David Rucki Commits Apparent Mortgage Fraud

The article is here. 

David Rucki Commits Mortgage Fraud While Going Through a Divorce

A Young Mortgage Fraud Letter 10092013 by mikekvolpe on Scribd

For more  on the Grazzini-Rucki case:

1) The definitive dossier documenting David Rucki's violence: 99 pages of police reports, orders for protection, letters, affidavits, and more...

2) The propaganda of 20/20

3) The court created horror of the five Rucki children

4) Dakota County disallows nearly all Sandra Grazzini-Rucki's evidence and only then is she convicted

5) Dakota County slaps destitute Sandra Grazzini-Rucki with $975 per month in child support, $14,000 plus bill

6) Missing in Minnesota: Michael Brodkorb's blog

7) Find the book, Sandra Grazzini-Rucki and the World's Last Custody Trial here.

In this article, John Hentges describes the systemic court corruption in Minnesota. 

A Fannie/Freddie By Any Other Name

Politicians are now paying lip service to reforming Fannie/Freddie. I wouldn't expect anything to actually get done but be prepared for all sorts of hair brained ideas. The first is by Congressman Barney Frank.

The more things change, the more they stay the same. Take the case of Barney Frank, Chairman of House Financial Services Committee. In an interview with FOX Business’ Neil Cavuto, he called for Fannie Mae and Freddie Mac to be abolished. “The only question is what do you put in their place,” he said.

...

What would he propose? He said, “I’ve worked closely with the Financial Services Roundtable… They are talking about the following: first of all, you separate it out, so there’s no more hybrid public-private. So, Fannie and Freddie and anything like them go out. You have a purely public FHA [Federal Housing Administration]… [that is] fully self-financing.”

Frank added, “If we want to subsidize housing then we could do it upfront and let the budget be clear about that.”

Clearly, Barney Frank hasn't been paying attention to me. Beyond that, Frank clearly doesn't understand why Fannie/Freddie are such a problem. It's as though the problem is the names. They've become too toxic and so if we change them and have another mechanism that does the exact same thing everything will be fine.

Let's start at the beginning. Mortgage securitization is a very complicated process but, in my opinion, it's a necessary one. It provides liquidity in the market and it transfers risk from banks to speculators. All of that is good. That means more people get loans and rates will be lower.

The problem is that in loan securitization there's only two games in town, Fannie Mae and Freddie Mac. That's duopoly and those never work. The second problem is that both are extensions of the government. So, what we had was a government run monopoly on securitization. Fix both problems and you fix Fannie/Freddie.

Instead, Barney Frank wants to go the other way. He wants to stop simply having an implicit government guarantee and just have an explicit government guarantee. Of course, that perpetuates the problem.

Commercial Mortgages Thawing?

Was the demise of commercial real estate greatly exaggerated?

Analysts have been warning for months that commercial real estate could be the next shoe to drop in the subprime mortgage collapse that came to a head in 2008.

But with signs of thawing in the securitization markets and indications that investors are ready to come to auction when properties are on the block, the idea that the industry represents a major looming danger for the economy is losing traction.

Prudential Financial executives, speaking at a market outlook discussion Tuesday in New York, said they are "reluctant optimists" on the space. Marc Halle, the firm's managing director of real estate investments, compared the industry to a "fly wheel" that likely will accelerate in the years ahead.

Some, like me, predicted gloom in commercial mortgages last year. It should be noted that the worst of the balloon loans will expire in 2012 and so there's still a long way to go.

Financial Reform Back on the Brink

Only a couple days after announcing a big breakthrough on financial reform, the same package may be back on the brink. First, Senator Feingold announced that he would vote against the measure.

In case you haven't caught this bombshell yet, Senator Feingold announced that he won't support the FinReg bill as negotiated. This means the bill needs to go back to square one unless there's a Republican defector in the next day or two, which is extremely unlikely.

Hours later, Senator Scott Brown announced the same.

I am writing you to express my strong opposition to the $19 billion bank tax that was included in the financial reform bill during the conference committee," wrote Brown. "This tax was not in the Senate version of the bill, which I supported. If the final version of this bill contains these higher taxes, I will not support it."

