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Do you have any idea what handstands the US government requires for the poorest of the poor to receive even $600 a month – and they give banks billions, no questions asked?

15 Thursday Jan 2009

Posted by CricketDiane in Cricket Diane C Sparky Phillips

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bailouts, banking and finance services committee, banks, bonds, commercial paper, commodities, consumer based economy, credit crisis, credit default swaps, credit derivatives, credit markets, Cricket Diane C Sparky Phillips, Cricket House Studios, cricketdiane, currency values, deflation, economic development, economic models, economic stimulus, Economics, Economy, employment, evidence based analysis and policy, Federal Reserve, financial institutions, financial systems, gdp, global economic crisis, Global Economy, gnp, government, Great Depression of 2008 2009, housing, housing market, inflation, International Concerns, Inventing Solutions For America, Labor, macro-economic future forecasting, Macro-economics future forecasting, Make It Work, mortgage backed securities, Physics of Change, Presidents Working Financial Group, Principles of Economics, Psychology, Quantum Physics, Real Time Crises, Real-World, Reality-based Analysis, Reasoning, recession, resourcing, Right Brain Thinking Skills Set, Rocket Science, Securities and Exchange Commission, Statistical Analysis, stock markets, stocks, unemployment, unsecured credit, US Congress, US currency values, US dollar, US economic crisis, US Government, US government policy, US House of Representatives, US Senate, US Treasury, Wall Street

http://www.nytimes.com/2008/12/18/business/18pay.html

By LOUISE STORY
Published: December 17, 2008

E. Stanley O’Neal, the former chief executive of Merrill Lynch, was paid $46 million in 2006, $18.5 million of it in cash.

But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.

Unlike the earnings, however, the bonuses have not been reversed.

As regulators and shareholders sift through the rubble of the financial crisis, questions are being asked about what role lavish bonuses played in the debacle.

For Wall Street, much of this decade represented a new Gilded Age. Salaries were merely play money — a pittance compared to bonuses. Bonus season became an annual celebration of the riches to be had in the markets. That was especially so in the New York area, where nearly $1 out of every $4 that companies paid employees last year went to someone in the financial industry. Bankers celebrated with five-figure dinners, vied to outspend each other at charity auctions and spent their newfound fortunes on new homes, cars and art.

More than 100 people in Merrill’s bond unit alone broke the million-dollar mark in 2006. Goldman Sachs paid more than $20 million apiece to more than 50 people that year, according to a person familiar with the matter.

***

http://topics.nytimes.com/top/news/business/series/the_reckoning/index.html

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Accountability for TARP funds is written into the legislation and evidenced in GAO report / budget – US economic crisis

13 Tuesday Jan 2009

Posted by CricketDiane in Analogic Reasoning, ancient sea, Benjamin Franklin, Cricket D, cricket diane, Cricket Diane C Phillips, Cricket House Studios, cricketdiane, Economics, Life In The USA - Rotterdam Club, Real Time Crises, Reality-based Analysis, Solutions, Solving Difficult Problems in Real Life Real World Real, Solving Impossible Problems, Sovereignty of the People, Sparky Phillips, Statistical Analysis, Subconscious Cross-Reference and Recall, Systems Analysis, Tangible from the Impossible, Thinking Skills, Thomas Jefferson, Thoughts, Twenty-first Century, Uncategorized, United States of America, US At Home - Domestic Policy, US Bill of Rights, US Constitution, US Declaration of Independence, US Government, We Come Bearing Gifts, Workable Solutions, XI-1

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bailouts, banking and finance services committee, banks, bonds, commercial paper, commodities, consumer based economy, credit crisis, credit default swaps, credit derivatives, credit markets, Cricket Diane C Sparky Phillips, Cricket House Studios, cricketdiane, currency values, deflation, econometrics, economic development, economic models, economic stimulus, Economics, Economy, employment, evidence based analysis and policy, Federal Reserve, financial institutions, financial systems, gdp, global economic crisis, Global Economy, gnp, government, Great Depression of 2008 2009, housing, housing market, inflation, International Concerns, Inventing Solutions For America, Labor, macro-economic future forecasting, Macro-economics future forecasting, Make It Work, mortgage backed securities, Physics of Change, Presidents Working Financial Group, Principles of Economics, Psychology, Quantum Physics, Real Time Crises, Real-World, Reality-based Analysis, Reasoning, recession, resourcing, Right Brain Thinking Skills Set, Rocket Science, Securities and Exchange Commission, Statistical Analysis, stock markets, stocks, unemployment, unsecured credit, US Congress, US currency values, US dollar, US economic crisis, US Government, US government policy, US House of Representatives, US Senate, US Treasury, Wall Street

http://www.gao.gov/financial/fy2008/08frusg.pdf

pg. 10 – 11

The following key points summarize economic performance in FY 2008.

*    After increasing by 2.7 percent in FY 2007, consumer spending was slightly negative over the four quarters of FY 2008, with a notable slowing in the final quarter.
*    Exports have been a key driver of the economy, maintaining a steady pace of growth in FY 2008 and accelerating markedly during the latter half of the fiscal year, but the outlook for exports is uncertain in view of the spreading world-wide recession.
*    Labor market conditions deteriorated during FY 2008. Nonfarm payroll employment declined at an average rate of 68,000 jobs per month in FY 2008, compared with the 109,000 average increase in jobs per month in FY 2007.

*   The unemployment rate trended steadily higher throughout FY 2008, reaching 6.1 percent at the very end of the fiscal year, compared to 4.7 percent at the end of FY 2007.
*    Overall inflation, as measured by the consumer price index (CPI), advanced to 5.3 percent in FY 2008, up significantly from the 2.4 percent pace of FY 2007. Core inflation (which excludes food and energy) remained relatively contained, however, rising to 2.5 percent in FY 2008 versus 2.1 percent in FY 2007.

NOTE – The above figures although written in the GAO budget have obviously been revised at this time – unemployment rate admitted to be 7.2% by govt.

– also, inflation has increased significantly regardless of anything economic experts on news outlets say, as partly evidenced by this report and others.

***

Pg 12 – 14

The Path to Recovery, Part I – HERA

In July 2008, Congress passed the Housing and Economic Recovery Act (HERA) of 2008, based on concern that continued losses at Fannie and Freddie and throughout the U.S. housing/credit market could lead to significantly larger and broader problems for both the U.S. and foreign economies.

HERA established a new regulatory agency: the Federal Housing Finance Agency (FHFA) with enhanced regulatory authority over the housing Government Sponsored Enterprises (GSEs)3, including the capital requirements and business activities of Fannie Mae and Freddie Mac. HERA also provided the Treasury Secretary with temporary authority to purchase any obligations and other securities issued by the housing GSEs.

Due to deteriorating conditions in the housing mortgage markets and the resulting negative financial impact on Fannie Mae and Freddie Mac, FHFA placed them under conservatorship on September 7, 2008. This action was taken to preserve GSE assets, ensure a sound and solvent financial condition, and mitigate systemic risks that contributed to current market instability.

Placing Fannie Mae and Freddie Mac under protection of a conservatorship enabled the Government to avert the initial threat of failure and focus on the larger, systemic challenges, with the ultimate intention of restoring financial stability. Under the conservatorship, the conservator (FHFA) replaced the organization’s senior management and oversaw the continued operation of the GSEs.

***

Pursuant to the authorities provided to the Secretary of the Treasury under the HERA, the Treasury Department, on September 7, 2008, took three additional steps to help ensure the solvency and liquidity of the GSE while they are working to resolve their financial difficulties:
a    o entering into senior preferred stock purchase arrangements with Fannie Mae and Freddie Mac;
b    o establishing a GSE credit facility; and
c    o establishing a GSE MBS purchase program.

***

HERA established the HOPE for Homeowners Program4, which provides another stop-gap measure by helping borrowers faced with foreclosure refinance through the Federal Housing Administration. Despite these actions, there was still a pressing need to address the more systemic challenges posed by the credit crisis.

3 The housing GSEs (Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System) are chartered by the Federal Government and pursue a federally mandated mission to support housing finance. Some GSEs are distinctly established as corporate entities – owned by shareholders of stock traded on the New York Stock Exchange. The operations of the housing GSEs are not guaranteed by the Federal Government.

4 HOPE for Homeowners is a voluntary program for the refinancing of distressed loans by providing Federal Housing Administration (FHA) insurance for refinanced loans that meet certain eligibility requirements. Both borrower and lender must agree to participate in the program.

***

The Path to Recovery, Part II – EESA and TARP
In October 2008, Congress passed and the President signed the Emergency Economic Stabilization Act (EESA), which authorized Treasury to establish and manage the Troubled Asset Relief Program (TARP). In general, TARP authorizes the Government to provide additional protection and stability to financial markets through a wide array of mechanisms:

*           EESA authorizes the Government to purchase or insure up to $700 billion in troubled assets, such as securities and other financial instruments.

*           The Treasury Secretary had immediate access to the first $250 billion. Following that, an additional $100 billion was authorized by the President. The last $350 billion is subject to Presidential approval and Congressional review.

In its first use of the TARP, Treasury created the Capital Purchase Program (CPP) to purchase up to $250 billion in senior preferred shares in a wide variety of banks and other financial institutions. These will be largely non-voting shares, may be sold to a third party, and will pay a 5 percent dividend in the first 5 years, and 9 percent thereafter.

a    Any firm participating in the CPP will provide the Treasury Secretary with a warrant guaranteeing the right to purchase additional common shares worth up to 15 percent of the value of the preferred stock purchased. The purchase price will be the average stock selling price over the 20-day period before the preferred stock purchase. If the company is unable to issue a warrant, it may issue senior debt instead.

b    EESA provides for: (1) oversight by the Government Accountability Office (GAO) and a Special Inspector General; and (2) transparency by requiring Treasury to make available an electronic description of assets acquired under the program.

– NOTE PROVISION ABOVE –
[my note that the above provision for accountability already exists]

***
Recovery Efforts and Actions
The following summarizes some of the recovery efforts to date and their impact on and implications for the Government’s consolidated financial statements.

It should be noted that, although HERA and EESA authorize the Government to spend hundreds of billions of dollars in the recovery effort, the majority of those funds have yet to actually be spent, and as a result, are not and would not be reported on the Government’s consolidated financial statements.

Generally, the Government has recorded the funds that have already been spent at cost. The Government expects to recover, if not earn a return on these funds.

Actions by Congress:
*    Passes HERA, which enhanced the regulatory framework and provided temporary authority for the Treasury Secretary to provide financial support to Government Sponsored Enterprises (GSEs).
*    Passes EESA, establishing the Troubled Asset Relief Program (TARP), authorizing the Treasury Department to use up to $700 billion in support of market stabilization efforts. The $700 billion limit shall be reduced by the difference between outstanding and guaranteed obligations under the EESA-authorized insurance program, if any, and the balance in the Troubled Assets Insurance Financing Fund (TAIFF), established by EESA to guarantee timely payments on mortgage-related assets.
*    Legislation only authorizes the Government to engage in specified market relief efforts. Authorizations by themselves do not impact either the Government’s financial statements or the deficit – the exercise of those authorities do.

Actions by the Federal Reserve System (Fed)
*    Lends approximately $30 billion in support of JP Morgan Chase to facilitate its acquisition of Bear Stearns;
*    Agrees to lend up to $85 billion to American International Group (AIG). Subsequent to FY-end 2008, the credit facility was modified and Treasury agreed to purchase $40 billion in Senior AIG preferred stock and will receive common stock warrants for 2 percent of the outstanding AIG common stock;
*    Announces Money Market Investor Funding Facility through which the Fed is authorized to buy $600 billion in CDs and commercial paper to bolster money market mutual funds, and sets up separate facilities to purchase certain AIG assets;
*    Agrees to guarantee $306 billion of Citigroup troubled assets. Pursuant to the agreement, Citigroup would cover the first $37 billion in losses, Treasury would cover the next $5 billion, and FDIC would cover up to $10 billion of additional losses. Treasury and FDIC receive Citigroup preferred stock as part of the arrangement;
*    Announces program to purchase up to $500 billion of mortgage-backed securities and up to $100 billion of Fannie and Freddie debt, and to lend up to $200 billion against new car, student, and small-business loans. Treasury has pledged $20 billion from TARP for this program as well;
*    Under the Supplementary Financing Program, Treasury borrowed $300 billion to increase cash balances at the Fed to support the Fed’s market stabilization efforts.

The vast majority of Fed actions and transactions will not directly impact the Government’s financial statements since the Fed is an independent entity and, while part of the Government, is not considered part of the Federal Government reporting entity. To date, the Government’s exposure is largely limited to any impact that losses from these programs may have on excess profits that the Fed is required to pass on to the Treasury’s General fund.

***

Actions by Treasury:

Under HERA authority, received preferred stock and warrants, valued at $7 billion as consideration for entering into assistance agreements – recorded as an investment.

Commits to provide up to $200 billion under a preferred stock purchase agreement to ensure that GSEs’ assets and liabilities remain in balance – records $13.8 billion as a liability in FY 2008, based upon the Federal Housing Finance Agency’s notification to the Treasury Department that a payment is due to Freddie Mac, based on Freddie Mac’s September 30, 2008 net worth status.

Fannie Mae did not require a payment in FY 2008. Purchased $3.3 billion in MBS and recorded that amount as a loan receivable in FY 2008.

Under EESA, used over $200 billion to purchase assets of qualifying financial institutions since fiscal year-end as of December 9, 2008. None of these purchases occurred during FY 2008.

Amounts expended under HERA and EESA have been and are expected to be treated as either investments or loans, as the Government may recover and possibly even earn a positive return on amounts invested as economic conditions improve.

As the first quarter of FY 2009 draws to a close, the Government is exploring a number of other recovery strategies. Actions under HERA, EESA, and other initiatives are intended to restore confidence to lenders and consumers, and provide stability to the nation’s economy.

***
[ . . . ]

Historically, the Government has incurred debt when: (1) it borrows from the public to fund budget deficits, and (2) government funds invest excess receipts in government securities.

However, in FY 2008, this relationship changed, with Treasury borrowing over $300 billion to increase cash balances at the Fed so that the Fed can assist with market stabilization efforts.

The implementation of both HERA and EESA including the Troubled Asset Relief Program (TARP) have the potential to increase future borrowings by more than $1 trillion. Substantial borrowings in FY 2009 and beyond are expected to fund stock and asset purchases at financial institutions across the country.
At the end of FY 2008, the Government had incurred $10 trillion in debt, comprised of: debt held by (or owed to) the public (i.e., publicly held debt) and intragovernmental debt (i.e., debt the Government owes to itself).

Publicly held debt (a balance sheet liability) includes all Treasury securities (e.g., bills, notes, and bonds) held by individuals, corporations, Federal Reserve banks, foreign governments, and other entities outside the Government.

Intra-governmental debt is primarily held in the form of special nonmarketable securities by various parts of the Government. Laws establishing Government trust funds generally require excess trust fund receipts to be invested in these special securities.

Intra-governmental debt is not shown on the balance sheet because claims of one part of the Government against another are eliminated for consolidation purposes (see Financial Statement Note 11).
Gross Federal debt [ . . . ]
Congress established a dollar ceiling for Federal borrowing, which has been periodically increased over the years (most recently from $9.8 trillion to $10.6 trillion in 2008). At the end of FY 2008, the amount of debt subject to the limit was $9.96 trillion, $655.2 billion under the limit. In October 2008, in connection with the passage of EESA, the limit was raised again to $11.3 trillion.

http://www.gao.gov/financial/fy2008/08frusg.pdf

pg 165 (numbered 159  in report)

Research and Development
Federal investments in research and development (R&D) comprise those expenses for basic research, applied research, and development that are intended to increase or maintain national economic productive capacity or yield other future benefits.
•
Investments in basic research are for systematic studies to gain knowledge or understanding of the fundamental aspects of phenomena and of observable facts without specific applications toward processes or products in mind.
•
Investments in applied research are for systematic studies to gain knowledge or understanding necessary for determining the means by which a recognized and specific need may be met.
•
Investments in development are the systematic use of the knowledge and understanding gained from research for the production of useful materials, devices, systems, or methods, including the design and development of prototypes and processes.
With regard to basic and applied research, the Department of Health and Human Services (HHS) had $16.6 billion (60 percent) and $11.4 billion (53 percent), of the total basic and applied research investments, respectively, in fiscal year 2008 as shown in Table 11. HHS also had similar R&D investment amounts (and percentage contributions) in each of the preceding 4 years.
Within HHS, the National Institutes of Health (NIH) conducts almost all (97 percent) of the department’s basic and applied research. The NIH Research Program includes all aspects of the medical research continuum, including basic and disease-oriented research, observational and population-based research, behavioral research, and clinical research, including research to understand both health and disease states, to move laboratory findings into medical applications, to assess new treatments or compare different treatment approaches; and health services research.
The NIH regards the expeditious transfer of the results of its medical research for further development and commercialization of products of immediate benefit to improved health as an important mandate.
With regard to development, the DOD and the NASA had $65.2 billion (82 percent) and $11.4 billion (14 percent), respectively, of total development investments in fiscal year 2008, as shown in Table 11. DOD changed its methodology for reporting yearly investments in research and development during fiscal year 2008 which affected the current and prior 4 years. Their data is based on research and development outlays (expenditures). As a result, the total amounts of investments in development (Table 11) have been restated. Development is comprised of five stages: advanced technology development, advanced component development and prototypes, system development and demonstration, management support, and operational systems development. Major outcomes of DOD development are:
•
Hardware and software components, or complete weapon systems, ready for operational and developmental testing and field use, and
•
Weapon systems finalized for complete operational and developmental testing.
NASA development programs include activities to extend our knowledge of Earth, its space environment, and the universe, and to invest in new aeronautics and advanced space transportation technologies that support the development and application of technologies critical to the economic, scientific, and technical competiveness of the United States. Some outcomes and future outcomes of this development are:
•
The Constellation Systems program to develop, demonstrate, and deploy the capabilities to transport crew and cargo for missions to the lunar surface and safely return the crew to Earth.
•
Robotic spacecraft that use electrical power for propulsion, data acquisition, and communication to accurately place themselves in orbit around the surfaces of bodies about which we may know relatively little.
•
The Fundamental Aeronautics Program conducts research to enable the design of vehicles that fly through any atmosphere at any speed. A key focus will be the development of physics-based, multidisciplinary design, analysis, and optimization tools to address the multiple design challenges in future aircraft.
•
The James Webb Space Telescope is a large, deployable infrared astronomical space-based observatory. The mission is a logical successor to the Hubble Space Telescope, extending beyond Hubble’s discoveries into the infrared, where the highly red shifted early universe must be observed, where cool objects like protostars and protoplanetary disks emit strongly, and where dust obscures shorter wavelengths.
•
The study of the dynamic Earth system to trace effect to cause, connect variability and forcing with response, and vastly improve national capabilities to predict climate, weather, natural hazards, and conditions in the space environment.

***

***

from Evidence-based Policy Report (UK)

This is not to say that most policy develops in such a linear way from first identifying the evidence, balancing the options and then developing and evaluating the resulting policy. As set out by the Chief Government Social Researcher, the idea of ‘evidence-inspired’ policy making might be more appropriate (Duncan, 2005). Amongst those interviewed, there was a clear distinction between the theory or ideal behind evidence-based policy and the realities of making policy in the real world.“…but that is very much an ideal, that’s very much a theory, which is sometimes overturned by events.”The reality of policy making was described as messy and unpredictable, rarely progressing in a linear fashion. Evidence was clearly just one factor which policy makers took into consideration when developing or implementing policy. Other factors and real-world events and crises all exerted an influence to a greater or lesser degree depending on the policy. Most importantly, the timing of most policies rarely allowed for a linear and methodical evaluation of the evidence. Evidence-based policy making, therefore, was not seen as something that is conducted in isolation. Although most of the policy makers were obviously uncomfortable with the idea of policy made ‘on the hoof’ in response to some pressing need to respond to an issue or on the basis of anecdote or media pressure, they acknowledged that a purely evidence-based approach was rarely possible.

www.gsr.gov.uk

http://www.gsr.gov.uk/downloads/resources/pu256_160407.pdf

– my comments –

I’ve been hearing on the news, even from government officials and Congress members including Barney Frank – that there is no accountability for recipients of the first TARP funds that were originally issued – nor those funds that were also used prior to that last year as emergency funds.

The fact is otherwise and can be found in the above document from the US government Accountability Office. In fact, I think I read that in the wording of the legislation originally passed on the TARP funds and in those other bailouts for “the housing bill” that Congress passed, for GSE’s, in the AIG bailout dollars and at the increased limits at the credit windows, etc.

Okay – so what the hell is this now? Are these government workers and elected members just pretending not to know this stuff or are they deciding that it is too much for them to find out how these funds have been used?

Obviously, there are the economic signs of literally a depression rather than a recession at this point and these dynamics are based on the basic definitions of an economic depression. It looks like a shallow depression that has been articulated to be shallow at this point. However, it is spreading out so far and so fast, that I would question what it will become next, having been artificially and unnaturally flattened and shallowed from what it would’ve been otherwise. My guess – a scientific wild-ass guess, at best – is that we’ve come to the “oh, hell” part of the equation.

that said, there is a serious uncontained fault in the foundation of our economy and I think it means that under the current stresses, this and other weaknesses could be amplified and cleaving long before anything could be done to stop it. Our cash / currency foundation is resting on projections that are based on faulty logic and pre-supposed factors that no longer exist. I would say that is now a serious problem because it has been a supporting structure for all US currency and asset values. That is a big fault line in the foundation.

