Imminent Big Ban Death Spiral
The mortgage & foreclosure scandal runs so deep that ordinary observers can conclude the US financial foundation is laced with a cancer detectable by ordinary people. The metastasis is visible from the distribution of mortgage bonds into the commercial paper market, money market funds, the bank balance sheets, pension funds under management, foreign central banks, and countless financial funds across the globe. Some primary features of the cancerous tissue material are allegations of mortgage bond fraud, major securities violations, absent linkage to property title, income tax evasion, forged foreclosure documents, duplicate property linkage to single mortgage bonds, NINJA (no income, no job or assets) loans to unqualified buyers, and more. In fact, more is revealed it seeems each passing week toward additional facie to high level and systemic fraud. The world is watching. The growing international reaction will be amplified demand for Gold, from impressions that the USDollar & USEconomy have RICO racketeering components extending to Wall Street banks and Fannie Mae mortgage repositories.
The centerpiece question, when allegation of the US bond fraud is coupled with European sovereign debt distress, comes down to WHAT IS MONEY? The answer is Gold & Silver and not much of anything else.Other assets like crude oil or farmland are effective hedges against tainted money, but when they contain debt tethers, they too are vulnerable. Huge flows of funds are fleeing traditional asset groups. Some mistakenly still believe the USTreasurys to be a safe haven. A shock of cold water comes to them when that bubble goes into reverse perhaps several months later after reaching 2% yields. The big magnificent epiphany in the last couple years has been that a house is not a hard asset, but rather a debt instrument extension. Important questions have arisen as to what assets are free from counter-party debt risk. The grand demands for physical gold prove that the futures gold contracts are not money either, but tainted Wall Street and London securities contracts that keep the system going.
The big banks have been called too big to fail. They are too big to plow under without removal from power of the bankers themselves. They are too big to permit their balance sheets to be liquidated without a US banking system seizure together, and a 30% to 50% additional housing market price decline. They are too big to send into receivership without igniting a credit derivative sequence of explosions. They are too big to block the widespread illicit practices and enforcement of law of regulations. However, a wondrous spectacle has begun to shine light. The mortgage & foreclosure scandal could turn out to be the big US Bank tombstone epitaph, as bank revenues from mortgages slide, as home owners tend to refuse on mortgage payments, as court cases unfold in full view, as class action lawsuits provide evidence on racketeering at a systemic level, as MERS and REMICs are isolated by the courts for further investigation. Time will tell. Time will reveal extraordinary efforts by the USCongress to pass additional laws that grease the bank pathways, past and present. Remember back in July 2007 when Bernanke claimed this was just a subprime mortgage problem. The Jackass called it an absolute bond contagion from its origin, which it surely turned out to be.
THE GIGANTIC ACHILLES HEEL EXPOSED
Two critical elements have been identified. The MERS electronic title registry system was designed to facilitate recording of property titles as associated mortgage bonds traded freely and changed ownership hands.Unfortunately, the title database has no legal standing, as declared by several state courts, including some supreme courts. Banks or financial firms holding the mortgage notes cannot team with the title database and force eviction during the home foreclosure process. That is the first gaping flaw. The second is the REMIC funding facility. The Real Estate Mortgage Investment Conduit was designed to facilitate funding mortgages, in particular Fannie Mae mortgages. Unfortunately, the conduit funding vehicle intentionally omitted citation of the mortgage income stream owner, so as to avoid tax obligations. The lack of identification means that the Fannie Mae asset backed securities might lack any legal claim to the mortgage loan income stream. Both flaws are being thoroughly scrutinized by legal experts and practicing attorneys.
