Bear Market

Housing Market Gone Wild

April 30, 2009 by · Leave a Comment 


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Senate Crams Cramdowns

April 30, 2009 by · Leave a Comment 

The Senate rejected an attempt by Sen. Richard Durbin (D-IL), to allow bankruptcy judges to modify mortgage terms and possibly lower (or cramdown) a portion of the principal balance on outstanding property loans.
The rejected legislation, if passed, allows judges to play the part of bankruptcy arbitrator when determining the market value of a property potentially facing […]

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Seven charged in Indianapolis mortgage fraud scheme

April 30, 2009 by · Leave a Comment 

Seven people have been charged with crimes related to nearly $20 million in fraudulent mortgage loans in the U.S. District Court of Indianapolis. The charges, announced  April 30 by Timothy M. Morrison, U.S. Attorney for the Southern District of Indiana, include wire fraud and money laundering as well as fraud and conspiracy.

According to the charges a total of 149 fraudulent loans amounting to $19.7 million were obtained by the defendants from three different lenders between November 2003 and August 2005. Each of the defendants are responsible for some, but not all, of the loans and multiple defendants are charged in many of the loan transactions. The lenders include People’s Choice Mortgage/Countrywide Home Loans (86 loans), Argent Mortgage Company (60 loans) and The Money Station (3 loans). The total estimated loss exceeds $8 million.

“Mortgage fraud adds to the underground economy that erodes the integrity of our tax system and it threatens the financial health of our communities,” said Al Patton, Special Agent-in-Charge of the IRS-CI Field Office in Chicago. “IRS – Criminal Investigation has an ongoing commitment to jointly working with other federal and state law enforcement agencies to pursue those individuals who manipulate the mortgage loan process for their own financial gain.”

The charges are the result of an ongoing investigation by Special Agents of the Internal Revenue Service – Criminal Investigation Division (IRS-CI) and the U.S. Attorney’s Office, with assistance from the Federal Bureau of Investigation (FBI).  All the mortgage fraud schemes charged were accomplished in the same general fashion. Participants in the scheme located properties and arranged to purchase them at a fair market value, generally by means of option agreements or unrecorded land contracts. Investors, most of whom were unwitting participants although the majority were friends or relatives of those charged, were located who were willing to invest their good credit, but no money, to be the purchasers of these properties at a much higher price than that negotiated with the seller.

The majority of the investors were located in Virginia and generally never saw the properties they were purchasing. They were told they were joining an investment club, that they  would not have to make any payments on the properties and that the properties would be managed for them by various participants. The investors received money, generally $4,000 per property in their name, for participating in the investment club. Mortgage brokers participating in the scheme allegedly prepared fraudulent loan applications, containing false statements, including: that the investors owned bank accounts, stock and other assets which they did not own; that the investors had income which they did not actually have; and that the investors were making the down payments on the properties from their own funds. In reality, other participants in the schemes provided the down payments for the properties, and were paid a fee of between $1,000 and $3,000 for doing so. Appraisers, employed by the participants, prepared appraisals vastly overstating the value of the properties in order to support the sales prices indicated on the closing documents. The false documents were then submitted to lenders and the lenders, relying on the fraudulent documents, issued the loans. The loans were funded via wire transfers of money from the lenders to a title company, which the scheme participants used to assist them in preparing false closing documents and issuing title company checks. When the loans closed, the properties sold for the fraudulently inflated sales prices, the sellers were paid the amount they had negotiated to receive and the proceeds from the loan were shared by the participants in the scheme.

Participants in the scheme were paid varying amounts depending upon their role. Those who located properties generally received $1,000 per property. Loan processors were generally paid $500 for their assistance in obtaining the loan. The participant funding the down payment was paid from $1,000 to $3,000 or each down payment they loaned. The investor recruiter who also assisted them in signing the loan papers was paid per loan. The remaining amounts were split between the scheme participants as well as being used to pay existing mortgages on properties purchased earlier in order to prevent lenders from discovering the scheme.

All of the loans involved in the schemes went into default.  The lenders wither foreclosed on the properties or took other action.

