Saturday, July 19, 2008

commentary...July 19.08    James Joyce table.


Good morning Ladies and gentlemen:


Gold closed down by 12.70 to 956.40 and silver fell by 53 cents to 18.12.


The open interest on the gold comex contract rose by 10,000 contracts to 493500 getting close to record levels.  Silver’s Oi also rebounded from the previous session rising by 1500 contracts to 143500.


The commitment of traders report released after the market closed showed the aggressive stance of the commercials in both of these precious metals.  In gold comex, the commercials  (the biggies) added a whopping 32000 contracts to their already high short positions last week.  However smaller commercial banks  added 14000 contracts of gold as if they sense economic danger.


It is very clear that the big commercials  (JPMorgan, Goldman, Morgan Stanley, HSBC, Scotia Mocatta,)  need to cap gold and silver’s rise.


Yesterday, we saw the close of options expiry on shares.  Gold fared pretty good and held up despite oil’s fall and the stock market rallying big time because of “better earnings” from the Citibank.

The SEC outlawed the shorting of bank shares and that sent the bank shares flying as there was no opposition to the purchase of banks.  The repo pool money goosed the bank shares and the rout was on.

The Dow finished up by 50 points capping a three day rally.


Citibank lost 2.52 per share or 2.5 billion dollars.  The world was expecting a loss of 3.5 billion dollars, so the market rejoiced and bid up all banking shares.  Merrill Lynch reporting late Thursday, and disappointed Wall Street by losing  almost 5 dollars per share.  The street was expecting 1.50 per share loss.


On top of this Merrill Lynch reported that it took a loss on 12 billion dollars on its level 3 assets.  It still has a long way to go as it is still knee deep I this quagmire.

Now comes word that Merrill Lynch had sold “Money Market” type of securities called  auction rate preferreds.    To cash these securities, an auction is performed twice monthly.  It now seems that these money market instruments are totally illiquid.  This week 6 billion dollars of these auction rate preferred failed.  They represent 40,000 angry investors who thought they were investing in money market instruments.  The total market for these relatively unknown securities is 360 billion dollars and Merrill Lynch is the primary dealer. More trouble is ahead for this company.  I have appended the Midas article for you to read:

As for the second issue of the day, Croesus has been informed about a disheartening problem at Merrill Lynch--$6 billion of illiquid securities, called auction rate preferreds, that are owned by some 40,000 customers of the thundering herd.

It seems these 40,000 investors can't sell these supposedly secure money-market-type instruments, which require auctions, and turn them into hard cash. And the issuers of these securities--closed-end mutual funds, like some in the BlackRock group, municipal authorities and student loan organizations--can't raise the cash to pay off investors.

It was some months back that a shocked Croesus learned about auction rate preferreds, which represent an asset class worth $360 billion in the market. Soros and others of his ilk even admitted to Croesus that they had never, ever heard of them.

As a Comerica Securities memorandum explains why cash doesn't always keep pace with these instruments: "Recent failed auctions appear to have been caused by volatility in and tightening of the credit markets and waning investor confidence. Although there are no obligations for firms to back ARS [auction rate securities], auction agents that collect fees for running auctions used to step in with their capital to prevent failures when bidding faltered. However, these firms and broker-dealers have grown unwilling to commit their money to ARS after suffering significant credit losses stemming from write-downs of mortgage debt and various corporate debt instruments."

The memo bluntly states: "In other words, the credit crisis is still alive and causing intense investor suffering."

Imagine that. In the year 2008, you can't turn shares into cash, especially when cash is king!

- end


Late yesterday afternoon we learned the results on the bankruptcy of Cheyne Financial capital over in England.  The Financial Times has learned that  there was an auction for 1.8 billion of assets  (original bankrupt assets was around 7 billion dollars)  ie.   The  Structured Investment Vehicles (SIV)  found bids of only 44 cents on the dollar.  If you recall, this is one of the first financial entities to go under.  I have appended this for you to read:


20:50 SIV auction draws bids of just 44 cents on the dollar - FT
The FT reports that the $1.8B worth of assets auctioned from the $7B SIV formerly known as Cheyne Finance this week drew bids of just 44 cents on the dollar. Recall that Cheyne was one of the first SIVs to enter receivership following the carnage in the credit markets. The article notes that under the restructuring, the auction will fund cash payouts for investors looking for an exit strategy, while unsold assets will be transferred to a new fund set up by Goldman Sachs. The FT goes on to point out that more than $170B remains stuck in SIVs.
Reference Link (subscription required)
* * * * *



News coming from outside the usa is not very good.  First the Financial times has learned that Gordon Brown wishes to relax  spending curves placed on him.  It seems the housing crisis has caused  tax revenues to drop while expenditures are rising. 


The central bank of Mexico has raised its interest rates because of soaring food and energy costs.


Trichet on Friday stated that he will not help out Ireland, Spain and Portugal who are mired in the worst  housing crisis in over 3 decades.  Even the mighty Germany is heading into recession as it has seen its growth this past few months  stymied.


The big news of the day, was the price in yield of the long bond  (prices fall).  The long bond fell in price to 114.32 as the Orwellians decided that banking shares and the stock market needed the necessary juice so they abandoned the long bond.