If the casual observer concludes that Fannie Mae mortgage bonds have no value, then that observer matches the same thought pattern of the Jackass, and the same as an increasing number of financial experts. The mortgage finance boom seems to have strong hint of a racketeering scheme to send financial products through the pipeline, earn fees, set up arbitrage, enable leveraged schemes, and justify executive bonuses. At the same time, the scheme had the perceived benefit of putting money in people's hands to spend when their jobs were shanghaied on a ship to China. It concealed the destruction of the USEconomy. It made homes very convenient ATM machines to abuse in consumer binges, as people eagerly burned their furniture. Harken back to the Great Macro Asset Economy, a slippery chapter scripted by Greenspan, one of several heretical chapters. Many citizens were turned into paupers who lost all their home equity, while 22% of the nation today lives in homes bearing negative equity overhead. Many reasonable people claim an elaborate Ponzi Scheme has been in progress, recently interrupted. Dirty hands seem to be working within the USGovt. The reflection on USTreasurys is filled with risk of a popped bubble. The reflection on the USDollar is filled with risk of downdrafts since a corrosive currency.
The Europeans have their damaged sovereign debt, but the Americans can boast twin beasts in the obvious USTreasury Bond bubble and the evident USAgency Mortgage Bond scam. The scam involves mortgage bond defects from improper perfection of property title that ensures revenue stream. The scam alleges securities violations from usage of the MERS title database, duplicate properties in multiple bonds, and forged documents. The scam alleges faulty finance vehicles (REMIC) with deep intractible flaws in the structure of funding the loans, whose remedy would come with a $1 trillion tax bill due (estimated by bank analysts). Just last weekend, the state of California demanded as part of a class action lawsuit, with MERS cited at the center, between $60 and $120 billion in unpaid property title recording fees. It seems no shady profit angle was left unused by the mortgage industry during the last decade that saved a few bucks and added to bank profit. The MERS & REMIC twins represent the two unfixable banking Achilles Heels. Can the USCongress build a wide back door for the big banks to escape prosecution with a fresh piece of supercharged legislation?? If they do, then civil disobedience will blossom across the land, in the form of public demonstrations, marches on Washington, non-payment of monthly mortgage bills, and demands to prove property title. The global response will be to sell any bonds with a US$ denomination.
The fallout comes as shattered integrity of the USDollar after broken credibility of the USFed and ruined prestige of Wall Street, all while a sanctioned USTreasury Bond bubble billows. The full USGovt guarantee of the Fannie Mae clearinghouse cesspool bridges the gap between USTBonds and USAgency Mortgage Bonds. One might argue that Agency Bonds differ from USTBonds only in the claim of linkage to mortgage income and ultimately home seizure, except that linkage is being removed in plain view to the public. The USDollar will suffer. Rather than fall versus other major currencies, the wrecked monetary system will take down all major currencies. Each fiat paper currency is being exposed as illegitimate in different ways. The consequences will be:
- All cost structures will rise, causing a worse global recession, a very heavy painful consequence.
- Income levels will not rise to meet the challenge, since monetary inflation destroys capital and erodes wealth engines in corporate structures.
- The US$-based bond markets give off a racketeering glow in global view.
The vast monetization schemes are set to come into motion for the bond market in general. The objects are hardly just USGovt debt securities, not even just Fannie Mae mortgage securities, but big bank Corporate Bonds as well. The schemes have painted the USDollar in a light with a RICO tint, as in racketeering, sanctioned by the US finance ministry and shielded from prosecution by US legal authorities and regulatory bodies. Worse still, the Financial Accounting Standards Board has permitted flagrant accounting fraud to the big dead US banks. Since April 2009, they have been permitted to declare any value they wish on their toxic balance sheets. That has enabled them to take advantage of USGovt largesse, direct USFed redemption of toxic bonds, called widely banker welfare. That has enabled them to tap the 0% money tree that produces carry trade profits. The only stipulation was the banks have been required to place their excess cash at the USFed itself, which thereby hid the central bank's insolvency, and distracted attention from the absence of Loan Loss Reserves for the banks. Details on the USFed balance sheet, and big bank vulnerability to further losses, are provided in the October Hat Trick Letter. Toss in the High Frequency Trading schemes, and the US financial markets look to contain more crooked venues than the Las Vegas casinos. The USDollar lies at great risk in the process.
