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11/01/2008

Of greed, corruption, collusion and irresponsibility

Article by WisestSage posted in Singapore Kopitiam. He puts everything about the collapse of subprime loans, minibonds etc in a simple way for all to understand. Greed, corruption, collusion, irresponsible govts and rating agencies are all accomplices in this fiasco. Now it is a case of blame game and see who ended with rotten eggs in the face. In recent months when the subprime-related securities trigger the collapse of Lehman Brothers, many Asians, including Singaporeans, got their fingers burnt. Some 10,000 Singaporeans have lost $500 million in their investments in Minibonds, DBS High Notes, Jubilee Notes, and Pinnacle Notes, some of them becoming worthless overnight. Asians have a reputation of saving habits as they need to save for the old age while most Asian countries do not have social welfare safety net. They inevitably become the victims of the structured products which have been marketed by the greedy bankers and the Wall Street crooks from the west. How come only Asians from Hong Kong, Singapore, and Taiwan are hardest hit by Minibonds, DBS High Notes, Jubilee Notes, and Pinnacle Notes, but none of the western countries is affected? Let me explain why the situation is so dire and dangerous. When the financial shits hit the ceiling fan, I was hoping that the so-called leading economics and financial commentators and opinion makers would explain the situation to the public via the national dailies, the blogs and the TV network. I came across not one article or broadcast that explains the underlying reasons for the inevitable dire consequences. Sure there were articles on the crisis, but they were merely describing the rescue of the largest insurance company in the USA (A.I.G.) if not the world and the amount involved. No explanation whatsoever, as to why only a few days earlier the Fed and the Treasury allowed the 4th largest investment bank, Lehman Bros to fold up but rushed in to rescue AIG with an unprecedented US$ 85 billion. In my various articles published previously, I explained in great detail the corruption within the global banking system and how these financial leeches through fraud and political protection created and amassed a global financial fortune in excess of US$500 Trillion. Let me assure you that this is not a typo error. You got it right. It is not billions but a whopping US$500 trillion. I have been advised that as of the Q2 of 2008, the figure may have reached US$565 trillion. This is a complex subject but I shall endeavour to make it as simple as I can. Starting Point The Ponzi Scheme The crux of the fraudulent Ponzi scheme is the twin pillars of: 1) Fannie Mae & Freddie Mc – the two giant mortgage corporations of USA 2) The Derivative financial tool known as Credit Default Swap (CDS) Once you have a grasp of these two concepts, you cannot but agree that we are facing total global banking collapse. Why? Because the entire global banking system has been built on these two financial pillars! But the system became irreparable in the last 7 years when CDS became the linchpin in the massive expansion of derivative trading and financial engineering. The Mechanics 1. Banks became greedy and were unwilling to earn safe and steady profits from mortgages for housing and commercial properties which usually spread over a period of between 5 to 30 years. 2. Banks wanted massive profits in the shortest period of time and the ability to lend massive amounts and not be regulated as to how to do it. 3. The crooks devised a scheme. It was a simple idea. 4. Banks will provide mortgages to all and sundry. 5. I am going to use a simple example and using small numbers to illustrate for ease of calculation. Thus, assuming the Bank gave out US$1 million to finance mortgages, bearing interest at 10%. 6. The bank then sold the mortgages to Fannie Mae and Freddie Mac at a discount. Fannie Mae and Freddie Mac being Government Sponsored Companies (GSCs) are able to get cheap financing to purchase these mortgages as they were assumed to be “guaranteed by the US Government”. 7. Fannie Mae and Freddie Mac then package these mortgages into all sorts of structured financial products and these were sold to investors (private as well governments). Central Banks hold massive amounts of dollar reserves and they need to find a safe haven for them. Hence, and invariably, Central Banks invest their reserves in US Treasuries and financial “mortgage-backed" products issued by Fannie Mae and Freddie Mac as well as other US financial institutions. 8. With the payment of US$ 1 million by Fannie Mae / Freddie Mac, the bank by law, can lend ten times the amount after keeping 10% reserves i.e.US$100,000. Therefore, the bank can lend US$9 million by “creating money out of thin air” i.e. by crediting the borrowers in their loan accounts in amount of the loans extended. These US$9 million loans secured by mortgages are then sold to Fannie Mae / Freddie Mac again. The cycle keeps repeating and the banks keep creating more and more loans. It was so easy that the banks decided to create dubious loans called “Liars Loans” whereby the borrower need not state the actual income and or ability to repay. 