This only leaves four undecided Senators: Grassley of Iowa, Snowe and Collins of Maine and Senator Cantwell of Washington. All would have to vote for the measure for it to get sixty votes.

New Home Sales Way Down

The first data for new home sales following the end of the tax credit has come in and it spells danger.

Sales of new homes plunged a record 33% in May to a record-low level after a federal subsidy for home buyers expired, according to data released Wednesday by the Commerce Department. Sales dropped to a seasonally adjusted annual rate of 300,000, the lowest since records begin in 1963.

There's more coverage here.

The Commerce Department said sales dropped a record 32.7 percent to a 300,000 unit annual rate, the lowest level since record keeping started in 1963, from a downwardly revised 446,000 units in April. The fall unwound two months of gains, which had been inspired by a government tax credit for home buyers.

Stocks are off across the board on the news. There was a fear among many that this sales credit would go the way of most of the government induced stimuli, most namely cash for clunkers. That is that as soon as the stimuli ended the sales would deflate. That's what happened in May. So, the housing market continues to be in a state of disarray.

Fannie/Freddie Price Tag on the Rise

Moneynews has the analysis on the latest price tag.

For all the focus on the historic federal rescue of the banking industry, it is the government’s decision to seize Fannie Mae and Freddie Mac in September 2008 that reportedly is likely to cost taxpayers the most money.

So far the tab stands at $145.9 billion and rising, the New York Times reports.

The Congressional Budget Office has predicted that the final bill could reach $389 billion.

Some analysts even estimate the total may reach $1 trillion, which Sean Egan, president of Egan-Jones Ratings, recently told Bloomberg is “a reasonable worst-case scenario."

Fannie/Freddie currently holds about $5 trillion worth of loans. The biggest struggle is figuring out the worth of those loans and just how many will default. That's why it's difficult to estimate just how much the tax payers will be on the hook.

Beyond that, Fannie/Freddie are now effectively most of the residential housing market along with FHA loans. So, their long term viability is tied to how quickly the housing market turns around. That's yet another major variable.

One thing that isn't a variable is that both are in desperate need of reform. It's clear that reform of Fannie/Freddie is something that isn't on the table any time soon. Without reforming these two, we are in constant danger since both pervert the market at all times.

Fannie/Freddie on the Brink

Both have been asked to be delisted from the NYSE, where they are both currently trading.

Fannie Mae and Freddie Mac shares were halted as regulators announced that both companies are being asked to delist from the NYSE and any other national securities exchange.

The Federal Housing Finance Agency, the conservator for both Fannie [FNM 0.9244 --- UNCH (0) ] and Freddie [FRE 1.22 --- UNCH (0) ], has directed both to delist their common stock and their preferred stock, the agency announced Wednesday in a press release.

Under normal circumstances, both companies would be dead man walking. Their only hopes would be for some shark to swoop in and buy them out. In this case, none of that will likely happen.

Our housing market is simply in no position to have these two go under. They are now owned by the federal government and will continue to be owned by the feds. This will make the process of transfer to private hands that much more difficult. Of course, that's so far in the future that we have many more worries before that anyway.

These companies are bleeding so much red that they no longer qualify for inclusion the NYSE. If they were a normal company, bankruptcy or outright dissolvement would follow soon. Now, this action is likely a precursor to more federal bail out dollars.

Meanwhile, housing starts were down in May.

U.S. housing starts fell more than expected in May to their lowest level in five months, a government report showed on Wednesday, as a popular homebuyer tax credit that had buoyed construction activity over the past two months expired.

That's the latest evidence that housing continues to struggle. Equities are down 1% on the news.

Financial Reform to Spin off Swaps

Financial reform appears to be heading toward spinning off swap desks.

Banks are likely to lose a key lobbying battle in the US over whether they will be forced to spin off their lucrative swaps desks, according to people familiar with financial reform negotiations in Congress.

Defeat, which would be a further blow to Wall Street, has been made more likely by Paul Volcker, the influential former Federal Reserve chairman, softening his opposition to the provision.Blanche Lincoln, the Senate agriculture chairman, is the lead proponent of the plan, which would force banks to create a separately capitalized subsidiary to house the derivatives dealing operations – a significant source of profits for big banks, such as JPMorgan Chase.

