International Forecaster Weekly

Like Deer Frozen in the Headlights

Investors acting like deer frozen in the headlights, control of the credit crisis is not a given, the time of the biggest mismanagement ever, by the Fed, emerging economies wont fill the void of the big western failures, loans and frauds

Bob Chapman | January 26, 2008

As we stated previously, fraud was involved in 85% to 90% of subprime and ALT-A loans and these frauds were recognized and known up and down the process, from borrow, to sale person, originator, lender, rater and the syndicator – the fraud was well established. They in part were even called liar’s loans.


Then came the multi-million dollar fraud schemes like federal prosecutors have unraveled in Atlanta. Obtaining $6.8 million in mortgages from Bear Stearns. Claiming $50,000 a month income when in fact yearly income was $105,000. The foreclosed mansion purchased for $1.8 million sold for $1.1 million. Our question is when are the prosecutors going to go after the other 350,000 or more fraudsters, including brokers, mortgage originators, lenders, syndicators and raters, they all knew what was going on. The FBI says losses from fraud in 2006 were $4.5 billion. They believe fraud caused half of the foreclosures. Via survey, it is estimated 60% of stated income loans were deliberately misstated by more than 50%.


What organized scamsters did was recruit borrowers with good credit to apply for gigantic loans, often of the stated-income variety, using false income and asset statements. Find a mortgage broker willing to submit false information and find appraisers who will approve inflated values. Some even used shell companies to divert the income. Bank fraud was easy because no one in the chain wanted the easy money to end. Some of the fraudsters are getting 30 years for bank fraud. That is for the big frauds. Hundreds of thousands of others go unpunished.

The central banks are throwing money at the financial system with the aim of getting the system to fully function again. In spite of massive infusions interest rates really haven’t fallen that much and it remains to be seen if lending will pick up again. The spread between official interest rates and interbank rates have never been this wide. We are seeing extreme measures; massive injections of which the recipient banks identities are not divulged. This is more like a CIA operation than a central bank effort to solve a problem. We do not believe covert measures are the answer to the problem. We face a question of solvency rather than liquidity and injecting liquidity is only going to delay the day of reckoning. Banks are in serious trouble and the FED, ECB, BOE and the BOC are helping banks to disguise the fact. After Northern Rock’s failure central banks will avoid another failure at all costs. This is not allowing the free market to work. We long ago proclaimed that Fannie Mae and Freddie Mac were on the edge of insolvency. What the government has arranged since last March is for the Federal Home Loan Banks to pour money into failing banks without letting it be known to the public. What our federal government and the Fed has done is silently and by stealth for nine months been nationalizing the entire mortgage market. The lenders, the banks and investment banks have to answer to their shareholders. Our arrogant government and the Fed answer to no one. They secretly made $750 billion in loans in the 3rd quarter alone. You didn’t read that or see that in the media did you? We wonder where all that money came from?

The bottom line is we are entering tough times. As the volume of money increases, its value falls. That makes the dollar very unattractive and investors exchange it for other currencies. No matter how you cut it we are in big trouble. The Fed has mismanaged the biggest risk of our times. Ever since the equity bubble began forming in the late 1990s, the Fed has been ignoring and condoning and conducting excesses in asset markets. Nothing more than a jump from one asset bubble to another asset bubble. The resultant inflation isn’t even a consideration. They quote bogus core inflation knowing that by their own gauges that inflation is over 10%.
In 2004, China bought 20% of our Treasuries, in 2005, 30% and in 2006, 36%. In 2007 it became a net seller. As of October 30, 2007, they had $388 billion in treasuries, slightly less than at the end of 2006. They are buying bonds issued by Fannie Mae, Freddie Mac and corporate bonds. The point is the purchases are slowing.
Foreigners must have a wish to lose money. Their Treasury holdings rose to $194.7 billion in the first ten months of the year, more than the $166 billion increase in Treasury securities held by the public. Incredibly, since George Bush too office, the debt issued to the public has risen $1.7 trillion, with $1.3 trillion of that increase being taken by foreigners. Of that $327 billion, or about 25% has been taken by China.


Consumers, who make up 72% of GDP, are retrenching as home prices continue to fall for the nation as a whole, which is the first time this has happened since 1933. Consumers are buried in debt as is government and we wonder for how long foreigners are going to fund this profligacy. Some say growing developing countries will fill the void left by the US. Don’t bet on it. If that is so, exports from China and India will fall in a big way.


The Fed seems to have mismanaged the biggest risk of our times. They created the problem deliberately in order to bring down the US, Canadian, European and Mexican economies to force these nations to accept world government. Their problem is that they never expected a credit collapse, which they caused as well They thought they could work it out and that is not the case. Bankers are furious about the losses and refuse to lend. The Fed went too far. Now there is no way out. We predicted all of this and we are not geniuses. The markings were all there. All you had to do was to think outside the box and have the guts to tell the truth about what was and is going on. Many people, worldwide, now know what is going on because of what we and a handful of others have exposed. It is no wonder Washington will do anything to shut us up.


If the FED, ECB, BOE, BOC, SNB and the People’s Bank of China and the Japanese central bank cannot control the credit crisis soon the system will implode. If it does collapse the entire world will go down. This could be a Modern Greek Tragedy, and your only protection is gold. Some say the Fed and other central banks are pushing us into depression. That is not true. They set the framework and they are being dragged into depression. They do not want this because depression will expose what they have been up too. You cannot under price credit and have negative interest rates indefinitely.


The intelligent in the investment world are frozen in the headlights trying to figure out which way to go. They know the stock markets and gold and silver prices are being manipulated. A good indicator is that not a single junk bond has been issued in Europe since August and only a tiny amount in the US. Europe’s corporate bond issuance fell 66% in the 3rd quarter to just under $400 billion, said the BIS. Whether you know it or not this has never happened before. The European market for asset backed paper has shrunk 18-weeks in a row. It has fallen 36% or $404 billion.
Average equity capital has fallen to 2.5% without good will, which always has been dicey on a balance sheet. Capital ratios for banks have fallen below 8% and if the banks do not raise more capital the BIS will force them to shrink their balance sheets.
As this war moves forward, inflation is officially 3.1% in the Eurozone and 4-3/8% in the US. The real inflation is 6% and 11.6% respectively. These numbers have caused a political storm in Germany where 71% of the German women want the Deutsch mark restarted. We lived in Germany for four years and have tremendous respect of the intelligence and common sense of one of Germany’s greatest assets. Yes, and we still love the green outfits as well as the beer. Germany won’t continue to put up with interest rates that should be higher and two separate injections of $500 billion to accommodate Spain and Ireland. That is why the ECB has inundated the system with money and credit. A further question is will Germany pay for the bailout of Spain and perhaps Ireland? We do not think so. Such an effort by the ECB would destroy the euro, the Eurozone and probably the EU as well. In addition, Germany is sick and tired of having its balance payments surplus gobbled up by other members who live beyond their means. As well, don’t forget German real estate has not gone up in value over the last 7 years and every other country’s real estate has.