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Gold Consolidation Nears End

April 30, 2009 by · Leave a Comment 


By Jim Willie CB,

The battle for survival continues, as banks resorted to basic revisionist accounting (aka fraud) in order to claim improved health. Their reward was a financial sector stock rally of the most queer kind. The rally depended on all manner of contrived demand from the most sordid of chambers opposed to free markets, using tactics that are typically abhorrent. Next this beleaguered sector must withstand valuation checks and fair value scrutiny. Unless analyst dissent is declared illegal, the sector should fall in value. The new facade of Stress Tests has filled the void left by Financial Accounting Standards Board (FASB) concessions that led to phony balance sheets. These Stress Tests are neither a test nor a reflection of stress. They are rigged excuses for continued funds, and worse, might be used to coerce healthier regional banks into merging with dead Wall Street banks laced with insolvency and fraud.These ridiculously hollow institutions continue to engage in sales of USTreasurys with rampant failures to deliver funds in order to maintain cash flow, not mentioned in quarterly earnings reports. See a related article entitled“Wall Street Selling Imaginary Treasuries” on Market Skeptics (CLICK HERE). This is called naked shorting, counterfeit, and not even complicated fraud. Imagine selling lemonade at a stand and handing over empty glasses. Regulators remain quiet on the subject, a continuation of permitted fraud from lack of oversight that continues from the last administration to the new. Nothing changed except claims of change. The USfinancial sector is reminiscent of an army of zombies that usurp the vitality of any firm they come in contact with, aided by a guiding government hand that directs living firms into their snares (and shares).

The USGovt should not take control of any bank or corporation unless it plans to fix it, carve off the rubbish, send the acid assets into the drain, discontinue lunatic contracts, and sell the remnant core in the open market. The cynical view, which is wholly embraced here, is that the USGovt is doing precisely that, except a long pause is designed to take place where Wall Street firms under the direction of Goldman Sachs (aka USDept Treasury) engage in profound fraud from TARP and other funds, until the system is sufficiently exploited, and then the big banks collapse from within before any resolution or sale can take place. Watch General Motors fail before it can walk (or drive) even a few months down the road. The primary purpose of government takeovers is to enrich Wall Street firms, and to conceal the past fraud on a gigantic unprecedented scale. Fannie Mae and AIG were nationalized to hide bond counterfeit in the former and credit derivative losses in the latter. One should be aware, certainly not a broadcasted fact, that the special inspector general for TARP funds Neil Barofsky working on behalf of the USCongress has already recommended 40 criminal investigations for fraud from the total over $1000 billion in its funds disbursement during his ongoing audit. The primary focus is AIG payouts, for which Goldman Sachs has steered some very suspicious redemptions at 100% parity. Wall Street would call the program a success. Administrators would call it a great thrust of desperately needed liquidity into banks. The public should know that the program is run by the same bankster criminals and is laced with the same disease that produced the original bank crisis: fraud. The absence of broad disclosure remains the cloak to conceal the massive abuse of public funds.

The US Federal Reserve is trapped. Not only does the 0% monetary policy put them in a corner without options, but ownership of a couple trillion$ worth of heavily impaired bonds has given the august overseer of failure and fraud and money laundering a bad case of constipation on a dead end street. Any change in either situation pushes USTreasury interest rates up, pushes up USAgency Mortgage rates, and renders great harm to the credit markets. The dirty secret is that the USFed is stuck in mud with a bad diet of offal on a road to certain ruin. The dirtiest secret of all might be that the USFed is engineering an orderly collapse of the USEconomy from starvation of Main Street of economic bread, namely credit.


The gold consolidation has been like a crock pot slowly cooking a beef stew over a long stretch, as hungry observers whet their appetite with hors d’oeuvres with the promise of bountiful meals. The gold chart presented in the last articles took a more long-term view, as it described the formation of the Right Side Handle in a clear bullish reversal pattern. That consolidation continues. Since February when gold touched the 1000 mark, the selloff and profitaking have taken place amidst a sequence of extraordinary USGovt and US Federal Reserve policy decisions. Gold actually fell following the announcement of $1050 billion in monetized USTBonds and USAgency Bonds, if you can believe that! The reason was an avalanche of (probably illegal) short COMEX futures contracts timed simultaneously, much like calculated denial of oxygen to a runner at the start of a race. The propaganda was that investors were worried about continued deflation, without benefit of knowing what deflation is. Monetary inflation has been historically off the chart, which should include credit derivatives and futures contract commitments.

