Once again, if it is too good to be true, then it probably isn’t what it’s touted to be.

Corrupt banksters, brokers, and insurance companies. Such a deal they don’t have for you.

As a software engineer and entrepreneur with a prior background in manufacturing engineering, whose personality could be summed up in the word “irreverent,” I find very few things offensive; what the financial services industry terms as “innovation” is a complete degradation of the term, and an attack on science and engineering.

Financial “innovations” are just new ways to frame confidence games. After the dot-com bubble burst, one of the reasons I wanted to stick around in the industry was to help build the systems that replace these people. My sector of the economy was put to work at the behest of Wall Street to figure out how to replace the American laborer. I’m hoping once we replace Wall Street, they might get on board with some progressive reforms when they’re feeling squeezed like everyone else.

The coinage of the term “financial products” was the inflection point of failure. Banking is supposed to be predictable, stable and dull. Banking is supposed to be the lubricant of an economy, not the machinery. The more exotic these concepts became, the greater the gambling and con games grew. And here we are, with the titans of finance still thinking they are masters of the universe. But why shouldn’t they? We have a president who’s financial team believes the same thing, and Obama seems more than satisfied with that state of affairs. Meanwhile taxpayers keep shoveling money into the pockets of these robber bankers.

I’ve read about the disaster in Jefferson County. Do their bonds fit into the municipal bonds category, where the interest income is tax exempt?

Are they settling for full price?

“Financial genius is leverage and a rising market.”

The wealthy underpay for government, and therefore have been overconsuming it. They also need someplace to put all that excess money/

That will come as a big surprise to David S., quoted on one of a number of web sites devoted to this debacle.

Agreed I follow the market a bunch and to be honest I could not describe these Securities and how they work even after reading this post I still have questions.
Regular people only buy what they don’t know if bankers suggest they buy it. Auction Rate Securities are not tech stocks that people demanded to buy not at those interest rates anyway.
People follow the Banker’s advice when selecting safe stuff for their portfolios.

There were an estimated $330bn outstanding in 2007. The Chicago Fed explains the size:

if defaults sart to happen I assume the interest rates should go way up. Unless the Fed steps in but will they any signs they will?

Is this debt on the banks books?

Yes, the interest on the bonds is tax-free. The problem there is that the County got sucked into buying interest rate swaps to hedge against an upward movement in interest on those auction rate bonds. Bloomberg reporters William Selway and Martin Z. Braun provide an excellent description of the problems: link. Naturally, I like this quote:

Commissioner Smoot says the commission misplaced its confidence in the bankers and advisers.

“I blame the people who said they were the experts,” Smoot says. “The big Wall Street bankers. Where are they now? We trusted them. We asked our folks to trust them. And you know what- — they violated our trust.”

I think every empire starts to fall once speculation gets to big compared to manufacturing and farming.

It is incredible, isn’t it? Paper financial transactions are called “products”, and sold like some new flavor of toothpaste, and this is called innovation. It is too laugh.

Never mind. Read the Chi Fed letter and it answers my questions.

Wow.

No, the bonds were not issued by the banks and brokers that sold them, but by third parties. Any obligation for these transactions will be the result of litigation, so it may be mentioned in the financial statements. Raymond James won’t book any exposure until they have to.

As to the interest rates, the bond documents set a specific rate if the auctions fail. In this case, the auction default rate seems to be 11%. That is one thing causing the problem. The swaps only pay off if other rates move higher, and since the Fed is keeping rates really low, the County is exposed for the loss on the swap. For details, see the link in my comment 10. It really is an excellent discussion of the problem.

They call that fraud.

Step right up – try your luck at the carnival.

This is the result of too many years of Republic rule and too many people believing the fairytails about government told by St. Reagan.

One of the things I really haven’t been able to wrap my head around is; where are all the indictments?

The S&L crisis/scandal was a rounding error compared to this debacle, and it was littered with investigations and indictments.

