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Posted by on Apr 3, 2010 in Bailout, Thinking of Buying?, Thinking of Selling? | 30 comments | Print Print

“Stealth Bailout”

Hat tip to JimG for sending this along:

Timothy Geithner is a Sniveling Scamster
Whew. That was fast. It didn’t take long for Wall Street to figure out how to game Obama’s new mortgage modification program, did it? The plan was hyped as help for “struggling homeowners”, but it turns out, it’s just another stealth bailout for pudgy bank-execs. It’s funny, the program hasn’t even kicked in yet and, already, bigtime speculators are riffling through their filing cabinets looking any garbage paper they can find to dump on Uncle Sam. Take a look at this on today’s Bloomberg report:

“Subprime-mortgage securities are rising at an accelerating pace as the U.S. begins to encourage reductions to homeowners’ balances, which may lead to fewer foreclosures and a quicker end to the housing slump….Senior-ranked bonds tied to borrowers with poor credit will mostly benefit after the Treasury Department said for the first time it would seek to cut the size of mortgages, reducing the likelihood that loan modifications will fail, according to JPMorgan Chase & Co., Morgan Stanley and Barclays Plc. (Bloomberg)

What does it mean? It means that Obama’s mortgage modification extravaganza has touched-off a gold rush in toxic paper. Subprime securitizations, which had been worth next to nothing, are now the hottest trade on Wall Street. It’s a subprime bonanza! The investment sharpies are scarfing up all the crummy MBS they can get their hands on, because they know they can trade it in for Triple A FHA-backed loans when the program get’s going. It’s another swindle cooked up by Treasury Secretary Timothy Geithner to keep the brokerage clan in the clover. Here’s how a Wall Street veteran explained it to me:

“It looks like the investors in securitizations will be swapping underwater real estate for govt-insured paper… I think the scam here is just to provide some cover so the hedge funds and other high net worth individuals can trade their low grade paper for Triple AAA mortgages insured by the FHA at the taxpayer expense.”

That’s it, in a nutshell. The faux-foreclosure prevention program has nothing to do with helping homeowners. That’s just diversionary gibberish to confuse the public. The real objective is to create a government landfill (aka–FHA) where the banks and other financial institutions can dump their toxic MBS-sludge and walk away with gov-backed loans. Get a load of this:

(Bloomberg) — The Federal Reserve’s completion this week of its program to buy $1.25 trillion in mortgage bonds probably won’t mean significantly higher U.S. home loan rates as investors return to the market, replacing the Fed…

What we are seeing is an effective handoff occurring between the Fed and industry buyers such as banks and pension funds,” said Christopher Sebald, chief investment officer for Advantus Capital Management in St. Paul, Minnesota…

Advantus is purchasing mortgage bonds after the Fed’s program drained supply in the $5.4 trillion market.” (Bloomberg)

Of course, they’re “purchasing mortgage bonds”, because the government is going to insure them. It’s a “no brainer”. And don’t you love that expression, “a handoff”, because that’s exactly what it is. The government hasn’t stopped pumping liquidity into the system; they’ve just found another entry-point where they can push it in. Here’s how it works: The new program offers incentives to banks and other deep-pocketed investors (in mortgage-backed securities) to slash the principal on underwater mortgages which keeps people from strategic default or foreclosure. Sounds good, right? But here’s the catch: When the mortgage is refinanced, it’s converted into a FHA-backed loan which provides an explicit gov-guarantee. So, for a slight loss on the face-value of the MBS, the investors (ie–investment banks, hedgies, etc) are able to resuscitate their moribund securitizations (MBS) and reap hefty gains. It’s like taking Fido’s steaming pile on the front lawn and turning it into the Hope Diamond. Abracadabra!

Geithner has figured out how to put together a bailout that will cost taxpayers hundreds of billions of dollars without any money actually exchanging hands. The value of the putrid mortgage-paper will soar because of the gov-underwriting, and the ginormous losses won’t be realized until the mortgages start blowing up sometime in the future. That’s when FHA will be put-to-pasture along with fellow-homicide victims, Fannie and Freddie. Pretty clever, eh?