9. As more and more of these loans were created, investors (government and private) demanded assurances that these loans were good for investments. The rating agencies (e.g. Moodys, Standard & Poor and itch etc.) who in collusion with banks, gave AAA ratings to what were essentially junks. This fraud led investors to believe that these financial products were good investments. 10. The rating agencies were only too aware that this scheme needed something more concrete to prolong the fraud and induce the investors to part with their monies. 11. The insurance companies like A.I.G. came into the picture. They were seduced by the idea that if they can insure against risks of accidents, storms etc., they could also insure risks against default by the mortgage holders. Thus was born the financial innovation – Credit Default Swap (CDS). Any financial product with a sound CDS would be rated AAA. It was as good as being guaranteed by Uncle Sam. Assholes the world over, especially central banks, fell for it – hook, line and sinker. 12. The scheme works out like this – AIG sells protection – i.e. in the event there is a default, AIG will pay out to the buyer who buys the protection (the CDS) in exchange for the payment of premiums covering the period of protection not unlike your usual insurance policy. It was easy money for everyone. The banks get to sell their loans and have the liquidity to create more loans. Fannie Mae / Freddie Mac and other financial institutions get the opportunity to repackage these loans / mortgages and sells them to investors with a tidy profit. The investors are happy with their so-called guaranteed returns. The insurance companies, investment banks and other players get their premium income for selling protection. It was old fashion mafia loan sharking and protection business dressed up in modern financial jargon and everyone was too arrogant and greedy to see through the fraud. 13. When loans default and continue to be delinquent, the law (depending on each country) provides that if the loan is in default for 90 days or more, it should be declared a Non-Performing Loan (NPL) and banks must provide reserve to cover the loss. 14. What happened was banks were covering the defaults and kept them on the books for two years or more in the hope that no one would be wiser and interest income from new loans would cover the defaulted old loans – the classic ponzi modus operandi. 15. When the two years default reached critical proportions starting with the sub-prime loans, the fraud began to unravel. Investors began demanding their protection money for the losses arising from these defaults. It has been estimated that the market value of the CDS was in excess of US$60 trillion but the capital of the insurance companies like AIG are only in the billions. It is therefore a physical impossibility to make good the demand for payment for the defaults. 16. If AIG the No. 1 insurer in US and the world is in default, it means the rest are in deep shits. You can take it as a given that no one and no one has good coverage and protection anymore. 17. When there is no coverage and protection, how can there be AAA ratings for new issues of such financial products? Fannie Mae/Freddie Mac etc. cannot package these products for sale to investors and if they cannot sell, they will have no funds to buy more dubious mortgages from corrupt and fraudulent Wall Street banks. With no additional funds, these crooks in JP Morgan Chase, Goldman Sachs, Citigroup, Lehman Bros., Morgan Stanley, Merrill Lynch, Bank of America, UBS, Barclays, HSBC, Deutsche Bank, Credit Suisse, etc. will have difficulty extending new loans. The “Musical Money Chair” will have to come to a complete halt. The entire system gets into a gridlock. Given the above explanation, can the US government and the Fed continue to bail out banks and other financial institutions? When US is in deficit in both the budget and current accounts, where else can they get the extra monies except by creating out of thin air (virtually by keying digits into computers) or print more dollars. If you are a sovereign lender or a private hedge fund, knowing the situation, would you lend more monies to the US Treasury knowing that each dollar issued (whether digitally or in printed notes) are not worth the value stated therein. These dollars ARE NO BETTER THAN TOILET PAPER. When the Asian investors become the insurers of the structured products like Minibonds, you know why they have been conned. It is inevitanle that they would lose their pants through the investments in structured products like Minibonds, DBS High Notes, Jubilee Notes, and Pinnacle Notes. Have you wondered why MAS and other financial regulators allow these structured products to be marketed to the naive general public? If they are not sleeping on their jobs, what are they doing all day long?

31 comments:

Anonymous said...

