AIG and Goldman -- Where our tax dollars are going

More about who we were truly bailing out in the AIG bailout:
http://www.reuters.com/article/ousiv/idUSTRE48R3HQ20080928

Bail Them Out or Jail Them -- Where is RICO when you need it!

Before I post another letter I wrote in response to my congressman's ill-advised vote to subsidize fraud, let me first direct the reader to the following link for a brief discussion of RICO - Racketeer Influenced and Corrupt Organizations Act. The main thing to take away from a discussion of RICO is that it can be applied to Securities Fraud such as the Mortgage Backed Securities. The parties involved may be Appraisers, Bond Raters, Investment Bankers and others who knowingly enabled the defrauding of Sovereign Wealth funds, foreign investors, and in the final stages American Pension funds and others with bundles of mortgages they knew were of low value. (If they didn't know, then they should be prosecuted on the grounds of criminal neglect with respect to their fiduciary responsibility.)

Honorable Congressman,
With all due respect, please consider this [ Wall Street bailout ] bill and the previous bailout of AIG to the tune of 85 Billion and the information that we have subsequently found out. The firm of the Treasury Secretary Henry Paulson was on the hook to the tune of 20 Billion dollars if AIG failed to make good on their end of the financial engineering efforts currently in play at Goldman Sachs. According to a recent New York Times article the AIG deal saves Goldman Sachs $20B . The article was published on September 27, 2008.
It is also well known that some of the current tightness of the credit is a direct consequence of actions by Treasury and the Federal Reserve such as increasing the reserve requirements for banking institutions. More money on reserve, means less money to lend, hence higher rates. Ergo, we have a manufactured crisis, with a tailor made solution that will allow the unwinding of financial engineering products with the taxpayer picking up the loss, while Goldman Sachs, and private individuals have their fortunes protected.
Yes, I do understand how the loss of $20 Billion will hurt Goldman Sachs and the Treasury secretary, but unless this matter of legislation is done in the full light of day and several months of critical review, I won't see why the proposed legislation helps the nation as a whole. I will hear after the fact from you and other legislators about how sorry you are for the error and that you had to "trust" those who had a consistent history of not being trustworthy.

The securitization of mortgages with well known, predictable weaknesses to defraud Asian investors and sovereign wealth funds that wanted to get a better return than U.S. Government bonds that were yielding less than 2% after 9/11 is more deserving of an application of the RICO statutes since it took active collusion between banks, appraisers, the GSEs, and others than a bailout from the public treasury.

Please take a listen to the following episode of the NPR program "This American Life" entitled "The Giant Pool of Money" which tries to explain the securitization process and the fee based motivation for the fraud. A transcript can be found here: http://www.thislife.org/extras/radio/355_transcript.pdf

Please look at the big picture. One example:

20 percent of U.S. power is provided by 100 nuclear reactors

Cost per reactor is about $2 Billion ( presuming economics of scale and using 1 design), we get from a back of the envelope estimate that we could build about 500 1 GigaWatt Nuclear Reactors for the expected $1 Trillion cost of this bill (and its children).

That would cover close more than 100% of our power needs and leave maybe 5 to 20 percent of the power capacity available for export to Canada and Mexico. We would be totally free of the need to import foreign oil. Lower power cost could even subsidize future bailouts of the financial services industry if you like!

Please develop that "Vision Thing" that we expect from our great leaders. If we can find a Trillion dollars at the drop of a hat, to bail out the hedge funds and children s "Financial Engineering" toys (MBS, CDO, swaps) then perhaps we should measure twice and cut once to deploy American treasury for planned, well thought out actions that may lead to real prosperity for many, rather than just the comfort of those who do lunch with Paulson.

Sincerely,

<anon>

As the Sun Sets in America

As the sun sets in America, the Congress and Senate of this land waits to see what sunrise in Asia will bring with the new day. Will they pass a favorable judgment on a debtor nation, or will they vote thumbs down by placing sell orders in the stock and credit markets.
Truly, this is a sad moment when a proud nation has found out that its leaders have been leading them astray on a path that leads to debt and servitude. The main product of the Financial Services Industry is debt.

The following is a recent letter I wrote to my Congressional Representative

Honorable Representative,

I’ll be straight to the point. Please vote against "The Emergency Economic Stabilization Act of 2008".

Please enact no legislation on this matter till after the elections and after a proper analysis of the problem and proposed solution can be scored by the Congressional Budget Office and other American and World Institutions.

Please have the expenditure also scored against a “zero base” review of how 700 billion to a trillion dollars can be spent to improve the health and welfare of the American people.

In the midst of all the talk of foreclosures, it seems that one of the major reasons for foreclosure in America has been forgotten. It is to cover the medical expenses of a sick citizen.

For most Americans, losing a job is just a part of life, losing one’s health care insurance or not being able to afford a decent education for self or children is about losing life and future.

I can understand how House Speaker Nancy Pelosi with millions of dollars of California real-estate and McCain with 7 or 10 million dollar homes may consider the current situation a circumstance where other peoples money must be put at risk immediately to protect the “public interest”, but many may say they have too many dogs (or dollars) in this fight to reason objectively about this issue.

There is no one I know who cannot delay buying their next home till next year, or their next car till the spring. On the other hand, if you have some exotic options, or interesting derivatives that are ticking their way to near expiration date, I can well understand why they may be getting a antsy about now!

I can think objectively about this issue and will consider carefully how my vote is used in November. I expect you to do the same --- this week!

Sincerely,

Starving the beast

Another recent letter to my Maryland representatives (with edits and modifications):

Honorable Senators and Representative,

Please keep in mind Reagan OMB chief David Stockman's reason for the excessive tax cuts and resultant deficits during the Reagan administration. The policy was called euphemistically: "Starving the beast".

