Another "How'd That Poker Feel Up Your Ass" America!?! from the Bush Family. (Prescott, brother of HW, Uncle of W, started the US-China Chamber of Commerce, which started this Ball of Wax which is consuming America.
Dozens of websites, emenating from a locale where the rule of law is, "steal as much as you can before you are stopped."

OK, just gotta get a little of the "Tree-Hugger" out of me (because it's just so passe').
Since it would only take $44 Billion to eradicate World Hunger every year, why are so many Christians hell bent against it, when they're giving totals over $90 Billion each year?

Losses? We don't need no stinking losses..........

This, and the underlying cause, are what will trigger a US default.

Silver & Gold

Investment thoughts: Silver has remained flat for 2010, yet I cannot shake the feeling, based on historical knowledge, that will not last. Consider that the Chinese have more than tripled the amount they buy since 2004.

While many have turned to gold as an asset saving measure, others have turned to silver, and I believe that will only increase. 90+%of all the gold ever mined still exists as coinage or jewelry, 90+% of all the silver ever mined is gone, used for industrial purposes, such as medicinal and photographic applications. The biggest fact I hang my hat on is the historic ratio gold and silver have maintained throughout history. In most decades, gold has been priced at a ratio between 9 times to 16 times the price of silver. Today that ratio is almost 70 to 1. that means one of three things have a great likelihood of happening;

1.) That gold is overvalued;and will fall in price, dramatically

2.) That silver is undervalued; and will increase in price, dramatically, or

3.) It's a combination of the two.

Anyway you slice it, the price of silver has little chance of falling.

For investors, this could be a bonanza.

Many experts are continuing to predict gold’s rise towards $2,000. Which means a realistic target price for silver should be between $100-$125/ ounce.

Already, that’s over a 500% gain over today’s price of $18...
Pressures on the availability of silver will only enhance what I believe will be silvers' rise.

Silver is used for so many of today's high tech industries from medical equipment, to compact disc production to photography. It is one of the most conductive metals found on Earth, so its continued importance in technological advances is all but guaranteed.

There are many ways to invest in silver; bullion, ETFs, Mining stocks, junior mining stocks.
I like many of the junior miners for their potential, the most attractive of them can be found on the Toronto Stock Exchange.

Editors note: I apologize to my many readers for not posting more often. Since the death of my wife, my life has dramatically changed, both in daily surroundings and financially. If I could find a way of making this site profitable, I would continue to do it. But my responsibilities dictate I devote energies elsewhere. Good luck to all of you and thank you so much for reading, it has truly been my privilege and honor.

Recruiterrick

Ahh, some people are thinking, as sent to me from a reader;

Anonymous said...

the top 25 banks have a combined marekt cap of 8 trillion. these banks have 208 trilion of dirivative exposure.
i expect the majority of these is ultra safe. but, let's say 20% have SOME risk. if this risky group takes, let's say, a 25% hit, that exceeds the cap. then what?

I am going to ignore the typos and give this guy an 'A' for paying attention in class. Unless all of us start asking the questions that must be answered by the banks and bankers, they will continue to force the taxpayers (that means you and me) to reimburse them for bad bets they made.

Let's take what "Anonymous" wrote and break it down.

1) $208 Trillion in derivative exposure is only what they show in level 1 accounting rules, that does not include what is held by shell corporations in offshore accounts tallied in level3 accounting rules.

2)To assume most of the derivative exposure is "ultra safe" is just that, an assumption. I believe we have not seen the worst of this crisis yet. Remember this, the peak for resets of option ARM loans does not come until spring of 2011. Guess what that $208 Trillion in derivatives is built on, yep, those once considered "prime" option ARM loans that will reset and recast at a time when the housing market could well be 50% lower in value than when those loans were first originated. In order to refinance, your house must appraise at or above the amount you are wanting to borrow or refinance. My guess is we will be looking at tens of thousands of families walking away from their homes, which means those loans become non-producing, which means any CDO or CLO or CMO or any other derivative built on those loans remaining in the producing column, goes boom and more than likely becomes a 100% loss. That is where the CDS that AIG was writing comes in. More taxpayer money to the banks that created derivatives they KNEW would go bad, and we know they knew because they turned right around and immediately bought a CDS on a CDO they just sold to some dupe (bank, or worse, a pension fund), even though they no longer had any financial tie to that CDO.

3) There is great likelihood all of those banks will require massive bailout monies again. What happens to you if you take all of your savings, go to Vegas and lose it all? Should the guys that get paid millions of dollars a year get off scott-free when they do the same thing thing, With Other People's money? Isn't that why we built prisons? Bailout my arse, throw their arse in to a cell, and make sure their cell mate is big and lonely. We'll see how many of their successors will play fast and loose with the law and other people's money. I'd bet we wouldn't have another financial crisis, ever, if we would enforce the laws we have now.

RuhRoh, Elroy

This afternoon, there was a mad rush by bloggers to relay the message that Japan is planning to sell their holdings of US Treasuries, in an attempt to shore up the falling yen. It does not appear to be true, Chief Cabinet Secretary Hirofumi Hirano stated today "There is no such plan at all, at this point in the government."

THANK GOD!!!

It will start a cascade of selling by several countries, because the best price will go to the earlier sellers, as more Treasuries are put on the auction block each new bunch will have to have a lower price to compete and win bids against what is the price right now, in turn the interest rate on US issued Treasuries will need to go up in yield, effectively killing economic expansion.

Today the national Debt is over $12 Trillion, by 2010 it will be over $14Trillion. The biggest problem for the US Gov't is we need to sell around $100 Billion each month just to fund the budget for 2010. That does not include the interest payments on what we have already sold. Each month, another $50 Billion must be raised to keep the US from defaulting. We will be competing against our own Treasuries, and the winner will be whoever can offer the best return to what little money is out there ready to be reinvested. Expect interest rates to go up soon. It won't be too long before a large holder of Treasuries begins selling their holdings, "because they have to" and the event described above will happen. After that , who knows? It ain't a very rosy picture, I know that much.

Income Inequality Growing

A big hat tip to Charles Hugh Smith For the above graph. His article is well worth the read.

If that graph does not scare the SH*% out of you, here is why it should. Note that the last extreme of inequality was reached just before the Great Crash of 1929. From 1929-1932 JPMorgan increased their ownership of American businesses three-fold, as did many other large financial institutions. These guys have a blueprint to follow, and are unafraid of PCA (prompt corrective action), from the government, as their campaign contributions and lobbyists have bought them refuge from the law of this great land.

