Wall Street has sold America out!

There is a real good set of reasons why the tea partiers and the Occupy Wall Street groups both think that the Wall Street banks consist largely of immoral criminals. Their behavior has clearly shown that they are. Here is Robert Reich describing the behavior of the banks:

Wall Street’s shenanigans have convinced a large portion of America that the economic game is rigged.

Yet capitalism depends on trust. Without trust, people avoid even sensible economic risks. They also begin trading in gray markets and black markets. They think that if the big guys cheat in big ways, they might as well begin cheating in small ways. And when they think the game is rigged, they’re easy prey for political demagogues with fast tongues and dumb ideas.

Tally up these costs and it’s a whopper.

Wall Street has blanketed America in a miasma of cynicism. Most Americans assume the reason the Street got its taxpayer-funded bailout without strings in the first place was because of its political clout. That must be why the banks didn’t have to renegotiate the mortgages of Americans – many of whom, because of the economic collapse brought on by the Street’s excesses, are still under water. Some are drowning.

That must be why taxpayers didn’t get equity stakes in the banks we bailed out – as Warren Buffet got when he bailed out Goldman Sachs. That means when the banks became profitable gain we didn’t get any of the upside gains; we just padded the Street’s downside risks.

The Street’s political clout must be why most top Wall Street executives who were bailed out by taxpayers still have their jobs, have still avoided prosecution, are still making vast fortunes – while tens of millions of average Americans continue to lose their jobs, their wages, their medical coverage, or their homes.

And why the Dodd-Frank bill was filled with loopholes big enough for Wall Street executives and traders to drive their ferrari’s through.

The cost of such cynicism has leeched deep into America, causing so much suspicion and anger that our politics has become a cauldron of rage. It’s found expression in Tea Partiers and Occupiers, and millions of others who think the people at the top have sold us out.

Wall Street has shown clearly that they cannot be trusted, but when someone tries to enforce regulations on them what do they do? They whine about how misunderstood they are. They are not misunderstood. They are the organized center of financial greed and immorality in the world.

Wall Street Bankers are responsible for the current economic problems because they created and sold “financial weapons of mass destruction.” They bought off the regulators with their K-Street lobbyists, and they have supported the libertarian conservative Republicans who have thwarted and stopped government regulation of bank trading and mergers.

Since the (bank-created) collapse of the Savings and Loan institutions in the 1980's commercial banks have been merging until there are now only about five really massive banks. These banks do not do much business with small businesses because such loans do not provide large profits. They instead compete with the financial trading banks like Goldman Sachs for trading profits, using the savings from commercial customers as the basis for their trades. Why not? It's a lot cheaper than borrowing money in the market, isn't it?

But along the way the banks have forgotten that people have to trust them to do business with them. If we express our lack of trust in the massive banks who don't give a shit what happens to us, then we become their enemy. Their enemies are people that the government they buy (see K-Street Lobbyists) is supposed to suppress. The bankers prefer to wield power rather than work to develop trust.

Bob Reich has the banker's number. The bankers have forgotten that they are not in the power business, they are in the trust business. And a lot of us have been burned and no longer trust them.

Smart bankers will push for stronger and more visible regulation. I doubt that there are very many smart bankers on Wall Street in positions of power within the banking structures.

When will the Wall Street criminals pay for their crimes?

A new study is being reported on showing that Americans have the lowest opinion of Wall Street Banks and financial institutions in a long time. Lindsay Owens looks at how Americans perceive the honesty and ethical practices as trends over 40 years.

Recent scandals involving Wall Street banks and financial institutions, headed by some of the world's most well-paid managers, executives and analysts, have many Americans asking themselves whether this game is rigged. It is this sense of injustice, coupled with economic insecurity, that animates changes in Americans' attitudes toward Wall Street. It's not just a small number of Americans, those who are actually "occupying" Wall Street, who feel such injustice. That's just the tip of the iceberg.

[...]

Americans have never exactly loved Wall Street stockbrokers or bankers—but we certainly didn't always hate them. Why this increasing hostility? The answer is a "perfect storm" of financial turmoil and a series of major scandals on Wall Street.

[...]

According to ... Harris Interactive, the percent of Americans with a great deal of confidence in the people running Wall Street had already reached an all-time low of just 4 percent by February of 2009. These figures are not just a reflection of Americans' dissatisfaction with the size of their bank accounts — they also reflect the increasing belief that Wall Street is playing a game that only the bankers can win.

Economic hard times, such as global recessions, do tend to bring about small, but noticeable drops in the public's confidence in Wall Street, just as we might expect falling confidence in a military that is losing a war.

But when economic downturns coincide with major scandals, as in the savings and loan crisis of the late 1980s and early 1990s and our current dilemma, the biggest changes in public confidence result — changes that may have contributed to the protests we are seeing on Wall Street today. In other words, Americans really begin to get angry when there is evidence of systematic foul play.

To be sure, material hardships such as unemployment rates in the 9 percent range and the continuing high levels of foreclosures and bankruptcies undoubtedly set the stage for a public outcry. But this outcry has a distinctly moral tenor. The sentiments of the Occupy protestors holding signs reading "Blame Wall Street Greed," "People not Profits" and "Wall Street was the Real Weapons of Mass Destruction" certainly echo the wider American public's sense of moral indignation.

Just 26 percent of Americans in an April 2011 Harris poll thought the people working on Wall Street were "as honest and moral as other people" (for a point of comparison, the percentage was 51 in 1997). In that same poll, 67 percent of Americans agreed that "most people on Wall Street would be willing to break the law if they believed they could make a lot of money and get away with it."

It was perfectly obvious by 2009 to the public that the financial collapse that occurred in the fall of 2008 was the direct result of extreme and reckless risk-taking by Wall Street bankers. It soon became equally clear that those banks considered themselves too big to fail, so they had been free to take insane risks with other people's money. They would get the winnings and the American taxpayers would take the losses.

This was all clear to the Wall Street bankers long before the financial collapse they created. The accuracy of their beliefs became very clear when, after they were bailed out, not a single criminal case was brought against the criminal bankers who had created the disaster. Instead by 2010 their bonuses were reaching record levels never before seen, even as the world economy was struggling to dig out of the economic rubble those bankers left in their wake.

Is the "Occupy Wall Street" a social movement that expresses the anger of the rest of us who have watched those economic criminals commit their crimes and then skate without any retribution? No doubt. And if it is not effective then there will be another to follow until the Wall Street criminals pay for their crimes.

The Obama White House is really dissapointing progressives.

Is the bailout of Wall Street bankers really grating your progressive soul? Is the tame rhetoric and failure to support progressive causes really irritating to you? It sure is to me. There are many things the Obama White House has done that I don't like, but it really irritates me that they bailed out the Wall Street bankers who caused this current Great Depression and are not doing a damned thing to reign them in now that they appear to be back in control of the economy. But I really don't begrudge the White House their actions to bail out the Wall Street banks in 2008.

If the Wall Street bankers had not gotten the bailout we would currently be deep into Great Depression II. The Wall Street bankers are assholes who deserve nothing better than to choose which will they line up in front of as they face firing squads, but the money they move keeps our world-wide economies working. If they had not started moving money again the entire world would have been in deep shit. So they got a bailout, got protected, got richer, and the rest of us are only in mildly deep shit. Hell of a trade-off, but it was done in the right direction.

And yep. The working class - as well as most of the middle class - got the shaft. Just not as badly as it could have been.

No, I am not a salesman trying to sell someone a product. I just think that anyone who tells you that things would have worked better if the Wall Street bankers had gotten what they deserve is lying to you. The salesmen want the Wall Street Bailout to go away and for the Wall Street banker to get what they deserve. Sorry! It ain't going to happen. There was no better outcome than we got, and it is amazing that we got as good as we did get.

The Obama White House is getting what it can realistically get. They are not shooting for the fences because the price of losing is too damned high. They are not perfect, though.

They have a real tin ear for how what they say and do will be portrayed by the media and they are unwilling to (swinging for the fences) support the progressive causes. Nor are they willing to try to change the public perceptions. I don't think they believe they have that level of bully pulpit. They may be right, but again it goes back to the fact that the guy who has it all to lose is not ready to risk it all to win.

That's where I think those of us who supported Obama's election are sitting right now.

Here are the results of the deficit hawks' proposals

When Social Security retirement is stolen to pay for the tax cuts for the rich and for their interminable wars (wars always benefit the wealthy but are fought by the not-so-wealthy) the end result is going to be poor houses. Glenn Beck specifically proposes them.

What will get us there? The bankers and wealthy big business owners are gambling on stock market and bond market speculations. When they lose, they will again demand that the tax payers bail them out because their services are all that will be keeping the economy out of the next Great Depression. The result? Look at Ireland. This is Digby's blog. Here are the pictures of unrest from Ireland.

I really don't want to see that happen here, but the only thing stopping it is the fact that the U.S. dollar was and remains the world currency and will remain so as long as the federal government does not default on its treasury bonds - at least not to foreign banks. Defaulting to the Social Security trust funds is fine. What is being proposed right now is an internal default. Lower Social Security benefits so that the government does not have to pay back the Social Security trust funds the money they have borrowed in order to fight two unnecessary wars and to pay the outlandish tax cuts for the wealthiest Americans. .

