If you are surprised by this appointment consideration, please know that I am not. And if you don’t know who Penny Pritzker is, you can count on me to refresh your memory.

Penny was Barack Obama’s national campaign finance chair and now she would like to become Secretary of Commerce. Well I suppose we should all be grateful that she hasn’t been tapped as Secretary of Treasury, considering she owes the Federal Government nearly a half billion dollars in restitution for her seized Superior Bank in Illinois.

Yes, my friends, Penny Pritzker, the Mother of subprime lenders, former owner of the seized Superior Bank is on Barack Obama’s short list for Secretary of Commerce.

I am sure all those customers she screwed are thrilled. In fact one of them had quite a bit to say about Barack Obama and his relationship with Prizker right here on this radio show after ole Penny’s bank went under and left her with a large part of her life’s savings flushed down the proverbial drain. (Note: If Play doesn’t work, click on MP3 Stream link, you don’t want to miss this woman’s story)

I can assure you this woman wasn’t psychic when she expressed concern that Pritzker would become a member of an Obama cabinet. She just happened to understand the concept of “Show me who your friends are and I will tell you what you are“.

You might say that Penny was a Pioneer of sorts. After all, her Superior Bank folded like a plastic door in a cheap banquet room years before the rest of the dominoes fell.

You might even say that the Superior Bank was a boilerplate for what’s happening today on Wall Street. She avoided the rush, so to speak. Her bank failed in 2001. I discussed this here on April 4, 2008. So did plenty of other bloggers, including RBO. Of course, all of this was dutifully ignored by those bastions of integrity, MSNBC and CNN.

For those of you who need a refresher course, here are some clips from that non-fiction story:

The Pritzkers are one of the nation’s wealthiest families and heirs to the fortune created by the Hyatt hotels. Yes, Penny is a billionaire. So basically, Penny could squash me like a bug right now for writing this.

Among their other endeavors, the Pritzkers were the owners of Superior Bank in Hinsdale, Illinois when it was seized.

Yes, I did say seized.

Penny Pritzker, Barack Obama’s great Chicago (of course!) friend was a pioneer you might say! She was a failed subprime lender who set the tone all the way back to 2001. She did it before it was even in style.

Here’s a little press release from the Office of Thrift Supervision back in 2001:

OTS Closes Superior Bank FSB; Hinsdale, Ill. Thrift is Insolvent

WASHINGTON – The Office of Thrift Supervision (OTS) closed Superior Bank FSB, Hinsdale, Ill., today and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver.

The FDIC transferred the insured deposits and substantially all the assets of Superior Bank into a newly chartered, full-service mutual savings bank, known as Superior Federal, FSB, which will open for business on Monday morning. All depositors of Superior Bank automatically become depositors of Superior Federal, and will have immediate access to their insured funds. All 18 of Superior Bank’s Chicago metropolitan area offices will open for business Monday and will continue to offer full banking services, including online banking. Superior Bank’s loan production and servicing operations will also continue to operate normally.

OTS used its authority under the FDIC Improvement Act of 1991 to close Superior Bank when it found that the bank remained critically undercapitalized — that its tangible equity capital was less than two percent of its total assets. The bank failed to implement a capital restoration plan that it submitted to OTS on May 24 this year.

Superior Bank suffered as a result of its former high-risk business strategy, which was focused on the generation of significant volumes of subprime mortgage and automobile loans for securitization and sale in the secondary market. OTS found that the bank also suffered from poor lending practices, improper record keeping and accounting, and ineffective board and management supervision.

Superior became critically undercapitalized largely due to incorrect accounting treatment and aggressive assumptions for valuing residual assets. The bank also experienced significant losses during 2000 from its automobile lending program.

OTS has determined that Superior Bank is insolvent, having incurred losses that have depleted all or substantially all of its capital. OTS also determined that Superior Bank was no longer able to transact business in a safe and sound manner.

OTS notified the bank of its serious concerns in July 2000.

The bank was purchased by two families in 1988 — the Pritzker family of Chicago, owner of Hyatt Hotels and other interests, and the Dworman family of New York, with interests in real estate and financial services activities — and was operated through a complex network of holding companies.

In light of these findings, OTS determined that closure and the appointment of FDIC as receiver were necessary to protect the interests of the bank’s insured depositors.

As of March 31, 2001, the failed bank had total assets of $1.9 billion and total deposits of $1.5 billion. FDIC insures depositors’ accounts up to the statutory limit of $100,000.

Superior is the only bank that OTS has closed in 2001, and only the fourth OTS-regulated institution closed in the past five years.

The FDIC has established a toll free telephone number for customers of Superior. That number is 1-800-331-6306, and will be available until midnight tonight and then from 7 a.m. to 7 p.m. daily thereafter.

At the time of this seizure, it was determined that Penny Pritzker and her family owed $460,000,000 to the Federal Government. Yes, that’s right folks. Nearly a half a billion dollars. Gee, i wonder if that’s all paid back yet, don’t you?

Back in September, 2008, I discussed Penny and her siezed subprime lending institution yet again and so did RBO. I felt she deserved another go-around considering she certainly appeared to be a prime forerunner of today’s Wall Street Meltdown–and this didn’t seem to bother Barack Obama one bit:

You see, while Barack Obama is faking outrage over all the bankruptcies and bailouts, he doesn’t mention that a number of his top ten contributors are from Wall Street, including Goldman Sachs, Lehman and the JP Morgan Chase. He also fails to mention that one of the first subprime lenders to stick it to borrowers and have her bank seized is a woman named Penny Pritzker, who just happens to be Barack Obama’s campaign Finance Chair (as confirmed on April 3, 2008) and a potential Secretary of the Treasury in an Obama administration.

Power and Control blogger has this to say:

This is a long and complicated story about how Obama backers were behind the mortgage industry meltdown. It hast to start some where, so lets start with a well known Chicago name Penny Pritzker. It starts with a bank failure.

And now, Penny is being considered as Secretary of Commerce. Kind of makes you feel all warm and fuzzy, doesn’t it? Don’t you always have a warm feeling when you meet one of Barack Obama’s close friends?

But don’t worry. Penny is going to fix herself and her friends us up really well. After all, look how well she has looked out for the little people in the past.