However, we must be mindful that with inflation rising big time with the CPI up 13% year over year and the PPI up over 22%, it would be foolhearty to invest in these instruments.  Why would you put money earning 4% if you are inflating at 13%.  You are behind by 9% a year and you still have to pay taxes on half your 4% gain.  Not a very good bet.


I neglected to tell you on Wednesday, that the TIC showed an outflow of 2 billion dollars  (a negative inflow)  in June instead of a positive inflow of 61 billion dollars in May.  It is quite possible that foreigners do not have an appetite for usa debt, agency paper and similar debt paper.


It looks like the usa dollar is heading south again.


Next week, expect the PPT to save the bonds but sacrifice gold and the stock market. The stock market will fall and gold will rise.

Please keep in mind that first day notice and the day that options on gold go off the board is the 28th of July.  The cartel generally hit that day and probably the 25th as well.


As a side note:  we have not been hit on any of my childrens  3 silver contracts.  Meaning?  A shortage of  physical metal.

I will leave you with  this  quote from James Sinclair’s site authored by his friend Monty Guild and  Tony Danaher:



“If the U.S. Fed, U.K. central bank, and other central banks continue to protect all of the institutions, all of the shareholders, and all the depositors, the crisis will actually be more prolonged and more difficult to come out of than if they let a lot of the smaller institutions go broke.

Thus far, it is obvious that the Fed and the U.S. and U.K. administrations want to make the government the lender of last resort and make it a world where mistakes are not punished.  We go on record saying that this is a mistake...the example of Japan comes to mind.”

--Monty Guild and Tony Danaher




Have a great weekend















Thursday, July 17, 2008

Merrill Lynch....income statement

Ladies and Gentlemen:


After the market closed, Merrill Lynch reported its earnings and they are devastating.  They are showing a loss of 9.7 billion dollars and somehow came in with a negative 2 billion of revenue.

Frankly, I have never heard of a negative sales figure before so this is  a first.


We will also hear from Citibank tomorrow and if they report badly as most think they will, the market will tank over 1000 points and nobody will be able to hold this market up.

Even though tomorrow is options expiry, gold will rise on this rare event.


 Here is Bloomberg’s assessment as to the loss at Merrill Lynch:





Merrill Lynch Posts Fourth Straight Quarterly Loss (Update2)

By Josh Fineman and Bradley Keoun

July 17 (Bloomberg) -- Merrill Lynch & Co., the third- biggest U.S. securities firm, reported a wider-than-forecast quarterly loss as the credit contraction saddled the company with $9.7 billion of writedowns.

Moody's Investors Service cut Merrill's credit rating and the firm's shares fell after it posted the second-quarter net loss of $4.65 billion, or $4.97 a share. The results, which compared with earnings of $2.14 billion a year earlier, were worse than the most pessimistic analyst forecast in a survey by Bloomberg.

Chief Executive Officer John Thain cut about 4,200 jobs in the first half of the year and is divesting assets to stem record losses and a 43 percent drop in Merrill's share price during the past 12 months. The company said it completed a $4.43 billion sale of its stake in Bloomberg LP and plans to sell a controlling interest in Financial Data Services Inc. Merrill's charges from the credit crisis now exceed $46 billion.

The quarterly loss was ``inexplicably larger than what people expected,'' Michael Holland, chairman of Holland & Co., which oversees more than $4 billion, said in a Bloomberg Television interview.

Merrill shares fell as much as 7 percent after the close of regular trading in New York, after gaining almost 10 percent today. Analysts at Citigroup Inc., Oppenheimer & Co. and Wachovia Corp. had predicted the firm would book at least $5 billion of writedowns in the quarter.

Trailing Rivals

Merrill failed to keep pace with its rivals. Goldman Sachs Group Inc., the biggest U.S. securities firm, reported earnings of almost $2.1 billion for the three months ended May 30. Morgan Stanley, the industry's second-largest company, posted $1 billion of net income. Both are based in New York.

Merrill today confirmed the sale of its 20 percent stake in Bloomberg LP, the parent of Bloomberg News. Merrill said it is financing the sale to Bloomberg Inc., the parent of Bloomberg LP. The investment bank said it also signed a letter of intent to sell a controlling share of mutual fund administrator Financial Data Services based on an enterprise value of more than $3.5 billion.

Thain, 53, abandoned an effort to sell Merrill's 49.8 percent share of fund manager BlackRock Inc. In a statement today, BlackRock said the two firms ``agreed to extend and strengthen our global distribution agreement.''

Merrill had negative revenue of $2.12 billion in the second quarter, compared to $9.46 billion of income a year earlier, after markdowns on assets devalued by the credit crisis.

Bond Insurance

Writedowns included $3.5 billion to account for the plummeting value of collateralized debt obligations, or securities backed by other bonds. Another $1.3 billion of charges were taken on residential mortgages. The firm also reduced the value of bond insurance contracts by $2.9 billion, and lowered the value of leveraged loans by $348 million.

The company lost $1.7 billion on securities held in its U.S. banks.

Revenue at the company's brokerage, the world's biggest with 16,690 financial advisers, fell 3 percent to $3.2 billion.

Thain, who joined Merrill in December, has sold about $18 billion of common and preferred shares to bolster capital, and overhauled risk-management as the company booked more than $37 billion of credit-market losses in the previous three quarters. The company's stock has fallen 57 percent since Thain became CEO Dec. 1.

