Totally Free Checking Going Away

Bank of America may lead the banking revolution away from totally free checking.

Bank of America Corp. and its rivals are moving away from free checking accounts as they grapple with losing millions in fee revenue from new regulations on overdrafts.

BofA is quietly testing new pricing plans on checking accounts nationwide, The Wall Street Journal reported Thursday. The newspaper said the Charlotte-based bank

(NYSE:BAC), which ranks fifth in Raleigh-Durham market share, is considering tiered pricing plans that encourage customers to do more business with BofA to avoid charges, rather than imposing flat monthly fees for all.

Overdraft fees were touted by the administration as one part of their crackdown on banks.

Banks will have to secure their customers' consent before charging large overdraft fees on ATM and debit card transactions, according to a new rule announced Thursday by the Federal Reserve.

The rule responds to complaints from consumer groups, members of Congress and other regulators that the overdraft fees are unfair because many people assume they can't spend more on a debit card than is available in their account. Instead, many banks allow the transactions to go through, then charge fees of up to $25 to $35.

For small purchases, such as a cup of coffee, the penalty can far exceed the actual cost of the transaction.

Of course, ironically enough, this was part of a populist push to take on the banks on behalf of the middle class. Totally free checking has become a staple among all the major banks for the last decade. If that goes away, that's a fee on everyone that has a checking account (though the plan is to only charge those with only a checking account and waive fees on this with multiple accounts) That would bring pain to far more of the middle class. That appears to be the end result of yet another regulation.

BofA to Consider the Reduction of Mortgage Balances

Bank of America will become the first bank to consider the reduction of mortgage balances as part of their mortgage rescue plan.

The program, while limited in scope and available by invitation only, signals a significant shift in efforts to deal with the millions of homeowners who are facing foreclosure. It comes as banks are being urged by the White House, members of Congress and community groups to do more to stem the tide.

The Obama administration is also studying whether to provide more help to people who owe more on their mortgages than their homes are worth.

Bank of America’s program may increase the pressure on other big banks to offer more help for delinquent borrowers, while potentially angering homeowners who have kept up their payments and are not getting such aid.

Citigroup is also said to be making such a consideration. So far, the program will be extremely limited.

This was a bone of a debate between myself and Wade Rathke. Rathke was adament that the reduction of balances was critical not only to giving borrowers an affordable mortgage but to show a correct balance sheet for banks.

That's because we've seen the reduction of real estate values and Rathke believes that mortgage balances need to reflect that or banks are showing assets that are simply not realistic.

I see all these programs as foolhearty and so this would only extend a misguided policy.

Bank of America Cuts Ties with ACORN

This broke earlier this morning.

Bank of America Corp. is suspending its work with the housing affiliate of embattled community organizing group ACORN. The decision comes as three Republicans in Congress ask Bank of America and 13 other financial institutions to give Congress a complete accounting of their dealings with the Association of Community Organizations for Reform Now or its affiliates.

In a statement, Bank of America said it would not enter into any further agreements with ACORN Housing Corp. until the bank is satisfied all issues have been resolved. ACORN Housing Corp. and Bank of America have worked together for years on mortgage foreclosure issues.

This is important for a number of reasons. First, we've heard about a number of governmental agencies that were cutting ties to ACORN. Then, the Congress voted to cut off all funds to ACORN. Yet, ACORN has downplayed all of these actions because in their assertion, they get most of their money from private sources. Well, Bank of America is private. It's also a major donor of the group. So, this is no small hit to the group.

If this were a boxing match, ACORN would be slowly taken apart by a fighter like Floyd Mayweather Jr. They continue to take blows from every side. None are themselves a knockout but it's clear they are getting their clocks cleaned. From time to time, they counter like when they announced they would sue, James O'Keefe and Hannah Giles, but ultimately they are slowly being taken apart. What we are watching is the slow dismantling of this group and there's really nothing they can do about it.

It's an almost certainty there's more tapes. The media coverage isn't letting up and there's so much corruption to report on the media will be busy for years. Meanwhile, having BofA cut them off is the equivalent of a tough body blow. You can bet there will be more body blows to come. Like all boxing matches, body blows add up until the fighter finally disintegrates under the weight of a constant barrage. That's what's happening to ACORN. They're not ready to fall yet, but it's only a matter of time until they drop and are knocked out entirely.

Too Big To Fail? Even Bigger

That's the supposition from this WAPO article.

Today, the biggest of those banks are even bigger.

The crisis may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.

J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.

Now, if you understand the dynamics that lead to the creation of financial institutions that became too big to fail, then none of this is any surprise. So, first here are the three main dynamics that lead to too big to fail.

1) Bank Deregulation

This bill passed in 1999. Essentially the bill broke down the proverbial wall between a commercial bank and an investment bank. As such, there was no longer a separation. The example I use is that Merrill Lynch and Paine Webber were now able to provide checking accounts. Even today, Etrade has checking accounts. This is the mundane and reasonable part of the bill. The more sophisticated part was that bank could get into investing. Banks could get into loan securitization. All sorts of financial business could be done by the exact same institution. This lead to the second dynamic.

2) Merger Mania

Mergers aren't new. I am not saying that the last ten years were the first time that banks merged. There were two differences. First, with bank deregulation, it was no longer bank merger but financial services mergers. Citigroup wouldn't have happened before 1999. That's because many of the financial services that Citigroup engaged in wouldn't have been legally done together before 1999. On top of this, with any good economy, there often follows more merger activities. That's because businesses see many more opportunities during booms. So, we had more mergers. On top of this, we had more sophisticated mergers. These created super financial services firms like Citigroup and AIG.

3) Unimaginative Regulators

If you've read my work frequently, you know I'm no fan of regulations or regulators. One area where this is different is in the case of monopolistic behavior. I believe that Sherman isn't used nearly enough to break up monopolies. In the case of financial mergers, what we had was something similar to emerging monopolies. Instead, we had regulators that couldn't imagine what the failure of newly merged companies could do. Citigroup does insurance, mortgages, investments and banking. It's failure would spread through the financial system. The regulators also were asleep when it came to what AIG was doing in credit default swaps and the risk this was causing to everything else. The regulators simply didn't have the imagination of what the brave new world of bank deregulation and mergers could do to the market.

So, with those three things in place, everyone said no more. Yet, nothing much has changed and in fact the crisis, and government's response, have only made things worse. Just think about what has happened. Almost no financial institution has failed. Any "failed" institution was immediately bought out usually with the government's help. When Washington Mutual failed, it was immediately bought out by Chase. When Merrill Lynch failed, it was immediately bought out by Bank of America. Most financial institutions of any size are immediately swooped up by financial institutions of even bigger size.

Well, Chase was big enough before. What do you think happens when you add WAMU and all its bank accounts? Now, Chase owns one in ten deposit dollars. Bank of America was already massive and now they have Merrill Lynch and all its financial dealings. In other words, these institutions were already too big to fail. They were to big too fail because they did everything and massive institutions merged with each other. Yet, knowing all this, the government not only looked the other way but even at times encouraged more of this behavior. There was a time when Bank of America was just a bank. They're know a financial services institution, and a goliath one at that. It's so in part because the government pressured it to buy Merrill Lynch rather than have Merrill fail and be broken up.

Yes, in a perfect world, these companies would fail break up and be sold for parts. As such, new smaller companies would be created. No more would you have golaiths. In this climate, the regulators are frightened of what might happen if a goliath were to fail and be forced into bankruptcy. As such, they rush to get another goliath to buy before that can happen. Of course, by doing so, they create an even bigger company. So, no one should be surprised that too big to fail is even bigger.

Some Perspective on TARP, Bank Profits, and the Economy

The second quarter's earning reports are nearly over and there has been a remarkable turnaround by many of the nation's banks and financial services companies. Many posted profits and some even posted rather robust profits. For instance, Goldman Sachs reported second quarter profits of $3.44 billion. Yet, when you look behind the numbers, it's clear that Goldman benefitted tremendously from government assistance and used barely little of that assistance to filter into the economy.

This week, Wall Street superpower Goldman Sachs announced second quarter net profits of $3.44 billion, far exceeding expectations. Earnings per share also rose, to $4.93 from $4.58 a year ago. This is a promising sign that the battered financial industry is on the mend, but it should be noted that Goldman didn’t do it alone. In fact, at least some of these profits were made possible by guarantees, low-cost loans and other assistance from the federal government.

...

Goldman also benefited from artificially inexpensive debt thanks to the FDIC’s Temporary Liquidity Guarantee Program (TLGP). This program put a federal guarantee behind bonds issued by Goldman and other banks, including Bank of America and JP Morgan Chase, making them far more attractive to investors. For example, when Goldman sold $5 billion of 3.5 year bonds in November, it was able to attract buyers while offering a yield only 200 basis points higher than ultra-safe Treasuries with similar maturities. Altogether, Goldman issued $28 billion in debt using this program between November and April.