I guess the main stream media didn’t think this Petty little Penny Pritzker Problem (say that three times fast) was important enough to look into back when some of us was being sooooooooo trivial about it.

Change You Simply Cannot Believe.

Additional links on this bilking of innocent people:
NY Times, December, 2001
FDIC Failed Bank Information - Superior Bank
OTS Closes Superior Bank FSB; Hinsdale, Ill. Thrift is Insolvent
OTS Announces Resolution of Charges Against Auditor of Closed Superior Bank FSB

Additional Uppity Coverage of this marvelous “choice” for Secretary of Commerce:

Barack Obama’s Finance Chairwoman and the Seized Superior Bank (April 4, 2008)

Obama’s Finance Chair - Failed Bank Owner Penny Pritzker and Wall Street Today (September 14, 2008

RBO: Penny Pritzker’s Problem (September 16, 2008)

Next month in Atlanta, a federal court will hear the high-profile appeal of former Alabama governor Don E. Siegelman, whose conviction on corruption charges in 2006 became one of the most publicly debated cases to emerge from eight years of controversy at the Bush Justice Department. Now new documents highlight alleged misconduct by the Bush-appointed U.S. attorney and other prosecutors in the case, including what appears to be extensive and unusual contact between the prosecution and the jury.

2) A paper in NC wonders if Presidential power, which has metastasized over the last few years, will be curbed in an Obama administration. The author sees in Emanuel’s decision to leave Congress to be Obama’s Chief of Staff confirmation that no job in Congress would compare with power in the Executive branch.

Read the rest ->

Presidential power has only further increased since [Andrew] Jackson. The need for government to act quickly in times of crisis, the centering of the president as the icon of national identity in popular culture and the executive branch’s control of information, among other factors, have vested a power in the presidency that far surpasses that of the other branches.

Thus it becomes not surprising to see one of the most powerful members of Congress [Emanuel] agree to become a White House staffer.

THE MORE SERIOUS QUESTION IS WHETHER A TRUE BALANCE OF POWER can be reconstructed. It needs to be. The Framers believed that an imbalance of power among the branches would inevitably lead to abuse and incompetence. The last eight years have proved them right. The Bush administration made constant claims to unlimited power that Congress had neither the will nor the ability to turn back. The resulting morass is history.

Whether an Obama administration will work to restore the constitutional balance is only speculation. The challenge is considerable. Checks and balances are inefficient, and ceding power to a coordinate branch is not easy, particularly when there are so many dire challenges facing the nation. But Emanuel’s choice to accept the chief of staff position rather than continue in Congress vividly demonstrates how much the need to repair the constitutional structure is in order.

I see this question as a moral one in addition to a constitutional one. I wonder if Obama will return any presidential power “to the people.” Hmmmmm.

3) Realclearpolitics has a transcript of Michael Steele announcing his bid for RNC chair. Now THAT would be interesting.

STEELE: I want the gig. I’m ready, I’m ready to lead this party. I think we’ve been kind of wandering and doubting ourselves for far too long. And I think this past election was the culmination of that self-doubt which has to end.

We have a message, I think, of empowerment and ownership and opportunity that resonates United States with Americans. We just need to get back to.

So, we could have an AA RNC chief, and AA president and de facto head of the Democratic party and ???? as DNC chief? Now that should make for some very entertaining racial politics.

4) The WaPo has a piece today about the ever-not-changing work of K Street. Apparently lobbyists see an incoming Obama administration as a reason to re-arrange the deck chairs rather than change how they do business. Out with republican head lobbyists and in with the democratic. Sigh. Oh, yeah, don’t forget the nepotism. Gotta have nepotism.

“Barack Obama campaigned on change. Well, change is good for the lobbying business,” said Ed Rogers, who was an aide to President Ronald Reagan and whose firm has represented such clients as Citigroup, Pfizer and Raytheon. “People will need the expertise and guidance more in the next year than they have in the last five.”

Many of the issues Obama has expressed an interest in tackling early, such as health-care policy, energy and taxes, have broad implications for some of the lobbying world’s most free-spending corporate clients. Patrick Von Bargen, a former chief of staff to Sen. Jeff Bingaman (D-N.M.) and aide to William Donaldson, the former chairman of the Securities and Exchange Commission, said he joined Quinn Gillespie this month with the expectation that his knowledge of clean energy issues would be a valued commodity.

“People who have labored in Democratic vineyards for years are familiar with the people involved, but also with the substantive issues, and how Democrats approach those issues,” he said.
——————
Ron Kaufman, a Republican lobbyist at Dutko Worldwide who served as a close adviser to President George H.W. Bush and Massachusetts Gov. Mitt Romney, said he cannot recall a better time to be a Democratic staff member looking for work. But he said his firm has always tried to keep both sides of the aisle covered so it does not have to panic during shifts in political control.

“The only change for us is that the Democrats are now the varsity squad, and I’ve been demoted to the junior varsity,” Kaufman joked.
——————-
Steve Elmendorf, a former top adviser to former House minority leader Richard A. Gephardt (D-Mo.), said that he understands why Obama took that approach, but that he does not believe lobbyists will be turned away. “I don’t think they’ve said ‘We’re not going to talk to lobbyists,’ ” Elmendorf said. “They are going to talk to stakeholders. The stakeholders are all going to be represented by lobbyists. It’s not going to be a black-and-white thing.”

Elmendorf is one of several who foresee a boon for the industry. A new Democratic administration and an increasing Democratic tilt in Congress means more activist government, he said. “That means businesses will have the potential for more things to happen to them. If they think that’s coming, they will be hiring people to figure out how to contend with that.”

BO has said he doesn’t want lobbyists to have unfettered access. But I think this stand is likely to quietly die a “death of 1000 cuts” as the collective power of all these lobbyists and their industries / interest groups do everything they can to preserve their influence. This could be very interesting to watch. Get out your hypocrisy-meters. And get out the hip-waders.

5) Newser has a story about the MLK family wanting its piece of the action from MLK / Obama merchandising. Now, as controllers of the MLK estate, etc, it is within the family’s rights to look after its interests. But scurrying after merchandising dollars strikes me as tacky. Of course, it is understandable that the family wants to protect its brand Of course, I don’t personally think of MLK as a BRAND, but I guess that’s a matter of perspective?