CDO Losses

Banks and brokers have taken more than $435 billion of writedowns and credit losses since the beginning of last year as mortgage-backed securities, CDOs, leveraged loans and other fixed-income assets lost value. Merrill's charges now top those at Citigroup Inc., the largest U.S. bank. Citigroup reports its quarterly results tomorrow.

Merrill's CDO holdings dropped to $19.9 billion at the end of June from $26.3 billion at the end of March, according to the firm's statement, mostly because of writedowns.

Moody's downgraded Merrill's long-term credit rating one level to A2, the sixth-highest available, and gave the debt a stable outlook. Standard & Poor's, which cut Merrill's rating on June 2 to A, the sixth-highest, today affirmed that assessment and said the outlook remains negative.

Second-quarter fixed-income trading revenue was negative $8.07 billion and equity-trading revenue was $1.73 billion, down from $2.15 billion a year earlier. Debt underwriting generated $367 million in revenue, down 22 percent, while stock underwriting revenue fell 38 percent to $338 million.

Hunkering Down

The investment-banking business is grappling with a plunge in fees from advising companies on mergers and stock and bond sales, as CEOs and corporate treasurers hunker down for a recession.

Thain today also broke off talks with Silverstein Properties Inc. about relocating the investment bank's headquarters to a skyscraper under construction at the World Trade Center site in downtown Manhattan. Discussions between Merrill, Silverstein and the Port Authority of New York and New Jersey, which owns the site, ``ended over economic terms,'' Port spokesman Steve Coleman said today in a statement.


I will report to you later tonight as Midas is down right now.

Speak to you later.




naked shorting...why I am so annoyed at Christopher Cox the Chairman of the SEC

Bootlicks For Bankers

Rob Kirby

Just this week we heard from the head of the SEC, Christopher Cox, that “naked shorting” of financial stocks would not be tolerated.

Absolutely bloody amazing!

In case anyone is unaware, naked shorting of ANY stock is basically supposed to be illegal in the first place,

Naked short selling involves selling stock without first borrowing (or sometimes even locating) the stock. If a naked short seller does not borrow the stock he sold, he will be unable to deliver that stock to the buyer to close the transaction. This is called a "failure to deliver" (FTD). Naked short selling is generally illegal, though market makers are allowed to temporarily naked short for the sake of bona fide market making. FTDs are always illegal when delivery failure exceeds 13 days.

How Phantom Naked Shorts Circulate In the System Like Real Ones:

Exchanges do not disclose whether short sales are naked and supply no information on FTDs. Even worse, in transactions where shares are not delivered, brokerages issue stock IOUs called "share entitlements." Retail customers' account statements do not distinguish between real shares and share entitlements.

FTDs create phantom shares that circulate in the system as real shares. Just as counterfeit currency dilutes and destroys value, phantom shares deflate share prices by flooding the market with false supply.

Naked shorting of equities has been an acknowledged problem for a very long time. See / listen to Jim Puplava’s excellent interview on this topic with Bud Burrell here.

The next thing folks need to understand is that all exchange traded equities [stocks] are electronically cleared through an institution called the Depository Trust Clearing Corporation [DTCC]. Since the DTCC clears all equity trades they CATEGORICALLY KNOW who the counterparties are that FAIL TO DELIVER. So why would you suppose the SEC has not subpoenaed from DTCC “lists of naked short violators” years ago?


Could it be that some company’s stocks, or industries deemed ‘unfriendly to financials’, are ‘targeted’ for regular take-downs or even decimation?


Perhaps we would get a better clue as-to-what’s-going-on if we knew a little bit more about whom the good folks are who run the DTCC?

Let’s take a peek at the rogues-gallery of “who is” on the Board at the DTCC:

  • Donald F. Donahue
    Chairman & Chief Executive Officer, DTCC
    Read Full Bio
  • William B. Aimetti
    President and Chief Operating Officer, DTCC
    Read Full Bio
  • Mark Alexander
    Managing Director - Global Markets, Merrill Lynch
  • Gerald A. Beeson
    Senior Managing Director and Chief Financial Officer, Citadel Investment Group, LLC
  • J. Charles Cardona
    Vice Chairman, The Dreyfus Corporation
  • Stephen P. Casper
    Chairman and Chief Executive Officer, Fischer Francis Trees & Watts, Inc.
  • Art Certosimo
    Executive Vice President, Bank of New York
  • Randolph L. Cowen
    Chief Information Officer, Goldman Sachs
  • Norman Eaker
    Principal, Edward Jones
  • Robert Kaplan
    Executive Vice President, State Street Global Services
  • Gerard LaRocca
    Managing Director, Chief Administrative Officer of the Americas, Barclays Capital
  • Ian Lowitt
    Co-Chief Administrative Officer, Lehman Brothers Holdings Inc.
  • Norman Malo
    President and Chief Executive Officer, National Financial Services LLC, Fidelity Investments
  • Louis G. Pastina
    Executive Vice President of NYSE Operations, NYSE Euronext
  • Ronald A. Purpora
    President, ICAP Securities USA LLC
  • Neeraj Sahai
    Senior Managing Director, Citi Markets & Banking
  • Timothy J. Theriault
    President of Corporate and Institutional Services, Northern Trust Corporation
  • Michele Trogni
    Global Head of Operations, UBS AG
  • David A. Weisbrod
    Senior Vice President, JPMorgan Chase & Company

Amazing, ehhh?

