Friday, October 31, 2008

HeNrY rOlLiNs

Saw henry rollins spoken word last night for the second time. He anaylizes the world in a great way. Some of my favorite points that he made:

-Republicans ran there 2004 campaigns on the idea that democrats cant stomach war. Why would anyone want to be able to stomach war. I go to veterans hospitals all the time and see iraq vets with limbs blown off, and lives destroyed and republicans are proud that they can stomach these things? I hope i am never able to stomach these things. I went back to a hotel after my visit to the vet hospital and cried for hours. Republicans say Democrats cannot stomach war and i say good , but i also say republicans cant stomach peace.

-Our nation is the biggest seller of weapons to the world. Peace will negatively affect our economy.

-Rollins met a man in Laos and instead of the man greeting henry with, whats up, how are you , whats going on, he used the phrase what is your life. Rollins said it took him a minute to think about how to answer it. the man from Laos said to Rollins that he used the odd phrase because it provokes thought, and is different.

This reminds me of my trainer, and friend dave. He is a straight up warrior of life. In every category. I cannot recommend him enough. and , check him out if you ever thought about dominating life itself.

Anyway Dave talks about the greeting. In general when most people meet they say how are you. But are they just saying hello? Are they looking for a longer answer than good, i am good? And isnt it true that when you actually answer this question with more than a sentence you catch the person who asked you, off guard. As if they truly did not want to know the essence to the answer of the question, how are you. Really. Tell me whats going on in your life. Tell me whats new. And i think he is dead on. Most people are being curteous and could care less how you are. What about your freinds and family? If you told them how your truly are every time they asked, all the depth and detail, glories and pain, how would they react?

I think about this all the time now. At every greeting. And since i now know what i know, if you ask me how i am im going tell you, especially dave. But i really like Rollins friend from Laos,and his greeting, WHAT IS YOUR LIFE? If you never thought about this do it. One of the most famous philosophies throught history once said and unexamined life is not worth living. And a modern day civil rights warrior said an examined life is painful.

Monday, October 27, 2008

Bush Was Right

I believe that banking institutions are more dangerous to our liberties than standing armies. (Thomas Jefferson, US President; 1743 - 1826)
The only time Bush got it right was what he said about the economy. Everyone Got Drunk.

Granted he said it to a friend, off camera, when no one was supposed

to sneak a recording device into the room.

I have read at least 50 articles, spanning the world wide web about the economy, credit default swapps, mortgage backed securities, hedging, money market acount, the bond market, the paper market, etc. And while i wrote two pieces on the economy already those were wrote during my learning process, this shall be my final paper.

Everything was great until home prices fell.

Than the house of cards fell.(no pun intended)

(ok yes it was)

Starting with foreclosures, leading into the drop in stock prices in the mortgage

backed securities sector, than into a rush to cash in insurance policies, When one couldnt pay they all couldnt, ending in (for now) the falling of giants, Bear, Lehman, AIG.

The story as i have read it, probably started 300 hundred years ago with the

origins of the banking system of this nation and how its built on leverage.

The crash of 2008 grew out of leverage.

If you ask me to borrow money today but promise to pay it back tommorrow with

interest knowing that my bills are due two days from now, I am leveraging.

I am betting my bills that you will pay me back. If you dont pay me

back i am screwed.

Today America is screwed.

Or most of us are, because someone is making out on this whole mess. Just like the Iraq Colonial Expedition (a line from michael hudson)(dont tell him bc i didnt ask to borrow it). While most of us suffer with the expense of blood and gold someone is getting rich off the expedition.

The basic idea of how banks work is that banks takes in savings

deposits and hand out loans. Savings accounts get 1% today, loans pay the

bank 5-10%. But regulation says the bank can lend out


than they have in stock. I think the rate is 30-1. For every dollar in the vault, they can loan out 30 dollars. This creates a problem if all loans stopped being paid than your savings account is finished. This is called a run on the banks and it happened during the 29' crash and the 87' savings and loan. People ran for there savings account, and it was gone.

A Government body the


is supposed to insure deposits so fear and panic wont lead to another bank run. But from what i read, when one bank, the Savings And Loans bank, crashed in 87' the FDIC spent over 50% of its reserves to replenish empty savings account. So what would


if more than one bank crashed?