...

Finally, it should be noted that Goldman Sachs and other major financial players are benefiting from a Federal Reserve program that allows them to borrow funds overnight for close to zero percent. Designed to catalyze economic activity and keep interest rates low for businesses and consumers, the program has also boosted bank profits by widening the spread between the cost of their incoming and outgoing capital.

...

Shrewd business decisions by Goldman traders (along with a reduced field of competitors) were undoubtedly responsible for a good share of the profits being crowed about by the firm this week. Notably, the firm cashed in on profit margins for commodity and foreign exchange trading that, according to the Financial Times, now stand ”between two and eight times higher than before the height of the financial
crisis.

So, what do we have? Godman received $10 billion in TARP funds. They received government guarantees on their debt. The government's bailout of AIG put an extra $11 billion into their pockets. They received access to low interest government loans. Furthermore, they benefitted from nearly zero percent short term Fed interest rates. What did they use all of this cheap money for? They used it to beef up their trading desks in commodities and currencies. Little if any of this money was filtered back into the economy in the form of business, commercial, and residential loans. In fact, Goldman has unloaded all its sub prime mortgage divisions. They still have a commercial mortgage division but all of commercial real estate has amounted to $15 billion for the first six months of the year. So, essentially, the government gave Goldman Sachs a big fat bailout and then Goldman used that money in a way that lined its own pockets while doing little for the rest of the economy. In fact, given that some of their profits were due to commodities trading you could even say they hurt all other Americans by speculating up the price of oil.

Then, there's Citigroup. Citigroup made $4.29 billion this past quarter. Yet, that profit was made entirely, and then some, by their sale of Salomon Smith Barney which they sold for $6.7 billion to Morgan Stanley Dean Witter. Of course, had they gone into bankruptcy they still would have sold Salomon Smith Barney but it would be sold for much less. By infusing Citigroup with $40 billion, the government allowed the company to stay afloat and continue operations. Those operations largely consist of investment banking and trading. The company's profits have little to do with any loans they are making. Much like Goldman, Citigroup took their bailout and pocketed it to increase their own profits without having much of that filter into the economy at large.

Then, there's Bank of America. Bank of America's profits fell but still posted of just over $7 billion in profits. Yet, it was all of its consumer operations that saw contractions. In the meantime, investment banking, mergers, and trading operations increased. In mid last year, Bank of America cut off its wholesale mortgage residential lending operations. It still has a retail residential mortgage division but those operations are being reduced not increased.

Next, let's look at Chase Bank. Chase Bank also posted unexpectedly robust earnings. Those earnings were created almost entirely from investment banking activities. Chase dissolved their wholesale residential mortgage operation in the fall of last year. They still have a retail residential mortgage operation and they still have a commercial mortgage division. (though again commercial mortgages have been non existent this year) Yet, it is their investment banking division that is making them all their money right now. In other words, the tax payers gave Chase billions so they could buy out WAMU and help other companies complete mergers that they were involved in. Little of that money filtered back into the economy at large.

Finally, there's mortgage giants Fannie Mae and Freddie Mac. Last fall, the taxpayers gave those two companies a bailout of nearly $50 billion. In fact, the bailout became so large that the government now is a majority owner in the two companies. In fact, the current market cap is about one fiftieth of the government's injection of the two. They were saved presumably to unfreeze the credit markets. Yet, since their bailout, all both have done is make credit more difficult to get. They've created break points for credit scores in the beginning of the year. They created new break points for condominiums. At the beginning of May, both created new rules for appraisals that have created an extra layer of headaches. It's now nearly impossible for anyone to get a loan with a loan to value of over 80% with either.

In fact, the access for residential mortgages continues to get more and more difficult. All that's happened since the bailout of both is that the difficulties have come more slowly. In other words, credit has continued to tighten only the tightening has slowed down.

Finally, there is the issue of loan modifications. Banks have done about one tenth of the loan modifications that the president wanted done by now, about 500,000. The situation has gotten so critical that Barney Frank has threatened to re introduce the so called cramdown rule which would allow bankruptcy judges to force loan modifications on bankruptcy proceedings. As such, these banks are so reluctant to modify loans for struggling borrowers that Frank wants to take out of their hands.

The president is fond of saying that TARP saved the financial sector from the brink of collapse. That maybe so but the financial was saved in order to continue activities that line the pockets if the players in the financial system and few others. The president is also fond of saying that the credit market has loosened. That's just nonsense. Commercial mortgages are non existent. Residential mortgages continue to be more and more difficult to get.

There's an irony here. The president attacked the Republicans for being too close to big business and their relationship didn't filter to the rest of the country. That's exactly what the TARP bailout, and all other financial bailouts, has created. Financial institutions like Goldman, Chase, Bank of America, and Citigroup were kept afloat rather than having to go through the dififculties of bankruptcy. It cost taxpayers $750 billion. The massive cost was justified because we were told that these institutions were necessary to the rest of the economy. Yet, we all saved these companies from themselves and all they've done is continue to engage in activities that make money for themselves that does little else for the rest of the economy. If the president claims that we saved the financial system from the brink of disaster, that might be true. If the president claims that by doing so, that has helped the economy at large, the evidence simply doesn't back him up. As such, the president has done exactly what he demonized his political opponents for doing.

The Stress Tests: Facilitating Back Door Nationalization

In fact, I predicted this about three weeks ago. The long awaited stress tests are in and they are largely in line with what has been leaked. Ten of the nineteen largest banks need more money. They need just under $75 billion total and it's lead by Bank of America that needs $35 billion.

So, now comes the hard work of finding this capital. There are only a few different ways for the banks to do this. One is to go into the private market and borrow or otherwise attain the capital. Of course, we come to banks when we need money. So, it's very unlikely that banks will borrow money from someone else. Second, they could sell some of their assets. Of course, all assets are so depressed that this would be the worst time to sell off parts of their companies. They could also issue more shares of stock. In fact, some have announced this.

Citigroup, Wells Fargo and Morgan Stanley, which will need to raise capital following the government's stress tests, announced plans to for common stock offerings.

Of course, issuing more shares dilutes each current shareholder, and furthermore, who's going to buy common shares in banks that have been openly been told they are in need of billions of dollars.

So, that leaves one option left. That is to convert preferred stock to common stocks. Guess what entity is the largest preferred stock holder in all these banks. That's right it is the U.S. government, and of course, one bank has already announced they would do this.

Citi plans to expand its public exchange offers previously announced on February 27 and said the deal could increase tier 1 common stocks from first-quarter level of $22.1 billion to as much as $86.2 billion.

The company said the U.S. government would own about 34 percent of Citi's
outstanding common stock.

So, Citigroup is already nationalized, and Bank of America et al will follow soon. This is back door bank nationalization.

The FDIC routinely does these "stress tests". They are always done privately. Never has such a test attracted such attention. Why? One effect is that banks will have a much greater difficulty getting more capital. Everyone now knows exactly how deep in the hole Bank of America is.

Some say that these tests being public means that lending will increase. That's a naive thought. These banks have been told they have six months to raise $75 billion. How would this mean that banks will lend more? They need more money themselves.

In effect, these banks have been publicly exposed as needing more money. It's more money that no one will give them. As such, they will be forced to do the only option available and that's to nationalize themselves.

Some More Thoughts on the Looming Commercial Mortgage Disaster

The periods between 2005-2007 were especially booming periods for commercial mortgages. This is important to understand because commercial mortgages are overwhelmingly done as balloon loans. What this means is that borrowers pay a monthly payment for a set period of time, usually from 5-7 years, and then the balance is due, the balloon. So, what this means is that the years from 2010-2013 will see an explosion of balloons coming due on commercial mortgages. In fact, about $1.4 trillion will come due in those three years.

Commercial real estate has tanked along with real estate in general. It's important to understand that commercial real estate value is inherently a function of the cash flows generated by the commercial property. The most simplified way to understand this is that the value of a property must carry a mortgage that allows for cash flows to be 120% of all expenses. While there are certainly variations, this is a baseline point.

Well, since the collapse in commercial real estate, what we have seen is several things in commercial properties. First, vacancies are up. Second, rents are down. Look at this way. The original loan was done with the assumption that rents would be at say $700 monthly, but now they are at $500 monthly. Furthermore, it was done with the assumption that the commercial property would be 90% occupied, but now it is only say 70% occupied. Since both drive down cash flows, what this means is that any new loan will be significantly less than the one that was taken out originally. Keep in mind that balloon payments will be coming due starting in full force in 2010. As such, a property that carried a million dollar mortgage in 2007, might only qualify for a mortgage of $750,000. Yet, that same property will have a balloon payment near one million dollars. As such, in order to avoid foreclosure, the borrower, or seller if it is sold, would need to make up the difference in cash. Now, multiply that by $1.4 trillion and you see the scope of the potential problem.

