Journalism in the Public Interest

Greenspan: Not My Fault

March 19: This post has been updated.

Alan Greenspan, former chairman of the Federal Reserve, will be presenting a 48-page paper to the Brookings Institution tomorrow. For years considered "The Maestro" of our economic system, Greenspan acknowledges in his paper that the Fed "did little" to address the systemic risks of banks that were growing increasingly complex, but he doubts that the recession could have been prevented.

I've pulled out a few choice excerpts. (If you want to read the full paper, we've put it in our handy document viewer.) 

On why the Fed and other regulators didn't pop the credit bubble:

Why did the 2007 bubble reach century-rare euphoria? The answer, I believe, lies with the dot-com bubble that burst with very little footprint on global GDP, and in the U.S., the mildest recession in the post-World War II period. And indeed the previous U.S. recession (1990-1991) was the second most shallow. Coupled with the fact that the 1987 stock market crash left no visible impact on GDP, it led the Federal Reserve and many a sophisticated investor to believe that future contractions would also prove no worse than a typical post-war recession.

Did they know what was coming? He says no -- they could "identify" bubbles, but they could not "effectively time the onset of crisis."

The current crisis has demonstrated that neither bank regulators, nor anyone else, can consistently and accurately forecast whether, for example, subprime mortgages will turn toxic, or to what degree, or whether a particular tranche of a collateralized debt obligation will default, or even if the financial system as a whole will seize up. A large fraction of such difficult forecasts will invariably be proved wrong. Regulators can readily identify underpriced risk and the existence of bubbles, but most importantly they cannot, except by happenstance, effectively time the onset of crisis. This should not come as a surprise.

And then he says that the Fed had the capacity to crack down on the bubble, but it would've compromised economic growth:

To be sure, central banks have the capacity to break the back of any prospective cash flow that supports bubbly asset prices, but almost surely at the cost of a severe contraction of economic output, with indeterminate consequences.

Could the crisis have been prevented? Greenspan says he doubts it.

Could the breakdown that so devastated global financial markets have been prevented? Given inappropriately low financial intermediary capital (i.e. excessive leverage) and two decades of virtual unrelenting prosperity, low inflation, and low long-term interest rates, I very much doubt it.

And his suggested regulatory solutions?

(1) increased regulatory capital and liquidity requirements on banks and
(2) significant increases in collateral requirements for globally traded financial products, irrespective of the financial institutions making the trades.

Greenspan also mentions a number of "less important" reforms. They include preventing financial institutions from forming complex structures for the purpose of avoiding higher taxes, as well as requiring "living wills" from financial institutions indicating how they can be liquidated with minimal economic impact. He warns, however, that "the notion of an effective 'systemic regulator' as part of a regulatory reform package is ill-advised. The current sad state of economic forecasting should give governments pause on the issue. Standard models, other than those that are heavily add-factored, could not anticipate the current crisis, let alone its depth."

It's particularly interesting reading this now, because on my morning commute to work, I've been making my way through economist Dean Baker's book, False Profits, in which he basically argues against many of these same points. Baker is co-director of the liberal Center for Economic and Policy Research. 

"In this financial crisis story, the crisis is talked about as if it were a rare and highly unlikely event -- a black swan -- rather than one that could be predicted with absolute certainty, even if the timing and exact course of events could not be known," writes Baker. Compare that to Greenspan's "standard models ... could not anticipate the current crisis," and I believe you have what is called a contradiction.

One thing Baker and Greenspan do agree on is this -- we don't need more "systemic regulators." The irony is that they agree on this for completely different reasons. Greenspan suggests that a systemic regulator wouldn't have been able to forecast the crisis either. And Baker writes that we don't need one because we already have one: "The problem was not that we lacked a systemic risk regulator but that we had one that failed catastrophically at its job," and that regulator, according to Baker, was the Federal Reserve Board.

Greenspan chaired the Fed from 1987 to 2006. While in 2008, he acknowledged he had been wrong about the self-correcting power of free markets, he has maintained that the Fed did not cause the housing bubble. His presentation tomorrow will continue in that vein, arguing that regulators knew of the bubble and had the power to rein it in, but could not have predicted the timing of the crisis, and ultimately could not have prevented the crisis.

I'm sure Baker will have a field day with that.

Update: This post has been updated to include a few of Greenspan's more minor reform suggestions.

“To be sure, central banks have the capacity to break the back of any prospective cash flow that supports bubbly asset prices, but almost surely at the cost of a severe contraction of economic output, with indeterminate consequences.”