By lowering Social Security benefits, the federal government will then only be faced with raising taxes enough to pay back the Chinese, Japanese and Middle Eastern Oil Magnates who own the rest of the bonds. All the government has to do is keep on over-taxing the workers for Social Security and the wealthy and the bankers will do quite well. The only people who will be hurt are future retirees.

The working class is being taxed so that their tax money can make the wealthy better off. That's what the talk of cutting Social Security benefits to lower the deficit is about. But Social Security has never run a deficit, nor will it. .The deficit has come from wars and unnecessary tax cuts on the already under-taxed wealthy Americans.

Don't buy stocks! It's a suckers' game!

Think it is safe to get back to investing in stocks and bonds?? That's Wall Street's game, and when Wall Street plays games the only winner is Wall Street. Don't ever forget that the Great Recession which we are slowly climbing back out of right now was a creation of Wall Street banks and their self-dealing.

That's not over. That's why the FBI is currently investigating the Wall Street banks and the hedge funds for illegal insider trading.

The man behind the investigation, U.S. Attorney Preet Bharara in Manhattan, has said the insider trading he's after appears to be "rampant" and has compared the practice to performance-enhancing drugs. Subpoenas from his office have gone out to giant firms, including mutual fund managers Janus Capital Group and Wellington Management. Fox Business News said Chicago hedge fund operator Citadel also drew a subpoena. None of these firms has been charged.

The breadth of the subpoenas suggests the probe could involve many mutual funds, hitting a sector that's always had a reputation of conservatism. It may change the minds of investors who still think the market operates equitably for all.

But it's still a good idea to buy stocks in the long run. They have on average gone up faster than bonds, right? According to Wall Street Jurnal's Paul B. Farrell that has not happened in the last two business cycles. That's because the hedge funds, Wall Street banks and wealthy investors have sucked all the profit out of stocks before the average investor can possibly buy them.

Paul Farrell offers this advice to investors. Stocks are a sucker's bet being offered by Wall Street.

1. American stocks are a high-risj sucker bet.(America’s divided into two stock markets: one for Wall Street’s rich insiders, another for Main Street’s suckers: “Investors, as opposed to traders, buy stocks in companies whose profits they expect to rise. The conventional wisdom says stock prices will follow profits up, but over the last two business cycles, that simply has not happened.” ) Main street has figured out they are the suckers that the Wall Street bankers are fleecing. They aren't going back into the markets any time soon.
   
2. New ‘big short’ dead ahead: Derivatives con game will crash again (Wall Street’s sneaky and will do anything to keep the derivatives casino running hot. Insiders “have no intention of ceasing their prop trading,” according to Lewis. “They are merely disguising the activity, by giving it some other name.) The derivitive game is goning to crash again.
   
3. Hedge funds shorting China: Warning — U.S. faces collateral damage (China may well crash first. Fortune’s Bill Powell interviewed hedge-fund kingpin Jim Chanos of Kynikos Associates, who’s “betting that China’s economy is about to implode in a spectacular real estate bust.” China is “an economy on steroids.” In a Charlie Rose interview, Chanos said “China’s on an economic treadmill to hell.” If so, then all of Wall Street’s highly promoted emerging markets are also sucker bets. )
   
4. New insider-trading indictments killing Main Street confidence (Investor distrust of Wall Street’s casino will skyrocket in 2011. Before the elections in November, an AP-CNBC poll found 61% of investors had already lost confidence in the market, thanks to extreme volatility; 55% believe the market’s rigged to favor insiders. )
   
5. Banksters’ perfect gambling record proves stocks a rigged game (Morici says “J.P. Morgan and Bank of America went through the entire third quarter without a negative trading day, no losing days on proprietary trades. Unless you believe in perfection, something stinks about the information they are using. If someone is winning all the time, then someone else is losing. That’s the ordinary investor. Stocks have become a rigged game.)
   
6. Wall Street is socially worthless, existing only to make insiders rich (John Cassidy writes: “Much of what investment bankers do is socially worthless.” Wall Street exists solely “to make itself very, very rich.” )
   
7. The Fed is America’s worst nightmare, a $3.3 trillion moral hazard (Moral hazard simply means no consequences for Wall Street’s complicity in triggering the 2008 catastrophe. As a result, Wall Street insiders came away believing they can take bigger and riskier bets in the future because they will get away with it next time, too. )
   
8. Wake up to a new normal: no growth, deflation (economist Gary Shilling, a longtime Forbes columnist, warns: “Real economic growth rates of 2% or less are likely through 2011.” But we need 3.3% just to keep up with population growth.
   
   So “high unemployment remains a political problem … with weak economic growth, looming deflation, and the dollar and Treasurys remaining the safe havens in a sea of global trouble.”
   
   Warning: America’s new era, featuring no growth, deflation and a jobless recovery, will continue for years, resembling Japan over the past two decades. Worse, brutal deficit cuts will trigger riots, as in England, France. )
   
9. Privatize Social Security: New GOP Congress loves dumb ideas. (Wall Street wants to get its hands on $20 trillion of your retirement money to lose in the next crash they create.)
   
10. Warning: Wall Street will lose another 20% of your money by 2020.

The fact is the FBI investigation shows that the entire stock buying game is as rigged as your local checking cashing or payday loan outlet. Probably more than your local loan shark. Buy stocks now and you will be fleeced.

Why is Wall street permitted to run such crooked markets? Because Wall Street belongs to the ultra-wealthy, and so does the Republican Party. The wealthy do nothing for the American economy except work to suck it dry so that they can invest the funds they steal in foreign countries where the return on investment is much higher. They are happily foreclosing on homes they don't even own. Would you buy financial products from someone this crooked or careless? You shouldn't.

Just for fun, read this article on American Wealth, Income and Power.

This brings me back to the question I asked in the previous post. Does America really need an extremely wealthy class for anything at all? They are parasites who add no value to America. America's wealth and power is and always has been built on the work of the workers and the middle class.

America's banks are shafting customers and investors again.

The foreclosure crisis is getting heavier. America's banks are foreclosing on homes they cannot prove they own, but they are filing so many foreclosures that the judges (if honest) don't have time to look at them. If they did, almost 97% of the foreclosures are based on fraudulent paperwork.

I had a few things to say about this over the last month or two, but I think people had a hard time believing that fraud and perjury on this scale was actually possible; that people were being thrown out onto the street on the basis of affidavits that were forgeries and perjury through and through. Forged, back-dated documents purporting to be contemporaneous records of the transfer of mortgage notes from one party to another. Complete circumvention of the existing legal system for recording real estate ownership - and its associated taxes and fees - and its illegal replacement with an unreliable, understaffed private system. The employees of the corporation running that system passing themselves off as vice-presidents of dozens of banks and servicers so they could foreclose on mortgages. Banks even claiming both that they were and were not the actual owner of the mortage in the very same filings. Failures to convey the actual mortgages to the real estate trusts that backed the securities that were sold to investors. Attempts to convey mortages to those trusts only at the moment of foreclosure. Servicers with a vested interest in the mortages they service going into foreclosure so they can collect fees, and associated failures to collect payments. People given mortgage modifications by the bank, then foreclosed on for failing to pay the original amounts. People without mortgages being foreclosed on. Multiple banks claiming to own the same mortgage foreclosing on the same property.

And at the sharp end of all this, an automated process of perjury and fraud. Notarized affidavits claiming that the signer has personal knowledge of the facts of the case described that were signed by someone else with no knowledge of the facts and not notarized at all. And a court system overloaded with foreclosures unable to and uninterested in examining the facts of the cases in front of it. Families thrown out on the street in the tens or hundreds of thousands on the basis of minute-long hearings in courts where judges refused to consider questions of fraud.

It's hard to comprehend just how pervasive and serious this problem is. Trillions of dollars have already been lost in the bursting of the real estate bubble, but trillions of dollars more of the remaining mortgage-backed securities may be entirely worthless. Not to mention the massive destruction of households and neighborhoods wrought by a mindless, mechanical legal process.

If you don't have time to read the whole thing at RS, I'm excerpting the key parts after the fold. But I recommend taking the time to read it.[ from Rolling Stone.]

There is a great deal more to read all worth it. But if you want to know why the mega banks are working so hard to commit this massive fraud on the courts and on the homeowners, look that this final statement from the Obsidian Wings article. I have bold-faced the key paragraphs below:

It's undeniable that many of the people facing foreclosure bear some responsibility for the crisis. Some borrowed beyond their means. Some even borrowed knowing they would never be able to pay off their debt, either hoping to flip their houses right away or taking on mortgages with low initial teaser rates without bothering to think of the future. The culture of take-for-yourself-now, let-someone-else-pay-later wasn't completely restricted to Wall Street. It penetrated all the way down to the individual consumer, who in some cases was a knowing accomplice in the bubble mess.