This is the world of banking leverage. The bank needs to lend to make money. The riskier the loan the more money. Now take it up one notch and you have the world of stock market leverage. Today when you buy stocks or bonds you can invest in a swapp. A fancy word for insurance. So that if your gamble loses you can cash

in your insurance policy and you still win.

Being a swapp and not insurance it does not get regulated. Meaning two things.

1.No one overseas the trading in these markets to look out for dangerous trends.

2. Anyone and Everyone selling this swapp/insurance has no obligation by law to keep stock piles of money on hand in case large numbers of people lose on there bet and seek


cash in their swapp/insurance. My first question is who was the smart guy at lehman brother and AIG who said we dont need no stinking financeial reserves in case people actually want to cash in their insurance. Secondly how come there has not been any prosecutions. If i sold insurance from my porch but never paid out i would be in jail.

This is one of the parts of the Economic trouble. With these types of rules(none) who would not want to get in on the racket. The housing market had increased in value for decades so anyone selling insurance/swapps on anything

mortgage related would have made a

killing for years. Premiums in and no one putting in insurance claims.

Imagine how Gieco would succeed under this model. So Sales of insurance boomed, CEO's raked in the free money. Wall stree bonuses were huge. Remember when the head of the New York Stock Exchanged retired with a 150 million dollars payout package. Time were good.

You could even buy insurance on stock you didnt own. HUH?

Thats right. I know it sounds weird. I mean how much of a killing would i make if i walked into a hospital and began to purchase life insurance on

patients in ICU. I would be betting against the patient. And my bet would be sound.

Well on wall street they are allowed to bet a stock will crash, making money

when the stock crashes. But too many people bet(bought swapps). And every one on wall street was selling them but not putting away funds to pay them off.

And No one in government was regulating. (they used to be but the law was changed)

But many had mentioned this to former Fed chairman Alan Greenspan. Who's job it was to watch over the economy of the country. Yet when he was told about the dangers of an unregulated credit default swapp market, that is estimated to be 50 trillion dollars in a 5 trillion dolar bond industry. That means while only 5 trillion bonds were sold, 50 trillion bets were made on the bond for its success or failure.

(yes trillion i did not make a mistake)

Greenspan said regulating this 50 trillion dolalr market was not needed. But this is not a Republican issue becuase the treasurey secratary under Bill Clinton, Robert Rubin also refused to regulate the market.

Mr. Rubin is now the economic adviser to current presidential hopefull Barack Obama.

Another aspect of this credit default swapp market

(buying insurance on a stock)

is how companies leveraged against each other by buying insurance from one company than selling insurance to another company.

Anything to make a buck.

Why would you want to buy and sell insurance on the same item, if you ever need to cash in the

insurance you have simply have to pay out the check you get, making no money right?


As risk increases so does insurance premiums. If i bought my premium for 10 dollars, but risk has increased current premiums to 200 hundred dollars, than it pays for me to hedge(buy cheap insurance and sell expensive).(remember there are no rules saying i cant buy and sell the same insurance coverage,and none saying who can sell insurance)

The Problem with this type of leverage is when many banks are interconnected, say if AIG cant pay Lehman, than Lehman can pay Bear, than Bear cant pay Wackovia and on and on. Until they all cry bankrupcy uncle. I have seen it a million times.(ok only once)

So now you have these banks linked together in a daisy chain, and you have this industry that is unregulated so no one has to report anything. So much of how each firm acts is secret. This means that if a bank failed in japan it could be linked to any chain and no one knows who is affected by what. And this not knowing,this uncertainty about what banks are sound, who placed what bets, who lied on their balance sheets, this has caused banks to freeze up their lending. No one knows how much risk is saturating each bank.
For example Wachovia was just bought by Wells Fargo for 14.8 billion dollars, yet one month ago Wachovia listed on its balance sheets its net worth was 50 billion dollars. So either Wachovia lost 35 billion dollars in a few days or Wells Fargo is getting 35 billion dollars in free stuff. Or the third option. That Wachovia is lying on its balance sheet.

But lets back up a minute and talk about selling the stock because what good is it to know the swapp story if you dont know the stock story.

Everyone knows what stocks are. Buy low sell high, lets make some money.

