The Biggest Fraud Ever In Capital Markets

Posted: Oct 09 2010     By: Jim Sinclair      Post Edited: October 9, 2010 at 5:12 pm
Filed under: General Editorial

My Dear Friends,
This is not an exaggeration. If anything, it might be an understatement.
I told you about this last week as a class action with a RICO statute was filed against servicers acting for international investment banks foreclosing on loans that represented the collateral for securitized mortgage debt, a fraudulent OTC derivative.
The banksters tried to sneak through a bill that would make their criminal actions legal. The screams were heard in the White House and before the bill passed all its requirements the President vetoed it. That occurred even before the bill had completed its required procedures.
We are now in Crisis #2 which can eclipse anything you have seen yet because of the size of the creation of this pariah in the OTC derivative disaster.
This will not pass quietly. It is going to tear the dickens out of what is left of the financial firms that brought the horror to the Western World. It will be orders of magnitude uglier than anything you have seen so far.
Gold is headed to $1650 for starters. When it vaults, the price will move hundreds of dollars in a matter of days.
When all this began, before others, I told you via JSMineset that "This is it! "
Now I am telling you the final you know what has hit the fan. The geometric rise in gold and fall in the dollar are now at the doorstep.
Are you ready?
I am, everywhere and in every sense!


‘This is the biggest fraud in the history of the capital markets’
Janet Tavakoli is the founder and president of Tavakoli Structured Finance Inc. She sounded some of the earliest warnings on the structured finance market, leading the University of Chicago to profile her as a "Structured Success," and Business Week to call her "The Cassandra of Credit Derivatives." We spoke this afternoon about the turmoil in the housing market, and an edited transcript of our conversation follows.

Ezra Klein: What’s happening here? Why are we suddenly faced with a crisis that wasn’t apparent two weeks ago?

Janet Tavakoli: This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back. But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security interest, and it’s not optional.

EK: And how much danger are the banks themselves in?

JT: When we had the financial crisis, the first thing the banks did was run to Congress and ask for accounting relief. They asked to be able to avoid pricing this stuff at the price where people would buy them. So no one can tell you the size of the hole in these balance sheets. We’ve thrown a lot of money at it. TARP was just the tip of the iceberg. We’ve given them guarantees on debts, low-cost funding from the Fed. But a lot of these mortgages just cannot be saved. Had we acknowledged this problem in 2005, we could’ve cleaned it up for a few hundred billion dollars. But we didn’t. Banks were lying and committing fraud, and our regulators were covering them and so a bad problem has become a hellacious one.

EK: My understanding is that this now pits the banks against the investors they sold these products too. The investors are going to court to argue that the products were flawed and the banks need to take them back.

JT: Many investors now are waking up to the fact that they were defrauded. Even sophisticated investors. If you did your due diligence but material information was withheld, you can recover. It’ll be a case-by-by-case basis.
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