Scandalous: The Obama Administration Refuses To Prosecute HSBC For Money Laundering

HSBC, Britain's largest bank, knowingly. intentionally, and for years violated U.S. banking laws to launder billions of dollars from drug cartels and from rogue nations under sanctions. This was not simple negligence, this was purely criminal.

There should be a line of HSBC managers and compliance employees being measured now for prison suits, in addition to HSBC itself being prosecuted. Instead, the Obama administration has done precisely what they've done in virtually all high profile white collar criminal cases. They have failed to prosecute. Instead, they have given HSBC a civil fine of $1.9 billlion - a slap on the wrist for an institution that made $16.8 billion in profit in 2011.

For all of his anti-Wall St. and class warfare rhetoric, Obama has been AWOL when it comes to holding actual Wall St. criminals liable. Indeed, under Obama, if you are a criminal, the safest place to be is Wall St., a major bank or a hedge fund operator.

The economic meltdown from the housing bubble should have led to a whole host of criminal prosecutions for fraud. When sub-prime loans were being bundled and resold with a AAA rating, that was not within the realm of reasonable opinion, that was criminal. When Goldman Sachs marketed four sets of complex mortgage securities to banks and other investors without warning of the high risk, or when they "secretly bet against the investors' positions and deceived the investors about its own positions to shift risk from its balance sheet to theirs," that is fraud. Yet the Obama DOJ refused to prosecute Goldman Sachs or anyone else.

As near as I can tell, no one from the economic melt-down of 2007 has been prosecuted by Obama - and its not hard to understand why. That melt-down was caused by Democrat policies over a period of two decades - ones fought by Bush, McCain and most other Republicans. To prosecute anyone for the crimes that occurred in the creation of the melt-down would shine a bright light on the facts - as well as the utter canard that the melt-down was caused by Republican economic policies or de-regulation.

Then there is Jon Corzine, former Democratic governor of NJ, hedge fund manager of MF Global - and the man who oversaw the fraudulent misuse and loss of $1.2 billion in customer funds. He is still walking the streets - and was a major bundler of funds for Obama in the most recent election.

And now HSBC with no criminal prosecutions of either the institution or the individual culprits. As to the institution:

US authorities defended their decision not to prosecute HSBC for accepting the tainted money of rogue states and drug lords on Tuesday, insisting that a $1.9bn fine for a litany of offences was preferable to the “collateral consequences” of taking the bank to court.

Had the US authorities decided to press criminal charges, HSBC would almost certainly have lost its banking licence in the US, the future of the institution would have been under threat and the entire banking system would have been destabilised.

HSBC, Britain’s biggest bank, said it was “profoundly sorry” for what it called “past mistakes” . . .

Breuer was pressed on why the US authorities had agreed to a deferred prosecution deal for the bank. He dismissed accusations that prosecutors had not been hard enough and said that the Justice Department had looked at the “collateral consequences” to prosecuting the HSBC or taking away its US banking licence. Such a move could have cost thousands of jobs, he said.

HSBC has already sacked all the senior staff involved in the scandal, and agreed to stringent monitoring – the first time a foreign bank has agreed to such oversight. “In this day and age we have to evaluate that innocent people will face very big consequences if you make a decision,” said Breuer. “I don’t think anyone is alleging that HSBC was the mastermind of the scheme,” he said. Rather it was their “incredibly lax” monitoring that was to blame. “HSBC was a vital player,” he said. “But they are not the Sinaloa cartel.”

What utter bullshit this is. One, this is a decision that HSBC is large enough that they can avoid criminal sanctions that would be used to crush smaller competitors under this scenario. Two, Breuer's attempt to minimize HSBC's actions as merely "lax monitoriong" is itself a fraud. You had employees being instructed by management to erase identifying information on transactions specifically so the U.S. authorities would not identify them as coming from unlawful sources. That wasn't lax monitoring, it was knowing and intentional money laundering. And a "my bad" from HSBC is not quite sufficient. If the only consequence for the individuals involved is that they got "sacked," that stinks of trying to hide facts that prosecution of these individuals would bring to light.

The Obama administration is utterly lawless. Obama's class warfare rhetoric is nothing but pure window dressing. This really is scandalous.

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Our Post Racial President, The Recession & The Financial Sector

So what caused our financial crisis?