Translation: I wasn’t gonna spoil the fun.

Potomac Oracle

March 20, 2010, 9:08 a.m.

This piece is about the fraud involved in foreclosure proceedings where Banks do not hold title and where it’s nominee does not have standing to foreclose. Banks owe the IRS trillions of dollars in taxes and they owe current property owners more trillions in asset value losses due to illegal sales. 

Andrea Silverthorne,  .(JavaScript must be enabled to view this email address)
asked me to forward this email to you.  Andrea has owned her own real estate firm for several decades and has researched these issues all of which involve Federal Reserve complicity in the housing meltdown.  Her finding are significant in that they uncover the enormity of the fraud at the highest levels of the Federal Reserve.  She reports the following:

Collapsing the R.E.I.Ts

1. A. One of the more unsavory acts of criminality that has gone unreported but not undetected deals with the purposeful disregard of IRS Codes Section 856-859—Regulating R.E.I.Ts.

The end result is that there are millions of prohibited transactions that were conducted over the past 2 years because the banks knowingly nominated ineligible foreclosure agents and used short sales to strip the REITs of assets.

Sales of properties that are collateral for mortgage backed securities can only be done once they are foreclosed. Sales before foreclosure, by the REIT or the REITs nominee, are called prohibited transactions by the IRS rules. If the REIT wants to raise cash fast, then depending on the year the REIT was formed, as the laws changed, they directly, or through their designated nominee, which must be legally recorded with the SEC, could sell between 5-7 properties before they exceeded the IRS limit, and the kicker was at a later date, every penny they received was due in taxes i.e., sell five properties for $500 thousand; the out of pocket profits at the end of the year that you owed the IRS, $500 K.

Now, these laws dictate every rule you must follow to maintain legal taxable status as a REIT. There have been hundreds and hundreds . . . thousands of sales prior to foreclosure——far exceeding 5-7 for every REIT that ever existed and then some.

So my interpretation is, that taxes are due on all of them, every penny the banks sold them for, belongs to the IRS, and because it has been many, many more than allowed by the IRS, then the banks have abrogated the REIT by breaking the rule; the REIT should no longer have the recognition as an REIT by the IRS.

The banks have effectively then collapsed the REITs.

The Foreclosure Fraud

B. Now, the same statutes also say the REIT must manage everything itself including sales of the properties, and it says that they can have a nominee, but it can not have a financial institution or an insurance company as that nominee. So now, you have another issue: Banks, Fannie, Freddie, Ginnie, etc are financial institutions. These financial entities have done the selling in the case of:

1. The illegal-prior to foreclosure sales, which are prohibited transactions and,

2. The foreclosures which are not prohibited transactions but are being sold by prohibited organization that can not, per the IRS, touch Mortgage Backed Securities, to boot they have without the REITs permission sold them for significantly less than the loan amount.

The Trillion Dollar Tax Dodge

C. Finally, the IRS rules say that the REIT must own and hold title to the collateral for the mortgage backed security.

I think that is why the 41 year old head of Freddie Mac committed suicide. I think MERS or the banks failed to transfer them, which is stealing.

To me this definitely goes beyond collapsing the REITs by breaking the rules that make them REITs in tax status, to stealing.

I have asked Dr. Ellen H. Brown, author of “Web of Debt” to read the statutes and then call or go see the IRS and ask them about it. I think the banks should be charged under the RICO provision of the Federal law, called the National Stolen Property Act.

2. A. Now as to MERS, it is owned by banks and that I believe is too thinly veiled to not be counted by the IRS as a financial institution, which would disqualify it from being able to be a REIT nominee, but the point in the main is that MERS was not named by the REIT; it is the bank’s nominee.

I think that the fact the REITS have actually been collapsed is why the Fed has bought a $ trillion in MBSs and that it is not the REITs buying in the main.

This is the most amazing scam I have ever seen, and I am quite sure that the SEC and other government agencies are in on the cover up, because the money that was lost was make believe MBSs; they sold millions of derivative mortgage pieces than actually existed.
Bottom line, they made the wrong decision; it has to come out because money is now owed to the IRS and the IRS needs the revenue for the country and its debt.

Illegal Sales Scam- & -The Fed Monetizing Banks

Today, I found out on new loans, the Home Valuation Code, that Cuomo orchestrated, has gone beyond the advisory of telling appraisers to use short and foreclosed sales as value, if the client who is the bank says that the intended use is its risk management; they are now making the appraiser, deduct for future losses based on present rates of depreciation based on illegal sales.