– cricketdiane

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Evidence based analysis – Economics and Policy – a reality based approach in use currently within international community

12 Monday Jan 2009

Posted by CricketDiane in Macro-economics future forecasting, Make It Work, Physics of Change, Principles of Economics, Psychology, Quantum Physics, Real Time Crises, Real-World, Reality-based Analysis, Reasoning, resourcing, Right Brain Thinking Skills Set, Rocket Science, Statistical Analysis

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bailouts, banking and finance services committee, banks, bonds, commercial paper, commodities, consumer based economy, credit crisis, credit default swaps, credit derivatives, credit markets, Cricket Diane C Sparky Phillips, Cricket House Studios, cricketdiane, currency values, deflation, econometrics, economic development, economic models, economic stimulus, Economics, Economy, employment, evidence based analysis and policy, Federal Reserve, financial institutions, financial systems, gdp, global economic crisis, Global Economy, gnp, government, Great Depression of 2008 2009, housing, housing market, inflation, International Concerns, Inventing Solutions For America, Labor, macro-economic future forecasting, mortgage backed securities, Physics of Change, Presidents Working Financial Group, Principles of Economics, Reality-based Analysis, recession, Securities and Exchange Commission, Statistical Analysis, stock markets, stocks, unemployment, unsecured credit, US Congress, US currency values, US dollar, US economic crisis, US Government, US government policy, US House of Representatives, US Senate, US Treasury, Wall Street

Analysis for policy: evidence-based policy in practice

http://www.gsr.gov.uk/downloads/resources/pu256_160407.pdf

This report presents findings from an investigation into the use of evidence-based policy in practice. It is based on interviews and discussion groups with policy makers from 10 Whitehall departments and the devolved administrations of the Scottish Executive and the Welsh Assembly Government. In total, 42 policy makers, in a range of middle management and senior civil service positions, took part.
It was conducted to gauge the extent to which the use of robust, research evidence is embedded within day-to-day policy making and policy delivery, and to understand the reasons why effective use of evidence in government decision making continues to present such a challenge. It provides a snapshot of current practices within government departments.

http://www.gsr.gov.uk/downloads/resources/pu256_160407.pdf

Analysis for policy: evidence-based policy in practice

Government Social Research
www.gsr.gov.uk

–

Government Social Research Unit
HM Treasury
Enquiries: gsr-web@hm-treasury.x.gsi.gov.uk
For general enquiries about HM Treasury and its work, contact:
Correspondence and Enquiry Unit
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ
Tel: 020 7270 4558
Fax: 020 7270 4861
E-mail: public.enquiries@hm-treasury.gov.uk

Analysis for policy: evidence-based policy in practice

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When mortgages are sold – the property becomes the ownership of the foreign bank or government that has bought it

11 Sunday Jan 2009

Posted by CricketDiane in America - USA, Analogic Reasoning, ancient sea, Comparative Analysis and Analogic Analysis, Creating Solutions for America, Creating Solutions That Work, Cricket D, cricket diane, Cricket Diane C Phillips, Cricket Diane C Sparky Phillips, Cricket House Studios, cricketdiane, CricketHouseStudios, Democracy, diane c phillips, Economics, Economy, Freedom, Freedom of Thought, Genius At Work, Integrated Thinking Processes, Intelligence, International Concerns, Inventing Solutions For America, Macro-economics future forecasting, Money, Principles of Economics, Real Time Crises, Real-World, Reality-based Analysis, Reasoning, Rocket Science, Sparky Phillips, Statistical Analysis, Systems Analysis, Tangible from the Impossible, Thinking Skills, Thomas Jefferson, Thoughts, Twenty-first Century, Uncategorized, United States of America, US At Home - Domestic Policy, US Bill of Rights, US Constitution, US Declaration of Independence, US Government, XI-1

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bailouts, banking and finance services committee, banks, bonds, commercial paper, commodities, consumer based economy, credit crisis, credit default swaps, credit derivatives, credit markets, Cricket Diane C Sparky Phillips, Cricket House Studios, cricketdiane, currency values, deflation, econometrics, economic development, economic models, economic stimulus, Economics, Economy, employment, evidence based analysis and policy, Federal Reserve, financial institutions, financial systems, gdp, global economic crisis, Global Economy, gnp, government, Great Depression of 2008 2009, housing, housing market, inflation, International Concerns, Inventing Solutions For America, Labor, macro-economic future forecasting, Macro-economics future forecasting, Make It Work, mortgage backed securities, Physics of Change, Presidents Working Financial Group, Principles of Economics, Psychology, Quantum Physics, Real Time Crises, Real-World, Reality-based Analysis, Reasoning, recession, resourcing, Right Brain Thinking Skills Set, Rocket Science, Securities and Exchange Commission, Statistical Analysis, stock markets, stocks, unemployment, unsecured credit, US Congress, US currency values, US dollar, US economic crisis, US Government, US government policy, US House of Representatives, US Senate, US Treasury, Wall Street

So, let’s see what we’ve got here . . .

Every piece of property in America has been sold three times over –

once when the seller received their price from the buyer’s mortgage,

secondly, when the bank or finance company charged 8 times the price of the property for the mortgage on it,

and, third, when that mortgage was sold to a secondary market packaged with other derivatives and mortgage-backed securities.

***

So now, every piece of property in the United States is no longer owned by anyone in our citizenry who would occupy and conduct their lives from it. That means, we don’t own America anymore.

***

Every property is now owned by banks around the world, foreign investment groups and other businesses rather than by anything or anyone in the US. Even the Fannie Mae and Freddie Mac mortgage products are sold off into the secondary markets so they can make more mortgages. Therefore even those properties are literally under the ownership of businesses elsewhere.

As much as some American banks and companies do own groups of these mortgage-backed securities, they are not people in respect to this property ownership – not homeowners – not those who would be members of the community – not church goers – not raising their families in those homes – and have no vested interest in the improvement and upkeep of the homes.

***

There are several serious flaws in this system and ideology of mortgage / home ownership / commercial property / real estate and property ownership. The first of which is that those holding the mortgages actually own the properties, not those people that are paying on the mortgages.

The more serious flaw, however, is that now none of the property in the US is owned by the US nor by its citizens. How can people be paying for something that they will never, never, never own? Why would they pay for these homes and properties when some foreign banking or investment group is actually being paid to pay off their debt in the property and those Americans paying the interest and principle will never own it?

***

Another reason this system is flawed, has to do with the pragmatic logistics of owning thirty thousand properties in the US when these have defaulted on their mortgages and the company of ownership exists elsewhere in the world. Not only did these companies, banks, hedge funds and investors never have a plan for this – they also have no real intention of using these properties as homes or businesses.

The properties are no more than a number on a page of assets somewhere – the real properties behind them mean nothing in this tally while the only real use the properties do have is no longer viable and no longer utilized. At the same time, those who would have use of the physical real properties among the citizens and businesses in the US have no genuine access to ownership of them. What purpose then do they serve?

When there exists no part and place for the citizens of a country to have real ownership in property and businesses of their country – there also ceases to exist any vested interest in support of the interests of the country and its communities, its governments, its existing businesses, its ideologies, its security, its assets, its improvements, its survival.

***

Now, the bankers, government officials, chamber of commerce leadership, lobbyists, Wall Street, and various other leaders of the United States appear to be trying to find a way to keep the same old game going. So, the real question is not what will restore the credit markets.

The real question is – how we will take what we have and go to something new that evolves from what it has been?

So we take these bankers out of the game for the very treasonous and criminal harms done to the United States and the World? Do we restore ownership of all mortgages, credit, properties, assets and US business interests of the US to the US?

Do we let those companies be destroyed that are holding to prices that are inflated for purposes of making money on the credit required for any purchases of their products, services or properties, including automakers and sellers of real estate? Do we stop subsidizing lobbyists, banks, financiers and foreign interests, profit-driven oil companies and pharmaceuticals?

***

How much of the problems would be solved if we make it the law that if a bank or finance company originates a mortgage, it must hold that mortgage for at least two-thirds of the life of the mortgage or for its entire term?

How much more of the economic problems in the US and around the World would be solved almost immediately by removing all credit derivatives from use – allowing no new ones to be made and by forcing all existing ones to be resolved before the end of 2009? What if that includes all credit derivatives, credit default swaps, mortgage-backed securities, bonds and commercial paper of any kind – all of which would be resolved before the end of 2009 and then never allowed again?

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If . . .

08 Saturday Nov 2008

Posted by CricketDiane in Economics, Economy

≈ 2 Comments

Tags

banking, bonds, Business, cash, commercial paper, counterfeit currency, counterfeit securities, credit crunch crisis, credit default swaps, Cricket Diane C Sparky Phillips, cricketdiane, currencies, currency values, Economics, Economy, Federal Reserve, foreign investment, global economic crisis, International Concerns, investment banking, Macro-economic analysis 2008, macro-economic future forecasting, Money, mortgage backed securities, Principles of Economics, Securities and Exchange Commission, stock market, stocks, toxic paper, US dollar, US economic crisis, US government bailouts, US government policy, US Treasury, Wall Street

If there were valid solutions to the economic crisis, why wouldn’t the involved parties use them?

Well, there are valid solutions that will work and some that will work quickly. So, why not put them into action immediately? It can’t wait for a new administration to take over, pick out the drapes and choose bedrooms in the White House.

I was surprised to learn that over 80% of the investors in the markets are moving huge blocks of investments because they are institutional players rather than individuals. That makes this situation and the things that can be done about it, a very different situation than during the Great Depression.

In fact, maybe this one can be called the “Incredible Depression” since so many people involved in helping to create it and profit from it are incredibly resourceful until it comes time to fix it. Then, I differ when it comes to calling a thing what it is.

There are often people being asked for opinions that have no good reason to accurately reflect the facts about the situation. When the game continues, they make money – so why wouldn’t they want everyone to have the opinion that nothing is really wrong at all?

Unfortunately, the truth is that a company’s value is not inherently created by the value of its stock nor by the dividends it pays – but by the underlying products and services which established the company in the first place. Without that, the corporations selling stocks, bonds, credit swaps, leveraging and every other play is no more than a pretense.

And, that is the real problem we face.

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US Economy – Credit Default Swaps – Illegal Securities and Financial Derivatives Activities and their misrepresentation of reality, values, and fact

23 Thursday Oct 2008

Posted by CricketDiane in Uncategorized

≈ 2 Comments

Tags

AIG, bailouts, bonds, capital, Capitalism, capitalization, cash, CDOs, CDS, commercial paper, commodities, consumer based economy, consumerism, counterfeit currencies, counterfeit securities, credit crunch crisis, credit default swaps, credit derivatives, Cricket Diane C Sparky Phillips, cricketdiane, currencies, currency values, Economics, Economy, elbow grease, Fannie Mae, Federal Reserve, financial derivative instruments, financial derivatives, Freddie Mac, global economic crisis, Global Economy, hedge funds, hedging, International Concerns, investment banking, Macro-economic analysis 2008, macro-economic future forecasting, Money, mortgage backed securities, RICO, securities, Securities and Exchange Commission, securities fraud, shareholders, stock exchange, stock market, Stock Market bailout, stocks, subprime mortgages, unsecured loans credit, US Congress, US dollar value, US economic crisis, US Economy, US government bailout, US government bailouts, US government economic crisis, US government policy, US Labor Department numbers manipulation, US statistics faulty and manipulated, Wall Street

Discrimination in mortgage lending is prohibited by the federal Fair Housing Act and HUD’s Office of Fair Housing and Equal Opportunity actively enforces those provisions of the law. The Fair Housing Act makes it unlawful to engage in the following practices based on race, color, national origin, religion, sex, familial status or handicap (disability):

* Refuse to make a mortgage loan
* Refuse to provide information regarding loans
* Impose different terms or conditions on a loan, such as different interest rates, points, or fees
* Discriminate in appraising property
* Refuse to purchase a loan or set different terms or conditions for purchasing a loan

Filing a Complaint

If you have experienced any one of the above actions, you may be the victim of discrimination. Recognizing the signs of lending discrimination is the first step in filing a complaint. HUD investigates your complaints at no cost to you. If you believe you have experienced lending discrimination, visit our housing discrimination complaint website to learn more about the complaint process.

HUD Fair Lending Studies

Pre-application inquiries about mortgage lending financing options represent a critical phase in the homebuying process. If potential homebuyers cannot obtain full and fair access to information about mortgage financing, they may give up on their pursuit of homeownership, their housing search may be restricted, or they may be unable to negotiate the most favorable loan terms. HUD has conducted a number of studies to determine whether minority homebuyers receive the same treatment and information as whites during the mortgage lending process. Read more on mortgage lending discrimination studies.

Subprime Lending

Subprime loans play a significant role in today’s mortgage lending market, making homeownership possible for many families who have blemished credit histories or who otherwise fail to qualify for prime, conventional loans. A recent HUD analysis, based on HMDA and related data, shows that the number of home purchase subprime applications increased from 327,644 in 1997 to 783,921 in 2000.

While the subprime mortgage market serves a legitimate role, these loans tend to cost more and sometimes have less advantageous terms than prime market loans. Additionally, subprime lenders are largely unregulated by the federal government. Data shows blacks are much more likely than whites to get a subprime loan, and many of the borrowers who take out these loans could qualify for loans with better rates and terms. As such, many have expressed fair lending concerns about the subprime market. Read more on Subprime Lending.

Predatory Lending

Some lenders, often referred to as predatory lenders, saddle borrowers with loans that come with outrageous terms and conditions, often through deception. Elderly women and minorities frequently report that they have been targeted, or preyed upon, by these lenders. The typical predatory loan is: (1) in excess of those available to similarly situated borrowers from other lenders elsewhere in the lending market, (2) not justified by the creditworthiness of the borrower or the risk of loss, and (3) secured by the borrower’s home. HUD is working hard to fight against predatory lending.

Minority Homeownership

HUD is committed to increasing homeownership opportunities for all Americans. HUD is engaged in a special effort to boost the minority homeownership rate since the rate for black and Hispanic Americans lags behind that of others. Read more about HUD’s efforts to Increase Minority Homeownership.

http://www.hud.gov/offices/fheo/lending/index.cfm

http://www.usdoj.gov/crt/housing/title8.php

***

NEW YORK (Reuters) – A former mortgage lender pleaded guilty on Thursday to conspiring to commit fraud in a $44 million theft of payoff proceeds for refinanced mortgage loans funded by Fannie Mae.

“When the fraudulent scheme was revealed, Fannie Mae held nearly $44 million in unpaid, but refinanced, underlying mortgage loans from Olympia Mortgage,” the U.S. Attorney’s office in Brooklyn said at the time of the indictment.

Thu Sep 11, 2008 5:50pm EDT

http://www.reuters.com/article/domesticNews/idUSN1117127920080911

***

The Organized Crime Control Act of 1970 (Pub.L. 91-452, 84 Stat. 922 October 15, 1970), was an Act of Congress signed into law by U.S. President Richard Nixon. It prohibits the creation or management of a gambling organization involving 5 or more people if it has been in business more than 30 days or accumulates $2000 in gross revenue in a single day. It also gave grand juries new powers, permitted detention of unmanageable witnesses, and gave the attorney general authorization to protect witnesses, both state and federal, and their families. This last measure helped lead to the creation of WITSEC, an acronym for witness security.

Part of the Act created the Racketeer Influenced and Corrupt Organizations Act.

http://en.wikipedia.org/wiki/Organized_Crime_Control_Act

***

Indiana (and probably elsewhere – in the Secretary of State office)

The Prosecution Assistance Unit was created within the Enforcement Section of the Securities Division to assist law enforcement agencies in prosecuting white collar criminals. Currently the unit includes two attorneys and two investigators devoted exclusively to the enforcement of the criminal provisions of the Indiana Securities Act, the Indiana Loan Broker Act and related statutes. The Unit operates under the direction and supervision of the Securities Commissioner and the Senior Investigator. PAU Home page

– On April 24, 2006, Michael Boehm was sentenced by the St. Joseph Superior Court to eight (8) years imprisonment upon his guilty plea to four (4) counts of selling unregistered securities to residents of South Bend. In exchange for the guilty plea, twenty-six (26) remaining counts of securities fraud and transacting business as an unregistered broker-dealer or agent were dismissed.

The case was presented by St. Joseph County Prosecutor, Michael A. Dvorak, on a referral from the Prosecution Assistance Unit. Boehm caused his company, M & D Whirlwind to issue approximately $4.5 million in promissory notes with interest rates of up to thirty percent (30%) to 65 Indiana residents. Boehm used part of the proceeds to make high risk loans to persons who were not credit worthy and who ultimately defaulted on their loans to Boehm’s company.

http://www.in.gov/sos/securities/pau/news.html

***

http://www.uscourts.gov/courtlinks/

http://en.wikipedia.org/wiki/U.S._District_Court

Jurisdiction

Unlike some state courts, the power of federal courts to hear cases and controversies is strictly limited. Federal courts may not decide every case that happens to come before them. In order for a district court to entertain a lawsuit, Congress must first grant the court subject matter jurisdiction over the type of dispute in question. Though Congress may theoretically extend the federal courts’ subject matter jurisdiction to the outer limits described in Article III of the Constitution, it has always chosen to give the courts a somewhat narrower power.

The district courts exercise original jurisdiction over—that is, they are empowered to conduct trials in—the following types of cases:

  • Civil actions arising under the Constitution, laws, and treaties of the United States;[6]
  • Certain civil actions between citizens of different states;[7]
  • Civil actions within the admiralty or maritime jurisdiction of the United States;[8]
  • Criminal prosecutions brought by the United States;[9]
  • Civil actions in which the United States is a party;[10] and
  • Many other types of cases and controversies[11]

For most of these cases, the jurisdiction of the federal district courts is concurrent with that of the state courts. In other words, a plaintiff can choose to bring these cases in either a federal district court or a state court. Congress has established a procedure whereby a party, typically the defendant, can “remove” a case from state court to federal court, provided that the federal court also has original jurisdiction over the matter. For certain matters, such as intellectual property disputes and prosecutions for federal crimes, the jurisdiction of the district courts is exclusive of that of the state courts.[12]

In addition to their original jurisdiction, the district courts have appellate jurisdiction over a very limited class of judgments, orders, and decrees.[13].

Other federal trial courts

There are other federal trial courts that have nationwide jurisdiction over certain types of cases, but the district court also has concurrent jurisdiction over many of those cases, and the district court is the only one with jurisdiction over criminal cases. The United States Court of International Trade addresses cases involving international trade and customs issues. The United States Court of Federal Claims has exclusive jurisdiction over most claims for money damages against the United States, including disputes over federal contracts, unlawful takings of private property by the federal government, and suits for injury on federal property or by a federal employee. The United States Tax Court has jurisdiction over contested pre-assessment determinations of taxes.

http://en.wikipedia.org/wiki/U.S._District_Court

***

Recent Convictions, Indictments and Investigations of Members of Congress and Executive Branch Officials

* = linked to Abramoff scandal

I.   Congressional Members

A.   Convicted

  • Rep. Randy “Duke” Cunningham: pleaded guilty to conspiracy to commit bribery, mail fraud, wire fraud, and tax evasion; sentenced to 100 months in prison and $1.8 million in restitution.
  • *Rep. Bob Ney: pleaded guilty to conspiring to commit fraud and making false statements in connection with Abramoff; sentenced to 30 months in prison, $6,000 in fines, and 200 hours of community service.
  • Sen. Larry Craig: pleaded guilty to disorderly conduct in a sex solicitation case in Minneapolis; also under investigation by the senate ethics committee for covering up the case.

B.   Indicted

  • Rep. Tom DeLay: indicted by a Texas grand jury on charges of conspiracy and money laundering. A Texas county court judge threw out the charge that he violated state campaign finance laws, and the Texas Third Court of Appeals and Texas Court of Criminal Appeals upheld the ruling. Additionally, he was named in the Abramoff investigation when two of his staffers entered guilty pleas, but he was never indicted.
  • Rep. William Jefferson: indicted for wire fraud, soliciting bribes, violating the Foreign Corrupt Practices Act, money laundering, racketeering, and obstructing justice.
  • Rep. Rick Renzi: under FBI investigation for land-swap and military-contractor legislation that benefits his former business partner and his father’s employer, respectively. Indicted on 35 charges, including conspiracy and money laundering.
  • Former Rep. Mark D. Siljander: representative 1981-1987; indicted in 2008 for funding (possibly in a fraudulent manner) an Islamic charity accused of funneling money to an Islamic warlord during 2003-2004.

C.   Under Investigation

  • *Rep. John Doolittle: under investigation by the DOJ in connection with Abramoff. Not seeking another term in 2008.
  • *Rep. Tom Feeney: under FBI investigation in connection with Abramoff; named as “Lawmaker #3” in Zachares’s guilty plea.
  • Rep. Mark Foley: under investigation by the House Committee on Standards of Official Conduct, FBI, and Florida Attorney General’s Child Predator Cybercrime Unit for “Pagegate.”
  • Rep. Jerry Lewis: under federal investigation for trading legislative favors for campaign contributions.
  • Rep. Allan Mollohan: under FBI investigation for receiving (but not reporting) campaign contributions from officials connected to organizations that profited from earmarks.
  • Sen. Ted Stevens: under FBI and IRS investigation for trading home renovation for congressional support for Alaskan oil giant VECO. He is also under FBI investigation for procuring $50 million in earmarks for the Alaska SeaLife Center in connection with his son and former aide.
  • Rep. Don Young: under investigation for taking bribes, illegal gratuities, and unreported gifts from VECO in connection with Stevens. Additionally, a senior staffer pleaded guilty in the Abramoff case, but he was never indicted.
  • Rep. Robert Menendez: under investigation for unfairly funding projects of a lobbyist / former aide.
  • Rep. Gary Miller: under investigation for allegedly using his congressional influence to evade taxes on a $10 million land deal, receiving a $7.5 million loan from a campaign contributor, and using his office to close an airport that affected a land development project of the campaign contributor.
  • Sen. Lisa Murkowski: a complaint with the senate ethics committee is pending regarding a sweet-heart land deal between Murkowski and a campaign contributor; Murkowski has since backed away from the land deal.
  • Rep. Ken Calvert: under investigation for sponsoring several different earmarks that increased the value of property owned by Calvert. One such earmark profited Calvert and a partner an estimated $500,000 in one year.