BIG BANKS VULNERABLE AGAIN
The next QE2 is a done deal but with the details missing. The next TARP-2 bailout package is having its justification and foundation fashioned from the building blocks of need and desperation, along with the cement provided by banking lobbies. The two initiatives will likely meld paths. A disorderly condition comes. An armada of lawyers is on the job ready to challenge mortgage securities, foreclosure orders, and much more. Class action lawsuits are on the docket. The US financial platforms are unraveling. The USDollar will follow a path to oblivion, locked in a destructive spiral. The Competing Currency War assures that other major nations will undermine, debase, and devalue their currencies rather than seek out, plan, and establish a new monetary system. The investment in a broken system will soon be realized as infinite, with unchecked spew, even $trillions tossed in Black Holes. The sound money experts have always argued that accelerated funds are required to maintain an asset bubble. That was vividly true with the housing bubble, which required a fleet of unqualified buyers to sustain the bubble in its final chapter.
Gold will therefore skyrocket in price, as the monetary system will be actively ruined from unbridled growth in money creation. The silver price gains will be at least double the gold gains. Markets are beginning to take control, and kick aside the heavy handed control levers. The horizon features a big US bank on death watch. The ripple effects would be shocking even to those who expect it. Other big banks would be dragged down in a chain reaction, while illicit control in certain key markets would be stripped away. Control would be lost by the Powerz. The risk is for confusion to rein with rising chaos. The bank stock index BKX signals an imminent breakdown.
The pressured bank stock index breakdown is led by Bank of America, HSBC, and Wells Fargo. The Wall Street firms remain protected bastions. The comprehensive improprieties and malfeasance in a chain link, from home loan origination to bond securitization to debt ratings to ultimate foreclosure, reveals a protected broken bankrupt system with a foul stench. Its financial status will be clearly broken soon in full view. Further accounting fraud sanctioned by the FASB might come about, but the date with the destiny of failure is assured. My best source from the banking world believes the wheels are coming off the renegade wagon. Pursuit of a fair gold price follows when HSBC fails, and that event is imminent. That wagon train has trademarks bearing the name USGovt and Wall Street nameplates, a merged enterprise. Great risk comes since HSBC manages the SPDR gold exchange traded fund for its gold bullion inventory (symbol GLD). To those who were shocked by the mortgage fraud, even more shock is assured by the gold market. The biggest banks have sanctioned outsized uneconomical short positions in the gold futures contract arena with notional value over $2 trillion. My expectation is for GLD fund lawsuits to line up by investors, since most of their gold has been leased by the COMEX and LBMA, since many of its shares have been used to cover short gold contracts.
PERHAPS JUST LAUNCH QE2 AT NIGHT
The USFed is showing some reluctance, remorse, or second thoughts about launching a gigantic second Quantitative Easing ship into already dangerous waters. John Hilsenrath has reported the hesitation in the Wall Street Journal, claiming only a few hundred $100 billion of bond debt might be monetized, perhaps $500 billion. The prevailing sentiment is that QE2 might not succeed in reviving the USEconomy and not might succeed in clearing the sclerotic condition in the banks. Whether wrenching constipation or multiple sclerosis in the banking channels and arteries, what difference!! My main question is WHEN DID 'QE1' EVER END?? The grand bond monetization is mostly hidden from view for USTreasurys, since almost every auction is a failure. The primary dealers are bankrolled on the quiet only days following the auctions. The grand bond monetization is mostly hidden from view for USAgency Bonds, since mammoth activity in Fannie Mae basements keeps the lid on evidence that their bonds have gone worthless. Watch the backdoor bank welfare in a TARP-2 package soon to be tossed into QE2. Watch the overall debt monetization be kept much more hidden from view, a new national priority. The USDept Treasury and the USFed do care what the world thinks, when the threat of them pulling the global plug on the United States seems a viable option to limit the damage even more on a global scale. A recognized cancer has been exposed in the global reserve currency. Reaction should be much more evident in the Gold price than in currency exchange rates. They move relative to each other.