Redbean;

can I conclude that materialism will cause mankind to suffer forever.

It has been a great pleasure reading your blogs and an honour to have some interactions here with You.

Wish You all the best, good health and happiness!

Yours Sincerely: patriot

redbean said...

haha patriot,

it's my pleasure to share. don't be surprise we have met before. we are of the same age group.

materialism, like hedge fund, capitalism, communism, religion etc are all neutral stuff. only extremism is bad. remember yin and yang. you need a balance for everything.

even greed can be good. but overdone it destroys.

Anonymous said...

We could have met if You flew frequently, I worked in the Airports fo about fifteen years.

That was about twenty years back.

And I was a retail salesperson in some large Electricals and Electronics Outlets for about ten years.

Stopped working for over two years, felt burnt out. Now occassionally have a glass or two at Safra Tampines, SIA Sports Club and Changi Airport Recreation Club.

Redbean, I intend to stop reading blogs and I must say here that You impressed me very much as a man of great benevolence. You have earned my greatest respect. All these said from my heart.

Yours Sincerely: patriot

Anonymous said...

> If you are a sovereign lender or a
> private hedge fund, knowing the
> situation, would you lend more
> monies to the US Treasury knowing
> that each dollar issued (whether
> digitally or in printed notes) are
> not worth the value stated therein.

Hooray for Asian mercantilism?

Anonymous said...

This article is old btw - it's been on Tan Kin Lian's blog for a while.

redbean said...

i just happened to read tjis article this morning and found the information is very clearly explained and useful.

and patriot, my younger days were in the airforce, then mindef. the rest were in the private sector. spend sometime running in and out of the airport on official business in the early 80s.

maybe our paths have not crossed till now. maybe we have a drink together one day.

cheers.

Matilah_Singapura said...

All horse-shit redbean.

Caveat Emptor: No one forced anyone to buy dog-shit dressed up as Belgian chocolate financial instruments.

You Cant' Cheat An Honest Man!

Anonymous said...

well, the fake belgian choclate came with seal of approvals

Anonymous said...

Redbean;

Allow me to suggest that we meet at the Changi Airport Recreation Club located at the 3M Floor, Terminal Two.

Tentatively set on the eigth Nov 08Saturday at 1930 hrs.

The Club Restaurant is open to the public and its' tel number is 65468218. Tell the Restaurant Operator You are meeting me.

In case You are busy, just call the Restaurant to relay the message to me.

The Club is located at the Burger King End of the Terminal, above the carpark.

Looking forward to meeting You.

patriot

redbean said...

hi patriot,

date is ok for me. shall we invite a few more bloggers who are game to join us? if too many we can go dutch.

cheers.

redbean said...

matilah, your free enterprise and free spirit is boom and doom. and that is what is happening to the greatest free enterprise today. it is turning communist : )

and in our case, we are turning into mercenaries, do everything for money. no morals no responsibility.

Anonymous said...

Hi redbean;

please be inform that You are free to arrange our meeting, time and place, as I am quite free most of the time.

You need only give me notice one/two days in advance.

Yours Sincerely: patriot

Anonymous said...

Ops, got your message after my last post was activated.

I do not mind to meet a few more for the first meet, though I would prefer it to be no more than four or five.

Going Dutch is the best choice, though costs of foods and drinks are quite low.

It will be nice to see You(all).

patriot

Matilah_Singapura said...

redbean,

Rugged self-interested individualist private enterprise (aka "capitalism") has been battling attempts at social control, and in extreme cases banishment (regulatory state and political ideals like communism and fascism) throughout human history, and it hasn't stopped today.

It is my belief that it will never stop — as long as there are ignorant people around with their cousins — the people who envy the success of others who are "better" than the average guy in some area.

As soon as you are successful, especially financially, it won't be long before some envious individuals tear you down — and attempt to steal your property by the political process.

The world is full of Jealous Losers — but thankfully, it isn't difficult to avoid them.

Matilah_Singapura said...
This comment has been removed by the author.
redbean said...

agree with you matilah. the music will start again and the story will be repeated.

patriot is suggesting a get together, on dutch basis. like to come along?

i would like to suggest NUSS guildhouse at Suntec City. more central. prices are reasonable. would $23 for dinner buffett bbq, no service charge except gst be reasonable? beer is reasonable too.

