Follow the Money Trail: It’s the blueprint for your case

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The selection of an attorney is an important decision  and should only be made after you have interviewed licensed attorneys familiar with investment banking, securities, property law, consumer law, mortgages, foreclosures, and collection procedures. This site is dedicated to providing those services directly or indirectly through attorneys seeking guidance or assistance in representing consumers and homeowners. We are available to any lawyer seeking assistance anywhere in the country, U.S. possessions and territories. Neil Garfield is a licensed member of the Florida Bar and is qualified to appear as an expert witness or litigator in in several states including the district of Columbia. The information on this blog is general information and should NEVER be considered to be advice on one specific case. Consultation with a licensed attorney is required in this highly complex field.
Editor’s Analysis and Comment: If you want to know where all the money went during the mortgage madness of the last decade and the probable duplication of that behavior with all forms of consumer debt, the first clues have been emerging. First and foremost I would suggest the so-called bull market reflecting an economic resurgence that appears to have no basis in reality. Putting hundred of billions of dollars into the stock market is an obvious place to store ill-gotten gains.
But there is also the question of liquidity which means the Wall Street bankers had to “park” their money somewhere into depository accounts. Some analysts have suggested that the bankers deposited money in places where the sheer volume of money deposited would give bankers strategic control over finance in those countries.
The consequences to American finance is fairly well known here. But most Americans have been somewhat aloof to the extreme problems suffered by Spain, Greece, Italy and Cyprus. Italy and Cyprus have turned to confiscating savings on a progressive basis.  This could be a “fee” imposed by those countries for giving aid and comfort to the pirates of Wall Street.
So far the only country to stick with the rule of law is Iceland where some of the worst problems emerged early — before bankers could solidify political support in that country, like they have done around the world. Iceland didn’t bailout bankers, they jailed them. Iceland didn’t adopt austerity to make the problems worse, it used all its resources to stimulate the economy.
And Iceland looked at the reality of a the need for a thriving middle class. So they reduced household debt and forced banks to take the hit — some 25% or more being sliced off of mortgages and other consumer debt. Iceland was not acting out of ideology, but rather practicality.
The result is that Iceland is the shining light on the hill that we thought was ours. Iceland has real growth in gross domestic product, decreasing unemployment to acceptable levels, and banks that despite the hit they took, are also prospering.
From my perspective, I look at the situation from the perspective of a former investment banker who was in on conversations decades ago where Wall Street titans played the idea of cornering the market on money. They succeeded. But Iceland has shown that the controls emanating from Wall Street in directing legislation, executive action and judicial decisions can be broken.
It is my opinion that part or all of trillions dollars in off balance sheet transactions that were allowed over the last 15 years represents money that was literally stolen from investors who bought what they thought were bonds issued by a legitimate entity that owned loans to consumers some of which secured in the form of residential mortgage loans.
Actual evidence from the ground shows that the money from investors was skimmed by Wall Street to the tune of around $2.6 trillion, which served as the baseline for a PONZI scheme in which Wall Street bankers claimed ownership of debt in which they were neither creditor nor lender in any sense of the word. While it is difficult to actually pin down the amount stolen from the fake securitization chain (in addition to the tier 2 yield spread premium) that brought down investors and borrowers alike, it is obvious that many of these banks also used invested money from managed funds as gambling money that paid off handsomely as they received 100 cents on the dollar on losses suffered by others.
The difference between the scheme used by Wall Street this time is that bankers not only used “other people’s money” —this time they had the hubris to steal or “borrow” the losses they caused — long enough to get the benefit of federal bailout, insurance and hedge products like credit default swaps. Only after the bankers received bailouts and insurance did they push the losses onto investors who were forced to accept non-performing loans long after the 90 day window allowed under the REMIC statutes.
And that is why attorneys defending Foreclosures and other claims for consumer debt, including student loan debt, must first focus on the actual footprints in the sand. The footprints are the actual monetary transactions where real money flowed from one party to another. Leading with the money trail in your allegations, discovery and proof keeps the focus on simple reality. By identifying the real transactions, parties, timing and subject moment lawyers can use the emerging story as the blueprint to measure against the fabricated origination and transfer documents that refer to non-existent transactions.
The problem I hear all too often from clients of practitioners is that the lawyer accepts the production of the note as absolute proof of the debt. Not so. (see below). If you will remember your first year in law school an enforceable contract must have offer, acceptance and consideration and it must not violate public policy. So a contract to kill someone is not enforceable.
Debt arises only if some transaction in which real money or value is exchanged. Without that, no amount of paperwork can make it real. The note is not the debt ( it is evidence of the debt which can be rebutted). The mortgage is not the note (it is a contract to enforce the note, if the note is valid). And the TILA disclosures required make sure that consumers know who they are dealing with. In fact TILA says that any pattern of conduct in which the real lender is hidden is “predatory per se”) and it has a name — table funded loan. This leads to treble damages, attorneys fees and costs recoverable by the borrower and counsel for the borrower.
And a contract to “repay” money is not enforceable if the money was never loaned. That is where “consideration” comes in. And a an alleged contract in the lender agreed to one set of terms (the mortgage bond) and the borrower agreed to another set of terms (the promissory note) is no contract at all because there was no offer an acceptance of the same terms.
And a contract or policy that is sure to fail and result in the borrower losing his life savings and all the money put in as payments, furniture is legally unconscionable and therefore against public policy. Thus most of the consumer debt over the last 20 years has fallen into these categories of unenforceable debt.
The problem has been the inability of consumers and their lawyers to present a clear picture of what happened. That picture starts with footprints in the sand — the actual events in which money actually exchanged hands, the answer to the identity of the parties to each of those transactions and the reason they did it, which would be the terms agreed on by both parties.
If you ask me for a $100 loan and I say sure just sign this note, what happens if I don’t give you the loan? And suppose you went somewhere else to get your loan since I reneged on the deal. Could I sue you on the note? Yes. Could I win the suit? Not if you denied you ever got the money from me. Can I use the real loan as evidence that you did get the money? Yes. Can I win the case relying on the loan from another party? No because the fact that you received a loan from someone else does not support the claim on the note, for which there was no consideration.
It is the latter point that the Courts are starting to grapple with. The assumption that the underlying transaction described in the note and mortgage was real, is rightfully coming under attack. The real transactions, unsupported by note or mortgage or disclosures required under the Truth in Lending Act, cannot be the square peg jammed into the round hole. The transaction described in the note, mortgage, transfers, and disclosures was never supported by any transaction in which money exchanged hands. And it was not properly disclosed or documented so that there could be a meeting of the minds for a binding contract.
KEEP THIS IN MIND: (DISCOVERY HINTS) The simple blueprint against which you cast your fact pattern, is that if the securitization scheme was real and not a PONZI scheme, the investors’ money would have gone into a trust account for the REMIC trust. The REMIC trust would have a record of the transaction wherein a deduction of money from that account funded your loan. And the payee on the note (and the secured party on the mortgage) would be the REMIC trust. There is no reason to have it any other way unless you are a thief trying to skim or steal money. If Wall Street had played it straight underwriting standards would have been maintained and when the day came that investors didn’t want to buy any more mortgage bonds, the financial world would not have been on the verge of extinction. Much of the losses to investors would have covered by the insurance and credit default swaps that the banks took even though they never had any loss or risk of loss. There never would have been any reason to use nominees like MERS or originators.
The entire scheme boils down to this: can you borrow the realities of a transaction in which you were not a party and treat it, legally in court, as your own? So far the courts have missed this question and the result has been an unequivocal and misguided “yes.” Relentless of pursuit of the truth and insistence on following the rule of law, will produce a very different result. And maybe America will use the shining example of Iceland as a model rather than letting bankers control our governmental processes.

Banking Chief Calls For 15% Looting of Italians’ Savings



COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary GET COMBO TITLE AND SECURITIZATION ANALYSIS – CLICK HERE


“The goal of this article is not to deny, by any means, the right of a mortgage lender to foreclose on a borrower who has failed to meet their financial obligations. However, it is intended to elucidate for fellow attorneys and members of the judiciary that while these financial obligations exist, so do the legal protections of our judicial system that were instituted to protect the property rights of Americans that are rooted in the United States and Florida State Constitutions. The judicial system was never meant to be evaluated by how swift justice could be dispensed or by how quickly a particular judge could dispose of cases on his or her docket. As officers of the court, both judges and attorneys are responsible for protecting the integrity of the sys- tem, ensuring that the system is never compromised solely for financial expediency.”

EDITOR’S COMMENT: This article, attached by link, has explicitly articulated the basic problem with foreclosures today as well as providing insight into the changing mortgage approval process. It should be used as an authoritative treatise in memos to the Court. It is balanced and applies knowledge of the mortgage approval and mortgage foreclosure process in the context of a correct perception of the difference between the theoretical workings of the securitization of debt and the actual practice.

While it is about Florida, it is also about the Nation. Basic to our national identity is the adherence to principles of natural and man-made law. The emphasis on the rights of individuals has long been recognized but increasingly ignored over decades of poorly reasoned decisions in favor of big business in what the authors call one of the darkest hours in judicial history.

These authors clearly explain how the system was rigged to provide the appearance of passive entities to avoid tax consequences and in so doing ignored basic requirements of substantive law.

Those entities, the “trusts” were never properly created, nor were they the recipients of transfers of loans into the pools in accordance with the requirements of the Internal Revenue Code nor did they comply with explicit instructions in the pooling and servicing agreements. They then show clearly how the requirements of procedural law, due process, have been systematically undermined and thrown under the bus of  an ideology that treats the individual as last in the chain of priorities instead of first.

“In 2008, the author appeared before a particular court in defending a foreclosure, at which time the judge was rubber stamping a large stack of uncontested summary judgments. Counsel remarked to the judge that in many of those cases, the bank did not establish the necessary predicate for filing foreclosures based on issues of standing and other legally re- quired foundations. The court asked if the author was representing the defendants in those files, and the author said he was not. The author then suggested to the court that his honor had sworn the judicial oath of office, including to uphold the Code of Judicial Conduct which in relevant part requires a judge to “respect and comply with the law and act at all times in a manner that promotes public confidence in the integrity and impartiality of the judiciary.” The court then said to counsel that if he continued in that line of discussion that he would be held in contempt in his court. Interestingly enough, this judge has recently stepped down to accept a position at a Florida foreclosure mill.”

REQUIRED READING: Securitization_Crisis

Roy D. Oppenheim is a senior partner at Oppenheim Law, a South Florida law firm focusing on real estate and foreclosure defense law. Mr. Oppenheim is a recognized expert in foreclosure defense, and has been used as a source by major media outlets including the Wall Street Journal, New York Times, AP, USA Today, FOX, NBC, CBS, the BBC and The Florida Bar News as well as The Daily Show and 60 Minutes.

Give me a little help here: Trusts, REMICs, and the Authority of the Trustee or Trustee’s Attorney to Represent

When U.S. Bank comes in as Trustee for the the holders of series xyz etc., the use of the words Trustee and series certificates give it an air of legitimacy. But this is probably just another bluff. Reading the indenture on the bond (mortgage backed security) and the prospectus, you will see that the “Trust” may or may not be the the Special Purpose Vehicle that issued the bonds.

And of course I remind you that the “borrower” (whom I call an “issuer” for reason explained in other posts) signed a note with one set of terms and the source of funding, the investor received a bond with another set of terms (and parties) who in turn received some sort of transmittal delivery or conveyance of a pool of “assets” from a pool trustee or other third party who obtained the “assets” under an entirely different set of terms (and parties) including a buy back provision which would appear to negate the entire concept of any unconditional “assignment” (a primary condition for negotiability being the absence of conditions and the certainty that the instrument sets forth all obligations without any “off-record” activity creating a condition on payment).

In short, we have a series of independent contracts that are part of a common scheme to issue unregulated securities under false pretenses making the “borrower” and the “investor” both victims and making the “borrower” an unknowing issuer of an instrument that was intended to be used as a negotiable instrument and sold as as a security.

One of the more interesting questions raised by another reader is this issue of trusts. care to comment on the following? I’ll make it an article and post it. Send it to me at Want to be a guest on the podcast show? Submit an article that gets posted.

1. What is a trust? How is it defined? How is it established for legal existence? Does it need to be registered or recorded anywhere?
2. Can a trust legally exist if it is unfunded? (If there is nothing in the trust to administer, is there a trust?)
3. What are the powers of the Trustee of an unfunded trust? Can a Trustee claim apparent or actual authority to represent the holders of bonds (mortgage backed securities) issued by a Special Purpose Vehicle — as an agent? as a trustee? Again what are the “Trustee’s” (agent?) powers?
4. Who can be a Trustee.
5. Can a financial services entity otherwise qualified to do business in the state claim to be an institutional trustee?
6. Can a financial services entity that does not qualify to do business in the state, not chartered or licensed do business as a bank? a lender? a securities issuer? a trustee? a trust company?
7. If the mortgage backed securities (bonds) are sold to investors what asset or res can be arguably in the trust?
8. If the mortgage backed securities (bonds) contain an indenture that purports to convey a pro rata share of the mortgages and notes in a pool to the owner of the certificate of mortgage backed security (bond) what asset or res can be arguably in the trust?
9. If the Special Purpose Vehicle has filed with the IRS as a REMIC conduit (see below) then how it own anything since by definition it is a conduit and must act as a conduit or else it loses tax exempt status and subjects itself to income and capital gains taxes?


Real Estate Mortgage Investment Conduits, or “REMICs,” are a type of special purpose vehicle used for the pooling of mortgage loans and issuance of mortgage-backed securities. They are defined under the United States Internal Revenue Code (Tax Reform Act of 1986), and are the typical vehicle of choice for the securitization of residential mortgages in the US.