Well according to my research there is an estimated 71 trillion dollars of total world savings. This is money that wants to make money and not sit in the bank. The safest bet

over the years has been US Treasury bonds. But Greenspan in the 2000's lowered rates to 1%. Someone who i read, who can read the market says there was a hidden message

in Greenspans actions at keeping the rate very very low. Basically he was telling the 71 trillion dollars

worth of world wealth to not buy US Government bonds.

Go somewhere else.

So searching for somewhere, anywhere to earn more than a measly 1% wall street tried something out that eventually grew into a monster.

Mortgage Backed Securities.

Which are home morgages that wall street banks buy in bulk and package into stock.

It began innocent.

One banker bought a thousand mortgages. This is 2000, 2001. And like clockwork he recieved a check every month from one thousand home owners who paid there morgage to this wall street banker. So instead of earning 1% from government bonds, this banker earned 7%, the morgage interest rate. It was so lucrative that he began to package up more and more mortgages to sell them to this 71 trillion dollar pool of money that was desperately seeking an avenue of investment that would earn more than 1%.

The thing was the these mortgage backed securities peformed so well, because remember the housing market had risen in value for decades. It was a given that my grandma bought her house cheap and would sell it for profit. And because

of their high performance they sold out like wildfire. Eventually wall street called the mortgage firms one day and said guys we need more mortgages our investors are hungry, but the mortgage lenders said sorry, we tried it all, but we have given out every mortgage we possibly could to prime customers(customers that could prove they had a job, downpayment, good credit). Wall street said these things are so hot and we need more so why dont you lower your standarsd, and we will reward you. Do whatever it takes to get us more mortgages.

So the game began.

But first to lower standards we have to have a federal government that would like lower standards and pushed for it. And they did.

So mortgage outfits all over the country, big and small began to lower standards. They wanted to cash in on the feeding frenzy going on on wall street. Greed was an issue but so was competition.

If one street is lined with companies selling mortgages and your firm has the strictest criteria most likely you would do the least business. So not only did the owners

of these companies race to the bottom to survive, but workers in these companies

would constantly push there superiors to lower standard. They didnt want to lose out on a sale.

Standards grew so laxs that 23 dead people in Chicago were given mortgages. And living people were able to get mortgages by not even showing w2 forms. Just answer two questions do you have a job and do you get a paycheck? yes ? ok here is your mortgage. And dont forget the story i broke in my first economic meltdown blog, that some companies were established with the sole purpose of temporarily parking money in a persons bank account so when they went through the mortgage application process they would pass. And when the mortgage was approved the funds were removed, and for this you paid a fee. Some Mortgage firms would recommend this type of service.

Now in the old days when banks would give you a mortgage they would make sure it was sound because the banks plan was to keep your mortgage on its books for the life time of the loan. Not anymore. With the intense feeding frenzy on wall street for as many mortgages as possible, each mortgage firm knew they would be giving a mortgage to a home owner than selling it right away to a wall street bank only to be sold again to an investor in say

china. There was no intimate connection to do the right thing. The mortgage firm had no interest in seeing the mortgage payed off. They got there fee and washed there hands.

And remember no one in the government was watching.

Now the theory was to get as many mortgage loans out as possible, so they gave low or no initial interest rates to make the american dream of owning a home seem within reach. And prices were rising at such a rate, that many sellers of mortgage told their clients that in 3 years when your higher interest rates kick in you would have accumulated so much equity that you will be able to renegotiate your mortgage at a lower rate. This did happen, for years, as long as home prices rose. But could they rise forever? And what would happen if they didnt? Well no and we are living the what happened question.

So you have many parts to the story. The Investor on wall street trying to feed the intense desire of his clients to buy more mortgage backed securities. You have the married couple who is told you can you can now afford your dream. You have the entry level seller at the mortgage firm begging his boss to lower standards and cash in on the rush or he is quitting to join the firm down the block. You have the billionaires in the middle east looking for safe areas to park there money. And you have the Stock Ratings agencies Standard and Poor giving these risky stocks AAA rating when they knew how risky they were.

This is another damning piece to the puzzle. The rating agency happens to be paid, handsomely to rate stocks by the same firms that sell the stock. Stocks that people buy based mostly on there rating. Rating relates risk.

How could they not know the risk in mortgages given out to risky clients would not be a riskier investment as a stock.

The answer is they knew.

Thus another party that should be in jail.

In emails uncovered by the federal goverment there are two quotes from employees at the ratings agencies that gave these risky stocks a safe rating that prove their guilt.