But many of these homeowners are just ordinary Joes who had no idea what they were getting into. Some were pushed into dangerous loans when they qualified for safe ones. Others were told not to worry about future jumps in interest rates because they could just refinance down the road, or discovered that the value of their homes had been overinflated by brokers looking to pad their commissions. And that's not even accounting for the fact that most of this credit wouldn't have been available in the first place without the Ponzi-like bubble scheme cooked up by Wall Street, about which the average home­owner knew nothing — hell, even the average U.S. senator didn't know about it.

At worst, these ordinary homeowners were stupid or uninformed — while the banks that lent them the money are guilty of committing a baldfaced crime on a grand scale. These banks robbed investors and conned homeowners, blew themselves up chasing the fraud, then begged the taxpayers to bail them out. And bail them out we did: We ponied up billions to help Wells Fargo buy Wachovia, paid Bank of America to buy Merrill Lynch, and watched as the Fed opened up special facilities to buy up the assets in defective mortgage trusts at inflated prices. And after all that effort by the state to buy back these phony assets so the thieves could all stay in business and keep their bonuses, what did the banks do? They put their foot on the foreclosure gas pedal and stepped up the effort to kick people out of their homes as fast as possible, before the world caught on to how these loans were made in the first place.

Why don't the banks want us to see the paperwork on all these mortgages? Because the documents represent a death sentence for them. According to the rules of the mortgage trusts, a lender like Bank of America, which controls all the Countrywide loans, is required by law to buy back from investors every faulty loan the crooks at Countrywide ever issued. Think about what that would do to Bank of America's bottom line the next time you wonder why they're trying so hard to rush these loans into someone else's hands.

---

Addendum 6:22 PM CST
Here is another recent article on the mortgage disaster. It lays out some of the problems and the likely fall out.

Employees or contractors of several major banks have testified in court cases that they signed, and in some cases backdated, thousands of certifying documents for home seizures. Financial firms that service a total $6.4 trillion in mortgages are involved, according to the new report. Big banks including Bank of America Corp., JPMorgan Chase & Co. and Ally Financial Inc.'s GMAC Mortgage have suspended foreclosures at some point because of flawed documents.

Federal and state regulators, including the Federal Reserve and attorneys general in all 50 states, are investigating whether mortgage companies cut corners on their own procedures when they moved to foreclose on people's homes.

"Clear and uncontested property rights are the foundation of the housing market," the report says. "If these rights fall into question, that foundation could collapse."

Here are some ramifications:

• Borrowers may not be able to ascertain if they're sending their mortgage payments to the right party.
• Judges may block all foreclosures.
• Prospective buyers and sellers could be in left in limbo.
• For major banks, if they discovered that they still owned millions of bad mortgage loans they assumed had been sold, the losses could reach billions.

It's that last one that really frightens the banks.

In theory the banks sold those mortgages on to investors who should take the losses. But if there is no proof that the mortgages were transferred to the investors, then those mortgages still belong to the banks when they go into default. The banks will have to make restitution to the investors because they investors have no court standing to foreclose from the (alleged) defaulters. Only the legal owner can do that.

If you notice in the earlier article (above) that may apply to as many as 97% of the mortgages that are (allegedly) in default. This is not a simple problem that the homeowners failed to pay and should be foreclosed on. This is major. It is a question of who takes the loss when the mortgage goes bad. If the investors legally own the homes, they are out the loss. But if the bank never transferred ownership then it is the banks who are on the hook for the massive and now inevitable losses in those homes.

If you think that the banks took a big hit to their reserves two years ago when the economy went bad, this would very probably dwarf those losses. Think the feds will step in and bail them out a second time in two years??

This is exactly the scenario that Alan Greenspan thought that the self-interest and professionalism of the banks would prevent when he allowed to housing bubble to grow uncontrolled. Greenspan was responsible for regulating the bank's behavior and he did not do so, depending on the invisible hand of the market.

Greenspan is a libertarian. He had been informed that everyone from the original mortgage brokers through the original lending banks to the firms that bundled the mortgages into mortgage-backed securities and sold them on to investors was cutting corners and holding down administrative costs by not doing the due diligence and the required legal document transfers. But the market factors were supposed to handle that. Guess what? The market failed - again!

I'd hate to own stock in a major bank right now.

What happened on the stock market during the May 6 "flash crash?"

Why did the Wall Street stock market suddenly go crazy and drop out of bed very suddenly on May 6th? That's still a question that has no clear answer. Tom Lauricells and Scott Patterson provide an update in the Wall Street Journal. This article is a progress report telling us the current status of the investigation into the flash crash. What isn't known is a lot more than what is known, and a lot of investors are quite leery of investing in stocks at present as a result. But what is known? The clearest thing is that all of a sudden the Dow Jones Industrial Average went into a sudden decline which was more rapid than ever before. Hundreds of stocks suddenly lost nearly all their value for no apparent reason.

It's not that there were no warnings at all. Fund managers were cutting back on buying stocks even before the crash because the market was acting strange. But there was no indication what the strange happenings meant.

Some new details include:

Stock-price data from the New York Stock Exchange's electronic-trading arm, Arca, were so slow that at least three other exchanges simply cut it off from trading. Pricing information became so erratic that at one point shares of Apple Inc. traded at nearly $100,000 apiece. And computer-driven trading models used by many big investors, apparently responding to the same market signals, rushed for the exits at the same time.

[...]

Todd Sandoz, co-head of equities in the Americas at Credit Suisse in New York, kept track as clients reduced risk in their portfolios. One way they did it was through trades that would profit if the Standard & Poor's 500-stock index fell: They sold short, or bet against, futures contracts linked to that index. They did the same with exchange-traded funds, which track baskets of stocks.

Those kinds of trades can send waves through the market. Brokers on the other side of the trades often hedge their own positions by selling the stocks contained in the index. That morning, Mr. Sandoz heard from his traders that there were relatively few buyers and sellers for some individual stocks—a sign that the market might not be able to smoothly handle big index trades.

The market was especially vulnerable because of the trading pullback identified by his colleague Mr. Vasan. The hedge funds that had been pulling back for several days—specialists in a strategy called statistical arbitrage—normally trade so much stock that they are a key source of market liquidity.

At about 2 p.m., as protests in Athens over the Greek debt crisis turned violent, the euro fell sharply, especially against the yen. The euro-yen exchange rate is watched widely by traders, with the yen seen as a safe-haven currency, the euro a proxy for riskier investments.

The euro's fall triggered concerns that a rush out of stocks was in the works. At Chicago hedge fund Sharmac Capital Management LLC, trader Jason Roney noticed the drop. "Something is wrong, look out!" he recalls shouting to his trading desk. He started shorting S&P 500 futures.

Traders across Wall Street were making similar moves, many driven by computer models that have become standard tools at banks, hedge funds and mutual funds.

Fund managers at Waddell & Reed Financial Inc. in Overland Park, Kan., moved to hedge their U.S. stock holdings, which total more than $7 billion, by betting that the S&P 500 would fall. Waddell decided on a large short sale of futures contracts known as E-minis, which mimic movement of the S&P 500. As Waddell's computers began parceling out the trade, other investors also were trying to hedge their portfolios, so trading volume in E-minis shot up to six times the usual volume.

But liquidity, the ability to buy or sell easily, was drying up. Between about 2:35 and 2:45, the six "market-making" firms that were most active that afternoon in E-mini trading—they step in as buyers or sellers on many trades—cut back their trading. Some pulled out altogether.

As a result, traders say, the big Waddell trade accelerated the sell-off. Waddell says it did not intend to "disrupt" the market.

Computers started to groan under the weight of the orders and slow by fractions of a second. It became difficult for exchanges and investors to keep track of prices.

In recent years, due in part to rules instituted by the Securities and Exchange Commission in 2007, the stock market has been opened to numerous trading venues and has evolved into a high-speed network. The rules stipulate that when an investor trades a stock, the order is routed to the venue with the best price.

On the afternoon of May 6, it was difficult for traders to trust the information they were getting, and for buyers and sellers to find each other. Nasdaq OMX Group Inc. operations personnel noticed problems with orders it had routed to Arca, the electronic trading platform of the NYSE, which handles about 12% of U.S. stock-trading volume. It was taking Arca longer to acknowledge receiving some orders. Orders for Nasdaq-listed stocks such as Apple and Amazon.com Inc. were hitting lags of two seconds or more on Arca—an eternity in today's markets.

Trading in Apple became especially volatile. At 2:40, its stock began falling swiftly, losing 16% in six minutes. Because Apple is a component of several indexes, weakness in the stock helped drag down the broader market.

Concerned about the impact of the delay on orders routed to Arca, Nasdaq officials used a tool called "self help," designed to prevent problems at one exchange from spreading to others. At 2:36:59, Nasdaq stopped routing orders to Arca. Other exchanges, including Chicago Board Options Exchange and BATS Global Markets, an electronic exchange near Kansas City, Mo., did the same.

The NYSE says Arca had "minor delays" on a computer server during the period, but says the problems were not significant and didn't add to the market's broader problems.

Computer systems at big brokerage firms were straining to keep up with the volume. Dark pools, trading venues that match buyers and sellers away from the major exchanges, had trouble getting accurate information. Some temporarily shut down.