The family of the Rev. Martin Luther King Jr. is demanding a share of the proceeds from the sudden wave of T-shirts, posters and other merchandise depicting the slain civil rights leader alongside Barack Obama.

Isaac Newton Farris Jr., King’s nephew and head of the nonprofit King Center in Atlanta, said the estate is entitled to hundreds of thousands of dollars in licensing fees _ maybe even millions.

“Some of this is probably putting food on people’s plates. We’re not trying to stop anybody from legitimately supporting themselves,” he said, “but we cannot allow our brand to be abused.”

MLK Brand??

6) One of the justifications for “undocumented workers” has long been that those people do the jobs “American’s don’t want to do.” Does that include teaching? Perhaps so, because the Dallas public schools have been hiring people without SSNs and arbitrarily assigning one to them “until they receive a valid number.” Of course, there’s a chance those SSN numbers might be REAL to someone else. The Dallas News has the story:

Years after being advised by a state agency to stop, the Dallas Independent School District continued to provide foreign citizens with fake Social Security numbers to get them on the payroll quickly.

Some of the numbers were real Social Security numbers already assigned to people elsewhere. And in some cases, the state’s educator certification office unknowingly used the bogus numbers to run criminal background checks on the new hires, most of whom were brought in to teach bilingual classes.
—————
The investigative report, obtained by The News through a records request, found “that the inappropriate procedure of assigning false SSNs has been systemic for several years” within DISD’s alternative certification program, which prepares new teachers for state certification when they don’t have traditional credentials.

A call Thursday to DISD’s alternative certification office was not returned. In recent years, DISD has hired people from various countries, including Mexico and Spain, to deal with a shortage of bilingual teachers.
—————-
In July, the district discovered that 26 of the false numbers were in use after matching DISD employee Social Security numbers with the Social Security Administration database. The numbers were already being used in Pennsylvania. DISD officials did not know Thursday whether the practice had caused problems for anyone holding the legitimate numbers.

Anyone out there having received an IRS notice of unpaid taxes on undeclared income might want to keep an eye on this story.

7) Still don’t see how the damaged economy will touch you? This article in the Christian Science Monitor should help clear THAT up somewhat.

If the states had their way, they would like Congress to give them help in four areas: help with the growing number of people applying for Medicaid, more funding for the rising unemployed, help with the growing number on food stamps, and an injection of funds to jump-start infrastructure projects that are ready to go.

In my area, the local schools have requested and gotten substantial increases each year. Since I live in a “progressive” area, increases are regularly sought for a variety of things: sidewalks (good), artwork around a remote public works building (?), community gardens (are you kidding me?), stormwater run-off infrastructure, another municipal pool (we only have 3) with glass pebbles inlaid on the floor, and more money for roads (well, . . . ) even as development in the form of housing continues unabated, with taller and taller and “greener and greener” condos going up

Oh, and we don’t allow “big box” stores in my community. They’re so, so, tacky and cheap, you know. So everyone drives over the county line to shop at Target and the brain trust here loses out on what remaining retail sales taxes are available. Even as more housing is built, property taxes increase because new housing does not pay for itself in terms of schools, sewer, water, and other city services - at least not here.
And the local university (isn’t there always one in a “progressive” town?) often buys up tracts of land, taking it off the tax rolls. So, as the university uses more services, it also cuts available tax funds to the town. And the university has a multi-billion dollar endowment. . .

Sigh.

Senator Clinton Calls for New Stimulus to Boost Economy and Help Those Hardest Hit by Recession, Calls for Investments in Infrastructure, Green Jobs, Mortgage Relief, Aid to Cities and States, and Extending Unemployment Insurance

Senator Hillary Rodham Clinton today called for a comprehensive new stimulus package to jump start the ailing economy. In a letter to President Bush and Senate leaders, Senator Clinton outlined a series of measures that would protect those Americans hit hardest by the recession and put the nation on the road to recovery.

The text of her letter to the President follows:

November 11, 2008

The Honorable George W. Bush
The White House
Washington, D.C. 20500

Dear Mr. President:

Our economy has lost more than one million jobs this year alone. The scope and scale of the economic challenges facing the American people are vast. Businesses, large and small, are struggling to secure financing to survive. Families cannot find affordable mortgages and consumer loans. The housing crisis, which has already wiped out hundreds of billions of dollars in home equity and even more in investment losses, grows deeper every day, with another wave of foreclosures looming.

The State of New York is the epicenter of this crisis. New York projects that more than 160,000 New Yorkers will lose their jobs as a result of the economic downturn. A recent analysis estimates that New York City will lose almost 30,000 construction jobs by 2010, in addition to the tens of thousands of jobs already lost to turmoil on Wall Street.

We are in a recession which demands decisive action. I believe that in order to stimulate this economy, we need to get people working, earning, and building – not just spending. We have borrowed hundreds of billions that have gone to banks and financial institutions and borrowed tens of billions more to energize the economy, yet the economic downturn has continued and the financial turmoil has worsened. What is clear is that any action we take – especially as we borrow more money to do so – must pay off in the near and long term. That is what America does best: we can address this crisis while preparing for our future.

However, we do have immediate needs that cannot wait between now and when the next Congress and the next President takes office. And although your Administration has voiced skepticism about the need for a stimulus bill, I believe that the current conditions call for a coordinated response now.

The most recent jobs report, indicating another 240,000 jobs lost last month and the worst unemployment rate in 14 years, shows that steps need to be taken to shore up the safety net as millions of Americans continue the search for work. Expanding Unemployment Insurance and the Supplemental Nutrition Assistance Program (SNAP) would not only provide relief to those hit hardest by our economic downturn, it would also spur economic activity as this money is immediately spent. New York alone has hundreds of thousands of people who will face the unemployment line and the loss of their food assistance during this economic downturn.

In the midst of one of the greatest fiscal crises to hit our states, an increase in the Medicaid FMAP rate would help prevent further and deeper cuts to health care and other essential services like education, child care and public safety. Rising demand for health insurance coverage through Medicaid due to increasing job loss is straining state budgets, and the federal government should act to help ease this growing burden on our states.