Essentially, this is all a race against time. In order to avoid this financial disaster what needs to happen is for the economy to bottom out, credit to loosen, so that both vacancies and rents increase and so that all of these potential differences will be available. Of course, we are talking about differences of 20-30%, and currently, banks are themselves struggling to raise capital just to stay afloat.

If the economy doesn't recover enough, then banks will be faced with an extra $1.4 trillion in "toxic assets" on their books. In commercial real estate, far fewer loans are securitized, about a quarter. About half are held by the banks themselves. Often, they are the very same banks currently struggling to stay afloat. Just think about what this means. Bank of America for instance is being told, reportedly, it needs another $30 billion in new capital. This doesn't take into account the potential for a flood of commercial mortgage defaults. Imagine the dire straits that BofA would face if they held a significant portion of a portfolio of $1.4 trillion in new "toxic loans".

This would all come at the worst time. There is now a growing narrative that things are bottoming out and soon they will improve. If they don't improve soon enough, the American public will be lead to believe that the worst is over only to be hit in the head with a brand new disaster starting in the first quarter of 2010. President Obama would likely be touting a recovery for several months until a brand new crisis unfolds. All of these banks would start to finally see the end of the tunnel only to be hit in the head with a brand new round of mass defaults. Whatever recovery we may or may not see will be wiped out and then some by the economic disaster that will follow the commercial mortgage bust.

"Manageable Losses"?

The financial world seems upside down to me. On the day it was leaked that Wells Fargo, Citigroup, and Bank of America had failed their stress tests each of their stocks was up. The market was up nearly three percent. That day, the leak said that six banks had failed their stress tests. Today, that number rose to ten and the market was down just slightly.

To me, it appears that the market and everyone near it is trying desperately to spin any news as good news. While these stress tests were still being administered, most analysts cried foul. The going narrative was that the stress tests were designed to be too easy to pass in an attempt to cover up for bad news. Now that more than half have apparently failed, the new narrative is that the losses are "manageable".

US regulators are working with the top 19 banks on Tuesday to put the final touches on the results of regulatory stress tests, which are expected to reveal about half the banks need more capital but face manageable losses.

How manageable are the losses though? After all, we've already poured three quarters of a trillion dollars into the banking system. We have set up a plan to remove their so called "toxic assets" at above market prices. Yet, half of them still need more capital. Are these losses really "manageable"?

Then, there is the stress test itself. It hasn't been released but what has been leaked says that they ran the test as though unemployment was at 10.3%. This was supposed to be the worst case scenario. Unemployment is now 8.6% and after Friday it will likely be about 9%. We should reach just over 10% by about September. Would it really be shocking if our overall economic picture was soon enough worse than an unemployment rate of 10.3%? If so, how many banks would fail then?

There's yet another part of this that makes no sense.

The results—due to be unveiled on Thursday—will likely show that the largest U.S. banks do not need dramatic new government interventions, which could further drive the recovery of banks' stock prices and signal an exit strategy for the government's intimate involvement in the sector.

Keep in mind that ten of the nineteen banks will be required to raise billions in new capital. Well, no one in their right mind in the private sector will give them any money. So, they will have to come to the government. It's even possible that many will convert preferred stock into common stock. So, how exactly will this end the government's "intimate" involvement with the banks?

It's like we are in an alternative universe where all bad is really good. Stress tests that no one should have failed were failed by more than half, and this is good news? Then, everyone will have to rush back to the government for more money, and this is a sign the government is done with their intimate involvement with said banks. I think everyone is deluding themselves. Of course, the problem there is that we all face reality at some point.

I'm Still Bearish and Here's Why

The numbers tell a story. We are entering this week following six straight weeks with every major average moving up. Most averages have gained about 20% or more from their lows six weeks ago. Furthermore, these moves haven't happened all on their own. They have been responses to not only better than expected earnings but all sorts of better than expected economic data. So, now the question is asked. Are we at the beginning of a sustained rally or is this still a bear market rally? I continue to remain bearish and here's why.

First, while we have seen a rally it has also been very volatile. Significant volatility, like what we continue to have, is a sign that the market is driven by traders not investors. Traders are in it for the short term. Investors are in it for the long term. If this is driven by short term traders, then it's also driven by technical rather than fundamentals. That's a sign of short term up not long term.

Second, while the numbers have been good, in reality they have merely been better than expectations. It isn't as though people are happy with the economic data per se. Rather, they are happy because it isn't as bad as they expected. That's how markets work. We have expectations and then the market responds depending on whether or not things are better or worse than expectations. Well, now we've had a six week run. Now, people expect more of the economy. Now that the expectations are higher there is a bigger likelihood that we won't meet expectations.

Third, the bank earnings are mostly smoke and mirrors. Almost each and every bank that made money, made it through accounting for one time activities like buyouts. That's what happened today to Bank of America. They crushed earnings but deep inside the numbers we find out that most of their earnings occurred by the way their buyout of Merrill Lynch occurred. Remember, they received a whole bunch of TARP funds and so in fact the tax payers funded those earnings.

One analysis has near $5 trillion in so called "toxic assets" that remain on the books of the banks. That's no minor problem and it isn't going away. I have little confidence in the Geithner plan to deal with them, and so in my view, the banks continue to have significant long term structural problems.

Fourth, we continue to lose north of five hundred thousand jobs monthly. What kind of an economic recovery includes half a million in lost jobs monthly. Yes, we've all heard that jobs are a lagging indicator. In other words, the rest of the economy recovers first and then jobs come back. Also, during 2002-2003, the economy began to gear up while we lost jobs. This happened mostly because productivity improved dramatically and so we didn't need more jobs. That's not happening now, not on the scale it was. If half a million people are losing their jobs monthly, I don't see what kind of a recovery we are having.

Finally, from my perch in the mortgage industry, I can tell you that credit continues to be frozen. In my seven years, this is by far the most difficult period to get a loan done. There are long waits. Banks routinely go out of wholesale mortgages. Programs are changing daily, and the guidelines continue to get more and more restrictive. If credit is still frozen, then what recovery do we have? I don't see how we can have any sort of sustained recovery if credit is frozen. That's what we have now, and it is getting worse not better.

I still continue to be more bearish than most. I made the prediction that the Dow would reach 5000 and I am holding to that.

Chris Dodd's Unique, Brazen, and Dangerous Corruption

Chris Dodd is likely not the most corrupt politician to ever grace our landscape, though he will give a lot of folks a good run for their corrupt practices money. What is truly stunning about Dodd's corruption is the combination of its brazen nature, his proximity to power and influence in the one industry most in need, and that no one seems to much care besides the voters of Connecticut hopefully in November of 2010.

I was first introduced to Dodd's corruption when it was revealed that he got multiple sweetheart loans from Countrywide. He repaid Countrywide with a bill known as Dodd/Frank. This bill would have allowed for hundreds of billions worth of "toxic loans" to be removed from the books of the newly formed Bank of America (which bought Countrywide at reduced prices because of these loans) and move them onto the books of the tax payer through FHA. Fortunately, this bill was very poorly written and so only a few hundred loans were done under the bill.

Yet, Dodd's revelations of corruption were only just beginning. We later found out that over the last twenty years it was Chris Dodd that is the single biggest beneficiary of campaign funds from both Fannie/Freddie. More than one eyebrow was raised when last July Dodd pronounced both to be "viable". It certainly appears to me as though that confidence was bought and paid for with twenty years of campaign contributions.

In the 1990's, Chris Dodd was tied to a questionable land deal in Europe with convicted insider trader Edward Downe of Bear Stearns. The latest revelation involves a massive amount of money coming from AIG into the campaign coffers of Dodd. Furthermore, yesterday it was revealed that upper management practiced pseudo extortion in "encouraging" lower level folks to contribute to Dodd's campaign.

What's truly amazing is how brazenly Dodd has moved from one corrupt deal to another. Even more amazing is that he continues to be head of the Senate Banking Committee. As such, Dodd is in a position to influence each and every player that he has been linked to corruption with.

As we endure a massive economic contraction centered in banking, we have the head of the Senate's Banking Committee linked to an endless stream of corruption involving the very banks he will be overseeing. Does anyone trust that his decisions won't be influenced by all of the corruption he is tied to?

Are we really to believe that a person this corrupt, in a position of this much power, will do what's right? Are we really to believe that such an explosive combination won't have explosive consequences? Dodd is now in a position to influence everything from future regulations, bailouts, TARP dollars, and the toxic asset buy out. Yet, it is undeniable that his decisions have been compromised. Yet, he not only continues to sit as head of the Banking Committee but there isn't one person in a position of power demanding that he be removed. Every entity from Bear Stearns to AIG has been tied to his corruption and they will all be deeply in bed with the government for the indefinite future. Yet, no one seems to think that Dodd's place as head of the Banking Committee will cause any problems whatsoever. I am here to tell everyone that a deeply corrupt person in a position of power is the worst combination and that's exactly the situation with Senator Chris Dodd.