2:40 p.m., Dow down 415 points

High-frequency-trading firms, which account for some two-thirds of U.S. stock-trading volume, were having their own problems. Their strategies often involve buying and selling stocks within microseconds—or one-millionth of a second. The market's plunge, along with discrepancies in data feeds from exchanges, scrambled their computer-trading systems.

With the Dow industrials down about 500 points, Tradebot Systems Inc., a Kansas City high-speed trading firm that says it can account for up to 5% of daily volume, pulled out. Other such firms did the same.

The roar on the floor of the Chicago Mercantile Exchange was deafening as the sell-off accelerated. The E-mini contract suddenly fell a massive 12.75 points in half a second, triggering a CME circuit-breaker that stopped trading for five seconds. The pause gave computerized futures-trading systems time to stabilize.

On the floor of the NYSE, the fast declines in some stocks were triggering brief slowdowns in trading, known as "liquidity replenishment points," to allow floor traders to step in and restore order. Other exchanges, such as the Nasdaq, didn't slow trading.

Among the problems this caused were "crossed" markets, where offers to buy were at prices higher than orders to sell. Around 2:46, for example, an investor offered to buy Apple for about $218, while another was willing to sell it for about $202. Such nonsensical quotes sent warning signals to computer systems and gave traders yet another reason to pull back.

Stocks everywhere started to collapse. Apple lost more than $23 a share, or 10%, between 2:44 and 2:46. Procter & Gamble Co., which had been trading around $61.50, saw huge sell orders hit the NYSE, and the exchange briefly slowed trading in the stock. By 2:47, the market for P&G was in chaos, with orders to buy from NYSE, Nasdaq and the BATS scattered from $39.89 to $44.24. The basic function of the stock market— bringing together buyers and sellers in an orderly fashion—had broken down.

Trades flickered across computer screens that made no sense. Shortly after 2:47, shares of Accenture PLC dropped in seconds from about $40 to one penny, then rebounded just as quickly. The explanation surfaced later: Market-making firms—regular buyers and sellers of certain stocks—have to maintain quotes at all times. To fulfill the requirement, they use "stub quotes," dummy quotes they never expect to be executed. But in the absence of buyers on May 6, computers matched automated sell orders with the dummy quotes.

Rumors swirled about of an erroneous "fat-finger" order by a trader at Citigroup Inc.—that the trader mistakenly entered extra zeros, turning millions into billions. Citigroup and regulators later said such an errant trade did not appear to have taken place.

But the rumor helped stabilize the market. If the massive decline was the result of a mistake and not some terrible news, that meant there were bargains to be had.

At 2:47, the Dow reached its nadir, down 998.50 points. As trading resumed in the futures market, buyers flooded in and prices started to rebound.

Within one minute, the Dow reclaimed 300 points.

But the problems weren't over. Exchange-traded funds, or ETFs, are baskets of securities that trade like a stock. NYSE's Arca is usually home to 30% of ETF trading. When other exchanges stopped routing orders to Arca, the normal flow of ETF buyers and sellers was disrupted.

Two big hedge-fund and trading firms, D.E. Shaw Group and Citadel Investment Group, detected problems in Arca's ETF computer feed. Citadel asked customers to route orders elsewhere. NYSE officials say they found no problems with Arca's ETF platform on May 6.

Some of the biggest ETF traders are firms that try to profit from discrepancies between prices of ETFs and the stocks that they track. But as questions mounted about pricing of individual stocks, these firms pulled back from trading. This hurt small investors who had placed "stop-loss orders," aimed at protecting against big losses by automatically selling once prices fell below a certain level. Those orders hit the market when there were virtually no buyers to be found.

At 3:01, Nasdaq once again began routing orders to NYSE's Arca.

Executives from several major exchanges joined a conference call to discuss, among other things, whether to declare some trades erroneous. After considerable debate, they decided to cancel trades in stocks and ETFs that had fallen or risen 60% or more.

In the final hour, trading remained erratic. At one point, Apple traded for nearly $100,000 a share on Arca, according to NYSE officials, after a buy order for 5,000 shares entered the market and only 4,105 shares were available. When Arca's computers saw that no more shares were available to sell, the system automatically assigned a default price of $99,999 to the remaining 895 shares. Those trades later were cancelled.

4 p.m., Dow closes down 342 points

This looks like a system that has grown too large for anyone to oversee, understand or in times of trouble, react to. It requires the high speed arbitrage traders to operate to create liquidity, but with the various markets getting out of synch with each other the possibility that one market would sell at a price lower than another was buying at can cause investors to back off and do nothing. The result can be a lack of stocks to buy or sell in specific markets and price reports that are delayed from one market can completely disrupt the functioning of the market.

This set of problems will be compounded by computerized trading when the trading data goes gives signals the computer is not programmed to react to. Since much of this is arbitrage trading which no human being looks at except in retrospect, the only thing the program can be programmed to do is just get out of the market. This is going to give other people in the market unpredictable signals. So everyone is going to hedge their investments all at once. Such hedge trading will then slow down and again provide signals that are fed back into the market causing more unpredictable behavior.

Regulators are already doing a few things to change the system, but since the details of what happened are not yet known the efficacy of the new regulations is not known.

New circuit breakers, now in pilot mode, require a five-minute trading halt on S&P 500 stocks that move more than 10% within five minutes. These "collars" could help keep prices from suddenly cascading.

But some forces behind the flash crash seem beyond the reach of regulators. Exchanges are unlikely to be able to prevent high-frequency trading firms or statistical-arbitrage firms from bailing out of the market en masse.

So there is not any real reason to think that there might be another flash crash any day.

That's the kind of uncertainty the markets hate.

============
Addendum 08/07/2010 3:08 pm
Well, well. I am going to thank Paul Hinds for sending me this link to an explanation of the flash crash by Nanex. This link is the text and back the main page at this link are the graphs. Here is the key part of Nanex's analysis:

There are 9 exchanges that route orders to NYSE listed stocks: NYSE, Nasdaq, ISE, BATS, Boston, Cincinnati (National Stock Exchange), CBOE, ARCA and Chicago. Each exchange submits a bid and/or offer price for each stock they wish to make a market in. The highest bid price becomes the National Best Bid and the lowest offer price becomes the National Best Ask. Exchanges compete, fiercely at times, to become the best bid or offer because that is where orders will be sent for execution. Exchanges also go to great lengths to ensure they avoid crossing other exchanges (bidding higher than others are offering, or offering lower than others are bidding), because if they do, many High Frequency Trading (HFT) systems will immediately execute a buy/offer and capture an immediate profit equal to the difference. Today, it is very rare to see markets crossed in stocks for longer than a few milliseconds.

Beginning at 14:42:46, bids from the NYSE started crossing above the National Best Ask prices in about 100 NYSE listed stocks, expanding to over 250 stocks within 2 minutes (See Part 1, Chart 1-b). Detailed inspection indicates NYSE quote prices started lagging quotes from other markets; their bid prices were not dropping fast enough to keep below the other exchange's falling offer prices. The time stamp on NYSE quotes matched that of other exchange quotes, indicating they were valid and fresh.

With NYSE's bid above the offer price at other exchanges, HFT systems would attempt to profit from this difference by sending buy orders to other exchanges and sell orders to the NYSE. Hence the NYSE would bear the brunt of the selling pressure for those stocks that were crossed.

Minutes later, trade executions from the NYSE started coming through in many stocks at prices slightly below the National Best Bid, setting new lows for the day. (See Part 1, Chart 2). This is unexpected, the execution prices from the NYSE should have been higher -- matching NYSE's higher bid price, unless the time stamps are not reflecting when quotes and trades actually occurred.

If the quotes sent from the NYSE were stuck in a queue for transmission and time stamped ONLY when exiting the queue, then all data inconsistencies disappear and things make sense. In fact, this very situation occurred on 2 separate occasions at October 30, 2009, and again on January 28, 2010. (See Part 2, Previous Occurrences).

Charting the bid/ask cross counts for those two days reveals the same pattern as 5/6! Looking at the details of the trade and quote data on those days shows the same time stamp/price inconsistencies. The NYSE stated that during the same intervals, they were experiencing delays in disseminating their quotes!

In summary, quotes from NYSE began to queue, but because they were time stamped after exiting the queue, the delay was undetectable to systems processing those quotes. On 05/06/2010 the delay was enough to cause the NYSE bid to be just slightly higher than the lowest offer price from competing exchanges, but small enough that is was difficult to detect (See Part 3, The Evidence). This caused sell order flow to route to NYSE -- thus removing any buying power that existed on other exchanges. When these sell orders arrived at NYSE, the actual bid price was lower because new lower quotes were still waiting to exit a queue for dissemination.

The key to the problem seems to me to be the various other markets cross-linked to the New York Stock Exchange and the problems caused when there was a delay in some but not all of the linkages. For those of you not familiar with computers, that is what the statement "If the quotes sent from the NYSE were stuck in a queue for transmission " means. Quotes that buyers and sellers depend on to make buy and sell decisions were lined up and not moving (stuck in the queue) making the buy and sell decisions made outside the New York Stock Exchange based on bad (delayed) data.

Computer trading depends on this instant transmission of data to operate. Because the computers supposedly have the very latest quotes sooner than other buyers and sellers in the market they can be programmed to buy or sell sooner than anyone else. That's how the computers perform the arbitrage function between different markets and supposedly keep prices on the different markets in synch within milliseconds.