The incident at the end of March involving Deutsche Bank and the COMEX pointed out serious exchange violations in all likelihood, as D-Bank surely did not hold 90% of its short gold positions in collateral. The German flagship bank almost defaulted. None of the big four banks hold proper gold collateral, routinely, and regulators look the other way. That is just another form of naked shorting, without prosecution. D-Bank in a panicky fashion came up with 850 thousand ounces of gold so as to satisfy a delivery, precisely at a time when the Euro Central Bank just happened to sell 1.141 million ounces of gold. The EuroCB event was anything but ordinary, but was treated as an asterisked event, with no explanation.

Regardless of market interference, despite all that the Powerz throw at gold, the weekly chart looks promising with a possible stochastix crossover in the making and a MACD momentum ready to turn up. The cyclicals look promising. A big battle is being waged. The bulls need a run above the trendline set from February joining three local tops. A move to 925 would establish the bullish rise out of the current pattern. The bear case would have a breakdown below the 860 mark toward 850 again. However, the moving averages show support, especially the 50-week MA. In the last week, some solid support has been seen with the less stable 20-week MA. Other extremely important factors are at work behind the scenes, which weaken the position of the gold cartel significantly this spring and into the summer. Whatever risk was present at the end of March will be more acute at the end of June. These factors are discussed at length in the April Hat Trick Letter.


The USDollar has enjoyed an extremely queer paradoxical rally since last August, when the US financial system exhibited clear signs of insolvency, destruction, and failure. Many observers wonder expect the USDollar will weaken again without additional large scale financial firms going under in failure. Financial failures are most opportune to lift the US$ exchange rates. Must the USDollar be sustained by a steady stream of failing firms, emergency measures, and floods globally of USTreasury Bonds? Perhaps! Since the autumn, a double top failure is plainly evident in the dollar DX index. In April, yet another rollover occurred, but this third turn is not definitive enough to declare a triple failure. A break to 84 would give such a claim credence. The 200-day moving average (in green) has twice provided last ditch support necessary to rekindle another run after each breakdown. Notice the rounded top nature of the series of breakdowns, sufficient to be on the lookout for a retest of the 200dMA at 83, and a clear fall below that level. Such an event would serve as a confirmation of the end to this queer counter-trend USDollar rally.




The long-term USTreasurys remain the arch-enemy of gold. Since the historic failure of the US financial sector last autumn, and is inability to be revived, the USTreasurys have benefited mightily. The flow has hardly been a Flight to Quality, since foreigners are almost uniformly shunning the US$-based bonds. Anyone who bothers to examine the Treasury Investment Capital (TIC) reports can see this plainly. Yet the US financial networks continue to trumpet their falsehoods. See the excellent article entitled “The Big Lie” by Rob Kirby on the topic (CLICK HERE). He describes the key facades corruptly managed and maintained to sell the phony story. Forced hedge fund liquidation by Wall Street perpetrators in an engineered credit contraction, the resulting decline in commodity prices, the compensating USFed actions to monetize the debt securities sold by foreigners, all worked to create the impression of a USTBond rally accompanied by a perverse USDollar rise. Now time seems to be running out, as the tide might be turning.


The 10-year USTreasury Note principal value is exiting the pennant pattern that has bounded its price since January. It is early to declare, but this might be the beginning of a meaningful breakdown in long-term USTreasurys. They have been kept aloft almost by pure monetization, a policy finally admitted in mid-March, long after the policy was put into effect. The 50-day and the 100-day moving averages have each been breached (in blue and red), and next is a challenge of the 200-day MA (in green). The corresponding bond yield battle is being waged at the 3.0% level. The message is being painted on the Treasury Billboard, that the main bidder for long-term USTreasurys is the USGovt via the USFed. They are isolated, which puts risk to both the USTBond and the USDollar from lack of integrity and confidence. Something has to give and it will. My guess is the USDollar will take a bad tumble and fall, rather than long-term rates to rise. The mountain of credit derivatives stand like a lattice work of financial nuclear bombs, with fuses hidden and crisscrossed in the dark. Defense of this mountain of mass destruction potential will be to the end, even if the entire US banking system and USEconomy enter a downward spiral.

THE BEST PART OF ANY USTREASURY SELLOFF WOULD BE THE BENEFICIAL EFFECT ON GOLD, DUE TO THE POWERFUL FEEDER SYSTEM. If the USDollar is sacrificed instead of USTBonds, in order to preserve the USTreasurys, then gold will also benefit, but not as strongly.


