Wednesday, December 22, 2010

As Rome Burns

An honest man can feel no pleasure in the exercise of power over his fellow citizens.
-- Thomas Jefferson (1743 - 1826)

Last month there was a hue and cry over a (previously removed) position being slipped back in over vocal objections at the Town of Southampton Town Board meeting. The pay scale was $150,000, roughly the same as most police in the Town after a couple of years.
Democrats were aghast that the 3 Republicans on the Town Board would try to slip this through without their approval.

Although one could not say that Democrats are naïve, in Suffolk County where Republicans pose as Democrats long enough to get elected (County Executive Levy, D.A. Tom Spota), it should be no surprise that once the Republicans again got a firm grip on power in the Hamptons, it would be business as usual.

Systemic corruption is different from actual corruption. The Republicans cannot escape the depth of the Heaney/Lombardo/Thiele/Schaeffer Hamptons monster, which gets its media support from the Southampton Press and Newsday. Without any real media unafraid of prosecution, only the Feds will have any interest.
Think about it. When was there last an article criticizing the power structure for what is currently called the “injustice” system in Suffolk County?

With Villages, Towns, Counties, and States about to be thrown into the chipper financially – doesn’t it make sense to slip in a few patronage jobs?

Wednesday, October 13, 2010

Bank Fraud of the Day

I believe that banking institutions are more dangerous to our liberties than standing armies.
-- Thomas Jefferson

The economy has been reeling from the massive problems caused by the Wall Street creation of securitized bonds – CDO’s and synthetic CDO’s, which fueled the housing boom. While these securitized mortgage bonds were being sold off across the world, the banks were busy buying credit default swaps to protect that phony bet. We are now seeing how this was engineered and how it is being addressed as the foreclosures come to market. Almost daily, fresh disclosures appear in the media.

The government handed out massive amounts of money, hundreds of billions of dollars, to support the perpetrators -- investment banks and insurers like Citibank, Bank of America, WaMu (JPMorgan Chase), Merrill Lynch and A.I.G., in order to protect the banking system. They paid back the T.A.R.P. money with near-zero percent loans that they used to invest but did not use to afford loans to the credit starved small businesses who were damaged by their excesses.

What is clear about all of this is that any finger pointing in this entire charade belongs entirely pointed in the direction of these corrupt institutions, which ran a casino at which unsuspecting borrowers were playing a rigged game. The house, the banks, fully supported by the government, always wins. Even the bond ratings agencies like Moody’s and Fitch were complicit in rating inferior investments as AAA+.

But, now full-fledged investigations by Attorneys General across the country, point to a picture that has long been suspected. Banks, in collusion with mortgage bankers and brokers, foisted a huge fraud upon the American people. Dangerous loans were practically forced upon borrowers and investors in the form of “liar loans” and free money to buy and speculate with -- and are culminating the fraud with doctored paperwork and illegal acts – starting with the banks themselves and moving on through the attorneys processing the foreclosures.

In New York, Eric Schneiderman, currently running for Attorney General, has promised to be the Sheriff of Wall Street. Should he win this Election Day, we have the promise of a full accounting of how Investment banks, mortgage brokers, foreclosure attorney mills and servicers who preyed upon homeowners – all worked together to perpetrate the biggest fraud in history.

Thursday, May 13, 2010

The Flash Crash

Buy on the rumor; sell on the news.
-- Wall Street Proverb

So here’s the deal.

Flash trades basically are handled by “bots” or computerized systems at close to the speed of light.
Buy or sell orders are handled in nanoseconds. In fact, orders are received and transacted faster if the physical location of the computer-generated trade is closer to the servers that exist for the Exchange – wherever that facility is actually located.
If the brokerage house/investment bank is closer to the Exchange, it’s possible to execute a trade faster than a local office of, say, Merrill Lynch, whose office could be in Iowa. The electronic time lag gives the edge to the broker near the Exchange.