I have NOT dug into all this data to make sure of its accuracy and guaranteed that each of the analysts or groups I am quoting performed good analysis. All I am saying is that the reports I have posted here make sense to me.

This is very similar to the set of cascading power problems that took down the Northeast power grid in 2003. Both appear to be problems when a massive interconnected system suddenly gets unbalanced demands on part of the system that are fed back into the overall system and causing a cascade failure. The initial cause this time is of course different from that of the power failure, but the problems caused when one part of the system did not reacting promptly created strains on other parts of the system. When an portion of the system failed it then increased the strains thrown onto the rest of the system. The system here is the group of 9 exchanges that route orders to NYSE listed stocks: NYSE, Nasdaq, ISE, BATS, Boston, Cincinnati (National Stock Exchange), CBOE, ARCA and Chicago. In this case, the New York Stock Exchange was the recipient of massive number of buy and sell orders caused by delays in quotes sent to the computers doing computerized trading.

The problem seems to me to be one of unbalanced workloads. If somehow regulations are put into place that prevent delayed quotes from causing outlandish workloads (orders to buy and sell instantly) on a single part of the system, then I suspect that such regulations will only solve the problem for delays in communications between the various markets. That is not to say that there aren't other possible causes of unbalanced loads screaming through the system in the future.

The delayed investigations into Wall Street are getting started!

At Last! The government is beginning to look at the securities that set off the current Great Recession! This is from the Guardian (London):

The New York attorney general is investigating whether eight Wall Street banks misled ratings agencies to inflate the grades of certain mortgage securities.

The attorney general of New York, Andrew Cuomo, sent subpoenas to eight banks last night, according to the New York Times. The paper named Citigroup, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch – now owned by Bank of America – Morgan Stanley and UBS as the banks under scrutiny.

The companies that rated the mortgage deals are Standard & Poor's, Fitch Ratings and Moody's Investors Service. The agencies have come under fire for overstating the quality of mortgage securities that later slumped in the wake of the housing collapse, helping to trigger the financial crisis.

The attorney general's inquiry suggests that he thinks the agencies may have been duped by one or more of the banks under investigation. He is scrutinising the rating agencies' fees arrangements, which allowed banks to shop their deals among the agencies to secure the best rating.

Cuomo is also looking into the practice of bank mortgage desks hiring rating agencies employees to help create mortgage deals that may have secured better ratings than they deserved.
[Highlighting by the WTF-o Editor.]

This is very significant in the effort to find out exactly what happened to nearly throw the U.S. and the world into a second Great Depression. A number of very important points are being addressed in this investigation. First, it has been clear since the Wall Street banks collapsed in September 2008 that a central pillar of the fraud in mortgage securities that set it off was the inflated reports of the rating agencies, http://www.guardian.co.uk/business/2010/may/13/wall-street-banks-investigated-mortgages-ratings. So far it has been eighteen months since the financial collapse in September 2008, and there has been no public investigation of the activities of the rating agencies.

That leads to the second question this report leads to. This investigation is being led by the New York Attorney General, NOT by the federal government. This financial fraud and the resulting disaster was nation- and world-wide. Why is the New York Attorney General, a state officer, the taking the lead in this investigation? The corrective actions, which will include regulation of the rating agencies both for their transparency and the manner in which they are chosen and paid for their services, will have to be primarily federal. Otherwise the banks will simply go state-shopping to find the least regulating state for them to operate in, just as the banks do with choosing the states they issued credit cards from.

This investigation is going to be worth following closely. Expect the Wall Street banks to take every possible action to shut it down or shut it up.

Republicans fighting Wall Street regulation tooth and nail.

What's up with the Republicans? As long as they say "No!" to Wall Street reform, the Wall Street banks will continue to fill their coffers for what they expect will be a critical election in November.



Robert Borasage explains what's behind the Republican obstreperousness.

Good anti-Wall Street Bank ad.

Go to Open left (or click on the title above) to see the discussion behind this ad.



From OpenLeft.

Best short analysis of the recent banking crisis so far

Want a short overview of what all went wrong with Wall Street in 2008? Here is a floor speech by Senator Ted Kaufman that does a superb job of summarizing the set of problems and how they worked out in the crisis.

It's already a summary, so I won't try to summarize it here. Go read it.

Here's a brief descripion of one of the worst things Wall Street did to the economy

Yet more on what bought the mortgage crisis on and killed off all five the biggest Wall Street Investment Banks together with AIG , the largest insurance company in the world, all of whom were too big to fail. This is from Vanity Fair. The very worst of it occurred because AIG in the form of their subsidiary AIGFP thought they could make a killing insuring risk (that is, buying the risk portion) of baskets of subprime (risky) mortgages through the use of credit-default swaps (essentially unregulated insurance policies) and because it reduced their projected costs, did not keep any loss reserves as protection against losses. Hey, that's what too big tofail means, doesn't it? In essence the credit default swaps stripped the risk off of the (inherently risky) subprime mortgages and sold it separately to gamblers. (Not all the gamblers realized they were gambling.) Then AIG's loss history got too high, so too late, they quit insuring those risks. But AIG's customers, the Wall Street Investment firms, were making a mint selling the baskets of subprime mortgages and had to have insurance on their product or the investors wouldn't accept that subprime mortgages could be safe enough to invest in. The story follows.

What no one realized was that it was too late. A.I.G. F.P.’s willingness to assume the vast majority of the risk of all the subprime-mortgage bonds created in 2004 and 2005 had created a machine that depended for its fuel on subprime-mortgage loans. “I’m convinced that our input into the system led to a substantial portion of the increase in housing prices in the U.S. We facilitated a trillion dollars in mortgages,” says one trader. “Just us.” Every firm on Wall Street was making fantastic sums of money from this machine, but for the machine to keep running the Wall Street firms needed someone to take the risk. When Gene Park informed them that A.I.G. F.P. would no longer do so—Hello, my name is Gene Park and I’m closing down your business—he became the most hated man on Wall Street.

The big Wall Street firms solved the problem by taking the risk themselves. The hundreds of billions of dollars in subprime losses suffered by Merrill Lynch, Morgan Stanley, Lehman Brothers, Bear Stearns, and the others were hundreds of billions in losses that might otherwise have been suffered by A.I.G. F.P. Unwilling to take the risk of subprime-mortgage bonds in 2004 and 2005, the Wall Street firms swallowed the risk in 2006 and 2007. Lending standards had fallen, property values had risen, and the more recent loans were thus far riskier than the earlier ones, but still they gobbled them up—for if they didn’t, the machine would have ceased to function. The people inside the big Wall Street firms who ran the machine had made so much money for their firms that they were now, in effect, in charge. And they had no interest in anything but keeping it running. A.I.G. F.P. wasn’t an aberration; what happened at A.I.G. F.P. could have happened anywhere on Wall Street … and did.

So much as David Halberstam describe the "Best and the Brightest" who got America into Vietnam at great and unnecessary loss, the Best and the Brightest on Wall Street assumed they understood what they were doing when they sold the innovative financial products.

The current result is that America and the rest of the financial world has been thrown so close to a second Depression that there seemed to be no stopping it as economies around the world have declined over the last year or more. It has only been through some unprecedented, controversial, experimental and fantastically costly government interventions that the unemployment rate is only 9.5% so far. And that is just so far. There is no real assurance yet that the delay on the drop to Depression has been more than temporarily delayed.

Sleep well. The Best and the Brightest are hard at work trying to fix the economic crisis they earlier created. Feel safer yet?

A strange Supreme Court ruling written by Scalia

This ruling created some strange bedfellows. Anton Scalia, the court's most conservative member, switched over to join the court's four liberal members. In fact, Scalia wrote the opinion. The issue was whether the federal banking laws preempt similar state laws designed to protect consumers. From McClatchy News Service:

WASHINGTON — In a rebuke of the Bush administration, the Supreme Court ruled Monday that a federal bank regulator erred in quashing efforts by New York state to combat the kind of predatory mortgage lending that triggered the nation's financial crisis.

[...]

The five justices held that contrary to what the Bush administration had argued, states can enforce their own laws on matters such as discrimination and predatory lending, even if that crosses into areas under federal regulation.

Justice Clarence Thomas, writing for the four dissenters, argued that laws dating back to the nation's founding prevent states from meddling in federal bank regulation. He was joined by Chief Justice John G. Roberts and justices Anthony Kennedy and Samuel Alito.

The ruling angered many in the financial sector, who fear it'll lead to a patchwork of state laws that'll make it harder for banks and other financial firms to take a national approach to the marketplace.

"We are worried about the effect that this ruling could have on the markets," said Rich Whiting, general counsel for the Financial Services Roundtable, a trade group representing the nation's 100 largest financial firms, in a statement. The decision "hinders the ability of financial services firms from conducting business in the United States. Even worse, it will cause confusion for consumers, especially those who move from state to state."
[Highlighting mine - Editor WTF=o]

The reported statement [Highlighted above] from the financial sector is very likely accurate.