Following the stock market crash in 1929, the Congress passed the Glass Steagall Act. That separated traditional banking activities from riskier investment banking activities. In 1999, that was largely reversed through banking deregulation.

This wouldn't exactly be a return to Glass Steagall, though that's also being proposed. This would, however, separate the very risky swaps trading from traditional banking activities.

One of the contributing factors to the financial crisis was that risky activities went bad for traditional banks and brought their entire operations to their knees. So, financial reform would separate one of these, swaps trading. If you are involved in swaps trading, you would have to do it separately from traditional banking activities.

How's Your Mortgage Rate?

How's your mortgage rate? I can believe 4.25%. I can even believe getting it with no points, though full closing costs. I am having trouble believing that this can be done by only putting 5% down and with no mortgage insurance.

Also, this deal is for a condominium which usually require higher down payments. Still, the phone number is available and hopefully everyone qualifies for this deal.

More Mortgage Nonsense

Four of the worst states as far as foreclosures: California, Arizona, Florida, and Michigan want to give money to the unemployed and those underwater (they owe more than the home is worth) to pay their mortgages.

Unemployed? Owe more on your mortgage than your home is worth? Your state might one day pay your mortgage.

Giving people free money to cover their home loans is just one of the radical ways that four states -- Florida, Michigan, California and Arizona -- plan to use $1.4 billion the Obama administration is sending their way to help the unemployed and underwater avoid foreclosure.

Many consumer advocates have said the government should help cover the payments of these troubled homeowners, lest the mortgage crisis continue spinning out of control and dragging down everyone's property values. But other housing experts warn that paying off loans creates a moral hazard and could actually dissuade people from looking for work.

The first problem is that while there are many reasons to try and artificially prop up real estate prices, none of them pass economic muster. First, if you leave things alone, the market decides and I trust the market a lot more than politicians.

Second, people say that depressed home prices hurt everyone. That's not true. They don't hurt those looking to buy. They also don't hurt those not looking to sell. The idea is that if we prop up real estate prices that's good because without that, even those that are on time will be hurt because their values will go down. That maybe so but unless they are selling immediately it matters not.

Third, like all such programs, this creates a horrible moral hazard. When I first started in the business, it was standard that borrowers had a certain number of months worth of mortgage saved to qualify for a loan. 2-6 months was the general standard. That was done to protect banks in case said borrower lost their job. By providing assistance to those without a job, the government de emphasizes saving. Even more extreme is the idea that those with underwater mortgages will have their balances reduced. Now, imagine if you've paid your mortgage on time and have plenty of equity, your deal is nowhere near as good.

Beyond that, what these states are doing is the equivalent of giving Pavel the Russian operative a band aid right after Jack Bauer sprayed him with a blowtorch. Even if this made sense financially this will help a fraction of those in need of help. Instead, tax payer money will go to help a fraction of those that need help.

More Money from Fannie Mae

Fannie Mae lost a whopping more than $13 billion last quarter. Wow!! Now, they need more money.

Mortgage giant Fannie Mae (FNM: 1.06, 0.04, 3.92%) bled another $13.1 billion during the first quarter, prompting the U.S.-owned company to request another $8.4 billion cash infusion from the Treasury Department.

Fannie Mae, which was placed into conservatorship in 2008 amid enormous mortgage losses, said it lost $13.1 billion, or $2.29 a share, last quarter, compared with a loss of $16.3 billion, or $2.87 a share, during the fourth quarter of 2009.

The company blamed the heavy losses on credit-related expenses that remain “at elevated levels” due to weakness in the U.S. economy and the housing market.

“In the first quarter we continued to serve as a leading source of liquidity to the mortgage market, and we made solid progress in our ongoing efforts to keep people in their homes,” CEO Mike Williams said in a statement.

This is a black hole and no one on either side understands the issue let alone has a solution.

The problem is without Fannie/Freddie there is no mortgage market. Banks now almost exclusively rely on Fannie/Freddie to sell their loans. The other source is FHA. So, we can't just let them fail because that would set the mortgage market into a tailspin.