Now that the Fed is buying all the loans; it is the Fed that will benefit by getting property way down for its new huge portfolio that it has taken from the REITS. Constitutional property rights have been buried more than six feet under.

MERS Postscript

I did a lot of research on MERS. They are basically a little tap dance that the banks amazingly dreamed up to pretend that the ownership of the note was under the MERS shell. They point to it in the mortgage documents that recent purchasers signed- and in the agreements between the banks and MERS, and they point to it in the courts, but if you picked up the shell it would not have the ownership pea under it because….it is not the banks that get to name a nominee; it is the REIT that must do it. A big tip off is that once default is declared MERS cannot come in on the foreclosure. See below or follow this link:

The bottom line is the IRS rule. These REITs and MERS are two separate animals. The REIT is what the investor invests in; he does not buy shares in MERS. The IRS says the REITs must own and hold the title to the property in their name. . . .period - end of discussion. It does not say Fannie Mae may hold them; nor can Freddie. In fact the IRS law says the opposite; it says that while an REIT can have a nominee act in its name, that nominee cannot be a finance or insurance company, and whomever they do pick it has to be in writing, and it must be registered and recorded with the SEC, and it has to be on the web site for the public to see.

None of the REITs have made MERS their nominee. The banks made MERS their nominee for the property they do not own, and if they do own it, then they are holding stolen property that belongs to the REITs.

Same goes for Freddie and Fannie. When a foreclosure is contested, the owner was getting a letter from Freddie saying: Hey I own the property . . .but that was before the 41 year old head committed suicide. I guess he goofed, admitting that he had ownership, when he was not supposed to; now they send letters with the banks and Freddie’s or Fannie’s name together. A foreclosure partnership????? I think not.

Potomac Oracle

March 20, 2010, 9:13 a.m.

OpEdNews: Ellen Brown - Writer

A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure.

MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose ��” on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS.

Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.

Eliminating the “Straw Man” Shielding Lenders and Investors from Liability

The development of “electronic” mortgages managed by MERS went hand in hand with the “securitization” of mortgage loans ��” chopping them into pieces and selling them off to investors.

In the heyday of mortgage securitizations, before investors got wise to their risks, lenders would slice up loans, bundle them into “financial products” called “collateralized debt obligations” (CDOs), ostensibly insure them against default by wrapping them in derivatives called “credit default swaps,” and sell them to pension funds, municipal funds, foreign investment funds, and so forth. There were many secured parties, and the pieces kept changing hands; but MERS supposedly kept track of all these changes electronically.

MERS would register and record mortgage loans in its name, and it would bring foreclosure actions in its name. MERS not only facilitated the rapid turnover of mortgages and mortgage-backed securities, but it has served as a sort of “corporate shield” that protects investors from claims by borrowers concerning predatory lending practices. California attorney Timothy McCandless describes the problem like this:

“[MERS] has reduced transparency in the mortgage market in two ways. First, consumers and their counsel can no longer turn to the public recording systems to learn the identity of the holder of their note. Today, county recording systems are increasingly full of one meaningless name, MERS, repeated over and over again.

But more importantly, all across the country, MERS now brings foreclosure proceedings in its own name ��” even though it is not the financial party in interest. This is problematic because MERS is not prepared for or equipped to provide responses to consumers’ discovery requests with respect to predatory lending claims and defenses. In effect, the securitization conduit attempts to use a faceless and seemingly innocent proxy with no knowledge of predatory origination or servicing behavior to do the dirty work of seizing the consumer’s home. . . . So imposing is this opaque corporate wall, that in a “vast” number of foreclosures, MERS actually succeeds in foreclosing without producing the original note ��” the legal sine qua non of foreclosure ��” much less documentation that could support predatory lending defenses.”

Potomac Oracle

March 20, 2010, 9:41 a.m.

The Fed—-Greenspan knew well in advance of the financial collapse that it was coming because he orchestrated the premature termination of sub-prime rates and lending which prevented sub-prime borrowers from rolling over their notes when the higher rates came due.(2007) Moreover, Greenspan is responsible for deciding on the following;

1. The change in how real estate would be valued…approved watering down the Scope of Work rule for Real Estate appraisals.(2005)

2. Allowed foreclosures to be included in the valuation of appraised values. (2008)

3. Looked the other way as R.E.I.T.s were being abused by banks in the process of foreclosure and valuation.(2008

4. Collaborated with banks to speedup foreclosures even when MERS could not guarantee delivery of mortgage note and titles as proff that the bank owned the property for which it issued foreclosure notices.(2008)

•The banks have perpetrated a hoax on the American people. None of them lost a penny on any of the loans. They sold them, everyone of them, to the secondary market, and it appears, as the banks fail and are examined, they not only sold them, but they sold them illegally more than once. Freddie Mac and Fannie Mae, Goldman Sachs, et al, also sold them, and the American tax payer covered what was lost, as far as the true amount of loans were concerned- and even, perhaps, the untrue amount of loans.  No one lost a dime except the American taxpayer, who ponied up for the money lost by the investors.