So, the cutthroat speculators and bunko artists who fleeced us all with their dogshit subprimes, have returned for another dip at the public trough. That means taxpayers will get scalped on the same investments a second time. Hey, it’s a double-whammy!

This really takes the cake. You gotta hand it to that sniveling scamster Geithner. He had his back to the wall and, presto, he extracts another rabbit from his hat. What a guy. He knew he couldn’t go begging to congress for more money, or they’d kick him to the curb. So he worked out a scam that picks up where the Fed’s $1.25 trillion quantitative easing bailout leaves off. It’s a seamless transition from one massive corporate giveaway to the next. Now the Fed has nearly $2 trillion worth of structured garbage on its balance sheet, (which it will undoubtedly dump on Fannie or Freddie) the banks are loaded with fresh reserves, and another trillion or so is earmarked for the shadow bankers who provide funding to the regulated banking system. AND IT’S ALL 100% FREE. Such a deal.

This bank/credit cabal is robbing us blind in broad daylight and no one seems to give a hoot. Maybe Barack Obama will save us from all ruin?

Fat chance!
By Mike Whitney


  1. Mike Whitney is on fire!

  2. Gaming the taxpayer largess is the new black.

  3. I’m all for piling on the government over this stuff, but I sense this guy’s blowing it out of proportion. It’s not like 100% of the subprime mortgages will go to zero. I’m skeptical of the “hefty gains.” Some of the comments make him sound like a loose cannon.

    Maybe I’m just numb to government intervention. Or maybe I just don’t understand completely. Where’s NBC and their dolls to help explain this one?

  4. The banks, pension funds, etc. will have to take a hit on thier MBS holdings, but not at 70 cents on the dollar – more like 20 cents on the dollar once the dust is settled. This whole thing has stunk from the beginning, but there is little else to do at this point (although putting a gallows on Wall Street and hanging a few would do wonders for the public mood). If the Paulson had not bailed the banks, our local ATM’s would not have worked (really folks from my banking friends), and we would all have been sorry. Now we need to clean up the balance sheets of our banks, pension funds, etc. I hate it as much as anyone, but it isn’t worth ruining the world economy. . .let’s hope we have all learned our lesson, but probalby not.

  5. So the tax payer flips the bill again as we kick the bucket down the road…

  6. WOW!!! I have no idea what goes on in these MBA classes but they are obviously teaching a class that I never had. It may be called “American Greed” It saddens me so much that there seems to be no checks and balances. This is all done with the help of the govt. and “Tricky Tim” . He may look like a Vulcan but he is really a vulture.

  7. MarkinSanDiego, you are either naive or foolish.

    The “world economy” has already been ruined. The difference is that now instead of hedge funds, big banks and other wall street vermin failing, the toxin has been shifted to us and the U.S. dollar.

    We now live in a banana republic, a failed regime with an increasingly worthless currency.

    Hey, but Mark please enjoy your visit to the ATM and the mall!

  8. The rich get richer and the poor bailout the fat cats on Wall Street. This is a shame, Obama may say this in the best interest of this country and saving the financial system but this is a complete BS story. Thanks to Jim for informing the public about what’s really happening. When election time come around, in 2012 don’t forget this article. One last thing, make sure you write a letter to Darrel Issa (R-CA) and let him know about the outrage, he seems to be the only realist with some guts.

  9. Dah, anyone who says they din’t see this coming, just isn’t paying attention.

  10. What suck is we all know what’s going on. But there’s nothing to be done.

    Government is bought and paid for.

  11. The Fed and Treasury can keep this game going for a very long time, so once you realize this, you may as well profit from it as they take the markets to new pre-crash highs.

  12. Very well said in post #7, President Camacho.

    I don’t believe for a single second that they had to bail out the banks. Bail out the insured deposits? Yes. But they could have done this by nationalizing the banks and backstopping the FDIC, SIPC, etc.