"If a cow asked us to rate a stock we would do it"


"I hope we are rich and retired by the time this house of cards crashes".

This is corrupt and illegal, buttom line.

It became a game to unload risk, knowing that the rating agency would polish up any turd you tried to sell with a perfect, safe, AAA rating.

In fact it became so popular to unload RISK as a stock for an investor to buy that firms began looking at any risk they had on their balance sheet to slice up and dump as a security. And the laws were so lax that

even after the security was bundled and sold, the investment bank that bundled it was able to go in and swap in riskier items, and take out items.

And the man that will save America is the Treasury Secretary Paulson. He was ceo of Goldman Sachs investment firm. Surprisingly, a firm that was left untouched by this mess, yet also a firm that did its share of selling this risky stock but getting out in time. It seems like that was the plan all along, from the small mortgage firm to the big wall street banks, get in , make money, get out. But the house of cards fell so fast that hardly anyone got out. All the wall street giants like Bear Sterns and Lehman brothers that sold the stock were stock with billions of dollars worth of shares on their desk ready to sell them when the people buying them smelled something fishy and stopped buying. These big banks were now sitting on billions worth of garbage, much of the money used to by the stock was taken out as loans.

The mortgage firms all around the country were also left holding a bag of garbage that they took out loans to buy with the expectation of selling the next day. At the height of popularity for these risky mortgages stocks being sold, wall street was calling up mortgage

firms daily telling them we need more mortgages. So the mortgage firms began to borrow huge sums of money to buy mortgages, but they were going to sell them tommorrow to wall street.

But when investors stopped buying from wall street wall street stopped buying

from mortgage firms, and many were left with 100 million

dollar+ loans they could not pay back. Fannie Mae and Freddie Mac chose this death.

Another interesting piece of the puzzle that only one man

i read of talked about was speculators. While prices in the real estate

market rose at dramatic

levels it paid for speculators to begin to buy houses, hold them for 6 months and sell for a profit. Some estimates show that 25-40% of the real estate sales in the 2000's was of a speculative nature. Now the mindset of a speculator does not care about adjustable rate mortgage loans or no interest teaser rates because they will use their loan for 6 months tops.

Once again life was great as long as

home prices rose. when they stopped rising there was no

money in speculating and many got out or faced foreclosure. This paper that i am summarizing argued that the high foreclosure rate cannot be blamed solely on the sub-prime market. His statistics show just as many prime market foreclosures as sub-prime.

Which expels the republican myth that this problem

has to do with people who took out mortgages

who could not

afford to and who should have known better. And I hope this blog entry shows that that idea is only 1/1o of the story.

Saturday, October 25, 2008

Be A Man America, Lets make some Magic

A friend of mine said a great line the other day. With every animal on earth the theme is that the strong survive. Not so with humans. We make sure the weak not only have a shot, but we let them rise to the top.

Case in point the economy. Welfare for the rich. No competition. Free market when in times of boom Socialism in times of bust. No accountability. Market forces are supposed to set prices, not corporate giants in collusion with each other.

But I'm confused, I thought our country practices capitalism, and free market principles so why is the government bailing out firms? Isn't a tenet of the free market theory to not interfere and let the weak die and the strong survive. Your not the only one who is Confused.

Many confusing ideas have grown more evident over the years. For example, are we a Democracy? If so why did the supreme court select the President of the United States in the year 2000 while stopping the vote count, and expressing in its opinion that it would be safer to pick someone that leave doubt while searching for the truth. Oh and they also ruled that no where in the constitution is their a right to vote for president.

Or do we have Fascist tendencies. Everyone hears the word Fascist and immediately thinks of Hitler and concentration camps for Jews. But that was the philosophy of a crazy man. The idea behind Fascism is the merging of Business and State. To me this idea is seen in America where corporations are said to control congress. They sponsor elections. They not only see most bills they support become law they usually help right them in order to increase business. And usually once the author of a bill passes the law for say the telecommunications industry, said congressman gets a meaty offer to quit congress and work for the telecommunications industry. Bribe? Corruption? Coincidence? Or the natural order of a Fascist state?

