How Wall Street Turned Americans Into Zombies

How Wall Street Turned Americans Into Zombies? (11/12/11)


How did we become just one vast hypnotized mass, even after the truth has been revealed? We’re walking around as if we’re mesmerized, not standing up, not demanding justice, still paying our mortgages to lenders who don’t even legally own them… How Wall Street was able to take over our minds and make us believe that we, homeowners, should be ashamed of the decline of our home equity, lost jobs, foreclosures, suicides?
The only thing we should be blamed for is the unlimited confidence that we had in our financial system and its players…


Foreclosure Scandal Exposes Systemic Derivatives Fraud

by John Hoefle

This article appears in EIR for Oct. 15, Vol. 37, No. 40.

Filing false documents in courts to obtain illegal foreclosures, breaking into homes and changing the locks while the residents are still legally living there, and even foreclosing on homes which have no mortgages—these are just some of the things the derivatives arms of the giant banks are doing, as they throw people to the wolves in a vain effort to stop their own collapse into oblivion. We are not at all surprised that the derivatives banks are acting this way—in fact, we would be a bit surprised if they didn’t, given the criminal nature of the financial markets. It would be nice to be able to say that we are surprised that the Federal regulators are letting them get away with it, but that one won’t fly. Under the Obama regime, with the help of Speaker of the House Nancy Pelosi, and “Bailout” Barney Frank and Chris Dodd of the House and Senate banking committees, the banks have gotten pretty much whatever they wanted. If that includes your house, too bad for you.


by Barry Ritholtz, Washington Post
October 5, 2011

I have a fairly simple approach to investing: Start with data and objective evidence to determine the dominant elements driving the market action right now. Figure out what objective reality is beneath all of the noise. Use that information to try to make intelligent investing decisions.

But then, I’m an investor focused on preserving capital and managing risk. I’m not out to win the next election or drive the debate. For those who are, facts and data matter much less than a narrative that supports their interests.

One group has been especially vocal about shaping a new narrative of the credit crisis and economic collapse: those whose bad judgment and failed philosophy helped cause the crisis.

Rather than admit the error of their ways — Repent! — these people are engaged in an active campaign to rewrite history. They are not, of course, exonerated in doing so. And beyond that, they damage the process of repairing what was broken. They muddy the waters when it comes to holding guilty parties responsible. They prevent measures from being put into place to prevent another crisis.

Here is the surprising takeaway: They are winning. Thanks to the endless repetition of the Big Lie.

A Big Lie is so colossal that no one would believe that someone could have the impudence to distort the truth so infamously. There are many examples: Claims that Earth is not warming, or that evolution is not the best thesis we have for how humans developed. Those opposed to stimulus spending have gone so far as to claim that the infrastructure of the United States is just fine, Grade A (not D, as the we discussed last month), and needs little repair.

Wall Street has its own version: Its Big Lie is that banks and investment houses are merely victims of the crash. You see, the entire boom and bust was caused by misguided government policies. It was not irresponsible lending or derivative or excess leverage or misguided compensation packages, but rather long-standing housing policies that were at fault.

Indeed, the arguments these folks make fail to withstand even casual scrutiny. But that has not stopped people who should know better from repeating them.

The Big Lie made a surprise appearance Tuesday when New York Mayor Michael Bloomberg, responding to a question about Occupy Wall Street, stunned observers by exonerating Wall Street: “It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”

What made his comments so stunning is that he built Bloomberg Data Services on the notion that data are what matter most to investors. The terminals are found on nearly 400,000 trading desks around the world, at a cost of $1,500 a month. (Do the math — that’s over half a billion dollars a month.) Perhaps the fact that Wall Street was the source of his vast wealth biased him. But the key principle of the business that made the mayor a billionaire is that fund managers, economists, researchers and traders should ignore the squishy narrative and, instead, focus on facts. Yet he ignored his own principles to repeat statements he should have known were false.

Why are people trying to rewrite the history of the crisis? Some are simply trying to save face. Interest groups who advocate for deregulation of the finance sector would prefer that deregulation not receive any blame for the crisis.

Some stand to profit from the status quo: Banks present a systemic risk to the economy, and reducing that risk by lowering their leverage and increasing capital requirements also lowers profitability. Others are hired guns, doing the bidding of bosses on Wall Street.

They all suffer cognitive dissonance — the intellectual crisis that occurs when a failed belief system or philosophy is confronted with proof of its implausibility.

And what about those facts? To be clear, no single issue was the cause.

Our economy is a complex and intricate system. What caused the crisis? Look:

●Fed Chair Alan Greenspan dropped rates to 1 percent — levels not seen for half a century — and kept them there for an unprecedentedly long period. This caused a spiral in anything priced in dollars (i.e., oil, gold) or credit (i.e., housing) or liquidity driven (i.e., stocks).

