As If We Needed Any More Evidence

OK, so I haven't blogged for awhile, and the following is a bit stale. Hey, I work for a living, and this isn't getting the attention it deserves.

To preface, for those of you who may think I was late to the bubble prediction bandwagon, I suggest you look here and see that I was predicting the train wreck in December 2005. Beat that, Nouriel Roubini.

We know that the overwhelming majority of opinion makers in the US are just sock puppets for the Financial Overlords. Ditto for our supposed intellectuals. They don't need to rub our noses in it. But along comes Roger Lowenstein in Bloomberg Businessweek to "explain" why there have been effectively no prosecutions resulting from the collapse. It's because, simpletons, there were no crimes committed. Demands to the contrary are just the result of our overheated, plebeian blood.

Well, Roger, here's the deal, and I'm speaking as a former prosecutor who's handled white-collar crimes, which is one more claim that you can make (Yes, I know Daddy was a Wall Street lawyer and Columbia law prof, but I have a shingle on the wall too, and my kids know that doesn't make them legal experts.): If this mess wasn't created by a tsunami of crime, we have glossed "criminal fraud" out of our legal system.

I'm no accountant, and if you want that kind of analysis, I recommend you go read Francine McKenna's column in Forbes, which is heavily linked. I'll stick with what we know of facts and law.

In 2002, the Dot Com Bomb and 9/11 had deflated the preceding bubble (Anybody remember how outraged we were over LTCM? Those were innocent times.), and investment houses and banks were sitting on cash with investors clamoring for it to go somewhere that produced a return. Fortunately, "help" was at hand: real estate.

First, create a demand pool for the money. This required bringing a pile of borrowers to the table who had no business being there. No problem. No-doc loans and "creative financing" (Read: Fake it 'til you break it.) bring everyone to the table.

Second, you need properties that "support" the loans. Again, no problem. You have everything from investment groups flipping properties internally to jack the prices to armies of in-house appraisers for whom "MAI" means "Made As Instructed."

Third, take that freshly inked paper, cut it up like paper dolls, and securitize it all over the place. Get the ratings agencies to help by declaring that poo no longer stinks.

Fourth, the piece de resistance. Cherry-pick the securitized pools and hedge. Then buy credit default swaps on both the bets and the hedges. And THEN sell the swaps upstream and downstream. AIG and the monolines will be more than happy to help.

Oh, don't forget to make sure the regulators remain lapdogs by reminding them that if they do their jobs, the house of cards will collapse, and then there will be no place for them when they leave government and want to earn some serious scratch.

And at every one of those steps, the commissions and fees run hot and heavy. And so do the fibs, the half-truths, the misrepresentations, the blind eyes, and the outright lies. Countrywide lied systemically to produce the greatest pile of toxic, residential mortgages in history. JP Morgan Chase wasn't any different on the commercial side. Chase propped itself up with a forced take-over of Washington Mutual (No, kiddies, it wasn't really WaMu that needed the propping.). Bank of America swallowed Countrywide with all the due diligence of a five-year-old dragging home a stray dog. And Goldman Sachs got caught buried shoulder-deep in the cookie jar, selling products it had created so it could bet against them. And on, and on, ad nauseam, ad absurdum.

And nothing. Few meaningful investigations, fewer prosecutions, and business goes on as usual. Except that it's right out in the open now; no one even bothers with back rooms. And it all gets ignored. So I guess you're right, Roger, in a sick way, because legally there is no crime without a conviction, and there can't be a conviction without a charge. But who are you going to blame, Roger, when Joe Main Street starts treating the rule of law with the same contempt his lords and masters demonstrate?

More on the Bailout

Well, stocks took off like a rocket yesterday because the Feds have come to the rescue and will save us all from Fannie and Freddie. But before you join the latest round of irrational exuberance, you may want to consider a few things.

First, Andrew Napolitano, Fox's con law talking head, thinks the whole bailout is an unconstitutional taking of the shareholders' property and will be tossed in the courts. Given that Judge Wapner's..er..Napolitano's whole schtick is that the federal government can't flush without committing a taking, I'm inclined to take his analysis with a grain of salt. I suspect he's missing a crucial point, such as the terms of the GSEs' charters, which any shareholder's rights would be subject to. Nevertheless, some clever lawyers might latch onto this and throw sand in the gears, and the proposal doesn't need any more grinding mechanisms.

For example, major credit default swap players have concluded the bailout is a credit event triggering the swaps. So far there has been no unwinding because the government guaranteeing payments, so there are no losses. Yet. The guarantees are funded only through 2009, and the protection buyers may see this as the last stop to get off of this train. If that happens, watch out.

Don't forget as well that the bailout won't help vast areas of the market one bit. GMAC is probably spinning in and may file Chapter 11 tomorrow. Its stakeholders are in trouble and can't afford the drain.

We shall live in interesting times.