So, it now appears that the “bootlicking” Cox and his cronies over at the SEC are going to begin “selectively” enforcing laws – already on the books – but, as it appears, only and exclusively to aid his “Faustian Friends” at the banks and brokers on Wall Street.

This is tantamount to treasonous dereliction of duty. For uttering such a statement Cox should be immediately impeached and the SEC disbanded. A troupe of green boy scouts could do better.

As an astute researcher and market observer – Bill Rummel of the Charleston Voice - recently wrote,

“No reprieve or notice was given by the SEC to the disgraceful [concentrated] shorting and manipulation of the gold and silver futures markets by some of those below, nor of the related mining stocks on the equity exchanges.”

Indeed, and it appears that Cox is signaling that disgraceful concentrated shorting of gold and silver futures and equities will continue to be overlooked by his now disgraced “Manchurian Candidate” of an institution which serves as a “bootlick” for bankers – who have really been running the whole show - all along.

In short folks; the SEC is cancerously complicit and only exemplifies how seriously broken “credible oversight” is in America’s ‘listing’ financial ship of state.

Up Next Folks: Naked Bond Shorts

Folks need to understand that naked equity shorts have always involved the trade of shares that do not exist – all under the watchful eye of regulators.

At GATA’s Washington conference back in April, I presented a paper titled, The Elephant In the Room, which illustrates how U.S. Treasury Bonds that CANNOT EXIST are regularly traded in massive volumes by none other than J.P. Morgan and friends.

Has a familiar ring to it, ehhh?

For those of you not paying attention – the trade of financial instruments that officially ‘do not exist’ amounts to unreported MONEY PRINTING.

It would now appear that monetary aggregate data supplied to us by the Federal Reserve might be more suspect than the Bureau of Labor Statistics’ inflation data.



Wednesday, July 16, 2008

July 16.08 commentary.     James Joyce table.


Good evening Ladies and Gentlemen:


As promised to you yesterday, the cartel boys decided in their great wisdom to bomb gold and silver today.  Gold fell by 16.00  to 961.10 and silver fell by 20 cents to 18.72


Yesterday, the open interest on gold climbed by an astronomical 14000 contracts to 484000.  Silver’s Oi climbed by a respectable 3500 contracts to a new high of 143500.  It is clear that the cartel members did not wish to see gold at 1000 dollars per oz   or silver at 20.00 usa per oz.


The ECB announced their sale of official gold and only 1.4 tonnes of gold was sold into the market. It is very clear that Europe is not involved in the supply of gold and silver.  We cannot think of anybody else but the usa as the source of physical supply.  Judging from the exports through the Bank of NY, it is very plausible that usa gold is leaving usa shores.


The big economic news of the day came from  Washington with the release of the consumer price index.  It came it at a huge increase of 1.1% for the month or a year over year of 13%.  This comes on the heals of yesterday’s 1.8% PPI  which is a precursor of inherent inflation in the pipeline.  The rise in the CPI was the worst reading in 26 years.


Initially gold reacted strongly to the news.  It was down by 10 dollars when the CPI hit the wires and then gold and silver rose smartly only to be whacked after the afternoon fix.  Same drill as before.

The cartel need to keep gold in check because of option expiry on gold shares this Friday and also  August 1.08 is a delivery month.  The cartel always carry on with a tantrum  during delivery months.


In other news, Wells Fargo reported a profit of 53 cents instead of 50 cents.  Wall Street rejoiced by sending  the Dow up 277 points.  Wall Street seemed to neglect the news that Southern California  saw home prices fall in June 2008 by 29.4% from June 2007.  This figure is absolutely huge as this means that the banks collateral is continually falling.


I would like to make this point to everyone:   it is impossible for the usa economic scene is improve without the housing stock sold or removed from inventory.  I would also like to point out that zero sales of these mortgage backed securities have been sold by  the banks.  It is still on their books.  The reason they cannot move them is because they have no market or there is fraud.


Tomorrow we will see earnings from JPMorgan and Merrill Lynch.  I am sure that Morgan will fudge their figures.  We will be keenly interested in the  Merrill Lynch numbers.

Other banking problems which will surface in the earnings scene will be Citicorp , Wachovia, National Bank of Ohio, and  Lehman Brothers.  If poor results and if the street sniffs that their level 3 assets have deteriorated, then you will see blood on Wall Street.


During the session we heard from the Home Builders and the sentiment was lousy!:



U.S. home builder sentiment crumbles in July-NAHB

NEW YORK, July 16 (Reuters) - U.S. home builder sentiment dropped to a record low in July as the confluence of falling home prices, rising energy costs and unemployment turned buyers away, the National Association of Home Builders said on Wednesday.

The NAHB/Wells Fargo Housing Market index fell two points to 16 in July from 18 in June, the group said in a statement.

Economists polled by Reuters had predicted the index would hold steady at 18. Readings below 50 mean more builders view market conditions as poor than favorable.

The three sub-indexes also plunged to record lows, said the NAHB, which has collected such data for over 20 years.

The index measuring the traffic of prospective buyers slid to 12 from 16, while the gauge of sales over the next six months declined to 23 from 27, the NAHB said. The index of current single-family sales dipped to 16 from 17, it added.