According to Obama, it was Wall Street greed and the lack of financial regulation. Indeed, to prove the point, he had DOJ and SEC initiate criminal investigations of one of the biggest of derivatives traders, AIG's Joseph Cassano. Further, Obama established a commission under Phil Angelides to lay blame - then promptly pushed for vast new financial regulations several months prior to the completion of the commission's report. No need to worry about that though, as the Commission's scope of investigation does not include Fannie Mae and Freddie Mac. This would be the same as commissioning an investigation into the causes of the civil war, yet excluding slavery from the scope of the investigation. The bottom line, even if the useless commission report were of any value, even if its recommendations were valid, and assuming all recommendations were followed completely, given the limited investigatory scope, the reality is that, the chances of the recommendations actually and effectively sorting out our financial sector would be minimal.

Further, it would seem today that the claim that derivatives were at the heart of our financial mess took a major knock over the past month. The WSJ reports that "both SEC and Justice Department investigations, which many had expected to expose the ultimate subprime malefactor, recently evaporated overnight, apparently clearing (AIG's derivatives trader) Mr. Cassano of wrongdoing." Color me not surprised. Derivatives played an important role in spreading risk. They fell apart not because of "Wall St. greed," (nor "white folk's greed," for that matter) but largely because of mark to market accounting rules and an incredibly anomalous turn of events where the market for mortgage backed securities dropped to zero for a period of time.

At any rate, the proximate cause of the sub-prime meltdown, and thus our current fiscal crisis, was the left's social engineering to force erosion of lending standards and downpayment minimums based on what amounts to racial quotas - no finding of any actual racism need be identified. Fannie Mae and Freddie Mac were then used to create massive demand in this degraded market.

The single most important correction Obama could make to insure a financial melt-down of this ilk never again occurs would be to reinstitute reasonable, colorblind lending standards by simpling striking the provisions of the Community Reinvestment Act that, today, punish lending institutions for failing to meet racial quotas without respect to whether any single act of racial discrimination every occurred. Obama would of course retain authority to punish severely any cases of actual racial discrimination in lending. Obama has chosen the opposite tack. He is significantly expanding government enforcement of current CRA provisions as part of his financial "reform."

And now we learn today that Obama, as part of his financial regulations, plans to introduce race and gender quotas into our financial sector itself. This from Real Clear Politics:

. . . Section 342 [of the Senate & House financial regulation bill] declares that race and gender employment ratios, if not quotas, must be observed by private financial institutions that do business with the government. In a major power grab, the new law inserts race and gender quotas into America's financial industry.

In addition to this bill's well-publicized plans to establish over a dozen new financial regulatory offices, Section 342 sets up at least 20 Offices of Minority and Women Inclusion. This has had no coverage by the news media and has large implications.

The Treasury, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the 12 Federal Reserve regional banks, the Board of Governors of the Fed, the National Credit Union Administration, the Comptroller of the Currency, the Securities and Exchange Commission, the new Consumer Financial Protection Bureau...all would get their own Office of Minority and Women Inclusion.

Each office would have its own director and staff to develop policies promoting equal employment opportunities and racial, ethnic, and gender diversity of not just the agency's workforce, but also the workforces of its contractors and sub-contractors.

Is it just me who is getting the old Soviet political officer vibe?

What would be the mission of this new corps of Federal monitors? The Dodd-Frank bill sets it forth succinctly and simply - all too simply. The mission, it says, is to assure "to the maximum extent possible the fair inclusion" of women and minorities, individually and through businesses they own, in the activities of the agencies, including contracting.

How to define "fair" has bedeviled government administrators, university admissions officers, private employers, union shop stewards and all other supervisors since time immemorial - or at least since Congress first undertook to prohibit discrimination in employment.

Sometimes, "fair" has been defined in relation to population numbers, . . .

Lest there be any narrow interpretation of Congress's intent, either by agencies or eventually by the courts, the bill specifies that the "fair" employment test shall apply to "financial institutions, investment banking firms, mortgage banking firms, asset management firms, brokers, dealers, financial services entities, underwriters, accountants, investment consultants and providers of legal services." That last would appear to rope in law firms working for financial entities.

Contracts are defined expansively as "all contracts for business and activities of an agency, at all levels, including contracts for the issuance or guarantee of any debt, equity, or security, the sale of assets, the management of the assets of the agency, the making of equity investments by the agency, and the implementation by the agency of programs to address economic recovery."