II.    Congressional Staff

A.    Convicted

  • *John Albaugh: former chief of staff to Rep. Istook; pleaded guilty to conspiracy with Ring; sentencing scheduled for September 2008.
  • *William Heaton: Ney’s former executive assistant on the House Administration Committee and chief of staff; pleaded guilty to conspiracy to commit fraud in connection with Abramoff and sentenced only to community service and 2 years probation because of assistance provided to investigators.
  • Brett Pfeffer: former Jefferson aide; pleaded guilty to conspiracy to commit and aiding and abetting bribery; sentenced to 8 years in prison.
  • *Tony Rudy: former DeLay deputy chief of staff; pleaded guilty to conspiracy in connection with Abramoff; sentencing scheduled for September 2008.
  • *Michael Scanlon: former DeLay press aide; pleaded guilty to conspiracy to commit bribery in connection with Abramoff; sentencing late June 2008.
  • *Neil Volz: former Ney chief of staff; pleaded guilty to conspiracy in connection with Abramoff; sentenced to 2 years probation and fined $2,000.
  • *Mark Zachares: former Young senior staffer on the House Transportation and Infrastructure Committee; pleaded guilty to conspiracy to commit wire fraud in connection with Abramoff; sentencing September 2008.

B. Indicted

  • Jim Ellis: former DeLay PAC executive director; indicted in Texas for violating election laws, criminal conspiracy, and money laundering in connection with DeLay’s PAC.

B. Under Investigation

  • *Ed Buckham: former DeLay chief of staff-turned-chairman of the lobbying firm Alexander Strategy Group; under investigation in connection with Abramoff. Rudy’s guilty plea includes Buckham as “Lobbyist B.” It also names him as a beneficiary of Rudy’s scheme to take other congressional aides on a trip to the Northern Mariana Islands.
  • Trevor McCabe: former Stevens aide; under FBI and Department of Interior investigation for a series of Stevens-sponsored earmarks that benefit the Alaska SeaLife Center, a nonprofit involved in a land deal with McCabe in connection with Stevens’ son.
  • Jeff Shockey: deputy staff director for Rep. Lewis; under investigation for participating in an earmarks-for-benefits scheme. Accepted a $2 million buy-out from the Copeland et al. lobbying firm as he returned to work for Rep. Lewis. Federal investigation ongoing.
  • Leticia White: former staffer for Defense earmarks; now employed as a lobbyist at Copeland et al., a lobbying firm alleged to be involved in an earmarks-for-benefits scheme. She accepted a cut in congressional salary allegedly to avoid the revolving door restriction as she moved back into the lobbying community.

III. Executive Employees

A. Convicted

  • Claude Allen: former Assistant to the President for Domestic Policy; pleaded guilty to misdemeanor theft for a $5,000 refund scam; sentenced to $850 in fines and 1 month of probation.
  • Lester Crawford: former commissioner for the Food and Drug Administration; pleaded guilty to filing a false financial disclosure and conflict of interest for falsely claiming to have sold his stock in the companies that he was responsible for regulating; sentenced to $90,000 in fines and 3 years of probation.
  • *Robert Coughlin: former deputy chief of staff at the Justice Department’s criminal division; pleaded guilty to conflict-of-interest charge for accepting various gifts from Abramoff and Ring; sentencing September 2008.
  • Brian Doyle: former deputy press secretary for the United States Department of Homeland Security; pleaded no contest to sending sexually explicit IMs and clips to an undercover officer posing as a 14-year-old girl; sentenced to 5 years in state prison.
  • *Italia Federici: former political aide to Interior Secretary Norton; facilitated communication between Abramoff and Griles; pleaded guilty to obstruction of the Senate’s Abramoff investigation; avoided prison sentence due to cooperation.
  • Robert Fromm: former program manager at the Army’s National Ground Intelligence Center; investigated in connection with Cunningham; defense contractor Wade’s guilty plea identified from as the “Official” who traded Wade’s job offers for government contracts; pleaded guilty to violating lifetime post-employment ban; sentenced to 1 year on probation and fined $2,500.
  • *J. Steven Griles: former deputy secretary for the Department of Interior; pleaded guilty to obstruction of justice in connection with Abramoff; sentenced to 10 months in prison and $30,000 in fines.
  • Lewis “Scooter” Libby: former Assistant to the President, Chief of Staff to the Vice President, and Assistant to the Vice President for National Security Affairs; convicted of obstructing justice, perjury, and making false statements to federal investigators in the leak of CIA agent “Valerie Plame’s” identity; sentenced to 30 months in federal prison, $250,000 in fines, 2 years of supervised release, and 400 hours of community service. President Bush commuted the prison term.
  • *David Safavian: former chief of staff for the Office of Management and Budget; convicted of making false statements and obstructing justice in connection with Abramoff; sentenced to 18 months in prison.
  • *Roger Stillwell: former officer in charge of the Northern Mariana Islands Stillwell in the Office of Insular Affairs at the Department of Interior; pleaded guilty to filing a false financial statement in connection with Abramoff; sentenced to $1000 in fines and 2 years of probation.
  • Brent Wilkes: GOP fundraiser/Bush pioneer/finance co-chair for the Bush campaign in California; charged with fraud and other offenses in connection with Cunningham. Three months later, the indictment was expanded to include more than 30 charges against his dealings with Foggo, including fraud, conspiracy, and money laundering. Convicted on 13 counts; sentenced to 12 years in prison.

B. Indicted

  • Kyle “Dusty” Foggo: former executive director of the CIA; charged with fraud and other offenses in connection with Cunningham. Three months later, the indictment was expanded to include more than 30 charges against his dealings with defense contractor Wilkes, including fraud, conspiracy, and money laundering.
  • Daniel Gonzalez: chief of staff for FCC chairman Kevin Martin; on board of energy company which participated in fraudulent Ponzi scheme.

C. Under Investigation

  • Alberto Gonzales: former Attorney General; under investigation for improperly firing at least seven U.S. attorneys. Numerous other administration officials are also under investigation in this matter.
  • Jose Rodriguez: former CIA official; under investigation for purposely destroying tapes depicting CIA torture of detainees.

IV. Abramoff Scandal Convictions

NOTE: not all Abramoff-related convictions are included on the above list, as businessmen and lobbyists do not fall into the categories under analysis; the list below is more complete. Most of the Abramoff-related corruption cases are being handled by Judge Ellen Segal Huvelle of the U.S. District Court for the District of Columbia.

Plead guilty
Jack Abramoff
John Albaugh
Jared Carpenter
Robert Coughlin
Italia Federici
J. Steven Griles
William Heaton
Adam Kidan
Bob Ney
Tony Rudy
Michael Scanlon
Roger Stillwell
Neil Volz
Mark Zachares

Convicted
David Safavian

Named but not charged
Ed Buckham
Tom DeLay
Tom Feeney
Ernest Istook
Kevin A. Ring

Source: Matthew DuPont, Xenia Tashlitsky and Craig Holman
Public Citizen
215 Pennsylvania Avenue, SE
Washington, D.C. 20003

Updated June 5, 2008


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Because Public Citizen does not accept funds from corporations, professional associations or government agencies, we can remain independent and follow the truth wherever it may lead. But that means we depend on the generosity of concerned citizens like you for the resources to fight on behalf of the public interest.

http://www.citizen.org/congress/articles.cfm?ID=17803

***

UNIFORM SECURITIES ACT
Act 265 of 1964
AN ACT to enact the uniform securities act relating to the issuance, offer, sale, or purchase of securities; to
prohibit fraudulent practices in relation to securities; to establish civil and criminal sanctions for violations of
the act and civil sanctions for violation of the rules promulgated pursuant to the act; to require the registration
of broker-dealers, agents, investment advisers, and securities; to make uniform the law with reference to
securities; and to repeal acts and parts of acts.

[ . . . ]

PART I
FRAUDULENT AND OTHER PROHIBITED PRACTICES
451.501 Offer, sale, or purchase of security; unlawful practices.
Sec. 101. It is unlawful for any person, in connection with the offer, sale, or purchase of any security,
directly or indirectly:
(1) To employ any device, scheme, or artifice to defraud.
(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they are made, not misleading.
(3) To engage in any act, practice, or course of business which operates or would operate as a fraud or
deceit upon any person.

451.502 Investment adviser; unlawful practices.
Sec. 102. (a) Except as otherwise provided in this subsection, an investment adviser, a federally covered
adviser, or a person who represents an investment adviser or a federally covered adviser shall not, directly or
indirectly, do any of the following:
(1) Employ a device, scheme, or artifice to defraud a client or prospective client.
(2) Engage in an act, practice, or course of business that operates or could operate as a fraud or deceit upon
a client or prospective client.
(3) Acting as principal for his or her own account, knowingly sell any security or purchase any security
from an investment advisory client, or acting as a broker for a person other than that client, knowingly effect
any sale or purchase of any security for the account of that client, without disclosing to the client in writing
before the completion of the transaction the capacity in which he or she is acting and obtaining the consent of
the client in writing to the transaction. The prohibitions of this subdivision do not apply to a federally covered
adviser or to any transaction with a customer of a broker-dealer if the broker-dealer is not acting as an adviser
in relation to the transaction.
(b) It is unlawful for any investment adviser to enter into, extend, or renew any investment advisory
contract unless it provides in writing all of the following:
(1) That the investment adviser shall not be compensated on the basis of a share of capital gains upon or
capital appreciation of the funds or any portion of the funds of the client.
(2) That no assignment of the investment advisory contract may be made by the investment adviser without
the consent of the other party to the contract.
(3) That the investment adviser, if a partnership, shall notify the other party to the investment advisory
contract of any change in the membership of the partnership within a reasonable time after the change.
(c) It is unlawful for any investment adviser acting as a finder to do any of the following:
(1) Take possession of funds or securities in connection with the transaction for which payment is made for
services as a finder.

[ . . . ]

(4) Participate in the offer, purchase, or sale of a security without obtaining information relative to the risks
of the transaction, the direct or indirect compensation to be received by promoters, partners, officers,
directors, or their affiliates, the financial condition of the issuer, and the use of proceeds to be received from
investors, or fail to read any offering materials obtained. This section does not require independent
investigation or alteration of offering materials furnished to the finder.
(5) Fail to inform or otherwise ensure disclosure to all persons involved in the transaction as a result of his
or her finding activities of any material information which the finder knows, or in the exercise of reasonable
care should know based on the information furnished to him or her, is material in making an investment
decision, until conclusion of the transaction.

[ etc.]
Rendered Wednesday, October 22, 2008 Page 1 Michigan Compiled Laws Complete Through PA 300 of 2008
Ó Legislative Council, State of Michigan Courtesy of http://www.legislature.mi.gov

(State of Michigan)

http://www.legislature.mi.gov/documents/mcl/pdf/mcl-act-265-of-1964.pdf

***

  • To state an actionable RICO claim under 18 U.S.C. §1962, a private plaintiff must plead seven elements:

(I)  that the defendant

(2)  through the commission of 2 or more acts

(3)  constituting a ‘pattern’

(4)  of ‘racketeering activity’

(5)  directly or indirectly invests in, or maintains an interest in, or        participates in

(6)  an ‘enterprise’ [undertaking]

(7)  the activities of which affect interstate or foreign commerce

Plaintiff seeks treble monetary damages,

  • The RICO statute defines an “enterprise” as “any individual, partnership, corporation association, or other legal entity and any union or group of individuals associated in fact although not a legal entity. 18 U.S.C. §1961 (c).

*  Under the statute, “racketeering activity” includes state offenses involving murder, robbery, extortion, and several other serious crimes punishable by imprisonment for more than one year and more than 70 serious federal crimes including extortion, interstate theft, narcotics violations, mail fraud, securities fraud, currency reporting violations and certain immigration offenses when committed for financial gain.

[However – ]

Counterfeiting, 18 U.S.C. §§ 471-73.

Mail & Wire Fraud, 18 U.S.C. § 1341.

Obstruction of Justice, 18 U.S.C. § §1503-1513.

Bribery, 18 U.S.C. § 201.

[ and ]

  • §1862(a) investing the proceeds of a pattern of racketeering activity or from collection of an unlawful debt in an enterprise affecting interstate commerce.
  • §1862(b) acquiring or maintaining an interest in an enterprise affecting interstate commerce through a pattern of racketeering or collection of an unlawful debt.

[ etc. ]

*  In 1978, amended to add as predicate act cigarette bootlegging.
* In 1984, amended to add as predicate acts dealing in obscene matters, currency violations, and certain automobile-theft violations.
* In 1986, added provisions relating to tampering with and retaliating against witnesses, victims or informants, money laundering and forfeiture of substitute assets.
* In 1988, amended to provide for life sentence where predicate offense also carried life sentence and added new predicate offenses: murder for hire, sexual exploitation of children, certain narcotics offenses.
* In 1996, Civil RICO could not be predicated on the purchase or sale of securities, but could be based on immigration fraud and alien smuggling as well as various infringements on intellectual property.

From – A Brief Overview of Federal Racketeering Laws – US

http://74.125.45.104/search?q=cache:oKHWr-4FDfYJ:policy-traccc.gmu.edu/resources/publications/burgerpres/Federal%2520Racketeering%2520Laws-ENG.ppt+conspiring+to+commit+fraud+in+the+sale+of+securities&hl=en&ct=clnk&cd=19&gl=us

***

SEC Botches Another Case – January 3, 2008

digg_url = ‘http://www.investigatethesec.com/drupal-5.5/node/9’;
digg_title = “SEC Botches Another Case – January 3, 2008”;
digg_bodytext = “David Patch\r\n\r\n \r\n\r\nFederal Agencies typically try their best to not air dirty laundry but for the Securities and Exchange Commission the task is becoming rather difficult.\r\n\r\n \r\n\r”;

digg_skin = ‘compact’;

David Patch

Federal Agencies typically try their best to not air dirty laundry but for the Securities and Exchange Commission the task is becoming rather difficult.

For the second time in barely 2 months the SEC has lost a case in federal court regarding illegal short sales associated with a Private Placement in Public Entity (PIPE) offering.

To start the New Year a federal judge in Manhattan threw out, with prejudice, the SEC’s case against Gyrphon Partners brought forth by the Division of Enforcement. The SEC’s case alleged that between 2001 and 2004 Gryphon Partners had defrauded PIPE issuers and violated securities-registration rules by shorting shares ahead of a PIPE placement and later covering their short position with the shares received in that placement.

Gryphon, on the other hand, contested that they legally “naked short” the stock through Canada where the US laws pertaining to a stock locate and borrow did not exist.

Apparently the federal judge has agreed with Gryphon and has terminated the SEC’s case on those charges. The US Judge finding that the SEC based its claim on agency materials with “negligible support” for its view of the short sale regulations and that it quoted “selectively” and “misleadingly” from one of them to support their case. The judge allowed the charges of insider trading relative to those short sale trades to remain however.

It was last October that a federal judge in North Carolina dismissed the SEC’s case against John Mangan for similar short sale activities in 2001 involving a PIPE deal with a small Maryland based Security and Protection company called Compudyne.

Why the difficulty in bringing enforcement cases of this nature to fruition?

Consider first that the loophole used by Gryphon Partners was no secret to those that commit this type of fraud. In 2000 the NASD recognized the loophole identified where shorts executed through Canada would fail settlement to the US purchasers of those trades. Unlike the US where a locate to borrow was required prior to the execution of a short sale, Canada had no such rules and thus allowed for short sales to trade without an equity share backing the trade.

In the exact years that Gryphon Partners was trading through the use of this loophole the SEC sat on the NASD proposed rule change to NASD Rule 3370. It was not until October 2003 that the SEC approved the NASD proposal with a delayed incorporation date of April 2004. By June 2004 the rule became obsolete under the SEC’s newly released Regulation SHO.

The SEC has also had difficulties recognizing the damage the illegal short sale can have on the investing public and public issuer.

According to records, as early as 1995 the SEC, working with the federal agencies, provided immunity to short seller Anthony Elgindy for taking bribes to manipulate securities while working for boiler room operations. Instead of prosecution Elgindy was enlisted as an informant to aid the authorities on the identification of and enforcement against pump and dump operations.

As the SEC followed Elgindy’s leads Elgindy continued to engage in illegal activities and was soon arrested by the federal authorities in May 2003 on charges of stock fraud, manipulation, and racketeering. Elgindy was using a private pay web site he set up to disseminate illegal information obtained and to enlist a group trading strategy to manipulate markets. Elgindy was later sentenced in 2006 to 9 years in a federal prison for his illegal acts.

Similarly John Fiero, with links to organized crime, money laundering, and short sale fraud was also an informant of securities regulators after being found guilty of fraud and manipulation.

In 1995 John Fiero colluded to drive down the price of 10 Nasdaq securities underwritten by now-defunct Hanover Sterling & Co. through illegal short selling of those securities. In 1998 the NASD brought Fiero up on enforcement charges and in January 2001 barred Fiero, fined him $1 Million, and expelled his firm Fiero Brothers (FSCO) from the industry.

But on October 1, 2001 Elgindy posted on his private web site, where Fiero was a paying member that “the NASD which barred and banned FSCO and fined him 1,000,000 bucks, gave him machines and room to trade from at their offices.”

So Elgindy takes bribes to manipulate markets and is given immunity to become an informant and John Fiero illegally shorts stocks, puts a brokerage house Hanover Sterling out of business along with the clearing firm Adler Coleman and the NASD is setting him up an office in their facility.

Who were Fiero’s working associates, beyond Elgindy that is?

In September 2000 Richard H. Walker SEC’s Director, Division of Enforcement testified before a House subcommittee about the involvement of Organized Crime on Wall Street. Walked specifically addressed Hanover Sterling stating “In May 1997, a FBI sting operation led to charges by the U.S. Attorney for the Eastern District of New York against Louis Malpeso, Jr., a reported Colombo crime family associate, for conspiring to commit securities fraud. The indictment alleged that Malpeso conspired with stock broker Joseph DiBella and Robert Cattogio, one of the heads of the Hanover Sterling brokerage firm, to inflate the price of a penny stock.”

Hanover Sterling was a mobbed up brokerage and the firm Fiero executed his illegal trades through.

Could it be any clearer why the SEC couldn’t get this issue straight in 2000 when the NASD first presented it and in 2008 as reforms continue to lack teeth?

Will the SEC learn from their mistakes and draft rule making that is less ambiguous and more straightforward? Not likely.

Present reforms to the latest short sale loophole, the Options Market Making exemption, has been out for public comment for near 18 months now covering two separate comment sessions. The SEC’s offerings, beside the straightforward elimination, would require extensive tracking and complicated auditing to identify areas of abuse. The result will be more confusion, reason to claim ignorance when violations are identified, and compliance violation levels of enforcement instead of the premeditated fraud actions.

And this is exactly how the SEC likes it.

In October 2007, during a Q&A at the PIPES conference held in New York City by DealFlow Media, David Markowitz SEC’s New York Bureau Asst. Director of Enforcement informed the audience of PIPE players that there were no strict guidelines on when a trade was legal or illegal relative to a PIPE contract. Markowitz claiming, each case needed to be looked at as a case-by-case basis relative to the circumstances surrounding the trading.

It was clear in an interview I had with Markowitz afterwards that the attorney was out of touch with the audience reactions to his case-by-case, attorney-by-attorney responses. Markowitz fully believed that the audience was in full understanding of the laws and the consistent application of the laws.

Since that speech two separate SEC cases for illegal PIPE trading practices have been tanked by two separate US Federal Judges who believe the SEC interpretations of the law do not comply with the interpretations as understood by the plaintiff nor the judge.

I suggest the SEC print up more get out of jail free cards to the crooks and criminals. The agency should stick to the small compliance violations that yield little resistance. Anything bigger than that and the SEC attorney’s are outclassed and out lawyered by people who take this game much more seriously. Should they take me up on my suggestion there will be no need to worry, the collateral damage that will ensue are generally the ones that don’t carry a voice in the markets anyway, they being be the silent retail investors and small business issuers.

For more on this issue please visit the Host site at www.investigatethesec.com

http://www.investigatethesec.com/drupal-5.5/node/9

***

Monday, November 12, 2007

Basel II Brings New Securitization Framework

As financial institutions move towards an originate and distribute model of securitizing loans into asset-backed securities, the Basel II Accord just adopted by the Federal Reserve Board provides a new securitization framework with concomitant disclosure mandates. A central principle of Basel II is that external ratings for securitization exposures retained by an originating bank, which typically are not traded, are subject to less market discipline than rating for exposures sold to third parties,. In the Fed’s view, this disparity in market discipline warrants more stringent conditions. Thus, Basel II requires that two external ratings be obtained

Basel II also requires that banks disclose the amount of credit risk transferred and retained by the organization through securitization transactions and the types of products securitized. These disclosures are designed to provide users a better understanding of how securitization transactions impact the credit risk of the bank.

Generally, the Fed believes that banks will be able to fulfill some of their disclosure requirements by relying on disclosures made in accordance with accounting standards, SEC mandates, or regulatory reports. In these situations, banks must explain any material differences between the accounting or other disclosure and the disclosures required under Basel II.

As recently noted by Jean-Pierre Landau, Deputy Governor of the Bank of France, the current model of securitization has two distinctive features. One is the increasing complexity of customized derivatives, which has made valuation and risk assessment more difficult. The second is the fragility of off-balance sheet structures and vehicles which underpin securitization. Structured investment vehicles are not built to absorb shocks.

Their relationships with sponsor banks are sometimes very ambiguous, he noted, and there may be a gap between the legal commitments taken by the banks through liquidity support and credit enhancements and the true level of responsibility they felt obliged to take to protect their reputation. But the central banker predicted that the implementation of Basel II will bring significant improvements in risk management of securitization exposures. Had it been in place some years ago, he speculated, current problems may have been avoided.

Echoing these remarks, Fed Governor Randall Kroszner said that the enhanced public disclosures under Basel II should allow market participants to better understand a bank’s risk profile, adding that recent market events have underscored the importance of such transparency.