    We needed them to prosecute the vermin who set us up for failure (Greenspan is at the top of the list), and take everything they personally owned (including assets that were shifted to other family members and entities).

    None of this ever needed to happen.

  13. Blur -The hefty gains described comes from the smart 2nd generation MBS owners who are buying the paper now that it is worth say 40cts because of all the problems, then when the cramdown drops the face from 100 down to 80 AND the gov offers to insure it/refi it at 80 then my paper I just bought on the 2nd hand market at 40 goes to 80…that is a hefty profit!!!!

  14. That’s gotta be one of the worst posts on your blog, Jim 🙂 Yeah, I know you didn’t write the piece. But, whoever this Mike Whitney guy is, he realy has no idea what he’s talking about.

    Let’s keep the blog about our local market, Jim. If we need to read conspiracy theories written by blowhards there are plenty of other sites we can go to!

  15. You work for the Vampire Squid, Daniel?

  16. Yea sure. Daniel is right. All this stuff about “the economy” and “markets” is way over his head.

    Let’s just stick to “flip grade” kitchen cabinets and bathroom fixtures.

  17. Clearfund,

    That is a pretty good layman’s explanation on how it’s working. Actually some of the really stinky sub prime garbage is being picked up for less than .40 cents on the dollar. Banks and hedge funds are catching a huge spread with the taxpayer footing the bill. Not even risk involved as they get the FHA guarantee and the media will proclaim them heroes for cutting 30% of the principal off the loan. Vampire squid needs some good PR right now so they must be in the thick of it. Somebody tell me what Daniel is thinking because I have no idea. The proof is the absolute elevation of liquidity and volume in the MBS market as of late.

  18. To me, this comes down to the ideas of fractional reserve banking and central economic planning. One big way to avert all of this is to stick to free-market, capitalistic principles and actually let those companies that are insolvent fail. Other bad stuff that was done can be prosecuted under fraud laws that have been around for a long time. That would probably take care of the lion’s share of scamsters and would set a precedent for future ones. New laws and regulations are a smokescreen and code for “we are trying to stall as long as we can so that those who over-leveraged can get out with as much ROI as possible.”

    The “too big to fail” argument is fear mongering and a farce at best IMHO. How people continue to fall for it, I don’t know. I guess that’s why good-cop bad-cop, the pick and roll, and 2 card monte still work. The old 1-2.

  19. Federal courts reported over 158,000 bankruptcy filings in March, or 6,900 a day, a rise of 35 percent from February, according to a report to be released on Friday by Automated Access to Court Electronic Records, a data collection company known as Aacer. Filings were up 19 percent over March 2009. The previous record over the last five years was 133,000 in October.

    “Even with the restrictive new law, we’re back up over where we were before the law changed,” Mike Bickford, president of Aacer, said in a phone interview Thursday from his headquarters in Oklahoma City.

  20. Thanks Clearfund, that makes sense, and those are huge profits.

    However, which loans in particular are being backed? Is the Fed backing only particular tranches? I thought we’ve sifted through most of the subprime already. Are most of the loans left currently performing? If so, $.80 could be a fair price. In which case, the original investors are the ones taking the hit. Yes, the fed could take a hit, but not necessarily creating another bubble. I still think the piece is extreme.

    As for those who think bailing out the banks wasn’t necessary, you really need to get with reality. The Fed had no choice. It’s the whole reason the Fed was created after the Great Depression. Believe it or not, we have learned something from the past. I don’t like it, but it had to happen.

  21. The Fed was actually created in 1913…the Great Depression started in 1929. I highly recommend The Creature From Jekyll Island by G. Edward Griffin.

    The whole notion of a lender of last resort and government bailouts is what drives the mal-investment and bubbles that eventually lead to a correction.

  22. Ah, thank you for setting me straight Greekfire! I stand corrected. (Though I still maintain the bailout was necessary.)

  23. There is still hope from an unlikely source. In 2005 word got around that you could get a loan for no money down with no qualifying and get rich. In 2010 the word is going around that all your financial problems can be solved by eliminating your mortgage payment and living rent-free for a year or two. This will overwhelm any “solution” provided by the government.