This latest attempt by Congress to dictate what "fair" employment means is likely to encourage administrators and managers, in government and in the private sector, to hire women and minorities for the sake of appearances, even if some new hires are less qualified than other applicants. The result is likely to be redundant hiring and a wasteful expansion of payroll overhead.

If the director decides that a contractor has not made a good-faith effort to include women and minorities in its workforce, he is required to contact the agency administrator and recommend that the contractor be terminated.

Section 342's provisions are broad and vague, and are certain to increase inefficiency in federal agencies. To comply, federal agencies are likely to find it easier to employ and contract with less-qualified women and minorities, merely in order to avoid regulatory trouble. This would in turn decrease the agencies' efficiency, productivity and output, while increasing their costs.

Setting up these Offices of Minority and Women Inclusion is a troubling indictment of current law. Women and minorities have an ample range of legal avenues already to ensure that businesses engage in nondiscriminatory practices. By creating these new offices, Congress does not believe that existing law is sufficient.

Cabinet-level departments already have individual Offices of Civil Rights and Diversity. In addition, the Equal Employment Opportunity Commission and the Labor Department's Office of Federal Contract Compliance are charged with enforcing racial and gender discrimination laws.

With the new financial regulation law, the federal government is moving from outlawing discrimination to setting up a system of quotas. Ultimately, the only way that financial firms doing business with the government would be able to comply with the law is by showing that a certain percentage of their workforce is female or minority.

The new Offices of Women and Minorities represent a major change in employment law by imposing gender and racial quotas on the financial industry. The issue deserves careful debate - rather than a few pages slipped into the financial regulation bill.

And Obama campaigned on a promise of healing America's racial divide? Between this and the reverse racism pervading the DOJ, it would seem that, like seemingly all of Obama's promises, the gulf between what he promised and the reality he has brought are night and day.

Update: It would appear that Obama is not merely going to force race front and center of our lending industry, but that his administration has actually resuscitated the very riskiest of loans - no doc's. This from Hot Air (links omitted):

Remember how angry America got in the wake of the housing market collapse about the no-document mortgages bought by Fannie Mae and Freddie Mac? The so-called “liar loans,” also known as “NINJAs” (no income, no job or assets) frequently allowed people who shouldn’t have qualified for mortgages to get loans by simply not disclosing their financial position, and then speculate that the equity would increase fast enough to either flip the house on a resale or refinance under better terms. ABC News and Forbes reports that just two years after the collapse, “liar loans” are making a comeback. . . .

In the height of the housing boom in 2006 and 2007, low-doc loans accounted for roughly 40% of newly issued mortgages in the U.S., according to mortgage-data firm FirstAmerican CoreLogic. University of Chicago assistant professor Amit Seru says that for subprime loans, the portion exceeded 50%.

Then came the housing collapse, with subprime loan defaults playing a leading role, particularly the low-doc “liar” variety. The delinquency rate for subprime loans reached 39% in early 2009, seven times the rate in 2005, according to LPS Applied Analytics.

. . . [T]he federal government has jumped feet first back into risky lending, this time through FHA . . .:

. . . the Federal Housing Administration is making 95% LTV [Loan To Value] loans to low-income borrowers with poor credit and little savings, he argues.

Say what?

Well, the fact that the federal government has shifted its social engineering to FHA after all but destroying Freddie and Fannie should come as no surprise. Nor should it come as a surprise that they’re using the same mortgage-backed securities mechanism that created the global financial collapse to shed the cost of guaranteeing those loans. But one might have thought that the collapse of the housing bubble from overspeculation and irrational supply of credit would have taught Washington a lesson about interfering with the lending markets.

If FHA is guaranteeing loans for 5% down to people with bad credit and no liquidity, then be prepared for the next collapse and bailout, this time at FHA. . . .

The only way that Obama and the far left can lead us down this road to hell again is because they have successfully hidden the actual causes of our current economic crisis. When Obama was elected, the chance that Congress would actually investigate the causes of the crisis dropped to zero. And indeed, it would seem that our Post Racial President is actually going to increase the degree of racial / social engineering in our financial sector. God help us but we are in a race - will Obama destroy our country before we can throw he and the far left out of office?

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Wall Street, A Billion Dollar Fraud & The Mortgage Meltdown

I have long been a defender of Wall St. against charges that it was the primary cause of our current economic troubles. Obama's demonization of "greedy" Wall St. is designed both to stoke populist anger and to hide the heavy hand of Democrat's race based social engineering - in which Obama took part - that is the real proximate cause of our current fiscal crisis. Moreover, I believe Obama's proposed changes to the financial regulations are not only unnecessary, but on at least several levels, deeply counterproductive (see here and here).