In his view, Basel II requires banks to assess the creditworthiness of borrowers and individual loans and investments, such as highly structured asset-backed securities, and to hold capital commensurate with that risk. This enhanced risk-sensitivity requires banks to hold a larger capital cushion for higher-risk exposures and thereby creates positive incentives for banks to lend to more creditworthy counterparties.

posted by James Hamilton @ 11/12/2007 09:11:00 PM

http://jimhamiltonblog.blogspot.com/2007/11/basel-ii-brings-new-securitization.html

***

http://www.ncjrs.gov/

NCJ Number: 78845
Title: Securities Fraud and RICO (Racketeer Influenced and Corrupt Organizations) (From Techniques in the Investigation and Prosecution of Organized Crime – Materials on RICO, P 154-210, 1980, G. Robert Blakey, ed. See NCJ-78839)
Author(s): N Flaherty
Format: document
Publication Date: 1980
Pages: 57
Type: Studies/research reports
Origin: United States
Language: English
Notes: Available in microfiche from NCJRS as NCJ-78839.
Annotation: The application of the Racketeer Influenced and Corrupt Organizations Act (RICO) to securities fraud is discussed.
Abstract: In securities fraud cases, the RICO law provides greater penalties for the perpetrator and greater monetary recovery for the victim than do the securities laws. Under RICO, defendants face a maximum criminal penalty of 20 years in prison, a fine of $25,000, or both. Offenders would also forfeit any interest obtained through securities fraud (the profits) or any interest or security in a business operated or controlled by securities fraud. RICO mandates that successful civil plaintiffs shall recover a monetary amount that triples their actual losses. Recovery of attorney fees is mandated rather than subject to a judge’s discretion. A civil court could also order the defendants to divest themselves of their interests in the defendant corporation, dissolve the corporation, or obey restrictions on future securities‘ activities. Recovery of triple damages under RICO requires proof of two instances of securities fraud. Such fraud occurs when a purposeful, knowing, or reckless misrepresentation or omission of a material fact is made in connection with an actual sale or purchase of securities. After securities fraud is established, the plaintiff must also satisfy the RICO law’s requirements. The acts of fraud must emanate from an enterprise that affects interstate commerce, be connected by a common scheme, and fall within the time limits of law. The case of King v. United States (10th Cir. 1976) is presented to illustrate the application of RICO to securities fraud. A total of 215 footnotes are listed. (Author summary modified)
Index Term(s): Federal law violations ; Case studies ; Securities fraud ; Racketeer Influencd n Corrpt Org Act
To cite this abstract, use the following link:
http://www.ncjrs.gov/App/Publications/abstract.aspx?ID=78845

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Global and United States Economic Crisis – not a crisis of confidence – A CRISIS OF FACTS and credit propped up by HOT AIR and POLITICS

23 Thursday Oct 2008

Posted by CricketDiane in Uncategorized

≈ 2 Comments

Tags

bailouts, capital, capitalization, commercial paper, credit default swaps, credit derivatives, Cricket Diane C Sparky Phillips, cricketdiane, currency values, Economics, Economy, financial derivatives, global economic crisis, International Concerns, Macro-economic analysis 2008, macro-economic future forecasting, Money, Principles of Economics, US dollar, US economic crisis, US government policy

For More Information

The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre12.shtm

***

Predatory Lending Practice

Do you feel that you have been taken advantage of by a mortgage lender involved in a predatory lending practice? Have you been pressured into accepting mortgage terms, or for that matter, have you been cornered into applying for a mortgage against your best interest or wishes? If you answered yes to any of the above questions then you are a victim of predatory lending.

Immediately contact a Real Estate Lawyer if you suspect being a victim of any predatory lending practice. Predatory lending practice is illegal, contact a Real Estate Lawyer now, to find out what your rights are.

A Predatory Lending Practice is any unfair and abusive practice whereby a mortgage broker or a mortgage lender uses any type of information about the borrower, to the borrower’s disadvantage, and then proceeds to convince the borrower to accept loan programs and or loan terms that were not in the best interest of the borrower. This practice also includes imposing higher interest rates, cost and fees, along with pre-payment penalties when more favorable terms could have been offered.

In response to the escalating trend in foreclosures Shelia Blair, Chairman of the Federal Deposit Insurance Corporation, recently expressed to the House of Representatives, “The time has come for national anti-predatory lending standards applicable to all mortgage lenders”. Furthermore, Blair indicated that regulations be imposed upon lenders to determine a borrower’s ability to repay a loan at its true cost, rather than on artificially low rates offered through aggressive advertising campaigns. Other areas needing immediate improvement include, Loan Flipping, Pre-Payment Penalties, Escrow of Taxes, and Fiduciary Obligations of Mortgage Originators.

Common Predatory Lending Practice Violations:

  • Foreclosure: Homeowners should not be misled about their rights and remedies when facing foreclosure.
  • Loan Flipping: Mortgage companies should not be engaged in the practice of persuading homeowners to refinancing their homes with little or no apparent significant improvement of the homeowner’s situation.
  • Red Lining: This would involve imposing higher interest rates and or steeper prepayment penalties in areas of a city considered to be less desirable.
  • Adjustable Rate Mortgages: Some lenders have steered homeowners into adjustable rate mortgages with low teaser rates without considering the borrowers capacity to reasonably meet future increases in the monthly payments.
  • Failure to Disclose: Each and every lender has the legal responsibility to fully disclose and completely explain each and every aspect of the mortgage for which you are applying.
  • Housing Discrimination: If you feel that your race, creed, religion, national origin, marital status, health status, sex or sexual orientation may have impacted your mortgage terms, your rights may have been violated.

The House of Representatives Financial Services Committee is facing estimates that 2.2 million homeowners are currently at risk of losing their homes. The subcommittee reviewed “predatory lenders” that gave loans to people who were either unaware or unable to repay the loans. The common concern is that this may be the most devastating real estate disaster since the Great Depression. Lenders are not allowed to take advantage of a homeowner’s circumstances to make excessive profits on a loan application. The law also precludes lenders from exploiting to their own advantage, the consumer’s lack of knowledge on various mortgage programs, offerings and qualifying guidelines. You do not have to settle for less than what you are entitled to. Do not allow any lender to take advantage of you or your situation.

See Also:

  • RESPA
  • Adjustable Rate Mortgage Index
  • Mortgage Fraud
  • Closing Cost

Immediately contact a Real Estate Lawyer if you suspect being a victim of any predatory lending practice. Predatory lending practice is illegal, contact a Real Estate Lawyer now, to find out what your rights are.

Content Related to Topic


  • Bush Administration Announces 44 Million in Housing Counseling Grants to Nearly 400 Agencies
    National and regional agencies distribute much of HUD’s housing counseling grant funding to community-based grassroots organizations.
  • HUD Sues Property ID Corp & 4 Real Estate Brokerages in Kickback Scheme
    Federal lawsuit seeks permanent injunction and return of illegitimate profits.

http://www.realestatelawyers.com/Predatory-Lending-Practice.cfm

***

Ex-Citigroup worker alleges illegal lending norms
15 June 2001
Reuters
By F. Brinley Bruton

A Citigroup Inc. unit deliberately targeted low-income, uneducated borrowers for loans and insurance they did not need or understand, a former employee alleged in a government lawsuit. The financial services giant has consistently denied such practices.

The charges, filed in an affidavit by part-time branch assistant manager Gail Kubiniec of Citigroup unit CitiFinancial, are part of the lawsuit filed by the Federal Trade Commission (FTC) against Associates First Capital Corp., a consumer lending unit that is part of CitiFinancial. The suit alleges predatory lending and deceptive marketing.

“I and other employees would often determine how much insurance could be sold to a borrower based on the borrower’s occupation, race, age, and education level,” Kubiniec said in the affidavit, a copy of which was provided to Reuters by a New York-based consumer advocacy group.

“If someone appeared uneducated, inarticulate, was a minority, or was particularity young or old, I would try to include all the coverages CitiFinancial offered,” she said in reference to insurance and other products often tied to real estate or personal loans.

Citigroup has not admitted to predatory lending, but said in March it had dealt with the FTC’s concerns by putting into place a program that addresses lending practices at Associates First, which Citigroup bought last year.

CITIGROUP DENIES ALLEGED ABUSES

Citigroup on Thursday denied alleged abuses at CitiFinancial, a longtime Travelers Group unit known as Commercial Credit until 1999. The unit changed its name shortly after financial services group Travelers merged with global bank Citicorp to form Citigroup.

The company said the allegations are against Citigroup policy.

“Ms. Kubiniec’s allegations are an affront to the tens of thousands of CitiFinancial employees who strive every day to act in their customers’ best interest,” Citigroup spokeswoman Leah Johnson said. “If true, the unethical sales tactics she describes would constitute serious violations of the company’s policies and standards.”

Kubiniec’s affidavit was filed on May 16 in a case brought by the FTC against Associates First in federal court in Atlanta. The FTC has charged Associates First with systematic and widespread abusive loan practices, often described as predatory lending. They include deceptive marketing to induce consumers to refinance existing debts into home loans with high interest rates, costs and fees.

The suit, which also names Citigroup and CitiFinancial as successors to Associates First, seeks redress for all borrowers who were harmed as a result of the alleged practices.

Federal Trade Commission officials could not immediately be reached.

Citigroup merged Associates First into CitiFinancial in March, but Kubiniec’s affidavit covers practices at CitiFinancial before the two units were combined.

“As soon as we learned of her allegations, we commenced a thorough review that has reassured us that these alleged practices are in no way characteristic of how CitiFinancial employees treat their customers and sell products,” Citigroup’s Johnson said.

Last year, Citigroup said it would take steps to improve the consumer lending practices at Associates First.

HARASSMENT ALLEGED

The affidavit was provided to Reuters by Inner City Press/Community on the Move and Inner City Public Interest Law Center, which is campaigning against Citigroup over its takeover plans and lending practices.

Kubiniec, who could not be reached for comment on the affidavit, alleges that she saw CitiFinancial employees “harass and intimidate borrowers” who were behind with payments. “Managers condoned whatever tactics an employee used, as long as he obtained payment,” she said.

“Typically, employees would only state the total monthly payment amount in selling a proposed loan. Additional information, such as the interest rate, and the financed points and fees, closing costs, and ‘add-ons’ like credit insurance, were only disclosed when demanded by the borrower,” she said. “It was also common practice to try to sell borrowers the largest possible loan.”

Kubiniec worked for CitiFinancial and its predecessor from 1995 until February in Lansing, Michigan and the New York towns of Tonawanda and Depew.

http://www.fbrinleybruton.com/story9.html

***

The phrase “loan shark” came into usage in the United States late in the nineteenth century to describe a certain type of predatory lender. Earlier variations of this vernacularism include “land shark” and “money shark.” The lenders to whom these epithets were applied charged high rates of interest and designed their credit products in such a way as to make orderly retirement of the debt difficult. Borrowers became trapped by their loans and were unable to pay off the principal. The interest payments dragged on and many borrowers became virtual debt peons. As Cobleigh explains, “The real aim of loan sharks is to keep their customers eternally in debt so that interest (for the sharks) becomes almost an annuity.”[1]

http://en.wikipedia.org/wiki/Loan_shark

There are many registered and legal lenders that lend to people who cannot get loans from the most mainstream lenders such as large banks. They often operate in cash, whereas mainstream lenders increasingly operate only electronically, which means that they will not deal with people who do not have a bank account. Terms such as subprime lending and “non-standard consumer credit” are used for this type of lender. Payday loans are one example of this type of consumer finance. The availability of these products has made true loan sharks rarer, though some legal lenders have been accused of behaving in an exploitative manner.

Payday loan operations have also come under fire for charging inflated “service charges” for the service of cashing a “payday advance” — effectively a short-term (no more than one or two weeks) loan for which charges may run 3-5% of the principal amount. By claiming to be charging for the ‘service’ of cashing a paycheck, instead of merely charging interest for a short-term loan, laws which strictly regulate moneylending costs can be effectively bypassed.

A loan shark is a person or body that offers illegal unsecured loans at high interest rates to individuals, often backed by blackmail or threats of violence. They provide credit to those who are unwilling or unable to obtain it from more respectable sources, usually because interest rates commensurate with the perceived risk are illegal.

Today loansharking tends to be associated in the popular mind with organized crime. The stereotypical loan shark is thought to be a gangster who extorts repayment of the debt with threats of physical brutality. Such loan sharks do exist, but the first loan sharks were not linked to crime families and they did not beat delinquent debtors. The phrase was originally applied to salary and chattel mortgage lenders who operated at the turn of the twentieth century. These creditors dealt in small sums (most loans were less than $100) and they charged high rates of interest (between 10% and 20% a month, and sometimes more). Many of these cash advances were interest-only and required a lump-sum payment to retire the principal. As a result, loans that were supposed to be short term often dragged on for months and years. To pay one lender the debtor often took out another loan in a process that was called “pyramiding.” The loan sharks frequently colluded in encouraging this expanding chain of debt.[2]

http://en.wikipedia.org/wiki/Loan_shark

Usury (pronounced /ˈjuːʒəri/, comes from the Medieval Latin usuria, “interest” or “excessive interest”, from the Latin usura “interest”) originally meant the charging of interest on loans. This would have included charging a fee for the use of money, such as at a bureau de change. After countries legislated to limit the rate of interest on loans, usury came to mean the interest above the lawful rate. In common usage today, the word means the charging of unreasonable or relatively high rates of interest. As such, the term is largely derived from Abrahamic religious principles and Riba is the corresponding Islamic term. The primary focus in this article is on the Christian tradition.

The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money: particularly the Act ‘In restraint of usury’ of Henry VIII in England in 1545 (see book references).

http://en.wikipedia.org/wiki/Usury

Usury and the law

“When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not.” (Blackstone’s Commentaries on the Laws of England, p. 1336).

In the United States, usury laws are state laws that specify the maximum legal interest rate at which loans can be made. Congress has opted not to regulate interest rates on purely private transactions, although it arguably has the power to do so under the interstate commerce clause of Article I of the Constitution.

Congress has opted to put a federal criminal limit on interest rates by the RICO definitions of “unlawful debt” which make it a federal felony to lend money at an interest rate more than two times the local state usury rate and then try to collect that “unlawful debt”.[17]

It is a federal offense to use violence or threats to collect usurious interest (or any other sort). Such activity is referred to as loan sharking, although that term is also applied to non-coercive usurious lending, or even to the practice of making consumer loans without a license in jurisdictions that require licenses.

Usury statutes in the United States

Each U.S. state has its own statute which dictates how much interest can be charged before it is considered usurious or unlawful.

If a lender charges above the lawful interest rate, a court will not allow the lender to sue to recover the debt because the interest rate was illegal anyway. In some states (such as New York) such loans are voided ab-initio[18]

However, there are separate rules applied to most banks. The U.S. Supreme Court held unanimously in the 1978 Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. case that the National Banking Act of 1863 allowed nationally-chartered banks to charge the legal rate of interest in their state regardless of the borrower’s state of residence.[19] In 1980, due to inflation, Congress passed the Depository Institutions Deregulation and Monetary Control Act exempting federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits . This effectively overrode all state and local usury laws.[20][21] The 1968 Truth in Lending Act does not regulate rates, except in the cases of some mortgages, but it does require uniform or standardized disclosure of costs and charges.[22]

http://en.wikipedia.org/wiki/Usury

***

Usury

Definition: Usury is defined as the act of lending money at an unreasonably high interest rate, this rate is defined at the state level. Repayment of loans at a usurious rate makes repayment excessively difficult to impossible for borrowers. This is also called “loan sharking” or “predatory lending”.

Usury has recently come back into legal conversations due to the emergence of payday loans and sub-prime lending. These types of loans are aimed at those who are at greater risk of defaulting, those with lower incomes. Payday loans are supposed to be used as short term loan to help people make it to their next paychecks by paying bills that are due before they receive it. Unfortunately these get abused and the lendees can get into further financial trouble.

Sub-prime loans, again, are for lower income individuals that are more at risk of not being able to fulfill their obligation in payments. These loans have higher rates, but obviously fall just below their state’s usury level to be legal.

Many are now asking for changes in how we define usury to eliminate these types of loans.

The usury laws, predatory lending, and loan sharking rules apply more to local banks. Since the passing of a federal law stating that the state usury laws do not apply to banks that label themselves with the words “national”, these banks have been able to offer loans above the state usury limit. These “national” banks are allowed to apply interest rates a number of points higher than the Federal Reserve Discount Rate. The Federal Reserve Discount Rate is the rate banks get when borrowing directly from the Federal Reserve Bank for short term funds.

However, at the Federal level, there is a criminal limit, as defined by Congress, for interest rates. This rate is twice the amount of the particular state’s usury limit.

here are a number of different lending tactics that are considered predatory lending. Some lenders dispute whether these are unethical, often citing that consumers have choices of who they get their loans from. Below are the most common practices labeled “predatory”.

Fees & APR. Common compaints on predatory lending involve fees incurred which are not included in the APR. Borrowers may not know they have a no-fee line of credit, or may not be able to get a no-fee line of credit. Lenders may take advantage of this by offering a reasonable interest rate, but tacking on a fee. The APR may appear attractive, but the fee is not considered in the APR, if it were the rate would appear significantly higher.

Risk-based lending. This is the practice of charging higher interest rates to the consumers who are labeled as high-risk, meaning there is a higher risk that the consumer will not be able to pay back the loan and thus default. Lenders argue they need the higher interest rates in order to offset the losses from those that default. Consumer groups, however, counter that the higher interest rates themselves make it more difficult for the individuals to pay back the loan, and the lenders are simply price-gouging.

Credit Insurance. Lenders will push single premium credit insurance stating that the insurance will pay off the loan if the homebuyer passes away. The cost of the insurance is often added to the loan, making it more appealing since it does not have to be paid in one lump sum. This makes the loan more expensive, and compounds the interest of the insurance over the life of the loan.

Interest Negotiation. Lenders often do not tell consumers that they may be able to negotiate the interest rate of the loan. By not communicating this to the consumer, the lending company increases profits.

http://www.usurylaw.com/

State Usury Laws

Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
Washington, DC
West Virginia
Wisconsin
Wyoming

http://www.usurylaw.com/

***

ORGANIZATION OF ILLEGAL MARKETS: ECONOMIC ANALYSIS

UNITED STATES. NATIONAL INSTITUTE OF JUSTICE, 1985

http://www.unicri.it/wwk/documentation/lmsdb.php?id_=10735&vw_=f

***

Competition law, known in the United States as antitrust law, has three main elements:

  • prohibiting agreements or practices that restrict free trading and competition between business entities. This includes in particular the repression of cartels.
  • banning abusive behaviour by a firm dominating a market, or anti-competitive practices that tend to lead to such a dominant position. Practices controlled in this way may include predatory pricing, tying, price gouging, refusal to deal, and many others.
  • supervising the mergers and acquisitions of large corporations, including some joint ventures. Transactions that are considered to threaten the competitive process can be prohibited altogether, or approved subject to “remedies” such as an obligation to divest part of the merged business or to offer licences or access to facilities to enable other businesses to continue competing.

The substance and produce of competition Acts vary from jurisdiction to jurisdiction. Protecting the interests of consumers (consumer welfare) and ensuring that entrepreneurs have an opportunity to compete in the market economy are often treated as important objectives. Competition law is closely connected with law on deregulation of access to markets, state aids and subsidies, the privatisation of state owned assets and the establishment of independent sector regulators. In recent decades, competition law has been viewed as a way to provide better public services.[1]

http://en.wikipedia.org/wiki/Antitrust

***

“The fact that secrets do not remain guarded
forever is the weakness of the secret society.”
-Georg Simmel, The Secret Society
“Free enterprise,” “open markets,” and
similar expressions are standard business
rhetoric, but in practice economic organizations
strive to limit, curtail, and restrict the
operation of competitive markets. Their tactics
include planning (Galbraith 1967), entry barriers
(Baker 1984; Porter 1980c), joint ventures,
mergers, director interlocks, political activity

(Pfeffer 1987; Pfeffer and Salancik 1978; Burt
1983), direct manipulation of market ties
(Baker 1990), and embeddeding business decisions
in social relationships (Granovetter
1985). These market-restricting tactics are legal,
but business organizations also indulge in
practices proscribed by law that flagrantly subvert
the market mechanism.

* Order of authorship is alphabetical to indicate
equal contributions. Direct correspondence to
Wayne E. Baker, Graduate School of Business,
University of Chicago, 1101 E. 58th Street, Chicago,
IL 60637. Funding was provided in part by
the Graduate School of Business, University of Chicago.
We benefited from the insightful and thorough
reviews provided by anonymous ASR reviewers.
We are grateful for comments received during
presentations at the 1992 annual meeting of the International
Sunbelt Social Network Conference
(San Diego, CA), the Decision Research Workshop
at the University of Chicago, and seminars at the

University of Michigan, Northwestern University,
and the Stanford Center for Organization Research.
We especially thank Elizabeth Knier, J.D., for meticulous
and diligent research assistance, and our
informants in the heavy electrical equipment industry
for sharing their insights and knowledge with
us. We thank Michele Companion and Timothy
Harrington for additional research assistance. We
appreciate the helpful comments provided by Gene
Fisher, Andy Anderson, Anthony Harris, Gerald
Platt, Doug Wholey, David Sally, and Paul Cowan.

http://www.soc.ucsb.edu/faculty/friedkin/Syllabi/Soc148/Baker%201993.pdf

WAYNEE. BAKER ROBERTR. FAULKNER
University of Chicago University of Massachusetts
We analyze the social organization of three well-known price-fixing conspiracies in the
heavy electrical equipment industry. Although aspects of collusion have been studied by
industrial organization economists and organizational criminologists, the organization
of conspiracies has remained virtually unexplored. Using archival data, we reconstruct
the actual communication networks involved in conspiracies in switchgeal; transformers,
and turbines. We find that the structure of illegal networks is driven primarily by the
need to maximize concealment, rather than the need to maximize efficiency. Howevel;
network structure is also contingent on information-processing requirements imposed by
product and market characteristics. Our i’ndividual-level model predicts verdict (guilt or
innocence), sentence, and fine as functions of personal centrality in the illegal network,
network structure, management level, and company size.