REMIC usage

REMICs are investment vehicles that hold commercial and residential mortgages in trust and issue securities representing an undivided interest in these mortgages. A REMIC assembles mortgages into pools and issues pass-through certificates, multiclass bonds similar to a collateralized mortgage obligation (CMO), or other securities to investors in the secondary mortgage market. Mortgage-backed securities issued through a REMIC can be debt financings of the issuer or a sale of assets. Legal form is irrelevant to REMICs: trusts, corporations, and partnerships may all elect to have REMIC status, and even pools of assets that are not legal entities may qualify as REMICs.[2]

The Tax Reform Act eliminated the double taxation of income earned at the corporate level by an issuer and dividends paid to securities holders, thereby allowing a REMIC to structure a mortgage-backed securities offering as a sale of assets, effectively removing the loans from the originating lender’s balance sheet, rather than a debt financing in which the loans remain as balance sheet assets. A REMIC itself is exempt from federal taxes, although income earned by investors is fully taxable. As REMICs are typically exempt from tax at the entity level, they may invest only in qualified mortgages and permitted investments, including single family or multifamily mortgages, commercial mortgages, second mortgages, mortgage participations, and federal agency pass-through securities. Nonmortgage assets, such as credit card receivables, leases, and auto loans are ineligible investments. The Tax Reform Act made it easier for savings institutions and real estate investment trusts to hold mortgage securities as qualified portfolio investments. A savings institution, for instance, can include REMIC-issued mortgage-backed securities as qualifying assets in meeting federal requirements for treatment as a savings and loan for tax purposes.

To qualify as a REMIC, an entity or pool of assets must make a REMIC election, follow certain rules as to composition of assets (by holding qualified mortgages and permitted investments), adopt reasonable methods to prevent disqualified organizations from holding its residual interests, and structure investors’ interests as any number of classes of regular interests and one –- and only one -– class of residual interests.[3] The Internal Revenue Code does not appear to require REMICs to have a class of regular interests.[4]

Qualified mortgages

Qualified mortgages encompass several types of obligations and interests. Qualified mortgages are defined as “(1) any obligation (including any participation or certificate of beneficial ownership therein) which is principally secured by an interest in real property, and is either transferred to the REMIC on the startup day in exchange for regular or residual interests, or purchased within three months after the startup day pursuant to a fixed-price contract in effect on the startup day, (2) any regular interest in another REMIC which is transferred to the REMIC on the startup day in exchange for regular or residual interests in the REMIC, (3) any qualified replacement mortgage, or (4) certain FASIT regular interests.”[5] In (1), “obligation” is ambiguous; a broad reading would include contract claims but a narrower reading would involve only what would qualify as “debt obligations” under the Code.[6] The IRC defines “principally secured” as either having “substantially all of the proceeds of the obligation . . . used to acquire or to improve or protect an interest in real property that, at the origination date, is the only security for the obligation” or having a fair market value of the interest that secures the obligation be at least 80% of the adjusted issue price (usually the amount that is loaned to the mortgagor)[7] or be at least that amount when contributed to the REMIC.[8]

Permitted investments

Permitted investments include cash flow investments, qualified reserve assets, and foreclosure property.

Cash flow investments are temporary investments in passive assets that earn interest (as opposed to accruing dividends, for example) of the payments on qualified mortgages that occur between the time that the REMIC receives the payments and the REMIC’s distribution of that money to its holders.[9] Qualifying payments include mortgage payments of principal or interest, payments on credit enhancement contracts, profits from disposing of mortgages, funds from foreclosure properties, payments for warranty breaches on mortgages, and prepayment penalties.[10]

Qualified reserve assets are forms of intangible property other than residual interests in REMICs that are held as investments as part of a qualified reserve fund, which “is any reasonably required reserve to provide for full payment of” a REMIC’s costs or payments to interest holders due to default, unexpectedly low returns, or deficits in interest from prepayments.[11] REMICs usually opt for safe, short term investments with low yields, so it is typically desirable to minimize the reserve fund while maintaining “the desired credit quality for the REMIC interests.”[12]

Foreclosure property is real property that REMICs obtain upon defaults. After obtaining foreclosure properties, REMICs have until the end of the third year to dispose of them, although the IRS sometimes grants extensions.[13] Foreclosure property loses its status if a lease creates certain kinds of rent income, if construction activities that did not begin before the REMIC acquired the property are undertaken, or if the REMIC uses the property in a trade or business without the use of an independent contractor and over 90 days after acquiring it.[14]

Regular interests

It is useful to think of regular interests as resembling debt; they tend to have lower risk with a corresponding lower yield. Regular interests are taxed as debt.[15] A regular interest must be designated as such, be issued on the startup day, contain fixed terms, provide for interest payments and how they are payable, and unconditionally entitle the holder of the interest to receive a specific amount of the principal.[16] Profits are taxed to holders.

Residual interests

Residual interests tend to involve ownership and resemble equity more than debt. However, residual interests may be neither debt nor equity. “For example, if a REMIC is a segregated pool of assets within a legal entity, the residual interest could consist of (1) the rights of ownership of the REMIC’s assets, subject to the claims of regular interest holders, or (2) if the regular interests take the form of debt secured under an indenture, a contractual right to receive distributions released from the lien of the indenture.”[17] The risk is greater, as residual interest holders are the last to be paid, but the potential gains are greater. Residual interests must be designated as such, be issued on the startup day, and not be a regular interest (which it can effortlessly avoid by not being designated as a regular interest). If the REMIC makes a distribution to residual interest holders, it must be pro rata; the pro rata requirement simplifies matters because it usually prevents a residual class from being treated as multiple classes, which could disqualify the REMIC.[18]


A REMIC can issue mortgage securities in a wide variety of forms: securities collateralized by Government National Mortgage Association (Ginnie Mae) pass-through certificates, whole loans, single class participation certificates and multiclass mortgage-backed securities; multiple class pass-through securities and multiclass mortgage-backed securities; multiple class pass-through securities with fast-pay or slow-pay features; securities with a subordinated debt tranche that assumes most of the default risk, allowing the issuer to get a better credit rating; and Collateralized Mortgage Obligations with monthly pass-through of bond interest, eliminating reinvestment risk by giving investors call protection against early repayment.

The advantages of REMICs

REMICs abolish many of the inefficiencies of collateralized mortgage obligations (CMOs) and offer issuers more options and greater flexibility..[19] REMICs have no minimum equity requirements, so REMICs can sell all of their assets rather than retain some to meet collateralization requirements. Since regular interests automatically qualify as debt, REMICs also avoid the awkward reinvestment risk that CMO issuers bear to indicate debt. REMICs also may make monthly distributions to investors where CMOs make quarterly payments. REMIC residual interests enjoy more liquidity than owner’s trusts, which restrict equity interest and personal liability transfers. REMICs offer more flexibility than CMOs, as issuers can choose any legal entity and type of securities. The REMIC’s multiple-class capabilities also permit issuers to offer different servicing priorities along with varying maturity dates, lowering default risks and reducing the need for credit enhancement.[20] REMICs are also fairly user-friendly, as the REMIC election is not difficult, and the extensive guidance in the Code and in the regulations offers “a high degree of certainty with respect to tax treatment that may not be available for other types of MBSs.”[21]

The limitations of REMICs

Though REMICs provide relief from entity-level taxation, their allowable activities are quite limited “to holding a fixed pool of mortgages and distributing payments currently to investors.”[22] A REMIC has some freedom to substitute qualified mortgages, declare bankruptcy, deal with foreclosures and defaults, dispose of and substitute defunct mortgages, prevent defaults on regular interests, prepay regular interests when the costs exceed the value of maintaining those interests,[23] and undergo a qualified liquidation,[24] in which the REMIC has 90 days to sell its assets and distribute cash to its holders.[25] All other transactions are considered to be prohibited activities and are subject to a penalty tax of 100%,[26] as are all nonqualifying contributions.

To avoid the 100% contributions tax, contributions to REMICs must be made on the startup day. However, cash contributions avoid this tax if they are given three months after the startup day, involve a clean-up call or qualified liquidation, are made as a guarantee, or are contributed by a residual interest holder to a qualified reserve fund.[27] Additionally, states may tax REMICs under state tax laws.[28] “Many states have adopted whole or partial tax exemptions for entities that qualify as REMICs under federal law.”[29]

REMICs are subject to federal income taxes at the highest corporate rate for foreclosure income and must file returns through Form 1066.[30] The foreclosure income that is taxable is the same as that for a real estate investment trust (REIT)[31] and may include rents contingent on making a profit, rents paid by a related party, rents from property to which the REMIC offers atypical services, and income from foreclosed property when the REMIC serves as dealer.[32]

The REMIC rules in some ways exacerbate problems of phantom income for residual interest holders, which occurs when taxable gain must be realized without a corresponding economic gain with which to pay the tax.[33] Phantom income arises by virtue of the way that the tax rules are written. There are penalties for transferring income to non-taxpayers, so REMIC interest holders must pay taxes on gains that they do not yet have.

Irrational Economics: What You Should know About Money

Gambling establishments know it, amusement parks know it, retailers know it — anything that separates your perception of spending your own money from the reality results in your spending more. And in the case of the American consumer, we are spending consistently more than we earn and more than we could ever pay back. 


We are all participating in a Ponzi scheme, relying on the next influx of credit from our home, credit card, auto loan or other lending scheme to pay the minimum payment on past debts. Meanwhile when we use chips at the gambling casino, we are not spending “money” so we spend more of it. When we use credit cards, we are not spending “money” so we spend more of it. When we use debit cards, we are not spending money so we spend more of it.


The result is that we walk out of the casino either broke or possibly in financial ruin. We get the credit card bill at the end of the month and we didn’t realize how much we spent. We see “over-limit” fees, late fees, and all kinds of interest and fee items that result in a “minimum payment” that is guaranteed to keep us in debt for life. We get our bank statement at the end of the month and for the 20% of us who even look at it, we get the same surprise — we spent more than we realized using our debit card, in stores and on the internet. We borrow on our home equity credit lines and increase our monthly payments to a level that is out of reach, or in the case of most Americans, to a level that is simply more out of reach that before (what’s the difference, I can’t pay it anyway).


For those of you who revel in conspiracy theory, here is one that is true. The deck is stacked against everyone by a tacit agreement between government and business. They want us stupid and ignorant. The Government, the retailers, the gaming establishments, the banks, the banking networks, non-bank credit card issuers and others on the receiving side of the dollars you spend all want you to avoid paying actual cash. Because they know that if you have cash in your hand you will regard it as yours, as you will be less inclined to part with it. They know that at the end of the month, if you are spending actual currency, you will be the one with money in your pocket and not them. 


Millions of Americans are steadily increasing their spending on credit cards, because they have no other place to go for the money to pay for their normal monthly bills — groceries, utilities, etc. Many are taking down the full amount of their home equity lines of credit for fear that these sources of credit will be frozen — a trend that is growing in the industry. People are taking this money and socking it away in investment accounts, which I hope are in Euro’s because the dollar is going to continue taking a major hit and inflation, while it is a global problem, is headed for far worse territory than most other places on the planet. 


The United States is a place of negative savings (i.e., debt) from top (Federal government) to bottom (you). And nobody is going to help you or your children or grandchildren because all the players have a vested interest in lying to you, misleading you and encouraging you to look at your finances as something other than your future wealth and security. If you are looking for help, look only to yourself and your family members. Get yourselves together and decide on how you are going to navigate the this mess. 


Here are some tips that will help:


  1. If you must use credit cards to “make the month” then you are headed for a disaster. So plan for the disaster instead of burying your head in the sand. Get one card that you bring the balance down to zero and use it sparingly, making payments exactly on time and allowing the revolving credit option to be used. So you don’t want to pay the card in full each month, you want to pay it in two or three months. Get a new telephone line and give out the number to your friends. Put the old line on voice mail and unplug it, because the creditors are going to be calling. If you don’t hear the call, it will be less stress. Most card companies do not sue, they hound you through collection agencies. So don’t enter into payment  arrangements with them, and don’t use bankruptcy just because you piled up credit card debt. 
  2. For Debt that you already have incurred and will incur in the near future, keep this in mind. You can game the system just like they have gamed you.  Inflation normally is not a  major factor in long term debt. But it is now. If you put off paying the debt, whether it is fixed or revolving, as long as possible, it is VERY possible that inflation will outpace the interest charges. There is no guarantee on this, but at this moment it looks highly probable. So if you pay these debts in 3-5 years it might cost you a fraction of the VALUE of what you owe now. 
  3. Pay in cash for the things you are buying if at all possible. It will keep you focussed on what you are spending and if you put the known expenses in envelopes at the beginning of the month, you will still have money at the end of the month.
  4. Your mortgage or rent payment takes priority. if that means not paying a credit card, so be it. Keep your house. It is the one non-dollar denominated asset you have. It is your inflation hedge.
  5. If you can’t pay the minimum on the credit card, don’t pay it at all. It doesn’t make any difference.
  6. Credit card payments should be the last thing on your list to pay after food, housing, medical etc. 
  7. If you think you are headed for bankruptcy try to hold out until the next congress gets to work. It is highly probable that the Republican changes will be reversed and that the old rules will return along with higher exemptions. 
  8. If you can’t get to an ATM to withdraw the cash and spend cash, then  use the debit card and your PIN, knowing that this is coming out of your bank account. But remember that each time you use that plastic card, you are one step removed from the financial decision as to whether to spend. The one who ends up holding the bag is you.
  9. Take advantage of credit card balance transfers with zero interest wherever you can. Play the game. 
  10.  If you owe taxes, make some minimum payment that you choose arbitrarily. Don’t enter into an agreement or make contact with the IRS unless they contact you.
  11.  If you are falling behind in your mortgage or under stress, don’t wait until the breaking point. Call your mortgage company NOW and tell them you need an accommodation. Get a moratorium on part or all of the payments. Even skipping one payment might make all the difference in the world.
  12.  Do NOT overdraft your account and do NOT go for a payday loan. There is NO benefit for you to do either. Both put you in the hole deeper. Work out something with your utility, borrow from a relative (AND PAY IT BACK!), but don’t go for these short-term options. All they do is take more money out of your pocket. 
  13.  If your credit score is very high, but YOU know you are headed for disaster, then get as many cards as you can and use them judiciously, keeping in mind the above. If you are screwed anyway, the amount does not make any difference. 
  14.  GAME THE SYSTEM: Think of your own ways to “Create” money or money supply in your life. Have Plan B for when you lose that job — what business could you get into on your own that takes very little money to start and which will give you SOME income. Look around and see what people need. You’d be surprised at what people are willing to pay for if it involves making their life easier, or making something convenient — like shopping for seniors etc.
  15.  Eat Healthy and exercise: It will reduce your stress level and bring more oxygen and nutrients to your brain. You are going to need your brain for everything it is worth to game the system and escape from the trap that was paid for you and the rest of us. 


