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Sunday, February 28, 2010

Goldman execs stand to profit in FDIC deal

The unfolding mortgage crisis could get a lot worse, for the taxpayer at least. I'm looking back through my history of sites visited under the term "FDIC" and I see numerous articles alarmed by the FDIC's dire fiscal condition.

A few weeks ago, I stumbled across a great video blog entry on how the FDIC was compensating OneWest--a bank owned by major Goldman Sachs players--for every house it sold at less than initial loan value. OneWest acquired the loans from failed lender IndyMac in 2009 based on FDIC assurances that their losses on IndyMac loans would be subsidized.

The revised video entry dated Feb 8th, by thinkbigworksmall.com, contains a thorough accounting of how the OneWest/FDIC deal works. The two fellas at thinkbig provide a real world example of how OneWest profits from their "loss share agreement."

The FDIC responded directly and hotly to the charges, in a press release dated February 12th. It offer a list of Supplemental Facts that explain how much risk and debt OneWest absorbed, as well as restrictions and procedures on receiving FDIC funds.

The FDIC response churned up some mainstream interest. WallStreet Journal's marketwatch brings up a you-tube response to another purchase of a failed lender by OneWest:
Earlier in February, the FDIC responded to a YouTube video that criticized its transactions with OneWest. The video has been removed [not sure if this is that of thinkbig, which remains posted], but FDIC spokesman Andrew Gray said in a Feb. 12 statement that it made "blatantly false claims" about the loss-sharing agreement.
The FDIC may be particularly sensitive about OneWest because it was formed in early 2009 when the regulator sold IndyMac to a group of private-equity and hedge fund investors, including former Goldman Sachs Group Inc. executive vice president Steven Mnuchin, as well as George Soros and J. Christopher Flowers.
John Paulson, who made billions of dollars betting against mortgage securities during the housing crisis, is also an investor.
The MarketWatch article, written by Alistair Barr, goes on to quote one analyst who said it "...was unusual for the FDIC to respond to criticism from outside the mainstream media." In other words, the FDIC tends to ignore criticism, because I doubt the mainstream media dares to criticize it much (accounting for the atypical nature of its response to the blogosphere.)

The thinkbig guys actually use the FDIC response to bring up what they deem a "huge" point: that the OneWest people only get their subsidy if the bank's losses exceed $2.5 billion or so. In other words, OneWest makes money if the homes they got from IndyMac collapse in value; no reward should they be able to sell them at a profit. According to the video, until OneWest "hit(s) that magical $2.5 billion loss mark," they have no incentive to offer loan modifications.

So in a broader sense, the FDIC deal with One West, and others like it, insure that the real estate market won't recover because the banks who take over loans from failed banks only get compensated for losses. OneWest has no reason to try and salvage what it can from IndyMac's mortgage portfolio--instead it can capitalize on the terms of the deal which more fully compensate OneWest if it can't sell the homes at full value, a prospect made infinitely more likely by the FDIC's reward-for-failure guidelines.

Goldman Sachs has been riding the taxpayers' money train for quite some time. They've been able to exchange their political influence at the highest levels of government for favored status as a bank holding company. They experienced record profits and bonus in 2009, in a year which saw their competitors struggle. The Goldman edge: cronyism. Bush Treasury Secretary Paulson was a former Goldman CEO reputed to have made $400 million while there. Former Goldman executives have served as economic advisers for the White House at the top or second highest positions.

Big media has always undersold the nexus between government and private sector, I suppose to further the myth that those who get ahead in our society do so by hard work and a level playing field--a notion the recent crisis (and those who've profited from the response) makes patently absurd. I'm indebted to the excellent work--real journalism--offered by the thinkbig guys and Tyler Durden at ZeroHedge who've exposed the techniques through which Goldman profits by cronyism. These methods are not only insidious but complicated. Easy it is to look at the methods by which financial companies make their money and assume they're simply to hard to understand. As a matter of fact, regulators complicit in the regulatory failures, and the entities that exploit them count on the lack of transparency and complexities of their dealings to keep them secret, a fact we see play out whenever the Federal reserve is called on to explain where the money went.

Now OneWest could argue--or the FDIC, since quasi-government agencies (read implicit guarantee) and Goldman Sachs are so often united in their purpose--that their purchase of IndyMac saved the government millions. Then again, the FDIC letter states that the entity isn't supported by federal taxes, a point which only emphasizes the FDIC's negative $20 billion balance and the impending necessity for a bailout.
Daryl Montgomery at seekingalpha.com explains:
"Its deposit insurance fund is now at a negative $20.9 billion. Despite statements that it has enough cash to keep operating (Bear Stearns and Lehman Brothers made similar claims), it is only a matter of time before the FDIC is bailed out. This will take place before the end of the year and will be done by tapping a line of credit from the Treasury department. Expect this event to be downplayed by mainstream media reports with claims that it is not really a bailout."