"Given the systematic deterioration of job markets, rising energy costs and sinking home values aggravated by the rising tide of foreclosures, many prospective buyers have simply returned to the sidelines until conditions improve," NAHB Chief Economist David Seiders said in the statement.

The latest data on existing homes showed sales edged higher in May, coming partly as banks saddled with foreclosed properties dropped prices to rid themselves of inventory. The process was seen as the first step in forming a bottom for the housing market, but widespread forecasts for falling home prices through 2009 will likely drive more foreclosures, analysts said....




Late in the day, we heard that there is a criminal investigation regarding the affairs of IndyMac Bank.  The regulators over the weekend discovered many problems regarding IndyMacs portfolio of mortgages. It looks like there was fraud in the issuance of these mortgages similar to what I reported to you regarding the Bear Stearns portfolio and the Countrywide portfolio.


There is now an investigation into the Bear Stearns fallout with respect to the actions of Goldman Sachs and Lehman brothers.

It is truly amazing that the regulators are not delving into the huge put sales and the massive action on Bear Stearns one week prior to the collapse.


On a similar avenue, the SEC chairman has decided to stop the naked shorting of the GSE’s.  It is totally amazing that Mr Cox refused to acknowledge our letters regarding the illegal and criminal naked shorting of gold securities.  Now that it has hit in his own home domain, they have decided to curtail  the illegal activity that is affecting the GSE’s and turning a blind eye to everything else.


The reason he is doing this is because naked shorting is so widespread that  it is now impossible to tell real certificates from phony certificates.  Why?  Because the brokerage crowd borrow certificates from the DTC to cover their shorts  or  remain naked and have their name on a list.  There is no penalty for failure to deliver.


If Mr Cox would force all naked shorts to cover, the whole financial scene would implode as they have probably shorted more shares than outstanding shares.

The SEC;s action on the naked shorting of the GSE’s caused the banking sector to rise big time.  The SKF index fell from 204 down to 158.5 as the shorts had to cover because of the new edit from the SEC.


That is all for today.


See you tomorrow














Tuesday, July 15, 2008

July 15.08 commentary.  (james Joyce table0


Good evening Ladies and gentlemen:


Gold closed up by 5.00 to rest at 977.10.  Silver  fell by 27 cents to 18.72.  The gold comex Oi rose by a huge 6000 contracts and the new Oi rests at 470,000.  Silver also saw an advance of a few thousand contracts.  It is clear that we have a constant seller supplying the paper.  Today, the volume was an astronomical 210,000 contracts with no switches.  This must be a record as I cannot recall a volume this huge with no switches.


Today, the price of oil fell by 8 dollars as this is the Tuesday where oil is priced for the CPI.  Today, they released figures on the PPI and it came it at a staggering 1.8% for the month or 22% on an annual basis.  The big contributing factors were food and oil.


Today, we saw huge volatility in the banking index.  The SKF started the day at 190.  It rose to 210.00 as Fannie and Freddie fell as the market believes that they are going to be diluted out of existence.

Lo and behold a recovery came at around 2:30 in the afternoon where the banking index fell to 183.54  (banking shares rose) but later succumbed as the Dow fell by 93 points and the banking index finished at 200.00.  Washington Mutual,  Citibank,  National bank, all fell as the credit crunch continues.


US retail sales rose marginally in the month of June up by .1% instead of projected .4% rise.  The factors stunting the growth were autos and auto parts.  This was the biggest drop in 2 years.


The fed sees that the budgetary deficit for 2008-2009 to widen because of the faltering economy  as it eats into revenues.  The rebate checks also will have a dampening effect on the deficit.  It is widely believed that the budgetary deficit will come in around 500 billion dollars.


GM announced today that it is suspending its dividend and that it will slash  employment by 20%. It intends to sell 4 billion dollars of assets to raise cash. It needs to bolster liquidity by 15 billion to stay afloat.


Many commentators have reported that this is the worst recession facing the usa in decades.  Noriel Roubini today on Bloomberg thought we are heading for a severe depression.

Banks use Fannie and Freddie paper as collateral and this is going to have devastating effects on the banks. I expect Fannie and Freddie’s shares to drop even further.


Expect a raid tomorrow as we are now in options expiry week.  However over in Toyko, Goldman Sachs have retreated and they have only 5000 contracts short.  This is a 3 year all time low as they seem to be vacating the gold market over in Toyko.


I will speak to you tomorrow


Monday, July 14, 2008

Ellen Brown: Let the Lawsuits Begin..banks Brace for Storm of Litigation....

This is a very important paper written by a lawyer Ellen Brown.  I think you will find this very informative!!!

Let the Lawsuits Begin:
Banks Brace for a Storm of Litigation

Ellen Brown, July 13, 2008

In an article in The San Francisco Chronicle in December 2007, attorney Sean Olender suggested that the real reason for the subprime bailout schemes being proposed by the U.S. Treasury Department was not to keep strapped borrowers in their homes so much as to stave off a spate of lawsuits against the banks. The plan then on the table was an interest rate freeze on a limited number of subprime loans. Olender wrote:

“The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value – right now almost 10 times their market worth. The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

“. . . The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC . . . .

“What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back.”1

The thought could send a chill through even the most powerful of investment bankers, including Treasury Secretary Henry Paulson himself, who was head of Goldman Sachs during the heyday of toxic subprime paper-writing from 2004 to 2006. Mortgage fraud has not been limited to the representations made to borrowers or on loan documents but is in the design of the banks’ “financial products” themselves. Among other design flaws is that securitized mortgage debt has become so complex that ownership of the underlying security has often been lost in the shuffle; and without a legal owner, there is no one with standing to foreclose. That was the procedural problem prompting Federal District Judge Christopher Boyko to rule in October 2007 that Deutsche Bank did not have standing to foreclose on 14 mortgage loans held in trust for a pool of mortgage-backed securities holders.2 If large numbers of defaulting homeowners were to contest their foreclosures on the ground that the plaintiffs lacked standing to sue, trillions of dollars in mortgage-backed securities (MBS) could be at risk. Irate securities holders might then respond with litigation that could indeed threaten the existence of the banking Goliaths.

States Leading the Charge

MBS investors with the power to bring major lawsuits include state and local governments, which hold substantial portions of their assets in MBS and similar investments. A harbinger of things to come was a complaint filed on February 1, 2008, by the State of Massachusetts against investment bank Merrill Lynch, for fraud and misrepresentation concerning about $14 million worth of subprime securities sold to the city of Springfield. The complaint focused on the sale of “certain esoteric financial instruments known as collateralized debt obligations (CDOs) . . . which were unsuitable for the city and which, within months after the sale, became illiquid and lost almost all of their market value.”3

The previous month, the city of Baltimore sued Wells Fargo Bank for damages from the subprime debacle, alleging that Wells Fargo had intentionally discriminated in selling high-interest mortgages more frequently to blacks than to whites, in violation of federal law.4

Another innovative suit filed in January 2008 was brought by Cleveland Mayor Frank Jackson against 21 major investment banks, for enabling the subprime lending and foreclosure crisis in his city. The suit targeted the investment banks that fed off the mortgage market by buying subprime mortgages from lenders and then “securitizing” them and selling them to investors. City officials said they hoped to recover hundreds of millions of dollars in damages from the banks, including lost taxes from devalued property and money spent demolishing and boarding up thousands of abandoned houses. The defendants included banking giants Deutsche Bank, Goldman Sachs, Merrill Lynch, Wells Fargo, Bank of America and Citigroup. They were charged with creating a “public nuisance” by irresponsibly buying and selling high-interest home loans, causing widespread defaults that depleted the city’s tax base and left neighborhoods in ruins.

“To me, this is no different than organized crime or drugs,” Jackson told the Cleveland newspaper The Plain Dealer. “It has the same effect as drug activity in neighborhoods. It’s a form of organized crime that happens to be legal in many respects.” He added in a videotaped interview, “This lawsuit said, ‘You’re not going to do this to us anymore.’”5

The Plain Dealer also interviewed Ohio Attorney General Marc Dann, who was considering a state lawsuit against some of the same investment banks. “There’s clearly been a wrong done,” he said, “and the source is Wall Street. I’m glad to have some company on my hunt.”

However, a funny thing happened on the way to the courthouse. Like New York Governor Eliot Spitzer, Attorney General Dann wound up resigning from his post in May 2008 after a sexual harassment investigation in his office.6 Before they were forced to resign, both prosecutors were hot on the tail of the banks, attempting to impose liability for the destructive wave of home foreclosures in their jurisdictions.

But the hits keep on coming. In June 2008, California Attorney General Jerry Brown sued Countrywide Financial Corporation, the nation’s largest mortgage lender, for causing thousands of foreclosures by deceptively marketing risky loans to borrowers. Among other things, the 46-page complaint alleged that:

“‘Defendants viewed borrowers as nothing more than the means for producing more loans, originating loans with little or no regard to borrowers’ long-term ability to afford them and to sustain homeownership’ . . . “The company routinely . . . ‘turned a blind eye’ to deceptive practices by brokers and its own loan agents despite ‘numerous complaints from borrowers claiming that they did not understand their loan terms.’ “. . . Underwriters who confirmed information on mortgage applications were ‘under intense pressure . . . to process 60 to 70 loans per day, making careful consideration of borrowers’ financial circumstances and the suitability of the loan product for them nearly impossible.’

“‘Countrywide’s high-pressure sales environment and compensation system encouraged serial refinancing of Countrywide loans.’”7

Similar suits against Countrywide and its CEO have been filed by the states of Illinois and Florida. These suits seek not only damages but rescission of the loans, creating a potential nightmare for the banks.

An Avalanche of Class Actions?

Massive class action lawsuits by defrauded borrowers may also be in the works. In a 2007 ruling in Wisconsin that is now on appeal, U.S. District Judge Lynn Adelman held that Chevy Chase Bank had violated the Truth in Lending Act by hiding the terms of an adjustable rate loan, and that thousands of other Chevy Chase borrowers could join the plaintiffs in a class action on that ground. According to a June 30, 2008 report in Reuters:

“The judge transformed the case from a run-of-the-mill class action to a potential nightmare for the U.S. banking industry by also finding that the borrowers could force the bank to cancel, or rescind, their loans. That decision was stayed pending an appeal to the 7th U.S. Circuit Court of Appeals, which is expected to rule any day.