Goldman Sachs is known to have been making its money by having its systems closest to the action. Fully 70% of all trading is now flash trading. Goldman is said to account for nearly 48% of these trades and 35% of all trades. Flash trades enable the fastest “gun in the East” to get ahead of other orders and with a few million trades a day, makeing its money by executing in and out before its rivals. Investors who have stop loss orders are sold out and combined losses of hundreds of billions of dollars are estimated. Goldman makes money. In fact, Goldman regularly has $100 million days.

Essentially, flash trades permits Goldman to see an order and choose its execution by inside information that is due to the faster (closer) proximity to the source of the information. The Flash Crash exposed this system.

Mayor Motz of Quogue was prosecuted for this. Only, in his case it was called “Frontrunning.” Either Motz is innocent or Goldman is guilty. You can’t have it both ways. The only difference was speed.

There you have it, folks.

Friday, May 07, 2010

Political Notes 5.7.10

Democracy becomes a government of bullies tempered by editors.
-- Ralph Waldo Emerson (1803 - 1882)

As the economy “improves,” the volatility in financial markets as well as the quality of life continues to deteriorate. The anomaly is not really inexplicable. What is missing is accurate reporting about what is going on. The government is desperate to have us believe that everything is on the mend. Despite the fact that “they are rioting in Africa,” or rather, in Greece, all is well. Except, that all is not well.

The fact is that the VIX, the market volatility index, is spiking and Wall Street had a wild ride on Thursday – down nearly 1000 points intraday.

The dismay sown by the Communists in Greece has risen to the level of a few fatalities. So, while a loan package via the IMF and Germany has been extended, the rest of the PIGS will soon arrive with their collective hands out. That’s when the fun will begin in the Eurozone – and that’s when it will start to really get interesting here in America.

We have Goldman Sachs, an investment bank that took TARP money because it was “too big to fail” unlike Lehman -- which had a hand in bringing down Greece through its “creative accounting” and credit-default swaps. GS is now arguably facing a criminal investigation – which the populace has been calling for, for years. The Eurozone is facing collective bankruptcy or at default on its Sovereign debt and the U.S. is facing the possibility of a double-dip recession. The current improvement in employment numbers may, in fact, be the predicted temporary rise in spring fever/seasonal employment for Small Business. Schiller, the Yale economic guru, has predicted a huge coming increase in foreclosures brought on by Alt-A and Prime loans which will reset this year and have a chilling effect going forward. The fact that nearly one third of all homes in America are worth less that the mortgage is important. Those that bought homes with the $8,000 tax credit have been told that the value of their homes dropped before the ink was dry on the loan documents.
As a backdrop to all of this, local economies from States to Counties, to Cities, to Villages have become the antagonists towards the one source of energy that can help solve the crisis – Small Businesses in America.

With fully 65% of all jobs emanating from this source, it has become the target instead of the savior for every civil service agency from the IRS, to the NY State Tax Department, the NYC Traffic Enforcement Bureau, and the Worker’s Compensation people, ending with Code Enforcement personnel, which initiate fines. The list of antagonists to the energy and drive needed by Small Business owners is growing as the deficits caused by the Wall Street/Banks/Mortgage Broker fiasco plays out.

The credit default swaps and phony mortgage products that were signed off on by unsuspecting borrowers – fueling the CDO’s and SIV’s that were sold off to pension funds, small banks, Countries, Cities, States, Counties and Villages across the country – are now spawning legions of civil service employees looking to make up the losses while creating a justification for them to keep their own jobs. Soon government will have no subjects to collect from and Hannibal Lector will be in charge of the feast.

This is being played out with the same tactics used by the King.

Threaten and tax the people -- who are the victims. Why? It’s easier than going after the banks. It’s cheaper. And, because we can.

But, why are we killing Small Business? It is the real Goose that laid the Golden Egg in America. This is the conundrum which begs a political answer in this country -- if we are to succeed.

Friday, April 30, 2010

Just Desserts or Black Swan?

Men stumble over the truth from time to time, but most pick themselves up and hurry off as if nothing happened.
-- Sir Winston Churchill (1874 - 1965)

Trying to read between the tealeaves in this regenerating economy is no easy task. While the numbers appear to show that business is improving in certain sectors, employment has again dropped along with optimism and foreclosures have again surged in March.