An enormous present pressure point in the legal process is the threat of Put-Backs. A mortgage security is put back to the bank that packaged the securities from a portfolio neatly arranged in tranches of loans, when the mortgage backed bond is forced by the courts to be bought back by the bank, after reckless underwriting or contractual defects or negligence were demonstrated. A fiduciary responsibility is enforced in the bond securitization process. Estimates wildly have come forth that $2 trillion, give or take a few hundred $billion, in mortgage bonds could be put back to the big banks. They are scrambling to win support from the USCongress for quick action. The TARP-1 package worth almost $800 billion was motivated by declines in the housing market. To be sure, plenty of Bait & Switch was evident, but leave that aside. The TARP-2 package might be required at least $1.5 trillion, accompanied this time by securities violations, defective fraudulent MERS & REMIC devices, and contract fraud, when the specter of class action lawsuits, even with RICO claims, hangs overhead. These carry criminal allegations, a far cry from a declining market. In an unprecedented move, the USFed has requested from the big US banks formal guidance on the requisite magnitude of the QE2 to be initiated, or better described as renewed.
The second round of big bank TARP bailouts certainly has come in a vastly different light. To solve the challenge, look for the USDept Treasury and the USFed, with direction provided by the Wall Street surviving monolith banks, to conduct a more secretive monetization of the big bank bond exposure. THEY WILL MONETIZE THE PUTBACKS IN THE DEAD OF NIGHT, DONE IN SECRET, WITHOUT FANFARE, IN A MORE DIRECT CABAL EXERCISE. They will use Fannie Mae as a bad bank, a bond cesspool tank, its reason for being, its raison d'être. When caught, they will claim they did it to avoid a USEconomic Depression. The truth is more that they will conceal their activity in order to retain power, to enable much more banker welfare courtesy of the captured USGovt, even to prevent a collapse of the US system.
GLOBAL BANKERS ANGRY & FEISTY & DEMANDING
The G-20 ministers have come forth with a vacant pledge as a working theme. Regard it as the billboard message of crisis. Ignore the words, but take serious note of the theme, since it wraps words around the alarm. The competitive currency devaluations will be devastating, even as fast moving trade deficits will be the visible outcome. National trade gaps will go out of control. The G-20 finance ministers issued an opening preliminary statement, a working theme. They will pledge to refrain from competitive devaluations and endorse market based exchange rates, whatever that means. Of course, the silent vote is not made by nations that shun attendance, like Brazil. They decided not to attend, due to stated concerns over growing hostility in competitive currency policy. China might have pulled that cord, as Brazil earned a favor. A US proposal was evaluated to set targets for current account gaps on the pathway to rebalancing global growth and realigning exchange rates. The United States will surely be kept exempt, causing more friction. The G-20 Meeting tells of the crippling devastation coming in the Competing Currency War, which will take down the entire monetary system. And furthermore, the evidence will be seen in the trade deficits. For instance, even Turkey is setting record deficits. Large deficits will be unavoidable. The obvious outcome of the G-20 Meeting was a sharp pullback in the US monetization project planning, but it will be temporary.
Talk of a Plaza-2 Accord has begun, but it will find zero traction. Unfortunately, any such accord requires nations to take the lead in sacrificing their domestic economies and banking systems. Such nations would have to agree to higher currencies, which harm their economies. That is not at all likely!! Instead, expect conflict, disruption, and chaos to grow. What is needed is consensus and order to depreciate the USDollar in relation to the other major world currencies by direct intervention. The present day environment has no maturity, no cooperation, and no order. It is loaded with resentment, animosity, and an apparent desire to topple the current power structure in Wall Street and London. In fact, a spirit of retribution and vengeance has slowly permeated the FOREX winds. Witness the Competing Currency Wars soon in full glory, which have moved past first gear, and are well into second gear. USFed Chairman Bernanke has in essence threatened to inflate with QE2 to infinity in order to support a system that cannot any longer be supported, a rickety US$-centric system.