“The idea of canceling tainted loans to stem a tide of foreclosures has caught hold in other quarters; a lawsuit filed last week by the Illinois attorney general asks a court to rescind or reform Countrywide Financial mortgages originated under ‘unfair or deceptive practices.’

“. . . The mortgage banking industry already faces pressure from state and federal regulators, who have accused banks of lowering underwriting standards and forcing some borrowers, through fraud, into costly adjustable loans that the banks later bundled and sold as high-interest investment vehicles.”

The Truth in Lending Act (TILA) is a 1968 federal law designed to protect consumers against lending fraud by requiring clear disclosure of loan terms and costs. It lets consumers seek rescission or termination of a loan and the return of all interest and fees when a lender is found to be in violation. The beauty of the statute, says California bankruptcy attorney Cathy Moran, is that it provides for strict liability: the aggrieved borrowers don’t have to prove they were personally defrauded or misled, or that they had actual damages. Just the fact that the disclosures were defective gives them the right to rescind and deprives the lenders of interest. In Moran’s small sample, at least half of the loans reviewed contained TILA violations.8 If class actions are found to be available for rescission of loans based on fraud in the disclosure process, the result could be a flood of class suits against banks all over the country.9

Shifting the Loss Back to the Banks

Rescission may be a remedy available not only for borrowers but for MBS investors. Many loan sale contracts provide by their terms that lenders must take back loans that default unusually quickly or that contain mistakes or fraud. An avalanche of rescissions could be catastrophic for the banks. Banks were moving loans off their books and selling them to investors in order to allow many more loans to be made than would otherwise have been allowed under banking regulations. The banking rules are complex, but for every dollar of shareholder capital a bank has on its balance sheet, it is supposed to be limited to about $10 in loans. The problem for the banks is that when the process is reversed, the 10 to 1 rule can work the other way: taking a dollar of bad debt back on a bank’s books can reduce its lending ability by a factor of 10. As explained in a BBC News story citing Prof. Nouriel Roubini for authority:

“[S]ecuritisation was key to helping banks avoid the regulators’ 10:1 rule. To make their risky loans appear attractive to buyers, banks used complex financial engineering to repackage them so they looked super-safe and paid returns well above what equivalent super-safe investments offered. Banks even found ways to get loans off their balance sheets without selling them at all. They devised bizarre new financial entities - called Special Investment Vehicles or SIVs - in which loans could be held technically and legally off balance sheet, out of sight, and beyond the scope of regulators’ rules. So, once again, SIVs made room on balance sheets for banks to go on lending.

“Banks had got round regulators’ rules by selling off their risky loans, but because so many of the securitised loans were bought by other banks, the losses were still inside the banking system. Loans held in SIVs were technically off banks’ balance sheets, but when the value of the loans inside SIVs started to collapse, the banks which set them up found that they were still responsible for them. So losses from investments which might have appeared outside the scope of the regulators’ 10:1 rule, suddenly started turning up on bank balance sheets. . . . The problem now facing many of the biggest lenders is that when losses appear on banks’ balance sheets, the regulator’s 10:1 rule comes back into play because losses reduce a banks’ shareholder capital. ‘If you have a $200bn loss, that reduced your capital by $200bn, you have to reduce your lending by 10 times as much,’ [Prof. Roubini] explains. ‘So you could have a reduction of total credit to the economy of two trillion dollars.’”10

You could also have some very bankrupt banks. The total equity of the top 100 U.S. banks stood at $800 billion at the end of the third quarter of 2007. Banking losses are currently expected to rise by as much as $450 billion, enough to wipe out more than half of the banks’ capital bases and leave many of them insolvent.11 If debtors were to deluge the courts with viable defenses to their debts and mortgage-backed securities holders were to challenge their securities, the result could be even worse.

Putting the Genie Back in the Bottle

So what would happen if the mega-banks engaging in these irresponsible practices actually went bankrupt? These banks are widely acknowledged to be at fault, but they expect to be bailed out by the Federal Reserve or the taxpayers because they are “too big to fail.” The argument is that if they were allowed to collapse, they would take the economy down with them. That is the fear, but it is not actually true. We do need a ready source of credit, so we need banks; but we don’t need private banks. It is a little-known, well-concealed fact that banks do not lend their own money or even their depositors’ money. They actually create the money they lend; and creating money is properly a public, not a private, function. The Constitution delegates the power to create money to Congress and only to Congress.12 In making loans, banks are merely extending credit; and the proper agency for extending “the full faith and credit of the United States” is the United States itself.

There is more at stake here than just the equitable treatment of injured homeowners and investors in mortgage-backed securities. Banks and investment houses are now squeezing the last drops of blood from the U.S. government’s credit rating, “borrowing” money and unloading worthless paper on the government and the taxpayers. When the dust settles, it will be the banks, investment brokerages and hedge funds for wealthy investors that will be saved. The repossessed will become the dispossessed; and unless your pension fund has invested in politically well-connected hedge funds, you can probably kiss it goodbye, as teachers in Florida already have.

But the banking genie is a creature of the law, and the law can put it back in the bottle. The imminent failure of some very big banks could provide the government with an opportunity to regain control of its finances. More than that, it could provide the funds for tackling otherwise unsolvable problems now threatening to destroy our standard of living and our standing in the world. The only solution that will be more than a temporary fix is to take the power to create money away from private bankers and return it to the people collectively. That is how it should have been all along, and how it was in our early history; but we are so used to banks being private corporations that we have forgotten the public banks of our forebears. The best of the colonial American banking models was developed in Benjamin Franklin’s province of Pennsylvania, where a government-owned bank issued money and lent it to farmers at 5 percent interest. The interest was returned to the government, replacing taxes. During the decades that that system was in operation, the province of Pennsylvania operated without taxes, inflation or debt.