Improvements in certain real estate in some sections of the country have been noted. Condos in Manhattan have reportedly increased in both sales price and numbers of transactions. There is a market in Manhattan for higher-end apartments (above $3 million) and for Hamptons’ summer homes in higher price brackets (above $2 million) as well as very low priced housing (under $350,000). Most of these transactions follow a simple logic: FNMA mortgages are readily available up to $417,000 and for those happy souls with cash – the lack of mortgages is not a stumbling block. Discounts of 15 to 20 percent all across the board are common.

Meanwhile the foreclosure numbers keep rising and more product comes on to the market. This ensures that home values will not appreciate to the top of the market (2006) until the year 2020 in many locations. Fully 25% of all homes are worth less than the mortgage on it.

Businesses, on the other hand, are suffering. Unfortunately, small businesses employ more than 60 percent of the labor force. If loans are not available, most small businesses have few options: continue to operate at a loss, or fire a few people. When there are no people left to fire, the businesses must close.
Even the touted success that GM has paid back its government loans turns out to be like the shell game played on Canal Street.

The hangover, of course, is that unpaid bills and taxes follow everyone around and it doesn’t matter that there is no business. With no financing, many small companies and their employees are enmeshed in a death spiral. The banks have seen to severe bankruptcy restrictions to prevent a sane exit from Dante’s new Inferno.
Even Hollywood is suffering.
The government has attempted to deal with these issues in a variety of unsuccessful ways. Mortgage modifications are an acknowledged disaster, extended unemployment benefits has become the New Welfare, and rather than soften the crushing debt load for small businesses and individuals, 16,000 new IRS agents have been hired to tighten the noose.

Goldman Sachs, that paragon of American Capitalism philosophy, was finally charged with civil fraud for working its magic

After working diligently, sometimes hand-in-hand with JP Morgan Chase, to destabilize Villages, Counties and Countries with their credit-default swap derivatives – then perversely betting that their toxic handiwork would fail – they get a slap on the wrist from the SEC. Considering the degree of devastation caused by knowingly shopping their degraded bonds like Johnny Appleseed, while shorting them since they expected them to plummet, nothing short of scores of indictments are in order. But, that will not likely happen.

Here are some questions to be asked and answered:

Were the banks complicit in creating mortgage products that they knew would implode at some point

before they saturated the market through complicit mortgage brokers who created any and all documents to push them through – as recently came to light at Washington Mutual?

Were they designed to self-destruct from day one? And, were the securitized mortgage bonds created after harvesting the deadly mortgages back from brokers and then sold off – WHILE purchasing credit default swaps so that they could sit and wait for the bombs to go off?

Were homeowners and real estate investors duped by the fine print into accepting mortgages and easy money that were doomed to fail no matter they did?

Will the Goldman investigation spread to all of the other banks like JPMorgan, Morgan Stanley, Bank of America, Wells Fargo, Deutche Bank and a few that were decimated, like Bear Sterns, Lehman, Merrill Lynch and Washington Mutual? Given the fact that companies like Countrywide, Ameriquest, Long Beach Mortgage and thousands of other independent mortgage brokers were peddling dynamite – will an extensive investigation find out that all of this was planned and carefully executed since at least 2005?

Given the fact that no borrower ever had the time to read an entire mortgage document at a closing, was this the industry’s dirty little secret about duping the public?
Will this pass because the government has no stomach for it, or will Europe force our hand with its own investigations into the matter.

Then, there is the other dangling shoe in Europe -- which is the Greek financial fiasco. Of course, this too was partly constructed
by Goldman's "creative accounting." How many more of these fiscal time-bombs are buried within sovereign debt structures across Europe?

Either of these problems is capable of morphing into a Black Swan

Wednesday, March 03, 2010

The Motz Matter

Just remember in the winter
Far beneath the bitter snow
Lies the seed that with the sun’s love,
In the spring, becomes a rose.

-- Bette Midler

It’s always a surprise that people lie to each other. There’s no question that this ridiculous sense of betrayal harks back to those days when we learned that our friends fudged and parents actually just sold us out. Since then, the downhill slide may have been more dramatic but a lot less surprising.

