KeNo's Housing and Economic Portal: Tuesday November 17 Housing and Economic stories

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Ron Paul On Bailouts, Wall Street Fraud And Washington Capture – (www.dailybail.com) Good Ron Paul video: Some exerpts: “Well, they take care of their own. There’s a great deal of influence in Washington from Wall Street. And I think most people have known about it but they’re really coming to the understanding [of] how it really works. If things are going well when the bubble is being formed and the Fed makes easy credit [then] a lot of people make a lot of money. But that’s doomed to fail. The bubble bursts and rightfully the thing to do then is to put people in jail if they committed fraud and the people who are bankrupt, let them go bankrupt. Well, we didn’t do that. Very little fraud was prosecuted and the people who were supposed to go bankrupt got bailed out. Some went bankrupt. If they didn’t have enough influence like Lehman Brothers, they went bankrupt, but somebody like Goldman Sachs, they’re in a much better position so they really got the bailout and they’re making tons of money. So it’s the system that is so bad.” On regulating (from 3:48): “Well the regulation has to be on the cause of the problem. The cause of the problem is easy credit, so the regulation has to be on the Federal Reserve. Then if things get out of whack, there are still regulations, it’s not like there wouldn’t be any regulation, but the regulations come in a different manner, they come through bankruptcy. We didn’t permit the bankruptcies. We did the bailing out. We perpetuated the problem by inflating the currency and bailing out the people that were benefiting, so fraud is a very significant problem that government should be involved in, you should deal with that, but the government is committing the fraud when they create this money and deal with their special interests. It’s a fraudulent monetary system. They run a counterfeiting operation, so yes, the regulations have to be there, but we can’t allow the central bank to create the bubble and say that it is unstable and we can prevent the problems by regulations. I think it’s all twisted around. The regulations have to come first….”

Calif. firm, execs charged in bond bid-rigging - (news.yahoo.com/s/ap) A politically connected financial firm and two of its executives were indicted Thursday for what prosecutors say was a bid-rigging scheme in the municipal bond business. The charges in the nine-count indictment filed Thursday in Manhattan federal court against CDR Financial Products Inc. are the first resulting from the Justice Department's probe of the mammoth municipal bondsindustry. CDR, based in Beverly Hills, Calif., has also come under scrutiny for its ties to New Mexico Gov. Bill Richardson. The indictment alleges that two CDR executives and one former executive from the firm engaged in bid-rigging conspiracies in which CDR was hired by public entities that issue municipal bonds to act as their broker and conduct a supposedly competitive bidding process. "This case is fundamentally about collusion, the illegal rigging of a purportedly competitive bidding process," said Joseph Demarest, head of the FBI's New York office. The result of the scam, Demarest said, was less money for the states, cities and counties that hired CDR. CDR is also known as Rubin/Chambers, Dunhill Insurance Services Inc. Prosecutors say CDR's company's owner and president, David Rubin, vice president Evan Zarefksy and formerchief financial officer Zevi Wolmark took part in two wire fraud schemes. The three are also charged with obstructing the IRS. Because such bonds are tax-exempt, the competitive bidding process is regulated by the IRS. Prosecutors said the company secretly manipulated the bidding process to enrich themselves and the bidding companies at the expense of the municipalities, the IRS or both. Under the scheme, CDR would arrange in advance which company would win a particular bid for bond business and arrange kickbacks to CDR in the form of inflated fees, authorities said. In one 2006 state bond deal, one of the bidders agreed to pay CDR a $475,000 kickback, according to the indictment. The municipal bond business is huge: In 2007 and 2008, about $800 billion worth of municipal bonds were issued across the country. If convicted of the most serious charge against them, the three men face a maximum prison sentence of 20 years. Rubin's lawyer Donald Etra said the charges "have no basis." "The bottom line is that David Rubin has done nothing wrong," Etra said. "He's a brilliant businessman and a prominent philanthropist." Lawyers for the other two men could not immediately be located. The company could face a maximum fine of $100 million for the bid-rigging charge. Federal prosecutors in New Mexico had also investigated CDR for its links to Richardson, the Democratic governor. The investigation forced Richardson to bow out of a possible Cabinet position in the Obama White House. Rubin and his firm contributed $110,000 to Richardson political committees from 2003 to 2005. The largest of those contributions, $75,000, was made less than a week before CDR was selected in June 2004 by the New Mexico Finance Authority to handle the reinvestment of idle bond proceeds. CDR was hired as a financial adviser on state transportation bond deals, which generated almost $1.5 million in fees for CDR in 2004-2005.

Fed: Mortgages Overwhelmingly Government-Owned Now - (www.bloomberg.com) The U.S. housing market faces a “difficult” return to normal because government-sponsored enterprises own or guarantee most mortgage lending while alternative sources have disappeared, said an economist with the Federal Reserve Bank of San Francisco. “Fannie Mae, Freddie Mac, and Ginnie Mae now own or guarantee an overwhelming share of originations,” bank senior economist John Krainer wrote in a paper released today. “At the same time, non-agency mortgage securitization and loans retained in lender portfolios have largely dried up.” The paper underscores the challenge that economists at the San Francisco Fed, one of 12 regional Fed banks, believe that the economy faces as it begins to emerge from the worst recession in seven decades. Bank researcher Glenn Rudebusch concluded in another paper this month that the economy is not likely to return to full employment soon even though the recession is “almost certainly” over. The U.S. government seized control of Fannie Mae and Freddie Mac in September 2008, after a surge in mortgage defaults threatened to topple the companies. The Treasury Department has committed as much as $400 billion to keep the two enterprises afloat while President Barack Obama’s policy makers figure out how to restructure their operations. “With the vast majority of current mortgage lending now intermediated in some form by the GSEs, it will be difficult for the housing market to return to normal,” Krainer wrote.

New York Feds Secret Choice to Pay for Swaps Hits Taxpayers - (www.bloomberg.com) In the months leading up to the September 2008 collapse of giant insurer American International Group Inc., Elias Habayeb and his colleagues worked nights and weekends negotiating with banks that had bought $62 billion of credit-default swaps from AIG, according to a person who has worked with Habayeb. Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar, according to people familiar with the matter. Among AIG’s bank counterparties were New York-based Goldman Sachs Group Inc. and Merrill Lynch & Co., Paris-based Societe Generale SA andFrankfurt-based Deutsche Bank AG. By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer. The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion. Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations. Subprime Mortgages: CDOs are bundles of debt including subprime mortgages and corporate loans sold to investors by banks. Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public. The New York Fed’s decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III. Habayeb, who left AIG in May, did not return phone calls and an e-mail. Goldman Sachs: The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article. In his resignation letter, Friedman said his continued role as chairman had been mischaracterized as improper. Goldman Sachs spokesman Michael DuVally declined to comment. AIG paid Societe General $16.5 billion, Deutsche Bank $8.5 billion and Merrill Lynch $6.2 billion. New York Fed: The New York Fed, one of the 12 regional Reserve Banks that are part of the Federal Reserve System, is unique in that it implements monetary policy through the buying and selling of Treasury securities in the secondary market. It also supervises financial institutions in the New York region. The New York Fed board, which normally consists of nine directors, in November 2008 included Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Friedman. The directors have no direct role in bank supervision. They’re responsible for advising on regional economic conditions and electing the bank president. Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm, says the government squandered billions in the AIG deal. “There’s no way they should have paid at par,” she says. “AIG was basically bankrupt.”