(Editor's note) To all who have read my blog, I thank you. I will be returning to regular reports soon. On April 2, I suffered a massive stroke, but I am OK, being released from all therapies, as I beat all of the established goals. I regretfully must report that my beloved wife, Erica, is now in the arms of the Lord, and I am confident he/she has removed the ravages of the disease which consumed her. To all who are personal friends, my son and I wish to thank you for all the love and support over the last 18 months, it has helped us in ways immeasurable.

Boosting the Fund Managers Retirement Package

A Hat Tip To Mish for the following;

The new PPIP plan is quickly being labeled as nothing but a back door for the banks that hold the most toxic of assets to dump them onto the taxpayers. Allowing a small, select group of companies to run the program, especially those most vocally for the program, leaves too much room for abuse.

The investors are limited to the largest firms. Of course, most of these firms are partly responsible for the mess. Lesser sized firms are prevented from the bidding process. By limiting the number of bids, the selected managers can control the prices, with little true bidding occurring.

Guess what that leads to - Overvaluing credit derivatives. It is the overvaluing of credit derivatives through level 3 accounting and off-shore accounts that has us in this mess in the first place. Had we had true mark to market rules for the last three years, as the market moved down in housing, the losses and unwinding of credit derivatives based on housing would have taken place immediately. As each downgrade happened, the loss would be recognized. Instead, under the current system, the holder can claim full value, even though the derivative may have received several downgrades.

Because we do not have true mark to market, the banks have since been securitizing credit card debt, student loan debt, even boat loan debt. What do you think these will be worth two years from now?

As Mish explains, it is most certainly a scheme allowing the bondholders to not lose a dime, the managers to realize a huge windfall, and the taxpayers exposed to massive losses. As more information comes out, the likelihood of success for this plan seems more remote. And it is apparent the burden to the taxpayer will increase.

From The Wall Street Journal, Treasury's Very Private Asset Fund;

"The Obama Administration insists it wants to "partner" with private investors for its new toxic-asset purchase plan. But the more details that emerge, the more it seems Treasury wants to work with only a select few companies. This is no way to conduct a bank clean-up.'

"The investment community was already suspicious last week when Secretary Timothy Geithner unveiled his plan, announcing that Treasury would select four or five companies as "fund managers" to purchase toxic securities. Given that the whole idea is to create a liquid market for these assets, we'd have thought Treasury would encourage as many players as possible.'

"But the bigger shock was when Treasury released its application to become a fund manager, a main rule of which is that only firms that already have a minimum of $10 billion in toxic securities under management can apply. Few hedge funds, private equity players or sovereign wealth funds come near this number. The hurdle would bar many who specialize in the very distressed assets that the Obama Administration is trying to offload from banks.'

"Hedge Fund Intelligence recently estimated total assets under management at Avenue Capital Group at $16.4 billion, King Street Capital at $15.8 billion, Fortress Investment Group at $13.7 billion, and Elliott Associates at $12.8 billion. Presumably, the portion of these portfolios devoted to toxic assets is significantly smaller. "It's difficult to imagine why most firms would even bother to apply now," one hedge fund manager told us.'

"Treasury rules also say the $10 billion limit must be comprised of commercial and residential mortgage-backed securities that are "secured directly by the actual mortgage loans, leases or other assets and not other securities." This is another way of saying that they must be "first tier" assets, for instance collateralized debt obligations (CDOs). But what many private players instead deal in are "CDOs squared" or CDOs secured by other CDOs, which would not count toward the requirement. This, too, will make it harder to take part in the program.'

"While dozens of banks and insurance companies today hold more than $10 billion in toxic securities, the vast majority are trying to get these assets off their books -- not lining up to buy more."This is ugly," says Joshua Rosner, the managing director of Graham, Fisher & Co., an independent research firm. "As long as they are experienced, there is no rational reason for creating limitations on who becomes a bidder and manager of assets. It doesn't serve the public good, though it may serve those few large firms that appear to have a privileged relationship with Treasury."

"None of this bodes well for the bank rescue. The purpose is to create new buyers for these toxic securities, a process that, in Treasury's own words, will lead to better "price discovery." .......The weaker asset-holding banks are already wary of selling into this program, worried that low bids will result in big losses that will further hurt their balance sheets. They will be even less likely to take part if only a handful of managers, who have every incentive to keep prices low, are doing the bidding.'

".........smaller players can now only take part in this program if they agree to "buy" into the funds run by one of the exclusive managers. So not only is the government going to be anointing a favored few to invest in these assets. It is also giving those favored few the opportunity to collect fees and profit-sharing from anyone else that wants to go in with them. In the wake of the AIG bonfire, Mr. Geithner is tempting another outcry."

How all of this is to be paid for is through the sale of more Treasuries. Without real economic activity increasing, the world will tolerate our Treasury printing only so many more bonds. At some point, our GDP must reflect the ability to pay those bonds back. We never want foreign buyers of Treasuries to doubt we can service them.

$8 Trillion is the amount estimated for new Treasuries over the next few years. Every dime given the banks has a high likelihood of doing nothing but covering losses. How many jobs in new technologies would $8 Trillion create?

It is better the top banks go bankrupt rather than the US. And soon.

The Economy May Well Doom Social Security

The Social Security Fund may not be as well funded, therefore in trouble much sooner, than many believe.

Since it's inception, the intent of Social Security was to provide a modest income to retirees who would otherwise have none. It worked marvelously well for decades, with its surplus being held by US Treasuries, which of course gained interest. Had it been left alone, the Fund would have had enough money to make it through any economic cycles, and provide a small safety umbrella for many generations of retirees.

Over the years, several changes have left the Social Security Fund basically empty. Starting in 1968, the SS Fund surplus was thrown into the congressional general fund to help pay for the escalating costs of Vietnam. That change robbed SS of interest gained on the surplus. In 1972, congress amended SS to include immigrants who had never paid into the system to receive the same benefits as anyone else 65 or older.

The biggest changes came in 1983, when the government began using the bonds within the SS Fund, to balance the national budget, and exchanged them for basic IOU's.

In a report by Tim Iacono, a light is thrown in one dark corner of government mandates;

"Among the plethora of new ills plaguing the U.S. economy as it goes stumbling toward its uncertain future is a problem that, until very recently (meaning two days ago), was believed to be one reserved for the latter half of the next decade - the dwindling social security surplus.'

"The initiative to reform the nation's second largest entitlement program and undo the marvelous mid-1980s accounting change that would make the U.S. budget deficit look deceptively small for decades was a resounding failure and the quacking started long before most had ever dreamed.'

