- 1) While certain blathering fools have made claims
that the Fed is buying up or is about to buy up untold amounts of new toxic
debt, including mortgage backed securities, as of now, that has not taken
place, nor in discussions of the FOMC has there been any support for such
plans, the which purchase would probably have to be authorized by Congress
or directly allowed under by the White House under the national security
directive that gives the President extraordinary powers to deal with the
financial crisis. (The Fed, by law, can only purchase the highest grade
debt and securities; the legislation creating the TARP waived some of this;
but that legislation has expired).
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- 2) So called Quantitative Easing (QE) refers to
Fed programs which, while monetizing debt through open market operations,
does not change the quality of Fed assets (i.e., adding more risky
assets, stocks, securities, etc). Doing the latter is called qualitative
easing and was what was being done under the bailouts and TARP. There is strong
resistance on the Fed board to this, despite the screaming from London
and elsewhere that this should be done.
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- 3) Nonetheless, the Fed has committed a massive
fraud, with hyper-inflationary consequences by effectively underwriting
the value of all MBS, and implicitly all the derivatives linked to them;
the amount of this fraud and illegal pledge of US credit behind toxic debt
far exceeds anything done in the bailout by an order of magnitude. Here
is how it worked.
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- 4) Faced with an immediate cash liquidity crisis
within several meagerer banks, including Citi and BoA around the Sept 30
rollover date, the Fed decided on a plan for QE that would inject
upwards of $200 bn into these bankrupt institutions through open market
operations. This is done by the Fed creating out of thin air this fiat
money (only a small portion of which is actually printed as cash; the remainder
is electronic transfers, which tends to mask the immediate hyper-inflationary
effects. This Fed funny money are then used to purchase Treasury debt either
from banks or financial institutions, or from Treasury sales by brokers
(such as Goldman Sucks), the funds for which sale are then placed on deposit
in so-called non-borrowed accounts in the banks, improving their balance
sheets, and allowing for the deployment of other assets and cash to handle
the rollover problem.
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- 5) That would be scam enough, covering up the insolvency
of the banking system. However, when making its last decision for QE, the
Fed announced that it would in effect finance a large part of it through
the sale of some of its toxic waste holdings (which was applauded by some
of those same Fed governors,who were opposed to new QE as inflationary,
since these sales would improve the Fed's balance sheet). But who
would buy this toxic garbage? According to at least two banking insiders,
the Fed sold these to the same banks they were injecting funds into, using
some of those same funds, and they sold them at full face value! In so
doing, the Fed effectively established the value of all MBS (marking them
to market, as they say), since if they were valued at less than the sale,
the Fed would have committed securities fraud. As one source said, now
if any MBS blows up, the holder will come screaming to the Fed and demand
that they stand behind it, at the value of their sale. In other words,
the Fed has underwritten the entire MBS market, and effectively all derivatives
linked to it, without the approval of the Congress (although Geithner and
the White House are fully complicit in this, with the WH (supposedly Obama
personally) being told that they would quickly become Hooverized if they
didn't go along).
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- 6) These same sources say that had this not been
done, at least three major banks would have gone under around the Sept
30 rollover, which under the new Fin Reg bill, would then have had
to be liquidated.
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- 7) The Fed and related crooks did not count on several
judges acting in the lawsuits blocking foreclosures and foreclosure sales
to allow plaintiffs to seek relief and possible financial and criminal
penalty against the banks, etc. The issue isn't the effect of blocking
the foreclosures, but the threat that these suits would draw attention
to the fact there is absolutely nothing behind any MBS; that they are pledges
to pay by banks, without any other recourse-- the equivalent of unsecured
promissory notes. In other words, they are really not secured at all, certainly
not by the property, nor even the original mortgage. The crazy daisy chain
looks as follows:
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- First, there was the mortgage
secured by the property; then, these were bundled and securitized
and sold to a third party, usually at a higher value, with commissions
and fees in the security sale; then this security is sold again, and again,
at different prices, each time commission. All of this is secured by only
one single mortgage interest stream, although that stream has generated
hyper-inflated monetary values of several times its original value and
which have attached to them various derivative bets both ways (i.e., that
they will be paid an that they won't)-- the whole thing is obviously
insane and totally unsustainable, and will always tend towards a thermonuclear
fireball.
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- This is the equivalent of one those
giant ponzi schemes in which the last guy is left holding what amounts
to an empty bag of promises. (Or another metaphor: It is the equivalent
of playing musical chairs on the deck of the Titanic; all of those playing
are doomed; it's just that the last guy without a chair has a greater real
perception of that doom).
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- It worked until the bottom fell out
of the mortgage markets, with masses of properties headed towards default.
Now there was no income to pay that last guy. So, back in 2007, and especially
in 2008 they all panicked and started beating down the doors of the banks
demanding payments, while feverishly trying to dump their worthless securities.
The TARP and related bailouts never intended to do anything else other
than give the perception that these things had some value (after all the
Fed was taking them in as security against loans and they were even buying
some of them.) But now the TARP is gone. And we have these suits, the which
all effectively pivot on a single fact: There is only one income stream
to secure that mountain of debt generated by securitization, and who can
lay claim to that income stream is in question. If these suits ever are
fully argued in court, the court would have to find that the MBS has no
real claim to whatever is generated in foreclosure sale, or that the banks
have no real claim. Either way, the whole thing blows up-kaboom!
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- The banks didn't want to go with the moratorium,
but they were told they had to by the Fed-- or else! The idea is to reach
some phony agreement on how the foreclosure funds will be dispersed to
avoid a panic. But, as one source stated, it is really too late for
that-- if someone decides to forcefully blow this story.
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- 8) The obvious point here is that the Fed and its
masters have committed massive fraud. They did so when they allowed for
this whole phony ponzi scheme around securitization. (The reason they unleashed
the whole surge of mortgages and pushed the bubble was so that they could
generate a larger bubble and all those fees, etc, from securitization--
pure financial hookus pokus). They have compounded this fraud by organizing
a totally illegal bailout, without Congressional approval, that illegally attempts
to place the full faith and credit of the US government behind worthless
pieces of paper-- the greatest hyper-inflation of financial assets in history.
We can blow this story and use it to bring down the Fed and push through
Glass Steagall and the HBPA (Homeowners and Bankers Protection Act).
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