That said, one thing that I do support is much stronger penalties for white collar crime. For example, if the accusations in this SEC Complaint of a billion dollar fraud are true, than Goldman Sachs should be severly punished and its employee, Mr. Fabrice Tourre, locked up and the key thrown away. Do read the SEC Compalint, as it is a window into the derivatives market, a snapshot of the relationship between Wall St. and the mortgage meltdown, and a road map to a billion dollar fraud.

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Demonizing Credit Default Swaps

If you listen to Obama and the left tell the story, the cause of our economic meltdown had nothing to do with Fannie, Freddie, fraudulent bond ratings, or - at the heart of all of these - race based market distortions introduced by Democrats and protected with the race card right up until Fannie and Freddie failed. The left's boogyman is Wall St. greed as expressed through transferring risk to Fannie and Freddie and the use of Credit Default Swaps. And this meme has been picked up in Europe as regards Greece's fiscal meltdown.

I blogged on Credit Default Swaps in a long post on the origins of our economic meltdown here. Credit Default Swaps are basically insurance - a way of managing risk. There is nothing untoward about them - though they failed during the mortgage meltdown because of mark to market accounting rules along with a big assist from fraudulent bond ratings.

Now, the left, and the Europeans, want to place substantial restrictions on Credit Default Swaps. It is suffice, it to say, an unwise idea. This from Prof. Bainbridge:

. . . This is just absurd.

Let's review what credit default swaps are and how they work:

Credit default swaps (CDS) are a form of insurance. Let's say you borrow money from me. I'm worried that you might default. So I hedge that risk by purchasing a CDS. If you end up unable to pay me back, the seller of the CDS will cover my losses. (The insurance analogy admittedly is not exact, but it suffices for present purposes.

As the Journal explained, banning the use of CDSs as a hedging device would have adverse consequences, just as banning insurance would:

Any attempt to restrict CDS trades could result in unintended consequences such as more risk for the financial system and higher borrowing costs for a range of nations and companies, some analysts and investors warn.

Restricting credit-default swap trading could push up borrowing costs for various nations if investors feel they have fewer ways to protect themselves if the bonds' prices decline. . . .

. . . As the Journal explained:

[A] study released Monday by Germany's financial regulator, BaFin, found no evidence that credit-default swaps have been used to speculate against Greek national debt. The study showed the net volume of outstanding credit-default contracts on Greek national debt has remained unchanged since January at about $9 billion. This compares to total Greek government debt of about $400 billion. "The market data do not show massive speculation in CDSs," the regulator concluded. . . .

There is much more. Do read the entire post. The bottom line is that CDS perform an important function, and to regulate them out of existence or to severely circumscribe their use is very likely to have unwanted consequences. And the last thing the world economy needs now is more volatility.

Of course, that is the rational way of looking at it all. For Obama, who has shown that he is quite willing to demonize anyone (Chysler secured debt holders) or anything (insurance companies) for political ends, rationality would seem to be of little consequence.

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Niall Ferguson: "Calls For More Regulation Are Symptoms Of The Very Disease They Purport To Cure"

Harvard Professor of Business Niall Ferguson is a brilliant historian and economist. He states that deregulation did not cause the financial crisis and opines that calls for more regulation of the financial markets as very ill advised. Rather, he sees the problem as being poorly designed regulations currently on the books.

This from Niall Ferguson writing at the NYT:

. . . Financial crises will happen. In the 1340s, a sovereign-debt crisis wiped out the leading Florentine banks of Bardi, Peruzzi and Acciaiuoli. Between December 1719 and December 1720, the price of shares in John Law’s Mississippi Company fell 90 percent. Such crashes can also happen to real estate: in Japan, property prices fell by more than 60 percent during the ’90s.

For reasons to do with human psychology and the failure of most educational institutions to teach financial history, we are always more amazed when such things happen than we should be. As a result, 9 times out of 10 we overreact. The usual response is to introduce a raft of new laws and regulations designed to prevent the crisis from repeating itself. In the months ahead, the world will reverberate to the sound of stable doors being shut long after the horses have bolted, and history suggests that many of the new measures will do more harm than good. The classic example is the legislation passed during the British South-Sea Bubble to restrict the formation of joint-stock companies. The so-called Bubble Act of 1720 remained a needless handicap on the British economy for more than a century.

Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis — or predicted the wrong crisis (a dollar crash) — have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.

There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now. Third, the continental Europeans — who supposedly have much better-regulated financial sectors than the United States — have even worse problems in their banking sector than we do. . . .

We need to remember that much financial innovation over the past 30 years was economically beneficial, and not just to the fat cats of Wall Street. New vehicles like hedge funds gave investors like pension funds and endowments vastly more to choose from than the time-honored choice among cash, bonds and stocks. Likewise, innovations like securitization lowered borrowing costs for most consumers. And the globalization of finance played a crucial role in raising growth rates in emerging markets, particularly in Asia, propelling hundreds of millions of people out of poverty.

The reality is that crises are more often caused by bad regulation than by deregulation. For one thing, both the international rules governing bank-capital adequacy so elaborately codified in the Basel I and Basel II accords and the national rules administered by the Securities and Exchange Commission failed miserably. It was the Basel system of weighting assets by their supposed riskiness that essentially allowed the Enronization of banks’ balance sheets, so that (for example) the ratio of Citigroup’s tangible on- and off-balance-sheet assets to its common equity reached a staggering 56 to 1 last year. The good health of Canada’s banks is due to better regulation. Simply by capping leverage at 20 to 1, the Office of the Superintendent of Financial Institutions spared Canada the need for bank bailouts.

The biggest blunder of all had nothing to do with deregulation. For some reason, the Federal Reserve convinced itself that it could focus exclusively on the prices of consumer goods instead of taking asset prices into account when setting monetary policy. In July 2004, the federal funds rate was just 1.25 percent, at a time when urban property prices were rising at an annual rate of 17 percent. Negative real interest rates at this time were arguably the single most important cause of the property bubble.

All of these were sins of commission, not omission, by Washington, and some at least were not unrelated to the very considerable political contributions and lobbying expenditures of the financial sector. Taxpayers, therefore, should beware. It is more than a little convenient for America’s political class to blame deregulation for this financial crisis and the resulting excesses of the free market. Not only does that neatly pass the buck, but it also creates a justification for . . . more regulation. The old Latin question is highly apposite here: Quis custodiet ipsos custodes? — Who regulates the regulators? Until that question is answered, calls for more regulation are symptoms of the very disease they purport to cure.

Read the entire article. And someone distribute this to Barney and Barack, please.

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A Shaky Foundation Indeed

Charles Krauthammer had an exceptional article on Friday picking apart the "New Foundation" speech that our Dear Leader in Chief gave at Georgetown. Obama used the speech to outline his plan to take our country on a radical turn to the left - and he did so with mind numbing dissembling.This from the pen of Dr. Krauthammer:

Obama offered his New Foundation speech as the complete, contextual, canonical text for the domestic revolution he aims to enact. It had everything we have come to expect from Obama:

The Whopper: The boast that he had "identified $2 trillion in deficit reductions over the next decade." It takes audacity to repeat this after it had been so widely exposed as transparently phony. Most of this $2 trillion is conjured up by refraining from spending $180 billion a year for 10 more years of surges in Iraq. . . .

The Puzzler: He further boasted of his frugality by saying that his budget would reduce domestic discretionary spending as a share of GDP to the lowest level ever recorded. Amazing. Squeezing discretionary domestic spending at a time of hugely expanding budgets is merely the baleful residue of out-of-control entitlements and debt service, which will increase astronomically under Obama. To claim these as achievements in fiscal responsibility is testament not to Obama's frugality but to his brazenness.

The Non Sequitur: "To make sure such a crisis [as we have today] never happens again," Obama proposes his radical health-care, energy and education reforms, the central pillars of his social democratic agenda. But Obama's own words contradict this assertion. Notes The Post: "But as his admirable summation of recent history made clear, these pursuits have little to do with the economic crisis, and they are not the key to economic recovery." Obama rarely fails to repeat this false connection. A crisis -- and the public's resulting pliability to liberal social engineering -- is a terrible thing to waste.

To interject here, our fiscal crisis resulted from the sub-prime market, government's social engineering in bank lending practices, a bond rating market that completely failed to accurately assess risk, all compounded by Wall Street's development of a new product that failed catastrophically when the market for subprime mortgages came to a grinding halt. Not a single thing Obama has done or proposes to do - beyond new draconian regulation of Wall St. - addresses these fundamental causes of our problems. And indeed, Barney Frank, one of the major architect's of our current disaster, has proposed mandating that municipal bonds be given top ratings for investment despite the real risks associated with those bonds. This is swindle and fantasy writ large.