These tips are contrary to what you will hear from Suze Orman and other people. They are controversial. While I believe this is the best advice, I could be wrong. Use your own brain and when you consult with others remember the 80-20 rule. 80% of the people you ask, don’t know much and will give you stock answers. Those are the people that will end up broke when this is all over. But by all means seek out the smartest people you know and talk about these things. 



The mere thought of the Fed issuing more of the derivatives that caused this crisis is sending central bankers into their back rooms wringing their hands. We are leading the world to the final conclusion that we cannot be trusted with money.

I have said many times in this post that there is not enough money in the world to bail this thing out. The answer is “none of the above” in terms of the options the Fed is looking at. The bottom line is that houses and therefore mortgages were inflated beyond supportable fair market values. Thus the CMOs, the derivative market as a whole, the auction market and everyone else who holds an interest in these mortgages are dealing with over-valuation. 

Our current regulatory system and FASB accounting policies have not anticipated this condition and thus we have no mechanism in place to effectively deal with the problem. The solution posed by Barney Frank is actually the answer — provide an opportunity to mark down these mortgages for the purposes of the borrowers payments, along with an opportunity for everyone to share the upside when the recovery begins. If we don’t do that we won’t see recovery for 10-20 years. If we adopt his plan, the recovery can start immediately. The Fed is rearranging deck chairs on the Titanic here. Neither they nor anyone else can cover the impact on the $500 trillion derivative market out there. 

The fact that other central bankers are looking at alternatives validates our premise here that the dollar is not merely going to take a hit like it did before Volcker stepped in, it is headed toward extinction unless we act responsibly. We have undermined the governments of many countries around the world by allowing Wall Street to run wild. We couldn’t have done more harm to them if we had attacked them militarily. They can and must respond to protect their nations. Our arrogance is not going to stop them from disengaging from U.S> policy and economics. Only humility and responsible action will restore confidence in our economy and our currency. 

Go to and see this article and others examining current conditions.

The Wall Street Journal  
April 9, 2008
Fed Weighs Its Options in Easing Crunch
April 9, 2008; Page A3

WASHINGTON — The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.

Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed; issuing debt under the Fed’s name rather than the Treasury’s; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.

  The Issue: The Fed has sold or committed a lot of its Treasury portfolio to support markets. Some worry it will soon run out of room to do more.
  The News: The Fed is considering several contingency plans for getting more lending capacity so that won’t happen.
  The Bottom Line: The Fed has lots of firepower left before it has to turn to these contingencies.

No moves are imminent because the Fed still has plenty of balance sheet room for additional lending now. The internal discussions are part of a continuing effort at the Fed, similar to what is under way at foreign central banks, to determine its options if the credit crunch becomes even more severe. Fed officials believe the availability of such options largely eliminates the risk of exhausting its stockpile of Treasury bonds and thus losing its ability to backstop the financial system, as some on Wall Street fear.

British and Swiss central banks also are contemplating contingency plans. For now, the European Central Bank is reluctant to consider options that require substantial modifications of its standard tools.

The Fed, like any central bank, could print unlimited amounts of money, but that would push short-term interest rates lower than it believes would be wise. The contingency planning seeks ways to relieve strains in credit markets and restore liquidity without pushing down rates.

The Fed is reluctant to heed calls from some Wall Street participants and foreign officials for the Fed to directly purchase mortgage-backed securities to help a market that still is not functioning normally.

Before the credit crunch began in August, the Fed had $790 billion in Treasury securities on its balance sheet, about 87% of its total assets. Since then, it has sold or lent about $300 billion. In their place, the Fed has made loans to banks and securities firms to assist them in financing holdings of mortgage-backed and other securities. Some on Wall Street say the potential for further declines in Fed treasury holdings could leave it out of ammunition.


The Fed holds assets to manage the nation’s money supply and influence the federal-funds rate, which banks charge each other on overnight loans. When the Fed buys Treasurys or makes loans directly to banks, it supplies financial institutions with cash; in effect, it prints money. The cash ends up as currency in circulation or in banks’ reserve accounts at the Fed.

Since reserves earn no interest, banks lend cash that exceeds their required minimum. That puts downward pressure on the federal funds rate, currently targeted by the Fed at 2.25%. The Fed could purchase securities and make loans almost without limit, expanding its balance sheet. That would cause excess reserves to skyrocket and the federal funds rate to fall to zero. The Fed would contemplate such “quantitative easing” only in dire circumstances. The Bank of Japan took this step this decade after years of economic stagnation.

Weighing the Possibilities

So the Fed is seeking ways to expand its balance sheet without causing the federal funds rate to drop. The likeliest option, one the Fed and Treasury have discussed, is for the Treasury to issue more debt than it needs to fund government operations. The extra cash would be left on deposit at the Fed, where it would be separate from bank reserves on deposit and thus would have no impact on interest rates. The Fed would use the cash to purchase an offsetting amount of Treasurys in the open market; for legal reasons, it generally cannot buy them directly from Treasury.

Treasury’s principal constraint is the statutory limit debt. Treasury debt was $453 billion below the limit Monday. In the past, Congress always has responded to administration requests to raise the limit, sometimes only after political theatrics.

Fed officials also are investigating the feasibility of the Fed issuing its own debt and using the proceeds to purchase other assets or make loans. It has never done so; the legality is unclear. Some foreign central banks, such as the Bank of Japan, do so.

Another possibility is seeking congressional approval to pay interest on banks’ reserves immediately instead of waiting until a 2006 law permits that in 2011. If the Fed paid, say, 2% interest on reserves, banks would have no incentive to lend out excess reserves once the federal funds rate fell to that level.

Congress put off the effective date because paying interest on reserves reduces the Fed profits that are turned over to the Treasury each year, widening the budget deficit. Although preliminary explorations suggest Congress would be open to accelerating the date, the Fed is leery of depending on action by Congress.

The Fed is inclined to use any additional maneuvering room to lend through its existing and recently expanded avenues. Officials are reluctant to buy mortgage-backed securities directly. They worry that such purchases would hurt the market for MBS that the Fed is not permitted to buy: those backed by jumbo and subprime and alt-A mortgages, which are under the greatest strain.

Moreover, the Fed is not operationally equipped to hold MBS and would probably have to outsource their management. Such holdings wouldn’t help avert foreclosures much, since the Fed would have little control over the mortgages that comprise MBS.

Write to Greg Ip at greg.ip@wsj.com1

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Mortgage Meltdown Consequences


Mortgage Meltdown Consequences — New Money, Old Money and New Dynamics — 

Cashless ATM, “second chance bank accounts” and other services auger well for Small Banks and Credit Unions.


The simple fact is that there isn’t any small bank who can’t provide the same services to any type of customers that a large one can. And if States would start depositing their entitlement and other money and revenue into state chartered local community banks, they would regulate their own state and local economies by insuring that reinvestment through loans would be on the local level with local deposits and a return to common sense in lending. It would also score political points for anyone running for local or statewide office. 


News from the Bureau of Engraving and Printing in Washington D.C. (BEP) — they are going to change the size of the various denominations of U.S. currency. There are also changes coming to prevent the Supernote coming out of North Korea which uses the same paper and managed to get the same printing presses that the BEP uses. They have been flooding the market with counterfeit currency quite successfully and the trend seems to be on the increase although, according to government reports, if they can be believed, the problem is not yet a large one.


A clean-out of the ATM cash locations will start to occur when the new bills come out since 85% of the cash terminals in most portfolios are unprofitable anyway and the operators will not be inclined to spend more money on a new cash dispenser for a location that isn’t making money anyway. This will present a new opportunity for those who permit or operate Cashless ATM terminal locations (Community banks, Credit Unions and Independent Sales Organizations). 

Networks like NYCE, AFFN, American Express, COOP and CU24 that allow “scrip” terminals (A/k/a Cashless ATMs) will be the prime beneficiaries of this trend. Cirrus and PLus who merely look away are likely, especially now that they are public, to specifically encourage the use of Cashless ATM after years of “opposing” it on paper. 

Companies like SMARTBanks (which has long-dominated the world of cashless ATMs) are likely to become major players in financial services as their volume once again mushrooms and their offering of services continues to diversify. It seems that with every step, the financial institutions that seek to block the ability of the small bank or credit union competitor cause another event that eventually comes up and hits them in the face, like a rake stepped upon in the field. 

Add to that the availability of “second chance checking” for those who don’t qualify to open a regular checking account and overdraft privileges on these strictly electronic bank accounts, and you have a prescription for a resounding come-back of the small financial institution and the death-knell of the once mighty giant players. 


“Second chance checking” places the small financial institution squarely in the path of the giants (who are now otherwise occupied with saving their skins) seizing the opportunity to provide services to the “unbanked” or under-banked population. Overdraft privileges allows small institutions to partner with -non-predatory lending vendors and offer a smart and socially acceptable way of providing short-term emergency loans placing them squarely in the way of growth of Payday loans.


Adding to this are world events that certain increase the risk if not the certainty that the dominance of the U.S. dollar in world currency is coming to an end, and that with constant devaluation of the dollar and inflation, merchants are starting to demand other currencies. There is even a tendency in foreign markets that will be vastly exacerbated by the advent of the new money being printed — where older wrinkled dollars are being devalued on the spot in favor of newer, crisper ones. 


In short, the mortgage meltdown with its CDO/CMOs, (really financial derivative breakdown, including over $500 trillion in derivative issues over the years) which undermined the confidence in American financial markets, is likely to cause a not-so subtle shift in the willingness to accept U.S. currency for payment of non-tax debt. And dollar reserves held by central bankers around the world are likely to reflect this shift by lowering the amount of dollar reserves and increasing the reserves of other currencies, especially the Euro. 


In short, people going to an ATM will be looking for alternatives. Even if the twenty dollar bill is preserved as to size in order to save the cash dispensing ATM terminal, the level of distrust as tot he quality and buying power of that money is likely to cause something of a shift in consumer and merchant acceptance of old dollars or even the new dollars, causing merchants to keep more than one currency in their drawers — old U.S. currency, new U.S. Currency and probably the Euro. 


I might add that regulatory influence European Central Bank will be probably vastly increase with respect control of financial markets all over the world including the United States where we have always jealously guarded our sovereignty but now surrendered it to a few financial “wizards” who undermined the position of the U.S., in the world at the worst possible time in the worst possible way with the worst possible outcomes for many borrowers, lenders, underwriters, auditors, investment bankers, and investors. 


Even if the twenty dollar bill is kept the same size there will be a run to the teller windows of banks, the drawer of merchants, and anywhere else people can lay their hands on the new currency which appears more sound. After all, since we are not on any gold standard or other back-up to the value of currency, the ONLY thing maintaining the dollar’s value is the confidence people have in it. 


It therefore follows that most operators of Cash ATMs are going to experience either a drop in the use of the ATM or a complete end to their use if the size of the twenty dollar bill changes — until they install a new cash dispenser. But even if a new cash dispenser is installed, merchants, as in New York City and other parts of the country are encouraging payment with Euros. The current ATM electronic and mechanical infrastructure is not sell suited at present to handle multiple currencies or multiple denominations in different sizes.

The ONLY infrastructure available to handle the versatility of demand for “money” is the merchant’s cash drawer, which will not only inure to the benefit of the operators of cashless ATM machines, but to the benefit of the merchants themselves. It is ONLY by getting a receipt and going to a live cashier that the demands of the customer will be met, at least in the short-term. 

A clean-out of the ATM cash locations will start to occur when the new bills come out since 85% of the cash terminals in most portfolios are unprofitable anyway and the operators will not be inclined to spend more money on a new cash dispenser for a location that isn’t making money anyway. 

This will present a new opportunity for those who permit or operate Cashless ATM terminal locations. Networks like NYCE, AFFN, American Express, COOP and CU24 that allow “scrip” terminals (A/k/a Cashless ATMs) will be the prime beneficiaries of this trend. Cirrus and Plus who merely look away are likely, especially now that they are public, to specifically encourage the use of Cashless ATM after years of “opposing” it on paper. 

Companies like SMARTBanks which has dominated the world of cash ATMs are likely to become major players in financial services as their volume once again mushrooms. It seems that with every step, the financial institutions that seek to block the ability of the small bank or credit union competitor eventually comes up and hits them in the face, like a rake stepped upon in the field. 

With the large financial institutions all in some sort of trouble now and the fact that the small ones were barred from playing in the CDO world (and therefore face no write-offs or liability), the time is ripe for small banks and credit unions to reassert their superiority in numbers, customer service and their ability to field more ATM locations than their largest competitors. Cashless ATMs cost, even now, less than 1/3 of the smallest cash dispensing countertop Cash dispensing ATM and cost 5% of the operating costs of the cash dispensers. Things are changing.

The good news for the consumer is that their convenience fees will go down or be eliminated in greater numbers because of the number of small banks offering surcharge-free access to a growing number of what the NYCE network calls “Point of Banking (a/k/a Cashless ATM a/k/a scrip terminals). 


The bad news is only for the banking giants who will see their ATM fee income and monthly statements income decline as more and more people gravitate back to their local banks. As depositors move and loan business moves and decentralization takes hold of the marketplace, supplanting what was a government-sponsored hegemony of a handful of banks, the flimsy foundation on which the giant financial services business model was built will crack and crumble. 