"In any event, word now comes from the CBO (Congressional Budget Office) that yet another fallout of the recent economic tailspin is that payroll taxes have fallen off a cliff along with home values and stock prices leading to the real possibility that the Social Security surplus will turn into a deficit much sooner than originally thought, all but vanishing next year according to the most recent calculations.'

"While this will have no impact on current recipients as incoming funds will about equal the monthly payments to more than 50 million senior citizens, it will have an untoward impact on funding the government's budget deficit, a shortfall that has been masked by these surpluses for years.'

"In what some refer to as the biggest Ponzi scheme of them all, the Treasury Department has been borrowing money from the Social Security trust fund to pay today's bills leaving behind just slips of paper stored in that file cabinet above."

To add, in the comments section of Tim's article, Aaron Krowne, owner of ML-Implode, submitted a comment from one of his readers, which expands the peril Social Security may soon face;

"A reader wrote in with an important clarification to our pickup of this article on ML-Implode. I thought I would relay that here for everyone's benefit. The upshot is the "IOUs" are not, as I had always assumed, run-of-the-mill Treasury's -- they are formally no different than the ad hoc IOU sticky notes from the movie "Dumb and dumber". The reader writes:'

"... there are no accumulated Treasuries in the Trust Fund. The Trust Fund is nothing more than a collection of interdepartmental markers, and is considered non-negotiable debt. It is not part of the national debt, and does not pay interest. If it was negotiable debt (Treasuries) it would be an asset to the fund, and could be sold on the open market to pay for future obligations just like any other retirement plan (and also would have sky rocketed in value during the greatest bond market rally in at least a generation). In 1980 the real change was to place all of the proceeds from Social Security into the general fund, replace it with non-negotiable markers in filing cabinet somewhere and call it unfunded pension liabilities. This has the advantage of making the national debt look lower. If it was funded by Treasuries then no new debt would need to be issued by the Treasury, but since it is not funded with negotiable debt, new debt will need to be issued (or benefit decreases, or increased taxes). Social Security is a pay as you go system, and the massive tax increases in 1980 to save it were nothing more that a middle class tax increase. When suckers will no longer fund the national debt, this program will be under serious pressure for massive change.. "

Serious pressure for massive change... It is truly a sad fact. When the Social Security program was started, it was a natural extension of a truly rich nation taking care of its own. Though born during the Great Depression, it has provided for basic needs among millions that would otherwise have been penniless.

For generations, it has been the one government program that required so little, yet gave so much.

Had no changes ever been made to the Social Security Fund, it would have run forever, benefiting every succeeding generation of retirees for eternity. Due to the governments lack of ability to manage the tax proceeds they collect from us, this magnificent program may well soon meet its demise.

Fried Frenchies

As many Americans would hoot and howl about, France has joined China in vocally challenging the US to do something more than talk about the global economic crisis.

Nicolas Sarkozy has inferred he will walk out of the upcoming G20 summit if tougher financial regulations are not implemented.

From the Times OnLine;

"France will not accept a G20 that produces a “false success with language that sounds good but contains no commitments”, his advisers said. '

"The French threat dramatically raised the temperature hours before President Obama arrives in London today. If carried through, it would ruin a summit for which Mr Brown and Mr Obama have high ambitions, believing it vital to international recovery.'

"Mr Sarkozy, who blames the “Anglo-Saxons” for causing the economic crisis, told his ministers last week that he would leave Mr Brown’s summit “if it does not work out”. '

"Mr Sarkozy’s threat underlines the emerging splits between world leaders. Germany and France have led opposition to plans to coordinate public spending, championed by the Administration of President Obama."

Whether you consider this childish, or not, it is a growing indication the world is focused on real action to stem the current financial crisis. Many countries are at the breaking point, facing record levels of unemployment, unserviceable debt loads, shrinking exports and business closures. Drastic actions may soon become the norm if the world economy does not change course.

The US is not only the leading economic engine of the world, it is the leader of the world. Should we, in the eyes of our partners, fail to lead, we leave them with little choice but to seek alternatives.

FASB Caves In

More evidence the bankers are making the rules. In efforts to keep toxic assets hidden, the FASB, which was told by congress last week to ease up on Mark to Market, caved in and gave them what they wanted.

OH, ask not what you can do for your country, ask what a lobbyist can do for you.

From Bloomberg;

"The changes proposed on March 16 to fair-value, also known as mark-to-market accounting, would allow companies to use “significant judgment” in valuing assets and reduce the amount of writedowns they must take on so-called impaired investments, including mortgage-backed securities.'

"FASB’s acquiescence followed lobbying efforts by the U.S. Chamber of Commerce, the American Bankers Association and companies ranging from Bank of New York Mellon Corp., the world’s largest custodian of financial assets, to community lender Brentwood Bank in Pennsylvania. Former regulators and accounting analysts say the new rules would hurt investors who need more transparency, not less, in financial statements.'

“What disturbs me most about the FASB action is they appear to be bowing to outrageous threats from members of Congress who are beholden to corporate supporters,” said Levitt, now a senior adviser at buyout firm Carlyle Group and a board member at Bloomberg LP, the parent of Bloomberg News.'

The FASB has been considered one of the last hopes in forcing more transparency into the financial system. By strengthening mark to market rules, the FASB could have helped bring toxic assets onto active accounting ledgers, and the bloodletting from derivatives losses could then be dealt with. Not now. The new ruling not only allows the hiding to continue, banks will now be able to claim profit from what little cash flows still come from deteriorating credit derivatives, without acknowledging principal losses associated with downgrades.

".....Allowing companies to hold on to assets without writing them down could discourage them from selling the securities, which would work against Treasury’s objective to resuscitate markets, he said.'

“It’s one of the unintended consequences of having the FASB bow to political pressure,” Richard Dietrich said.'

"Conrad Hewitt, a former chief accountant at the SEC who stepped down in January, said representatives from the ABA, American International Group, Fannie Mae and Freddie Mac all lobbied him over the past two years to suspend the fair- value rule.'

"Executives “would come to me in the afternoon with the argument, ‘You’ve got to suspend it,’” Hewitt said in a March 25 interview. The SEC, which oversees FASB, would reject their demands, and “the next morning their lobbyists would go to Congress,” he said.'

‘Is That Fair?’

"At a March 12 hearing of a House Financial Services subcommittee, lawmakers showed impatience with FASB'

“You do understand the message that we’re sending?” panel chairman Paul Knjorski, a Pennsylvania Democrat, asked FASB Chairman Robert Herz.'

“Yes, I absolutely do, sir,” Herz replied'

"After hesitating, Herz said he would try to get a new fair- value rule finished within three weeks.'

“The financial institutions and their trade groups have been lobbying heavily,” Herz said in an interview after the hearing. “Investors don’t lobby heavily.”