Outright counterfeit of USTBonds is the likely province of JPMorgan. Its evidence probably vanished with that of Enron fraud when a certain building was demolished in the Big Apple on an important date known by two numbers that bracket the number 10. Naked shorting is more crafty and devious, but no less counterfeit. The details of naked shorting of USTreasury Bonds are very ugly, and surprisingly broad based. This is supposedly the most liquid and transparent market in the world. NOT SO!!! Market Skeptics (cited with links above) provides some excellent insight on the totally illegal practice and its clear consequences. They wrote,

“Following the collapse of Lehman Brothers in September, fails to deliver among the 17 primary dealers in the US treasury market have rocketed to more than $2 trillion over a period of weeks and still lie above $1.3 trillion. Broker/dealers have stopped delivering bonds. Holders of US treasuries are now scared to lend into the repo market in case their bonds are not returned, and potential buyers sit on the sidelines fearful of handing over their money to a counterparty that at best might not deliver a bond on time, and at worst might go under… If investors turn their back on treasuries, the US government will find it increasingly difficult and expensive to raise money and roll over its maturing debts. Upward pressure on interest rates will occur at a time when the government needs to be loosening monetary policy in order to jump-start a domestic economy that is heading towards a depression. As a result of fails to deliver, the most transparently priced instrument available now has investors scratching their heads. The natural balance of supply and demand has been altered and the true price of treasuries has become obscured… Fails to deliver in the treasury markets are not a new phenomenon. There is data for fails for treasuries, agencies and mortgage backed securities as far back as 1990, says Susanne Trimbath, an economist, and former employee of the Depository Trust Co, a subsidiary of Depository Trust and Clearing Corp. Back then, though, there would be $50 billion of fails in a whole year, she says. That figure has grown enormously.Failures in US treasuries were 8.6% of all treasuries outstanding in the first five months of this year, compared with 1.2% in the first five months of 2007. That has ballooned further over the past three months, hitting more than $2 trillion for almost the entire month of October, more than 20% of the daily treasuries trading volume.”

Corruption has permeated the entire USTreasury market, which is the great alternative to real money in gold. Some alternative! One can safely claim that almost every single important market in the United States is corrupt. GOLD REPRESENTS AN ALTERNATIVE, BUT AVOID ALL EXCHANGE TRADED FUNDS. They just use your money to short gold, again in naked short sales. It will be physical gold that brings ruin to the Powerz in their corrupt paper chase charade, where price discovery has become a laughing stock.


See the May Hat Trick Letter for a series of arguments regarding the Swine Flu outbreak, which reads like a spy novel. The press & media networks cannot tell the story, since they function as crowd control, shaping public opinion, public address system, according to master directives, rather than an unbiased investigative information source benefiting from the beacon that used graced that industry.Several key facts regarding the weaponized influenza paint a picture that indicates an organized plan in progress with a clear purpose and probable motive. Distraction is certain, but motive is never known exactly. Its origins aint random and it dont involve evolution. Participants are the usual suspects. A great public awakening might begin, but the late anger will coincide with casualties. Details for arguments are far too controversial and dangerous to provide in any forum such as this. This is a deadly serious issue. However, one theory that carries far too little weight is that the Swine Flu is being spread by the most unsuspected of sources, animal lovers of a tender age. Sorry, but too cute, and we need to break the tension! baby-pig

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Jim Willie CB, editor of the “HAT TRICK LETTER”

Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.


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Housing: The Steeplechase Analogy

April 30, 2009 by · Leave a Comment 

April 30, 2009 

The inevitability of the housing/ leverage/speculation bubble’s collapse can be illustrated by the analogy of a steeplechase in which the hurdles are lowered to near-zero: everybody qualifies, everybody wins.

Though there are many causes for the housing bubble’s expansion and collapse, let’s consider the most basic one: the bar for qualifying for a mortgage was lowered to near-zero. This can be illustrated by a steeplechase analogy in which the long-standing prudently high mortgage qualification hurdle of “20% down, verified income and 35% maximum of income” was replaced by one a mere few inches in height:

Surprise–everyone with a pulse and the will to lie/stretch the truth not only qualified for the “race,” they all crossed the finish line with flying colors. Is there any wonder that millions of marginal buyers leaped into the race, and that their marginality was quickly revealed once they left the track and returned to real life?