Commodity prices are surging, and emerging economies are battling against fast rising price inflation. The USEconomy operates under 7% to 8% annual price inflation, but emerging nations have it a bit worse. Currency appreciation is a necessary tool to keep prices under control for other nations. The BIG problem here is that they are reluctant to allow significant currency appreciation as long as the Chinese Yuan remains static and fixed. The key is China. No nation will agree to a currency rise without China doing so first, and doing so with some magnitude to matter. Emerging nations are cutting deals, even with non-Anglo industrial nations, to avoid usage of the USDollar in trade settlement. If Plaza-2 happens, it will have China as its champion, and right now they are angry.
The Yen Carry Trade has a vast hidden doorway. Japan has revealed a hidden pressure point. It is the unwind of the great Yen Carry Trade. It was the greatest financial engineering project in modern history. Its unwind is coming to an end finally with a climax upward thrust in the Yen, amidst clouding factors like the rise of China. In fact, China is diversifying its FOREX reserves to some extent by using USTreasurys to purchase Japanese Govt Bonds, which has drawn great resentment from Tokyo. Witness more currency war battles, bigger than skirmishes.
The climax chapter of the USTreasury Bond bubble, with its benchmark 0% label, removes the Yen Carry Trade since both sovereign bonds offer near 0% yield. The yield differential is eliminated. The end of the great carry trade signals a great added monetary system stress factor and a further step toward a USGovt debt default. The carry trade provided tremendous demand for the USTreasurys, which has been replaced by the Printing Pre$$. The Yen currency is the quiet litmus index of the competing currency war, its turbo-charge. It remains hidden from view and free from discussion. Details are provided on it in the October issue of the Hat Trick Letter, along with many implications of the bank condition on the gold price.
GOLD CONSOLIDATES BIG GAINS
The gold price rose almost 200 points from the beginning of August to the first week of October. It is consolidating the gains, a digestion process. The resistance was broken. More importantly, the big US bank grip on the gold market was somewhat broken. A bull market remains, and the strong seasonal months of December and January lie around the corner. The effect of a seasonally strong September has been seen in impressive terms.The Competing Currency War, the dangerous injurious round robin exercise to devaluate currencies, feeds the gold bull in magnificent style. The G-20 platitudes will be brushed aside. The gold bull is given a rich diet in huge volumes of fiat money from strained monetary presses, justified to protect export trade, committed to serve the broken banks. In the middle of the sovereign debt crisis and the mortgage bond eruption and the insolvent bank condition, GOLD IS REGARDED AS THE SAFER HAVEN, since not tied to debt and not associated with counter-party risk. Gold has emerged as a global reserve asset, a competing currency!!
Expect a consolidation in the gold price while the USDollar attempts to bounce up. The Euro currency defense is only beginning. The Euro hit 140 per US$, and has come down with a mild selloff. The damage to be done to the European Economy is being evaluated. The 78 level on the US$ DX index was not defended. A bounce was made possible at 77 instead, a firmer support level. The monetary system is crumbling slowly but assuredly. All attention is on the USDollar, especially after the mortgage foreclosure scandal erupted. Pay note to the bearish crossover of the 20-week MA below the 50-week MA. It signals a test of the 75 critical support, which will bring about a thrust move in Gold past $1400. Notice how the bullish MA crossover in March signaled a test of the upside resistance. A full 800 basis point run-up followed the reliable sentinel signal. My expected 78 to 84 range was blown out, but maybe a slightly wider range will be defended with 77 support. An eerie calm does not seem likely, not with the complete mortgage ensemble in the news. The United States financial structures have never looked more corrupt or broken in the national history. As the US$ standard bearer of the monetary system takes severe damage, look for the Gold price to march toward $1500 and the Silver price to march toward $30. It is written; it will be done. The bankers in the temple will eventually be placed in their deserved domicile or find themselves on the run.
THE HAT TRICK LETTER PROFITS IN THE CURRENT CRISIS.
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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com . For personal questions about subscriptions, contact him at JimWillieCB@aol.com