BACKGROUND
Collusive agreements in the heavy electrical
equipment industry go back to the 1880s, but
the price-fixing “schemes of the 1950s were
given special impetus when repeated episodes
of price warfare proved incompatible with top
management demands for higher profits”
(Scherer 1980, p. 170). Top executives imposed
unrealistic profit objectives in an industry
characterized by chronic overcapacity, increasing
foreign competition, and stagnating
demand (Ohio Valley 1965, p. 939). To cope,
managers decided to conspire rather than compete.
Their elaborate conspiracy involved as
many as 40 manufacturers and included more
than 20 product lines, with total annual sales
over $2 billion. The conspiracy was pervasive
and long-lasting; it became, insiders said, a
“way of life” (U.S. Senate Committee on the
Judiciary 1961, pp. 16879-84 [henceforward
Kefauver Committee]).

http://www.soc.ucsb.edu/faculty/friedkin/Syllabi/Soc148/Baker%201993.pdf

The study of the organization of conspiracy
is important for both theory and policy. We
contribute to research on organizations by
studying illegal networks involving companies
and their agents (employees). Most knowledge
about interorganizational networks is based on
studies of legal practices. Interorganizational
conspiracies, however, are a perduring feature
of capitalist societies. Our study explores the
extent to which theories based on legal networks
can be generalized to illegal networks.
Most sociological knowledge about organizational
crime is based on studies of corporate
offenders and their offenses (Shapiro 1980, p.
29). We move beyond this focus by analyzing
the organization of criminal activity, as well as
its effect on outcomes.
Studies of the social organization of conspiracy
also provide new insights relevant to
public policy, especially regarding the investigation
of antitrust violations and the enforcement
of antitrust laws. The anticompetitive activity
we study here is so common that uncovering
it is a chief purpose of major “guardians
of trust” (Shapiro 1987) like the U.S. Department
of Justice. Price-fixing and other
anticompetitive practices reduce consumer and
societal welfare (Scherer 1980). Successful
conspiracies artificially raise prices above the
competitive norm (Lean et al. 1982; Scherer

1980; Ohio Valley Electric Corp. v. General
Electric Co. and Westinghouse 1965, p. 915
[henceforward Ohio Valley 19651).

+++    ++++   +++

The Tennessee Valley Authority’s (TVA)
planning in 1958 for the Colbert Steam Plant
exposed the conspiracy. The TVA complained
about possible bid rigging to the U.S. Justice
Department because it had received identical
or nearly identical bids for electrical equipment,
ranging from $3 for insulators to
$17,402,300 for a 500,000 kilowatt steam turbine
generator (Walton and Cleveland 1964,
pp. 24-29). The Justice Department’s investigation
in 1959 revealed extensive collusion and
grand jury indictments followed in 1960.

http://www.soc.ucsb.edu/faculty/friedkin/Syllabi/Soc148/Baker%201993.pdf

***

The Sherman Act defines neither the practices that constitute restraints of trade nor monopolization. The second important antitrust statute, the Clayton Act, passed in 1914, is somewhat more specific. It outlaws, for example, certain types of price discrimination (charging different prices to different buyers), “tying” (making someone who wants to buy good A buy good B as well), and mergers—but only when the effects of these practices “may be substantially to lessen competition or to tend to create a monopoly.” The Clayton Act also authorizes private antitrust suits and triple damages, and exempts labor organizations from the antitrust laws.

http://www.econlib.org/library/Enc/Antitrust.html

Anticompetitive Practices

In referring to contracts “in restraint of trade,” or to arrangements whose effects “may be substantially to lessen competition or to tend to create a monopoly,” the principal antitrust statutes are relatively vague. There is little statutory guidance for distinguishing benign from malign practices. Thus, judges have been left to decide which practices run afoul of the antitrust laws.

An important judicial question has been whether a practice should be treated as “per se illegal” (i.e., devoid of redeeming justification, and thus automatically outlawed) or whether it should be judged by a “rule of reason” (its legality depends on how it is used and on its effects in particular situations).

To answer such questions, judges sometimes have turned to economists for guidance. In the early years of antitrust, though, economists were of little help. They had not extensively analyzed arrangements such as tying, information sharing, resale price maintenance, and other commercial practices challenged in antitrust suits. But as the cases exposed areas of economic ignorance or confusion about different commercial arrangements, economists turned to solving the various puzzles.

[ . . . ]

The recent era of antitrust reassessment has resulted in general agreement among economists that the most successful instances of cartelization and monopoly pricing have involved companies that enjoy the protection of government regulation of prices and government control of entry by new competitors. Occupational licensing and trucking regulation, for example, have allowed competitors to alter terms of competition and legally prevent entry into the market. Unfortunately, monopolies created by the federal government are almost always exempt from antitrust laws, and those created by state governments frequently are exempt as well. Municipal monopolies (e.g., taxicabs, utilities) may be subject to antitrust action but often are protected by statute.

About the Author –

Fred S. McChesney is the Class of 1967 James B. Haddad Professor of Law at Northwestern University School of Law and a professor in the Kellogg School of Management at Northwestern.

http://www.econlib.org/library/Enc/Antitrust.html

***

The basic goal of safety-and-soundness regulation is to protect “fixed-amount creditors” from losses arising from the insolvency of financial institutions owing those amounts, while ensuring stability within the financial system. Fixed-amount creditors are bank depositors, beneficiaries and claimants of insurance companies, and account holders at brokerage firms who are owed fixed amounts of money. Investors in a stock or bond mutual fund are not fixed-amount creditors because the value of their investments is determined solely by the market value of the fund’s investments. Financial institutions with fixed-amount creditors include banks, S&Ls, credit unions, insurance companies, stockbrokers, and money-market mutual funds (MMMF). Compliance regulation broadly seeks to protect individuals from “unfair” dealing by financial institutions and in the financial markets and to impede such crimes as “money laundering,” although this crime is hard to define.

http://www.econlib.org/library/Enc/FinancialRegulation.html

Financial regulation in the United States is carried out by an alphabet soup of federal and state agencies. The federal bank regulators include the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration. The Securities and Exchange Commission (SEC) regulates stockbrokers, MMMFs, stock and bond mutual funds, stock trading—including the stock exchanges—and financial disclosures by publicly traded corporations. State regulators oversee state-chartered banks, savings institutions, and credit unions as well as all insurance companies. State securities regulators are a junior partner to the SEC in that field.

Safety-and-Soundness Regulation

Safety-and-soundness, or solvency, regulation seeks to prevent financial institutions with fixed-amount creditors from becoming insolvent. Because government regulation cannot prevent all insolvencies, however, governments have created mechanisms to protect at least small fixed-amount creditors from any loss when a depository institution, insurance company, or brokerage firm has become insolvent—that is, has “failed.” These mechanisms, such as deposit insurance, insurance guaranty funds, and investor protection funds, can properly be viewed as a product warranty for solvency regulation. That is, they protect fixed-amount creditors against losses when the “product,” regulation, which is supposed to protect fixed-amount creditors, fails to prevent a financial institution’s insolvency.

For the more than three centuries that banks and insurance companies have been chartered by governments, notably with the founding of the Bank of England in 1694, governments have imposed regulations to ensure that these institutions remain both solvent (the value of their assets exceeds their liabilities) and liquid (they can meet payment requests, such as checks and insurance claims, when presented). The principal solvency regulation today centers on capital regulation; that is, the financial institution must maintain a positive capital position (its assets exceed its liabilities) equal to at least a certain portion of its assets. Other solvency regulations force asset diversity by limiting loan and investment concentrations among various classes of borrowers or the amount of credit extended to any one borrower.

[ . . . ]

Solvency regulations are enforced by examiners who assess the value of an institution’s assets and determine the scope of its liabilities, a particularly important function in property and casualty insurance companies. A financial institution can become insolvent (its liabilities exceed the value of its assets) if it suffers a large sudden loss or a sustained period of smaller losses. Likewise, a seemingly solvent bank or insurance company can turn out to be insolvent if examiners find hidden losses—assets have been overvalued or liabilities have not been recognized. Quite often, fraud is the underlying cause of those losses.

Compliance Regulation

Compliance regulation seeks to ensure “fair” and nondiscriminatory treatment for customers of financial institutions and to prevent financial institutions from being used for criminal or terrorist purposes. Compliance regulation has recently become a major responsibility for the regulators and a major cost burden for financial institutions.

Congress has enacted numerous protections for customers of federally regulated financial institutions; sometimes these protections extend to other types of financial firms, such as small-loan companies. These laws include the Truth in Lending Act, the Truth in Savings Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act, the Expedited Funds Availability Act, and various privacy protections, to name just a few. In recent decades, Congress also has enacted legislation barring discrimination in bank lending, including the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Consumer Credit Protection Act, and the Community Reinvestment Act. Each new law increases compliance costs for banks and other financial institutions.

Congress enacted the Bank Secrecy Act in 1970 not to enhance secrecy but to reduce it: the act’s intent was to prevent banks from being used as money-laundering conduits. Under this act, banks are required to submit Currency Transaction Reports to the Treasury Department for individual currency deposits and withdrawals exceeding ten thousand dollars unless the bank customer, such as a grocery store, regularly engages in large cash transactions with the bank. Banks also are required to submit Suspicious Activity Reports for any banking transaction that seems suspicious or out of the ordinary for that customer. According to Lawrence Lindsey, an economist and former governor of the Federal Reserve System, for the seventy-seven million currency-transaction reports filed between 1987 and 1995, the government was able to prosecute only three thousand money-laundering cases. The three thousand cases produced only 580 guilty verdicts. That amounts to more than 130,000 forms filed per conviction.

The USA PATRIOT Act, passed in the aftermath of the 2001 terrorist attacks, broadened the Bank Secrecy Act’s reach. Since then, the federal government has stepped up its enforcement of the Bank Secrecy Act, including the levying of multimillion-dollar fines against banks for violations. As a result, financial institutions of all types have increased their spending on compliance. Much of the cost of this spending is borne by customers of these institutions through higher fees and lower returns.

Conclusion

While financial institution regulation has changed dramatically over the centuries, its goal has not changed: to protect fixed-amount creditors against loss should their financial institution fail and to ensure timely payment of checks, insurance claims, and other obligations of these institutions as they come due. However, financial regulation has sometimes failed badly. Hence the need for a product warranty—in the form of deposit insurance, insurance guaranty funds, and the like—to protect depositors, insureds, and brokerage customers from regulatory failure.

About the Author –

Bert Ely, the principal in Ely & Company, Inc., is a financial institutions and monetary policy consultant in Alexandria, Virginia. In 1986, he was one of the first people to publicly predict the U.S. S&L crisis.

http://www.econlib.org/library/Enc/FinancialRegulation.html

***

At an SEC roundtable that looked at lessons from the credit crisis, Chairman Cox discussed the need to give investors more useful, timely, and transparent information, and the need for Congress to fill a U.S. regulatory gap and provide statutory authority for government oversight of credit default swaps.

SEC Protecting Investors, Markets During Credit Crisis

During the current turmoil in the credit markets, the SEC has worked closely with other regulators in the U.S. and around the world to protect investors and the markets.

  • SEC Actions During Credit Crisis

SEC Expands Sweeping Investigation of Market Manipulation

Work Begins on Congressionally Mandated Accounting Standards Study

http://www.sec.gov/


The SEC News Digest

The SEC News Digest provides daily information on recent Commission actions, including enforcement proceedings, rule filings, policy statements, and upcoming Commission meetings.

Current Issue

  • October 22, 2008 issue (dig102208.htm)

http://www.sec.gov/news/digest.shtml

***

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US and Global Economic Crisis – have the laws been changed such that no recourse is possible or – IS IT Still Illegal?

22 Wednesday Oct 2008

Posted by CricketDiane in Uncategorized

≈ 1 Comment

Tags

AIG, banking, bonds, Capitalism, commercial paper, commodities, consumer based economy, consumerism, counterfeit currencies, counterfeit securities, credit crisis, credit crunch crisis, credit default swaps, credit defaults, credit derivatives, credit leveraging, Cricket Diane C Sparky Phillips, cricketdiane, currencies, currency, currency values, Economics, Economy, exotic financial instruments, Federal Reserve, financial derivatives, financials, foreign investments, free market economy, global economic crisis, Global Economy, inflation, International Concerns, Inventing Solutions For America, investment banking, leverage, Macro-economic analysis 2008, macro-economic future forecasting, Principles of Economics, securities, Securities and Exchange Commission, stock market, stocks, unregulated securities, unsecured loans credit, US bailout, US bailout plan, US Congress, US dollar, US dollar value, US economic crisis, US Economy, US Government, US government bailouts, US government policy, US sold out for socialism nationalism dictatorship and, US Treasury, Wall Street

Collusion is an agreement, usually secretive, which occurs between two or more persons to deceive, mislead, or defraud others of their legal rights, or to obtain an objective forbidden by law typically involving fraud or gaining an unfair advantage. It can involve “wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties.”[1] All acts affected by collusion are considered void.[2]

http://en.wikipedia.org/wiki/Collusion

Collateralized debt obligations (CDOs) are an unregulated type of asset-backed security and structured credit product. CDOs are constructed from a portfolio of fixed-income assets. These assets are divided by the ratings firms that assess their value into different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are applied in reverse order of seniority and so junior tranches offer higher coupons (interest rates) to compensate for the added default risk. Since 1987, CDOs have become an important funding vehicle for fixed-income assets.

Some news and media commentary blame the financial woes of the 2007-2008 credit crunch on the complexity of CDO products, and the failure of risk and recovery models used by credit rating agencies to value these products. Some institutions buying CDOs lacked the competency to monitor credit performance and/or estimate expected cash flows. On the other hand, some academics maintain that because the products are not priced by an open market, the risk associated with the securities is not priced into its cost and is not indicative of the extent of the risk to potential purchasers.[1] As many CDO products are held on a mark to market basis, the paralysis in the credit markets and the collapse of liquidity in these products led to substantial write-downs in 2007. Major loss of confidence occurred in the validity of the process used by ratings agencies to assign credit ratings to CDO tranches and this loss of confidence persists into 2008.

http://en.wikipedia.org/wiki/Collateralized_debt_obligation

Market history and growth

The first CDO was issued in 1987 by bankers at now-defunct Drexel Burnham Lambert Inc. for Imperial Savings Association, a savings institution that later became insolvent and was taken over by the Resolution Trust Corporation on June 22, 1990.[2][3][4] A decade later, CDOs emerged as the fastest growing sector of the asset-backed synthetic securities market. This growth may reflect the increasing appeal of CDOs for a growing number of asset managers and investors, which now include insurance companies, mutual fund companies, unit trusts, investment trusts, commercial banks, investment banks, pension fund managers, private banking organizations, other CDOs and structured investment vehicles.

CDOs offered returns that were sometimes 2-3 percentage points higher than corporate bonds with the same credit rating.

It may also reflect the greater profit margins that CDOs provide to their manufacturers.

A major factor in the growth of CDOs was the 2001 introduction by David X. Li of Gaussian copula models, which allowed for the rapid pricing of CDOs. [5][6]

According to the Securities Industry and Financial Markets Association, aggregate global CDO issuance totaled US$ 157 billion in 2004, US$ 272 billion in 2005, US$ 552 billion in 2006 and US$ 503 billion in 2007.[7] Research firm Celent estimated the size of the CDO global market to close to $2 trillion by the end of 2006.[8]

[edit] Concept

CDOs vary in structure and underlying assets, but the basic principle is the same. Essentially a CDO is a corporate entity constructed to hold assets as collateral and to sell packages of cash flows to investors. A CDO is constructed as follows:

  • A special purpose entity (SPV) acquires a portfolio of credit. Common assets held include mortgage-backed securities, Commercial Real Estate (CRE) debt, and high-yield corporate loans.
  • The SPV issues different classes of bonds and equity and the proceeds are used to purchase the portfolio of credits. The bonds and equity are entitled to the cash flows from the portfolio of credits, in accordance with the Priority of Payments set forth in the transaction documents. The senior notes are paid from the cash flows before the junior notes and equity notes. In this way, losses are first borne by the equity notes, next by the junior notes, and finally by the senior notes. In this way, the senior notes, junior notes, and equity notes offer distinctly different combinations of risk and return, while each reference the same portfolio of debt securities.

***

Tacit collusion occurs when cartels are illegal or overt collusion is absent. Put another way, two firms agree to play a certain strategy without explicitly saying so.

http://en.wikipedia.org/wiki/Tacit_collusion

The RICO Act

On October 15, 1970, the Racketeer Influenced and Corrupt Organizations Act (18 U.S.C. §§ 1961-1968), commonly referred to as the “RICO Act”, became law. The RICO Act allowed law enforcement to charge a person or group with racketeering, defined as committing multiple violations of certain varieties within a 10 year period. The purpose of the RICO Act was stated as “the elimination of the infiltration of organized crime and racketeering into legitimate organizations operating in interstate commerce.” S.Rep. No. 617, 91st Cong., 1st Sess. 76 (1969). However, the statute is sufficiently broad to encompass illegal activities relating to any enterprise affecting interstate or foreign commerce. Section 1961(10) of Title 18 provides that the Attorney General may designate any department or agency to conduct investigations authorized by the RICO statute and such department or agency may use the investigative provisions of the statute or the investigative power of such department or agency otherwise conferred by law. Absent a specific designation by the Attorney General, jurisdiction to conduct investigations for violations of 18 U.S.C. § 1962 lies with the agency having jurisdiction over the violations constituting the pattern of racketeering activity listed in 18 U.S.C. § 1961.[2]

http://en.wikipedia.org/wiki/Racketeering

A racket is an illegal business, usually run as part of organized crime. Engaging in a racket is called racketeering.

Several forms of racket exist. The best-known is the protection racket, in which criminals demand money from businesses in exchange for the service of “protection” against crimes that the racketeers themselves instigate if unpaid. A second well known example is the numbers racket, a form of illegal lottery.

The term racket comes from the Italian word ricatto (blackmail) and is also used as a pejorative term for legitimate businesses. Typically, this usage is based on the example of the “protection racket” and indicates that the speaker believes that the business is making money by selling a solution to a problem that it created (or that it intentionally allows to continue to exist), specifically so that continuous purchases of the solution are always needed.

***

http://en.wikipedia.org/wiki/Portal:Criminal_justice

Criminal Justice Portal on wikipedia

For relevant case law, see Public order crime case law in the United States

In criminology public order crime is defined by Siegel (2004) as “…crime which involves acts that interfere with the operations of society and the ability of people to function efficiently”, i.e. it is behaviour that has been labelled criminal because it is contrary to shared norms, social values, and customs. Robertson (1989:123) maintains that a crime is nothing more than “…an act that contravenes a law.” Generally speaking, deviancy is criminalized when it is too disruptive and has proved uncontrollable through informal sanctions.

Public order crime should be distinguished from political crime. In the former, although the identity of the “victim” may be indirect and sometimes diffuse, it is cumulatively the community that suffers, whereas in a political crime, the state perceives itself to be the victim and criminalizes the behaviour it considers threatening. Thus, public order crime includes consensual crime, victimless vice, and victimless crime. It asserts the need to use the law to maintain order both in the legal and moral sense. Public order crime is now the preferred term as against the use of the word “victimless” based on the idea that there are secondary victims (family, friends, acquaintances, and society at large) that can be identified.

For example, in cases where a criminal act subverts or undermines the commercial effectiveness of normative business practices, the negative consequences extend beyond those at whom the specific immediate harm was intended. Similarly, in environmental law, there are offences that do not have a direct, immediate and tangible victim, so crimes go largely unreported and unprosecuted because of the problem of lack of victim awareness. In short, there are no clear, unequivocal definitions of ‘consensus’, ‘harm’, ‘injury’, ‘offender’, and ‘victim’. Such judgments are always informed by contestable, epistemological, moral, and political assumptions (de Haan, 1990: 154).

http://en.wikipedia.org/wiki/Public_order_crime

In criminology, corporate crime refers to crimes committed either by a corporation (i.e., a business entity having a separate legal personality from the natural persons that manage its activities), or by individuals that may be identified with a corporation or other business entity (see vicarious liability and corporate liability).

Corporate crime overlaps with:

  • white-collar crime, because the majority of individuals who may act as or represent the interests of the corporation are employees or professionals of a higher social class;
  • organized crime, because criminals can set up corporations either for the purposes of crime or as vehicles for laundering the proceeds of crime. Organized crime has become a branch of big business and is simply the illegal sector of capital. It has been estimated that, by the middle of the 1990s, the “gross criminal product” of organized crime made it the twentieth richest organization in the world — richer than 150 sovereign states (Castells 1998: 169). The world’s gross criminal product has been estimated at 20 percent of world trade. (de Brie 2000); and
  • state-corporate crime because, in many contexts, the opportunity to commit crime emerges from the relationship between the corporation and the state.

http://en.wikipedia.org/wiki/Corporate_crime

***

Securities fraud, also known as stock fraud and investment fraud, is a practice in which investors make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws.[1]

Generally speaking, securities fraud consists of deceptive practices in the stock and commodity markets, and occurs when investors are enticed to part with their money based on untrue statements.[2]

Securities fraud includes outright theft from investors and misstatements on a public company’s financial reports. The term also encompasses a wide range of other actions, including insider trading and front-running and other illegal acts on the trading floor of a stock or commodity exchange.[3][4]

According to the FBI, securities fraud includes false information on a company’s financial statement and Securities and Exchange Commission (SEC) filings; lying to corporate auditors; insider trading; stock manipulation schemes, and embezzlement by stockbrokers.[5]

http://en.wikipedia.org/wiki/Securities_fraud

Corporate fraud

Fraud by high level corporate officials became a subject of wide national attention during the early 2000s, as exemplified by corporate officer misconduct at Enron. It beame a problem of such scope that the Bush Administration announced what it described as an “aggressive agenda” against corporate fraud.[6] Less widely publicized manifestations continue, such as the securities fraud conviction of Charles E. Johnson Jr., founder of PurchasePro in May of 2008.[7] FBI director Robert Muller predicted in April of 2008 that corporate fraud cases will increase because of the subprime mortgage crisis.[8]

***

Accountant fraud

Further information: Accounting scandals

In 2002, a wave of separate but often related accounting scandals became known to the public in the U.S. All of the leading public accounting firms—Arthur Andersen, Deloitte & Touche, Ernst & Young, KPMG, PricewaterhouseCoopers— and others have admitted to or have been charged with negligence to identify and prevent the publication of falsified financial reports by their corporate clients which had the effect of giving a misleading impression of their client companies’ financial status. In several cases, the monetary amounts of the fraud involved are in the billions of USD.

http://en.wikipedia.org/wiki/Securities_fraud

utual Fund fraud

Main article: 2003 Mutual-fund scandal

A number of major brokerages and mutual fund firms were accused of various deceptive acts that disadvantaged customers. Among them were late trading and market timing. Various SEC rules were enacted to curtail this practice.[16] Bank of America Capital Management was accused by the SEC of having undisclosed arrangements with customers to allow short term trading.[17]

[edit] Short Selling Abuses

Abusive short selling, including certain types of naked short selling, are also considered securities fraud because they can drive down stock prices. In abusive naked short selling, stock is sold without being borrowed and without any intent to borrow.[18] The practice of spreading false information about stocks, to drive down their prices, is called “short and distort.” During the takeover of The Bear Stearns Companies by J.P. Morgan Chase in March of 2008, reports swirled that shorts were spreading rumors to drive down Bear Stearns’ share price. Sen. Christopher Dodd, D-Conn., said this was more than rumors and said, “This is about collusion.”[19]

Ponzi schemes

Main article: Ponzi scheme

A Ponzi scheme is a fraudulent investment operation that involves promising or paying abnormally high returns (“profits“) to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. It is named after Charles Ponzi.[1] A Ponzi scheme has similarities with a pyramid scheme though the two types of fraud are different.

http://en.wikipedia.org/wiki/Ponzi_scheme

A Ponzi scheme usually offers abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and pays) require an ever-increasing flow of money from investors in order to keep the scheme going.