Some Thoughts on the Last Four Trading Days

The market has been rather choppy so far with the Dow moving from up 50 to down 30 and everywhere in between. I won't venture a prediction on where it finished, however unless there is a monumental shift, this will be a very good week for stocks all around. So far, the Dow is up about 9% and most averages fall somewhere there abouts.

How did this come about? The market has centered on several pieces on news and formed a "narrative" for the short term. The first bit of news was a leaked internal email from the CEO of Citigroup to staff suggesting that the company had turned an operating profit for the first two months of the year. Right after this, the February retail sales numbers were reported and they were better than expected and just about even. The latest bit of news also comes from Citigroup where their chairman suggests that the company has turned the corner and doesn't expect to need any more tax payer capital. Bank of America also made a similar suggestion. Also, GM reported that they won't need anymore cash for NOW. Now, there has been all sorts of bad news reported as well. There was some bad employment data. A new report showed that foreclosures were up about 30% in February and several Treasury nominees withdrew their names.

That the market latched onto the good news and made significant gains as a result tells me that it was "oversold". Oversold is, in my opinion, overused, however, in this case, I use it specifically because the market latched on to good news and ignored bad news. That tells me that there were a lot more people looking for a reason to buy than to sell. Now, in reality, while oversold seems like a firm level, in fact it is often a very short term dynamic. A level that is oversold one week, can easily be broken through the next week. That's why short term trading is so difficult in the market.

What concerns me much more than the short term movement is some of the drivers of it. I have no reason to question the veracity of the retail numbers, however I do believe they are an anomaly. The same month they were relatively even we lost almost 600,000 jobs. It's unlikely that retail sales will continue to stabilize if we continue to lose this many jobs. It's even less likely that a stabilization in retail sales will lead to a stabilization in jobs. As such, while we have seen a small reprieve, I don't think these numbers are in any way indicative of a trend.

That is not necessarily all that troublesome. What is troublesome is the multiple announcements by Citigroup, Bank of America, and GM. If we are to take these announcements, along with the retail data, at face value, then we might be looking at the most over hyped "crisis" ever. Now, take a look at this opinion piece from earlier in the week.

Here's the problem: Today's true market value of the U.S. banks' toxic assets (that ugly stuff that needs to be removed from bank balance sheets before the economy can recover) amounts to between 5 and 30 cents on the dollar. To remain solvent, however, the banks say they need a valuation of 50 to 60 cents on the dollar. Translation: as much as another $2 trillion taxpayer bailout.

That kind of expensive solution could send the president's approval rating into a nose dive. Consider: $2 trillion is about two-thirds of the tax revenue the federal government collects each year.

The logical alternative -- talk show hosts' solution du jour -- is to temporarily restructure or nationalize the banks and leave taxpayers alone. Remove the toxic assets, replace management and cut the too-big-to-fail financial dinosaurs into smaller, nimbler entities. Then reprivatize these smaller banks and let the recovery begin.

Now, either reality is more like what is presented in this piece or it is more like what the higher ups and Citi and BofA are presenting. The author of this piece is claiming that not only is there a serious solvency problem, but that to resolve it would require the Treasury to overpay for all of these "toxic assets". Both Citi and BofA are saying that they have turned the corner and they won't even need any more capital injections.

Then, there is the issue of the email from the CEO proclaiming the first two months were profitable. The leaked email provided no context and of course it is unclear if it was ever meant for the viewing of the general public. This too seems rather dubious. We don't know if his calculations include any write downs, or if they are simply measured by cash flows. It seems rather hard to believe that into the teeth of a serious recession that this bank would somehow be turning profit. Not but a month before this was leaked, they negotiated for the Feds to inject cash and take over about 40% of the company. Were they really doing this will turning a profit? The stock market was down about 20% in the period in question. With all their investment related divisions, were they really able to turn a profit into the teeth of a serious bear market?

Then, there is GM. Back at the beginning of February, the CEO of GE said that he didn't see any reason why GE would need to cut dividends. At the end of February, GE announced they would need to cut dividends. That's what this announcement reminds me of. Did I miss something? Has GM figured out a way to make money? If not, how long before they need a cash infusion? After all, the last one was supposed to be a bridge until they restructured. I have heard nothing of a restructuring. So, unless I am missing something, GM is going to run out of money rather soon.

I say this because the market suffers from both a crisis in confidence and in credibility. Bankers and CEO's are not to be trusted right now. If they come out and make dubious forecasts only to find out later they were far too rosey, that will boomerang in an awful way once the truth is revealed. If sometime in early April, GM announces they need more money PRONTO, then, that won't only crush GM but the entire market. If the first quarter reveals heavy losses for Citigroup, that would be nothing more than a crisis in confidence and in credibility. It would mean that no one is to be trusted. If no one in the market is to be trusted, then investment Dollars pour out in waves. I can only hope that this short term rally is NOT built on dubious outlooks and predictions because if they are, god help us all when the truth comes out.

Citigroup and the Absurdity of TARP

There was lots of news reported on Citigroup this morning.

The giant but troubled Citigroup (C) reported an $8.3 billion loss Friday morning, and said it would split itself into two separate companies -- effectively ending its era as the “financial supermarket” molded by legendary Citi CEO Sandy Weill.

Citigroup, which had seen its market value cut by a third this week, reported a fourth quarter loss of $8.29 billion, or $1.72 a share, compared with a loss of $9.83 billion, or $1.99 a share, from a year ago. This was Citi’s fifth-straight quarterly loss since the financial crisis started in August of 2007.

The loss was much more than the $1.12 a share analysts were expecting, according to Thomson Reuters. Excluding one-time items, Citi lost $2.44 a share.

Now, what is happening at Citigroup is a microcosm for the absurdity of TARP. First, before this report, Citigroup received $20 billion in TARP money. Yet, that wasn't enough for Citigroup to make the difficult decision of breaking itself up.

Just last week, Citigroup announced that its best performing division, Smith Barney, would be sold to Morgan Stanley. What's important to understand about the current financial crisis is that all of this is occurring because far too many got far too deep in the Mortgage Backed Securities with sub prime loans as the underlying financial vehicle. What's important is that mega financial companies have perfectly capable investment arms, banking arms, insurance arms etc.

In other words, while it is clear that Citigroup is through, Smith Barney is a perfectly viable investment firm. The same could be said of Merrill Lynch's flagship investment firm. The same could be said of all sorts of financial companies.

Had we not have had TARP, many of these companies would have failed. Then, their profitable assets, like Smith Barney, would have been swept up by so called vultures. Their unprofitable assets would have been sold at deep discounts and then their debtors would have tried to collect whatever they could have. That's what happens in capitalism.

Yet, the Feds convinced all of us that such a process could not occur or the whole entire system would fail. It's of course a prediction that can't be tested. Yet, we also learn that Bank of America just got $20 billion. Yet, BofA has been busy buying up a lot of these troubled assets. Clearly, they aren't at risk of financial collapse. They can't be or they wouldn't have been so busy swooping up a lot of the weak players. In other words, BofA just used tax payer money to buy up these weak players.

Had we allowed the system to transform on its own, BofA's everywhere would have swooped in to buy bits and pieces of failing financial institutions. Make no mistake, many players were in trouble but not all. The Hartford is not in trouble. Warren Buffet's, Berkshire Hathaway, is not in trouble. There are plenty of other banks and other institutions that are plenty viable to swoop up the good assets. Instead, we have carried weak players and allowed them to continue when what should have happened is that they met the fate of Merrill Lynch and Bear Stearns. That's how capitalism works. That's how it has always worked, and prior to now, no one screamed the sky would fall if it was allowed to work. Yet, it seems that now is different, and the natural course of capitalism couldn't be allowed to occur. I believe the fate of Citigroup is proof that folks like me were right and they doomsayers were wrong.

Senator Dodd to the Autos: Pot this is Kettle You're Black

Chris Dodd made this stunning announcement yesterday.

General Motors Corp should replace its chief executive if it receives emergency
government loans to avert likely collapse, a U.S. senator drafting bailout
legislation said on Sunday.

Another senior Democrat involved in the matter said negotiators expected a final deal by Monday, but he was less sure whether there was enough support in Congress to help GM, Ford Motor Co and Chrysler LLC.

"Obviously, that's a much more complicated question as to whether the votes
are there," Sen. Carl Levin of Michigan told "Fox News Sunday."