"The political action committees of banks including Citigroup, Bank of America, Bank of New York Mellon, Wells Fargo and banking trade groups contributed money to Kanjorski’s re- election campaign last year, according to the Federal Election Commission. CitiGroup gave $6,500, Bank of America $7,000, Bank of New York $8,000 and Wells Fargo $13,000.'

"Kanjorski spokeswoman Abigail McDonough didn’t return calls seeking comment.'

This probably means the losses on credit derivatives will get deeper and deeper. Any CDO that is 50% of its original value today, may be worth half as much a year from now if housing values decline, and foreclosures continue. Since congress, and our Treasury, have committed trillions to saving the banks, these kinds of "hide the losses" games only benefit the corporations that created this mess. And the taxpayer is asked to assume the losses.

The US Legislative process has devolved into a system of lobbying. Only those that can pay for lobbyists have any voice in the system.

Since the lobbyists have but one allegiance, to the client that pays the fees, safeguarding our country is no longer central.

The World is Making Other Plans

From Reuters;

TOKYO (Reuters) - "The role of the U.S. dollar as the key global currency will decline after the financial crisis, and its value may also weaken due to America's current account deficit, officials at some of Asia's top think tanks said."

"Chalongphob Sussangkarn, a former Thai finance minister and now president of Thailand Development Research Institute, also expressed worries about any sharp fall in the dollar."

"The U.S. deficit is so huge. This is why all countries, particularly East Asia, are concerned because we hold a lot of these assets. What happens if the U.S. dollar falls 40 percent? Many central bankers will be losing huge amounts of money."

From "The Japan Times";

"The U.S. alone can no longer resolve the current global economic crisis."

"In order for the entire Asian region to keep growing, we must create the third-polar regime in Asia by introducing the Asian common currency, which stands on par with the US Dollar and the euro," the report says."

From FT.com;

"China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund."

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC."

From the Straits Times;

"PARIS - IMF managing director Dominique Strauss-Kahn said on Wednesday that talks on a new world reserve currency to replace the US dollar were 'legitimate' and could take place 'in the coming months'."

From The Moscow Times;

"The Kremlin published its priorities Monday for an upcoming meeting of the G20, calling for the creation of a supranational reserve currency to be issued by international institutions as part of a reform of the global financial system."

Is it time to ask US citizens to "Get a Clue?"

The failure of Washington to rein in the abuses of our financial system will cause world leaders to seek remedies away from US interests. The continuing bailout of failed banks, the blind eye given to enforcement of existing law, and the elimination of protective law, has created a mountain of anger among world leaders.

Instead of listening to its people, the US government has committed an additional $8 Trillion to attempt to deal with the aftermath of "toxic" assets. Back last September, at a rate of 300:1, congressmen and congresswomen received faxes, phone calls and letters against the original EESA/TARP. Congress then voted, against their own constituents wishes, to grant Henry Paulson use of $700 Billion in taxpayer monies, at his own discretion, with no oversight.

Within weeks, the Federal Reserve committed the US taxpayer to a (illegal) buyout of AIG. Though Ben Bernanke, and Paulson, said the taxpayer would realize a profit from this venture, it has amounted to nothing but a $200 Billion loss. A great deal of that money has gone to companies which had already received TARP funds. It is reported that AIG still has over $2 Trillion in CDS contracts. Many anticipate that to be a 100% loss. Again, to be added to the national debt.

When the original TARP was not enough to keep otherwise insolvent banks from going under, the Federal Reserve began to negotiate directly with these banks. Citi now has guarantees for $300 Billion of "toxic" assets. Bank of America has guarantees of more than $100 Billion. Citi and Bank of America may very well have several times those "toxic" assets still outside of any regulatory view or control, that have yet to even be considered.

Now the government comes up with a plan to shift the losses of Trillions more in "toxic" assets to the taxpayers.

The banks, all of them, should be allowed to rise and fall on their own decisions. The creation of assets that are now toxic was the decision of a few. Those few should bear all of the consequences. Not the taxpayer. It is how a "Free Market" system is supposed to work.

Even though it has become obvious to the rest of the world, the average US citizen is oblivious. The reason congress acted as it did was for one reason: The US legislative process has devolved to nothing more than a system of lobbying. Only those with the money to pay for that lobbying have any voice in this system.

Nothing else explains why any congress person felt comfortable enough voting for the original TARP, when they heard from the people that elected them, at a rate of 300:1, against the TARP.

Funny thing is, two weeks later a national election occurred, and most of these congress folk were voted back into their seats.

Because more than 70% of all Treasuries issued sit in foreign accounts, the value of those Treasuries, and the dollar, sit in those accounts as well. At the rate the national debt is increasing, just to save banks that made bad decisions, many of these foreign holders of US debt are getting nervous. Initiatives to wean themselves from reliance on the US are being sown because of that nervousness.

Many foreign central banks feel the US has misled them. When most of the Treasuries they own were purchased, the US appeared to be a Free Market, and confidence in our system was high. Over the last 18 months, the actions of The Federal Reserve and US Treasury have quadrupled the amount we now owe. The majority of that increase has gone to otherwise insolvent banks to cover losses from toxic assets. Confidence in our ability to service the increasing debt goes down with every new Treasury sold. To a holder of US Treasuries, further commitments that may double the national debt from here, without creating new economic activity, will cause alarm.

Folks, this is very bad. Were it not for that initial confidence in our system, we would never have been able to sell that many Treasuries, and we would never have reached the current level of debt. Plans to increase our debt would never be started without that confidence. The world is politely telling us WE ARE LOSING THEIR CONFIDENCE. Pretty soon, the dialogue may not be so polite.

Unless our elected officials immediately start doing what is best for everyone, and not the privileged few, expect some drastic actions from those foreign holders of US debt.

BTW - Be like Yukon Cornelius and look for silver and gold.

Dollar Dominance and China

The actions in Asia, especially China, must be paid close attention to by the leaders in the US. China is integral to any of our stimulus and bailout plans, because someone must buy the Treasuries we issue to fund these efforts. Few others can help us as much as China.

China currently owns more US denominated debt than any other single entity, in the world. That allows the leaders in the US to think that the Chinese have as much reason as we do to maintain the value of those investments. Since the value of those investments will rise, or fall, on the strength of the US's ability to repay those loans, many here feel that all those that own Treasuries will help save the value of those Treasuries.

This line of thinking includes the presumption that all those that buy Treasuries will hold them to maturity, thus extending the time frame for actions that will prop up the value of those Treasuries. This thinking is also a natural extension of the US and its dollar as the reserve currency for the world. Many of the world's largest transactions, especially in certain commodities such as oil, are mainly conducted in dollars. It is hard for the leaders of the US to see the world differently, for they, as well as all Americans, have enjoyed the benefits of this position since WWII.

