The latest Greek tragedy And Sovereign Defaults Pose A Great Threat

May 8 2010

The latest Greek tragedy continues to leave carnage in its wake, crime compounds the debt problems, Problems everyone knew about nobody did anything about, the Sovereign debt bubble is now upon us, and could bring the world financial system down, a situation like the French Revolution in Greece, food stamps at a record high, unemployment and problems of poverty in the US

It was 7 years ago we said Fannie Mae and Freddie Mac were bankrupt. Most everyone within the beltway knew it, but no one would say anything about it. This as it now turns out they were the poster companies, which led to sovereign debt problems, but also showed that they were involved in massive fraud over several years and many in Washington knew it. Earnings were fabricated in order to create conditions, so that the officers could collect millions of dollars in bonuses. Part of this scam was engineered by Goldman Sachs, which pushed more than $100 million in earnings into future years. Earnings were structured so that they justified larger payouts for executives.

These two GSE’s were later joined with Ginnie Mae and FHA, not for fraud as far as we know, but in making and insuring loans, that were not worth the paper they were written on. They were the entities, and they still are, that were at the heart of the mortgage crisis. They were responsible for the distortions in the housing market as essentially the lenders of last resort. Remember, everyone had to have a house whether they qualified for it or not. We should also add that the Fed created and controlled the housing boom, aided and abetted by these GSE’s and, of course, the lenders and raters. That said, it could have never happened and is continuing to happen with key assistance from these four lenders of last resort. Over a six-year period they arranged for mortgage credit to double; mis-pricing of finance never entered their minds. What in part the GSE’s were responsible for was the over liquidation of the mortgage market, that in turn led to distortion that came to be known as collateralized debt obligations, asset backed securities, ABS, and MBS, mortgage backed securities. They were sold by the likes of Goldman Sachs, JPMorgan Chase, Citigroup and others, who arranged with the raters S&P, Moody’s and Fitch to have bonds rated AAA that in fact were junk, BBB. In a low interest rate environment, choosing yield, professional investors gobbled them up supposedly after doing their due diligence, which obviously never occurred. All those lawyers and no legal opinions. It seemed impossible and it was. They bought trillions of dollars worth. We said, at the time, this is impossible. Could it be the Fed said, we want you to buy this paper and if there is a problem, we have you covered? This naturally led to more home buying and more CDOs, ABS and MBS, which let the GSE’s off the hook in part at least. We would guess the Fed was behind this in order to transfer some of the risk from the GSE’s to institutional investors. The result of all this was a giant bubble, which is being and has been re-inflated over the past couple of years. The reasons in government are obvious. Just do not let it collapse on my watch. This is why the crisis isn’t over and why it won’t be over for at least two more years. Then for how many years will it bump along the bottom?

Outrageous monetary policy by the FOMC and Alan Greenspan led to ever more profits in the banking system and on Wall Street. In the end the lifeline was the GSE’s and still is. Banking and Wall Street, as we all well know, expedited the distribution of these toxic assets. The problems created by this cabal in their quest for extraordinary profits are still with us.

As we look to the future we see more bubbles from that era still to be dealt with and that is sovereign debt. For 19 nations that problem is acute. They are on the edge of insolvency. Iceland has led the pack and today the visible are Greece, Portugal, Ireland, Spain and Italy, all in different stages of collapse. More will soon follow reaching a crescendo next year. The contagion will be complete as bad debt stretches around the world affecting debt and credit everywhere. No one will escape it – it will be just a matter of degrees. We are embarking into a crisis of confidence in governments. Even though Americans do not understand what is wrong with monetary and fiscal policies, they believe their own government is untrustworthy. Some 82% and 79% in two polls just said so. The public obviously sees something is wrong that it quite doesn’t understand. The professionals who should understand are looking the other way hoping it will just go away.

Compounding these debt problems we have banking and Wall Street running Washington in an ongoing criminal enterprise, which is being splashed all over the media. Something that few have talked about is the failure of Goldman Sachs and the event that could cause the collapse of the derivative markets. The system is fragile, especially since it has been kept alive for seven years by massive amounts of money and credit being injected into the system by the Fed. This is nothing new – it has been going on for a long time. It is just now being exposed. How can you hope the system will function when you have unregulated derivatives, hedge funds that are unregulated, black box front running and naked shorting? That is massive rules violations and the SEC and CFTC do absolutely nothing about it of real import. As time passes the Fed will have to again increase liquidity, not just to banks that keep it on deposit at the Fed, in a sweetheart deal, but to small businesses and individuals. If that doesn’t happen the system will be sucked under by the undertow of deflation.

Wall Street doesn’t care about the state of the systems – they want to make money anyway they can – legal or illegal, as the public has found out much to their chagrin. Do not forget more money is made by professionals on the short side than on the long side.

What is going on concerning sovereign debt is eventually going to bring the world financial system down. It did not just happen that way; it was planned that way.

“The annual operating shortfall is running between $4 and $5 trillion; not $500 billion as we saw before the crisis or the $1.4 trillion that they announced for fiscal 2009. Now to put that into perspective, if the government wanted to balance its deficit on a GAAP basis for a year, and it seized all personal income and corporate profits, taxing everything 100%, it would still be in deficit.â€