The system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter. However, the scheme is often interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.

Hypothetical example

1920 police mugshot of Charles Ponzi

1920 police mugshot of Charles Ponzi

An advertisement is placed promising extraordinary returns on an investment – for example 20% for a 30 day contract. The precise mechanism for this incredible return can be attributed to anything that sounds good but is not specific: “global currency arbitrage“, “hedge futures trading“, “high-yield investment programs“, “Offshore investment“, or something similar.

With no proven track record for the investors, only a few investors are tempted, usually for smaller sums. Sure enough, 30 days later the investor receives the original capital plus the 20% return. At this point, the investor will have more incentive to put in additional money and, as word begins to spread, other investors grab the “opportunity” to participate. More and more people invest, and see their investments return the promised large returns.

The reality of the scheme is that the “return” to the initial investors is being paid out of the new, incoming investment money, not out of profits. No “global currency arbitrage”, “hedge futures trading” or “high yield investment program” is actually taking place. Instead, when investor D puts in money, that money becomes available to pay out “profits” to investors A, B, and C. When investors X, Y, and Z put in money, that money is available to pay “profits” to investors A through W.

One reason that the scheme initially works so well is that early investors – those who actually got paid the large returns – quite commonly reinvest (keep) their money in the scheme (it does, after all, pay out much better than any alternative investment). Thus those running the scheme do not actually have to pay out very much (net) – they simply have to send statements to investors that show how much the investors have earned by keeping the money in what looks like a great place to get a high return. They also try to minimize withdrawals by offering new plans to investors, often where money is frozen for a longer period of time, for example 50% return per month for one year. They then get new cash flows as investors are told they could not transfer money from the first plan to the second.

The catch is that at some point one of three things will happen:

  1. the promoters will vanish, taking all the investment money (less payouts) with them;
  2. the scheme will collapse of its own weight, as investment slows and the promoters start having problems paying out the promised returns (and when they start having problems, the word spreads and more people start asking for their money, similar to a bank run);
  3. the scheme is exposed, because when legal authorities begin examining accounting records of the so-called enterprise they find that many of the “assets” that should exist do not.

http://en.wikipedia.org/wiki/Ponzi_scheme

A bubble. A bubble relies on suspension of belief and an expectation of large profits, but it is not the same as a Ponzi scheme. A bubble involves ever-rising (and unsustainable) prices in an open market (be that shares of a stock, housing prices, the price of tulip bulbs, or anything else). As long as buyers are willing to pay ever-increasing prices, sellers can get out with a profit. And there doesn’t need to be a schemer behind a bubble. (In fact, a bubble can arise without any fraud at all – for example, housing prices in a local market that rise sharply but eventually drop sharply because of overbuilding.) Bubbles are often said to be based on “greater fool” theory. Although, according to the Austrian Business Cycle Theory, bubbles are caused by expanding the money supply beyond what genuine capital investment supports, and in this case would qualify as a Ponzi scheme, with expanded credit taking the place of an expanded pool of investors.

Some examples –

In June 2005, in Los Angeles, California, John C. Jeffers was sentenced to 168 months (14 years) in federal prison and ordered to pay $26 million in restitution to more than 80 victims. Jeffers and his confederate John Minderhout ran what they said was a high-yield investment program they called the “Short Term Financing Transaction.” The funds were collected from investors around the world from 1996 through 2000. Some investors were told that proceeds would be used to finance humanitarian projects around the globe, such as low-cost housing for the poor in developing nations. Jeffers sent letters to some victims that falsely claimed the program had been licensed by the Federal Reserve and the program had a relationship with the International Monetary Fund and the United States Treasury. Jeffers and Minderhout promised investors profits of up to 4,000 percent. Most of the money collected in the scheme went to Jeffers to pay commissions to salespeople, to make payments to investors to keep the scheme going, and to pay his own personal expenses.[29]

In February 2006, Edmundo Rubi pleaded guilty to bilking hundreds of middle and low-income investors out of more than $24 million between 1999 and 2001, when he fled the U.S. after becoming aware that he was under suspicion. The investors in the scheme, called “Knight Express”, were told that their funds would be used to purchase and resell Federal Reserve notes, and were promised a six percent monthly return. Most of those bilked were part of the Filipino community in San Diego.[30]

12DailyPro was a version of what is commonly known as a “paid autosurf” program where “investors” deposited money and received an extremely high profit (44%) within a short period (12 days). Charis Johnson created what authorities considered one of the largest modern day versions of the Ponzi scheme. She accumulated a total of over US$1.9 million from the program. More than 300,000 people joined over the course of 8 months, spending over $500 million.[32] When a federal investigation of 12DailyPro took place, its main payment processor, Stormpay, froze all funds related to it. Stormpay has since refused to return any of these funds. On February 24, 2006, the United States Securities and Exchange Commission (SEC) ordered 12DailyPro and its parent company to cease and desist all operations. On February 28, a Los Angeles judge ordered all company assets and records to be turned over to an appointed receiver for investigation. Charis F. Johnson now faces criminal and civil suits from both local and federal agencies.

  • In May 2007, the Florida Office of Financial Regulation and the Florida Department of Law Enforcement announced they were investigating local Bradenton investment broker Michael O. Traynor, 56, and his son, Matthew O. Traynor, 28, on complaints from at least a dozen residents in Sarasota and Manatee counties alleging that the Traynors defrauded clients out of approximately $8 million in investor funds. On November 16, 2007, Michael Traynor, who had found many of his clients though his church social circles, was arrested on a first degree felony grand theft charge that he had stolen $6.5 million from his investors. It is believed Traynor stole funds from at least 34 clients in Sarasota, Manatee and Hillsborough counties between 2001 and February 2007. At least 10 investors filed complaints with state regulators, and many had unfruitful meetings with Traynor to have money returned, including those who met him through Bradenton Christian Reformed Church and Bradenton Christian School.

Representatives of the Florida Department of Law Enforcement called Traynor’s scam a “classic Ponzi-scheme”. Traynor had sold investments in Manatee County for InterSecurities Inc., also known as ISI, since 1997, and was the company’s Bradenton branch manager before he was fired in February 2007.

Currently (May 2008) the Finnish National Bureau of Investigation is investigating a long running scheme where possibly over 10,000 people could have lost up to €100 million investing in WinCapita‘s WinClub “investment club”, supposedly a currency trading scheme. Investigators now say they have found no evidence that WinCapita ever engaged in any legitimate currency trading at all.[37]

http://en.wikipedia.org/wiki/Ponzi_scheme

***

Some manifestations of this white collar crime have become more frequent as the Internet gives criminals greater access to prey. The trading volume in the United States securities and commodities markets, having grown dramatically in the 1990s, has led to an increase in fraud and misconduct by investors, executives, shareholders, and other market participants.

Securities fraud is becoming more complex as the industry develops more complicated investment vehicles. In addition, white collar criminals are expanding the scope of their fraud and are looking outside the United States for new markets, new investors, and banking secrecy havens to hide unjust enrichment.

A study conducted by the New York Stock Exchange in the mid-1990s reveals approximately 51.4 million individuals owned some type of traded stock, while 200 million individuals owned securities indirectly. These same financial markets provide the opportunity for wealth to be obtained and the opportunity for white collar criminals to take advantage of unwary investors.[citation needed]

Recovery of assets from the proceeds of securities fraud is a resource intensive and expensive undertaking because of the cleverness of fraudsters in concealment of assets and money laundering, as well as the tendency of many criminals to be profligate spenders. A victim of securities fraud is usually fortunate to recover any money from the defrauder.

Sometimes the losses caused by securities fraud are difficult to quantify. For example, insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.[22]

http://en.wikipedia.org/wiki/Securities_fraud

Potential perpetrators of securities fraud within a publicly-traded firm include any dishonest official within the company who has access to the payroll or financial reports that can be manipulated to:

  1. overstate assets
  2. overstate revenues
  3. understate costs
  4. understate liabilities

***

The United States Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation, and awards fees and expenses.

The PSLRA imposes new rules on securities class action lawsuits. It allows judges to decide the most adequate plaintiff in class actions. It mandates full disclosure to investors of proposed settlements, including the amount of attorneys’ fees. It bars bonus payments to favored plaintiffs, and permits judges to scrutinize lawyer conflicts of interest.

Background: Overview of Securities Fraud Actions Under Section 10(b) and Rule 10b-5

The Securities Exchange Act of 1934 (commonly known as the “Exchange Act” or the “1934 Act”) gives shareholders the right to bring a private action in federal court to recover damages the shareholder sustained as a result of securities fraud. The majority of securities fraud claims are brought pursuant to Section 10(b) of the Exchange Act (codified at 15 U.S.C. § 78j), as well as SEC Rule 10b-5, which the SEC promulgated under the authority granted to it by Congress under the Exchange Act. (This article refers to federal securities fraud actions as “Rule 10b-5 actions” or “Rule 10b-5 cases” as convenient shorthand.)

The Supreme Court has held that there are six elements that a plaintiff must allege and prove in order to prevail in a Rule 10b-5 action:

1. The defendant made a “material misrepresentation or omission”;

2. the defendant acted with “scienter”, or a “wrongful state of mind” (typically understood to mean that the defendant intended to make the material misrepresentation or omission, or acted with recklessness in making the misrepresentation or omission);

3. the material misrepresentation or omission was made “in connection with the purchase or sale of a security”;

4. the plaintiff who was allegedly victimized by the fraud relied upon the material misrepresentation or omission (if the security is traded on a public stock exchange, such as the New York Stock Exchange or NASDAQ, the law will typically presume that shareholders rely on the integrity of the market, and therefore that the price of the stock reflected material misrepresentation and that shareholders relied upon the integrity of the market);

5. the plaintiff suffered an economic loss as a result of the alleged fraud; and

6. the plaintiff can allege and prove “loss causation”, which means that the allegedly fraudulent misrepresentation or omission caused the plaintiff’s economic loss. See Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005).

Each of these elements has been heavily litigated in thousands of cases over the past 70 years, and the courts have applied these six elements in a multitude of different factual situations.

http://en.wikipedia.org/wiki/Private_Securities_Litigation_Reform_Act

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FindLaw > Library

The Private Securities Litigation Reform Act of 1995


By Pillsbury Winthrop Shaw Pittman LLP

On December 22, 1995, the U.S. Senate voted to override President Clinton’s December 19, 1995 veto of the Private Securities Litigation Reform Act of 1995 (the “bill” or the “Reform Act”). With the House of Representatives having similarly voted on December 20, 1995 to override the veto, the Reform Act, which affects dramatically the ability of companies to defend themselves against class actions brought under the Federal securities laws, became law on December 22, 1995; its provisions do not apply, however, to any private action commenced before that date.

The bill is a complex piece of legislation. This bulletin is intended to outline only some of the most important provisions of the bill and their effect on corporate disclosure issues. All companies should immediately review their practices to take advantage of the new provisions. We can provide further analysis to anyone who is interested.

The following are the main provisions in the Reform Act, which are discussed in more detail below:

  • Safe Harbor for Forward-Looking Information
  • Limitations on Joint and Several Liability
  • Increased Pleading and Proof Requirements
  • Limitation on Damages
  • Class Action Procedural Reforms
  • Enhanced Attorney Sanction Provisions
  • RICO Amendment Eliminating Sanctions Claims
  • Auditor Duty Regarding Financial Fraud
  • Additional SEC Rulemaking Authority

Safe Harbor for Forward-Looking Information

For most companies, the most important provision of the Reform Act is the “safe harbor” for forward-looking statements or projections. As finally crafted, this provision will greatly increase protection for such statements and also will provide a mechanism for getting lawsuits dismissed at a very early stage in a proceeding, before legal costs mount and executive time is squandered in depositions and other discovery. The safe harbor applies to actions brought under both the Securities Exchange Act of 1934 (the “Exchange Act”) and the Securities Act of 1933 (the “Securities Act”), although its scope as to types of forward-looking statements covered is limited. For example, forward-looking information contained in GAAP financial statements is not protected by the safe harbor (see below). Nor does the provision apply to any initial public offering

Under the bill, a written or oral statement that predicts the future prospects of a company is immune from civil liability (although not from actions brought by the SEC) if either (1) the statement is identified as a forward-looking statement and also identifies “important” factors that may cause actual results to differ materially from those predicted or (2) the statement was not made with actual knowledge of its falsity.

“Bespeaks Caution” Doctrine

Reflecting Congressional supporters’ belief that the U.S. capital markets will benefit from an increased flow of forward-looking information, the Reform Act adopts a strong form of the case law that has become known as the “bespeaks caution” doctrine. Under the formulation in the Reform Act, an issuer (and others covered by the safe harbor) will be immune from civil liability if the forward-looking statement is identified as a forward-looking statement. The legislative history accompanying the bill makes clear that it is unnecessary to state explicitly that “This is a forward-looking statement.” Instead, cautionary words such as “we estimate” or “we project” likely will be sufficient.

In order for a company to benefit from the protections offered by the “bespeaks caution” prong of the safe harbor, a forward-looking statement must also be accompanied by one or more qualifiers stating “important factors” why the results predicted in the forward-looking statement may not come true. It will not be necessary to identify all the factors that might cause the statement not to “pan out” or even to identify the factor that causes the final result to differ from the prediction. The point is to identify enough factors so that an investor should realize the risks involved in relying on the forward-looking statement.

What is a Forward-Looking Statement?

The Reform Act contains a thorough definition of “forward-looking statement,” including those items that one might expect, i.e., projections of revenue or losses, plans and objectives for future operations, products or services and statements relating to future economic performance that would normally be included in a “Management Discussion & Analysis” section. It also includes any underlying or related assumptions that are stated.

Financial Statements Exclusion

Projections and other forward-looking statements contained in GAAP financial statements are not protected by any provision of the safe harbor. Thus, contingent liability disclosure that is protected by the provisions of the safe harbor when contained in the body of a document (such as a Form 10-K) may not be protected by the safe harbor to the extent that it is also contained in the financial statement footnotes. Existing SEC Rule 175, which is promulgated under the Securities Act, provides a much narrower regulatory safe harbor for certain forward-looking information, including, according to some judicial interpretations, information contained in financial statements. Rule 175 is not affected by the Reform Act.

Additional Exclusions

The safe harbor does not apply to statements made in connection with initial public offerings, rollup transactions, tender offers or partnership or limited liability company offerings, among other things. Issuers who are subject to judicial or administrative decrees or orders or who have been convicted of crimes relating to violations of the securities laws are prohibited from relying on the safe harbor for three years after the date of such conviction or the entry of such decree or order.

Oral Statements

In addition to the general safe harbor coverage for both written and oral statements, the bill affords special “bespeaks caution” treatment for oral forward-looking statements made by issuers and their officers, directors and employees. As to such statements, the general requirement that a forward-looking statement be accompanied by a listing of “important factors” can be met by a statement identifying the information as forward-looking along with a further statement clearly conveying the message that actual results may differ materially from the results predicted in the forward-looking statement and referencing a “readily available written document” that contains cautionary language meeting the standard discussed above. The document reference may be to an SEC filing or to any publicly disseminated document, including those posted by an issuer on-line, as, for example, an earlier press release. Thus, in an oral presentation to analysts or any other group, a company spokesman should refer to the fact that the presentation contains predictions, should identify those by reference to “estimates” or “projections” or similar terms and should refer to written information that is available to the listeners that contains meaningful cautionary language or identifies important factors that could cause actual results to differ from the oral projections.

Requirement to Show Knowledge of Falsity

Persons covered by the safe harbor are not limited to reliance on the “bespeaks caution” prong; in fact, the bill provides that unless a plaintiff proves that a forward-looking statement was made with actual knowledge of its falsity, then the maker of the statement will be immune from liability based on the statement, even where the maker of the statement has not met the “bespeaks caution” requirements. In a colloquy on the Senate floor, the bill’s proponents made it clear that recklessness does not suffice for a finding of actual knowledge under this provision.

[ Etc.]

http://library.findlaw.com/1999/Sep/1/129878.html

***

Ten Things We Know and Ten Things We Don’t Know
About the Private Securities Litigation
Reform Act of 1995

JOINT WRITTEN TESTIMONY OF
JOSEPH A. GRUNDFEST AND MICHAEL A. PERINO

Stanford Law School

Before the
Subcommittee on Securities
of the Committee on Banking, Housing, and Urban Affairs
United States Senate
on July 24, 1997

{ . . .}

“Much of the information reported in this testimony exists only because of the substantial efforts of a hardworking team at Stanford Law School who have built the first Designated Internet Site for the posting of litigation materials on the World Wide Web. This site, which can be viewed at http://securities.stanford.edu, was nominated by the Smithsonian Institution as one of the five best applications of information technology by an educational institution in 1997. As of July 22, 1997, the site lists 202 companies that have been sued in federal securities class actions governed by the Reform Act, together with the full text of more than 100 complaints, as well as myriad briefs, decisions, opinions, and orders relating to securities fraud class action litigation in federal and state court. The site has recently been described as the on-line “mecca” for information on securities class action lawsuits.”2

2. State court class action securities fraud litigation against publicly-traded issuers has become a material factor in the litigation process since passage of the Act. These cases were rare prior to the Act’s passage.

The relative stability of the aggregate litigation rate masks a significant shift of activity from federal to state court. In the first eighteen months after the Reform Act, a total of ninety-two issuers were sued in state court proceedings.11 As detailed in Mr. Perino’s separate testimony, there has been some decline in state court filings in 1997, but overall approximately ninety-two of 238 post-Reform Act litigations (38.6%) involve at least some state component. There is widespread agreement that these figures represent a substantial increase in state court litigation.12 Two phenomena seem to explain the bulk of this shift. First, there appears to be a “substitution effect” whereby plaintiffs’ counsel file state court complaints when the underlying facts appear not to be sufficient to satisfy new, more stringent federal pleading requirements, or otherwise seek to avoid the substantive or procedural provisions of the Act. Second, plaintiffs appear to be resorting to increased parallel state and federal litigation in an effort to avoid federal discovery stays or to establish alternative state court venues for the settlement of federal claims.13

In addition to this increase in state class action activity, Figure 1 suggests that there has been a significant shift in the kinds of defendants appearing in state litigation. Prior to the Reform Act, most state cases (approximately 89%) alleging fraudulent activity in connection with the purchase or sale of securities involved non-publicly-traded securities.14 By contrast, the vast majority of state court class actions filed since the Reform Act (81.5%) involve securities that trade on national markets.15 These cases typically involve allegations that the price of the company’s securities was inflated due to misrepresentations or omissions affecting transactions on national markets, precisely the kinds of claims that were most often filed in federal court prior to the Act. In 1997, these actions continue to be filed in state court, despite overall declines in state filings. The sudden increase in the appearance of these cases in state court strongly supports the inference that the shift in forum selection was driven by the passage of the Reform Act.

3. Plaintiffs are alleging accounting fraud and trading by insiders more frequently than before the Act’s effective date.

Along with the shift to state court, one of the most significant effects associated with passage of the Reform Act are the changes in the style of litigation that has evolved in response to the Reform Act’s requirements

In particular, there has been a significant increase in the number of federal complaints alleging trading by insiders during the period when the fraud was allegedly alive in the market and a significant increase in the number of cases alleging misrepresentations or omissions in financial statements as the basis for liability. Approximately 59% of a sample of post-Reform Act federal complaints allege a misrepresentation or omission in financial statements.16 Allegations of misstated financials account for 67.4% of Section 10(b) complaints involving publicly-traded companies.17 In sharp contrast, similar allegations are found in only 34% of pre-Reform Act cases.18 Allegations of trading by insiders now appear in about 57% of post-Reform Act cases, whereas these allegations are found in only 21% of pre-Reform Act cases. Alleged trading by insiders is particularly important in cases against high technology companies, appearing in 73% of those cases, but that statistic must be interpreted with caution because of the prevalence of option-based compensation in the high technology sector.

http://securities.stanford.edu/research/articles/19970723sen1.html

Some of what is listed as “not known” – (1997)

1. How will the courts interpret the Act’s requirement that complaints “state with particularity all facts” on which an allegation of fraud is based?

Section 21(D)(b)(1) of the Reform Act provides that:

the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed. (emphasis supplied)

A major question raised by this provision relates to the vigor with which courts will interpret the statutory language calling for an articulation of all facts upon which a plaintiffs’ information or belief underlying a complaint is based. For example, the court in In re Silicon Graphics, Inc. Securities Litig., Fed. Sec. L. Rep. ¶99,468 (CCH), 1997 WL 285057 (N.D. Cal. May 23, 1997), held that plaintiffs’ allegations in a 73-page amended complaint were too generic and that in order to provide sufficiently detailed information about alleged negative internal reports the allegations “should include the titles of the reports, when they were prepared, who prepared them, to whom they were directed, their content, and the sources from which plaintiffs obtained this information.” Id. at 97,133.