It is also increasingly clear that we need to take steps now that not only mitigate the fallout, but also begin putting the nation on the path towards recovery. That is why I believe the stimulus we pursue should focus on rebuilding our infrastructure and building a new, clean energy economy. Stimulus should focus on putting people back to work by investing in infrastructure and green jobs. That is how we can restore our prosperity today and ensure it in the future.

So I am proposing, among other steps, that we speed investments in infrastructure, including $410 million in New York roads, bridges, and transit systems, as well as training for new jobs in the clean energy economy, or “green collar jobs.” A federal investment in our infrastructure serves the dual purpose of modernizing our country’s deteriorating roads, bridges, and transit systems while stimulating the economy. Investing in these projects will create tens of thousands of good paying jobs. More than 40 highway, transit and rail projects are “shovel-ready” in New York alone.

I am also proposing an investment in training programs to prepare a new green workforce for the clean energy jobs of the future. I believe we can create at least five million green collar jobs - and we can speed the creation of those jobs while also training displaced workers to fill them in the very short term.

The next wave of foreclosures looms, and we should address it immediately. It is critical that we modify unworkable mortgages into clear and stable terms if we are to prevent the bottom of the housing market from falling even further. I have proposed HOME, the Home Owners Mortgage Enterprise, based on the successful program enacted during the New Deal which not only saved one million homes but also turned a profit for the Treasury. We should continue focusing on initiatives large and bold enough to meet the scale of the challenges presented by the faltering housing market.

The road to recovery will be difficult. But it is imperative that we take these urgent and important steps to kick-start the economy and hasten a return to prosperity that is shared and strengthens the middle class. I ask that you work with congressional leaders in developing a comprehensive stimulus package that the Congress can pass next week to reach your desk immediately thereafter.

Sincerely,

Hillary Rodham Clinton

cc: Majority Leader Harry Reid
Senator Robert C. Byrd
Senator Daniel Inouye

Take a good look. That’s leadership: the difference between a work horse and a show horse. Not for glory. No headlines. For the American people. It is still heartbreaking that we are being deprived of someone so caring and capable at the helm.

I know some are angry that Senator Clinton went out and campaigned for Barack Obama. But before anyone starts any Hillary bashing, this woman has been fighting on behalf of the Democratic Party for over 35 years. Severely outspent, in debt, with the press lynching her daily and her own party actively pushing and rigging it for the other guy, she did what she had to do to live to fight another day. Furthermore, she kept her word to the American people to fight for the Democratic nominee and a Democratic agenda.

I know that President-elect Obama has reversed himself on his policies and associations at lightning fast speed, so giving his word may not mean anything. But I do know to her, it means everything. It may seem an irritating quality at times. If I give my word, I don’t break it. Ever. My word is my bond.

Furthermore, had Hillary behaved any differently and shunned the Party, rest assured her crucifixion would have followed. Just witness the disgraceful treatment Governor Palin is receiving as we speak if you doubt this.

I will not second guess her. I just observe that Hillary is still out there “putting her shoes on” and doing her job. And while I may wish she had acted differently these last couple of months, I am certainly glad to have her earnest and dedicated voice in the Senate, still working on our behalf.

Notice, too, Senator Clinton is asking for action to be taken immediately, unlike Obama who is basically saying ‘it’s Bush’s mess ’til I get here in a couple of months.’ Where are his immediate solutions? Suggestions? He is not even planning on attending the emergency economic summit later in the week, but sending surrogates in his stead. If I were set to take over in a couple of months — I’d want to show up and keep my ears open and learn something.

People are hurting right now. It doesn’t matter which administration gets the credit. Help is required for the American people. Scorekeeping is not the issue. Hillary gets that.

Thank you so much Speaker Pelosi, Chairman Dean, Senator Reid, Senators Byrd, Kerry, Kennedy, McCaskill, Rockefeller and the rest of the backstabbers for throwing this good lady under the bus and instead, leaving us with Mr. Hopey Changey who seems to think it’s more important he choose a puppy for his daughters right now.

How’s that working out for ya’?

It’s time we forewarn ourselves so we can stop ‘em dead in their tracks — and we can toss their greedy schemes in the wood chipper before they mess us up again! Me? I’m tryin’ to figure out who murdered the LAW [and those safety nets that kept average Americans safe].)

[Note from Larry Johnson--Folks, this is a very important piece and deserves your time and attention. It is long and it is challenging but LD, who knows the Wall Street world from the inside, is giving you the Willy Wonka tour of the Money Factory. Please check it out.]

Despite billions and now trillions of dollars in capital injections and equity investments made by our government, private equity, and sovereign wealth funds, our economic turmoil is a long way from being over. I do find it interesting that despite numerous Wall St. titans having indicated to us at different points over the last year that we were in the 7th inning of this fiasco, that now a recurring theme is that we should not expect any real economic recovery until 2010. Actually maybe we were in the 7th inning but it was the 7th inning of the first game of a 4 game set.

Well, if we want to figure out where and when we are moving forward, I think it would be beneficial to know from where and when we came.

For those over 50 years of age, perhaps you remember when mortgage money dried up. Perhaps you also recall the days of putting down 20% before you even thought of buying a home. In any event, the growth of the secondary mortgage market in the mid 1980s was a result of some very sharp financial minds on Wall St. who engineered a product called a Collateralized Mortgage Obligation (CMO).

CMOS and their cousins that grew from that model were and are not necessarily bad structures. However, much like prescription drugs. if and when they are abused. they can be deadly.

CMOs used the stream of cash flows from a standard fixed rate mortgage to create specific bonds which met the investment desires of a wide array of investors, including money market funds, bank portfolios, insurance companies, money managers, and pension funds. Prior to the development of the CMO, mortgages were an investment that typically only met the needs of bank portfolios.

As the CMO market grew, two developments occurred. First and foremost, Wall St. firms (which were making on average 1 point on each deal … on an average deal size of 300 million, the Wall St. underwriter made $3 million dollars … not too shabby) had an appetite for more and more mortgage collateral to do more and more deals.

In the mid-1980s, most CMO deals were done with private homebuilders such as Pulte Homes, Centex, Ryland et al. The second development was more substantial. If Wall St. could use mortgage collateral to execute CMOs, why couldn’t they use other forms of loans/assets to create similar sorts of structured products. Thus in the late 1980s the Asset Backed Securities market was launched using credit card loans, auto loans, computer leases, equipment leases, and the like. Again, all Wall St. was doing was using the stream of cash flows from these well underwritten loans to create securities that met the guidelines and needs of a wide array of investors. Again prior to the developments of these markets, the banks underwrote these loans at rates and terms that met their own portfolio needs (REMEMBER THIS POINT!!).