Anonymous said...

Hi redbean;

me heavy smoker, any smoking allow in NUSS? Or anyone allergic to cigarette smoke?

Sorry for imposing.

From the post, I suspect Matilah is based/stay abroad. Me right, Matilah Singapura?

patriot

redbean said...

oh dear, no smoking in restaurant and bar. i don't smoke and heavy smoking will be a problem to me.

looks like your interests are more similar to matilah. he smokes and drinks and make merry.

Anonymous said...

redbean;

that's the little vice which unfortunate started fifty(50) years ago without abate.

And Guinness Stouts have been a daily thing for decades.

But I should be able to bear an hour or two.

If Matilah Singapura smokes, how far do You seat away from him?

Smoking and drinking = perfect partners. Smoking is allowed in the open-air section in CARC T2.

patriot

redbean said...

ya, many find them great partners. unfortunately i have this funny thing, not exactly a phobia, but just cannot stand the sight and smell of cigarette butts. weird but it is true.

nothing against the smokers.

Matilah_Singapura said...

Yes, I am "abroad", living under the radar in the Peoples' Social Democratic Union of Australia, so I shall not be attending your interesting soiree.

I enjoy cigars. I reckon people who like smoking should be left alone and allowed to pursue that which makes them happy — including smoking anything they like — even though inhaled combustants are potentially lethal.

Better to kill yourself and enjoying doing it along the way than to allow the government to slowly kill you in agony. :-)

Anonymous said...

Okay redbean;

I shall refrain from smoking for the duration You guys are around, this compromise I can bear.

patriot

Anonymous said...

Hi Matilah Singapura;

can't bear to disagree with You on the last point.

Better suicide than Euthanasia approved by others.

My 93 year old mother smoke for sixty over years and my late(lived for 88 years) father smoked four packets a day. I think my mother did not suffer from breast cancer because she smokes. A joke that carries some truth, I guess.

patriot

redbean said...

my mother was a chain smoker too. no cancer and passed away at 92.

anyway, we still can have two more for company this sat. anyone like to come along?

matilah is in oz ;)

Anonymous said...

Dear redbean;

do me a favour, confirm the date and venue of the meet. Once this is done, I am going to divorce the keyboard.

patriot

redbean said...

ok patriot,

nuss guild house at suntec city. next to carrefour at level 5. if you drive, i think it is at tower one. go straight into basement one, turn left after the entry barrier and take the nearest lift there, 30 meters from that entrance. meet you at the reception at 7pm this sat 8 nov. dress decently. no slippers or shorts. collar t shirt and jeans ok.

going to changi means going from west to east. jiat lat.

inviting two more to join us. can email me at redbeansg@yahoo.com.

cheers

Matilah_Singapura said...

My gran dad chain smoker Camel non filters since he was a kid. Lived way pass 90. Never ever remember him getting anything more serious than a cold. Died peacefully in his sleep.

OTOH Jesus, no smoke, no drink, no fuck — dead at 34.

Go figure :)

Anonymous said...

To redbean: On.

To: Matilah Singapura: Camel, my brand for 45 years, this two months, keep running out of stock, damn sickening. I will extend your grandads' legacy, rest assured.

Yourstruly: See You and goodbye!

patriot

Matilah_Singapura said...

To patriot:

My sympathies. There is nothing worse than running out of your favourite drug :)

I recall my student days in Aust, long before the word "internet" was even invented: we used to think the world was coming to an end because we had run out of gunja... This was openly smoked on campus every Friday by everyone including the (younger and sexy) lecturers when there was cheap beer and a rock band to entertain the students.

I'm very glad to have studied here. I thank NUS from judging me "too stupid" to be allocated my 1st and subsequent choices to my preferred field of study. If I wasn't "kicked out" of NUS, I wouldn't have come to Australia.

Thank you god. amen.

redbean said...

hi patriot,

we need to exchange our mobile numbers just in case there is any last minute changes. you can pass it to me at redbeansg@yahoo.com.

cheers

Anonymous said...

Hi redbean;

I have forwarded my mobile and landline numbers, do call me once You received the mail, it was sent earlier in the day.

Yourstruly: patriot