Add to that the availability of “second chance checking” for those who don’t qualify to open a regular checking account and overdraft privileges on these strictly electronic bank accounts, and you have a prescription for a resounding come-back of the small financial institution and the death-knell of the once mighty giant players. 


All these services and more are now available to any financial institution to offer customers who walk in through their door, through the proliferation of third party vendors who are willing to set up, sell, monitor, score risk and even take the risk on these accounts. It is the dawning of a new age, where the syndication and derivative schemes of the old fashioned giants are replaced by a better market system for distribution of credit, wealth and prosperity. Free-market enthusiasts should be excited.


Boom and Bust Cycles: Predictions on American Life — PART I — MONEY

Boom and Bust Cycles: Predictions on American Life — PART I MONEY

The best predictor of future behavior is past behavior. It’s all we have really. Of course the problem with using past behavior is that we relying on defective memories or reports from people who had their own agenda in relating “facts” that tend to enhance their own future. Thus it is with something of a grain of salt that we take what is reported and convert it in our minds as something we know. 

Accordingly, our predictions are sometimes right and sometimes wrong depending upon the quality of the information we used, our ability to process that information and of course the ever-present probability of intervention of unforeseen acts, events, or plain bad intent. 

This is why when news was news, reporters would seek corroboration from multiple reliable sources before reporting it as fact. Now they report things that are unsubstantiated, partial and misleading, or mere statements of opinion in a hash that is known within their industry as fact based entertainment. It follows that anyone forming opinions on “mainstream” reporting is more likely to arrive at miscalculations and wrong conclusions than before.

Nevertheless, there are some things we know from American HIstory and World History that appear to be true, except for those instances where “revisionists” undertake to change public opinion by denying the painfully obvious with such fervor and passion and persistence that at least some portion of the population comes to doubt their own senses. It is clear that central policies of the United States are increasing resulting in failure to affect outcomes in economics, politics, war, or world society. we can argue over why, but the facts are inescapable as are the conclusions regarding our presents status.

Boom and Bust seems to be a fact if not an inherent part of human nature. We bunch up a group of ideas and theories, right or wrong, and act as if they were not only true but absolute. After a while, with the passage of time, the idea or theory becomes obviously true because “that’s the way it works.” The concept of a theory “proving” true because of people validating it with their behavior (despite obvious flaws in the idea or theory) usually does not occur to anyone — except for old texts, rarely read, by people who started with more basic questions and arrived at reality is which is far more ambiguous and ambivalent than prevailing political and economic theory, slogans or sound bites. 

In the context of this ambivalence and ambiguity we attach our perceptions of American Boom and Bust here for your entertainment or edification. Here are some thoughts on past, present and future which we believe have a high degree of integrity and reliability, based upon our reading, measurements, and interviews with those “in the know” (i.e., people who espouse a theory or slogan that gains currency and  thus, for a while, becomes a self-fulfilling prophecy which is “true” — at least long enough for book royalties and trading of securities to fill their own pocketbook).

MONEY: BOTTOM LINE: After years of enjoying the benefits of being the currency of choice, the U.S. dollar is declining in value and status and will continue to diminish tot he point where our wealth and fortunes depend upon the decisions of foreign sovereign nations and private companies rather than the U.S. treasury or the Federal Reserve. 


The United States will be called on to pay is debts and a series of deep recessions and possibly depression will ensue as a result of our obligation and attempts to pay off the debts created by our borrowing and the free ride that ends when those holding U.S. currency convert to other currencies or other forms of “money.”. This will cause tension in our foreign relations and could lead to war rather than payment.  


Within the last 250 years of American history, 


  • the Colony of Massachusetts declared wampum, the currency of native Americans to be the official currency of the colony. 
  • Virginia used tobacco as currency, 
  • there was no Federal Reserve or central bank at all, on and off, in our history, and 
  • at times the Fed was only as strong or directed as its leader (like Strong who died 18 months before the 1929 crash), 
  • our coin currency came from Spain (the origination of the “dollar”), 
  • paper currency came alternatively from 
    • individual banks where a central exchange was used to publish their relative values, or 
    • paper currency came from the King of England, or 
    • paper currency came from the Federal government or 
    • paper currency came from states or groups of states, and 
    • even now the money supply comes from multiple sources and issuers 
    • only one of which is the Federal government through the Federal Reserve and the United States Bureau of Engraving and Printing. 
  • The rest of our money supply basically comes from private systems of payments varying in media from paper, conversation, or digital representations on some accounting or reporting host located out in cyberspace. 

In ALL cases, the issuance of money led to boom and eventually bust of that currency, which means according to the paradigm we have adopted here, that our current money supply is in for some major changes. Wampum for example, went to zero in value because colonists figured out a way to mass produce it ( a scenario not unlike the current mortgage meltdown which derives from a Ponzi scheme using derivative securities to vastly increase the money supply and circumvent monetary policy). “Not worth a continental” was an expression of disgust with the issuance of currency from our new government during the war of independence. Greenbacks alternately received the same reception, only to come back in other forms. State Bank notes went out of favor only to come back as bank sponsored prepaid branded or co-branded plastic cards. The list is endless. The conclusion is inescapable: currencies come and go. Money changes because it is based upon confidence and trust in the issuer. 


Our prediction is that 


  • private proprietary “money” which has already supplanted government efforts to control the money supply will continue to expand exponentially through issuance of private paper including derivative securities like collateralized debt obligations (which despite the current situation are not likely to go away anytime soon), 
  • together with adoption and acceptance of some foreign currency in lieu of the U.S. dollar by private individuals and companies will lead to an “obvious” conversion (i.e.,  recognition long after the fact) to our money supply, and a deep erosion of the ability of both the Federal Reserve or the U.S. Treasury to have any significant impact on monetary supply. 
  • Thus monetary policy of the United States will increasingly become irrelevant and be regarded as such. It is already happened. This is past and is not a prediction. 
    • Merchants in Manhattan and other places are asking for Euros instead of dollars. 
    • Electronic payment systems go through the Federal Reserve not in its position of authority but rather as a logistical clearing operation between member banks. 
    • “Prepaid” debit and ATM cards, some with “overdraft” (i.e., loan privileges) including payroll, loyalty, wire transfer emulation and other electronic accounts that the Federal Reserve never sees, except indirectly through total balances at member banks, are rapidly taking the place of paper currency or even traditional electronic payments. 

In succeeding installments we will cover the rise and fall of mass transportation, healthcare, war, oil, pharmaceutical companies, education, technology and innovation. In brief we believe the relevant historical cycles point to a severe continued downdraft for current dominant players in oil, healthcare, prisons, pharmaceutical companies (because of innovation in stem cell applications and innovation in protocols that currently result in each aging consumer to ingest hundreds if not thousands of expensive pills per year), insurance, and financial services, while an updraft of great significance is in the works for new companies, transportation, energy, education, medical protocols and procedures and personnel. The big new industry might be the protection of your identity and personal information from everyone including the agencies, companies and people who now pretend to do it for you. 

Mortgage Meltdown: Free Market Theology and Politics

Mortgage Meltdown: Socialized Losses and Expenses

The root of any solution to the current credit crisis and meltdown is politics, which is simply a consensus of opinion. When people consent to an idea like “free market” it seems to work because we make it work. The fact is that we don’t have a free market, we never had a free market, and if we did, the mortgage crisis  would be even worse. When we give up our ideology in favor of thoughtful response to the facts “on the ground” we will have a solution. Failing that, the economy is headed for far worse than ever imagined by the doom  sayers.

There is not enough MONEY in the world to stop this crisis. Mortgage Meltdown/Credit Crisis/Monetary Crisis/Housing Crisis can ONLY be solved politically through a consensus of ALL parties involved. REAL incentives must be present for borrowers, homeowners, bankers, mortgage brokers, appraisers, lenders, underwriters, investment bankers, retail securities brokerage houses, traders, money managers, CFO’s of government and companies and individual investors. “Bailing out” some of the variables just tips the economy more toward ultimate disaster. 

While we have free market forces at work within our economy, sometimes they work and sometimes they don’t. That is why you need a referee (government regulation). Free market ideology is wrong in its premise — that given the chance, everyone will rise to their highest potential, at least in terms of wealth. That has never been true because people are all different, they have all different perspectives and values, and all different life challenges that come from factors outside the closed circle of economic theory. 

In a truly free market, tyranny is the inevitable result. Those with the ambition, leadership qualities and political skills end up with controlling positions in the marketplace and in government such that wealth is unevenly distributed to themselves. Innovations, education, and cultural advances that endanger the dominance of such persons or companies are squelched. It’s legal because we make it legal. For the past 10-12 years American society has been reaching for the “ideal” of non-regulation or “free economy.” Now even the most ardent free market proponents are conceding that it has brought us to the brink of disaster.

In a truly “free market,” the market is actually a closely held dominated society with despotic leadership. Government mirrors the society in which the predatory and monopolistic entities get to pay for legislation and enforcement (and non enforcement) they want. 

In a truly free market, a few people dominate government and the marketplace so that losses and expenses are transferred to the citizens while profits and gains are transferred to the leaders in the marketplace and in government. This is what Bill Maher called “socialized losses.” I would add “socialized expenses.” 

Thus a truly free market is actually a socialized marketplace for the benefit of those at the top. In other words, “free market” is a combination of words stating an idea that does not exist but which politically is accepted because politicians and business leaders refer to it so much it has gained sufficient acceptance by listeners to be considered true. 

Thus it is the opinion of most people that “free markets” exist even though all empirical evidence is to the contrary. 

However as a political tool, the bullet phrase “free market” is appealing and is used to socialize the marketplace for the benefit of a select few right under the noses of the people whose opinion was swayed by disinformation emanating from the top.


  • We already have socialism as the predominant policy in our politics. We just call it other things like “benefits,” “bailout.” loan, relief package, earmarks, etc. 
  • We have socialized medicine — it just works to provide profits to the Big Pharma and service providers instead of medical service to the patients. 
  • We have socialized schools — it just works to provide added money to government budgets instead of education to our children and college for aspirants. 
  • We have socialized police — it just works to put more people behind bars than any other country in the world in a highly secretive privatization of prisons, the owners of which need to know the prisons will always be full. 
  • We have socialized fire departments — but they are sacrificed in budget cuts as soon things get a little hairy. 
  • We have socialized defense — but it used offensively to promote oil and profits pursuant to policies that should have been abandoned decades ago, instead of providing for the defense and welfare of citizens beset by disasters (Katrina) or defending and securing our borders.
  • We even have socialized money — it just works such that non-regulated money floods the marketplace, leveraged off of a money supply that is supposed to be controlled by the Federal Reserve, creating hollow profits and rising stock prices, while the rest of the citizenry deals with prices so high for fuel, food and other essentials that they can’t make it on two incomes.
  • We are a socialized economic society NOT a free market society. It just works for the benefit of the people at the top instead of the usual way of  spreading the benefit throughout the country to all the citizens. 

In a truly free market, Bear Stearns would have gone out of business, the proper result of overreaching behavior that tipped the risk allocations without telling anyone. 

OR, in an environment where free market forces were the goal, the Fed would not only have opened up its window to private investment houses, but also to private individuals and small businesses that were equally in danger of being wiped out. Instead we have the Fed conspiring to bail out one of a dozen variables in the equation that would produce a solution and then, responding to political pressure (something that the Fed was designed NOT to do), it increased the bailout for Bear Stearns 500% so rich people and the people that worked for this firm would not get completely wiped out. 

Careful examination of the Fed bailout of Bear Stearns, however, reveals the perfect plan for bailing out all the players behind all the variables in the equation for solving our monetary crisis, credit crisis, housing crisis, confidence crisis, political and economic crisis: Leaving the opportunity for their fortunes to rise when the crisis is over allows maximum protection for the player to recover, establishes an equilibtrium or plateau that is fairly strong is withstanding further downward pressure, and restores CONFIDENCE in the U. S. financial markets around the world.

By starting out as $2 per share and then moving up to $10 per share, the Fed and JP Morgan established a new precedent that can be applied to borrowers, investment bankers, lenders, investors in CDOs, homeowners who are in foreclosure and homeowners who are at risk. 

If followed out to its maximum advantage, foreclosures could stop, evictions would cease, payments would resume, CDOS (CMOs) would recover their value on balance sheets, capital insolvency would recede, and the opportunity for every one to recover as much as possible would be restored. 

As we have repeatedly said, there is not enough MONEY in the world to stop this crisis. Mortgage Meltdown/Credit Crisis/Monetary Crisis/Housing Crisis can ONLY be solved politically through a consensus of all parties involved. REAL incentives must be present for borrowers, homeowners, bankers, mortgage brokers, appraisers, lenders, underwriters, investment bankers, retail securities brokerage houses, traders, money managers, CFO’s of government and companies and individual investors.

Central to the solution is a political feat of enormous proportions: accepting the fact that housing prices were artificially inflated in 2001-2007. A reduction of the mortgage balances, payments and interest rates combined with an incentive to all players to recover their losses downstream when the market recovers would stop the slide, eliminate the crisis and stimulate the recovery. 


VISA Fraud Costing New Stockholders and Consumers Billions of Dollars

The media and lazy stock analysts have failed to read what was right in front of them. Visa faces some challenging times and in-fighting between the stockholders, the junior financial institutions members and stockholders on the one hand, and the handful of controlling mega-banks on the other hand. The prospects of government anti-trust units and private actions against VISA and other networks has never been higher. It’s not the first time and it won’t the the last.

ATM Fraud and Anti-Competitive Practices

When will the media and analysts report that Visa et al are foregoing $180 million per year in profit for the sole purpose of keeping a death grip on potential competition from small financial institutions, exposing the gaping hole in the “service” offering of a few large financial institutions that control Visa policies? 

This is costing Visa shareholders at least a couple of billion dollars, and restricting the prospects of the company in the global economy. 