And now that the entire charade of passing off these millions of highly risky, doomed-to-default mortgages via securitization to unwary investors has ended, risk avoidance has led not just to a reinstatement of higher qualifying standards but a raising of the bar.

So now in the post-bubble aftermath, the hurdle not only excludes the marginal risky borrowers, but some of those who might have qualified before the bubble mania infected the housing and lending markets.

Way back when the bubble was, well, still bubbling merrily, I offered two analyses of the bubble’s impending demise based on various data and this chart from the FDIC:

Foreclosures and Financial Ruin: How Bad Will It Get? (April 26, 2006)

Housing Wealth Effect Shifts Into Reverse (May 2, 2006)

(And as a lagniappe, here is a more recent appraisal of the same data: Will Delinquencies Trigger a New American Revolution? (April 7, 2008))

What this FDIC charts says is 74% of households were above poverty level at the top and 69% owned houses. The remaining 5% were either too ethical to lie/cheat their way into a huge mortgage or they were among the few remaining prudent citizens.

I’m going to state various data points here; all are sourced in the above articles.

The FDIC estimated 5% of home owners were marginal and would not have cleared the more strigent “hurdles” of the pre-bubble era of relative fiscal sanity. Since there were roughly 75 million homeowners (50+ million mortgages and 25 million homes owned free and clear) that means 3.75 million homeowners could not really afford to own a home. These marginal borrowers are now losing their homes.

Many numbers are being bandied about, such as 2.3 million U.S. properties in foreclosure (default notices, auction sale notices and bank repossessions) in 2008 (RealtyTrac), 2.1 million foreclosures in 2008 and 1.7 million in 2007 (Moody’s Interestingly, this first wave of foreclosures aligns rather closely with the 3.75 million most marginal owners identified by the FDIC.

But lest we assume “the worst is over” (ah, the rallying cry of the Bulls at every turn, every hour and every minute of every day), let’s revisit this oft-reprinted chart of future mortgage resets:

As we can see, the washout of marginal subprime borrowers is receding (the first 4 million foreclosures) but the waves of other mortgages resets is just beginning. We might also note that about 8.3 million borrowers are underwater on their mortgages, owing more than the value of their home, and depending on which projection you trust this number is on the rise to 10 million or is already at 10 million when recent declines in value are considered.

These numbers suggest there are another 4 million homeowners who are at risk of default/ forclosure in the next two years. As for this being “the bottom,” let’s return to our steeplechase analogy.

If millions of households no longer qualify for a mortgage, then who’s going to be buying the 8 million houses which are in default? Yes, speculators are busy snapping up “bargains,” but few seem to ask who will be buying from the speculators.

The other enormous difference between the bubble peak and the present is jobs are being lost which may never come back. In Endgame 3: The End of (Paying) Work (January 21, 2009) I came up with a potential decline of 21 million jobs out of the bubble-peak workforce of 137 million, jobs in the FIRE ecoomy, retail and construction which aren’t coming back.

Let’s say I’m off by a factor of two and “only” 10 million jobs are lost (or fulltime wage-earners are cut to part-time or temp), then how many households will be able to “jump” the qualifying hurdles?

While we’re on the steeplechase analogy, let’s apply it to the lenders and banks which are supposed to fuel the next housing bubble with limitless mortgages at low rates. As various facts about the stress test have come to light–that it wasn’t very stressful, that 7 of the 19 banks failed to clear even this super-low hurdle, etc.–then we have to wonder what the “stress test” of a truthful accounting of bank assets and liabilities might reveal:

If the Treasury’s phony stress test was a 6-inch high hurdle, then reality is a 10-foot high solid concrete barrier. Confidence in the truthfulness of the Treasury’s stress test is essentially zero; whata bout all the off-balance sheet “assets”? What are the market values of all the toxic “assets” currently valued on what correspondent Jason calls “Hopium”–the fragile hope that a future re-inflated bubble will lift the value of worthless assets back to their bubble-era glory?

You can lower the bar on borrowers and banks to near-zero to create the illusion of “qualification” or “certification” but reality remains a 10-foot high concrete barrier which the marginalized borrowers and banks have yet to face. With jobs in decline and defaults far from the end-game, clearing a 6-inch high hurdle does not mean the contestants are ready to clamber over the looming 10-foot high barrier just ahead.