Senate Banking Committee Chairman Christopher Dodd of Connecticut said on
CBS's "Face the Nation" that GM and Chrysler, also facing a likely near-term bankruptcy without help, should probably merge.

Now, this annoucement isn't stunning because it isn't accurate, I think it is very accurate. It's stunning however for it unbelievable chutzpah. Personally, I think that any company that asks for a bailout has inherently shown total failure of its upper level management inherently. The mere act of asking for a bailout means that the CEO has failed in their duties and needs to go. You have proven incompetence when your "leadership" means your company is begging the government for money.

That said, for Senator Chris Dodd to complain that someone else needs to be removed from their position of power is the ultimate pot calling the kettle black. This is the same Chris Dodd that as head of the Banking Committee received not one but two sweetheart loans from Countrywide while investigations of Countrywide were ongoing. Talk about a leader with conflict and one that has been compromised, that leader is Chris Dodd.

Beyond this, I have written often of the corrupt bill that his name on it passed this summer. This bill which had the fingerprints of both Countrywide and Bank of America (which wrote major parts of the bill after providing Dodd with thousands in campaign contributions) would have had the FHA take over $350 billion worth of troubled loans from troubled borrowers. So far, thankfully, this bill has been an abject failure. While about $350 billion has been allocated, so far only about 100 loans have closed on this bill. While that is better than the alternative which is to unleash the fury of this corrupt bill, its abject failure speaks to the lack of effectiveness of its author, Chris Dodd.

Finally, as head of the Banking committee since 2007, he has overseen the meltdown in the industry. While he has overseen it, he has done nothing to warn, stem the tide, or in any way shape or form contribute to making the situation any better. Instead, he has gotten into bed with most of the corrupt players that made it happen.

While I agree that the CEO of GM, and every CEO that asks for a bailout, must go, so to must Chris Dodd. I hope to see him out the door of the Banking Committee right behind the CEO of GM.

Monday Bloody Monday

That's the only way to describe the economic hurricane to hit Wall Street this morning. Lehman Brothers is filing for Chapter 11. Merrill Lynch is being bought out by Bank of America for half what it was worth a year ago. Finally, AIG is on the bring of destruction and looking for financing.

First, this latest hurricane of bad news on Wall Street should indict the current Federal Reserve policy. I was weary of the Fed's aggressive action in saving Bear Stearns from financial disaster. At the time, the Fed not only acted as the Federal Reserve and opened up its coffers to back the deal. The Fed also acted as an investment banker and a rainmaker. It brought Bear Stearns and JP Morgan together. It negotiated the deal, and it even extended a line to make sure the deal went through. Most troubling of all, the Fed forced this deal on both sides over a weekend when it would normally take many months to negotiate something like this. This was all done under the assumption that 1) Bear Stearns' failure would be too much of a shock to the markets to allow and 2) this would not become something the Fed would do regularly.

These assumptions only worked if Bear Stearns was a unique situation. Clearly that was a faulty assumption. Here is how my colleague Francis Cianfrocca at Redstate described it.

As I described here, this is the weekend that the Treasury and the Federal Reserve decided to stop bailing everyone out. Secretary Paulson has been hinting for weeks now that we have to let capitalism work the way God intended it to. Which means: if you screw up, you die.

This is what we free-market conservatives have been saying we wanted all along, folks. We'll be getting a chance to eat our own dog food. On balance, I have to say it's a good thing... I hope.We are now going to see the unwinding of the 158-year-old broker-dealer Lehman Brothers.

The regulators are going to try this another way, and they decided to let Lehman die without the benefit of an overt and specific public bailout, as had been the case with Bear Stearns and Fannie Mae/Freddie Mac.

Unfortunately, responding to financial crisis is not the sort of thing we can try through trial and error. I am not privvy to private correspondence but I'd be willing to bet the powers that be at Lehman saw what the Feds did for Bear Stearns and expected the same for them. Now then, the time for serious criticism is later. More important for now is what the immediate future holds. Francis picks that up.

The Federal Reserve did announce last night that its various emergency-liquidity facilities would be significantly broadened and expanded in scope. If you're so inclined (and I am), you can consider this another kind of bailout. But the Treasury and the Fed both refused to give Wall Street what the latter were looking for, which is an explicit public guarantee of Lehman's distressed assets. It's a completely new chapter in the Panic of 2007. (And 2008. And 200...)

Whether Lehman's assets and trading positions are liquidated in an orderly or disorderly fashion will determine the tone of the next few weeks in financial markets.

The only bright side here might be that Bank of America is acting like the vulture we need in order to facillitate a recovery. After sweeping in to buy out Countrywide, they are now eating up the remains of Merrill Lynch, though of course, that was a terribly corrupt deal. (the Countrywide buyout that is) While all of this is going on, some so called experts are adding fuel to the fire (H/T to Hot Air)

Christopher Whalen, managing director of Institutional Risk Analytics, a research firm, predicts that approximately 110 banks with $850 billion in assets could close by next July. That's out of 8,400 federally insured institutions, he said, which together hold $13 trillion in assets. Individual customers are starting to get nervous about the financial health of their banks for the first time in generations, he said. Whalen's firm analyzes the safety and soundness of banks for business clients, but began receiving inquiries from individuals in the past two months for the first time, he said.

"If we don't get ahead of this, we are going to face a run on the retail banks by election day," he said.

AP Business Writers Madlen Read, Tim Paradis and Stephen Bernard in New York, Martin Crutsinger in Washington, Ieva Augstums in Charlotte and Michael Liedtke in San Francisco contributed to this report.

Now, before anyone runs out and withdraws all their cash, just keep in mind most accounts are insured up to 100k. This sort of nebulous and cryptic fear mongering is the worst kind of thing at a time like this. Without offering anything concrete, this analyst says that "some customers are getting nervous" and if we don't get out "front there will be a run on banks". That is the sort of irresponsible statement that sets off a panic where there wasn't one.

I, for one, think this may wind up being a good thing in the end. Think about what is happening now as some sort of cleansing. It's like the financial equivalent of one of those teas you can buy at GNC that cleanses the body of all of its toxins. The financial market has lots of toxins in the form of bad loans. Now, all the banks and other financial institutions that hold onto these need to be removed and only leave those that didn't get too weighted in said loans. That's what is happening today. Keep in mind that these teas make you need to go to the washroom over and over when you take one, but you wind up feeling better days and weeks later. The same thing can happen now if we all let the market do what it does, and no one panics.

No Veto For Dodd/Frank

According to Politico, the White House has pulled its veto threat for the Dodd/Frank Housing bill.

A landmark housing bill heads to the House floor after winning President Bush’s support Wednesday despite Republican complaints over billions added by Democrats to assist low-income families and communities facing large foreclosures.

Here is the key portion of the bill.

The underlying housing bill authorizes up to $300 billion in new loan guarantees for the Federal Housing Administration to help at-risk homeowners refinance and avoid foreclosure. On top of this, the Congressional Budget Office estimated Tuesday that Paulson’s Freddie-Fannie rescue plan could cost as much as $25 billion over the next two years. And the addition now of an $800 billion debt ceiling increase is a reminder of Washington’s own troubled mortgage, already hovering near $9.5 trillion.

Now, what this article doesn't say is that this bill will also provide $300 billion in guarantees so that banks can sell off their most troubled loans. As much as this is a bailout for troubled borrowers, it is just as much a bailout for the banks holding the loans of these troubled borrowers. Now, the Federal government will guarantee the mortgages of borrowers who frankly have no business holding a mortgage to begin with.

I have already pointed out that in my estimation that this bill is nothing more than a sophisticated corrupt quid pro quo between Chris Dodd, Bank of America and Countrywide. We already know that earlier this year Bank of America bought out Countrywide. We know that Bank of America bought them for a depressed price because Countrywide was holding onto billions of dollars worth of bad mortgages. Many of these mortgages will now be eligible to be moved onto the books of FHA. We also know that Chris Dodd received multiple "sweetheart loans" from Countrywide. Less reported is that Bank of America has been funneling campaign cash to the average of about $1000 per week for about a year and a half to Chris Dodd. What has been reported only in the D.C. Examiner is that proprietory documents suggest that Bank of America wrote significant portions of this bill. As such, there is rather strong evidence that the sweetheart loan and campaign cash were used so that Bank of America could have Chris Dodd create a bill that would be favorable to their buyout.

Yet, no one is reporting on this. This quid pro quo is now in its final stages. To add insult to injury, this bill will also bailout Fannie Mae and Freddie Mac. As I pointed out earlier, not bailing them out is NOT an option. They are both far too vital to the entire real estate market to fail. If they are not financially viable they must be infused with cash. That said, they are structurally flawed as socialistic monopolies. By giving them a bailout without a significant restructure, all the government is really doing is the equivalent of feeding a crack addict with more crack.