The Republicans are pushing reform of Fannie/Freddie but their idea of reform is nonsensical. John McCain wants to give Fannie/Freddie five years to be self sufficient or fail. First, failure is not an option for the reasons I mentioned. Second, they could very well be self sufficient in five years.

That doesn't mean that the problems will be solved. The problems will merely be masked. The problems and solutions are simple. First, there's two of them. That's a duopoly and not economically viable. So, break them up. Second, they are extensions of the government. So, fully privatize them. It's that simple.

Is the U.S. A Sub Prime Borrower?

Financial analyst Peter Schiff makes the comparison.

Euro Pacific Capital president Peter Schiff says it's better to have an inflexible currency — and that the ability to print money is making the U.S. a subprime borrower.

“The U.S. government is making the same mistakes that subprime borrowers made when (banks) were making teaser rates on their mortgages,” Schiff says.

“What happens if interest rates go up to 10 percent, which is half of what they were in 1980? All of a sudden, we’re paying $1.5 trillion a year (in interest),” Schiff told CNBC.

Sub prime was always a house of cards. It was done with no money down loans where income was stated but not verified. This lead to all sorts of fraud and abuse. On top of this, sub prime was almost exclusively financed by Adjustable Rate Mortgages. This house of cards was masked because the hot real estate market allowed for refinancing and sales before there was too much trouble.

That house of cards ended when people could no longer refinance and these ARM's adjusted up. The U.S. debt is financed by U.S. Treasury bonds. These are ARM's on steroids. In sub prime, these ARM's had fixed rates for 2, 3, and 5 years. U.S. Treasury bonds adjust day by day and minute by minute.

Schiff's point is that we are already over leveraged. Yet, rates are now low. Soon, we'll be financing 12-15 trillion dollars worth of debt at rates that are much higher. Our debt is already a house of cards. It's financed purely by our reputation. What will happen when that debt is financed at 6-8%? It could be the same trigger that ultimately doomed sub prime.

The Center for Responsible Lending Conspiracy

The conservatives are working themselves up in a lather and they've found their latest whipping boy for the mortgage crisis. It's the Center for Responsible Lending. This particular whipping boy hits several erogenous zones. First, the CRL was tied into John Paulson, who's been recently disgraced by the Goldman Sachs scandal. Second, a major player at CRL is now in the Obama Treasury Department, Eric Stein. Overall, it fits the narrative that misguided policies from groups like this pressured banks into making bad loans.

The Center for Responsible Lending presents itself as a tireless advocate of poor and downtrodden borrowers facing a credit industry of greedy banks, payday lenders and other financial predators. Yet a review of CRL’s advocacy paints a different picture of the organization. It is intimately tied to some of the worst actors in the lending business and its advocacy has too often hurt, not helped, the very people it claims to defend.

The California financiers Herbert and Marion Sandler must have had a rude shock when they saw themselves depicted in an October 2008 comedy routine on “Saturday Night Live,” the popular late night television show also known as “SNL.”

Presented as a mock C-SPAN broadcast, the sketch brutally parodied the politicians who orchestrated the bailout legislation that fall.

I'm always amused by narratives like this. First, it was the Community Reinvestment Act. Then, it was ACORN. Now, it's the Center for Responsible Lending. If all these groups were responsible for the mortgage crisis, they did it an Orwellian fashion. Tha t's because no one had heard of them when the mortgage boom was happening. Somehow, they puppeteered the complicated mortgage market that include brokers, banks, securitizers, as well as fancy products like Mortgage Backed Securities and Collateralized Debt Obligations. They did it all without anyone noticing.

I don't know why it's so hard for people to believe that the Federal Reserve was chief in responsibility. After all, what has more influence: the group that effectively controls the supply of money in the world or some obscure group no one has heard of. Yet, Conservatives jump over themselves to blame the obscure left wing group of the hour for creating the crisis, and most never mention the Fed.

The whole thing is totally without logic, and by that I mean, the logic created by conservatives. Conservatives will tell you that there's too cozy a relationship between banks and D.C. Well, if that's the case how did some obscure group force these banks into doing bad loans they didn't want to do?