Rather than bailing out bankrupt banks and sending them on their merry way, the Federal Deposit Insurance Corporation (FDIC) needs to take a close look at the banks’ books and put any banks found to be insolvent into receivership. The FDIC (unlike the Federal Reserve) is actually a federal agency, and it has the option of taking a bank’s stock in return for bailing it out, effectively nationalizing it. This is done in Europe with bankrupt banks, and it was done in the United States with Continental Illinois, the country’s fourth largest bank, when it went bankrupt in the 1990s.

A system of truly “national” banks could issue “the full faith and credit of the United States” for public purposes, including funding infrastructure, sustainable energy development and health care.13 Publicly-issued credit could also be used to relieve the subprime crisis. Local governments could use it to buy up mortgages in default, compensating the MBS investors and freeing the real estate for public disposal. The properties could then be rented back to their occupants at reasonable rates, leaving people in their homes without the windfall of acquiring a house without paying for it. A program of lease-purchase might also be instituted. The proceeds would be applied toward repaying the credit advanced to buy the mortgages, balancing the money supply and preventing inflation.

Local and Private Solutions

While we are waiting for the federal government to act, there are also private and local possibilities for relieving the subprime crisis. Chris Cook is a British strategic market consultant and the former Compliance Director for the International Petroleum Exchange. He recommends getting all the parties to settle by forming a pool constituted as an LLC (limited liability company), in a partnership framework that brings together occupiers and financiers as co-owners under a neutral custodian. The original owners would pay an affordable rental, and the resulting pool of rentals would be “unitized” (divided into unit interests, similar to a REIT or real estate investment trust). Among other advantages over the usual mortgage-backed security, there would be no loans at interest, since the property would be owned outright by the LLC. Eliminating interest substantially reduces costs. The former owners would be able to occupy the property at an affordable rental, with the option to buy an equity stake in it. For the banks, the advantage would be that they would be able to find investors again, since the risk would have been taken out of the investment by insuring full occupancy at affordable rates; and for the investors, the advantage would be a secure investment with a dependable return.14

Carolyn Betts is an Ohio attorney who served in Washington as issuer’s counsel for MBS trusts formed by various federal governmental entities, and represented Resolution Trust Corporation in its auction of defaulted commercial mortgage loans during the last real estate crisis. She proposes a squeeze play by the states, in the style of that brought against the tobacco companies by a consortium of state attorneys general in the 1990s. She notes that at the end of 2007, at least 20% of the funds held by the Ohio Public Employees’ Retirement System (PERS) were in mortgage backed securities and similar investments. That makes Ohio public money a major investor in these mortgage-related securities. Ohio governments have an interest in not having homes foreclosed upon, since foreclosures destroy local real estate markets, contribute to lower tax revenues and losses on PERS investments, and cause a strain on state and local affordable housing systems. A coordinated series of actions brought by state attorneys general could eliminate the culpable banker middlemen and return the properties to local ownership and control.

Andrew Jackson reportedly told Congress in 1829, “If the American people only understood the rank injustice of our money and banking system, there would be a revolution before morning.” A wave of private actions, class actions and government lawsuits aimed at redressing injurious banking practices could spark a revolution in banking, returning the power to advance “the full faith and credit of the United States” to the United States, and returning community assets to local ownership and control.


Ellen Brown, J.D., developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves and how we the people can get it back. Her websites are and

1. Sean Olender, “Mortgage Meltdown,” San Francisco Chronicle (December 9, 2007).

2. See Ellen Brown, “The Subprime Trump Card,”, June 26, 2008.

3. Greg Morcroft, “Massachusetts Charges Merrill with Fraud,” MarketWatch (February 1, 2008).

4. Henry Gomez, Tom Ott, “Cleveland Sues 21 Banks Over Subprime Mess,” The Plain Dealer (Cleveland, January 11, 2008).

5. Ibid.

6. Marc Dann Resigns as Attorney General,” (May 14, 2008).

7. E. Scott Reckard, “California Atty. Gen. Jerry Brown Sues Countrywide,” Los Angeles Times (June 26, 2008).

8. Cathy Moran, “And the Truth (in Lending) Shall Set You Free,” (June 11, 2008).

9. Gina Keating, “Mortgage Ruling Could Shock U.S. Banking Industry,” Reuters (June 30, 2008).

10. Michael Robinson, “City of Debt Shows US Housing Woe,” BBC News (December 30, 2007).

11. “Is the Latest Liquidity Crunch in Remission?”, (March 26, 2008).

12. See E. Brown, “Dollar Deception: How Banks Secretly Create Money,” (July 3, 2007).

. For more on this funding solution and why it would not inflate prices, see E. Brown, “Waking Up on a Minnesota Bridge: How to Solve the Infrastructure Crisis Without Selling Off Our National Assets,” (August 4, 2007).

14. Chris Cook, “Peak Credit and a Flight to Simplicity,” Asia Times (April 3, 2008).



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