Mayor Motz was popular in Quogue. His wife was the head judge. His son aspired to public office. He was adored by some, respected by others, vilified by those who lived outside of Quogue. It’s still a Village where you have to studiously observe the speed limit – unless you live there. And, we won’t delve into a recent imbroglio involving an accident that most locals know about where people died. Let sleeping dogs lie.

So, here’s the deal: Motz was basically charged with switching tickets. Essentially, the attribution for trades was held in abeyance until everything was settled at the end of the day. ILLEGAL.

But, get this. Goldman Sachs does trades in nanoseconds. By computer, trades are done BEFORE they are attributed to the buyer or seller – and the advantage is attributed to Goldman. NOT ILLEGAL. Forget the fact that GS has destabilized Greece.

Is Goldman being investigated? Are they being indicted, arrested and forced to take pleas for trades where the firm inures to the firm’s advantage. And, who may I ask, is reporting this. The Southampton Press, Newsday? Anyone?

Makes you wonder what THEY afraid of?

Thursday, February 25, 2010

EuroCrash vs. The PIGS

They’re rioting in Africa
They’re starving in Spain
There’s hurricanes in Florida
And Texas needs rain.

(The Merry Minuet)

A business associate complained today that his house was falling into foreclosure, his credit-line second mortgage was in default, his credit cards were about to be charged-off, and he has been left, literally, with nothing of value. He lives on Long Island. He has a small business where he derives his income.
He was thankful that he has no assets. No one can attach them.

Meanwhile, a woman who bought a brownstone in upper Manhattan bemoaned the fact that she could get nowhere with the Department of Buildings and was unable, after nearly two years, to complete its renovation legally. The property is now worth 50% of what it was purchased for in 2007. But, she refuses to hire a lawyer despite her tribulations, even after the useless employment of expediters.

In Manhattan, real estate brokers took solace in the hordes of Europeans who, after the destruction of Lehman Brothers reportedly hopping off their 747’s onto the tarmac before the plane landed and immediately lined up behind shopping carts at Tiffany’s and filled out broker’s applications in order to scoop up condos with their rapidly appreciating Euros.
Builders in the Hamptons were stepping over ½ acre lots in Hampton Bays in order to pick up those 3-5 acre parcels in Water Mill to build mini-McMansions that were so popular with those Eurozone émigrés.

It was convenient to believe that Europe has much less exposure to the subprime mess. But, as the game has played out, it wasn’t simply those CDO’s and SIV’s that did them in.
Goldman Sachs, for example, was an advisor to the Greek government and proceeded to do two very neat tricks:
First, they showed the pencil-pushers how to hide a lot of debt, “off balance sheet” – then, knowing that this was an hourglass that would certainly run out, the boys at GS bought a whole lot of CDS’s (credit default swaps) which essentially bet that the value of the Greek debt would degrade to the point of default.
That’s the same play they used with mortgages and took TARP money from Paulson (Treasury Secretary and former Goldman CEO) in addition. Few people know about the private letter ruling that allowed Paulson to meet and do business with Goldman during the meltdown (read “To Big to Fail”).

Europe is now rapidly becoming the wagging tail that follows the American dog.
Portugal, Ireland, Greece and Spain (PIGS) now face the possibility of default on their debt. Not to far on the heels of already defaulted Iceland and Dubai – which recently rescheduled its debt while offering only 60 cents on the dollar.
No moral hazard here folks. That’s only for individuals. Corporations and countries walk away from debt all the time.

As Kenneth Rogoff of Harvard writes, this is just the beginning:

The Federal Reserve last week raised the discount rate charged to banks for direct loans, and plans to end its $1.25 trillion purchases of mortgage-backed securities in March. President Barack Obama’s administration is proposing a $3.8 trillion budget for fiscal 2011 to spur the recovery.
“When they start tightening monetary policy even a little bit, it’s going to send shockwaves through the system,” Rogoff said.
In an interview a month before Lehman Brothers Holdings Inc. went bankrupt in 2008, Rogoff said, “The worst is yet to come in the U.S.” and predicted the collapse of “major” investment banks. His 2009 book 'This Time Is Different,' co- written with Carmen M. Reinhart, charts the history of financial crises in 66 countries.
“We almost always have sovereign risk crises in the wake of an international banking crisis, usually in a few years, and that’s happening,” he said."Greece is just the beginning.”