  24. As for those who think bailing out the banks wasn’t necessary, you really need to get with reality. The Fed had no choice.

    This statement has been thrown around a lot. I have yet to see any proof whatsoever that these bailouts were necessary (mind you, I did advocate for backstopping the FDIC, SIPC, NCUA, and PBGC, and also advocated for government work programs while things shook out.

    Insured deposits are insured for a reason — to avoid runs on the banks. Outside of insured deposits (maybe backstopped money market funds, many of which I’ve been told are covered by the SIPC), why do we need to “save” anything? Would prices have gone down? You bet. And they needed to come down, too! Would credit be harder to get? Absolutely! As it should be. We need to get away from the notion that we can have “eternal growth” without any negative consequences. Nobody is entitled to cheap credit. A tight credit market is NOT the end of the world.

    Show me some proof that the world would have ended. Until I see proof, it’s just the ramblings of the same idiots who supposedly “didn’t see it coming.” They have no credibility.

  25. Greekfire, oh yeah, the Long Depression caused by the crash of the 1873 was totally caused by some kind of time machine thing from the Fed’s creation in 1913. Right.

    “The whole notion of a lender of last resort and government bailouts is what drives the mal-investment and bubbles that eventually lead to a correction.”

    Incentivizing people to make money any way they can, including fraud, absent regulation or any chance of punishment, causes bubbles. Ignoring that reality insures we get another . . . and we’ll deserve it for being the ignorant peasants we’ll have been reduced to.

    The Fed must have also used that time machine to make the Dutch buy Tulips, the British shares in the South Sea Company, and the French stock in the Compagnie d’Occident. What b*stards!

  26. I hear you, CA Renter. I’m not a fan of the bailouts – they upset me just as much as the next person. I can’t prove they world would’ve come to an end if we didn’t bail them out, but our financial system would’ve been massively crippled. I don’t think anyone wants another Great Depression.

  27. CA Renter..
    There is never going to be any “proof” that it was absolutely necessary to bail out the banks. I mean what would constitute proof in your book? Shall we go back a year and half in our hot tub time machine and NOT bail out the banks…. then see what happens?
    This is going to be written about for decades by economic scholars, PHD candidates, and the like. Heck, Bernanke himself has written and lectured about the great depression extensively .. “Essays on the Great Depression”.
    And I submit that there will always be disagreement among the experts.

  28. I can’t prove they world would’ve come to an end if we didn’t bail them out, but our financial system would’ve been massively crippled. I don’t think anyone wants another Great Depression.

    Until somebody can come up with some proof or evidence that our our financial/social/physical world would have ended, nobody can claim that the bailouts were necessary.

    Again, the “crippled financial system” and the resulting recession/depression were guaranteed once they opened up the credit spigot and began lending money to people who never had the means to pay back the loans. When they decided to pile more leverage on top of this upside-down pyramid, they ensured the failure of our financial system. We cannot avoid it.

    Do you really think the current financial system isn’t “crippled”? I’d say an economy that requires trillions of dollars worth of backstops, guarantees, and direct printing is in fact a crippled financial system.

    We are either going to be killed by inflation or deflation. Personally, I favor deflation because there is an end to it at some point. Inflation will end up causing much, much more damage that cannot be undone for generations (if ever).

    We have not avoided the depression. We have only postponed it (yet again) and set ourselves up for an even greater depression down the road.

  29. @ Blur: Your welcome on the correction.

    @ Emmi: If you look at the root causes of panics, even the panic of 1873, they almost always involve over-leveraging (read mal-investment) and some sort of government cooperation that helps to stoke and/or prolong the flames. The Fed is the 4th version of a central banking authority here in the US. The previous three tried and failed.

    Back to 1873, I think that was a time of rampant speculation and government intervention in multiple sectors. My main point is that speculation is fine, but you must be willing to suffer the consequences of failure. This reality alone would help temper over-speculation. Government involvement only accentuates the boom and bust phases.


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