In the late ’80s Freddie Mac and Fannie Mae got a whiff of the profitability of these CMO deals and used their significant lobbying power to get legislation passed that made it advantageous from a tax standpoint for CMOs to be launched through them. While some Wall St. firms were reluctant to support Freddie and Fannie in this process, given F/F ’s position in the business they won out. (REMEMBER THIS POINT!!)

As the CMO and ABS engines grew ever stronger throughout the early to mid 90s, Wall St. needed to find more and more collateral to continue to feed this profit monster. Some Wall St. firms either purchased or made strategic alliances with originators (Lehman Bros bought Aurora Mortgage in Aurora, Colorado … Bear Stearns owned EMC Mortgage in Texas … Merrill Lynch purchased First Franklin, a sub-prime originator, from National City Bank) while some originators formed their own broker dealers to retain the profits of distributing these products (Countrywide Mortgage formed Countrywide Securities, JPM Chase grew its own investment banking presence in the late ’90s as did Bank of America)

In the midst of this growth, Wall St. continued to use this CMO model not only across other consumer asset classes but then branched out and used it with corporate loans as well. Thus Wall St. structured CLOs (collateralized loan obligations using the same financial engineering).

While there were hiccups with different deals for the most part the machine ran smoothly. The machine, though, was built on the premise of strict underwriting of the underlying loans and a robust ratings process.

However, at the turn of the century there were two critically important developments that occurred to truly escalate the disastrous situation we have currently. A number of individuals from Wall St. realized that they could form their own firms (hedge funds) which allowed them a greater share of the profits from this structured financial engineering with less internal or external oversight. (REMEMBER THIS POINT!!)

A large number of qualified analysts from the rating agencies left those firms to come to Wall St. to participate in the profit machine. This shift of talent both to hedge funds and from ratings agencies dramatically exacerbated and accelerated the financial meltdown of the last two years. (***given the amount of money in these hedge funds as well as the amount “earned” by the hedge fund managers it should be no surprise that they became very influential in currying political favor … especially with Barack this go round!!)

At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans … no income no asset check). WOW!!! What were we thinking?? Well Wall St. felt, “let’s worry about it tomorrow or maybe not at all because we are making too much money today.”

Hedge funds factored into the fray in two ways. They partnered with their friends on Wall St. in managing CBOs and CLOs and they purchased the cheapest bonds in the deals or so they thought. Rating agencies either were not smart enough to know what they were rating or were blinded by their own stream of profits given the growing volume of deals. They were negligent or complicit or both. Honestly there was nobody who truly was looking out for the investors, who it was assumed should look out for themselves. Where was the SEC when you really needed them??!! This was all hunky dory as long as the economy was humming and delinquencies and defaults by consumers, homeowners, and corporations were well behaved.

In 2005 or thereabouts Wall St. had such a voracious appetite for volume of collateral product that they pressed the envelope even further and came up with “synthetic” structures. These structures purely used a pool of known collateral (be it sub-prime mortgages, home equity loans, corporate loans, et al) as a reference pool for the stream of cash flows in the deal. Wow!!

Without the need for actual collateral Wall St. really rocked. (REMEMBER THIS POINT)

Under the “originate to distribute” model Wall St. hired reams of financial quants and engineers to structure deals. Wall St. grew their distribution efforts globally to sell these products far and wide.

Life was good!! … or so they thought.

Wall St. actually started to think they were as smart as everybody told them. Wall St. thought that their own models were so robust because they had the smartest minds build them. Wall St. thought that they had become so effective at “distributing” risk that they were blind to the fact of just how much risk they “created”. Then the music stopped. The Fed needed to increase rates to slow the pace of inflation that was emanating from global economic growth especially in Asia. Mortgage rates reset at higher levels. Freddie and Fannie started to show signs of distress. Wall St. pressed so hard that they “killed the goose that had laid the golden eggs”.

Against that backdrop, through the 3rd quarter in 2008, check out the volume of underwritings in these respective sectors vs 3rd quarter 2007.

The mortgage and asset backed markets (including commercial mortgages) are twice the size of the overall U.S. government bond market and app half the size of the U.S. equity markets. The mortgage market doubled in size from the end of 2003 until the end of 2007!!!

Investors now fully appreciate that with the economy slowing and seemingly picking up speed that delinquencies and defaults will continue to ratchet higher. The embedded losses are only exacerbated by the massive leveraging that occurred via the use of “synthetic” cash flows. No, the media has no appreciation for this and will not share it with the public.

Where are the other shoes that have yet to drop??

Please refer back to the “synthetic” structure that I discussed. These synthetic structures grew exponentially with the growth of a product called the “credit default swap” or CDS. This product, in theory, is outstanding because it acts to protect investors against defaults on the underlying referenced corporation or entity (such as sub-prime mortgages). That said, instead of helping to distribute risk the CDS market has effectively “created” risk because it has grown to the point where it now is 10 times the size of the overall corporate bond market that it is supposed to be tracking.

Yes, the tail is very much wagging the dog. Hedge funds dominate the trading activity with close to 60% of the overall trading volume. Hedge funds have gotten good press so far for not having had many “blow ups”!!

Give it time, because hedge funds do not have to report to anybody as to what their positions are and where they have them marked. There is no doubt that they have positions that are grossly mismarked and that they have many positions that are totally illiquid. For many investors in these funds these are truly “roach motels”. Hedge funds will sell what is most liquid when they can to meet redemption requests. We should expect a significant number of hedge fund liquidations, consolidations, and out and out disasters.

Read more how “Hedge Funds on Hot Seat.”

In the S&L crisis of the late ’80s the overall cost was estimated to be $100bln+ with the government taking over and liquidating failed institutions. Now given the tremendous systemic risk that links Wall. St investment banks to hedge funds to insurance companies, to sovereign wealth funds to commercial banks to municipalities the losses are untold.