Two insightful reader comments on yesterday’s entry Propaganda: We Are Complicit:



I think the one word that sums up this phenomena is – “Hopium”

Hope + Opium.

Hope is like a drug. It’s addictive and makes you feel good but in the end it’s bad for you.

Cheryl A.

As you noted, a big part of this debacle is related to confidence and I’ve been thinking about what it would take to restore my confidence in the system: (this is a wish list… I’m not delusional in thinking that any of these will occur)

Removal of GS people from all positions of influence and power, as well as anyone remotely connected to Goldman Sachs (GS). For a discussion on the reach of GS see ‘Goldman Conspiracy:’ RICO? Or Medal of Freedom? and Tremonti and Johnston do Goldman Sachs.

Real/accurate government data in all areas

Repayment of all monies paid out to Wall Street executives over the past 8 years that are the result of they or their firms engaging in activities related to the collapse

Each time a member of Congress speaks about legislation or professes to represent the interests of the public at hearings or other events, he/she must simultaneously state any contributions received from businesses potentially affected.

Real reporting by newspapers, i.e. not influenced by politics and advertisers (why pay for a newspaper subscription when all you receive as purported news is extended advertising)

Let insolvent businesses fail

Enforcement of securities regulations

Return of legislation intended to protect the public, such as Glass Steagall

Obviously, there are many more, but this would be a good start.

However, as I stated at the start, I believe there is little hope for reform. Sorry, America, We’re Too Corrupt To Fix The Financial System.

Thank you, Jason and Cheryl. 

Thank you, Mark L. ($35), for your most generous contribution to this site. I am greatly honored by your support and readership.


Go to my main site at
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New Homes Demolished in Victorville, CA

April 30, 2009 by · Leave a Comment 

Hat tip to several – thanks! Note: Victorville is east of Los Angeles at the southern edge of the Mojave desert.

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Report: Stress Test Results Delayed

April 30, 2009 by · Leave a Comment 

From Bloomberg: U.S. Stress Test Results Delayed as Early Conclusions Debated

The Federal Reserve will postpone the release of stress tests on the biggest U.S. banks while executives debate preliminary findings with examiners … The results, originally scheduled for publication on May 4, now may not be revealed until toward the end of next week … A new release date may be announced as soon as tomorrow, they said.

Note that President Obama announced today that GMAC would be receiving government aide (as part of Chrysler deal, GMAC will takeover all financing of Chrysler vehicles). GMAC is one of the 19 banks undergoing stress tests.

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Chrysler: bulls make money, bears make money, pigs get slaughtered

April 30, 2009 by · Leave a Comment 

It looks like Chrysler is going down for the count. A few piggish bondholders decided to play chicken with the Federal Government. They are going to lose this game and, consequently, lots of money too. Chrysler and the Obama Administration did not have a strong hand. Their best alternative to a negotiated agreement (BATNA) was bankruptcy – not a very good fallback option. James Kwak calls Chapter 11 the government’s nuclear option because bondholders are not the only one’s who are going to lose here. The holdouts amongst the bondholders knew this and pushed their piggish agenda. Now they are going to get slaughtered.

But what about everyone else?  I am not optimistic that a bankruptcy can be controlled unless the administration puts in some cash after the filing.  They have promised to put in $6 billion if the Fiat deal comes through. This would make their money senior to all other claims and give them much more say over the course of events during bankruptcy.  That would also give Chrysler time to work through a bankruptcy without liquidation.  Here’s how I see things playing out for some major constituencies.

  • Auto Workers.  There will likely be massive job losses here.  Let’s see what Obama does regarding funding the newly-insolvent company to prevent more job losses.  The dealer network will be cut back significantly, so the job losses will not necessarily be concentrated in Detroit.
  • Shareholders.  They will get nothing. They will be replaced by the unions (new majority owners in deal with Administration), the government, and Fiat (if the deal goes through)
  • Bond holders.  They are going to get stuffed..big time.  It is a case where they should say, “I fought the law and the law won.”  End of story.
  • CDS insurance writers.  Get ready for major pain.  If bond holders are getting screwed, you know the companies who guaranteed credit default swaps (CDS) are not going to be very happy here.  Question: are bond holders playing chicken because they have insurance?  If so, you can consider the CDS writers another negotiating party that did not get a seat at the table and are going to be left holding the bag – a reason to want some major changes in how the CDS market is run.
  • General Motors.  This is a dry run for them.  Now, they have a chance to see how things play out for Chrysler and use this as leverage to say, “see, you don’t want to hold out on us. Look at Chrysler.”  But, again, the CDS insurance problem may be at play in bondholder negotiations.
  • Fiat.  This is good for Fiat.  Chrysler will be cheaper now and this also gives them more leverage over Opel and Vauxhall in those negotiations.  On that score, it is a net loss for GM, which owns those two European subsidiaries.
  • Chrysler retirees.  They are going to take it on the chin.  I guarantee you there will be pain felt in Chapter 11 for the pension fund.  Chrysler can pull an airline maneuver and slough off some of the pension income and health care liabilities too.  The unions have already made large concessions here, so perhaps this will be less of a factor.