The much more likely scenario was that no one forced the banks, Fannie/Freddie, and all other Wall Street titans into doing anything they didn't want to do on any significant scale. The Community Reinvestment Act accounted for 3% of all mortgages at its height. It was never more than 3%. Yet, this obscure government program forced the banks to give anyone a loan with a heart beat...is this really what conservatives would have us believe.

The Community Reinvestment Act only applied to retail banks not wholesale using mortgage brokers. (the same for CRL) Are conservatives saying that small community banks are responsible for the crisis...because that's who the CRA applied to. The Chase's, WAMUs and Countrywide reiled on mortgage brokers mostly and those loans had nothing to do with CRA. It had nothing to do with the Center for Responsible Lending. The exotic loans we now call "toxic assets" were all a creation of wholesale mortgages. Wholesale sub prime lending just happened to explode less than a year after the Fed lowered its Fed Funds Rate below 1%. Are conservatives really saying this is mere coincidence and all these obscure groups were pulling the strings on people while no one noticed?

Here's my full summary of the crisis.

Defending Goldman Sachs

Goldman Sachs has officially become a pinata and used for politicians of all sides. The events this week on Capitol Hill were brilliant political theater. Senators from both sides took turns roasting Goldman Sachs executives. Democrats think they've found a perfect symbol and foil to use to create just the right public perception against Wall Street and pass financial reform. Since everything is political in D.C., many conservatives have gone to defending Goldman Sachs.

The absurdities of its case are evident from the SEC complaint. Paulson, ACA and Goldman knew exactly where each other stood. Indeed paragraph 30 of the SEC complaint states that ACA rejected some of the subprime reference positions that Paulson had proposed for inclusion in the mortgage reference pool and substituted others in its place. As such, the SEC claim’s of Goldman deception looks utterly groundless given ACA’s active role. Unless it was brain dead, ACA knew that it was negotiating with a party on the opposing end of the agreement.

At this point the mysteries only deepen. If Goldman committed fraud, then so did Paulson, who was mysteriously not charged. Even more notably, the SEC complaint makes no mention that Goldman actually took the same side of the deal as ACA, which puts it in the unique position of defrauding itself. In light of Goldman’s business decision, it is odd for the SEC to fault Goldman’s efforts to enlist ACA’s aid in selling the new round of CDOs to other sophisticated investment banks. So long as ACA knew what was going on, Goldman adopted a sensible marketing strategy that helps other investors.

and...

As self-righteous Senators grill Goldman Sachs about their role in the housing bubble, it would not be far fetched to request that the Senators switch seats with the Goldman executives.

After all, it wasn’t Goldman that passed the Community Reinvestment Act that forced banks to make loans to people who could never pay them back. It wasn’t Goldman that created and supported Fannie Mae and Freddie Mac. And it wasn’t Goldman that drove interest rates down to a below market level to cause a housing rush not seen since gold was found in them thar’ hills in the mid-1800s.

In our hyperpartisan world, if your opponents hate you must defend. It's the only way to explain Republicans' continued defense of big oil. So, it's important to look again at what Goldman Sachs has been accused of.

hey got together with this guy Paulson. Paulson wanted to bet against the housing market but he wanted to have an extra safe bet. So, he handpicked the worst of the worst mortgages and told GS to package those into a Collateralized Debt Obligation. Then, he bet against it through a Credit Default Swap (it's very complicated but that's the layman's explanation). GS did this and then sold the CDO to their clients without disclosing the deal they made with Paulson to those that bought it.

Now, I am not a lawyer and so I don't know if this is illegal. I do know that it should be if it isn't. I also know that it isn't merely that this guy bet against it. He and GS created it and it was designed to fail and GS never disclosed that to their clients. That's not behavior you want to defend.

Yes, their behavior has been politicized and so be it. Let's also not lose sight of what they've done.

Financial Reform and Mortgages

I can't speak for anything else but I can tell you with certainty what will happen in mortgages as a result of financial reforms. If you have ever closed on a mortgage, you can appreciate this. It's sometimes referred to as "signing your life away". That's because there are near one hundred documents to sign. Get ready there will be more. All those documents are created in response to some regulation. More regulations mean more documents to sign.