•As it takes some time to process and sell the loans, the fraudulent ones were already non- performing before they reached the packagers i.e. the banks and the secondary marketers had to know, or should have known the loans were bad when they sold them.

•The biggest crime of all has been the illegal devaluation of trillions of dollars of the American home owner’s equity in their property,  accomplished by the very banks that sold the loans to the REITS and have no administrative right over them whatsoever, as the IRS statutes governing REITS dictate. Banks are foreclosing on Americans without the standing to do so.
Real estate, given it is residential improved property does not ever go down. When the market dies, unlike the stock market, there are no buyers to take the market down. When the market comes back it just resumes where it left off. 

Given, during the time the market was becalmed, a property owner got in trouble and had to sell, or was foreclosed on, it could not –by law- count on an appraisal for value. The New York Times quoted the New Jersey property tax administrators as saying their property rolls had not gone down at all since World War II.

That is the tensile strength of real estate and, therefore, - the tensile strength of the nation. Here in my state of Florida it has never gone down before.

It was changes to the preamble of Appraisal Standards and rules of this organization that began in 2005, at the request of the Subcommittee, whose membership included the non governmental Federal Reserve, which set up the unprecedented fall in residential American property values. It went something like this:
In 2005, just as Alan Greenspan was saying that the real estate market was headed for a bust, through the Appraisal Standard Subcommittee, a request was receive by the Appraisal Foundation Board, with regard to the need for the deletion of one Standard Rule and the creation of a new one called the “Scope of Work Rule” to take effect at the end of 2006. 

In an unprecedented move the change was effectuated at mid year in July 2006.
Within this new rule lay the seed of the destruction of America ’s property value. The rule was short and simple and contained within it was this one statement: “The Scope of Work could be used for the “intended use of the client.” There are many appraisal organization blogs during this period that pointed out the vagueness of this new rule; its possible conflicts with their neutrality position-and how to apply it.
In 2007, in a series of advisories, geared for the 2008 Appraisal Foundation Board changes, the Federal Reserve controlled Appraisal Standards Subcommittee said the Scope of Work Rule could be interpreted as allowing the bank’s “risk management” to be the intended use.
The advisory went into effect January of 2008 and within eight to nine months, properties values, which had remained stagnate, or in the case of South Florida , actually started to go up again, plummeted like lemmings off a cliff 40-50%.
The Appraisal Standard Foundation never changed its rule that sales done in haste or under duress could not be counted as arms-length or as value on an appraisal for a bank or anyone else, and therefore the new “Scope of Work Rule not only violated the neutrality of an appraisal, but also conflicted with this imperative. Nonetheless appraisers began to use duress sales en mass for banks in their appraisals, and the press began to write about them as if they were representative of value, even when they sank to below half what it would cost to rebuild the home, gleefully quoting the now discredited Moody’s who would call them up and wildly report predictions of more falling values to come.
Conveniently by the time the new Homeowner Valuation Code was effectuated last May, the American property owner had been robbed of his home and investment property equity.
Along the way, the Bush administration was approached, in 2006, and asked to request a change to the Fair Debt Collection Practices Act. The change concerned the five day rule, whereby, within 5 days from the first contact of a debt collector, the debtor had to be told who he owed the debt to. In this change, a legal pleading, such as a foreclosure suit was exempted from the rule; thereby granting the lawyer handling the foreclosure immunity from not telling the home owner that his client had no standing and therefore -no right to foreclose on the property.

Trillions in equity has been destroyed since the Greespan decision of 2005. He’s not to blame?  He was in charge!  Who does he blame? Who goes to jail?  The man who won’t leave a home he’s worked all his life to pay off.  that’s eho goes to jail.

Here is a must-see PBS Frontline episode called ‘The Warning’:

it’s all about the engineered bubbles you are talking about.  It details the extraordinary lengths Mr. Greenspan went to prevent and punish those, such as Brookesly Born, who tried to protect the American people..

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