This decision WILL hinder the national banks from providing uniform services across the nation. It will certainly make it less economically beneficial to consolidate many local banks and create the kinds of mega-banks who helped the massive Wall Street banks create the mortgage crisis.

In other words, it removes some of the economies of scale that caused the creation of banks like Bank of America. That means that regional banks will be able to compete on a more equitable basis, and banking services will be provided in a more competitive market across the nation.

So does that mean that the megabanks will have higher costs and pass them on to the consumers? Half right. The higher costs will mean that there is less opportunity to make mega profits for the top managers. Along with that, the much greater competition will mean that the consumers will get lower prices than is possible when dealing with a single monopoly national bank, or with one of three or four oligopoly banks. Along with lower costs, the bankers will have greater knowledge of the needs of local markets than the mega banks possibly can, meaning the regional banks will have a shift of some competitive power away from the mega banks. The customers will win.

Too bad, Wall Street. You will have less opportunity to cause boom and bust economic cycles. Instead the free market will have the best opportunity to function.

The AIG bonuses-to-crooks story is worse than originally reported

It appeared Friday and yesterday that the bonuses the AIG managers gave to the executives of the financial products unit that bankrupted AIG was only a comparatively small $100 million or maybe $170 million. I say "comparatively" advisedly. That's all by itself a lot of money to be misused by bankers for their own personal gain.

The Wall Street Journal, however, has offered a new report. The true amount was at least $450 million. If my math is correct, that is 2.6% of the total $170 billion the treasury has put into AIG so far.

Or looking at it another way, taking my numbers from the Tax Foundation report as of July 2008, the average taxpayer who paid any income tax at all for 2007 paid $$7,543.07 in total income tax. That includes Bill Gates and Warren Buffet, of course, but it is still a lot of money. If the bonuses to a few crooked and stupid financial products executives totaled $450,000,000, then each of the 135,719,160 taxpayers who paid uncle Sam any income tax at all paid the first $3.32 of their tax money directly to the crooked executives at AIG.

Talk about your fraud, waste and abuse!! The bakers at AIG make government at every level in America into pikers!

AIG's inappropriate bonuses to Executives must not be allowed to stand

AIG has given $millions in bonuses (See also this Reuters article) to the very same executives who are running the unregulated side of the company that caused all the losses that drove AIG into bankruptcy. The Bush administration was convinced that the financial collapse of AIG would drive the overall financial economy into collapse, so the government could not afford to let AIG go into it's well-deserved bankruptcy. This has since required the government to step in giving AIG close to a fifth of a $trillion dollars of taxpayer money (so far) to bail them out and keep them functioning. Had AIG been smaller, then the government could have let them go into bankruptcy as they had the smaller Lehman Bros. earlier.

Josh Marshall reported briefly this morning on why the AIG administrator (appointed by the Secretary of the Treasury) claimed he felt it was necessary to provide those bonuses. The Reuter's report explained it this way:

AIG Chairman Edward Liddy said in a letter to U.S. Treasury Secretary Timothy Geithner that the firm was legally obligated to make already-committed 2008 employee-retention payments, the value of which were set early last year before problems at the Financial Products unit became public.

About half of the $1 billion was due to be paid to staff of AIG's main insurance businesses and the rest to employees of the largely unregulated AIG Financial Products.

AIG Financial Products was the unit that made bad bets on toxic mortgages and credit default swap contracts that led to the company's near collapse.

The decision to give out those bonuses is so wrong on so many levels that it is beyond ridicule. AIG is on life support, based on the earlier decisions made by the very executives now getting these bonuses as payment for their earlier services. Without taxpayer funding, there would be NO MONEY with which to pay these bonuses! So why did Liddy make that decision? Here's what we know about Liddy.

AIG Chairman Edward Liddy was appointed as Chairman of AIG back in June 2008 after AIG had gotten into severe credit problems. Liddy is a long-time Wall Street banker, clear trusted by the Board of AIG to protect AIG from the problems it was in. The timing of his appointment, well before the general Wall Street Financial Crisis demonstrates clearly that his loyalty is to AIG as an institution first rather than to the government, the taxpayers, or even the overall banking system.

This orientation would have made him a good match for the Bush Treasury Secretary, Henry Paulson, also a long-time Wall Street banker. By the end of the Bush administration, it was generally clear that Paulson similarly had a greater loyalty to the institutions of Wall street Banking than he did to taxpayers, government or to society in general.

Unfortunately, most of Obama's experts have similar backgrounds, not least being Timothy F. Geithner the current Secretary of the Treasury.

So what, you say? That's where the expertise is. Quite true. But consider Chairman Liddy's explanation for his decision to pay those bonuses, shown above. Then consider this article at CFO.com. It's title, "Creditors Could Go After Lehman Bonuses," is not even hinted at by Chairman Liddy's explanation.

The CFO article, based on the earlier experience of Lehman Bros. after they went bankrupt, rather strongly suggests that a bankrupt company not only did not need to pay out bonuses to it's executives, but also that if they did, the bankruptcy court could later demand that those bonuses be returned for redistribution to the creditors. Such a payment of bonuses when bankruptcy looms literally amounts to theft from the creditors.

The only difference in situation between the earlier, smaller Lehman Bros. and AIG is that the Treasury stepped in to provide funds that allowed AIG to remain outside the jurisdiction of the bankruptcy court. By so doing, the Treasury also became AIG's largest creditor.

Why Liddy and his attorneys might think the government would not sue to get those bonuses back is a mystery, unless they were depending on the kindness of Timothy Geithner based on his prior history at the Federal Reserve Bank of New York and on the general nature of the incoming personnel at the Obama Treasury Department. That may not have been a bad bet. Liddy many also have believed that they could weather the firestorm of political objections.

On this latter bet, I sincerely hope they were wrong. Those bonuses must not be allowed to stand. That's MY money, and yours, being paid to crooks and fools as a reward for failure. Wall Street cannot be allowed to float along with impunity above the financial disaster that they, specifically, are largely responsible for.

Wall Street must change before it drags America (and the World) back into further financial crises like this one. They have largely created this financial mess. They must not be allowed to do it again. Retrieving those bonuses will not change Wall Street, but it will be a strong signal that the old rules they wrote are dead.

This is going to be a clear battle. It is between them and us, and we'd better win.

Why are each of us paying at least $1000 to bail out the gamblers of the AIG hedge fund?

Barry Ritholtz explains in simple terms what the essential problem is with AIG and the excuses given for bailing out the gambling crooks after they took their losses. You need to go read his post.

If you don't want to click through to his post, he explains that AIG is in fact two different companies.

The first. the old firm, is the largest life insurance company in the world. It is AAA rated because it is state regulated. State regulation means that a company that sells life insurance, where they sell a policy that is basically a promise to pay a certain amount when the insured dies. Because an insurance company collects premiums for years, even decades, before it comes time to pay what it promised, a lot of companies used to keep too little in reserves and simply gamble that they can keep collecting money and not have to pay "until later." So the states inspect life insurance companies and guarantee that they have sufficient reserves to be able to pay the claims and are not wasting those already committed reserve funds elsewhere. AIG not only was regulated, it did everything possible to guarantee that the funds were on hand. It was, and remains, a very conservative AAA rated insurance company and made (and continues to make) good money based on its reputation.

The second company has grown out of the first, and is an unregulated hedge fund that sold CDS and other derivatives into the shadow banking system. Trading on the reputation and AAA rating of the insurance company, they became one of the biggest gamblers on Wall Street. This is the bankrupt company (created because of the disastrous Commodities Futures Modernization Act pushed through the Senate by Sen. Phil Gramm and signed by Bill Clinton. It is this second nest of gamblers, operating under the shadow of the first companies' AAA rating (a scam if there ever was one) that is now bankrupt and has caused the government to nationalize both companies.

Henry Paulson, Secretary of Treasury under Bush and previously Chairman of Goldman Sachs, made the decision that in order to protect the counterparties to the disastrous CDS sold by the AIG hedge fund company the taxpayers were going to have to bail out the unregulated, uninsured gamblers at the AIG hedge Fund side and pay off all those bad CDS even though they were uninsured and had no guarantee of government backing. Ritholtz offfers his suggestion.

What should have been done?
Simple: When we nationalized AIG, we should have immediately spun out the good, solvent life insurance company. It is a highly viable standalone entity.

The hedge fund should have been wound down in an orderly fashion. Match up the offsetting trades, the rest go to zero. End of story.

You as a credit default swap gambler have no reasonable expectation that anyone other than the incompetent firm you placed your bet with is going to make good. You had as your counter party another hedge fund. That was the risk YOU — not the taxpayer — assumed. That is was under the roof of a legitimate insurance company is irrelevant.

Right now, we are into this clusterfuck for $166 billion — every last penny of which is a needless waste.

Taxpayers should not be bailing out hedge fund trades. This insanity must cease immediately .

I agree that this is the decision that should have been made. Why did Paulson not make it? Here are three facts to consider:

• From what I have read, no one knows who the counterparties out there who will be damaged are. Bank secrecy, you know.
  
• But I have also read that Goldman Sachs was AIG's biggest customer for derivatives and CDS.
  