Contributions made by banks which supposedly cover the FDIC's costs are wholly inadequate. The consequence will be a massive bailout probably to exceed that of the S&L crisis during the Eighties, which came as the result of risky commercial real estate deals by the S&L's, coupled with inadequate regulations, associated with a group of Senators called the Keating Five.

Add to this the nefarious role GS played in the Greek debt crisis. Apparently several years previous to the crisis, a team of Goldman witchdoctors dispatched to Athens to hawk their derivatives shell game recommended that Greece enter into currency swaps, in a move that delayed budget problems and reduced the debt load in the short-term. As best as I understand it--Goldman simultaneously bought credit default swaps which would pay big in the event of a collapse of Greek debt. In other words, GS played both sides: sell the politicians on a debt proposal which ran counter to their longer term fiscal stability while betting on the higher risk of default through the Credit Default Swaps.

The same pattern played out with AIG. At one point, GS CEO Blankein actually told AIG to default, although GS was owed billions. Few people could figure out why Goldman was willing to let AIG default, being that it was owed so much by AIG, until of course they realized that Goldman had insured their loans to AIG with CDSs which would pay off big if AIG defaulted.

Th regulatory environment has failed for two reasons. First, those in government, particularly those with too-close connections to former employers, must maintain distance and impartiality, in what's known as "arm's length." With a revolving door between Goldman and the White House, not to mention Congressional staff and department aides, this impartiality is impossible.

The second problem areas are what are called fiduciary responsibilities--managing others' money. If Goldman was selling products it knew to be risky, it was violating legal and ethical boundaries. If Goldman saw the broader systemic risks which made the CDSs so appealing, why did it steer clients towards taking on more exposure to debt (and risky, exotic derivatives at that) amid what Goldman knew to be deteriorating market conditions?

There's a pattern to these plays on systemic risk: create volatility, then prosper off it. Goldman's exemplary results in 2009 indicate that the company was either very lucky or had foreknowledge of the pending collapse and took steps to profit from it. The absence of regulatory enforcement either allowed the opportunity to arise through disaster capitalism, or the entities that gained from it set up the conditions that made it happen, a la 9-11.

The Federal Reserve has recently pledged to investigate Goldman's Grecian deal-making gambit. I don't know how effective the Federal Reserve can be, being that its regulatory oversight responsibilities were so utterly ineffective leading into the crisis. It's doubtful that industry self-regulation is possible through the Fed, as it is owned by a group of banks it purports to regulate. The Fed's effort to manage public perception through an internal investigation that won't be made public can hardly force accountability.

Additional source
Robert G's blog explains the math in one example of OneWest's deal management tactics and acumen. In an update dated February 16th, Mr. Hertzog denies he had anything to do with the video, although his figures were used by thinkbigworksmall without his consent.

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Thursday, February 11, 2010

9-11 Photos and Crotch-bomber hint at more than negligence

As I look at recently released aerial photographs from 9-11, the cloud issuing forth from the collapsing building looks like a banana peel. I'd seen in the documentary Loose Change how similar the building's collapse was to a pyroclastic flow. A pyroclastic flow is one generated by heat, like a volcano, and it puts out a distinctive smoke cloud.

Looking at the photos, ask yourself: doesn't the trajectory of the smoke and debris indicate an explosion? Since when does a collapsing building send smoke in a pattern like that, which looks more like the impact of an artillery shell?

Then of course there are all the inconvenient truths like the fires that burned for weeks in the basements. Where no air can get in, only thermite can burn. Or the reports of explosions. A sequence of explosions triggered by nano-thermite would pulverize the concrete and send it up into the air, not a simple collapse.

No wonder these photographs weren't released for more than eight years after the event! And then, it took a Freedom of Information request to get them out in the public view.

Seeing what I could dig up new on the photos at the site 911truth.org and came across a cross-posted article, "Amid media blackout-Congressional hearing reveals US intelligence agencies shielded Flight 253 bomber," by Alex Lantier of wsws.org.

On first read, in its beginning the article doesn't really surprise me as the superficial elements of the Abdulmutallab story were pretty clear. Young extremist gets radicalized. Gets on plane. Detonates bomb. Fails. Kind of like the shoe bomber Richard Reid. Not a lot there. At first.

Personally, I'd dismissed the story. It'd come on Christmas. The bomb hadn't detonated. No one had been killed.

As I'd read things through, I saw that much could have been attributed to government ineptitude. We all know that the much ballyhooed National Security State has holes in it bigger than Swiss cheese. So it'd come as no big surprise that the young Nigerian's name hadn't come up on a no-fly list-or had, yet been misspelled or some such clerical error.

So what if Abdulmutallab hadn't made the list of terrorists? Heck, Edward Kennedy had been on it at one time. Its membership had expanded to over 500,000, with many false positives. The performing artist formerly known as Cat Stevens, a convert to Islam now named Yusuf Islam, had necessitated a redirection of one inbound cross-Atlantic flight some years ago. He'd apparently given money to some Islamic charity.