Generating structural long term economic failure by sending our hard earned cash into stuff we can't see (derivatives and option's that can expire with zero value) is just another "Starving the beast" strategy. This will tie the hands of many future administrations.

Use the 700 Billion for a comprehensive "Industrial Policy" that will rebuild America's capacity to build items of real tangible value: Computers, Automobiles, Telecommunications hardware, Pharmaceuticals, Bio-Engineering, and derivatives that have real value: Software, Education, and an Educated population. Lets stop importing high school teachers from the overseas at low wages. Pay elementary and high school teachers a wage higher than the 70 percentile of the population. You will then never have a discussion again about the quality of the schools due to the competition by qualified candidates for those jobs. You usually get what you pay for!

Concentration of wealth in the financial sector is a sign of a society entering a major declining phase.(Kevin Phillips, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism)

If you vote for this bill and others like it without considering the entire "Industrial Policy" issue, this go around won't be called "Starving the Beast", it will be known as "Killing the future". If our decision makers continue with the current "lack of industrial policy", this will certainly be known as the China Century.

Sincerely,

<anon>

700 Billion for WHAT?

This is what I recently wrote to my Maryland federal representatives:

If these mortgage derivatives are so complex that the businesses that paid Ph.D mathematicians and physicists to construct them don't understand them, then why is it that overnight or in a matter of weeks we will be seeking to place all this "toxic waste" on my balance sheet!

Please consider the model of FDR during the run on the banks in the 30s. He did not say, “Oh. These banks have lost a whole bunch of money by imprudent investments and improper lending, lets give them $700 Billion dollars to continue what they were doing before!”. FDR closed the banks. He had the books examined, then re-opened the viable among them with appropriate guarantees.

It is not possible to send good money after bad on a faulty business model. If tomorrow, a terrible financial tragedy such as the Chinese and Russians decide to liquidate all of their Mortgage Backed Securities from Fannie Mae and Freddie Mac, then perhaps a direct intervention should be done. But even in that case why intervene? If they dump good MBSs on the market at low prices, it would allow the American People to buy overpriced debt for pennies on the dollar and hence it may even help underwrite the high cost of some ill-advised mortgages that many recent buyers have.

It is not lost on me that the threats posed by Russian and the many Asia MBS holders to the current interest rate levels. I suspect the threat of 20% interest on new mortgages and car loans may have a tendency to focus the mind. Well guess what you could use that $700 Billion to a Trillion dollars that is burning your pockets. It could be used to subsidize future mortgages offered by Fannie and Freddie. Ergo, at the closing table have GSEs show up and buy whatever points are needed to buy down the mortgage rate to a percentage equal to current inflation rate plus one percent (the normal appreciation rate of residential real-estate for the last 70 to 100 years!).

Please consider the following calculation:

(1 Trillion dollars ) / (2 million foreclosures ) = $500,000 per foreclosure.

I am sorry, but this just does not COMPUTE!

I truly think that the problem may be that Goldman Sachs and other firms may have a few unexpired options with expiration dates spread throughout the coming year that 700 Billion may help cover. Please don’t fall for this.

As far as granting job security to Wall Street executives who failed basic math and failed to realize that the purpose of derivatives is to decrease the volatility of returns, not increase them, I don’t think so! As a student of mathematics and basic finance myself, I assure you that these fellows well understand what they have on there books and what is in Congress. They have on their books some bad bets, and in Congress they hope that they have enough folks that are gullible enough or corrupt enough to bail them out.

Please just let the market work and flush the “bad money” out. Don't let them rail road you into "stupid stuff" like the expected 3 trillion dollar bill for the current Iraq adventure that if you divide by 30,000,000 Iraqis nets out to about $100,000 per Iraqi citizen.

Please don't have the history books cite you and the other current office holders as the “most simple” group of legislators the world has seen. Please read the fine print, the same way I have on 5 fairly priced contracts my wife and I have offered on homes in Maryland. Each contract rejected because of some higher bid placed by folks who were probably not offering any down payments nor reading anything but the lips of the real-estate agents, loan officers, and appraisers who assured them that a $300,000 dollar house was worth $700,000 and that real-estate only goes up in price. (Please tell that to the Japanese after the last 15 years that they have experienced.)

One of the most dramatic effects of having NO bailout is that concerns such as Infosys and SATYAM may have less money to fund outsourcing efforts! Ergo, more American software and electrical engineers can stop trying to sell real-estate and start paying off those mortgages they took out by working at jobs that they trained for.

The London Economist starting tracking the problems in real estate 2002, sounded alarm in late 2004: http://www.economist.com/finance/displayStory.cfm?story_id=3477796.

The inflated values have been known by regulatory officials for some time: Real Estate agents informed me in late 2004 that the FBI has begun threatening jail time for fraudulent appraisals:
http://realtytimes.com/rtapages/20050202_appraisalcrisis.htm (Apparently, they took no action!)


A discussion of the Mathematics, dynamics, and Psychology of the Real Estate Bubbles delivered at a conference sponsored by the Federal Reserve and the World Bank
http://realestate.wharton.upenn.edu/newsletter/bubbles.pdf Keep this one in mind as you see Federal Reserve officials pretend at surprise and amazement at the on going difficulties in the Real Estate market. This was presented in 2002 about the same time that the Economist started tracking the phenomena.

The following article is a real gem. It outlines in a fairly complete fashion the geometry of the mechanisms that created the bubble:
http://www.washingtonmonthly.com/features/2004/0404.wallace-wells.html

Please note that the article is dated April 2004 and cites information from the London Economist which noted that the current situation was a CERTAINTY, with the historical data to support the thesis.

Let the market work and use that $700 Billion to give my neighbors and my family healthcare and a quality education system that we as Americans can be proud of.