• The disastrous decision to pay off the uninsured debts for AIG was made by Hank Paulson, ex-Chairman of Goldman Sachs.

I can certainly connect the dots and see what probably motivated Paulson, one of the very largest crooked gamblers out of the now failed shadow banking system of Wall Street. How likely is it that he is protecting his fellow gamblers?

Whatever you decide about Paulson's decision, one thing is completely clear. Any so-called bank that is too big to fail is also too big to operate without close, intensive government regulation. Such regulation does not imply insuring their product, though. That needs to be made absolutely and publicly clear.

Here's why AIG is costing the taxpayers over $150 billion and counting

The New York Times has a good article that explains why AIG is in so much more trouble than any of the other financial firms. Go read it. "Propping Up a House of Cards" is a good description.

Next week AIG is going to post the greatest quarterly loss that any American corporation has ever reported. It even surpasses the very worst losses by General Motors. Maybe the money spent to prop AIG up would have been better spent helping Detroit auto firms.

Who was Bernie Madoff?

Julie Creswell and Landon Thomas Jr. at the New York Times attempted to answer that question. Here is an excerpt from the article:

So who was the real Bernie Madoff? And what could have driven him to choreograph a $50 billion Ponzi scheme, to which he is said to have confessed?

An easy answer is that Mr. Madoff was a charlatan of epic proportions, a greedy manipulator so hungry to accumulate wealth that he did not care whom he hurt to get what he wanted.

But some analysts say that a more complex and layered observation of his actions involves linking the world of white-collar finance to the world of serial criminals.

They wonder whether good old Bernie Madoff might have stolen simply for the fun of it, exploiting every relationship in his life for decades while studiously manipulating financial regulators.

“Some of the characteristics you see in psychopaths are lying, manipulation, the ability to deceive, feelings of grandiosity and callousness toward their victims,” says Gregg O. McCrary, a former special agent with the F.B.I. who spent years constructing criminal behavioral profiles.

Mr. McCrary cautions that he has never met Mr. Madoff, so he can’t make a diagnosis, but he says Mr. Madoff appears to share many of the destructive traits typically seen in a psychopath. That is why, he says, so many who came into contact with Mr. Madoff have been left reeling and in confusion about his motives.

“People like him become sort of like chameleons. They are very good at impression management,” Mr. McCrary says. “They manage the impression you receive of them. They know what people want, and they give it to them.”

As investigators plow through decades of documents, trying to decipher whether Mr. Madoff was engaged in anything other than an elaborate financial ruse, his friends remain dumbfounded — and feel deeply violated.

“He was a hero to us. The head of Nasdaq. We were proud of everything he had accomplished,” says Diana Goldberg, who once shared the 27-minute train ride with Mr. Madoff from their homes in Laurelton, Queens, to classes at Far Rockaway High School. “Now, the hero has vanished.”

If, in the end, Mr. Madoff is found to have been engaging in fraud for most of his career, then the hero never really existed. Authorities say Mr. Madoff himself has confessed that he was the author of a longstanding and wide-ranging financial charade. His lawyer, Ira Lee Sorkin, declined to comment.

During the decades that Mr. Madoff built his business, he cast himself as a crusader, protecting the interests of smaller investors and bent on changing the way securities trading was done on Wall Street. To that end, like a burglar who knows the patrol routes of the police and can listen in on their radio scanners, he also actively wooed regulators who monitored his business.

This seems to be the view that is coming out from the investigations into Bernie Madoff's scheme. In a nutshell, Madoff is a psychopath with a real sense of grandiosity and a well practiced ability to lie, a pleasure in deception, no sense of shame and no sense of regret at what he does to the people he manipulates and steals from.

That seems likely to me to be a set of personality traits that are well-rewarded on Wall Street, and similarly rewarded in politics.

For more information on who Bernie Madoff is and his history, here is a link to the Wikipedia article on Bernie Madoff. It contains an interesting technical description of his alleged investment strategy (it helps to know that ITM means In The Money, ATM means At The Money, and OTM meants Out of The Money. For good, brief explanation of those term, see this wikipedia article.)

It is now coming to light that Madoff probably used the strategy described in the wikipedia article, known as collar trades to bamboozle people who wondered how he was making his profits. It is not clear if he started using it and it failed, leading him to move into the ponzi scheme or he simply didn't use it except as a bamboozlement tool. In addition, he had a sophisticated marketing plan that targeted charitable foundations that are required to pay out 5% of their capital every year. By doing that he had a stable set of buyers who could not withdraw everything at once, and only had to offer that 5% return. This avoided the short term problems that normally cause a ponzi scheme to collapse quickly. Then he sold the investments through his country club connections in an affiliation swindle. The article also goes into how the so-called sophisticated investors and the regulatory agencies were bamboozled. For the latter, the general attitude of laissez faire deregulation that has been predominant both on Wall Street and in Washington helped a great deal.

It has been a Hell of a scheme conducted by a an immoral master schemer, and if the entire structure of unregulated banking on Wall Street had not collapsed, it probably would have continued until Madoff died.

Can Citigroup and Bank of America survive?

The question of what Barack Obama is going to do about the financial sector of the economy appears to have come back with a vengeance today. Both have dropped significantly in the market because of the trouble they are in, so now Felix Salmon recommends that they be nationalize instead of bailed out.

Both Citigroup and Bank of America are down more than 20% in early trade today, and I imagine that Hank Paulson and Tim Geithner are starting work on yet another weekend deal of some description, since at this rate it seems that neither institution is capable of surviving in its present form much longer. They should embrace the inevitable and just nationalize the two banks.

Any deal will be necessarily complicated by the fact that Paulson dragged his heels when it came to requesting the second tranche of TARP funds, even after he blew through the first $350 billion in no time. As a result, it's far from clear what money Treasury can use to shore up two of America's most systemically-important financial institutions.

On the other hand, this isn't a bank run: Citi and BofA aren't suffering from liquidity problems. They have all the liquidity they need, thanks to the Fed. The problem is one of solvency: the equity markets simply don't believe that the banks' assets are worth more than their liabilities.

Citigroup's severe problems with mortgage-based investments are well known at present, but Bank of America is the bank the feds have gone to in order to takeover other failed banks. That appears to be BoA's problems. They bought Countrywide, the nations largest mortgage broker, last Spring when it was effectively bankrupt, paying the $4 billion price in BoA stock. Then when the financial crisis hit last Fall and wiped out the big Wall Street investment banks, BoA took over Merrill Lynch. They got a $25 billion subsidy from the Secretary of the Treasury to take Merrill Lynch on, but it wasn't enough. TPM reprts that BoA is getting ready to ask for an additional $100 to $200 billion.

The problem with the great deal BoA got on Countrywide is the sloppy and very frequently dishonest methods they used to sell mortgages. At the time BoA took Countrywide over, it looked like a good deal by one of the few remaining very large banks that was still solvent. Let's not forget, though, how deep Countrywide was in causing the entire Wall Street Credit crisis.

Countrywide Home Loans was a division of Countrywide Financial Corp., which in 2007 was the nation’s largest mortgage lender and serviced $1.4 trillion in loans. It was labeled “the company perhaps most responsible for the mortgage crisis” by Rep. Henry Waxman, D-Calif., chairman of the House Committee on Oversight and Government Reform. Waxman last year blasted the company’s executives for taking astronomical salaries and bonuses as Countrywide’s stock plummeted amid staggering losses from an orgy of subprime lending. The losses ultimately led to Countrywide’s sale last year to BofA. Meanwhile, attorneys general from states across the nation sued Countrywide over deceptive lending practices before 15 of them negotiated an $8.4 billion settlement on behalf of borrowers in the fall.

Both deals depended a lot on what BoA thought the books said the companies were worth. But that was in part before the economic problems had been determined to be so bad that the economy was declared to be in Recession since December 2007, and before the criminal ponzi scheme of Bernie Madoff was exposed. The latter has demonstrated both that Wall Street is rife with fraud and criminality. Taken together it also shows that the audit firms doing the auditing are completely inadequate.

The fact is that nothing today is going to do more than simply allow further digging to find more problems, and the history is that the problem will continue to be of staggering cost. The real question is how much longer the banks will be bailed out using taxpayer money.

It should be clear by now that the banks cannot be trusted to run their own business. The management is complicit in the criminality, fraud and incompetence even if they did not instigate it. The entire American financial structure needs to be rebuilt, with the current managers generally replaced (and the replacements should get paid a lot less.)

So can Citigroup and Bank of America survive? Good question. It looks less and less like they can.

The WaMu story; how the Wall Street banks screwed up

Wamu's story is rather extreme, but unfortunately, not very extreme. The Executives of WaMu simply took the Wall Street philosophy to its logical conclusion.

As you read these excerpts from the New York Times, notice the motivation of chief executive Kerry K. Killinger. Then notice how he influenced the entire bank by choosing and financially motivating the supervisors who worked for him.

On a financial landscape littered with wreckage, WaMu, a Seattle-based bank that opened branches at a clip worthy of a fast-food chain, stands out as a singularly brazen case of lax lending. By the first half of this year, the value of its bad loans had reached $11.5 billion, nearly tripling from $4.2 billion a year earlier. [Snip]

According to these accounts, pressure to keep lending emanated from the top, where executives profited from the swift expansion — not least, Kerry K. Killinger, who was WaMu’s chief executive from 1990 until he was forced out in September.