A good article to read in all this is “Exploring the New Corporate Bankruptcy Strategy” on the PBS Frontline website. It has quotes from a number of bankruptcy experts including Elizabeth Warren, now Congress’ TARP watchdog.  In her full interview, Warren gives some insight into the effect Chapter 11 has on pension funds and the net effect of ERISA and moving from defined benefit to defined contribution schemes.

Originally published at Credit Writedowns and reproduced here with the author’s permission.

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Manisha Thakor and Sharon Kedar: The Return of The Real American Dream

April 30, 2009 by · Leave a Comment 

In a recent New York Times Op-Ed piece, Paul Krugman, the noted Economist, Nobel Prize Winner & Princeton Professor said, “…these days America is looking like the Bernie Madoff of economies; for many years it was held in respect, even awe, but it turns out to have been a fraud all along.” Ouch. These are very strong words from such a brilliant man.

That got us thinking. If our economy, or at least our much-vaunted financial system, was a fraud, then what about the long cherished American Dream? Was that concept just a big, fat fraud too?

We’ve all heard the gut-wrenchingly scary statistics. Many stock markets around the globe are 50% off their highs. Unemployment is the US is over 8%, the highest levels in decades. 1 in 8 US mortgages are currently delinquent or in foreclosure. The result is that experts estimate American households have lost a whopping $20 TRILLION in wealth between the twin collapses of the stock and housing markets.

That’s a fall of epic proportions by anyone’s measure, leading one to question how real those glory days were. This brings us back to today’s query: Was The American Dream a fraud too? At its simplest level, The American Dream is about freedom and happiness. So let us ask you three simple questions:

1. What did you do last Monday?
2. Did you feel free?
3. Did you feel happy?

If you are like millions of Americans, the odds are high that you don’t even remember what you did last Monday let alone whether you felt footloose and fancy free. As such, we’d argue that whether we like it or not, in many ways we are now being forced to return to The Real American Dream – which was not a McMansion and SUV for every man, woman, and child. For so many of us, the things we were doing during the go-go years of the past two and a half decades really didn’t bring us freedom and happiness. From what we’ve seen as personal finance experts – for most of us, we didn’t own our homes, our cars, our fancy shoes and cutting edge electronics… they owned us. Many of us were slaves to our possessions. We often worked at jobs we didn’t like to acquire possessions that we either tired of shortly afterwards or that burdened us with the need for upkeep, care, and insurance. In short, we were trapped, not in The American Dream but in The American Scream.

As devastating as it has been, the upside to this economic downturn is that we are all being forced to engage in mindful spending. Whether you’ve just lost a job, have been put on furlough, or are simply worried that this may be coming down the pike, many people are starting to think tactically about their spending for the first time in years. They are asking, “Will this really add to my life? Will it make me happy?”

Surprisingly, what many people are finding is that when they don’t miss the takeout dinners night after night. When you can only buy one new article of clothing at a time, instead of ten, you really savor that item. A recent Pew Foundation study found some significant shifts in the way Americans are defining luxuries versus necessitie

As horrible as it’s been for many people, there may be a silver lining. Being forced to cut back may be exactly what we needed to bring back The Real American Dream.

Manisha Thakor and Sharon Kedar are the co-authors of ON MY OWN TWO FEET

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Credit Ratings Accused Of Reaping Profits As Regulators Fail

April 30, 2009 by · Leave a Comment 

Ron Grassi says he thought he had retired five years ago after a 35-year career as a trial lawyer.

Now Grassi, 68, has set up a war room in his Tahoe City, California, home to single-handedly take on Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. He’s sued the three credit rating firms for negligence, fraud and deceit.

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