It is also costing the American consumers who use ATMs a whopping $5 billion per year in EXCESS fees. And it is costing the American Economy something on the order of $75 billion in revenues to small business owners, in addition to the billions in profits that small financial institutions should be making, and the resulting impact of restricting the ability of small institutions to invest money locally (for lack of deposits they could otherwise attract).

Visa and MasterCard, and NYCE, and STAR and Pulse, are all networks that are essentially controlled directly or indirectly by just a few large financial institutions for the benefit of themselves and contrary to the interests of their junior member financial institutions, the customers of smaller financial institutions, small merchants, artificially inflating costs to the operators of the terminals, the customers/cardholders that use the terminals and depressing their own revenues at the expense of what are now public shareholders.

These institutions have been using the networks to force small financial institutions to use their services (community banks and credit unions), while using their “rule-making authority” (largely regarded as quasi governmental, even though it isn’t), to make sure the smaller banks and credit unions can’t compete on a level playing field in providing ATM convenience. 

The ATM “Scrip” terminal, which performs all ATM functions and allows the merchant to fund the withdrawal from his cash drawer, is a very inexpensive, simple and small-footprint way of extending the reach of small banks and credit unions into stores and other locations that are more convenient to customers, at lower cost to the bank and the customer, and which would enhance sales at smaller merchants. 

It’s use at about 25,000 “off the radar” locations in the United States and hundreds of thousands of locations around the world also increases the volume of transactions, revenues and profit at the network level, so why wouldn’t the networks promote it? Instead they changed their policy in 1997 and have ever since been aggressively publishing bulletins containing “rules” prohibiting ATM Scrip Terminals and threatening banks with $10,000 fines per day. 

The networks enforce this policy through intimidation, and have aggressively adopted policies inhibiting fair competition between their controlling large financial institution, on the one hand —  and all the rest of the depository institutions in the country who would compete with them for deposits and loans customers if they could offer convenient low-cost or no-cost ATM access. 

This puts VISA and other network squarely in the cross hairs of DOJ and private actions for anti-competitive practices (hardly the first time they were accused of that).  

By adopting policies that are plainly contrary to its own business model in order to benefit a few large institutions VISA has decreased its revenues and profits and now threatens to decrease its prospect for maintaining or expanding market share, because the rest of the world is going toward ATM Scrip Terminals. 

Beginning in April 1997, these policies were adopted, after previously allowing, even welcoming the ATM Scrip terminal into the world of ATM convenience. The networks began systematically putting hundreds of companies and processors out of business who allow the scrip terminal to operate. 

By the way, CU24, a credit union network, NYCE and other networks expressly permit “scrip” terminals but do not promote them.  Others don’t exclude it but actively make it difficult for anyone to operate ATM Scrip terminals. The average U.S. surcharge for ATM Scrip is now under $1.00. The average ATM surcharge for the big machines is around $3.00 now. Hence the larger financial institutions, whose death grip on the system prevents smaller institutions from competing with them, are picking up $3 per transactions for those few customers of community banks and credit unions while offering free ATM service to their own customers. The small banks and credit unions can do the same thing but are prevented from doing so by the “rules” of the networks. 

These networks, including Visa with all of its other potholes, have passed rules against it. It is simply a contrived barrier to entry into the ATM convenience model, and all the resulting benefits of getting new customers, depositors and loans prospects.  

It is a barrier to small banks and credit unions who could put out 20  ATM Scrip terminals at a total cost of $20,000 into 20 locations closer to the work and homes of its customers. The networks, particularly VISA, require the small financial institution to invest their $20,000 into One machine which of course presents no competition at all to BOA, Chase etc. 

20 machines strategically placed by each small financial institution would present an intolerable competitive problem for the large banks, so they have squelched it. The cost of that policy now extends, as a result of the VISA IPO, from the financial services marketplace, to investors in Visa equities, who will be deprived of seeing their company’s revenues and profits artificially restricted by a policy that has nothing to do with the business of their company and everything to do with the business of third parties whose interests are antithetical to the interests of Visa’s business model.

Instead of carrying and operating costs of perhaps $200 per year for 20 ATM scrip terminals, small financial institutions face the daunting prospect of paying around $12,000 per month! This is a figure that would all but obliterate those smaller institutions that are profitable and would create solvency problems in credit unions.  

Thus they are required to restrict their ATM presence to one or two terminals when they could be placing dozens if not hundreds out in the competitive geographic area, producing millions of transactions, and substantial revenues to Visa et al. 

How many transactions? The answer is that back in 1997, there were nearly 13 million ATM Scrip transactions per month in the U.S. alone. Now the figure is under 1 million, and that is “sub rosa”. Allowing for the continuation of what had been meteoric growth of the ATM Scrip business, the number of transactions could today could easily exceed 200 million per month. Allowing 8 cents as the revenue of the network for each of these transactions means that Visa et al are foregoing total revenues of at least $16 million per month, most of which is profit. 

Thus somewhere around $180 million in net profit before taxes is being diverted from the networks (mostly VISA) to the benefit of third parties whose business directly benefits from these policies.

Requiring the use of big bulky, machines with vaults, cash dispensers, and other bells and whistles increases the operating cost, cash management, and insurance costs to hundreds of dollars per month, from what would be about $10 per year for the smaller “scrip” terminal. 

How will these networks explain to their member banks and now their shareholders why they are restricting electronic access to depository accounts (which is, after all, their business) and thus eliminating large revenue opportunities and profit on the bottom line? 

And if they do not change their “rules,” then the prospect of other networks or direct agreements between processor, banks and merchants becomes more likely, particularly in view of the fact that the “scrip” terminal is the dominant player in all emerging markets around the world. 

Will stockholders be pleased to learn that Visa profits and market share are shrinking because of the interests of a few large customers in the U.S. domestic banking business?

Mortgage Meltdown: Foreclosure Offense and Defense: Plan of Engagement

I am researching the possibility that there might be a securities violation that could inure to YOUR benefit (not just the buyers of CDOs). You see there are several breaches that occurred here all stemming from the fact that the market was artificially inflated. The scheme most closely resembles a Ponzi scheme and so it smacks of breach of fiduciary duty, lack of TILA disclosures, AND the sale of a security (which means failure to provide a prospectus, right of rescission, and other elements of registering or offering securities for sale of a security). remember that rescission rights, no matter what you may hear to the contrary, could extend to many years. Most people don’t know that. 

And in securities litigation, failure to provide a prospectus disclosing everything including your rescission rights, risk factors and how the deal is actually working, including use of proceeds, rights can extend far into the future with the statute of limitations running not from the date of the transaction, which sometimes happens, but more often from the date you discovered that you defrauded and how you were defrauded. 

The security in this case was the note and mortgage. You were encouraged by all the predatory participants to believe that the house was worth a certain amount of money (i.e., that fair market value was as stated), that you could sit back and watch it go up further without any action on your part, and without any knowledge on your part that the scheme would only work for YOU if they could continue to artificially inflate the apparent fair market values in the housing market. That way, you were told, you could either refinance and get money out of the deal or sell and get money out of the deal, all without any risk at all, or so it seemed. This then is a passive investment promising a return based upon the offering and the “work” of the offeror. 

All of these legal theories overlap, along with fraud in the inducement, fraud in the execution, failure to disclose under SEC rules, and violations of the various banking regulations which require a lender to do due diligence. In this case the lender did no due diligence (hence the proliferation of “no doc Loans) because they knew in advance that they were not assuming the risk of loss in the event of default. 

If you have a mind to do so I would encourage you to read the 10k and other filings of Countrywide Financial Corporation and you will see that they were selling the CDOs with a return of 8%, which of course is higher than any mortgage rate they were getting. The proceeds from the sale of the securities were allowed to be used for operational expenses INCLUDING service of the debt. Right there in black and white and signed by the executive of the company itself in full disclosure to avoid jail, is an admission of a Ponzi scheme —- which by definition is a scheme in which a greater fool down the line puts in money which is then used to profit the Ponzi operator and to pay prior “investors” until the money runs out.

So I would start with someone that can audit your closing documents from a TILA (Truth in Lending Act). Second I would look up some securities lawyers that really know their stuff, and who might be willing to take this on a contingency. And I would look up the class action lawyers in your neighborhood and have a talk with them. I am certain they will be very interested. Also go see and pester your local City Attorney and County Attorney and State Attorney would be very interested in this because they are ALL (1) under pressure to get relief for the government agency or unit and (2) understaffed and not very knowledgeable about the terms of relief that are available. They need help and you through your connection with me and others, can provide it. You can give them our blogsite so they can be brought up to speed. I can serve as adviser, expert or whatever. 

Here are some of the possible objectives that could be set without regard to any evaluation of the likelihood of success in your situation or any other:

1. Rescission and damages: tricky to get both, but the theory would be that you were deprived of the money you spent, you were deprived of the benefit of the bargain, and you lost money just by moving in and reasonably relying on what appeared to be the due diligence of the lender, appraiser, underwriter, etc., none of whom was doing the normal due diligence because there was no actual risk to them — including the fact that they they all could express plausible deniability. What they didn’t figure on, because they were too short-sighted, was the sudden implosion. So the plausible deniability defense is gone, a casualty of sheer volume. No lender, appraiser, or underwriter can expect to pass the giggle test when they go out and value a house at $250,000 one week and then $275,000 the following week, and then $335,000 the next month without wondering whether these prices are a real. 

2. Reduction of mortgage balance to reflect inflated values. So if your mortgage is $225,000 and the house is now showing a fair market value of $185,000, you should get a $40,000 reduction in the principal due on your mortgage.

3. Reduction in the interest rate, and getting fixed rate.

4. Reduction of payments without negative amortization.

5. Refund of loan origination costs or reduction of mortgage further for those amounts.

6. Refund the down payment you made or reduction of the balance further for that amount.

7. Payment of compensatory damages

8. Payment of Attorney Fees

9. Payment of treble damages under applicable RICO and similar acts.

10. Payment of punitive damages for bad behavior.

11. Payment of exemplary damages to serve as an example to others who might engage in the same wrongful behavior.

12. Settlement (where both parties release each other from claims made in litigation) MIGHT include a provision for reduction of your mortgage balance and reduction of your payments; this could be tied to an agreement wherein over the years if you are able to refinance or sell the house for more than the amount of the reduced mortgage, the lender can participate as an equity partner in the house. If worded properly, this would enable the lender, the investment banking operations and the owners of CDOs to restore the value (all or some) to their balance sheets, thus getting them out of trouble with regulatory authorities in terms of the viability as a continuing business. If such settlements occur on a widespread basis, the housing market will stabilize more quickly and after it stabilizes, the prospects for an earlier recovery are correspondingly enhanced. If real estate values recover, then tax revenues to government will stabilize proportionately and also recover. If people are kept in their homes, the prospect of ghost villages virtually vanishes.

13. With the causes of action for SEC violations, fraud and breach of fiduciary duties involved, there is nothing to stop people who have already been evicted from their homes from bringing these suits and settling with the added factor of taking that vacant house, putting them back in it, with a little money in their pocket so they can right themselves and go on with their lives. 

We are not being so presumptuous to say that we have the key to put ALL the toothpaste back in the tube. However, this approach takes into account the needs of the economy as a whole as well as individual victims and the perpetrators whose downfall might simply hurt more people.

I know this is a nasty business. But it is business. Don’t get mad, get even. And don’t get even, get ahead. When you discuss this with others leave out the the moralizing, and present the “conspiracy” in a calm, deliberate and organized way. Remember that lawyers are busy and some are lazy. You need to get to the meat of the situation quickly to interest them and what you want is someone to take this on a contingency. 

Investment Advice

  • Several people have emailed me regarding what to do with their investments. I am not Warren Buffett and I don’t have a crystal ball so what I say here should be checked against other knowledgeable analyses. Keep in mind that most people are full of s–t. Everyone thinks they are a genius in an up market. In a down market, everyone still thinks they are a genius, like gamblers because they count their successes and don’t count their losses. Most economists, securities analysts (I used to be one), institutional traders (I used to be one), fund managers (I used to be one) etc are ill-trained, poorly educated, not well-rounded, and basically go with the herd. They sound good but they don’t know a thing about real economic behavior. Account representatives are even worse. Their job is to get you to do something without concern to wether you make or lose money (if you find one that doesn’t fit the mold, hold onto him or her for dear life).
  • First any investment in money market, CD, US Treasury, or other strictly dollar denominated assets including actual cash or deposits on hand should be converted to non-cash assets or non-dollar denominated assets. There are several internet banks and other companies that will allow you to keep accounts in dual currencies or more. My assumption is that the dollar is in for a crash. My theory is that if I am right, then you will make a lot of money. If I am wrong, there is little to suppose that the Euro or Canadian dollar or the Yen or Yuan will do badly. Either way you are probably pretty well protected.
  • Precious metals are always an inflation hedge but you are depending, again, on perception of value as opposed to real value. It is not likely that Gold ever again be “money.” hence it will always be a commodity and thus subject to the rules and trends of the commodity trading marketplace. The same holds true for corn, oil, and other commodities. yes they are likely to increase in value (and they present an inflation hedge as well) but you probably should not venture into commodities now unless you are already a successful commodity trader. Pick an ETF or other fund and let someone else make the trading decisions.
  • Stocks are not necessarily bad particularly if the company does not depend upon US consumer spending, and if the company does not hold or depend upon receiving US dollars. If it is getting Euros in payment for goods and services or other currencies around the world that are not pegged (i.e. a currency whose value is derived from whatever the value of the U.S. dollar is — BE CAREFUL),  then if it is a good company it will do well in the intermediate term even if it gets hit with the usual over-selling that occurs when an economy fails. 
  • Don’t stop looking at fundamentals just because it is in another currency. It is true that you “make money” if the dollar dives and the foreign stock dives less, but that is not a very safe strategy. Find even financial institutions that are oversold because of the general fear of bank failures. Avoid Citi, BOA, Lehman, and all of the other major national banking groups. They are all at risk. Think about the firms that figured out the crash months or years ago, like Goldman Sachs and see how they are doing now. 
  • Bonds are not necessarily bad either for the same reason, and the same with CD equivalents etc. As long as principal interest, dividends etc are paid in Euros or some other currency not tied to the dollar, you should do OK, if you pick right on the company or mutual fund.
  • Keep in mind that most people are unwilling to accept the coming crash and that they may be right and that I may be wrong.
  • Why Euros? Because it is the ONLY currency of consensus. 2 dozen countries are involved in the Euro, thus giving you immediate diversification of risk. 
  • Real estate: Avoid bargain locations — they might never come back, avoid locations that might be affected by flooding from rising sea levels, use leverage if you can afford the staying power, and stay in for the long haul (3-5 years minimum). This is a non-cash asset whose value will rise proportionately to the decline in the value of the dollar. If the dollar does not decline, and you have avoided problematic locations, you will still be OK. 
  • Jewelry: For short term trading and turnovers in the marketplace there are probably some profits to be made. I don’t recommend it. There are a lot of people who know more at a glance than you would with an electron microscope and a handbook.
  • Lending Money: Tie the interest payments and the principal to the real rate of inflation and use an index like oil rather than the CPI which at this point has been rearranged so many times the tires are worn out. 
  • Borrowing Money: Avoid borrowing at ridiculously high rates (in case I am wrong) and avoid if possible, the imposition of indexing on inflation. If indexing is going to occur, argue for the CPI, which the government will keep at the lowest possible levels in order to keep social security and other payment increases to a minimum. A reasonable loan will put you in the position of tremendous leverage and profit if I am right and still give you ordinary returns on investment if I am wrong.