After a certain point, a list of that size begins to lose meaning and reads probably more like a list of enemies of the state than a list of real threats, who aren't likely at all to get their name out as martyrs for their cause, at least until after they've been martyred. See the great article "The Backfiring of the Surveillance State" by Glenn Greenwald, first appearing in Salon.

Then there were the details about the so-called "crotch-bomber," as Abdulmutallab has been referred to in less than glorifying terms. Details provided in an interview with an American waiting in the terminal area. He'd said Abdulmutallab had been accompanied by an older man of Indian descent, and that he'd listened in to an extended conversation between the Indian man and the airline employee at the check-in desk in Amsterdam airport.

The Indian succeeded in getting Umar onto the plane without a passport! This was a clear breach of every airline protocol imaginable. No identification? The thought that someone could board the plane without any ID boggles the mind.

Then fast-forward to the full-body scanners that have since been installed at Heathrow Airport. These devices are prone to abuse because they reveal the human body by seeing through clothes. Apparently a celebrity's picture had been kept and passed around among the screeners at Heathrow.

Then there are the people selling the body scan machines, which are slated to be installed in airports everywhere. Not surprisingly, they are sold by companies directed by former intelligence agencies people, including former Department of Homeland Security chief Michael Chertoff. Chertoff has been accused of leading a massive cover-up for the real participants in the 9-11 bombings. I can't attest to the validity of those accusations, but Chertoff is a hardcore Zionist sympathizer, and any involvement in 9-11 by our own government would certainly involve people like Chertoff whose loyalty clearly lies with the interests of Israel, which were and are to justify an open-ended war against Islam.

Anyway, back to Abdullmutallab and the Lantier article. Lantier explains that during a Congressional hearing a State Department official admitted that "US intelligence officials had interceded to block a visa revocation."

Passing the buck from State, Director of National Counterterrorism Center Michael Leiter said there'd been a failure. This was an obvious statement. Leiter went on to talk about the threat posed AQAP, the Al Qaeda-affiliated (for whatever that's worth) group in Yemen.

Lantier goes on to decipher all the intelligence-ese concluding the inaction to push Abdulmutallab onto the watch-list "came despite the fact that US intelligence agencies were well aware of the threat posed by AQAP." Lantier then acknowledges that "the US government did not declare AQAP a terrorist group until January 19, 2010"!

Ok, enough said about the official explanation. No one appears to have been held responsible for the blatant breach of security. Chertoff's scanners of course have now been funded and scheduled for installation in airports throughout the world.

That change of perspective could be attributed to simple bureaucratic mismanagement or something darker--like disaster capitalism, the classic form of opportunism outlined so eloquently by Naomi Klein, in which government incompetence feeds the impetus to privatize, which ends up costing taxpayers big. Of course the contracts for work previously done by government flows to cronies and those with the most influence--like former officials and politicians.

The process of doling out juicy contracts to the private sector is clearly one that requires close cooperation between government and the private sector, a role that typically calls for former bureaucrats and politicians to act as go-betweens and lobbyists. Naturally career bureaucrats nearing retirement are quite sympathetic to private industry efforts being that many find a second job at companies like Chertoff's once they retire.

The body scanners are a motive that can't be dispelled by simple bureaucratic incompetence. I'd say the enlargement of the National Security State creates demand for terrorism, as if without it the massive bureaucracy would be starved of money, power, and influence. Naturally, with such power at its fingers, the NSS is prone to find threats everywhere; upon discovery of these threats--in places where they're least expected--the NSS justifies an expanded mission for itself.

Scarily, it's only a matter of time before the NSS turns its eyes on the domestic security environment. Creating a surveillance society is clearly one way to find threats: scrutinize any population hard enough and the boogeyman will be surely be found, which invites persecution of minorities, and anyone who dares resist the expanding power of the state.

Lanier ends his article noting similarities between 9-11 and Abdulmutallab's case. In both examples, the intelligence agencies who are supposed to protect us took odd and unusual steps to prevent doing their jobs as effectively as possible. Of course bureaucratic incompetence becomes a great cover whether or not the intelligence lapses were intentional.

Fortunately, the crotch bomber didn't end up killing anyone. Yet we find ourselves wrestling with the explanation of why the event occurred, and discovering lapses in judgement that seem far too deliberate. Yes, it's possible that Abdulmutallab was being farmed along in order to disrupt the organization which radicalized him, and planned his mission. And I guess the intelligence services would want to see the plan go along, but only up to a point that it doesn't threaten American lives.

At a certain point those responsible for our safety must intervene to stop acts of terror that they know will likely be committed. If they don't maintain an accurate list of radicalized Islamic threats (especially those whose parents specifically warn us, like Omar's) they act not in our defense but in support of the enemy. And if our military and intelligence services aren't protecting us, what good are they?

See Lantier's article here.


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