To think that a stimulus package of even $300bln along with the $700bln commitment that has already been made is going to “fix” our economy is foolhardy. We will definitely get “bear market” rallies in the stock market and politicians and market timers who will tell you that all is well but don’t get fooled by “that man behind the curtain”. The losses in the banking system alone are upwards of $1 trillion. From there let’s move into insurance companies, hedge funds et al. Paulson, Sheila Baer, Bernanke and others know that any money that goes into the system is purely going to help the banks recapitalize themselves in the face of these losses.

When Barney Frank, Nancy Pelosi, and Barack Obama complain that they need to make sure that credit lines open and remain open, they are not addressing the fact that the banks have an overwhelming amount of non-performing assets already and that those assets are likely going to grow in the face of an unemployment rate headed up by 2% to 4%!!

Please read this article in Monday’s WSJ highlighting how Uncle Sam is reworking the terms of the rescue package for AIG. This article highlights the systemic risk (Goldman Sachs is widely speculated to have the greatest counterparty risk exposure to AIG) and the very fluid nature of the deteriorating situation. Guess what? As taxpayers we have the bulk of the risk as we own 80% of AIG and will very likely lose a lot of money on this deal. That said, the near term losses would very likely be even greater if AIG were not propped up by the government. It is not a given that our longer term losses and negative impact on GDP won’t exceed the perils of immediate losses. We have a high stakes game of craps on our hands.

“Government, AIG Near Pact to Scrap Original Terms of Deal” … oh what fun!!

I have little doubt that we will also in large measure “nationalize” the auto industry. Read here how the “Auto Makers Force Bailout Issue” …

IMO, there are only a few moves that Obama, Summers, Geithner, Volcker, Buffet or Rubin can do to change this situation for the better. Those moves include:

1. lowering the tax rate on capital gains (I’m not so sure that Barack wants to do that)
2. categorically state that tax rates will not change (not sure he will do that either)
3. spending freeze!! (also not sure he wants to do this either).

Even with those moves, it may only shorten the length of our very deep recession but will not negate it.

Honestly, I have to believe that Barack is kicking himself thinking that his entire program to create social change may very well be at the mercy of these economic constraints. IMO, if he and/or the Democratic leadership aggressively push the tax/spend agenda, the markets will punish them in very short order.

With the unemployment rate headed higher, to at least 8% if not 9% or 10%+, I firmly believe that people will use any money from the government to simply pay off existing debt. That is the rational move at this point. Our U.S. personal savings rate is 1%!!! In China the personal savings rate is 40%!! The party’s over, the lights have come back on, and somebody has to pay the bill. Yep, that’s right and regrettably that bill is on the U.S. taxpayer. Screwed again.

The government has already massively increased it’s own debt and will “crowd out ” lending into other sectors.

If we go back to the first point I asked you to remember, with the “originate to distribute” model broken and not soon if ever to return, banks will now only underwrite those loans (consumer or corporate) that they feel comfortable putting into their own portfolio at terms and rates that are amenable to both sides. That is why I think rates for these loans will be higher and volumes will be lower. Batten down the hatches.

Paulson knew of the consequences of this scenario earlier this year. He hoped the banks could sell assets, he says as much in this piece … “Paulson, Bernanke Strained for Consensus In Bailout.”

As Maryann Hurley a Vice-President of D.A. Davidson recently said, “When the banks shed their balance sheets of a lot of these unwanted and poorly performing assets.” they may start to lend again. Hurley added that consumers need to fix their balance sheets as well after years of going into debt. The lack of a rigorous underwriting process is coming home to roost.

She adds, “I’m guessing it’s not going to be before 2010 at best and it’s most likely 2011 before the economy really starts to turn around.”

7th inning of game 1 of a 4 game set …

LD

Jobs were lost in virtually every sector: manufacturing, construction, and especially the service sector, which had been the sector that provided job strength over the last few years.

In summary, there is nothing to like about this report and it is likely to get worse. Estimates on unemployment rate range from 7% to 9% by the middle of 2009.

Read more here on how the “Economy Sheds Jobs.”

Goldman Sachs, which had the most accurate call on the employment report, is now calling for a -3.5% GDP for 4th qtr 2008 and a -2% for 1st qtr 2009.

Also: The market expects a .50 cut in the Fed Funds rate in December to an overall rate of .5%.

This call leads us to wonder whether we are going to move into a Japanese-style economy from the 1990s in which lending rates were literally 0 but savings were still very significant and borrowing anemic. Banks did not fully recognize losses. Inflation was not an issue given that borrowing needs were non-existent. This scenario is not the case here in the United States since our deficit borrowing will be enormous!!

Equity markets are expected to open flat to slightly higher this morning. Actually those markets opened up app 1% and got as high as 2.5% but have come back down to +1% after the GM earnings. (11:30 am).

Bonds are lower with rates up by app 8-10 basis points.

Commodities are mixed with early call on gold up 2-3% but copper is lower … again … oil also looks like it will open slightly lower but moved higher in sync with the overall market.

The auto situation continues to receive a lot of focus. The “cash burn” rate for Ford and GM is between 2-3bln a month.

The Big 3 are asking for 50bln in capital to address health care costs and liquidity … expect them to get it from Uncle Sam with Uncle Sam taking warrants in the companies … all that said, indications are that the auto companies will have layoffs and cost cuts wherever possible. Ford posted earnings of -$1.31 per share vs expectations of -.93. GM posted earnings (how is it that they are called earnings when in fact they are losses?!) of -$7.35 per share vs expectations of -$3.94. This GM situation is truly dire.

Read more here how “Ford Plans More Cuts.”

All the focus on bank lending really needs to focus on the ability of the banks and brokers to “sell” those loans (mortgages, auto loans, credit card loans, et al) to investors through the “securitization” process.

Investors are very cautious and have little appetite at current rates to buy these loans. Given that lack of demand, banks are not willing to lend. Ultimately rates for these products need to move higher to attract investors.

The idea that Freddie and Fannie will be the buyer of last resort for these mortgages is a movie that we have seen before and it has a very bad ending.

Read more here on how “JP Morgan’s Illiquid Assets Rise.”

Speaking of Fannie: Expect a RECORD loss when they post 3rd qtr earnings.
Another situation that bears watching is AIG … they are trying to sell divisions to repay Uncle Sam but are meeting with little demand currently or buyers are very cautious as they can’t get financing for the purchase.