Mortgage Meltdown: Remedial Legislation

Mortgage Meltdown Remedial Legislation

Barney Frank has a good idea that will work. Mortgage notes must be reduced without penalty to borrowers, and of course continue the tax exemption for short sale. 

Cooperation will be needed by FDIC, Federal Reserve, SEC, FASB, IRS, Controller of Currency and Treasury Department. 

I would add the following AFTER reducing the mortgage by a flat percentage (because it will take too long to figure out 10 million mortgages on a case by case basis):


  1. Contingent reverse amortization (betting that housing prices will recover particularly in the event that this plan is put into effect). 75-25 in favor of homeowner up to recovering value of home at time of purchase. Then 75-25 in favor of Lender over purchase price until full value of mortgage is covered. Encourages homeowners to stay in their homes instead of abandoning them. Covers 8.8 million homes instead of 1 million.
  2. Allow contingent equity to reported as actual capital for lenders. Allows capital requirements and reserves to be met and allows further lending, increasing market liquidity in the credit and money markets.
  3. Allow contingent equity to be reported as footnote capital for investment banking. Allow financial institutions to recover write-downs and avoid additional write-downs.
  4. Allow contingent equity to be capital for CDO holders, including where used as collateral.
  5. Use flat relief percentage unless hardship is demonstrated. HUD has hearings. Suggested decrease in mortgage debt 20%.
  6. Use Fed Funds rate plus 1% as interest rate, 30 year amortization fixed. 3 point service fee that can be paid up front or 5 points if added to note. This applies to all mortgages. Opt-out provisions can apply for those homeowners who wish to opt out. Many will do so rather than go through the hassle of adjustment, even though most of the work will be done by lender.
  7. 1 year moratorium on all foreclosures on primary residential dwellings, giving time for mortgages to be converted.
  8. 2 month moratorium on payments of principal and interest on primary residential dwellings. Insurance and Taxes must still be paid. Borrowers given up to an additional 6 months to bring their escrow accounts for insurance and taxes up to date.
  9. After 1 year moratorium, foreclosures resume only on those homes where the mortgage note has been reset, as above, and borrower has defaulted. 
  10.  After 10 years original mortgage and note reinstated, adjusted for payments as above.
  11.  On second homes provide relief, by half of the above, and after 5 years original terms reinstated. 
  12.  Credit cards: Remedial cap on interest at 15%
  13.  Credit Cards: If interest rate is already 15% or under, reduce the rate by 25%.
  14.  Cap overdraft, bank fees etc. at 60% of current industry rates. 
  15.  Payday advance: cap fees, costs and interest at 10% per month. Require payroll deduction for repayment over maximum of 10 weeks.
  16.  Establish aggressive regulatory environment wherein the ultimate holders of risk (CDO owners) are educated as to actual quality of the mortgage-backed securities. This would include indexes identifying subprime loans, subprime borrowers, and various levels of prime borrowers statistically, so that ratings agencies, insurers, investors, fund managers, CFO’s and Treasurers can properly evaluate the risk of the investment. 
  17. This uses full information to allow market forces to dictate the credit liquidity offered to home buyers and other consumer debt. In other words, if the buyers of CDOs had been told the truth about these mortgage backed securities, and other aggregate derivative investments, neither the ratings  nor the demand for them would have been nearly as robust. 
  18. The meltdown would never have occurred. instead the incentive was to put out as many mortgage loans as possible, artificially inflated prices, because the lenders, closing agents, appraisers etc., were all incentivized to appease the confusion and worriers of the borrower and get the borrower to sign papers.

Economy Meltdown: The Virus is Spreading — Remedy=TRUTH

The bottom line is that the Federal reserve is fast becoming irrelevant for reasons described below (and foecasted by Alan Greenspan in 1996), proprietary currencies already out number fiat currencies worldwide, and a return to local government chartered bank currencies and other trusted issuers is probably the only way we can restore order to the markets. Holding onto the current assumptions and policies is like holding onto the railing of the Titanic.

It is becoming apparent that two things are true about derivatives and their current pernicious effect (actual and perceived) on the financial markets and world economies: (1) the true total of derivatives held in the marketplace actually approaches $500 trillion and (2) all $500 trillion of them are suspect now because of the unconscionable actions of a few people who used their creativity with as much concern for consequences as a three year old playing with matches.

Let’s put this in some perspective. The pendulum is swinging too far, as it always does. Yet it is pretty obvious that it has not even hit the half way point in its swing. Debt securities of all types are going to get hammered, credit is going to dry up, and equities are going to take a massive hit, along with the U.S. dollar. Eventually the market will reach some plateau (I wouldn’t call it equilibrium) and there will be a realignment of power, privilege and values.

Just using the most obvious indicators it is clear that the first order of business is to keep people in thier homes, immune from foeclosure at all costs regardless of who is to blame. The way to do that is for all players to realize that they have a dog in this hunt and that lower returns and some write-offs are better than complete write-offs and an economic depression.

The second order of business is to take on regulatory actions in the U.S. and abroad that over time will re-assert the appearance and reality of a fairly fair marketplace. Monetary policy — loosening credit, is not going to help the lenders who are already out of balance in their capital accounts.

Restoring the nomimal value of loans, even at lower levels and lower interest rates will soften the blow that we all see coming now. The only way to do that is to forget punishing anyone, and use the channels in place to restore order to the real estate, debt markets and equty markets.

The patchwork attempted every night by senior economic players in government and Wall Street cannot work except in spurts. It should be abandoned in favor of policies and regulation that reflect more concern for the integrity of the marketplace, the welfare of the constituents, and the return of honor, character and truth.

The truth is that there is not enough money in the world to bail out anyone in the current situation. It is obvious that central monetary policies are worrisome at best. It is equally obvious that power is trending back toward the states from the Federal government that is paralyzed by competing well-paid lobbyists. There is another obvious observation: power, control, and value is trending fast to other monetary centers and currencies other than the U.S. dollar.

We are now in the same place on an even trading field, as everyone else. This means our dollar must be backed by real value, real productivity, and a real economy that runs independent of impulse purchasing by buyers going deeper and deeper into debt.

What does this mean for the U.S. Citizen? Start with safety. The number of homes at risk is now around 7 million. This presents the prospect of over 20 million people displaced, seeking, finding or not finding alternative housing. The total humer of hosueholds at risk for debts other than mortgages appears to be over 35 million, which means that there are over 100 million people whose next meal is in doubt. Social “unrest” is a certainty unless an entirely new mindset is adopted by those who purport to be leaders.

For people with money, there are options that must be considered immediately. Holding U.S. dollars or assets that can only be valued in U.S. dollar denominations, presents a far greater risk than holding even a bad investment in some other currency. Diversification has never been more important because of the uncertainties. But the probability of a U.S. dollar recovery of any meaningful proportion is dim at best. Holding non-U.S. dollar denominated assets is probably the best route even if it means taking some losses now. But remember that real esatate can be sold for any currency. It will decline another 20% or more in many places but it will also recover.

Inflation is starting to take on a hockey stick trajectory if you look at a basket of goods purchased by the bottom 2/3 of the population.  The divide between those who have investments and can take protective measures outside U.S. currency, and those who do not have that luxury will be ever widening.  The average working stiff is going to continue to get paid in U.S. dollars that are worth less and less each month, while the number of dollars he or she receives remains constant.

My radical suggestion is that states and state banks go back to issuing proprietary currency. Deals should be made with holders of precious metals and financail isnitutions to give credibility and integrity to the new currencies and a new common exchange medium other than the U.S. dollar should emerge as the balancing mechanism.

Here is a little secret for you: most of the governors sitting on the Federal Reserve Open Market committee are well aware of the probability that new currencies will emerge.

Here is another secret, the use of derivatives has created “money” in volumes far in excess of all the fiat currencies in the world — so we have alrady gone private with currency when nobody was watching.

The Federal Reserve has been reduced to an inefficient bookkeeper when the transactions happen to flow through as ACH and wire transfers.

The state governments are on the right track — taking matters into their own hands. They should get support of the people — if they do not adopt the corporatocracy rules of Washington. In some states it is too late.  But we can always hope…..

Mortgage/Credit Bust: Vapor without Value

The American Economy: Vapor without Value

My effort here has been to point out that we are creating a fraudulent environment, much like an embezzler, that requires more fraud and more lies each time to cover up the last fraud and the prior lies. Our economy is now one which runs on boom and bust and cannot run any other way unless fundamental changes are made in the paradigm of American politics, econometrics and economics.

This morning, Paul Farrel wrote an article that is precisely on point, in explaining the bust we had in the 1990’s, explaining the bust we are having now, and explaining the next bust which is already in the making. 

The only thing I would add is that I think the policy makers are going to try the same thing again right now to “bail out” the current economic collapse.

If you want to protect your wealth, your retirement, your nest egg your rainy day fund, read this carefully and start thinking about it. 

The American economy is now a house of cards trading in vapor that is “rated” with value. There isn’t enough  real “money” in existence that will bail us out of the funny “money” that has been created. A major shift in our perspective must occur, and it starts with telling the truth. Here, reprinted from this morning, is the best summary of the unvarnished truth that I have found. 


A mind-blowing machine

In America, land of the bubbles, the next pop will be the biggest

By Paul B. Farrell, MarketWatch

Last update: 7:32 p.m. EST Jan. 28, 2008

ARROYO GRANDE, Calif. (MarketWatch) — Three cheers! Wall Street’s got a new rally song: “I’m dreaming dreams, I’m scheming schemes, I’m building castles high.”

Actually it’s the 1919 tune that launched the roaring run-up to the ’29 crash and the Great Depression. Remember the lyrics: “I’m forever blowing bubbles. Pretty bubbles in the air. They fly so high, nearly reach the sky. Then like my dreams they fade and die.”


And it still fits today! Listen to venture capitalist Eric Janszen’s scary new paradigm in “The Next Bubble,” a Harper’s Magazine report: “That the Internet and the housing hyperinflations transpired within a period of 10 years, each creating trillions of fake wealth, is, I believe, only the beginning.”


Translation: The next bubble is already expanding. Now listen very closely as Janszen makes the single most dangerous prediction of 2008: “There will and must be many more such booms, for without them the United States can no longer function. The bubble cycle has replaced the business cycle.”


After the collapse of the 1990s dot-com bubble we laughed at all the hype they had spewed: “This time it’s different.” “New paradigm.” “New economy that only went up.”


Well, stop laughing: The new, new came true, says Janszen. Seriously, the economy and the stock market can no longer function without an ever increasing series of bubbles, one after another, rapidly expanding then bursting, with all the manic trading, risk, uncertainty, hypervolatility and distortions that come with it.

Janszen traces bubbles through history: From the 1720’s South Sea Bubble to the housing-subprime bubble. Bubbles are accelerating, becoming more frequent, a frenzy feeding on itself: “Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble fully deflated, a new mania began to take place.”


What’s so scary is not that the subprime bubble was happening so fast on the heels of the dot-com bubble, not that the pundits, the public and the policy makers all appeared to be ignoring it. What’s really scary is that our best and brightest leaders in Washington, Wall Street and Corporate America wanted to create a bubble! They even threw jet fuel on this raging fire with cheap money, favorable taxes and minimal oversight.


Of course the Treasury and the Fed will never admit it, but they saw the housing bubble as a healthy economic necessity in their warped ideology! In their myopic minds, the housing bubble was the messiah “saving” America from a big, bad bear/recession.


Publicly they denied the bubble’s toxicity, dismissing it as “regional froth.” Privately, they conspired to create a massive new bubble driving America deep into debt.


‘New economy’ morphs into out-of-control robot


This new ideology is extremely dangerous: It assumes the American economy can no longer be managed by politicians or Wall Street quants. The “new economy” has a life of its own, a “Terminator” from a dark future, an “I, Robot” from Asimov’s sci-fi world.


Yes, our economy has become a self-sustaining “bubble-blowing machine” inventing new bubbles at warp-speed even before the last is buried, in endless reincarnations of Schumpeter’s “creative destruction” cycles.


What’s next? More asset-backed bubbles. The dot-com ’90s created $7 trillion in market value. The housing boom created $12 trillion in “fake wealth.” Janszen predicts the next great bubble will be a $20 trillion “alternative energy” bubble. In fact, Wall Street’s already hustling biofuels, solar, wind, nuclear, geothermal and hydroelectric as the new alternative energies destined to replace oil, gas and coal in this next new economy.