The court also observed that the degree of specificity required by the Reform Act was the subject of specific debate in Congress, and quoted the statement of Rep. Dingell who expressed concern on the record that, under the legislation as drafted, names of confidential informants, employees, competitors, and others who provided information leading to the filing of the case would be required to be disclosed. Id. at 97,130-97,131. The court found that Congress had enacted precisely the language as to which Rep. Dingell had complained, and that plaintiffs must plead the sort of information described by Rep. Dingell to meet the requirements of the Reform Act.42 Id. at 97,131. Plaintiffs did not meet this burden and the complaint was dismissed.

2. How will the courts interpret the Reform Act’s “strong inference” pleadings standard? Will they adopt the Second Circuit standard or move to a stricter standard?

Under the Reform Act, plaintiffs are now required to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”45 The interpretation of this standard has been the subject of considerable disagreement among district courts. The debate focuses on whether the Reform Act simply adopts the Second Circuit standard, or goes further. Several courts have held that the Reform Act adopted the Second Circuit pleading standard,46 while other courts have found that the Reform Act standard goes beyond the Second Circuit standard.47 No Court of Appeals has directly addressed this issue. Accordingly, we are uncertain if, in the long run, courts will adopt the Second Circuit standard or move to a stricter standard such as that employed by the Silicon Graphics court.

Again, we expect that the resolution of this uncertainty will materially affect the future evolution of federal securities fraud litigation. The higher the standard courts set, the more difficult it becomes for plaintiffs to withstand motions to dismiss and the lower the volume of anticipated litigation in the federal courts.

http://securities.stanford.edu/research/articles/19970723sen1.html

***

In law, a class action or a representative action is a form of lawsuit where a large group of people collectively bring a claim to court. This form of collective lawsuit originated in the United States and is still predominately a US phenomenon, at least the US variant of it. However, in several European countries with civil law (as opposed to the Anglo-American common law principle, which is used by US courts), changes have in recent years been made that allow consumer organisations to bring claims on behalf of large groups of consumers.

Federal class actions

In the United States federal courts, class actions are governed by Federal Rules of Civil Procedure Rule 23 and 28 U.S.C.A. § 1332 (d).

Class action lawsuits may be brought in federal court if the claim arises under federal law, or if the claim falls under 28 USCA § 1332 (d). Under § 1332 (d) (2) the federal district courts have original jurisdiction over any civil action where the amount in controversy exceeds $5,000,000 and either 1. any member of a class of plaintiffs is a citizen of a State different from any defendant; 2. any member of a class of plaintiffs is a foreign state or a citizen or subject of a foreign state and any defendant is a citizen of a State; or 3. any member of a class of plaintiffs is a citizen of a State and any defendant is a foreign state or a citizen or subject of a foreign state.[1] Nationwide plaintiff classes are possible, but such suits must have a commonality of issues across state lines. This may be difficult if the civil law in the various states have significant differences. Large class actions brought in federal court frequently are consolidated for pre-trial purposes through the device of multidistrict litigation (MDL). It is also possible to bring class action lawsuits under state law, and in some cases the court may extend its jurisdiction to all the members of the class, including out of state (or even internationally) as the key element is the jurisdiction that the court has over the defendant.

***

Class members often receive little or no benefit from class actions. Examples cited for this include large fees for the attorneys, while leaving class members with coupons or other awards of little or no value; unjustified awards are made to certain plaintiffs at the expense of other class members; and confusing notices are published that prevent class members from being able to fully understand and effectively exercise their rights.

http://en.wikipedia.org/wiki/Class_action

***

Subject: Warning – Selling Unregistered Securities

Last-Revised: 29 Mar 1995
Contributed-By: Michael R. Mitchell (mitchel4 at ix.netcom.com)

Under the U.S. Securities Laws, specifically The Securities Act of 1933, the mere offer to sell a security — unless there is an effective registration statement on file with the SEC for the offer — via the Internet can be a felony subjecting the offeror to a 5 year federal prison term. See the Securities Act of 1933, Section 5(c) Of course, sales and deliveries after sale of unregistered securities is unlawful (Section 5(a)) as is failure to deliver a prospectus (Section 5(b)).

Listen to an example from my own experience as a securities lawyer in Los Angeles. Many years ago a young man came into my office and asked my advice about whether he could advertise in the Hollywood Reporter for investors in a movie he wanted to make.

I explained to him that such a course would be fraught with peril for him because it would violate the federal securities laws. He said, “Everybody does it; there are a bunch of ads soliciting people to invest in movies there every day.” He said, “Well, I’m going to do it.”

About a week later, he phoned me up and said he had got a letter from the SEC requiring him to refund any money he had collected and requiring him to visit the LA office of the SEC. It appears that the SEC reads the Hollywood Reporter. It also reviews the Internet newsgroups.

Certain transactions are exempted from the prohibition (See Section 4) and certain securities are exempted from the prohibition (See Section 3). How a security is defined is set forth in Section 2(1) — and includes, among other things, any note, stock, bond, investment contract, put call, straddle, option, etc.

You can determine whether a registration statement is or was in effect as to a security by accessing the free SEC Edgar search machine at this URL:
http://www.sec.gov/cgi-bin/srch-edgar

http://invest-faq.com/cbc/warn-unreg-secur.html

***

Twelve Firms Unite For Trading In Unregistered Securities

Twelve Wall Street firms that had started competing platforms for trading unregistered securities known as 144a issues have agreed to cooperate on a single platform operated by the Nasdaq stock market, the exchange said yesterday.

The move, the result of two months of negotiations between the firms and Nasdaq, the country’s second-largest stock exchange after the New York Stock Exchange, will bring liquidity and transparency to a market that has so far been opaque, the chief executive of Nasdaq, Robert Greifeld, said.

Bank of America, Bear Stearns, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, UBS and Wachovia will join with Nasdaq to form the market, called the Portal Alliance.

Mr. Greifeld said the 144a market would experience strong growth in trading volume.

Companies are increasingly turning to private investors, known as qualified institutional buyers with at least $100 million in assets, to raise capital through 144a offerings without the regulatory burden of a public offering.

In recent months, many securities firms had started 144a platforms, including GSTrUE by Goldman Sachs and OPUS-5, begun by a group of five banks including Citigroup, Merrill Lynch and Lehman Brothers Holdings. Nasdaq started a portal market this year to trade these private placements of stock.

Nasdaq data show the private placement market reached $162 billion last year, outpacing the $154 billion value of overall public offerings.

By REUTERS
Published: November 13, 2007

http://query.nytimes.com/gst/fullpage.html?res=9C0DE4D61F31F930A25752C1A9619C8B63

***

Investment Firm Sold Millions in Unregistered Securities

April 5, 2006
Missouri Attorney General Jay Nixon has filed a lawsuit to shut down a St. Louis company that sold at least $3.8 million in unregistered securities to investors on the promise of exorbitant rates of return.

Investors in Global Power Global Wealth (GPGW) Enterprises not only didn’t realize those returns, Nixon says; in most cases, the investors lost their principal investments

as well.

The lawsuit cites GPGW and its subsidiaries, Global Wealth Investments, Opportunity Lives and Global Wealth Builders, for numerous violations of the Missouri Securities Act of 2003 and the Missouri Merchandising Practices Act. Also named as defendants in the lawsuit are GPGW president, Andre E. Mitchell of O’Fallon, Ill., and vice president Henry L. Allen of St. Louis.

The lawsuit claims Mitchell and the other defendants sold investments to at least 461 persons nationwide, including at least 66 residents from Missouri, at a total value of at least $3,867,000. Documents provided to investors by the defendants promised rates of return of up to 500 percent to 800 percent within four to 24 months.

Investors also were falsely promised that their principal investment would always be secure, the lawsuit says. The defendants ignored two previous cease and desist orders issued by the Missouri Commissioner of Securities, Nixon and Missouri Secretary of State Robin Carnahan say.

“The defendants offered staggering rates of return on investments and brazenly continued to sell unregistered securities even after they were ordered twice to cease and desist,” said Nixon. “We are working with Secretary of State Carnahan and have filed this lawsuit to ensure that the defendants are prohibited from operating in Missouri and that investors who fell prey to this scam are made whole.”

“Along with the Missouri Securities Division of my office, I am committed to protecting Missouri investors,” said Carnahan. “Unfortunately, this individual continued to defraud investors even after he was ordered by the Missouri Securities Commissioner to stop selling the unregistered investments.”

The lawsuit asks the court to grant a permanent injunction against the defendants to prevent them from continuing to engage in unlawful, unfair and deceptive acts while selling securities. It also asks the court to:

• Freeze all accounts and sequester all funds held by the defendants;
• Authorize the Commissioner of Securities to take control of the defendants’ property, including investment accounts, rent and profits; to collect debts and to acquire and dispose of property;
• Order the defendants to provide full restitution to all consumers from whom the defendants defrauded;
• Impose appropriate civil penalties on the defendants;
• Order the defendants to pay to the investor education and protection fund an amount of money equal to ten percent of the total restitution paid to consumers; and
• Order the defendants to pay all court, investigative and prosecution costs in the case.

http://www.consumeraffairs.com/news04/2006/04/mo_securities.html

***

A U.S. appeals court has ruled that a lawsuit

brought by credit card holders against a group of major banks over the use of forced arbitration in lending agreements can go forward.

The plaintiffs charged that the banks had conspired to universally institute the practice of mandatory arbitration for disputes, rather than allowing claims to be heard in court, and that their actions violated antitrust law.

The Second Circuit Court of Appeals’ ruling overturned the ruling of a lower court that threw the suit out on procedural grounds. The appellate judges on the case, Ross v. Bank of America, ruled that there was sufficient evidence to indicate that violations of the Sherman Antitrust Act were taking place.

“According to [the plaintiffs], the banks conspired in order ‘to immunize themselves from economic responsibility for antitrust and consumer protection violations, and to reap supra-competitive profits from their cardholders,'” the court said in its ruling.

“The cardholders also contend that the alleged collusion produced several market effects, including the creation of a ‘non-price trade advantage over cardholders’ and the removal of any economic incentive for the banks to comply with antitrust and other laws, thereby shifting the risk and cost of their non-compliance to cardholders.”

“Even if the individual plaintiffs could not demonstrate injury from their claims, the court said, “the [c]omplaint alleges that reduced choice and diminished quality in credit services result directly from the banks’ illegal collusion to constrict the options available to cardholders.”

“These harms are sufficiently ‘actual or imminent,’ as well as ‘distinct and palpable,’ to constitute…injury in fact,” the court said.

Defendants in the case include Bank of America, Citigroup, J.P.Morgan Chase, Providian, and Discover Financial Services

.

April 29, 2008

Court Rules Credit Card Arbitration Lawsuit Can Go Forward

Suit charging collusion between banks and creditors against customers

http://www.consumeraffairs.com/news04/2008/04/cc_arbitration.html

***

A list of recent class action outcomes and info

http://www.consumeraffairs.com/class_actions/

***

http://www.law.cornell.edu/uscode/15/usc_sec_15_00000078—u004-.html

TITLE 15 > CHAPTER 2B > § 78u–4
Prev | Next

§ 78u–4. Private securities litigation

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Legislative History

The PSLRA was enacted into law by the U.S. Congress over a veto by President Bill Clinton. The U.S. House of Representatives approved the bill by a 319-100 margin, and the U.S. Senate approved it 68-30. Every Republican in the House voted in favor of the legislation, and only four Republicans in the Senate voted against it: William Cohen, John McCain, Richard Shelby, and Arlen Specter. Prominent liberals in the Democratic Party like senators Tom Harkin, Ted Kennedy, Claiborne Pell, and Carol Moseley Braun voted in favor of the legislation while many conservative-to-moderate Democrats such as senators John Breaux, Robert Byrd, Fritz Hollings, and Sam Nunn and representatives such as John Murtha and Gene Taylor voted against it. Both the current Senate majority leader, Harry Reid, and the current Speaker of the House, Nancy Pelosi, voted for the bill. This event was one of two times during Bill Clinton’s entire two terms in office that Congress successfully overrode one of his 37 presidential vetoes to enact a bill into law.

The PSLRA was originally developed as part of Newt Gingrich‘s Contract With America. Its principal authors in the House were Representatives Thomas Bliley, Jack Fields and Chris Cox. Senators Chris Dodd and Pete Domenici sponsored the legislation in the Senate.

The Dura Decision and Loss Causation

The Dura decision held that a plaintiff in a Rule 10b-5 case had not adequately pleaded loss causation by merely alleging that he “paid artificially inflated prices for Dura securities” at the time of purchase. The Supreme Court observed that an investor who purchases a stock at an artificially inflated price suffers no economic loss at the time of purchase. The loss occurs only when the truth is disclosed and the stock price falls as a result. Thus, a plaintiff who sells his shares “before the relevant truth begins to leak out” does not suffer any economic damage. The plaintiff in Dura failed to allege that the “share price fell significantly after the truth became known”, and therefore the complaint had not alleged loss causation.

The United States Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation, and awards fees and expenses.

The PSLRA imposes new rules on securities class action lawsuits. It allows judges to decide the most adequate plaintiff in class actions. It mandates full disclosure to investors of proposed settlements, including the amount of attorneys’ fees. It bars bonus payments to favored plaintiffs, and permits judges to scrutinize lawyer conflicts of interest.

http://en.wikipedia.org/wiki/Private_Securities_Litigation_Reform_Act

***

Accounting scandals, or corporate accounting scandals are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations or affiliates.

In public companies, this type of “creative accounting” can amount to fraud and investigations are typically launched by government oversight agencies, such as the Securities and Exchange Commission (SEC) in the United States.

In 2002, a wave of separate but often related accounting scandals became known to the public in the U.S. All of the leading public accounting firms—Arthur Andersen, Deloitte & Touche, Ernst & Young, KPMG, PricewaterhouseCoopers— and others have admitted to or have been charged with negligence in the execution of their duty[citation needed] as auditors to identify and prevent the publication of falsified financial reports by their corporate clients which had the effect of giving a misleading impression of their client companies’ financial status.[citation needed] In several cases, the monetary amounts of the fraud involved are in the billions of USD.

http://en.wikipedia.org/wiki/Accounting_scandals

American International Group, Inc. (AIG) (NYSE: AIG) is a major American insurance corporation based at the American International Building in New York City. The British headquarters are located on Fenchurch Street in London, continental Europe operations are based in La Défense, Paris, and its Asian HQ is in Hong Kong. According to the 2008 Forbes Global 2000 list, AIG was the 18th-largest company in the world. It was on the Dow Jones Industrial Average from April 8, 2004 to September 22, 2008.

On September 16, 2008, AIG suffered a liquidity crisis following the downgrade of its credit rating. The London unit of the world’s largest insurer by assets sold credit protection Credit default swap (CDS) on collateralized debt obligations (CDOs) that declined in value. [1] The United States Federal Reserve loaned money to AIG at AIG’s request, to prevent the company’s collapse, in order for AIG to meet its obligations to post additional collateral to trading partners. The Federal Reserve announced the creation of a credit facility of up to US$85 billion in exchange for warrants for a 79.9% equity stake and the right to suspend dividends to previously issued common and preferred stock.[2][3][4][5] AIG announced the same day that its board accepted the terms of the Federal Reserve Bank’s rescue package.[6] This was the largest government bailout of a private company in U.S. history, though smaller than the bailout of Fannie Mae and Freddie Mac a week earlier.[7][8]

On October 9, 2008, the company borrowed an additional $37.8 billion from the Federal Reserve Bank of New York.

[ . . .]

In the mid-2000s AIG became embroiled in a series of fraud investigations conducted by the Securities and Exchange Commission, U.S. Justice Department, and New York State Attorney General‘s Office. Greenberg was ousted amid an accounting scandal in February 2005. The New York Attorney General’s investigation led to a $1.6 billion fine for AIG and criminal charges for some of its executives. Greenberg was succeeded as CEO by Martin J. Sullivan, who had begun his career at AIG as a clerk in its London office in 1970.[3]

[ . . . ]

September 2008 concerns about stability

AIG’s share prices fell over 95% to just $1.25 on September 16, 2008, from a 52-week high of $70.13. The company reported over $13.2 billion in losses in the first six months of the year.[9][10]. AIG’s Financial Product division headed by Joseph Cassano had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. Of those securities, $57.8 billion were structured debt securities backed by subprime loans.[11] CNN named Cassano as one of the “Ten Most Wanted: Culprits” of the 2008 financial collapse in the United States. [12]

http://en.wikipedia.org/wiki/American_International_Group

***

As Lehman Brothers (the largest bankruptcy in U.S. history) suffered a major decline in share price, investors began comparing the types of securities held by AIG and Lehman, and found that AIG had valued its Alt-A and sub-prime mortgage-backed securities at 1.7 to 2 times the rates used by Lehman.[9] On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation, in an effort to raise necessary capital for the company.[9] The Federal Reserve has hired Morgan Stanley to determine if there are systemic risks to a failing AIG, [ . . . ]

*** NOTE ***

How could Morgan Stanley give a fair and objective determination about AIG – now there’s collusion at work.

(my note) – cricketdiane

***

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US economic crisis – Global economic crisis based in credit derivatives – gambling by Wall Street – by Banks – by Hedge Funds – by The Rich Upper Class – by Traders – by Ratings Agencies

22 Wednesday Oct 2008

Posted by CricketDiane in Uncategorized

≈ 1 Comment

Tags

bailouts, banking, bonds, Capitalism, cash, CDO, CDS, commercial paper, commodities, consumer based economy, consumerism, corruption, corruption and abuse of power, corruption in US government, counterfeit currency, counterfeit securities, credit crunch crisis, credit default swaps, credit derivatives, Cricket Diane C Sparky Phillips, cricketdiane, currencies, currency values, Economics, Economy, Federal Reserve, financial derivatives, free market economy, global economic crisis, Global Economy, government bailout of credit default swaps, government bailout of Wall Street, International Concerns, investment banking, investment banking bailouts, Macro-economic analysis 2008, macro-economic future forecasting, Money, mortgage backed securities, non-collateralized credit, Office of Thrift Supervision, principles of economic, securities, Securities and Exchange Commission, stock market, stocks, unsecured loans credit, US Congress, US dollar, US economic crisis, US Government, US government bailout, US government policy, US Treasury, Wall Street

Also, stock index futures and options are known as derivative products because they derive their existence from actual market indices, but have no intrinsic characteristics of their own. In addition to that, one of the reasons some believe they lead to greater market volatility is that huge amounts of securities can be controlled by relatively small amounts of margin or option premiums. One reason derivatives are popular is that they can be transacted off-balance-sheet.

http://en.wikipedia.org/wiki/Derivative_security

Derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The main types of derivatives are futures, forwards, options and swaps.

The main use of derivatives is to reduce risk for one party. The diverse range of potential underlying assets and pay-off alternatives leads to a wide range of derivatives contracts available to be traded in the market. Derivatives can be based on different types of assets such as commodities, equities (stocks), residential mortgages, commercial real estate loans, bonds, interest rates, exchange rates,

**or indices (such as a stock market index, consumer price index (CPI) — see inflation derivatives — or even an index of weather conditions, or other derivatives). Their performance can determine both the amount and the timing of the pay-offs. Credit derivatives have become an increasingly large part of the derivative market.

***

A bank may have substantial sums in off-balance sheet accounts, and the distinction between these accounts may not seem obvious. For example, when a bank has a customer who deposits $1 million in a regular bank deposit account, the bank has a $1 million liability. If the customer chooses to transfer the deposit to a money market mutual fund account sponsored by the same bank, the $1 million would not be a liability of the bank, but an amount held in trust for the client (formally as shares or units in a form of collective fund). If the funds are used to purchase stock, the stock is similarly not owned by the bank, and do not appear as an asset or liability of the bank. If the client subsequently sells the stock and deposits the proceeds in a regular bank account, these would now again appear as a liability of the bank (although the same funds held in a brokerage account may or may not be off-balance sheet). However, it’s been argued that the contrary is also feasible.

http://en.wikipedia.org/wiki/Off-balance-sheet

Off balance sheet (OBS) usually means an asset or debt or financing activity not on the company’s balance sheet. It could involve a lease or a separate subsidiary or a contingent liability such as a letter of credit. It also involves loan commitments, futures, forwards and other derivatives except such derivatives pertaining to equity securities, ESOP, or phantom stock, which usually must be held as reserves in the Long Term Debt section of a Balance Sheet (See Also Backdating Options), when-issued securities (famous in the US)[clarify] and loans sold.

***

Financial instruments can be categorized by form depending on whether they are cash instruments or derivative instruments:

  • Cash instruments are financial instruments whose value is determined directly by markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.
  • Derivative instruments are financial instruments which derive their value from the value and characteristics of one or more underlying assets. They can be divided into exchange-traded derivatives and over-the-counter (OTC) derivatives.

Alternatively, financial instruments can be categorized by “asset class” depending on whether they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorised into short term (less than one year) or long term.

Foreign Exchange instruments and transactions are neither debt nor equity based and belong in their own category.

http://en.wikipedia.org/wiki/Financial_instrument

* See chart on this page – very good

Some instruments defy categorization into the above matrix, for example repurchase agreements.

***

OTC and exchange-traded

Broadly speaking there are two distinct groups of derivative contracts, which are distinguished by the way they are traded in market:

  • Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is unregulated. According to the Bank for International Settlements, the total outstanding notional amount is $596 trillion (as of December 2007)[1]. Of this total notional amount, 66% are interest rate contracts, 10% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. OTC derivatives are largely subject to counterparty risk, as the validity of a contract depends on the counterparty’s solvency and ability to honor its obligations.
  • Exchange-traded derivatives (ETD) are those derivatives products that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange acts as an intermediary to all related transactions, and takes Initial margin from both sides of the trade to act as a guarantee. The world’s largest[2] derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European products such as interest rate & index products), and CME Group (made up of the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade and the 2008 acquisition of the New York Mercantile Exchange). According to BIS, the combined turnover in the world’s derivatives exchanges totalled USD 344 trillion during Q4 2005. Some types of derivative instruments also may trade on traditional exchanges. For instance, hybrid instruments such as convertible bonds and/or convertible preferred may be listed on stock or bond exchanges. Also, warrants (or “rights”) may be listed on equity exchanges. Performance Rights, Cash xPRTs and various other instruments that essentially consist of a complex set of options bundled into a simple package are routinely listed on equity exchanges. Like other derivatives, these publicly traded derivatives provide investors access to risk/reward and volatility characteristics that, while related to an underlying commodity, nonetheless are distinctive.