Every discussion of global trade, foreign policy initiatives, intervention in markets, you name it, is framed in the unstated understanding the US is the world's leading power and leading economic engine. For decades this underlying truth has been globally assumed for all dialogue and discussion, both public and private. While the world grapples with the growing economic crisis, it looks to the US for solutions. The US, because of our position in the world and the resources at our disposal, will remain at the top for the foreseeable future.

But, our leaders, and more importantly our media, should pay close attention to new ideas from other world leaders. Currently, there are powerful undercurrents to lessen not only the US's position in the world, but to diminish the US Dollar as the reserve currency for the world.

As I wrote a few weeks ago in "Chinese Economists Favor Gold Over US Bonds", more than two-thirds of Chinese Economists favor the central government invest in gold, rather than US Treasuries. That is very revealing, for most of these economists work either directly, or indirectly, for the Chinese government. What they favor must be assumed to be what the Chinese government favors. In comparison, the US is adopting the ideas put forth from its economists to solve the current economic crisis. Should we think the Chinese won't do the same?

If China does what the economists suggest, they won't be buying many US Treasuries in the future, they will use extra surpluses for purchases of gold. That may translate into a bad outcome in the near future sales of US Treasuries. In Britain, the funds needed for stimulus have already been denied. From "U.K. Bond Auction Fails for First Time since 2002";

"March 25 (Bloomberg) -- The U.K. failed to find enough buyers for 1.75 billion pounds ($2.55 billion) of bonds for the first time in almost seven years as debt investors repudiated Prime Minister Gordon Brown’s plan to stem the worst economic crisis in three decades."

"The risk of failed auctions is increasing as governments around the world boost spending to revive their economies after financial institutions incurred more than $1 trillion of losses and writedowns since the start of 2007."

Britain, prior to this failed auction, has said it will sell 146.6 Billion Pounds in debt in 2009 to try to revive its economy. The first 1.75 Billion failed to attract enough buyers. The likelihood they get to their goal of 146.6 Billion Pounds now seems remote. To repeat a line from the above article, "The risk of failed auctions is increasing....". The US has almost quadrupled its debt over the last decade. The reason Britain failed to sell even a small fraction of the bonds it needs for economic recovery is investors feel Britain already has more debt than they can service. How soon will investors feel the same concerning the US?

At this point, the Chinese economists seem to have more faith in gold, than US Treasuries.

There exists a second, and more compelling reason, the Chinese may not buy Treasuries in the near future. It is their desire to topple the US Dollar as the Reserve currency for the world. These same economists, and the central government, are slowly moving to a formal position that the volatility of the dollar, and value of US Treasuries, has them hostage. As long as they hold huge reserves of dollar denominated debt, the value of their investments is subject to the actions of the US government. Throughout Asia, the idea of reliance on the dollar, and safety of US Treasuries, is no longer guaranteed. Thus, it may not be in their best interests to be reliant on either.

The Chinese, as well as the Japanese and Koreans, bought many of the MBS from Wall Street, FNMA and FHLMC. They saw first hand the rapid decline in those investments, some as much as 50%. Convincing them future debt sold by the US will not have the same outcome has now become much harder.

China is now leading the charge to replace the Dollar with the Yuan as the reserve currency for all of Asia. From Jim Willie writing in "Financial Sense";

"A crisis of global confidence in the USDollar is upon us. Foreigners have begun to lose respect for USGovt approach to problem solving, for US bank administration, and for USDollar custodial management. Foreigner creditors have suffered deep losses from fraudulent bond export, continue to sit atop mountains of US$-based debt securities, and watch current events in horror."

"Due to USDollar instability and unreliability, Beijing is introducing a serious currency experiment, in order to aid in the stability of the Asian economy. The Chinese intention seems clearly to decouple both China and Asia from the USDollar and to introduce the yuan as the regional reserve currency."

"This is a very clever economic as well as political plan by China. The plan is a pathway for regional economic stability for Asia, centered finally in China in a monetary sense. China will proceed under the legitimate political cover of their own financial reform toward stabilization. Chinese bank leaders like Zhou Xiaochuan have begun to state publicly some nontrivial arguments about how continuation of the current US$-based global unipolar financial system bears costs and risks that far exceed the benefits........The Chinese are considering a new debt security, which will compete for Asian surplus funds and thus displace the USTreasury Bond. If successful, the Chinese will turn the tables completely, and wear the big currency boot. Chinese sentiment has changed, as has their patience."

Should the US not find a solution soon to the economic crisis, which is radically different from what is currently proposed, expect other nations to proceed on their own. China, as well as many other countries, blame the US for this mess. Since the US has refused to jail those responsible, and, over the last 18 months helped those responsible hide the carnage, China, as well as Russia, Germany, France and Saudi Arabia, have all been very vocal about reducing the US's role in world markets.

This is very bad for the US. Under the current plans, the US must sell several Trillion in US Treasuries over the next two to three years. Since those Treasuries have no physical asset backing them, such as gold, any actions like those described above, will reduce any interest in buyers. At the same time, if China creates its own set of bonds, and auctions them, most Asian countries will purchase those instead of US Treasuries.

For many reasons, the world has changed dramatically over the last decade. Most countries can diminish their anger over the Iraq War. In contrast, they are now willing to take action against the ravages of Wall Street's creative financing.

The US forced the moral argument over the last 50 years to focus on money and wealth. It is that focus that may end our current system as we know it.

When on the Government dole.......

This is too good not to talk about.

There are literally hundreds of thousands of homeowners "underwater", meaning they owe more than their home's appraisal value, with their mortgages. First the Bush administration, and now the Obama administration, have gone to great lengths to warn homeowners not to pay a fee for an attorney to help you negotiate for a loan modification. If done properly, a loan modification can reduce interest payment, reduce the principal owed, or both. It is especially helpful if you happen to have taken an Option ARM loan, which can carry severe increases in payments beyond the "teaser" period.

The last thing a bank or servicer wants to do is lessen the amount you pay. Every nickel matters to a bank, more so if you are with one that placed an additional bet on the performance of your mortgage by creating a CDO, CMO or similar credit derivative which they have kept on their books. Those losses are magnified.

If you are paying your mortgage on time, no matter where you live, or what type of mortgage you have, the bank will NEVER let you modify. Your loan is performing, and they have no incentive to reduce what you are paying them. Both neighbors directly on either side of you may have already gotten a loan mod, or worse, walked away from the house, and the bank still has no incentive to help you reduce your payments. Many who read this will agree with the bank. The borrower has a contractual obligation to fulfill the terms of their mortgage. It is hard to say these people are wrong, because deep down, we all know the law is the law.

