of the crowd, what Wall Street does is make bets ahead of valuable information they obtain in the course of everyday business.

Say you're working for the commodities desk of a big investment bank, and a major client — a pension fund, perhaps — calls you up and asks you to buy a billion dollars of oil futures for them. Once you place that huge order, the price of those futures is almost guaranteed to go up. If the guy in charge of asset management a few desks down from you somehow finds out about that, he can make a fortune for the bank by betting ahead of that client of yours. The deal would be instantaneous and undetectable, and it would offer huge profits. Your own client would lose money, of course — he'd end up paying a higher price for the oil futures he ordered, because you would have driven up the price. But that doesn't keep banks from screwing their own customers in this very way.

The scam is so blatant that Goldman Sachs actually warns its clients that something along these lines might happen to them. In the disclosure section at the back of a research paper the bank issued on January 15th, Goldman advises clients to buy some dubious high-yield bonds while admitting that the bank itself may bet against those same shitty bonds. "Our salespeople, traders and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research," the disclosure reads. "Our asset-management area, our proprietary-trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research."

Banks like Goldman admit this stuff openly, despite the fact that there are securities laws that require banks to engage in "fair dealing with customers" and prohibit analysts from issuing opinions that are at odds with what they really think. And yet here they are, saying flat-out that they may be issuing an opinion at odds with what they really think.

To help them screw their own clients, the major investment banks employ high-speed computer programs that can glimpse orders from investors before the deals are processed and then make trades on behalf of the banks at speeds of fractions of a second. None of them will admit it, but everybody knows what this computerized trading — known as "flash trading" — really is. "Flash trading is nothing more than computerized front-running," says the prominent hedge-fund manager. The SEC voted to ban flash trading in September, but five months later it has yet to issue a regulation to put a stop to the practice.

Over the summer, Goldman suffered an embarrassment on that score when one of its employees, a Russian named Sergey Aleynikov, allegedly stole the bank's computerized trading code. In a court proceeding after Aleynikov's arrest, Assistant U.S. Attorney Joseph Facciponti reported that "the bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways."

Six months after a federal prosecutor admitted in open court that the Goldman trading program could be used to unfairly manipulate markets, the bank released its annual numbers. Among the notable details was the fact that a staggering 76 percent of its revenue came from trading, both for its clients and for its own account. "That is much, much higher than any other bank," says Prins, the former Goldman managing director. "If I were a client and I saw that they were making this much money from trading, I would question how badly I was getting screwed."

Why big institutional investors like pension funds continually come to Wall Street to get raped is the million-dollar question that many experienced observers puzzle over. Goldman's own explanation for this phenomenon is comedy of the highest order. In testimony before a government panel in January, Blankfein was confronted about his firm's practice of betting against the same sorts of investments it sells to clients. His response: "These are the professional investors who want this exposure."

In other words, our clients are big boys, so screw 'em if they're dumb enough to take the sucker bets I'm offering.


Not many con men are good enough or brazen enough to con the same victim twice in a row, but the few who try have a name for this excellent sport: reloading. The usual way to reload on a repeat victim (called an "addict" in grifter parlance) is to rope him into trying to get back the money he just lost. This is exactly what started to happen late last year.

It's important to remember that the housing bubble itself was a classic confidence game — the Ponzi scheme. The Ponzi scheme is any scam in which old investors must be continually paid off with money from new investors to keep up what appear to be high rates of investment return. Residential housing was never as valuable as it seemed during the bubble; the soaring home values were instead a reflection of a continual upward rush of new investors in mortgage-backed securities, a rush that finally collapsed in 2008.

But by the end of 2009, the unimaginable was happening: The bubble was re-inflating. A bailout policy that was designed to help us get out from under the bursting of the largest asset bubble in history inadvertently produced exactly the opposite result, as all that government-fueled capital suddenly began flowing into the most dangerous and destructive investments all over again. Wall Street was going for the reload.

A lot of this was the government's own fault, of course. By slashing interest rates to zero and flooding the market with money, the Fed was replicating the historic mistake that Alan Greenspan had made not once, but twice, before the tech bubble in the early 1990s and before the housing bubble in the early 2000s. By making sure that traditionally safe investments like CDs and savings accounts earned basically nothing, thanks to rock-bottom interest rates, investors were forced to go elsewhere to search for moneymaking opportunities.