This bill is an unmitigated disaster and not only is no one opposing it, but it is being supported overwhelmingly. When a bill this corrupt gets overwhelming support, it speaks volumes about the systemic corruption on both sides of the aisle.

Corrupt Dodd/Frank Passes the Senate...The Media Yawns

What if a I told you a story about a corrupt politician that was bought off by multiple corrupt banks in order to procure a quid pro quo that was presented as a life saver to struggling homeowners but was in fact a payback in order to turn a merger into a financial boon. Furthermore, what if I told you that this corrupt politician was selling out his country's tax payers to the tune of $300 billion. I bet you would say that this would be shocking and every media would be looking to uncover the next detail of the scandal. I bet you would say this politician's colleagues would be outraged and looking for blood. I bet you would say this was the beginnings of a political thriller and everyone in the country would be engaged.

Of course, you would be wrong. Last night the Senate OVERWHELMINGLY passed the Dodd/Frank mortgage bailout plan. This bill is not merely corrupt. The corruption is obscene not only in its brazenness but in its scope. Furthermore, what is really troublesome is that the culture of corruption in D.C. is so engrained that politicians on both sides either didn't know it is corrupt or simply didn't care. This bill passed overwhelmingly 63-5. What's more is that the obscene levels of corruption are a matter of public record. All one needs to do to know this bill is corrupt is be adept at Google or their favorite search engine.

Chris Dodd is head of the Senate Banking Committee. Recently, we found out that multiple times he received special rates from trouble mortgage lender Countrywide. Then, we found out that Dodd has been receiving campaign contributions averaging $1000 weekly from Bank of America.. Then, we all found out the clincher. Bank of America was responsible for drafting portions of the corrupt Dodd/Frank bill.

So, what is Bank of America's interest in the bill? Bank of America bought out Countrywide in January of this year. Countrywide's stock price had been terribly depressed because they were heavily weighted in non performing sub prime and option arm loans. This deal was extremely risky for Bank of America because they were also accepting this non performing paper. That's where the Dodd/Frank bill comes in. This bill provides $300 billion so that the federal government buys all this non performing paper from banks like Countrywide. This bill turns a risky transaction into a hundred billion dollar financial boondoggle for Bank of America.

In other words, for providing a reduced rate on couple hundred thousand dollar loans and just under $200,000 in campaign contributions, Bank of America received a corrupt bill that would remove somewhere in the neighborhood of $100 billion dollars of bad loans from their portfolios. That's a stunning return on corrupt investment.

What's really stunning is that every major media is presenting this bill as merely a bailout for struggling borrowers. You won't find anyone in the MSM point out each of these crucial details in discussing the passage of this bill through the Senate yesterday.

Why not? Is a corrupt $300 billion bill not big enough? Is there no story when two corrupt banks buy off a corrupt politician so that their merger becomes a financial boon? The media was certainly scintilated when the Jack Abramoff story broke? Did any of his malfeasance ever reach this level? Duke Cunningham was a major story and yet his corruption was peanuts compared this $300 BILLION CORRUPTION. What exactly will it take for the media to notice that tax payers are footing the bill in order to turn a risky merger into a financial boondoggle? After all it only took me four google searches to confirm everything I just said. Does the media not know how to use Google? How much longer will they continue to refer to this bill as a bailout for struggling borrowers?

This is no bailout for struggling borrowers. That's just what the corruptors have presented in order to make this bill presentable. This is the last piece of an elaborate quid pro quo that began nearly two years ago. All of these troubled loans that no one wants are now going to be owned by the public, through FHA. That means borrowers with no hope of ever being responsible enough to pay them back will now have the federal government as their creditor. Chris Dodd got a a couple of good loans and $1000 a week in campaign contributions for about a year and a half. Meanwhile Bank of America removes billions worth of bad loans from their books, solves their liquidity crisis, and thus gets flush with cash, government cash. No one seems to care.

For an updated summary including the backstory and context of how we got here with this corrupt bill please go to this link.

The Surreal Life: Starring the Legislature

According to dictionary.com the meaning of the word surreal is

Having an oddly dreamlike quality.

The way I understand the word surreal is when you are witnessing something and it is so unbelievable that it just doesn't seem real. As I have witnessed this Congress for the last seven years, it all seems surreal. Whether they bury good sensible bills on committee or rush out to pass corrupt bills, it as though they are trying to make things worse and the whole thing is surreal.

I first started following the SAVE Act back last fall. At the time, it appeared to be a bill on the fast track to being law. After all, it was sponsored by Heath Shuler, a Democrat, supported by an eclectic and bi partisan group of politicians, activists and special interest groups. The SAVE Act is an enforcement only anti illegal immigration bill. It was an enforcement only bill and its focus was a verification system that all employers would eventually be able to use to verify the legal status of their employees. As we all saw last summer, the folks overwhelmingly want to enforce the border and this bill would go a long way toward that. Yet, after some fanfare and all sorts of political support, the bill is languishing in committee. The Speaker refuses to vote on the bill because Ms. Pelosi insists on adding some sort of amnesty to the bill. Of course, an amnesty provision would ruin a bill meant strictly to enforce the borders. The bill continues to need about thirty more signatures on something known as a discharge petition to force it to the floor. I suppose the bill made so much sense that it made too much sense to simply pass through our Legislature. (even though it would be supported by the overwhelming majority of the public)

The Broadcast Freedom Act would banish the Fairness Doctrine once and for all. The Fairness Doctrine would mandate that on any "controversial" topic there would be a mandated equal time for both sides of the issue. The Fairness Doctrine was abolished during the Reagan administration and not surprisingly Rush Limbaugh started a revolution on talk radio that has made that media a force it never was before. While Rush Limbaugh has lead an army of Conservative voices on radio, liberals have mostly failed on that medium like a lead zeppelin, as exemplified by Air America (short of Alan Colmes). The Fairness Doctrine is nothing more than an end run around the 1st amendment. By forcing radio stations so called "equal time" they will in reality simply be removing most voices from the media. The banishment of the Fairness Doctrine is an example of what happens when the free market is allowed to flourish and government stays out of the way. Had Reagan not been such an effective President his decision to remove the Fairness Doctrine would have been a bigger part of his legacy. The Broadcast Freedom Act is also languishing in committee. Its sponsor, Mike Pence, is also attempting to generate a discharge petition and is still twenty signatures short.

Meanwhile, the signature piece of legislation of this Congress in both 2007 and 2008 was their so called landmark Energy Bill. This bill was so full of mandates and subsidies for ethanol that farmers haven't been planting much of anything but corn to use for fuel. Never mind that most experts said that best case scenario ethanol would only fuel 15-20% of our vehicles, our legislators wanted to make sure that ethanol was given its due. I'm sure it is only coincidental that corn is found in plethora in the state of Iowa, the first to vote in the primaries. Whatever the reason, the only effect of this so called Energy Bill was its contribution to the explosion in food prices. Since farmers grew nothing but corn to go into cars, there wasn't anything left over for other crops. Then, supply and demand took over and food prices shot up.

Just so no one thinks this is some partisan hit job, let's remember that the incompetent Democratic lead Congress is only in power because the Republican lead Congress was equally as corrupt and incompetent. They came to power under the principle of fiscal discipline and yet each and every bill was so full of pork that their spending gave drunken sailors a bad name. Their excessive spending was epitomized by the Farm Bill and the so called bridge to nowhere, an earmark sponsored by Ted Stevens to build a bridge in Alaska. We learned only recently that among the many earmarks and pet projects in the farm bill was a special project for Speaker Hastert's district that wound up making the former Speaker quite the pretty penny. The Republicans were thrown out largely because they represented folks that valued fiscal responsibility. Yet, it appears no lessons were learned because these same Republicans mostly went along with another Farm Bill passed just last month full of nearly as much pork.

Of course, nothing has been as surreal as watching the Congress, on both sides, trying to fall over themselves to pass legislation in response the mortgage crisis. It all started with H.R. 3915. This was a punitive bill and its only effect would have been killing the mortgage broker industry. While that failed to get passed, what happened next was proposal after proposal that for larger and larger bailouts of troubled borrowers. The proposals started at one billion, then ten billion, thirty billion, and now the Dodd/Frank bill which is a mega $300 billion bailout. While this bill was sold as a bailout for struggling borrowers, the nefarious nature of the bill is that it will also bail out struggling banks holding onto mortgages for these so called struggling borrowers. The two main recepients of this bill will be Countrywide and Bank of America.