Common derivative contract types

There are three major classes of derivatives:

  1. Futures/Forwards, which are contracts to buy or sell an asset at a specified future date.
  2. Options, which are contracts that give a holder the right to buy or sell an asset at a specified future date.
  3. Swappings, where the two parties agree to exchange cash flows or returns.

http://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-traded

***

CME Group

From Wikipedia, the free encyclopedia

Jump to: navigation, search

CME Group Inc.
Type Public
Headquarters Chicago, IL, Flag of the United States USA
Key people Craig S. Donohue
Industry Security & Commodity Exchanges
Market cap 19.7 billion USD[1]
Employees 1970[1]
Website www.cme.com

CME Group Inc. (NASDAQ: CME) is the world’s largest futures exchange. CME Group was created July 12, 2007 from the merger between the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT). On March 17, 2008, it announced its acquisition of NYMEX Holdings, Inc., parent company of the New York Mercantile Exchange, which was formally completed on August 22, 2008.[1]

http://en.wikipedia.org/wiki/CME_Group

***

Other examples of underlying exchangeables are:

  • Property (mortgage) derivatives
  • Economic derivatives that pay off according to economic reports ([1]) as measured and reported by national statistical agencies
  • Energy derivatives that pay off according to a wide variety of indexed energy prices. Usually classified as either physical or financial, where physical means the contract includes actual delivery of the underlying energy commodity (oil, gas, power, etc.)
  • Commodities
  • Freight derivatives
  • Inflation derivatives
  • Insurance derivatives[citation needed]
  • Weather derivatives
  • Credit derivatives

http://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-traded

Cash flow

The payments between the parties may be determined by:

  • the price of some other, independently traded asset in the future (e.g., a common stock);
  • the level of an independently determined index (e.g., a stock market index or heating-degree-days);
  • the occurrence of some well-specified event (e.g., a company defaulting);
  • an interest rate;
  • an exchange rate;
  • or some other factor.

Some derivatives are the right to buy or sell the underlying security or commodity at some point in the future for a predetermined price. If the price of the underlying security or commodity moves into the right direction, the owner of the derivative makes money; otherwise, they lose money or the derivative becomes worthless. Depending on the terms of the contract, the potential gain or loss on a derivative can be much higher than if they had traded the underlying security or commodity directly.

***

VALUATION –

Market and arbitrage-free prices

Two common measures of value are:

  • Market price, i.e. the price at which traders are willing to buy or sell the contract
  • Arbitrage-free price, meaning that no risk-free profits can be made by trading in these contracts; see rational pricing

http://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-traded

***

Criticisms

Derivatives are often subject to the following criticisms:

Possible large losses

See also: List of trading losses

The use of derivatives can result in large losses due to the use of leverage, or borrowing. Derivatives allow investors to earn large returns from small movements in the underlying asset’s price. However, investors could lose large amounts if the price of the underlying moves against them significantly. There have been several instances of massive losses in derivative markets, such as:

  • The need to recapitalize insurer American International Group (AIG) with $85 billion of debt provided by the US federal government[3]. An AIG subsidiary had lost more than $18 billion over the preceding three quarters on Credit Default Swaps (CDS) it had written.[4] It was reported that the recapitalization was necessary because further losses were foreseeable over the next few quarters.
  • The loss of $7.2 Billion by Société Générale in January 2008 through mis-use of futures contracts.
  • The loss of US$6.4 billion in the failed fund Amaranth Advisors, which was long natural gas in September 2006 when the price plummeted.
  • The bankruptcy of Long-Term Capital Management in 2000.
  • The bankruptcy of Orange County, CA in 1994, the largest municipal bankruptcy in U.S. history. On December 6, 1994, Orange County declared Chapter 9 bankruptcy, from which it emerged in June 1995. The county lost about $1.6 billion through derivatives trading. Orange County was neither bankrupt nor insolvent at the time; however, because of the strategy the county employed it was unable to generate the cash flows needed to maintain services. Orange County is a good example of what happens when derivatives are used incorrectly and positions liquidated in an unplanned manner; had they not liquidated they would not have lost any money as their positions rebounded.[citation needed] Potentially problematic use of interest-rate derivatives by US municipalities has continued in recent years. See, for example:[5]
  • The Nick Leeson affair in 1994

Counter-party risk

Derivatives (especially swaps) expose investors to counter-party risk.

[ Etc. ]

http://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-traded

***

http://en.wikipedia.org/wiki/Derivative_(finance)#Common_derivative_contract_types

Common derivative contract types

***

Here’s an interesting perspective in light of reality that we know today –

“Remember the bankruptcy of Orange County, California, and the Barings Bank due to poor investments in financial derivatives? At that time many policymakers feared more collapsed banks, counties, and countries. Those fears proved unfounded; prudent use, not government regulation, of derivatives headed off further problems. Now, however, the Financial Accounting Standards Board, the Federal Reserve, and the Securities and Exchange Commission are debating the merits of new rules for derivatives. But before adopting regulations, policymakers need to separate myths about those financial instruments from reality.”

10 Myths About Financial Derivatives

by Thomas F. Siems

Thomas F. Siems is a senior economist and policy adviser at the Federal Reserve Bank of Dallas. The views expressed here are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of Dallas or the Federal Reserve System.

Cato Institute
1000 Massachusetts Ave, NW
Washington DC 20001-5403
Phone (202) 842-0200
Fax (202) 842-3490
Contact Us
Also in this text:

“Most financial derivatives traded today are the “plain vanilla” variety–the simplest form of a financial instrument. But variants on the basic structures have given way to more sophisticated and complex financial derivatives that are much more difficult to measure, manage, and understand. For those instruments, the measurement and control of risks can be far more complicated, creating the increased possibility of unforeseen losses.” – Thomas F. Siems

http://www.cato.org/pubs/pas/pa-283.html

The largest appeal of derivatives is that they offer some degree of leverage. Leverage is a financial term that refers to the multiplication that happens when a small amount of money is used to control an item of much larger value. A mortgage is the most common form of leverage. For a small amount of money and taking on the obligation of a mortgage, a person gains control of a property of much larger value than the small amount of money that has exchanged hands.

Derivatives offer the same sort of leverage or multiplication as a mortgage. For a small amount of money, the investor can control a much larger value of company stock then would be possible without use of derivatives. This can work both ways, though. If the investor purchasing the derivative is correct, then more money can be made than if the investment had been made directly into the company itself. However, if the investor is wrong, the losses are multiplied instead.

http://www.wisegeek.com/what-are-financial-derivatives.htm

Derivatives made the news in 1995 when rogue trader Nick Leeson single-handedly caused the failure of the Barings bank of England. Nick Leeson was a derivatives trader whose trades did not work out, and due to the enormous leverage of the trades used, the losses became so large that the bank was bankrupt when the results of his trades become due. Warren Buffet, a much revered and very successful investor, has stated in one of his annual reports that he is very much against the use of derivatives and he expects that they will lead to eventual failure for anyone who uses them. In spite of all this negative press, derivatives have long been a normal part of business and investing and are likely to be so for many more years.

***

Unlike Warren Buffet, Sir Julian Hodge, the Welsh banker, issued his apocalyptic warning three years before the first rash of derivatives disasters involving Metallgesellschaft, Orange County, Sears Roebuck, Proctor & Gamble, happened in 1994. More was to come in 1995 in the form of the Daiwa and Barings scandals. None of those on their own, however, threatened to bring the world financial system to its knees. Until recently the crisis that came closest to doing so involved LTCM in September 1998. Nearly 10 years later, in March 2008, the FED took emergency action to avoid what was called derivatives Chernobyl. That action seems to have worked … so far, but could a mega-catastrophe lie around the corner …?

http://projects.exeter.ac.uk/RDavies/arian/scandals/derivatives.html

Derivatives and Speculation

The job of a derivatives trader is like that of a bookie once removed, taking bets on people making bets.

The description above comes from In Into the Fire a novel about fraudulent trading in derivatives new! (now out in a new edition), by Linda Davies. Why on earth should anyone want to be a bookie once removed? The answer was given 63 years earlier by John Maynard Keynes in his best-known work.

Keynes on Speculation

“Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not the faces which he himself finds the prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view.”

“It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree when we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.”

Keynes, John Maynard The general theory of employment, interest and money. London : Macmillan, St. Martin’s Press, 1936. page 156.

http://projects.exeter.ac.uk/RDavies/arian/scandals/derivatives.html

***

Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Because derivatives are just contracts, just about anything can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.

Derivatives are generally used to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using American dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into euros.

http://www.investopedia.com/terms/d/derivative.asp

Introduction To Weather Derivatives
by Felix Carabello,Associate Director, Environmental Products, Chicago Mercantile Exchange (Contact Author | Biography)

Even in our advanced, technology-based society, we still live largely at the mercy of the weather. It influences our daily lives and choices, and has an enormous impact on corporate revenues and earnings. Until recently, there were very few financial tools offering companies’ protection against weather-related risks. However, the inception of the weather derivative – by making weather a tradeable commodity – has changed all this. Here we look at how the weather derivative was created, how it differs from insurance and how it works as a financial instrument.

http://www.investopedia.com/articles/optioninvestor/05/052505.asp

Temperature as a Commodity
Until recently, insurance has been the main tool used by companies’ for protection against unexpected weather conditions. But insurance provides protection only against catastrophic damage. Insurance does nothing to protect against the reduced demand that businesses experience as a result of weather that is warmer or colder than expected.

In the late 1990s, people began to realize that if they quantified and indexed weather in terms of monthly or seasonal average temperatures, and attached a dollar amount to each index value, they could in a sense “package” and trade weather. In fact, this sort of trading would be comparable to trading the varying values of stock indices, currencies, interest rates and agricultural commodities. The concept of weather as a tradeable commodity, therefore, began to take shape.

[ . . . ]

In 1997 the first over-the-counter (OTC) weather derivative trade took place, and the field of weather risk management was born. According to Valerie Cooper, former executive director of the Weather Risk Management Association, an $8 billion weather-derivatives industry developed within a few years of its inception.

CME Weather Futures and Options on Futures

In 1999, the Chicago Mercantile Exchange (CME) took weather derivatives a step further and introduced exchange-traded weather futures and options on futures – the first products of their kind. OTC weather derivatives are privately negotiated, individualized agreements made between two parties. But CME weather futures and options on futures are standardized contracts traded publicly on the open market in an electronic auction-like environment, with continuous negotiation of prices and complete price transparency.

Broadly speaking, CME weather futures and options on futures are exchange-traded derivatives that – by means of specific indexes – reflect monthly and seasonal average temperatures of 15 U.S. and five European cities. These derivatives are legally binding agreements made between two parties, and settled in cash. Each contract is based on the final monthly or seasonal index value that is determined by Earth Satellite (EarthSat) Corp, an international firm that specializes in geographic information technologies. Other European weather firms determine values for the European contracts. EarthSat works with temperature data provided by the National Climate Data Center (NCDC), and the data it provides is used widely throughout the over-the-counter weather derivatives industry as well as by CME.

http://www.investopedia.com/articles/optioninvestor/05/052505.asp

***

In finance, a credit derivative is a derivative whose value derives from the credit risk on an underlying bond, loan or other financial asset. In this way, the credit risk is on an entity other than the counterparties to the transaction itself.[1] This entity is known as the reference entity and may be a corporate, a sovereign or any other form of legal entity which has incurred debt.[2] Credit derivatives are bilateral contracts between a buyer and seller under which the seller sells protection against the credit risk of the reference entity.[3]

The parties will select which credit events apply to a transaction and these usually consist of one or more of the following:

  • bankruptcy (the risk that the reference entity will become bankrupt)
  • failure to pay (the risk that the reference entity will default on one of its obligations such as a bond or loan)
  • obligation default (the risk that the reference entity will default on any of its obligations)
  • obligation acceleration (the risk that an obligation of the reference entity will be accelerated e.g. a bond will be declared immediately due and payable following a default)
  • repudiation/moratorium (the risk that the reference entity or a government will declare a moratorium over the reference entity’s obligations)
  • restructuring (the risk that obligations of the reference entity will be restructured).

Where credit protection is bought and sold between bilateral counterparties this is known as an unfunded credit derivative. If the credit derivative is entered into by a financial institution or a special purpose vehicle (SPV) and payments under the credit derivative are funded using securitization techniques, such that a debt obligation is issued by the financial institution or SPV to support these obligations, this is known as a funded credit derivative.

This synthetic securitization process has become increasingly popular over the last decade, with the simple versions of these structures being known as synthetic CDOs; credit linked notes; single tranche CDOs, to name a few. In funded credit derivatives, transactions are often rated by rating agencies, which allows investors to take different slices of credit risk according to their risk appetite.

http://en.wikipedia.org/wiki/Credit_derivative

Credit default products are the most commonly traded credit derivative product[4] and include unfunded products such as credit default swaps and funded products such as collateralized debt obligations (see further discussion below).

The ISDA[5] reported in April 2007 that total notional amount on outstanding credit derivatives was $35.1 trillion with a gross market value of $948 billion (ISDA’s Website). As reported in Times Sept. 15.08 “Worldwide credit derivatives market is valued at $62 trillion”. [6]

Although the credit derivatives market is a global one, London has a market share of about 40%, with the rest of Europe having about 10%.[4]

The main market participants are banks, hedge funds, insurance companies, pension funds, and other corporates.[4]

Unfunded credit derivative products include the following products:

  • Credit default swap (CDS)
  • Total return swap
  • First to Default Credit Default Swap
  • Portfolio Credit Default Swap
  • Secured Loan Credit Default Swap
  • Credit Default Swap on Asset Backed Securities
  • Credit default swaption
  • Recovery lock transaction
  • Credit Spread Option
  • CDS index products
  • Constant Maturity Credit Default Swap (CMCDS)

Funded credit derivative products include the following products:

  • Credit linked note (CLN)
  • Synthetic Collateralised Debt Obligation (CDO)
  • Constant Proportion Debt Obligation (CPDO)
  • Synthetic Constant Proportion Portfolio Insurance (Synthetic CPPI)

http://en.wikipedia.org/wiki/Credit_derivative

***

Proposals for a makeover of the financial system include reform of the credit derivatives market, which offers over $50 trillion of default insurance coverage. Do investors need that much insurance, or is this mainly a dangerous casino operating under the radar of regulators — until a major financial institution like AIG needs a bailout? What sort of reform is needed?

The seller of protection in a credit derivatives contract receives premiums from the buyer of protection until maturity, or until default of the named borrower. Contracts are negotiated over the counter, not on an exchange, so it is difficult to know how much insurance exists on each borrower, or to know who has insured whom, and for how much.

That privacy is not unusual in the normal course of business contracts. What is unusual is the size of the potential claims. There is a public interest in knowing that systemically important sellers of protection have not overdone it. If a large bank or insurance company does not have enough capital to cover settlement claims, then its failure, or the threat of it, can cause mayhem, as we have just seen.

  • OPINION
  • OCTOBER 22, 2008

Derivatives and Mass Financial Destruction

Complex financial products can be useful if regulated properly.

By DARRELL DUFFIE

http://online.wsj.com/article/SB122463222894556573.html?mod=googlenews_wsj

The Fed is pressing dealers to quickly establish clearing in credit derivatives. The dealers have expressed an interest in using their own clearing counterparty, the Chicago Clearing Corporation. Alternatively, they could clear credit derivatives with a new joint venture of the Chicago Mercantile Exchange and Citadel (a large hedge fund). Either way, regulators should ensure that a clearing counterparty is extremely well capitalized and has strong operational controls.

Unfortunately, the urgency to set up clearing for credit derivatives may lead us to miss the opportunity to reduce exposures even further by clearing credit derivatives along with other forms of over-the-counter derivatives, such as interest-rate swaps and equity derivatives, which represent similarly large amounts of risk transfer.

Mr. Duffie is a professor of finance at Stanford University’s Graduate School of Business.

Please add your comments to the Opinion Journal forum.

http://online.wsj.com/article/SB122463222894556573.html?mod=googlenews_wsj

***

A credit derivative is an OTC derivative designed to transfer credit risk from one party to another. By synthetically creating or eliminating credit exposures, they allow institutions to more effectively manage credit risks. Credit derivatives take many forms. Three basic structures include:

credit default swap: Two parties enter into an agreement whereby one party pays the other a fixed periodic coupon for the specified life of the agreement. The other party makes no payments unless a specified credit event occurs. Credit events are typically defined to include a material default, bankruptcy or debt restructuring for a specified reference asset. If such a credit event occurs, the party makes a payment to the first party, and the swap then terminates. The size of the payment is usually linked to the decline in the reference asset’s market value following the credit event.

http://www.riskglossary.com/link/credit_derivative.htm

***

[PDF]

THE J.P. MORGAN GUIDE TO CREDIT DERIVATIVES

File Format: PDF/Adobe Acrobat – View as HTML
Blythe Masters, global head of credit derivatives marketing at J.P. Morgan in New … performer in credit derivatives rankings. J.P. Morgan was was placed: …
http://www.investinginbonds.com/assets/files/Intro_to_Credit_Derivatives.pdf –

(from Google)

***

[PDF]

A Beginner’s Guide to Credit Derivatives

File Format: PDF/Adobe Acrobat – View as HTML
This document will attempt to describe how simple credit derivatives can be. formally represented, shown to be replicable and ultimately priced, using rea- …
http://www.probability.net/credit.pdf –

(from Google)

***

When Delphi filed for bankruptcy October 8, investors had to start assessing their losses on more than $2 billion in the auto parts maker’s bonds, which have recently traded at around 60% of their face value. As bad as that is, there is more. Looming over the market like an invisible and unpredictable giant is an estimated $25 billion in credit derivatives, a form of insurance whose value is directly linked to the ups and downs of Delphi debt.

What happens to these complex contracts as the underlying bonds plunge in value? Will ripple effects amplify the Delphi damage, spreading harm to institutional and individual investors who otherwise have no stake in Delphi?

The Delphi situation points to a broader question: Is the credit derivative market, which grew from next to nothing in the mid-1990s to an estimated $5 trillion at the end of 2004 — and is perhaps more than twice that size today — pumping new, poorly-understood risk into the financial markets? Or are these exotic products helping to mitigate the shock from corporate crises, as their proponents claim?

The Ballooning Credit Derivatives Market: Easing Risk or Making It Worse?

Published: November 02, 2005 in Knowledge@Wharton

http://knowledge.wharton.upenn.edu/article.cfm?articleid=1303

***

Calls to curb credit derivatives market

By Joanna Chung and Aline van Duyn in New York and Paul J Davies in London

Published: September 23 2008 23:30 | Last updated: September 23 2008 23:30

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Pressure to regulate the $62,000bn credit derivatives market mounted on Tuesday as the main US market regulator called on Congress to pass laws to supervise the industry.

Christopher Cox, chairman of the Securities and Exchange Commission, told the Senate banking committee that “significant opportunities” for manipulation existed in the market for credit default swaps, which offers a kind of insurance against companies defaulting on their debt.

http://www.ft.com/cms/s/0/d52898c4-89b9-11dd-8371-0000779fd18c.html

***

(compiled by Cricket Diane C Sparky Phillips, 10-22-08)

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US Census Bureau figures off in la-la land – why don’t they match up?

21 Tuesday Oct 2008

Posted by CricketDiane in Uncategorized

≈ Leave a comment

Tags

bailouts, banking, bonds, commercial paper, commodities, counterfeit currencies, counterfeit securities, credit crunch crisis, credit default swaps, credit derivatives, Cricket Diane C Sparky Phillips, cricketdiane, Federal Reserve, financial derivatives, global economic crisis, Global Economy, International Concerns, investment banking, Macro-economic analysis 2008, Macro-economics future forecasting, mortgage backed securities, Principles of Economics, securities, stock market, unsecured loans credit, US economic crisis, US Economy, US government bailouts, US government policy, US Treasury

Housing Vacancies and Homeownership   chart icon CHART

Homeownership Rate (HR)
The homeownership rate at 68.1 percent for the current quarter was not statistically different from the second quarter 2007 rate (68.2 percent) or the rate last quarter (67.8 percent).

New Home Sales   chart icon CHART

Sales of new one-family houses in August 2008 were at a seasonally adjusted annual rate of 460,000. This is 11.5% below the revised July 2008 estimate of 520,000.

Construction Spending   chart icon CHART

Total construction activity for August 2008 ($1,072.1 billion) was nearly the same as the revised July 2008 ($1,071.8 billion). Please see our web site for further details: http://www.census.gov/constructionspending

Quarterly Financial Report – Retail Trade   chart icon CHART

After-tax profits for retail corporations with assets greater than $50 million averaged 2.3 cents per dollar of sales for the second quarter 2008, up 0.1 (+/- 0.1) cents from the average of 2.2 cents for the first quarter 2008.

Housing Starts/Building Permits   chart icon CHART

Privately-owned housing starts in September 2008 were at a seasonally adjusted annual rate of 817,000. This is 6.3 percent below the revised August 2008 estimate of 872,000.

http://www.census.gov/cgi-bin/briefroom/BriefRm

U.S. Census Bureau
Economic Indicators

***NOTE***

Something is very wrong with these numbers – it is not possible to have this many foreclosures and have the same number in home ownership. With the credit crunch crisis that has been prevalent and pervasive enough to “bailout” the banks lending programs – how could new single family housing and construction starts have anything close to these numbers?

The profits at around two cents per dollar of sales couldn’t possibly be correct unless there is more crooked accounting going on in these arenas as well. Of course, if lay-offs accounted for this somewhere and actual profits were being hidden in continued growth or what? There is something very off about all these numbers.

note by cricketdiane

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