Just so no one thinks that we don't have enough regulations. We have something called Regulation Z. Look it up. Guess what. If there's a Reg Z, A-Y is there as well.

Here's my "favorite" regulation. If I pull someone's credit, I have three business days to sign the initial disclosure. Suffice to say, that was never enforced. You can all imagine the enforcement levels of more regulations.

Too Big To Fail

NPR just published the results of a survey of "experts" about what Obama's financial reform will do to curb too big to fail.

Everyone thinks the reforms just aren't enough to solve the problem.

Take, for example, "too big to fail" -- the idea that if one of the largest banks in the country gets into trouble, the government will save it with taxpayer money.

"A vote for reform is a vote to put a stop to taxpayer-funded bailouts," Obama said in his speech in New York on Thursday.

I cannot find any experts -- of any party -- who are willing to agree with Obama on this one.

"We're not seeing a very forceful step on the too-big-to-fail problem," said Carmen Reinhart, an economist at the University of Maryland. "If there's any doubt that the crisis may be systemic, we will bail out again."

Here's what I see. The reality is this. By bailing out the banks in 2008, we have created too big to fail as a near certainty. That's because bailing them out told all banks of that size that they are to vital to fail and the government will back them if they do fail. The banks have been told that their industry is not like others.

So, this problem will not be solved with band aids. Simply creating a slew of new bureaucracies and rules will do little. That's because their size and structure will remain the same. They will still be potentially too big to fail.

That's why there's a push in several circles to break up the banks. That would provide the sort of change that will force them to no longer be too big to fail. The reality is that this is a complicated problem with complicated solutions. Yet, both sides have engaged in sloganeering and platitudes. Those aren't answers to too big to fail. As such, financial reform will ultimately fail. As long as Citigroup has tentacles in insurance, investment, mortgages, and insurance with assets that near a trillion dollars, it will continue to be too big to fail. No one has proposed an idea to stop that. Too big to fail will not be solved until it is addressed.

Limbaugh First to Politicize Goldman Sachs

I'll let Limbaugh speak for himself.

RUSH: There's a piece of news out there that's a very teachable moment and I want to start with this. The stock market is down about 148 points in the last hour. Now, the reason the market is down is because the Securities and Exchange Commission which is a part of the regime -- this is the teachable moment -- the SEC has filed civil charges against Goldman Sachs for essentially profiting on the subprime mortgage crisis knowing full well that the housing market was gonna bubble up and crunch and they were playing both sides, profiting on both sides of it. The suit from the SEC basically shows that Goldman Sachs and others knew that the housing market was gonna crash, they kept selling these mortgage-backed securities on the one hand and then they bet against them on the other hand. They were going short.

This was not the result of any unfettered capitalism, folks. This was not unfettered capitalism. This crash is the result of Barney Frank, Chris Dodd, Franklin Raines, Jamie Gorelick and all these other liberals and their elitist buddies on Wall Street who knew what was going on in the subprime mortgage crisis, gaming the system to enrich themselves. From Clinton, Barney Frank, Chris Dodd on, they created an unsustainable mortgage situation and then other liberals enriched themselves by betting against it at Goldman Sachs, and that's what this suit is all about. Now, you might say why today? Because there's a story out there that Goldman Sachs is fully in support of the financial regulatory reform bill. My friends, here's the teachable moment. Obama wants this story out there.

Let's get a few things out of the way. First, Goldman Sachs is innocent until proven guilty. So far, they've only been accused of serious wrong doing. Second, there's no doubt that what Goldman Sachs is accused of went on and probably a lot. Third, trying to blame Chris Dodd for the wrongdoing of Goldman Sachs is simply propaganda.

Here's all anyone needs to know about anyone that analyzes the mortgage crisis. Do they have an agenda? If they do, you may as well stop listening because you'll hear propaganda. If you ask Karl Rove why the mortgage crisis happened, he'll tell you it's because Democrats blocked Republican attempts to reform Fannie/Freddie. If you ask Sean Hannity why the mortgage crisis happened, he'll tell you it's because liberals pushed the Community Reinvestment Act. If you ask Alan Colmes why, it's because of deregulation. Now, Rush has decided to step into the fray.