Timing? The new “alternative energies” bubble will last about 8 years, from a 2005 launch till a peak around 2013, when it will “creatively destruct,” when all possible “fake wealth” is squeezed out, when investors wise up to the scam, when that new bubble pops.


In his finale, Janszen admits that when the “alternative energy” bubble finally self-destructs around 2013, “we will be left to mop up after yet another devastated industry,” while Wall Street “will already be engineering its next opportunity.”


But be warned: Even before we near the end of the “alternative energy” bubble, the law of unintended consequences could trigger a meltdown, not of the bubble but of the “bubble-making machine” itself! The machine will implode, taking down Wall Street, Washington, Corporate America … and with it, the “new economy,” the “new paradigm” and the “bubble-making machine!” (e.s.)


‘Black Swan’ self-destructs ‘shadow banking’ derivatives


The trigger? A “black swan” off the radar and invisible to the quants managing the world’s derivatives.


The brilliant supertrader and risk manager Nassim Nicholas Taleb says a “black swan” is an extremely rare, improbable event (like 9/11) that cannot be predicted, yet has catastrophic impact. Black swans are events outside the vision, experience and technology of the world’s derivative traders’ geniuses.

What will the black swan destroy? How about the derivatives market that spreads so far beyond subprime loan obligations.


Pimco’s Bill Gross warns that $500 trillion of derivatives are hiding in a “shadow banking system” that “craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage … with no requirements to hold reserves against a significant ‘black swan’ run that might break them.”


Derivatives have become a renegade army of “I, Robots.” “According to the Bank for International Settlements … total derivatives amount to over $500 trillion, many of them finding their way onto the balance sheets of SIVs, CDOs and other conduits of their ilk comprising the Frankensteinian levered body of shadow banks.”


Shadowy? Pyramid schemes? Frankenstein? Terminator? Black swan: Gross paints a much darker future than Janszen: “The last two decades alone have witnessed pyramid schemes involving savings and loans/junk bonds, the small investor/dot-coms, and now global bonds/subprimes … in each and every case the originator of a surefire ‘can’t miss’ concept collected huge premiums from a willing investment public, only to see the pyramid collapse either of its own merits or from the lack of additional gullible investors. There will be more to come, much like a regular university that welcomes a never-ending stream of new ‘students’ who pay annual ‘tuition’ to be ‘educated.'”


Higher truth


Never-ending: Gross and Janszen agree on that. But they’re both wrong. The biggest low in Janszen’s argument: “Given the current state of our economy, the only thing worse than a new bubble is its absence.”


Wrong, wrong, wrong! Remember, this new paradigm assumes that the only way the American economy can exist in the future is if Wall Street’s greedy “bubble-blowing machine” keeps feeding on itself, creating an endless, accelerating succession of ever-bigger bubbles.


Folks, that’s one of the dumbest economic theories ever, silly “new age” magical-thinking touted as a scientific basis for the new self-indulgent ideology of Wall Street, Washington and Corporate America.


There’s a higher truth: The best (not worst) strategy would be to let the “bubble-blowing machine” implode, live with the absence of a new bubble for a while, then quietly step back and reassess our unsustainable “growth-at-all-costs” economic policies that are secretly designed to benefit the self-interests of Wall Street’s insiders who profit by endlessly blowing bubble after bubble … after bubble … after ...(e.s.)

Brave words from someone who isn’t afraid to challenge the conventional wisdom folks. Listen closely to what he says.

Mortgage/Credit Meltdown: Stimulus vs. Economics 101

Mortgage Meltdown: Economics 101

Theoretically economics should be a separate discipline from politics. It is referred in textbooks as the study of scarcity and allocation of resources. It ought to be an “assist” in developing national, regional and local policies that lead to better lives of citizens. In fact, however, it is merely an arm of political partisanship and ideology. It has become the effluent (sewage) of econometrics (measurement of economic data) because the measurements are selected for the purpose of furthering political ambition, power, and ideological agendas. The resulting economic policies are not surprisingly ineffective, unrealistic, and often lead to disastrous consequences.

The latest blast from the past is the talk of “economic stimulus.” In other words, more of the same, deferring the inevitable crash until somebody else gets into public office and we can blame them for not controlling an economy that has been scrambled with political agendas for 50 years or more. 

We don’t need and should not want “stimulus.” What we need is to correct our perspective, change our behavior, and pursue a zero tolerance on economic policies that are not designed to add value to our society, our competitiveness in a world economy, and encourage the one thing that has distinguished the American experiment from all other societies and systems of government and rules of the marketplace — INNOVATION. Capitalism and a republic operating under democratic principles are good things in theory. But if not practiced in reality they become mere buzz words behind which ambitious people hide their personal goals.

Economists are right when they constantly remind us that we are in a constant process of trade-offs. We take more from there and gain a little somewhere else. We spend a little here and take a little from there. This is true. Yet the same economists come up with exotic theories supporting unscrupulous politicians of all political persuasions. We are told that spending is not real spending because the multiplier effect will produce more in taxes than it costs the government. Ornate “theories” predict the recovery of the economy, and the necessity of periodic recessions, boom and bust cycles, etc.

For example, if the multiplier is 5, then one dollar spent by the government produces $5 “stimulus” to the economy. If the average tax is 20%, the government spends a dollar and gets it back. And five people get the benefit of extra revenue. But it doesn’t work that way. The multiplier is rarely 5 even if it averages five for the entire economy. The revenue is subject to costs that are not taxed. And the tax code which consists of thousands of pages of conflicting policies, procedures and favors to large political contributors, hardly provides 20% tax revenue. it is more like less than 1%, which is why the deficit continues to rise an alarming rate.

Add to that the intense pressure from government, business and banks for consumers to spend every penny they get and the pressure to improve one’s credit score at all costs so that more debt can be acquired and spent, and we are left with a nation whose citizens are completely enslaved in debt, a government that is hopelessly in debt and locked in policies that can only make the matter worse, and a currency whose value is correctly perceived by the rest of the world as resting on an economy based on the BIG LIE: Using whatever means are at the disposal of decision makers, they coerce, trick and otherwise convince consumers to buy items they don’t need or even want. Now that consumers are basically out of money and have no more credit available, the government wants to get more credit into their hands and give them just enough money to make a down payment on acquiring more goods than they need or want. 

This is not “stimulus”. It is pushing us over a cliff. If we want to give citizens some extra money, then let us couple it with reality — education on saving the money, retraining their spending and building wealth. 

A basic working assumption of economists is that individuals are rational maximizers most of the time. In other words they are successful, most of the time, about making decisions that are in their best interests. It is a nice assumption but isn’t true. Perhaps it could be closer to true if (1) everyone received adequate education and (2) government, industry and finance gave up the desperate goal of spending more regardless of the costs. 

As it stands, we are a generation developing a legacy that is the opposite of our parents — the inheritance will be trillions — tens of trillions — in debt and a currency that is nearly worthless. We will be a society of uneducated, unsophisticated citizens who cannot spell “innovation”, much less come up with it. 

And the top 1/2% of the country unaffected by the desperate poverty, hunger and housing situation of their fellow citizens, will debate “stimulus” packages that are geared to channelling even more money to themselves while giving the appearance of helping the nation. The upper class will socialize police services to make sure they don’t get hurt by people who are hungry and disaffected. Fore services will be socialized so that the homes of the wealthy are saved, the lives of the wealthy are saved and the property of the wealthy is preserved. The rest can go the way of Katrina. Healthcare will be socialized but the money will fist go to insurance companies and then to medical providers thus guaranteeing higher medical costs, and the brokering of life and death for profit. 

The solution for the current crisis that threatens us with the worst economic conditions we may have ever experienced, is to stop it. The Fed and finance sector cannot spend our way out of it without creating worse conditions. Punishing the rascals who came up with this scheme of moving risk around under sea shells so fast that nobody knows where it lands is not the answer either. Maybe they deserve jail. But more importantly, we deserve a viable society and viable economy. 

The rascals have the channels already established through which solutions can be passed. Getting rid of them would be like disbanding the one force that could have kept order in Iraq after the invasion — the Iraqi army and police. We need the power of government and the finance sector. It was the the investment banking firms that created the funny money and not the Federal reserve. That is why the Fed’s lowering of interest rates and “increasing liquidity” will have minimal results. 

The brakes have already been outlined in this blog. To summarize, stop the foreclosures (and don’t distinguish between those who “deserve” to be foreclosed), stop the write-offs for lenders, halt the criminal investigations, modify the mortgages down to any level that will keep the houses occupied, provide the owners of CDOs with a return as soon as possible as much as possible, and THEN find ways to crank up the economy without excess consumer spending and debt.

Mortgage Meltdown: Elephant in the Living Room

David Leonhardt: Congratulations on your article today in the NY Times. You addressed the elephant in the living room. For about 100 years, the United States has been acting like an embezzling bookkeeper. First “borrow” a little. Then borrow more because of “necessity”, now you are in debt you cannot pay and living better than you ought to, buying things you don’t need. Now you have better standing in the economic community and you can get credit (you have more because you are spending more, even if it is not money you earned and not value you contributed) whereas before you would have been laughed at. Each dollar you get into your hands becomes a down payment on something bigger and better that you can’t afford. 

People you buy from want you to buy more because they are making more money on more sales. Your employer is getting bookkeeping figures from you that show nice profits so he is spending and investing his “money” wisely or unwise; (money that isn’t there because you took it). Your vendors come up with ways to give you more credit, and the banks discover there is money to be made lending you money. Your balance sheet looks better and better as millions more like you are stealing from themselves (their home equity) or stealing from others to make the down payment on purchasing assets that they don’t need and in many cases don’t want shortly after they buy them. Balance sheets are getting better and better. “Income” is rising. All the economic indicators show that the U.S. is a magical powerhouse that for some reason could not be reproduced in other countries far more established than ours.

Eventually the big LIE gets bigger. Even the people who know or suspect, disregard their own judgment because things are going so well. Like Detroit automakers ignoring the threat from foreign car manufacturers and losing jobs, real income, and real wealth in the process. Assets rise higher and higher in price, more “equity” is created. The fact that the price rise is pulled only partly by demand is not analyzed or reported. Prices are going up because money is being created, printed and conceptualized by merchants, financial institutions and non-financial institutions who have figured out ways to get more money into the hands of the American consumer. Prices are going up because money’s value is going down. Eventually the embezzler starts to rationalize that with all his/her assets he could pay it back if called upon to do so, disregarding the fact that the value is dependent upon the greater fool theory — that someone will always come along and pay more for what you have. All the embezzlers hope for a miracle.

Longevity further “legitamizes” the illegal activity, the theft from your employer, the trick played on your creditors, and the willingness of the creditors to create, promote and allow the fraud and theft to continue. The day of reckoning we always know, comes to the embezzler. In individual cases it hurts only a few dozen people. But when 300 million people do it, it affects billions of people. While waiting for the end and denying it will ever happen, the embezzler become enslaved to their jobs and their standard of lving. They can’t go on vacation because a substitute acountant would discover that the figures have been manipulated — like the basket measured by various price indexes is revamped by a government measuring inflation. The government has an incentive to lie about inflation because if they didn’t, all the pensions and social security and other payments would have to be increased by more each year. That would leave less money for war and social programs. But the the loss of value of the dollar is catching up to us in what is developing as massive hyperinflation — due this year.

First the inflation caused by the greater fool theory. Second the fact that the tide is out on the massive shock caused by the mortgage meltdown —- embezzlement gone wild. The LIE gets bigger and bigger as the government and industry try to cover it up. But other countries with other central banks and other financial institutions and other investors have finally gotten the idea that the U.S. dollar’s “hegemony” as you call it is based upon vapor. We can’t predict what specific actions governments, financial institutions and commercial enterprises will take to protect themselves from the suspicous dollar, but we can predict with certainty, they will protect themselves before they protect us. The consequences of these actions, individually and collectively could be extremely serious to our government, states’ rights (witness greenhouse standards imposed by states where the Federal government failed to step up), regional alliances (witness alliances of attorney generals on tobacco suits and suits against lenders and investment bankers for the mortgage meltdown), where money is stored, and how commercial transactions are conducted. It will probably have a decisive effect on de facto national borders (sorry Dobbs — you are right, but the game is probably over).

The fact is that our economy, more than any other by a wide margin is primarily based upon consumer spending. There is nothing wrong with consumer spending and there is nothing wrong with profit or capitalism. The bitter pill that is coming, whether we like it or not, is that the money is running out. Increasing liquidity is a euphemism for printing money. But the Fed has little effect on the larger set of transactions that create money supply that the Fed cannot control — like the sale of CDO’s with triple AAA ratings, insured by respected bond insurers in order to get money into the hands of unsophisticated, uneducated (thanks to ignoring the educational needs of our young) and clueless people who trust that a system as large as our whole monetary system could not be manipulated, that the appraisal of the value of their house, the mortgage they were steered into by a mortgage broker, and the approval by the lender lends credibility to the transaction (just like on the other end the investor relied on on AAA ratings insured).

By moving the risk from the lender the only motivation was to lend more and devise increasingly sophisticated techniques to get people to sign up for houses on monthly payments they could afford, only to discover that they were guaranteed to lose the house later. By offering the investor a “safe” investment, and developing incentives along the way to sell, package and offer higher rates of return, they guaranteed an unlimited supply of money which would (like in the eyes of every Ponzi) last forever, because the values would continue to increase by 50% per year or more thus enabling refinancing, more fees and more interest as borrowers get deeper and deeper into a debt they will never be able to cover like our embezzler who took just a “little” as a “loan” at the start. 

Presidential candidates and candidates for other offices are skirting the issue because they don’t have the time to study it and therefore don’t understand it. Obama gets close by intuition, Clinton knows only the old school of economics and the econometrics that were manipulated to produce policy. Edwards, undertands the effect but the cause. McCain, Huckabee, Romney and the rest are in the same camp as Hillary. They just don’t understand the implications of selling our tolls roads, ports, military technology etc. to potentially enemy combatants.