●Low rates meant asset managers could no longer get decent yields from municipal bonds or Treasury’s. Instead, they turned to high-yield mortgage-backed securities. Nearly all of them failed to do adequate due diligence before buying them, did not understand these instruments or the risk involved. They violated one of the most important rules of investing: Know what you own.

●Fund managers made this error because they relied on the credit ratings agencies — Moody’s, S&P and Fitch. They had placed an AAA rating on these junk securities, claiming they were as safe as U.S. Treasury’s.

●Derivatives had become a uniquely unregulated financial instrument. They are exempt from all oversight, counter-party disclosure, exchange listing requirements, state insurance supervision and, most important, reserve requirements. This allowed AIG to write $3 trillion in derivatives while reserving precisely zero dollars against future claims.

●The Securities and Exchange Commission changed the leverage rules for just five Wall Street banks in 2004. The “Bear Stearns exemption” replaced the 1977 net capitalization rule’s 12-to-1 leverage limit. In its place, it allowed unlimited leverage for Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns. These banks ramped leverage to 20-, 30-, even 40-to-1. Extreme leverage leaves very little room for error.

●Wall Street’s compensation system was skewed toward short-term performance. It gives traders lots of upside and none of the downside. This creates incentives to take excessive risks.

●The demand for higher-yielding paper led Wall Street to begin bundling mortgages. The highest yielding were subprime mortgages. This market was dominated by non-bank originators exempt from most regulations. The Fed could have supervised them, but Greenspan did not.

●These mortgage originators’ lend-to-sell-to-securitizers model had them holding mortgages for a very short period. This allowed them to get creative with underwriting standards, abdicating traditional lending metrics such as income, credit rating, debt-service history and loan-to-value.

●”Innovative” mortgage products were developed to reach more subprime borrowers. These include 2/28 adjustable-rate mortgages, interest-only loans, piggy-bank mortgages (simultaneous underlying mortgage and home-equity lines) and the notorious negative amortization loans (borrower’s indebtedness goes up each month). These mortgages defaulted in vastly disproportionate numbers to traditional 30-year fixed mortgages.

●To keep up with these newfangled originators, traditional banks developed automated underwriting systems. The software was gamed by employees paid on loan volume, not quality.

●Glass-Steagall legislation, which kept Wall Street and Main Street banks walled off from each other, was repealed in 1998. This allowed FDIC-insured banks, whose deposits were guaranteed by the government, to engage in highly risky business. It also allowed the banks to bulk up, becoming bigger, more complex and unwieldy.

●Many states had anti-predatory lending laws on their books (along with lower defaults and foreclosure rates). In 2004, the Office of the Comptroller of the Currency federally preempted state laws regulating mortgage credit and national banks. Following this change, national lenders sold increasingly risky loan products in those states. Shortly after, their default and foreclosure rates skyrocketed.

Bloomberg was partially correct: Congress did radically deregulate the financial sector, doing away with many of the protections that had worked for decades. Congress allowed Wall Street to self-regulate, and the Fed the turned a blind eye to bank abuses.

The previous Big Lie — the discredited belief that free markets require no adult supervision — is the reason people have created a new false narrative.

Now it’s time for the Big Truth.


1) The Gramm-Leach act was signed into law on November 12, 1999. This act removed the financial regulation which stood between investment banks and traditional banks. This regulation had been put in place during FDR’s administration (known as Glass-Steagall Act of 1933 – this act prohibited any institution to serve as a combination of an investment bank, a commercial bank, or an insurance company) to separate these two group.
Their association was determined to have been a key reason for the Great Depression.

2) Fannie & Freddiealmost, but not quite government agencies focused on affordable home loans. The Clinton administration insisted of them to focus their efforts on forgotten elements of society – people who could not qualify for the regular mortgages. These efforts came to be known as the sub-prime and alt-A mortgage sectors.

3) The large banks (Citigroup, JP Morgan Chase, Goldman Sachs – are just a few) created “peculiar” financial products from bundled mortgage loans such as Collaterized Debt Obligations (CDO’s) and Structured Investment Vehicles (SIV’s). These financial products were packaged up (combined into securitized pools) and sold like shares of stocks to “sophisticated investors” such as pension funds, endowment funds, foreign banks and corporations. This moved the loans off the books of the large banks so they would have more reserves to lend, and the insane game would start all over.
This enabled the investment banks to bundle-up all subprime, high-risk mortgages inside those securitized pools.