With all of the government intervention currently and more intervention expected, it is not a stretch to say that as taxpayers we are all investors in the biggest multi-strategy hedge fund in the world. Problem is, I think that our “investment” may in many circumstances be like that roach motel. We can get it, but just how the heck do we get out …??

Last but not least … Warren Buffett purchased preferred stakes in Goldman Sachs at 125 with a 10% dividend and warrants to purchase more at 115 … Goldman closed yesterday at app 81 … yes down 35% from Buffett’s purchase … Buffett did the same trade with General Electric when GE was at 22.25 … GE closed yesterday at 18.3 … yes down app 20% … Warren is smart but he has the luxury of time and excess cash … those investments were made in late September.

I caution you from focusing too much on the day-to-day swings in the markets and continue to assess the trends in the economy. Bounces are temporary. Markets correct by price and time.

Granted we have had app a 40% correction in price, but we will likely now suffer from either more price corrections or a market that at best “treads water” thus a time correction.

We hope you had a Happy Friday!!

……..

Ed.’s Note: Our apologies for not posting this story on Friday. It was entirely the editor’s fault. LD wrote this by mid-day Friday. We will try to do better.

Emanuel Was Director Of Freddie Mac During Scandal

President-elect Barack Obama’s newly appointed chief of staff, Rahm Emanuel, served on the board of directors of the federal mortgage firm Freddie Mac at a time when scandal was brewing at the troubled agency and the board failed to spot “red flags,” according to government reports reviewed by ABCNews.com. According to a complaint later filed by the Securities and Exchange Commission, Freddie Mac, known formally as the Federal Home Loan Mortgage Corporation, misreported profits by billions of dollars in order to deceive investors between the years 2000 and 2002. Emanuel was not named in the SEC complaint (click here to read (SEC complaint)) but the entire board was later accused by the Office of Federal Housing Enterprise Oversight (OFHEO) (click here to read) of having “failed in its duty to follow up on matters brought to its attention.”

Read all: Emanuel Was Director Of Freddie Mac During Scandal

Thanks, NewHampster!

And what other outrages are goin’ on out there?!?!?!?!?

Our reluctant allies on the Right believe McCain was struck by the perfect storm. McCain’s loss was less about campaign strategy failures than an incredibly unpopular president of the same party and an economic October surprise which underscored his Party’s difficulties. It really was about Change. From the National Review:

1) 2008′S OUTCOME AND THE BANKING CRISIS AND STOCK MARKET CRASHES –
The media talk was wrong, the media talk that had gone on all year and reached its height in the summer and early September about an irresistable Democratic trend and unstoppable Obama. After a successful Republican convention and a week of campaigning by McCain-Palin capped by Obama`s “lipstick on a pig” gaffe, McCain had a nice national lead and one so strong in Ohio there were rumors Obama was pulling out. For purposes of perspective on last night’s results, it’s good to remember some of McCain’s numbers in various polls that second week in September:

Florida: +8

North Carolina: + 18

Georgia: + 18

Oklahoma: + 31

Idaho: + 39

New Jersey: - 3

New York: – 6

Michigan – dead heat

Wisc —dead heat

Minnesota — tied.

And the Gallup poll released September 11 showed a GOP five point lead in the generic question which could have translated into twenty to thirty seat pickup.

2) HARD TO CALL – This Fall’s political environment was unprecedented — an economic crisis not seen since the Great Depression. So there was no prior experience to fall back on. Campaign Spot readers and loyal Jedi warriors wanted Obi to make his unapologetic predictions of the past. That prediction was impossible. What could be said was that McCain was still very much in it despite the burdens he faced, including everyone’s 401(k) turning to cinders.

3) MCCAIN CAME BACK – Striding into one of the worst political headwinds ever McCain actually staged a comeback. A week after his last debate performance, his “Joe the Plumber” initiative and excellent performance at the Al Smith dinner in New York, four good polls showed him one or two points away from a lead. Even Rasmussen, who still gave Obama a four point advantage, noted McCain was shaving
the Democrat’s national lead and had moved back into a slight lead in Florida and Ohio. Then came more days of market crash. Yet, even after that, the survey data showed undecided voters were inclined towards McCain but also wanted to vote their frustration and anger over the economy and were inclined, rightly or wrongly, to take it out on Bush and the GOP.

4) THE DEMOCRATIC PROCESS IS A BLUNT BUT ULTIMATELY BENEFICENT INSTRUMENT — One place your Obi worked for Barry in 1964 was the New Hampshire primary and he vividly remembers that loss and then the carnage in November. (Even Sooners Coach Bud Wilkinson, one of the state’s religious figures, lost a Senate bid in Oklahoma.) But two years later came a GOP blowout marked by Ronald Reagan’s first election to political office. And back in `76 some of us thought
nothing was more important than electing Jerry Ford. But defeat that year ultimately led to a new Republican party and the Reagan era.

So when you ask: How could the American people do this? Don’t they know what they are getting? Well, unfortunately the blunt instrument approach — shock therapy — is like that. Lots of collateral damage in the hope the GOP will get itself together and give America a better time, a newer era.

6) FIGHT HARD; FIGHT FROM THE START TO STOP THE COLLATERAL DAMAGE – So the problem with the blunt instrument is the unintended consequences. The 1964 results meant the social tragedy, especially for the poor, of the Great Society programs. The 1974 Democratic Congressional blowout cost 13 million South Vietnamese their freedom. The 1976 defeat meant Carter era malaise at home and one of the most perilous periods for U.S, national security.

The liberals in Congress will soon push to discourage entrepreneurship and economic growth, nationalize the medical system, weaken the military, use state power to coerce Americans into removing mentions of God from the public square, accepting abortion on demand and the altering the definition of marriage. And an early test for President Obama will be his reaction to pressure in two areas from his own party that may brand his administration early as decidedly leftist. He will be pushed to take various measures to stifle dissent through enacting the Fairness Doctrine and ending the secret ballot in union elections. And he will be pushed to make a decision that cost the newly elected President Clinton his honeymoon period — changing the “Don’t Ask, Don’t Tell” policy about gays in the military. On all of this, the congressional liberals and their media allies will be unrelenting. And yet all this represents opportunity for the GOP. The last Congress was the most unpopular in history because of its radical liberalism. Yet the GOP failed entirely to enumerate for voters that Congress’s transgressions. That opportunity is coming again.