But then don't tell me you are angry about AIG executives, who wrote the derivatives that are sending all of us into a depression, shouldn't get their bonuses. Henry Paulson and the Bush White House wrote the contract with AIG. Yes, Geithner knew of it back in October, when it was written. But, the contract had already been signed. Long before Obama was even elected.

What the government is doing now, advertising to the public to avoid loan modification companies that charge a fee, while they are giving massive amounts of money to these banks to keep the derivatives hidden, is criminal.

None of these loans that are now blowing up should ever have been given, none of them. What was so wrong about a thirty year mortgage with 20% down and a Debt to Income ratio of 35% or less? That is prudent lending.

105% financing with 50% Debt to Income ratio is something a fool does. If a bank wants to give you money under "the deal of a lifetime", and tells you it is okay, isn't it the bank's duty to know right from wrong when lending their depositor's money.

What does it say about that bank when they knowingly sell that risk to someone else?

What character flaws have to be present for a company to buy tens of thousands of these loans, package them into MBS, and then create a CDO, which they then sell to a pension fund or a money market account for huge fees, knowing there is great risk of default?

The Federal Reserve, and now the government itself, not only are cognizant of these underlying causes for the meltdown, they are extending them. While they tell the public that you should not let an attorney help you modify your loan, they are giving the banks Trillions of dollars. What the government does not tell you is most Loan Modification companies charge $2500 - $4000, depending on the amount of your mortgage. The average savings to homeowners, over the life of their loan, can exceed $100,000 on the average house. That seems like a deal to me.

Maybe it's because the government has had its own modification plan for over 5 months. It is called "Hope for Homeowners." It was touted by the previous administration as the financial panacea for over 400,000 families. $300 Billion has been allocated by congress to go to this program.

And what a rousing success it has been. In 5 months, there have been 752 applications. It has helped prevent 1 (one) foreclosure. Maybe the other 751 applicants decided it was better to use a loan modification company and have an attorney argue with the bank.

The reason for the failure of Hope for Homeowners- The banks are to voluntarily refinance delinquent mortgages by reducing the principal balance on loans to 90% of a home's current market value. In states like California, Florida, Arizona and Nevada, the decline in housing values exceeds 50% in some neighborhoods from the peak.

As long as the Federal Reserve, Congress and the Government give banks free money to keep them alive, and pay million dollar bonuses, they essentially are saying "screw the average American."

Why should Ken Lewis voluntarily do anything? After all, he is only interested in keeping his stockholders happy, and his compensation package whole. The rest, well, Bank of America is too big to fail, right? So, let the taxpayers pay for his losses.

Folks, until the banks that need taxpayer money to stay open, due to their own stupidity and lack of character, are forced into doing anything differently, they won't.

Here's how you force them. Every financial institution that must have government money to stay open, must immediately go to the Government's own pay scale. Everyone in the financial institution immediately goes to the new pay scale, at their equivalent government grade, for as long as they need the government money. They can resume their old pay structures when they get out of the hole, pay the government back, and be a self sustaining business.

If they don't accept those terms, they can choose to go it alone.

We would find out very quickly who the Good Americans are, and those that just wrap themselves in the flag for their own benefit.

Why should Ken Lewis get paid more than a General in Afghanistan? It is that General who makes Ken's life possible. If Ken screwed up, why should anyone else have to pay for it?

And the average homeowner should be able to level the field and negotiate with Ken with the aid of an attorney.

Just food for thought.

More Mark to Market

From the Opinion page at the Wall Street Journal (I just wish they had started talking about this two years ago, the problem would be a fraction of what it is now.)

We Need Honest Accounting
Relax regulatory capital rules if need be, but don't let banks hide the truth.
By James S. Chanos

"Mark-to-market (MTM) accounting is under fierce attack by bank CEOs and others who are pressing Congress to suspend, if not repeal, the rules they blame for the current financial crisis.'

"We have a sorry history of the banking industry driving statutory and regulatory changes. Now banks want accounting fixes to mask their recklessness. Meanwhile, there has been no acknowledgment of culpability in what top management in these financial institutions did -- despite warnings -- to help bring about the crisis. Theirs is a record of lax risk management, flawed models, reckless lending, and excessively leveraged investment strategies. In the worst instances, they acted with moral indifference, knowing that what they were doing was flawed, but still willing to pocket the fees and accompanying bonuses.'

"Financial institutions had no problem in using MTM to benefit from the drop in prices of their own notes and bonds, since the rule also applies to liabilities. And when the value of the securitized loans they held was soaring, they eagerly embraced MTM. Once committed to that accounting discipline, though, they were obligated to continue doing so for the duration of their holding of securities they've marked to market. And one wonders if they are as equally willing to forego MTM for valuing the same illiquid securities in client accounts for margin loans as they are for their proprietary trading accounts?'

"According to J.P. Morgan, approximately $450 billion of collateralized debt obligations (CDOs) of asset-backed securities were issued from late 2005 to mid-2007. Of that amount, roughly $305 billion is now in a formal state of default and $102 billion of this amount has already been liquidated. The latest monthly mortgage reports from investment banks are equally sobering. It is no surprise, then, that the largest underwriters of mortgages and CDOs have been decimated.'

"There is a connection between efforts over the past 12 years to reduce regulatory oversight, weaken capital requirements, and silence the financial detectives who uncovered such scandals as Lehman and Enron. The assault against MTM is just the latest chapter.'

"........The truth is the market is functioning correctly. It's just that MTM critics don't like the prices that investors are willing to pay.'

"Unfortunately, the FASB proposal on March 16 represents capitulation. It calls for "significant judgment" by banks in determining if a market or an asset is "inactive" and if a transaction is "distressed." This would give banks more discretion to throw out "quotes" and use valuation alternatives, including cash-flow estimates, to determine value in illiquid markets. In other words, it allows banks to substitute their own wishful-thinking judgments of value for market prices.'

"Obfuscating sound accounting rules by gutting MTM rules will only further reduce investors' trust in the financial statements of all companies, causing private capital -- desperately needed in securities markets -- to become even scarcer. Worse, obfuscation will further erode confidence in the American economy, with dire consequences for the very financial institutions who are calling for MTM changes."