All of these folks have an agenda. Everyone of them just happens to blame the exact thing that fits their agenda. The mortgage crisis was incredibly complicated. It was a confluence of several things and can't be condensed into a simple soundbite. If Goldman did what they are accused of doing, it's because they were greedy and corrupt not because of a politician.

Here's my full analysis of the financial crisis.

The Goldman Sachs Scandal

Watch this story. This will be the biggest financial scandal since Bernie Madoff.

The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.

The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.

In a statement, Goldman called the S.E.C. accusations “completely unfounded in law
and fact” and said the firm would “vigorously contest them and defend the firm and its reputation.”

The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.

As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.

Basically, Goldman Sachs got together with a hedge fund manager named John Paulson to create a product destined to fail so that both could bet against it. Paulson hand picked some of the worst mortgages in the world and those mortgages were put into a portfolio of Collaterilized Debt Obligations called Abacus 2007-AC1. Then, that was sold to investors by Goldman Sachs. Sachs never told these investors of their deal with Paulson nor did they tell them they were betting against them, themselves.

How does this happen? Let's start with the fact that these "synthetic" CDO's are one step below rocket science. Here's just one portion of their Wikipedia page.

Synthetic CDOs do not own cash assets like bonds or loans. Instead, synthetic
CDOs gain credit exposure to a portfolio of fixed income assets without owning
those assets through the use of credit default swaps, a derivatives instrument.
(Under such a swap, the credit protection seller, the CDO, receives periodic
cash payments, called premiums, in exchange for agreeing to assume the risk of
loss on a specific asset in the event that asset experiences a default or other
credit event.) Like a cash CDO, the risk of loss on the CDO's portfolio is
divided into tranches. Losses will first affect the equity tranche, next the
mezzanine tranches, and finally the senior tranche. Each tranche receives a
periodic payment (the swap premium), with the junior tranches offering higher
premiums.

If you think you're confused just because this isn't your business, you're wrong. You're confused because this is mind numbingly confusing. You've got all sorts investments, securities, and other products all put together to create something that's unbelievably complicated. That's tailor made for fraud. If they buyer can't make heads or tails, they can easily be defrauded. I asked an attorney with experience on the legal end of CDO's to explain them and here's the explanation.

a derivative product (that have elements of bonds, convertible notes and options)

That's just about all investment products all rolled into one. If you're confused, that might have been the point.

Critical Time in Housing

The most recent housing number shows signs of an improving housing market.

The number of pending sales of existing homes in the US rose in February, giving the real estate market an optimistic outlook for the coming year.

Extended Homebuyer Tax Credit

Much of this recent increase in existing home sales has been attributed to the extended home buyer tax credit, which requires homebuyers to sign a sales contract by April 30th in order to be eligible. Pending sales on existing homes rose 8.2% according to the National Association of Realtors (NAR) Index, which now sits at 97.6, far above where economists thought February home sales numbers would be, with some actually predicting a decline of 0.5%.

There have been all sorts of so called green shoots in housing for months. Prices have steadied. Sales have increased at least slightly. Yet, none of it matters.

All that matters is what will happen over the next four to six months. That's because housing has been carried by two important stimuli and each has gone away or is about to go away. What will be critical is what will happen to the market once both go away.

The biggest stimuli was the Fed's quantitative easing that bought in excess of one trillion dollars of mortgage bonds. That's kept the thirty year mortgage at and below 5%. That ended on the first of April and now we'll see just how high mortgage rates will go without it. The market was barely motoring along while interest rates were at record levels. What will happen when rates go up? What if they only go up 1%. That's about $200 extra dollars a month in mortgage payments on a $200,000 mortgage.

Second, the first time home buyer credit incentive is about to expire at the end of the month. That gave first time homebuyers $8000 which could be applied directly to the down payment. That's no small amount. In fact, that largely drove the health March home sales numbers. So, what will happen to housing once these two go away?

In fact, it's scary to think just how weak the housing market has been considering the enormous stimulus that's been driven into the market. In fact, we've had near record low mortgage rates for more than a year and still the housing market has done little to recover. For almost nine months, first time home buyers were given an enormous credit and still the housing market was still not moving. So, we'll see where housing will go now that both will go away.