4) The investment vehicles became more complicated as the time went by. Wall Street “geniuses” were probably thinking that if they invent more complicated investments, the risk of being exposed would be minimal. The investment banks came up with a structured investment vehicle which would require a certain mix of different types of loans. Then, they sent the order to their pawns to look for such loans. Once the order was filled, the large banks would divide the loan into finer pieces assigning them to specific shares of the structured vehicle. This created a range of paper/loans which could be marketed and sold as high grade/low grade with an encouraging rate of return upon the investment. Then, once again, these would be sold to pension funds, endowment funds, foreign banks, wealthy individuals, hedge funds, mutual funds, anyone willing to take a risk and buy.

5) The most important piece of this financial enigma was the high degree of complicated ownership of any single home loan and trying to find a way to register that complicated ownership with each individual county courthouse as required by law. MERS ( is a database which tracks the ownership & servicing rights. Here is the description from their website:
MERS is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.

This quote, based upon the need to keep track of the high degree of slicing of ownership and servicing rights is the reason you can challenge your foreclosure and WIN.

6) MERS lacks standing to foreclose, but so does original lender, although it was a signatory to the deal. The lender lacks standing because title had to pass to the secured parties for the arrangement to legally qualify as a “security.” The lender has been paid in full and has no further legal interest in the claim. Only the securities holders have some rights in the game; but they have no standing to foreclose, because they were not signatories to the original agreement. They cannot satisfy the basic requirement of contract law that a plaintiff suing on a written contract must produce a signed contract proving he is entitled to relief.

7) The TARP fund – was a $700B bailout to the large banks and particularly AIG which was/is an insurance fund which insured all of the mortgages in the structured investment vehicles against default and foreclosure. These mortgages had been divided many times over, and each mortgage was insured four or five times.
When the mortgages started to default and foreclose, the insurance companies ended up paying 100 cents on the dollar on these insurance policies they wrote to companies such as Goldman Sachs, Wells Fargo, Bank of America, JP Morgan Chase and others. It was the TARP money, the taxpayer’s money passed through AIG which bailed out the banks.

8) PLEASE, keep in mind that it is more profitable to foreclose on the mortgage (than perform a mortgage modification), collect the insurance (probably more than once), remove a non performing loan from the books and put a tangible asset of certain value back on the books. This creates a better balance sheet so banks can extend more loans. And the process starts all over again… Why the banks should they accept $4,000 from the Government when they can get the premium of foreclosure?

9) CONCLUSION if your note has been securitized as most have, homeowners have further proof that the servicer had no legal right to foreclose according to numerous cases such as US Bank v. Ibanez, Carpenter v. Longan, Adler v. Sargeant, and many others.


Knowledge is Power

Only we have the power to change our perception about
current circumstances

We are witnessing one of the hardest economic crisis in U.S. history which will impact not only our lives, but the lives of our children. There are many reasons for this terrible economic outcome and none of them is our fault. We were pulled inside of this game, a game that brought an end to the life we once knew. Let’s face it – America as we knew it is no more. Even though we can’t put all the blame on Wall Street and greedy bankers, they are still the first ones in a long line of offenders. They sold us a dream much bigger than we ever dared to envision. They were really good in selling it because even I, the biggest cynic out there, believed that we were born under the lucky star when our house doubled in price in less than two years… Of course that was just the biggest scam ever and wasn’t at all what the banks tried to make it seem… So, our only way to defend ourselves is to learn as much as possible about everything that happened on Wall Street for the last ten years (at least).

Piggybankblog provides all the information we need to understand our mortgage issues, to learn how to fight back and protect ourselves and our kids future. This blog will make you laugh, will make you cry, and will definitely educate you.

In addition, everyone MUST see an Oscar winning documentary Inside Job based on extensive research and interviews with financial insiders, politicians and journalists. Producer Charles Ferguson began his Academy Award acceptance speech by reminding us that three years after our worst financial meltdown “not a single financial executive has gone to jail.” I saw this movie by chance. My daughter is a huge fan of Matt Damon’s, and he is the movie narrator. By then, I was already on my way down the line researching this big mortgage mess around us. You can only imagine how shocked I was to realize that only few people knew about “Inside Job”. No marketing campaign at all… this tells us a lot, if we want to stop and think for a while. You have to realize that the time has come to face the facts. It’s not too late. If we don’t do anything and history repeats itself how could we explain that ignorance to our kids? Politicians, product of heavy lobbying by corporations, are constantly speaking up from their respective party position. Of course, this is only for us and for media, because behind the scenes they are all attending the same parties, games, golf tournaments. They are much smarter than we give them credit for – they know that as long as people are divided on Democrats and Republicans, Christians, Muslims, Jews and every other religion under the sky, they won’t be able to realize that actually the only division that matters for our shared future, for our kids better tomorrow is – CLASS DIVIDE.
Until we realize that, everything will remain the same.


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