For more reading on Mark to Market;
Bloomberg
The Big Picture
Goldseek
Economy in Crisis
Nicole Gelinas
Market Ticker

Easy Picken's

After reading, hearing and watching all the furor over the new TALF, the feeling is not as bright as yesterdays' upswing in the market. The only people for the new program are the very same people who told us:

1) The original market interventions by the Fed, including the TARP, were necessary and would work. So far, the Fed has increased its balance sheet almost $2 Trillion, mostly by exchanging good US Treasury Bonds with toxic assets from the banks.
2) The Maiden Lane operations (I, II, and III) initiated to cover losses of CDO's by Bear Stearns, then AIG, were promised, as late as January of this year by Ben Bernanke, to give taxpayers a profit. Maiden Lane has so far lost over $40 Billion, and counting.
3) The bailout of Fannie Mae and Freddie Mac were supposed to increase mortgage lending. So far, the only result is a loss of $100 Billion to each.
4) The bailout of AIG directly would give the taxpayers a profit ($200 Billion loss, so far). To date, it has amounted to a pass through so companies already receiving bailout monies could get more. Now, many sources are reporting the losses could go as high as a few Trillion.
5) $25 Billion to the US automakers was, we were told, to allow them to retool and start making cars of the future. No cars of the future yet, but now they are getting $17 Billion more, with proposals to extend that to maybe $60 Billion.
6) $300 Billion in guarantees of "toxic" assets for CitiGroup would calm the markets. In exchange, the government received warrants for shares in Citi, that they value at $20 per share. Citi currently trades at $3 and change.
7) A sustained ZIRP (Zero Interest Rate Policy), or almost ZIRP, from the Fed was supposed to ease lending to bring housing prices back up. Since lowering rates, housing values have fallen further and faster.
8) Ben Bernanke has predicted several times over the past two years that his initiatives would cause an upturn in GDP in a few quarters. He now predicts the GDP will rise in the second half of this year. More than 2 million jobs have been lost since his first prediction.

The new TALF, if not policed, will only provide a backdoor for the banks that are most bankrupt to dump their toxic, level 3 assets on the taxpayers.

The proposal requires 5% from the private investor, and the government will loan them another 5% to meet a 10% down down payment. Let's say Citi has an SIV that they claim is worth 80% of its original $1 Billion value. No private investor will pay 25% for this SIV. Now, through an intermediary, Citi is able to put in a bid for the 80%. They pay $40 Million, the government pays $40 Million. That covers the 10% down payment. Now that SIV is off of Citi's books, and onto the FDIC's, Treasury's or Fed's books.

If it loses all of its value (which in the case of SIV's is highly likely), Citi (or its intermediary), instead of being out $800,000 million more, is now only out $40 Million. They effectively just transferred the remainder of the loss to the taxpayers via the Fed, Treasury and FDIC. Any amount they are able to get on the open market, should a cash flow actually be sustainable from the SIV, will lessen the loss. The point is, they currently cannot sell it for anywhere near what they have in it. Too many of the people that predicted the crisis was contained two years ago, are the same people now saying the SIV is worth what Citi says it's worth.

For more on this, please see;
Karl Denninger
Mish
Reuters: Stiglitz

I can only hope and pray there are safeguards to keep what I described from happening. The idea that they are hiring hedge funds as subcontractors to conduct all of this does not bode well, for me.

For a very good read, may I suggest Matt Taibbi's article "The Big Takeover" in Rolling Stone.

The Winds are Blowing Harder

It seems the winds are blowing harder.

With the Fed's Quantative Easing, all the current bailout extensions with the promise of Trillions more, and now the imminent unveiling of Geithners new TALF plan, which will create the "bad bank" scenario (under the FDIC?!), the amount of US Treasuries being printed will soon skyrocket.

Well, we won't be alone. The EU will soon be forced to consider the same. Although, the EU is not the US, and an unraveling there is very likely. It will only take one or two prominent members to back away from such proposals, or another unexpected series of bank failures, to insure the EU will not be able to fully implement an identical plan.

Funny thing is this, the US and the EU will need for each other to buy the new bonds for either plan to work. China will not be participating at a meaningful level, they are worried about the future value of what they already have. The Indians have notoriously avoided overexposure to US and EU debt for years, and there is no indication they wish to swim in that pool now.

That leaves the handful of smaller states and unions for the Treasury to go begging too. The oil rich states won't buy many, unless oil goes back up to $100+ bbl. Japan, they just started there own bailouts, again. Korea just got us to buy back Agency bonds that had lost 50+% in value in a couple of years, so it is unlikely they buy Treasuries that have a good chance of losing some value. Brazil is busy forging new relationships with everyone except the US. Singapore? They seem to be waiting for the fallout to begin bargain hunting, plus, they are investing in food production at an increasing rate.

Who else, that can buy $5, $6, $7 Trillion or more of US Treasuries over the next few years?

Remember, China is the largest holder of US Treasuries at a little over $1 Trillion. And it took them years to get to that point. China was only able to do that because of the enormous trade surplus created by a mountain of credit in the US. China ramped up its production, and sold all of those goods, to Americans who were borrowing against the rising value in their houses.

The rise in credit, and borrowing, in the US was so great that from 1990-2007, China increased its manufacturing of goods 673%. In comparison, the US increased its manufacturing 76% during the same period.

Because our leaders are convinced we must save the companies most responsible for our current situation, they are following the same path these very companies took in getting us here. That is, the US is committed to overleveraging to try and ease the effects of overleveraging.

Paco Ahlgren, writing for Seeking Alpha, sums it up nicely;

"The U.S. government, however, wants you to believe that the only cure to this disease, brought on by decades of inflationary money-printing and easy credit – which inevitably led to malinvestment, unprecedented economic volatility, and ultimately, several horrific economic collapses – is yet again to expand the money supply and to further ease credit until the U.S. consumer resumes his relentless and irresponsible plight to spend, rather than to save. I'm at a loss as to how anyone of a sound and rational mind can honestly believe that the solution to this type of economic catastrophe is yet more borrowing and spending. It's like saying the cure for heroin addiction is an overdose. It's preposterous."

It seems painfully obvious to me this is hardly a solution. To double down on a bet, when your cards are a 2 and a 4, and the dealer is showing a 10, almost always leads to a loss of the bet.

All we can do at this point is pray the economy does not regurgitate another 2 million jobs over the next 4 months, and the government, paying 80 cents on the dollar for "toxic" assets under the new TALF, is able to recoup that 80 cents. Highly unlikely, because the government is hiring a few select hedge funds to run the program.

Most people follow the government numbers when it comes to unemployment figures. Those numbers, what the BLS (Bureau of Labor Statistics) uses, have been changed several times over the last 50 years. If we were to use the system they used in 1932 to calculate unemployment, the rate of unemployed would be over 15%. Not 8.1%

How many jobs would investment in "green" technologies, rebuilding infrastructure, and revamping our factories to produce more of our own goods would $12 Trillion buy? That is the amount committed, today, to save the existing credit system.