Now we're in the same situation all over again, only far worse. Wall Street is flooded with government money, and interest rates that are not just low but flat are pushing investors to seek out more "creative" opportunities. (It's "Greenspan times 10," jokes one hedge-fund trader.) Some of that money could be put to use on Main Street, of course, backing the efforts of investment-worthy entrepreneurs. But that's not what our modern Wall Street is built to do. "They don't seem to want to lend to small and medium-sized business," says Rep. Brad Sherman, who serves on the House Financial Services Committee. "What they want to invest in is marketable securities. And the definition of small and medium-sized businesses, for the most part, is that they don't have marketable securities. They have bank loans."

In other words, unless you're dealing with the stock of a major, publicly traded company, or a giant pile of home mortgages, or the bonds of a large corporation, or a foreign currency, or oil futures, or some country's debt, or anything else that can be rapidly traded back and forth in huge numbers, factory-style, by big banks, you're not really on Wall Street's radar.

So with small business out of the picture, and the safe stuff not worth looking at thanks to the Fed's low interest rates, where did Wall Street go? Right back into the shit that got us here.

One trader, who asked not to be identified, recounts a story of what happened with his hedge fund this past fall. His firm wanted to short — that is, bet against — all the crap toxic bonds that were suddenly in vogue again. The fund's analysts had examined the fundamentals of these instruments and concluded that they were absolutely not good investments.

So they took a short position. One month passed, and they lost money. Another month passed — same thing. Finally, the trader just shrugged and decided to change course and buy.

"I said, 'Fuck it, let's make some money,'" he recalls. "I absolutely did not believe in the fundamentals of any of this stuff. However, I can get on the bandwagon, just so long as I know when to jump out of the car before it goes off the damn cliff!"

This is the very definition of bubble economics — betting on crowd behavior instead of on fundamentals. It's old investors betting on the arrival of new ones, with the value of the underlying thing itself being irrelevant. And this behavior is being driven, no surprise, by the biggest firms on Wall Street.

The research report published by Goldman Sachs on January 15th underlines this sort of thinking. Goldman issued a strong recommendation to buy exactly the sort of high-yield toxic crap our hedge-fund guy was, by then, driving rapidly toward the cliff. "Summarizing our views," the bank wrote, "we expect robust flows . . . to dominate fundamentals." In other words: This stuff is crap, but everyone's buying it in an awfully robust way, so you should too. Just like tech stocks in 1999, and mortgage-backed securities in 2006.

To sum up, this is what Lloyd Blankfein meant by "performance": Take massive sums of money from the government, sit on it until the government starts printing trillions of dollars in a desperate attempt to restart the economy, buy even more toxic assets to sell back to the government at inflated prices — and then, when all else fails, start driving us all toward the cliff again with a frank and open endorsement of bubble economics. I mean, shit — who wouldn't deserve billions in bonuses for doing all that?

Con artists have a word for the inability of their victims to accept that they've been scammed. They call it the "True Believer Syndrome." That's sort of where we are, in a state of nagging disbelief about the real problem on Wall Street. It isn't so much that we have inadequate rules or incompetent regulators, although both of these things are certainly true. The real problem is that it doesn't matter what regulations are in place if the people running the economy are rip-off artists. The system assumes a certain minimum level of ethical behavior and civic instinct over and above what is spelled out by the regulations. If those ethics are absent — well, this thing isn't going to work, no matter what we do. Sure, mugging old ladies is against the law, but it's also easy. To prevent it, we depend, for the most part, not on cops but on people making the conscious decision not to do it.

That's why the biggest gift the bankers got in the bailout was not fiscal but psychological. "The most valuable part of the bailout," says Rep. Sherman, "was the implicit guarantee that they're Too Big to Fail." Instead of liquidating and prosecuting the insolvent institutions that took us all down with them in a giant Ponzi scheme, we have showered them with money and guarantees and all sorts of other enabling gestures. And what should really freak everyone out is the fact that Wall Street immediately started skimming off its own rescue money. If the bailouts validated anew the crooked psychology of the bubble, the recent profit and bonus numbers show that the same psychology is back, thriving, and looking for new disasters to create. "It's evidence," says Rep. Kanjorski, "that they still don't get it."

More to the point, the fact that we haven't done much of anything to change the rules and behavior of Wall Street shows that we still don't get it. Instituting a bailout policy that stressed recapitalizing bad banks was like the addict coming back to the con man to get his lost money back. Ask yourself how well that ever works out. And then get ready for the reload.

[From Issue 1099 — March 4, 2010]