Between 2001 and 2007, Mr. Killinger received compensation of $88 million, according to the Corporate Library, a research firm. He declined to respond to a list of questions, and his spokesman said he was unavailable for an interview.

During Mr. Killinger’s tenure, WaMu pressed sales agents to pump out loans while disregarding borrowers’ incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients.

WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the bank’s executives. WaMu pressured appraisers to provide inflated property values that made loans appear less risky, enabling Wall Street to bundle them more easily for sale to investors.

“It was the Wild West,” said Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. “If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.” [Snip]

“I never had a clue about the amount of off-the-cliff activity that was going on at Washington Mutual, and I was in constant contact with the company,” said Vincent Au, president of Avalon Partners, an investment firm. “There were people at WaMu that orchestrated nothing more than a sham or charade. These people broke every fundamental rule of running a company.” [Snip]

“It was a disgrace,” said Dana Zweibel, a former financial representative at a WaMu branch in Tampa, Fla. “We were giving loans to people that never should have had loans.”

If Ms. Zweibel doubted whether customers could pay, supervisors directed her to keep selling, she said.

“We were told from up above that that’s not our concern,” she said. “Our concern is just to write the loan.”

The ultimate supervisor at WaMu was Mr. Killinger, who joined the company in 1983 and became chief executive in 1990. He inherited a bank that was founded in 1889 and had survived the Depression and the savings and loan scandal of the 1980s.

An investment analyst by training, he was attuned to Wall Street’s hunger for growth. Between late 1996 and early 2002, he transformed WaMu into the nation’s sixth-largest bank through a series of acquisitions.

A crucial deal came in 1999, with the purchase of Long Beach Financial, a California lender specializing in subprime mortgages, loans extended to borrowers with troubled credit.

WaMu underscored its eagerness to lend with an advertising campaign introduced during the 2003 Academy Awards: “The Power of Yes.” No mere advertising pitch, this was also the mantra inside the bank, underwriters said.

“WaMu came out with that slogan, and that was what we had to live by,” Ms. Zaback said. “We joked about it a lot.” A file would get marked problematic and then somehow get approved. “We’d say: ‘O.K.! The power of yes.’ ” [Snip]

Branches were pushed to increase lending. “It was just disgusting,” said Ms. Zweibel, the Tampa representative. “They wanted you to spend time, while you’re running teller transactions and opening checking accounts, selling people loans.”

Employees in Tampa who fell short were ordered to drive to a WaMu office in Sarasota, an hour away. There, they sat in a phone bank with 20 other people, calling customers to push home equity loans.

“The regional manager would be over your shoulder, listening to every word,” Ms. Zweibel recalled. “They treated us like we were in a sweatshop.”

On the other end of the country, at WaMu’s San Diego processing office, Ms. Zaback’s job was to take loan applications from branches in Southern California and make sure they passed muster. Most of the loans she said she handled merely required borrowers to provide an address and Social Security number, and to state their income and assets.

She ran applications through WaMu’s computer system for approval. If she needed more information, she had to consult with a loan officer — which she described as an unpleasant experience. “They would be furious,” Ms. Zaback said. “They would put it on you, that they weren’t going to get paid if you stood in the way.” [Snip]

The sheer workload at WaMu ensured that loan reviews were limited. Ms. Zaback’s office had 108 people, and several hundred new files a day. She was required to process at least 10 files daily.

“I’d typically spend a maximum of 35 minutes per file,” she said. “It was just disheartening. Just spit it out and get it done. That’s what they wanted us to do. Garbage in, and garbage out.”

WaMu’s boiler room culture flourished in Southern California, where housing prices rose so rapidly during the bubble that creative financing was needed to attract buyers.

To that end, WaMu embraced so-called option ARMs, adjustable rate mortgages that enticed borrowers with a selection of low initial rates and allowed them to decide how much to pay each month. But people who opted for minimum payments were underpaying the interest due and adding to their principal, eventually causing loan payments to balloon.

Customers were often left with the impression that low payments would continue long term, according to former WaMu sales agents.

For WaMu, variable-rate loans — option ARMs, in particular — were especially attractive because they carried higher fees than other loans, and allowed WaMu to book profits on interest payments that borrowers deferred. Because WaMu was selling many of its loans to investors, it did not worry about defaults: by the time loans went bad, they were often in other hands.

WaMu’s adjustable-rate mortgages expanded from about one-fourth of new home loans in 2003 to 70 percent by 2006. In 2005 and 2006 — when WaMu pushed option ARMs most aggressively — Mr. Killinger received pay of $19 million and $24 million respectively.

WaMu’s retail mortgage office in Downey, Calif., specialized in selling option ARMs to Latino customers who spoke little English and depended on advice from real estate brokers, according to a former sales agent who requested anonymity because he was still in the mortgage business.

According to that agent, WaMu turned real estate agents into a pipeline for loan applications by enabling them to collect “referral fees” for clients who became WaMu borrowers.

Buyers were typically oblivious to agents’ fees, the agent said, and agents rarely explained the loan terms.

“Their Realtor was their trusted friend,” the agent said. “The Realtors would sell them on a minimum payment, and that was an outright lie.”

According to the agent, the strategy was the brainchild of Thomas Ramirez, who oversaw a sales team of about 20 agents at the Downey branch during the first half of this decade, and now works for Wells Fargo.

Mr. Ramirez confirmed that he and his team enabled real estate agents to collect commissions, but he maintained that the fees were fully disclosed. [Snip]

By 2005, the word was out that WaMu would accept applications with a mere statement of the borrower’s income and assets — often with no documentation required — so long as credit scores were adequate, according to Ms. Zaback and other underwriters.

“We had a flier that said, ‘A thin file is a good file,’ ” recalled Michele Culbertson, a wholesale sales agent with WaMu.

Martine Lado, an agent in the Irvine, Calif., office, said she coached brokers to leave parts of applications blank to avoid prompting verification if the borrower’s job or income was sketchy. [Snip]

By the time shareholders joined WaMu for its annual meeting in Seattle last April, WaMu had posted a first-quarter loss of $1.14 billion and increased its loan loss reserve to $3.5 billion. Its stock had lost more than half its value in the previous two months. Anger was in the air.

Some shareholders were irate that Mr. Killinger and other executives were excluding mortgage losses from the computation of their bonuses. Others were enraged that WaMu turned down an $8-a-share takeover bid from JPMorgan.

“Calm down and have a little faith,” Mr. Killinger told the crowd. “We will get through this.” [Snip]

In September, Mr. Killinger was forced to retire. Later that month, with WaMu buckling under roughly $180 billion in mortgage-related loans, regulators seized the bank and sold it to JPMorgan for $1.9 billion, a fraction of the $40 billion valuation the stock market gave WaMu at its peak.

Billions that investors had plowed into WaMu were wiped out, as were prospects for many of the bank’s 50,000 employees. But Mr. Killinger still had his millions, rankling laid-off workers and shareholders alike.

“Kerry has made over $100 million over his tenure based on the aggressiveness that sunk the company,” said Mr. Au, the money manager. “How does he justify taking that money?”

This was a disaster caused by Killinger's greed, his excessive pay and his prospective bonuses. But on a more global scale, it was also caused by bankers hiring people who are motivated by money instead of the satisfaction of growing a long term effective business. The clearest example of that in this story is the role of the advertising slogan "The power of Yes." Policy was set to match the advertising slogan rather than to build a bank for the long term, and the proof of its effectiveness was the short-term growth of revenue (which was "jacked up" by dubious accounting.) Since Killinger had been an analyst himself, it's where that attitude came from - Wall Street. All that counts for the company is the bottom line, and financial reporting is done quarterly and annually, while stock market price is considered daily and even hourly.

Killinger had no interest in anything about WaMu except his salary and his excessive bonuses, and Wall Street's short-term obsession with quarterly performance fed right into that. True, the bonus system itself was clearly poorly structured, but remember that it was structured for Killinger by the Board of Directors who Killinger himself had appointed.

To achieve those bonuses, Killinger made sure that apparently high profit but dubious loans were pumped out at high rates of speed (1)by pressuring employees to do whatever it took to sell the loans and (2) by kickbacks to mortgage brokers who initiated the loans and faked the paperwork to make sure they could be sold to investors, then (3) by running loan approval sweatshops in which it was never permissible to say No because saying No meant the supervisors bonus was reduced. In every case the supervisors were motivated by high bonuses dependent on achieving short term goals by any means possible and by ignoring long term consequences.

As an exercise for the reader, consider how and why Wall Street itself, run by bankers motivated by money (instead of building businesses) and obsessed with the latest quarterly reports, has collapsed. Remember that Wall Street itself is now on life support being funded by none other than Henry Paulson, currently Secretary of Treasury and previously Chairman of Goldman Sachs Wall Street Bank. And Paulson himself is using taxpayer money to bail out his precious banks. The Wall Street attitudes that destroyed WaMu dominate Wall Street and have had much the same effect there as on WaMu.