Now back to Mr. Krauthammer's analysis of Obama's "New Foundation."

The Swindle: The Obama administration is spending money like none other in peacetime history. Obama is smart. He knows this is fiscally unsustainable. He has let it be known privately and publicly that he intends to cure the imbalance with entitlement reform. . . .

In the New Foundation speech, Obama correctly (again) identifies the skyrocketing cost of Medicare and Medicaid as the key fiscal problem. But then he claims that Medicaid and Medicare reform is the same as his health-care reform, fatuously citing as his authority a one-day meeting of handpicked interested parties at his "Fiscal Responsibility Summit."

Here's the problem. The heart of Obama's health-care reform is universality. Covering more people costs more money. That is why Obama's budget sets aside an extra $634 billion in health-care spending, a down payment on an estimated additional spending of $1 trillion. How does the administration curtail the Medicare and Medicaid entitlement by adding yet another (now universal) health-care entitlement that its own estimate acknowledges increases costs by about $1 trillion

I was going to write a pithy conclusion to all of this, but cannot do better than Krauthammer himself:

This is the sand on which the new foundation is constructed. Obama has the magic to make words mean almost anything. Numbers are more resistant to his charms.

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Wall St., Credit Default Swaps, Glass-Steagall, The Subprime Crisis . . . & Black Tuesday

"September 30 is the day when positions unwind and this is when the pain on Main Street will really start."

That dire prediction comes from Dinah Lord. Ms. Lord is a blogging friend who spent her formative years as a trader on Wall St. She has been kind enough to do a post explaining the role of deregulation of the finanicial industry with the repeal of the Glass-Steagall Act in 1998 as well as the credit default swaps that are at the crux of the subprime crisis. It fills in an informational gap that I have not seen anywhere else. This is mandatory reading for all taxpayers.

This from Ms. Lord:

. . . Starting back in 1995, the masters of the bond and credit market universe got too cute by half and structured a new and exciting financial instrument, the credit default swap and it's these credit default swaps that are the crux of the problem. The magnitude of the fallout from this hairy piece of "financial engineering" is staggering. Believe me, when I tell you that these things are so wrapped around the axle I don't think anyone knows who's got what.

Under a CDS, a bank originates loan to a company. A second bank (or other financial institution) can agree to cover the credit risk for the loan, by agreeing to make payment to originating bank if the company defaults on the original loan. The originating bank pays a small insurance premium to the second bank for assuming the risk of the loan.

Typically, payments under a CDS would only be triggered by the company’s failure to pay interest or principal on its debts due to bankruptcy or some other severe liquidity issue. But there are a host of intermediate or special cases that will doubtless provoke lawsuits when something goes wrong (CDS being a new market, it is by no means "recession-proof").

Credit default swaps were sold to the world as hedging transactions. Investors were told that they were simply transfers of risk, so that banks that made loans could transfer credit risks to insurance companies, which did not make loans directly, or to foreign banks that could not easily make loans in the U.S. market.

But they didn't work out that way...the real estate bubble burst and the mortgage market melted down, factors of life their models didn't take into account. Which brings us to another Gods of the Copybook Heading meets Gordon Gecko Greed is Good moment...the moment when "Wall Street" took over and expanded the volume far beyond what was required for hedging risk. The traders at commercial banks and insurance companies, freed from the constraints of Glass-Steagall by Bill Clinton era deregulation, jumped in with both feet.

After all, bonuses depend on the volume of business. Therefore, bank traders sold the credit risk of a loan not just once, but as many as 10 times. And they sold it not to solid banks and insurance companies, but to three solid banks, one solid insurance company, three dodgy brokers and three hedge funds. Then the traders went out and sold other CDS products that were not even related to actual loans on the books, but to imaginary indices of credit quality in the "widget" industry.

The credit risk of the system was hugely multiplied.

Instead of one $10 million credit risk loan, there are now ten $10 million credit risks on just one loan.

See what I mean about being wrapped around the axle?