Here is the truth: An economy based upon getting funny money into the hands of consumers who are too unsophisticated (because of lack of education) to know what to do with it, and under so much pressure to spend it, and under the spell of making every dollar count as a down payment on more debt, is a house of cards. The dollar is plummeting not because we have a temporary economic problem. It is plummeting because the core assumptions of our economic systems are based upon false figures, and mythology. An economy that is based upon consumers going into debt rather than savings is doomed just as the embezzler is doomed. A 60 inch TV screen that is purchased on debt that the borrower can never repay is not a real sale, not a real loan, and produces no real revenue or profits.

Added to that, like the embezzler, we are now viewed as the the nice guy next store that nobody knew was a criminal. The far reaching effects of the current socio-economic prospects both domestically and abroad are only beginning to surface. How well or badly the domestic and international populations take the reduction of essential social services like housing, food, fire, police and healthcare, nobody knows. History doesn’t give much reason for hope. We are probably in for a transition that will be historic in all perspectives.

Voting Fraud

I’ve kept quiet about this too long. I guess I thought that whoever was doing it would stop out of fear of discovery. I no longer believe that. In my opinion a Republican will be elected in the next Presidential election. Actually that is not true. A more explicitly true statement would be that a Republican will be sworn into office regardless of who was elected. I reach this conclusion easily. You see, I know how it is being done. 

I know the business of creating, programming, using, marketing and selling ATM machines and payment devices like you see in stores where you swipe your card. On the ATM side the company that has the hold on  the market is Diebold, but there are others. The Diebold model is essentially what was used (copied by others) in the creation of electronic “ATM” voting machines. 

Making changes to the design and construction of an ATM machine requires considerable expense and retooling. So even the removal of the receipt function would require considerable programming, changes in telecommunications and manufacturing. It would have been LESS expensive and MORE profitable for Diebold to retain the receipt function. It obviously would provide a clear audit trail which would available to verify the results of any election.

Since everyone requires a receipt or at least the option of a receipt in performing a financial transaction, the programming to support that, and the “intelligence” (the chip inside the machine) and the actual construction of the ATM would need to be changed and redesigned because of the awkwardness of a space where a receipt would normally appear. 

Diebold, which is taking on a new name du jour,  closely connected to the Republican party and the inner guard easily was awarded the contract to produce voting machines across the country by like minded Republican officials who received their marching orders from Washington. Even the method of acquiring the machines was provided from the White House. Nothing was left to chance. 

Favoritism is no surprise, but what was done here is disturbing to say the least. An ATM manufacturer was picked because of the similarity of functions — verifying, authenticating, tabulating, and communicating.

The first design of the voting machine included a receipt which was assumed everyone would want. That design, produced by someone who was merely a design professional working within Diebold in anticipation of getting the contract for voting machines, was based upon obvious functions — security, accurate tabulation, and a receipt for auditing and reconciliation purposes — all functions that any ATM design professional was intimately familiar with. In fact, the original design called for a double receipt — one for auditing in the event of a recount to confirm the automated tally and one for the voter.

Several things happened after that which resulted in events which cast doubt on not only the electoral process generally, but the 2004 election and the New Hampshire Democratic primary specifically. It probably casts doubt on the entire American electoral process. 

First the design was changed eliminating the receipt.  Second, the programming was supplied by an outsource programmer — something that was completely unnecessary and unusual but not unique. Third, the design and programming prevented any audit other than tabulating the numbers that were posted to a candidate. The process by which the numbers are posted to each candidate is not subject to an actual audit where the “transaction” can be examined. Diebold and other companies who have created these machines refuse to share the original programming language to the State and County Officials in charge of elections and who have demanded the “source” code. 

The reason that they have deferred compliance with publishing or allowing access to the source code is not a legal one. It is a political reason. The source code contains permissions for changes in the way that the machine posts the individual vote of an individual voter to one candidate or another. The default method is to post it as it was voted. But the permission is in the code to allow other algorythms to be used. 

Those permissions would not exist unless they were intended to be used. The voting is not automated in the sense of “no human Hands.” The method of posting the numbers to each candidate is an algorythm (software program) which can be tuned in favor of any candidate. The investigating press has explored the manual methods by which the machines could be tampered with, but the probability is that there is a second method of telecommunications with the machines that resets the algorythm to one of several choices.

By doing this, the results of an election can be changed quite easily and with precision. Care would have to be exercised in not creating a landslide in favor of what would have been the losing candidate since the exit polls would clearly be 180 degrees opposite. So the actual results must be monitored during the actual election and modified slowly by diverting votes from one candidate to another. This would require telecommunications in and out to a source other than the Official Supervisor of Elections. Such devices have been minaturized to such small dimensions that one could be looking right at it and not see it.

In the case of the 2004 election, the republicans naively assumed that the election would be close. But they realized by mid-morning  of election day that Kerry was winning by a landslide. Cheney went into the “situation room of the White House” at about 10:30 am after being told by Carl Rove that they had lost big.  Kerry’s people and the news organizations all confirmed a big win for Kerry. Cheney was caught by surprise. The thinking was that only a small amount of “tweeking” would be required. Now he had to change a landslide against them into a narrow victory that could be at least somewhat credible. 

He contacted his confidential IT person who put a particular strategy into motion whereby the machines would start taking some of the votes, then more votes from Kerry and adding them to Bush’s total. At the end of the day, the machine could only report how many people voted, and who they voted for — from a database created in the machine.  What people do not realize is that nothing is truly automated in the magical sense. It takes someone to key in a program to tell the machine what to do when it receives a certain instruction from the keyboard or screen.

Anticipating the possibility or probability of a loss, the Republicans can set up an IT strategy to interdict the voting in the machines so the results would be adjusted to their satisfaction. The machine was designed and programmed in a way that called for an audit which amounted to repeating the readout it originally gave and not the process or programming by which it made the tallies. 

No person has had access to the chip that was in the machine containing the algorythm used in the 2004 election. It was not necessary to manually approach each machine although that certainly was one way it could be done as had been amply and frequently demonstrated by many organizations investigating the potential for massive fraud in the electoral process. In fact, by now, the card containing the instructions for this programming probably cannot be tied any longer to any particular machine. Thus what I am saying here is impossible to verify. 


The second time it surfaced obviously, was in the New Hampshire Democratic primary. The Republicans had picked the candidate they wanted to run against: Hillary Clinton.  Again no surprise, normal politics. When she was the obvious front runner, nothing was required. She was set to win Iowa, New Hampshire and most of the other primaries handily. Stories were planted in the press about how nice she was even to Republicans and Newt Gingrich gave his historic warning about not underestimating the incredible strength of the Clintons. An effective myth of invincibility had been created by a tacit agreement between the Republicans and the Clinton political machine. what promises were made, is left entirely to conjecture. 

Then she lost Iowa — two candidates came out ahead of her. She was headed to New Hampshire where her 20 point lead in the polls, had not only evaporated, it had swung the other way. The day before the election and the morning of election day she was down at least 9 points, which was impossible to overcome. Then came the results where she was consistently ahead for the entire day never losing a margin of less than 2 points except for one brief moment in early tabulations where she was even with Obama. As in the 2004 Presidential election, again the exit polls had an Obama victory and again she was told during election day by her own people that she had lost, and people were ready to jump from her campaign. It was obvious she was losing and would lose big again in New Hampshire. It was equally obvious that going into South Carolina, she would most likely lose by an even wider margin. That would leave Obama as the probable candidate and possibly Edwards if Obama stumbled.

The Republicans new that they had an easy excuse — dislike of Hillary — to peg their November victory on, and that they could even make it wider margin than the 2004 election for that reason. This time it was obvious that the machines had to start interdicting votes from the start in order to create a credible voting pattern that the press would later trace to her staged or unstaged tears in the diner incident. 

Once again, no audit trail and no way of checking — unless someone up in new Hampshire gets a copy of this and someone gets the right IT person to look at the design of the machine as a whole and looks for communication devices that are built into the machine and secondary drives that direct the method of tabulation. 

Unless this is actually revealed in its entirety so that the American public can understand that none of their elections were secure of they used electronic “ATM” voting, it will continue, it will get refined and it will get “better.” The people in control will do everything they can to stay in control and expand their control. That’s why GW had that smirk on his face.   

Mortgage Meltdown: How the Big Boys Control the Rules

Unfair Competition by Large Banks Created the Infrastructure for this Mess

A few people have asked: Why not do a story on the alternative to the cash-dispensing ATM? After considering the research, and seeing a connection with the mortgage meltdown crisis because this situation is the single greatest marketing tool used by  large financial institutions to decentralize banking deposits (sucking local deposits out of the places they were earned and placed for safe keeping and putting them all over the country, if not the world) and to attract banking customers away from their small local bank or credit union who can and does service their needs far better and far more safely than any large company could with its headquarters and decision makers located thousands of miles away.

If you look at this week’s Economist, you will find on Page 86 that countries in Africa (“third world?”) have discovered a far more elegant and inexpensive solution: The customer activated Point of Banking ATM. In fact, if you look hard enough you will find that more than 25,000 ATM’s are already running in this country. If we used that system as extensively here, crime would be reduced to zero at the site of an ATM, ATM fees paid by consumers would be slashed by at least 2/3, more locations and more convenient locations would provide ATM access, and local bankers and credit unions would start getting their share of the business stolen from them by the oppressive tactics used by large financial institutions to undermine the ability of the small financial institution to compete on a fair and level playing field. 

The Point of Banking ATM is what it sounds like. You perform any of the transactions that are currently available on those monstrosities you see attached to banks, in malls, or in large merchant locations. However instead of an “automated” (which frequently does not work) cash drawer and “vault” (which is fairly easy to penetrate), the customer must go to the cashier to receive their cash. Anonymity and embarrassment of NSF works the same way as all ATMs. But in 21 years of use all over the world there has not been a single criminal act against the user of such a machine, the merchant who maintains the store in his location, or the machine itself. Te concept was started by two ex-American Express managers who had been downsized out of their jobs in the 1980’s.

The standard ATM in this country quite successfully invites all sort of criminal behavior ranging from banging a customer on the head for the cash to using construction equipment to break the machine out of the wall. Only in the United States is the far smaller, far less expensive (in cost and operating expenses) Point of Banking terminal in “disfavor”. 

The reason is the usual — those who disfavor it, do so because it would increase competition, lower consumer fees for access to their money, require virtually no maintenance, require no increase in insurance, and require no extra cash on premises because the Point of Banking terminals produce an astonishing rate of 72% sales. In other words, for every $1 taken out of their account, they spend 72 cents of it on average. Thus the unfair hold that these large institutions and large merchants have over others offering or who would offer the same services, is stifled.

Thus competition generated by ATM convenience would be leveled out between small merchants and large ones if merchants could spend a few hundred dollars (there are even Independent Sales Organizations that will install them for free), and receive interchange revenue from the banking system as well as providing their customers with greater flexibility in their payment options and the convenience of going home both with the groceries (or whatever) PLUS the cash. and most of all, enable small banks to effectively compete against large banks.  

Like all ATM’s the Point of Banking terminal gives a receipt. With the cashless ATM the customer presents the receipt to the store operator or cashier and the customer receives his cash, less any purchases he made (if any). The merchants gets the withdrawal electronically deposited to his designated depository account at his choice of financial institution, just like the use of credit and debit transactions — but in this case the merchant makes money rather than loses it to fee charged to him by MasterCard, Visa, STAR etc.

The odd thing about all this is that the machine used to drive Cashless ATM machines is that not only is it readily available, it already exists (by the millions) in almost every merchant location, large and small. It is the exact same terminal you see in every merchant location that accepts credit and debit for payments. It is programmed over the phone to do ATM transactions instead of or in addition to the “Point of Sale” debit and credit. The card is swiped, the PIN inserted and the choices appear on screen as to what you want to do.

So why wouldn’t small merchants, community banks and credit unions demand access to Point of Banking? The reason it turns out is that the banking associations (or the “networks” as they are commonly called), have passed regulations either banning Point of Banking terminals or severely restricting their usefulness or their ability to generate revenue to anyone who installs one. It seems that to small fearful community bankers and credit unions and small merchants these behemoth data processing centers known as MasterCard and Visa, have taken on the aura of a quasi-governmental entity. 

Thus when the networks say the rules are changed, nobody challenges the rules because “you can’t fight city hall.” The networks have deftly positioned themselves as “city Hall” when in fact they are simply private data processing centers controlled by the largest banks in the country — and clearly doing so against the fair trade and practices statutes of every state, against the rules of the Federal Reserve and against the federal and state antitrust laws. The networks have gone even further by publishing information that associates the Point of Banking ATM with strip clubs, gambling prostitution and other vices, whereas the cash dispensing ATM the largest banks use, are genuine banking machines. it is the same tactic being employed in reverse by the ‘Community Association for responsible Lending” which is trying desperately to legitimize the practice of payday predatory lending charging interest upwards of 500% per year. 

The reason is simple. In economic terms it is called “barriers to entry.” There are 6,000 financial institutions in the Untied States alone. About 1% of these banks control the rules, and have in the recent mortgage meltdown, reduced the Federal Reserve to a whimpering ineffective vehicle for monetary policy. The 1% cannel all the fees, perks from deposits and the customers by offering conveniences that the small bank presumably cannot. 

The small bank or credit union cannot create a network of ATM locations that has convenient locations all over the its own marketing area, let alone the region, the country or foreign countries. But they could do so if they only had to pay a few hundred dollars per location and receive a revenue return on that investment. And the merchants whose daily foot traffic can’t justify the large ATM (with all its insurance, cash loading, armored car, security, maintenance and repair problems, not to mention its sheer size) could benefit along with the small friendly community banker or credit union that “installed” his ATM allowing him to put a sign in his window like “ATM 99 cents”, which is about one-third (1/3) the price charged by Bank of America and other banks at their ATM’s. 

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