Nothing has been as surreal as watching the progression of the corrupt Dodd/Frank bill come to the edge of being law. In the last two weeks we have found out that Chris Dodd, its main sponsor, has received favorable treatment from Countrywide, received about $1000 a week for the last 18 months from Bank of America, and of course Bank of America was allowed to write major parts of the bill. The last piece of information was never meant for the public as it came from "proprietary" documents from the Congress. Now, given the obscene corruption going on behind this bill, one would think that legislators would be jumping over themselves to be the first to bring the corruption to light. Not these legislators. In fact, the bill overcame a filibuster attempt 83-9 with a majority of Republicans voting with EVERY SINGLE Democrat to move this bill toward a final vote. Even though we know that its chief sponsor has been totally and completely corrupted, the bill will likely not only pass but overwhelmingly.

According to the Hill, the bill's passage has earned a reprieve for now.

The Senate hit impasses over legislation aimed at helping struggling homeowners and a rewrite of spying laws, forcing Democratic leaders to push back consideration of those measures until next month.

...

On the housing legislation, Senate Majority Leader Harry Reid (D-Nev.) said an amendment squabble pressed by Republicans this week was too difficult to overcome in the time lawmakers have left before the break.

...

Reid suggested Wednesday night that the housing bill could be delayed, but finally slammed the door on the possibility Thursday morning. Reid also said that when the Senate returns, he still will not allow Republican amendments that did not pertain to housing issues.

"There will be no amendments other than housing-related amendments," he said.

Neither Reid himself, nor the story, mentioned that this bill has been corrupted. It is as though it never happened, and the only problems with it are procedural. So while perfectly reasonable bills like the SAVE Act and the Broadcast Freedom Act languish in committee, the corrupt monstrocity known as Dodd/Frank is on the brink of being law. Its a pattern over the last eight years at least, and it is like the Congress is trying to pass bad bills and force good bills to languish. Like I said, the whole thing is surreal.

Corrupt Bill Moves Through the Senate Overwhelming

The corrupt bill that is being sponsored by Chris Dodd has actually not only passed the Senate but passed 83-9.

Ethics, schmethics. Despite the cloud over Countrywide pals Chris Dodd and Kent Conrad, the latest mortgage bailout boondoggle has cleared another congressional hurdle. The Senate voted 83-9 to move forward on Dodd’s housing aid bill. Final vote is scheduled for later today. We’ll see if the White House upholds its veto threat.

Here is a summary of events so far. Chris Dodd has sponsored a bill that would not only be a huge bailout for borrowers but many banks as well. At the same time, we have learned that not only did Dodd get a VIP loan from Countrywide Bank. This would be the same Countrywide Bank that was at the center of many of the bad loans that epitomized the mortgage boon that lead to the disaster.

On top of this, we also know that Bank of America has been funding Dodd's campaign to the tune of about $1000 a week for the last eighteen months. Bank of America is scheduled to buy out Countrywide. This bill is scheduled to remove most of the bad loans from the books of the newly minted company because the federal government will buy them all.

Furthermore, we have found out that Bank of America actually helped write much of the bill. We know all of this and so do the Senators that just voted. Yet, overwhelmingly they actually support this corrupt bill. What this means is that a corrupt bill is being forced upon the public even though we all know it is corrupt. Yet, no one much cares about what is now happening.

The whole thing is surreal. Everything about this bill is the height of corruption and rather than rejecting it unanimously, the Senate has approved it by a margin that is overwhelmingly veto proof. How exactly does it happen that our government would support such a corrupt bill? The only is answer I come up with is that they are all incredibly corrupt from each of the two parties.

For a detailed summary, with context and backstory, please go to this link.

An Updated Summary of the Corruption at Countrywide, Bank of America, and Beyond

The roots of this scandal are buried within the mortgage crisis itself. In August of last year, after several years of excess, fraud, and irresponsibility, the market finally turned on so called Mortgage Backed Securities and the sub prime crisis began to start in earnest. The crisis spread from simply sub prime to just about every loan type. As the market assessed the plethora of bad loans, the crisis popped the bubble on the speculative real estate market.

The crisis has two entirely separate issues. The first has plenty of political capital. Currently, there are million of borrowers that are struggling to pay their mortgages. There were politicians every were jumping over each to look to try and help struggling borrowers. Banks were also struggling but it would have been political suicide for any politician to look as though they were trying to help banks (for obvious reasons). By holding onto a bunch of bad loans, banks faced a liquidity crisis. They needed to sell these loans and the secondary market was no longer buying them. This offered a complicated dynamic. Both entities needed help. Neither, in my opinion, deserved or should have received it. While borrowers were sympathetic banks were powerful. Furthermore, while saving borrowers made sense politically, resolving the bank's liquidity crisis was the only way to resolve the actual crisis.

The first major piece of legislation was H.R. 3915. This was, in my opinion, an atrocious piece of legislation and it caused quite a stir within the mortgage industry. That's because it attempted to outlaw Yield Spread Premium, a tool for mortgage brokers to make money. This bill was introduced in the banking committee in the House of Representatives by Barney Frank. While this bill caused great outrage within the mortgage community, it was all overblown because the bill was dead on arrival once it arrived in the Banking Committee in the Senate headed by Chris Dodd.

Meanwhile as the mortgage crisis deepened, the liquidity crisis that it caused began to purge banks and mortgage companies without discrimination. It started with small and mid size mortgage companies like First Magnus and moved onto more powerful mortgage companies backed by banks like New Century and Greenpoint. The situation took on a new dimension when rumors spread that Countrywide was in trouble and also on the brink of shutting its doors. Countrywide even began selling CD's at above market rates in an apparent desperate attempt to raise cash.

The situation took on an even grimmer turn when giant Bear Stearns nearly shut its doors in March of this year. The situation was quite complicated and thus the average person didn't understand the details. In effect, Bear Stearns would have closed down had the Fed not stepped in and procured its sale to J.P, Morgan. Many politicians, especially among the Democratic party, characterized the Fed's action as a bailout. The details are complicated and ultimately in many ways politically irrelevant, because the Fed's action in saving Bear Stearns re invigorated calls for borrower's bailout. Thus, the Fed action in saving Bear Stears in effect gave new political capital to the upcoming bill at the center of this scandal.

In January, Countrywide was saved from closing when it was announced that Bank of America was stepping in to buy it out. The deal represented a boon for Bank of America as not only was Countrywide depressed already but the price was less even then its current price.

The transaction represents a 7.5 percent discount to where Countrywide shares ended Thursday after they soared on news that a rescue plan was in the works. It also effectively leaves Bank of America with a big loss on its $2 billion August investment in Countrywide Financial Corp. during the height of the summer’s global credit crisis.

Now, while the deal was a boon there was one significant hitch. Bank of America was also taking on all of Countrywide's bad loans. If Bank of America could successfully rid itself of these loans this transaction would be a financial success of dramatic proportions. As you will all see later the manner in which it will rid itself of these loans is at the center of this scandal.

This set the stage for the next piece of mortgage legislation, H.R. 5831 or Dodd/Frank. This bill was unprecedented in size and scope. While prior bailout proposals ranged between one billion and ten billion dollars, this one was in the neighborhood of $300 billion. Furthermore, it allowed borrowers to not only receive rates the market wouldn't approve them for, but it would even artificially reduce their loan amounts. The other thing the bill did, the thing politicians conveniently didn't publicize much, was it bought up billions of bad loans that banks couldn't find buyers for. The bill would do what the market for loans wouldn't, take bad loans off the hands of banks desperate for cash.

On June 4th, Barack Obama clinched the Democratic nomination for President and became the first African American to lead the ticket of a major party. Within days, he made his first decision as the newly minted candidate. He created his Vice President vetting committee, consisting of Jim Johnson, Eric Holder and Caroline Kennedy. Within days, Johnson's appointment turned into a scandal for Obama. Johnson, a former CEO for mortgage giant Fannie Mae, had received millions in "VIP" loans from Countrywide. Countrywide was not only at the center of the mortgage crisis, but it was a frequent target of Obama himself. Within days, Johnson resigned, but the scandal surrounding Countrywide was just starting.

It turned out several prominent politicians received favorable treatment from Countrywide. The most significant was Chris Dodd. That's because as head of the Banking committee not only was he working on an important piece of legislation regarding Countrywide but in a position to investigate wrongdoing on their part. Dodd, for his part, gave a dubious explanation. He claimed that while he knew that the loans he was receiving were VIP, he didn't ask what that meant. Then, the Washington Examiner reported on two very important and troubling developments. First, it turns out that the VIP loan was not the extent of financial support from mortgage giants affected by his legislation.

Countrywide's VIP loan to Dodd, which saves the Banking Committee chairman $75,000 over 30 years, smells like a potential quid-pro-quo now that Dodd has pushed a bill that will save the company from itself, but what about Bank of America's behavior?

Bank of America's political action committee (PAC) has donated $20,000 to Dodd since he became chairman of the banking panel 17 months ago. From January 2007 to March 2008, Bank of America employees have donated at least $50,400 to Dodd's campaigns, according to the Center for Responsive Politics. So, while Dodd's sweetheart loan from Countrywide saves him personally $200 per month, his chairmanship earns him politically more than $1,000 per week.