Also, the liberals know that neither in 2006 nor 2008 did the American people vote for the left-wing agenda. They are hoping conservatives will again go along after some polite demurrals. So, if loud and noisy but enlightened opposition is offered at every turn, much of the collateral damage can be avoided. And the American people will see the real agenda of the liberal elites.

7) REJOICE — Electing an African American president closes a painful but proud chapter in American history. What a country.

8 ) TOUJOURS L’AUDACE —We gather our armies. We go forward.

Finally, Dick Morris chimes in that McCain did better than the media predicted:

For political historians, it’s worth noting that Obama hasn’t scored the knockout that many predicted. As I write, it seems clear that John McCain will lose by a few points in the popular vote, not by the double digits so confidently predicted in the media polls. The fact is that most of the undecided voters went to the Republicans.

What do you think? Is there anything McCain could have done differently? Or were the conditions too unfavorable for any Republican?

What else is going on?

At the end of the Democratic Primary season, this was the situation:

Popular Vote
Senator Hillary Rodham Clinton: 17,857,446, (48.04%)
Senator Barack Obama: 17,584,649 (47.31%)

Pledged delegates

Senator Hillary Rodham Clinton: 1,730.5 (39.17%)
Senator Barack Obama: 1,747.5 (39.55%)

(source)

Then, for no apparent good reason, in June Howard Dean and Nancy Pelosis decided THEY, not the delegates chosen by the electorate and not the superdelegates appointed via proper party procedure, were going to decide who would represent the top of the ticket for the general election. Now that same leadership wants YOU to legitimize their undemocratic and unprincipled methods by putting their selected candidate into the White House on November 4.

But WE can say no to the subversion of democratic principles within the Democratic Party. We can say no with our votes and by urging our fellow Democrats to pay attention to the particulars of the candidate Howard Dean and Nancy Pelosi selected to represent the Democratic Party.

Put this ad on the air and let America know that our voices count.

Over the next 24 hours and across the internet, we as a community will urgently be raising money to run edgy and persuasive ads made by Democrats in key battleground states. Generous contributors have pledged $500 in matching funds. Your voice counts. Please contribute now

CLICK ON ROSIE TO DONATE:

Or go to Democrats For Principle Before Party - The Denver Group’s general election website, where you can view other ads the group is running:

He doesn’t seem to be having a problem. He is a cash cow. Or rather, a whole herd.

I dreamt that I heard Barrack Obama had spent $500 million dollars on his campaign to secure the presidency. Maybe I am off by a few mil. If I am, no doubt some brilliant blogger will help set me straight. I can almost always count on a diligent investigative blogger for the real facts since in the latest chapter of the world gone mad, the New York Times seems to be giving up on actual investigative reporting. At least where Barack Obama is concerned. They are more concerned with the cost of Sarah Palin’s wardrobe or Cindy McCain’s personal trials.

There’s transparency in this election season. But it mostly centers around how many usually reliable mainstream media sources are in the tank for Obama.

But here’s the thing. With this kind of money in the tank, why do I get so many emails from Barack, Michele, Joe, David and Nancy? I get them every day, sometimes several times a day. Sarah Palin had barely walked off the stage at the Vice Presidential debate when I got an email from David about what a great job Joe had done. Send money.

I guess it takes a lot of money to rig an election. All those people to bus in. All those free lunches and dinners. All those homeless or disenfranchised people to pay to register voters and get them to vote the same day when their address or identities can’t be verified. All those ACORN workers and zealous volunteers to tear up McCain and Palin signs, destroy other property and intimidate people. All those bloggers to infiltrate sites promoting freedom of speech, election reform and accountability in the media.

And all that media time to purchase for the much touted upcoming infomercials set to run during sports events.

Yup, fraud, is indeed, expensive.

Money is a sore spot right now. As we witness the collapse of the economy, it seems more obscene than usual that any candidate is spending millions of dollars on the election. So I am confused by the Democrats, my usual party of choice.

How is it that Republican nominee John McCain, along with Democratic Senator Russell Feingold from Wisconsin have pushed for campaign finance reform and not Obama or party leaders like Nancy Pelosi and Harry Reid? McCain and Feingold have been talking about campaign finance for a long time. They first introduced their bi-partisan bill in 1995. Talk about tenacity. I wonder what Barack Obama was doing thirteen years ago.

I’m also wondering if Obama is so concerned about the economy and sending a message of unity that we need to work together, why didn’t he head for Washington immediately as a Senator and the current leader of the party when the bail out was on the table? Why did he need to be summoned by the president?

And why isn’t he willing to honor staying within a budget that can be agreed upon by both parties? Was all this work on campaign finance reform for nothing?

I guess fraud is, indeed, expensive. As are below the belt commercials that criticize John McCain for not doing email or that question his life expectancy.

It’s true that John McCain can’t type or raise his arm very high.

Kind of tough to do when you have nerve damage after being tortured in a prisoner of war camp for five and half years.

And it’s true that John McCain has had a recurrence of a kind of skin cancer. It is a commonplace cancer that affects many Americans who go to the doctor, have it taken care of and go about their lives.

But raise the specter of technological incompetence or cancer and you can really get a bang for your buck. Through the magic of television alone, you can suggest that McCain is an old guy who is out of touch. An old guy on the verge of death.

Nice. I guess indecency is also expensive.

As more and more Americans struggle with gas prices, foreclosures and unemployment, it is understandable to want to lash out. For many the obvious target would be the Republicans, since so much of the disaster in our financial world happened under George Bush’s watch. But many Democrats were also asleep at the wheel, or so tied up in angry partisan politics that they refused to participate in substantive discussions and actions to prevent a collapse.

The buck needs to stop somewhere. How misleading that the Democrats, under Nancy Pelosi’s supposed leadership do not want to acknowledge that both parties have played a role in the collapse of the economy. What a poor example that the Democrats and Barack Obama have rejected reasonable campaign finance reform so that they can spends millions upon millions of dollars to promote his candidacy while many hardworking Americans have to choose between filling their plate at dinner time or their gas tank at the pump.

The buck needs to stop somewhere. I’m thinking, Just say No deal.