Or should we all hang our heads and admit that we live under a dictatorship? A prison with goodies. If i put you in jail, but give you a huge cell, like the size of a house. And I give you a job so you can pay for that nice house. And I let renovate the house. And I let you get a nice job. So you can buy a nice car, an ipod, and a laptop. Maybe take a vacation here and there. And I let you have newspapers (run by my prison guards). I supply your children with schools run by my prison guards. Your job is run by my prison guards. Cross my guards and I take it all away. Praise and support my guards and you get more goodies and a bigger house and better vacations and a nicer car.

This sounds like a system that will support the weak and handicap the strong.

Basically what i wanted to say was about the economy. Were most people shocked even me, yes. Should we have been, no. Forgetting about the mortgage crash for a second and look at the obvious.

As a nation we buy more than we sell. We have more credit than savings. Our government borrow money everyday just to function. If we followed this plan on an individual level we would all be in a soup kitchen and sleepy on the sidewalk. As a nation we have lived like a college kid with his first credit card and not like an adult.

The phrase we should leave our kids a better nation/world than we inherited seems lost. What happened?

As individuals and as a nation we need to grow up an start acting like adults. If your name is Bear Sterns, AIG, or Bank of America and you cannot manage your company you are weak and you should fail. Just like all those mom and pop shops that were put out of business when Walmart rolled into town. No one cried for them and they were our blood. Yet our Congress cries for these corporate monsters that have grown larger than some nations. They have no national loyalty yet we are told they are too big to fall. Borrowing from my favorite phrase, REALLY?

If I was in charge and some used the phrase to big to fall around me I would tell them to shrink. If you are too big to fall than you are too freakin big.

Last year when Joe the plumbers cousin, Susan the Walmert clerk, when she got sick had to be hospitalized and couldn't pay her credit card bills or mortgage and is now homeless was she not big enough to fall? When did the corporate machine become more valuable to our nation than an individual down on their luck?

Bear Sterns took excessive risk, gambles like anyone would go to Vegas to do, and they lost. Susan the Walmart clerk was struck by an act of god. She got sick.

Why is it that France has faster Internet service than America? And better cell phone service? Its because they still practice a little something called competition. If two guys own a deli on the same block in a natural world they will compete to win the customer. Service goes up. Deals pop up. Quality goes up. Innovation shows its face. But what we have in America is only two huge deli's that have gotten together and teamed up against the consumer. They keep prices high, service down, and innovation and quality go out the window.

They believe they are doing good. There stock might even go even and they might even turn a profit. But inside their spirit grow weak. Challenges make men, and complacency makes men weak. Weak men create weak nations. Weak nations attract weak leaders, building weak bridges, creating weak dreams, and creating weak schools, to indoctrinate the next generations for the weak culture.

The weak men have conformed and have been chosen to lead the next generation. And they have been rewarded with stock options and islands, and imported vehicles.

Could you are I create a start up bank today to compete with JP Morgan/Chase/ Bear Sterns, or whatever that gigantic company is called now.

Is it any surprise that our Detroit auto makers cannot compete with foreign car makers. They know no matter how bad business is our government will help them out. What kind of motivation is this for them to innovate and improve.

Why is it that there is still a law on the books from the 70's when oil companies couldn't make money that paid them to stay in business. Subsidies. So that last year when the oil companies made record profits quarter after quarter, breaking new records, these oil companies were still getting subsidies from the government.

Why is it that our Government also subsidizes the farm industry. If left on its own, the farming industry in the U.S. would not survive. But instead of making them take responsibility to live or day the Government pays them enough to continue growing so they can stay in business while putting foreign farmers that they compete with out of business.

What is the worry with giving them the opportunity to sink or swim. We are so afraid of sinking that no one is swimming anymore. We are a nation floating with safety tubes on our arms and its time we grow up and take them off. I mean how silly would it be to see a grown man in the pool with swimmies on his arms. Even my 5 year old daughter would giggle(if i had one). (if i had two they both would giggle)(a lot) ( because one would feed off the other one's giggle, which would create a cyclical effect feeding the other one, and so on an so forth, until both would giggle at maximum giggle capacity).

Where are all our innovators? Where have all our leaders gone? The last ones I remember have been taken out, JFK, Bobby Kennedy, Malcolm and Martin.

Remember when the Brooklyn Bridge was built? Remember when we landed men on the Moon? That was magic. That was innovation. Where has all the magic gone? China made magic at the Olympic games during the opening ceremony. It was glorious to watch.

I want my country to make magic again. I want to make magic. Don't tell me I cant. And I better not here you say you cant either.