That $12 Trillion may be lost in entirety if the value of the Treasuries being issued falls. The government is assuming it can ease the flow of credit, which will somehow translate into borrowing, that will create new jobs. Even if it works, and that is one big if, that process will take decades when you factor in the current losses that must be accounted for first.

Somehow, we must start creating as many jobs as are being lost. With all of the resources going to propping up "zombie" banks, I find it hard to understand how we are doing that.

Is this what we really want?

First the Bush administration, and now the Obama administration, are allowing their buddies on Wall Street to keep the insane amounts of money they have made over the last eight years, and forcing you, the average citizen, to pay for their yachts, mansions, first row seats, etc. Even the Politburo would have denied this.

To add insult to injury, our leaders now say the contractual obligations of the bailout structure demand these companies, that MUST have taxpayer money to keep from going bankrupt, give bonuses for losing money. Bonuses, by the way, to the very individuals that caused the ramp up in over-leveraging by selling fraudulent bonds, that are now worthless. Several hundreds of trillions of dollars of worthless.

For all those blaming Obama, Geithner may have been part of the original negotiation with AIG. But he worked for Bernanke. Henry Paulson and the Bush White House were the ones that drew the original contract. Goldman Sachs has been a major beneficiary of the money given AIG.

Do you honestly believe that is a coincidence?

Under which President did the bailout party begin?

Ok, on to the next worrisome tidbit. It is fraud if an insurance company writes a $100,000 policy on a house, yet only has $5000 in assets. Should something happen to that house, and they have to pay $100,000, it is clear they do not have the assets to cover it.

It is also fraud to represent a security as safe, when it is clearly not. If an investor buys a loan to make money on the interest, and is told it is from someone with the best credit score who had enough income to pay the maximum payment, he expects that to be true. If it turns out that someone only made enough money to pay half the maximum payment, and their credit score was 100 points less than what is considered good, that is fraud.

Both of these things are at the heart of our current crisis. Loans that were represented as having sound underwriting have been proven anything but. Credit Default Swaps were, and still are, being sold by companies that do not have the capital to pay off when the credit derivative they have been issued to insure, defaults.

The latter is exactly why AIG is now owned by the government.

Both of these constitute fraud. Yet, we had President Obama tell Jay Leno that there was nothing illegal about the build up to our current crisis.

I don't know about you, but for me, that is probably the most unsettling statement I have heard from a President in years. And we just got past a President that made a lot of unsettling statements.

It means there may be no investigation into all the blatant fraud coming from Wall Street over the last eight years. Goldman Sachs, among others, were selling CDO's and CMO's, with fraudulent underwriting standards, then immediately buying CDS from AIG, betting those CDO's and CMO's would fail.

AIG still has over $2 Trillion in CDS floating around out there. The $200 Billion so far to AIG is only a drop in the bucket. Remember when Bernanke and Paulson told us the taxpayer might make money on AIG? If these guys are the smartest financial guys we have.........(reference above picture).

Watch what the Chinese, and maybe many other countries, do next. They expect some very big people on Wall Street, and I am not referring to Bernie Madoff, to go to jail over all of this. If we do not send them, the rest of the world will let us choke on our own vomit. Guaranteed.

You see, it is not only US corporations that have been affected by the credit meltdown. We have exported these "toxic" assets to every corner of the world. Large foreign banks have them. The Central Banks of major trading partners have them. Sovereign Wealth Funds have them. Pension accounts and money market accounts around the world have them.

They all expect the US to do what they consider the right thing, and jail those responsible for selling them something that was not what they were told. And if we don't do that, they expect the US to make them whole on all losses.

Well, when the losses amount to hundreds of trillions of dollars, we just don't have the ability to raise that kind of money. You have heard a very few congress people say it is far worse than you know, this is what they are referring to.

Many are upset that the previous administration is not being pursued for crimes against the constitution. Because the economic crisis is an immediate threat to the foundation of civilization, it must be dealt with first. Giving a pass to financial crimes, when the losses are greater than available monies, is a huge mistake. The US must stand up and tell the world that fraud will not be rewarded.

Bonuses to AIG tells the world that fraud is rewarded. At least in the United States of Goldman Sachs.

AIG Sues Countrywide

Thanks to Justin Owings @ ML-Implode for the graphic

It was only a matter of time before this train started selling tickets.

AIG Sues Countrywide for Misrepresenting Mortgages

Countrywide, under the stellar direction of Angelo Mozilo and David Sambol, began to lower their guidelines for "prime" loans sometime in 2004. Countrywide, then the largest mortgage lender in the nation, decided to up their profits by allowing people with low credit scores, putting little or no money down, into loans designed for people with good credit scores.

"United Guaranty said in the complaint that it had reviewed loan files that showed that most mortgages covered by 11 policies for asset-backed securities were either underwritten in violation of Countrywide’s own guidelines or contained defects, such as missing documents, misrepresented credit scores or false social security numbers."

The problem is well beyond AIG. All of these loans, and there are a few trillion dollars worth of them, are scattered around the world in MBS, CDO's and other credit derivatives. That means the fallout is only beginning. FNMA and FHLMC alone hold about $1.5 Trillion in these loans from Countrywide on their books. The default rates from the Countrywide originations are far greater than any other group, including subprime.

What AIG is accusing them of is selling loans as prime that were actually subprime or worse. Because the borrowers were able to get terms reserved for those that have the best credit scores, it means those terms can lead to financial difficulty sooner for someone with less financial resources.

Of course these loans would blow up sooner and at a greater rate.

Countrywide didn't care. They were making huge profits, and Wall Street loved them for the constant supply of loans they could securitize and turn into derivatives.

I have been talking about this problem for years. In 2005, I received a nasty letter from the Countrywide legal team telling me to stop representing Countrywide's guidelines and accounting procedures as "unethical." Well, I have never stopped, and have been asked twice to present, in court proceedings, against Countrywide on behalf of plaintiffs. Both cases were settled, out of court, of course, in favor of the plaintiffs.

Countrywide has gone through great efforts to conceal its behavior. Many people like me were intimidated into silence. As were many former employees. Countrywide's customer service is abysmal, their double billing and lost payment records legendary. There will be many more stories on this subject, and I expect the number of companies suing Countrywide, now Bank of America, to increase.

My big question is this - If Fannie and Freddie together have $5 Trillion in loans, and $1.5 Trillion are from Countrywide with false underwriting standards, what will the end result for them be?