Few real estate brokers are now touting the advantages of a Manhattan market supported by the soon to be expected plummeting Euro. In fact, those who did buy condos and hopped back onto the plane are now worried about higher maintenance fees from enlarged shares of unsold or defaulted apartments and value dropping like a rock. At 311 West Broadway, a 68 unit condo in SoHo, for example, there are rumors of a huge inventory of unsold apartments with a developer whose monthly loan vig is $6 million a month. StuyTown value dropped from $5.8 Billion to a current value of $1.8 Billion. Rental prices are also dropping substantially despite what any broker tells you.

And, in the Hamptons, where the newly installed Supervisor Anna Throne-Holst has been the poster girl for the Moody’s investment rating for Southampton Town (which has dropped) – and the fact that it has only dropped a couple of notches shows you how both drugs and alcohol can be useful while reading through “news” reports. With a multi-million dollar budget loss that no one can figure out, a devastating indictment of a previous Supervisor Skip Heaney in a report by Linda Kabot, and rapidly disappearing revenues, only a fool would believe that the Town’s credit rating is anywhere near investment grade.
Construction of new homes is non-existent (certainly on spec), the value of the real estate tax credit has already been discounted and, considering the fact that there is no industry beyond real estate in the Hamptons, property tax receipts, transfer taxes, and home values have plummeted. It is much cheaper to rent than to buy anything. Values are 50% lower and are still dropping regardless of what anyone tells you.

Perhaps Goldman Sachs was the budget advisor in Southampton as well?

This economy has a minimum of another three years before it stabilizes, IF we do not have a double-dip and IF there is no credit bubble that bursts due to multi-trillion dollar deficits and the printing of fiat money.

Thursday, February 11, 2010

The Debt Bomb

He that dies pays all debts.
-- William Shakespeare (1564 - 1616), "The Tempest", Act 3 scene 2

Few people have a handle on the real financial crisis that we are experiencing.
The trickle down from Wall Street’s implosion is talked about but not well attended. What is happening on Main Street and on Madison Avenue is the disappearance of credit. Few businesses can operate without credit. The uneven flow of stock to sell (whether it be lettuce or Chinese handbags) requires money to smooth out the wrinkles. Those wrinkles are the cost of electricity, garbage removal and last, but not least, salaries. We won’t mention taxes – which the government regularly demands – if you’re not yet dead.

The recipients of the TARP, arguably nothing more than a palliative, went to the banks. They kept the money after filling some holes in their balance sheets and the rest have gone for bonuses. We’ll never see any of that money. Dimon (JPMorganChase) got $17 million, Blankfein (Goldman Sachs) got $9 million -- if you believe the media – and a variety of top bankers got from $500,000 on up. All told, they gave out nearly $30 Billion to reward them for creating the morass.

Now, facing the next wave of this rolling disaster, commercial loans, the real problem is coming home to roost. Since there can be no “double-dip” according to Geithner, we have to punt. Along with the evaporation of the dollar’s value and the rolling implosion of foreign “sovereign” debt (that means that countries are defaulting on their loans), we have the commercial real estate and credit to small businesses going the way of dinosaurs.

When commercial loans default, it is usually due to the fact that business is drying up and the value of the mortgage loans is higher than the value of the property. With that comes the following: business failures, commercial foreclosures, and loss of jobs due to companies going out of business.

This doesn’t have to happen but it will happen. Why?
Because, small business loans were always a tenuous proposition. The SBA, for example, only gave loans to business owners who had collateral (usually in the form of real estate) to guarantee the payback. At this point, there are about 10 different reasons why that cannot work (credit scores, drop in value, foreclosures, reduced business, etc.). If SBA loans didn’t work before, they will be impossible now – unless the government stepped in to help. That will not happen despite the PR, which the administration will spread around.

We’re all in for a long and difficult recovery. But, it has not yet started. We are still heading into a nosedive.