These aren't bank tellers funding Dodd, either, as contributors include Bank of America's director of government affairs John Collingwood and Barbara Desoer, who oversees the merger with Countrywide and will "run the combined companies' mortgage operations," according to The Los Angeles Times.

In other words, not only was Dodd receiving favorable loan terms from troubled lender Countrywide, but for the last year and a half he was receiving about $1000 a week from their suitor, Bank of America. At this point there was the strong appearance of a quid pro quo but it was still only an appearance.

Then, the next important development changed all that. A proprietary, internal Congressional document was discovered by Jay Carney of the Washington Examiner. It indicates that in fact Bank of America wasn't merely going to be helped by this by having a bunch of bad Countrywide loans get bought by the federal government. In fact, according to this document, Bank of America was leading the way in drafting this bill. In other words, we have two banks that are going to be critically affected by this legislation. One bank offered the central player, Dodd, a very favorable mortgage. The other contributed to multiple campaigns to the tune of roughly a $1000 a week for about a year and a half, and then the bank literally wrote major parts of the bill. You do the math on what all of that means.

Keep in mind that this bill wouldn't merely save borrowers but the banks currently holding onto their mortgages. Banks are desperate to rid themselves of these bad mortgages. The secondary market refuses to buy them. Of course they won't, who would buy bundles of mortgages full of borrowers that are unwilling or unable to pay on time. What this bill will do is rid their portfolios of all these bad loans. Keep in mind, again, that the only thing keeping Bank of America from making out like a bandit in buying out Countrywide were all of the bad loans they were taking on. This bill solves that problem rather nicely and neatly.

Then, this past week Jeb Hensarling demanded an immediate investigation of Countrywide, Bank of America and Dodd himself. The Senate leadership lead by Harry Reid, rather than immediately ordering an investigation, is now trying to ram this legislation through before the media attention gets too problematic. This is among the most brazen and despicable flaunts of power I have ever witnessed. Instead of investigating serious allegations of corruption, the Senate is attempting to ram through the very bill at the center of the corruption. So far, they are planning on continuing to have a vote next week. Any politician that votes for this legislation has a hand in the very corruption surrounding it.

The scandal doesn't end there unfortunately. This scandal extends to the media. Outside of Fox News, Conservative blogs, and financial media like the Wall Street Journal, you will find scant attention to this scandal. The Conservative Revolution has compiled a list of major media that is following this scandal. Outside of the ones I mentioned there are a handful of newspapers that are reporting on it. Why is that? Can a scandal get any bigger or more important? What we have is a powerful politician getting very special favors and then allowing a bank to craft legislation that benefits the bank and at the same time presents this legislation as a compassionate bailout for struggling borrowers. It frankly doesn't get anymore corrupt than that and every media should be jumping all over themselves to report new details. Yet, what we have is a major media blackout of the story. You won't find much coverage on the networks, CNN, MSNBC, or any papers like the New York Times and Washington Post. The reasons for this are not clear though of course I can give some logical hypothesis.

I do however know that Jack Abramoff was a major scandal. I know that the coverage of the likes of Duke Cunningham, Bob Ney and Mark Foley became front page and intense. Now that a Democrat is in the middle of a major scandal much of the media is strangely silent. Of course, corruption has no ideology and furthermore it is like a cancer. It spreads and affects everything around it. Corruption is allowed to flourish only when the media looks the other way as its happening and that's exactly what is happening here.

Dodd/Frank, Barack Obama, and Judgement

Last month, Barack Obama made another in a series of speeches in Las Vegas on the mortgage crisis. Buried within the speech was a line that was of little importance at the time however should become quite relevant in the campaign given what we have recently found out.

To stabilize our housing market and to bring this crisis to an end, I’m a strong supporter of Chris Dodd and Barney Frank’s proposal to create a new FHA Housing Security Program. This will provide meaningful incentives for lenders to buy or refinance existing mortgages, and to convert them into stable 30-year fixed mortgages. This is not a windfall for borrowers – as they have to share any capital gain. It’s not a bailout for lenders or investors who gambled recklessly – as they will take losses. It asks both sides to sacrifice. It offers a responsible and fair way to help Americans who are facing foreclosure to keep their homes at rates they can afford.

Now,what he is talking about is the Dodd/Frank bill that has recently run into controversy because of corruption uncovered between Dodd, Countrywide and Bank of America. Now, more prominent in Obama's speech was this line.

Here, in Nevada, we see how so many people are fighting for their American Dream. Because in so many ways, Felicitas and Francisco have lived the American Dream. Their story is not one of great wealth or privilege. Instead, it embodies the steady pursuit of simple dreams that has built this country from the bottom up....

Yet a predatory loan has turned this source of stability into an anchor of insecurity. Because a lender went for the easy buck, they are left struggling with ballooning interest rates and monthly mortgage payments. Because Washington has failed working people in this country, they are facing foreclosure, and the American Dream they sought for decades risks slipping away.

Dodd/Frank is a boondoggle and bailout for irresponsible and well connected banks masquerading as a compassionate piece of legislation supposed to help the most vulnerable and unfortunate among us. It is also the centerpiece of Barack Obama's plan to reinvigorate the mortgage market. Lost among the shocking details of what we have learned about the cozy relationship between Chris Dodd, Countrywide and Bank of America is the fact that Barack Obama gave this bill his seal of approval.

In his defense of the bill, Barack Obama makes two misleading statements. First, he proclaims that this isn't a bailout of borrowers because they would now share in "any capital gain". While this is true, it is also beside the point. Right now, most of these borrowers have no capital gain. They currently owe more than their properties are worth. This bill would artificially lower their mortgage below the value of the property. In my opinion half of say $25k is better than zero. Furthermore, the banks would in fact take losses but far smaller than they would without the bailout. These banks need to sell these loans and they need cash. That's exactly what this bill provides. Furthermore, the only other option for these banks vis a vis these loans is foreclosure. In that case, not only would they get less than they would with this bill but only after months of legal haggling and headaches. Of course, this bill is a bailout for all involved, and it is obvious to anyone that analyzed the bill from the beginning.

Dodd/Frank would provide roughly $300 billion in funds to bail out troubled borrowers. Many times this would include not only giving these borrowers rates they would never qualify for on the open market, but it would include artificially lowering their loan amounts as well. For banks, the federal government, through FHA, would buy up many of their most troubled mortgages. Banks are facing a "liquidity crisis" because they are holding onto mortgages they intended on selling to other parties. Since the open market is unwilling to buy them, it is quite a boon to get the government to do what the open market wouldn't. Furthermore, Bank of America received quite a great deal in buying Countrywide. The only caveat was that Countrywide was holding onto an enormous amount of these bad mortgages. As such, this bill would turn this buyout into quite the boondoggle for Bank of America. That is the nefarious undercurrent behind this bill that is now coming to the surface. That said, nothing in the bill was hidden from the public. Anyone who analyzed the bill from the beginning, like myself, would have come to the conclusion that the bill was a nightmare waiting to happen.

The Washington Examiner story found one other interesting piece of information.

Only Barack Obama and Hillary Clinton have received more Bank of America money than Dodd during the current election cycle. Republican nominee John McCain slightly trails Dodd, with $64,000 in reported Bank of America contributions.

From the beginning this bill was nothing more than packaging. It was billed as help for struggling homeowners. Of course, it turns out it is much more than that. This bill is really a bailout to irresponsible and greedy lenders. What it really is is a bill to make the buyout of Countrywide by Bank of America a financial boon. Of course, this is the bill that Barack Obama vouched for.

There is of course nothing more than rumor and innuendo that Obama was directly involved in any corruption. That is frankly besides the point. What he did was vouch for a corrupt bill. If someone vouched for Ishtar their movie recommendations would no longer be trusted. The same would be true if someone recommended an incompetent or corrupt lawyer, doctor, or mechanic. So, what do we make of a politician that vouches for a bill that later turns out to be corrupt? In fact, they probably didn't realize that the bill was corrupt, however all corrupt bills are bad bills. If a politician recommends a corrupt bill, no matter the reason, their judgement must come into question.

That's what this bill always was. That's how I described it from the beginning. I don't see that it was corrupt, however I did know right away that it was a bad bill. Why didn't Barack Obama make the same judgement? If he didn't what are we to make of his famous judgement? He has made judgement the centerpiece of his election theme. Yet, he vouched for a bill that has now been exposed as corrupt in the worst sort of a way. That is the message that I would be hammering if I am John McCain. If Barack Obama is going to make judgement an issue, then he needs to account for his support for this corrupt bill.

For an updated summary of this entire fiasco including backstory, context and a detailed history of events please go to this link.