Because of this axle, banks around the world are under tremendous pressure. They've even stopped loaning to each other which tells you how bad it is. Bond traders have been standing around with their hands in their pockets - no one is making trades. LIBOR is quaking under the weight of the stress and the short term paper market has pretty much seized up. Commercial paper is how companies finance their day to day operations and make payroll. September 30 is the day when positions unwind and this is where the pain on Main Street will really start. A flood of redemptions is preparing to swamp Hedge Funds. The US Mint has stopped production of gold coins due to soaring demand. Tonight's Asian market open will indeed be interesting. . . .

This isn't over by a long shot. Unless this can get things moving quickly (and have you ever known anything to happen quickly when the US govt is involved?) havoc will continue to wreak the credit markets, the relief rally in the stock market will be brief. Will smart money continue to stay on the sidelines? Will there be any smart money left? At heart, financial markets are about confidence in the system and confidence has been gravely shaken.

In other words, the jig is up.

How bad it will be is anybody's guess. . . . I believe we will all muddle through somehow.

I'm also a free market trader and believe that the market has to work this out. These type of bailout programs just tend to delay the pain and there is going to be some pain, my friends. I oppose the structure of this bailout on principle, so watching these government types preening and posturing in front of the cameras this weekend was like watching a train wreck in slow motion. They are beyond clueless. And infuriating. For Nancy Pelosi to call the House Republicans for not attending negotiations that they weren't invited to attend is an outrage. To see these Democrats stand up in front of the cameras and outright lie their a$$e$ off just shows you what we're dealing with.

. . . If you are interested in learning more, this piece . . . is a good place to start and this will provide you a window into what's been going on with the banking side of the equation. If you want to laugh and learn as you get up to speed on these magillas go here and check out this horse race analogy.) . . . Some of Dinah's other Wall Street [blog posts] can be found here.

And please be reminded that the fasten seat belt sign is still illuminated. It's gonna be a bumpy one.

The full post contains much more in the way of musings, and I highly recommend her blog to all readers.

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Krauthammer On The Subprime Crisis: Time For A Return To Public Executions

Krauthammer is being a bit ironic this morning, but his point is well taken. America is livid over this fiscal crisis and wants a pound of flesh to satiate its cravings before beginning the job of putting our financial house back in order. Unfortunately, we can either punish the wrong-doers or we can rehabilite Wall St. Doing both simultaneously will not work.

This from Charles Krauthammer:

. . . Congress has every duty to be careful with taxpayers' money and to suggest improvements in the administration plan. But part of Congress's reaction has nothing to do with improving the proposal and everything to do with assuaging the rage of constituents -- even if it jeopardizes the package's chances of success, either by weakening it or by larding it up with useless complicating provisions designed solely to give the appearance of sticking it to the rich.

Window dressing such as capping pay packages, which the Bush administration has already caved in to. I've got nothing against withholding golden parachutes from failed executives. But artificially capping the pay of people brought in to lead these wobbly companies back to health is a fine way to tell talented executives to look elsewhere for a job. In the demagogic parlance of this election year, it is a prescription for outsourcing our best financial minds to London and Dubai.

The mob is agitated but hardly blameless. While the punch bowl -- Alan Greenspan's extremely low post-Sept. 11 interest rates -- was being held out, few complained about cheap loans and doubling home values. Now all of a sudden everything is the fault of Wall Street malfeasance.

I have little doubt that some, if not many, cases of malfeasance will emerge. But what we conveniently neglect is the fact that much of this crisis was brought upon us by the good intentions of good people.

For decades, starting with Jimmy Carter's Community Reinvestment Act of 1977, there has been bipartisan agreement to use government power to expand homeownership to people who had been shut out for economic reasons or, sometimes, because of racial and ethnic discrimination. What could be a more worthy cause? But it led to tremendous pressure on Fannie Mae and Freddie Mac -- which in turn pressured banks and other lenders -- to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity.

Were there some predatory lenders? Of course. But only a fool or a demagogue -- i.e., a presidential candidate -- would suggest that this is a major part of the problem.

Was there misbehavior on Wall Street? The wheels of justice will grind. But why wait for justice? If a really good catharsis will allow a return of rationality to Capitol Hill -- yielding a clean rescue package that will actually save the economy -- go for it.

Capping executive pay is piffle. What we need are a few exemplary hangings. Public hangings. On television. Pick a few failed investment firms, lead their CEOs in chains through the canyons of Manhattan and give the mob satisfaction. Better still, precede the auto-da-fe -- fire is highly telegenic -- with 24-hour reality-TV coverage of their recantations, lamentations and final visits with the soon-to-be widowed. The ratings would dwarf "American Idol," and the ad revenue alone would make the perfect down payment on the $700 billion.