Friday, January 22, 2010

Double Dipping

Nearly all men can stand adversity, but if you want to test a man's character, give him power.
-- Abraham Lincoln (1809 - 1865)

Most economists but not all politicians admit that we are in the midst of a recession, at the very least. Some call it the Great Recession and some call it a mini-Depression. According to Bernanke and Geithner we are on the mend and while somewhere between 10% and 25% are unemployed (if you calculate the various categories of Not Working), the government’s standard line is that we are on track to recovery. Maybe later this year, maybe next year at the latest. Of course, if you are a Federal or State Civil Service employee, you are more likely to be unaffected by economic events around you. Federal and State governments have so far been loath to fire or lay-off civil service workers. But, that too could change if things get bad enough. To wit, California.
Then there’s Lloyd Blankfein and the Goldman Sachs “Bank,” formerly known as an “Investment Bank.” The latter gets no government bailout money; the former can take whatever it can get. And, it certainly did.

Obama’s big mistake was in not sweeping out the Goldman Sachs employees (current and former) so as to emulate FDR’s clean sweep of the crooks. Instead we have Geithner and Bernanke in the shadows of the biggest con man, former Treasury Secretary Henry Paulson, who saved Goldman but killed Lehman and Bear Sterns. Of course, as a former CEO, he knew where the stock warrants were buried. While all of us were getting the picture on Main Street, Washington was still under Blankfein’s control. At least when Joe Kennedy was picked to run the S.E.C., he was known to be a crook who would catch the others.

What was on the horizon last year was the possibility of a double-dip or, even more ominous, a VW. The first refers to a second downdraft and the second refers to yet another uptick after the double-dip, followed by still another drop in economic activity.
Somewhere along these lines comes the possibility of Depression.
There were numerous drops in the Dow back in Depression number one and the last, which occurred in 1933, was the killer. At that point, the Dow had lost 90% of its value.

Recently, in addition to the bad news about Dubai’s default on its Sovereign debt, there is speculation about a default in Greece. The Greek economy is now saddled with debt totaling 133% of GDP. Souvlaki can’t solve that alone. And, Germany is entering double-dip territory. Recently, there have also been figures in the U.S. that belie a cause for concern that we may also suffer that fate. We now may be heading down again.
The fact that China is now tightening its belt while our own banks take more of the remaining credit off of the table, does not bode well for small businesses or their shrinking employment roster.

If we are entering a double-dip recession (which to some appears to be a Depression), some trends will accelerate.
In Manhattan, restaurants, clothing stores and real estate agencies continue to tout their special sales while beginning to close up shop.
Several condo developments have been abandoned in favor of hotel projects but the sluggish sales at locations like Trump SoHo, 350 West Broadway, and 311 West Broadway – are a signal that brokers still manipulate the truth. There is money around but the number of sales is off significantly and the discounts are deep.

In the Hamptons, as the new government takes shape under Anna Throne-Holst in Southampton, the Town is still struggling with anemic property tax receipts and evaporating transfer taxes. Available funds are becoming harder to come by.
The investigation into what happened to the missing $13 million in Town coffers is shifting from Linda Kabot to former Supervisor Skip Heaney – according to a lengthy document she forwarded to the investigating team. For the first time, Heaney criticized the Southampton Press for its coverage in this regard – a highly unusual complaint given its heavily pro-Heaney and pro-Republican history. With a Republican Party that is fractured and a Democratic Party that has never had a strong grip on reality, both the Independent Party (led by Al Gregor) and the Conservative Party (Frank McKay) have become more important.
Wherever that $13M investigation leads, the Town now needs the money. Loss of numerous Town jobs and a further contraction in available cash is now more of a possibility.
Restaurants have closed, real estate agencies have gone out of business and more and more shops are for rent.
Sales of properties beyond the upper limit of $750,000 are scarce and prices are still dropping.

Look for Bridget Fleming to fill the vacancy created by Throne-Holst who was elected Southampton Town Supervisor – and keep an eye on Regina Calcaterra for State Senator, who is challenging Ken LaValle. She is strong on gay rights and has the bona fides to pull off an upset over the incumbent.

Times really are a’changin.