Whatever it takes to clear our heads.

Read the entire article.

Krauthammer may in fact be correct that the crowd wants the blood of Wall St. CEO's before rationality can be returned. But the people who at the root cause of this crisis reside in Washington. I agree wholly with his conclusion - though I would choose different criminals to be consumed in the auto de fe. Chris Dodd and Barney Frank would be leading the list of the condemned, followed shortly by Chuck Schumer and Harry Reid. Then we would have a bit of justice with our retribution.

Other posts related to Subprime Crisis (from oldest to newest):

McCain, The Fannie and Freddie Crisis, and Obamafuscation - Obama and the entire Democratic Party are trying to blame Republicans for the subprime crisis. But this crisis was created by Bill Clinton and protected against Republican efforts to reign it in over a decade – until it failed, nearly pulling out entire economic system into a depression.

A Washington Post Front Page Hack Job - The Washington Post does a hit job on McCain, grossly distorting his record on regulatory matters and ignoring his cosponsoring of legislation to establish much stronger regulation of Fannie Mae and Freddie Mac.

Dodging a Depression - The NYT and WSJ document just how serious is the subprime crisis. Quite literally it brought us to the point of a complete and catastrophic stoppage of our financial systems as institutions lost confidence in their fellow institutions. This was not a stock market crash, it was a lending and credit crash. The WSJ describes the events of the week leading up to the crisis point.

Obama & The "Family" Of Fannie Mae - Documenting Obama’s relationship to Fannie Mae.

The Origins – And Foreseeability – Of the Subprime Crisis - A 1999 article in the NYT describes the Clinton Administration forcing subprime loans onto America and also forecasts that this will create a house of cards that will fall apart in a down market.

Covering The Left’s Fannie - The NYT tries to play up old ties of a McCain campaign worker with Fannie Mae while minimizing the fact that McCain himself, in 2005, co-sponsored legislation that may well have prevented the fiscal crisis we are in now.

The Left’s Subprime Meltdown - A post by the Anchoress discusses this subprime crisis as a creation of the left and a system that was protected to the end by the left. She adds additional sites, quotes and links to explain the mosaic.

Fannie & Freddie, McCain & Obama, Subprime & Wall St.The WSJ discusses both how the subprime loan market came about and how Democrats, including Obama, were both the cause of the problem and the roadblock to a solution that would have averted this catastrophe. Dafydd at Big Lizard's explains how Mortgage Backed Securities worked on Wall Street.

A Doddering Fool & Charlatan - Chris Dodd is up to his ears in the subprime crisis. With our economy teetering on an actual depression due to the Fannie/Freddie/subprime loan crisis, it was not merely surreal to watch Senator Chris Dodd chair an emergency hearing of the Senate Banking Committee to evaluate the Treasury's proposed rescue plan, it was obscene.

Finally – Oversight - The FBI has finally announced criminal investigations at Fannie and Freddie.

When Will They File As A 527 – The NYT continues its wholly biased reporting on the subprime crisis, refusing to report on the genesis of the crisis and instead, reporting on the relationship between Fannie Mae and Rick Davis of McCain’s campaign team.

McCain The Chessmaster - Opining on the potential risks and rewards of McCain's decision to cancel campaigning, return to Washington to take part in negotiations over a response to the subprime crisis, and tentatively cancel the Friday debate.

The President Addresses The Nation - Bush explains the stakes involved for America with the subprime crisis.

McCain The Chessmaster Part II - McCain was responding to a 3 a.m. phone call in returning to Washington. He is given political cover and support by Bill Clinton.

A Spotlight On The Left's Subprime Crisis - A video summary of the origins of the subprime crisis with lots of footage of Rep. Barney Frank and others protecting Fannie Mae from regulation by the Bush Administration and McCain.

WaMu Swallowed Up In The Left's Subprime Swamp - Washington Mutual goes under because of toxic mortgage debt.

Great Moments In Leadership - Obama phones it in on the subprime crisis.

The "No Deal" - McCain Responds - The left is blaiming McCain for failure of a deal on the subprime crisis. McCain answers in a memo.

Dodd, ACORN, and the Penultimate Screwing of the Taxpayers - The left, the people responsible for the subprime crisis, proposed a deal that would have used the return on rehabilitated investments not for the benefit of taxpayers but to fund progressive advocacy organizations that are fundamentally corrupt.

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