There is more evidence of Fraud by Hanky Panky Paulson, and Goldman CEO Lloyd C. Blankfein, (C stands for criminal). Paulson gave himself “waviers” because of the obvious conflict of interest. These waviers allowed Paulson and Blankfein to conspire to defraud the taxpayers with their phony “Financial Meltdown”. If Pauslon and Blankfein were not conspiring to to give us Shock Doctrine, they must have been having a long distance romance.

During the week of the A.I.G. bailout alone, Mr. Paulson and Mr. Blankfein spoke two dozen times, the calendars show, far more frequently than Mr. Paulson did with other Wall Street executives. On Sept. 17, the day Mr. Paulson secured his waivers, he and Mr. Blankfein spoke five times. Two of the calls occurred before Mr. Paulson’s waivers were granted…

Mr. Paulson’s schedules from 2007 and 2008 show that he spoke with Mr. Blankfein, who was his successor as Goldman’s chief, 26 times before receiving a waiver.

On the morning of Sept. 16, 2008, the day the A.I.G. rescue was announced, Mr. Paulson’s calendars show that he took a call from Mr. Blankfein at 9:40 a.m. Mr. Paulson received the ethics waiver regarding contacts with Goldman between 2:30 and 3 the next afternoon. According to his calendar, he called Mr. Blankfein five times that day…

According to the schedules, Mr. Paulson’s contacts with Mr. Blankfein began even before the height of the crisis last fall. During August 2007, for example, when the market for asset-backed commercial paper was seizing up, Mr. Paulson spoke with Mr. Blankfein 13 times. Mr. Paulson placed 12 of those calls.

More proof of the conspiracy is Paulson’s original three page plan. He wanted to give himself absolute power to loot the treasury without any penalties.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Nathan, there was one low profile indictment of one of the perpetrators of the Jefferson County debacle, though in another scam, and the article I linked in 10 says that there are investigations pending of several of the JP Morgan banker/brokers involved in that scandal.

My knowledge of this is very imperfect. My understanding is that for issuers of bonds this was, in an environment of low interest rates, a way for them to avoid the fees and costs of regular loans. The interest rates they were paying (determined by the auctions) could be a little higher but without the added overhead they would actually be saving money. And remember the auction was geared, in theory, to find the lowest acceptable interest rate, not the highest. Buyers and sellers could enter and exit the market through the auctions. As long as there was a sufficient number of both, and the banks involved were willing to provide credit to cover the short money demands between auctions, you could say these investments were liquid. But after the bursting of the housing bubble and especially into February 2008, buyers dried up, auctions did not meet minimum sell prices and so failed, and banks refused to provide bridging credit, so all of a sudden those holding ARS were stuck. So why did buyers dry up? Well, probably for two reasons. First, they needed what money they had to cover their losses elsewhere not re-invest it. Second, just as the bursting of the housing bubble indicated that housing was vastly overpriced, the same could be said of these bonds as well. Why would you buy a bond if you know that its underlying value is much less than stated?

So ARS got hit for much the same reason that housing did. Both represented bubbles and when the one burst, the other soon followed. Were investors taken for a ride? Yes. Were they greedy? Also yes. The central lesson here is once again that financial innovation is really about separating investors from their money, the savvier the investor the more complicated the innovation is all.

Wall Street and our elites are essentially one. There was massive, systemic fraud from the lowest levels to the highest in the financial industry. We are talking about instances of fraud in the millions. The FBI is supposed to be following a few thousand. That’s about it. But what can we expect when it has been the stated policy of both the Bush and Obama Administrations not just to keep the worst of the worst in terms of people and institutions in place but to funnel trillions to them. The wholesale looting of government begun under the Bush Administration continues and has even accelerated under Obama.

I’m stunned at how crooked so many of these financial “innovations” are on their face.

What was the FEC and the FED and Congress doing when these con men were creating these “innovations”? Did absolutely nobody suggest that it sure seemed like Wall Street sharpies were coming up with a thousand different ways to fleece the rubes? Is it surprising that these “innovations” came to be immediately after a decade in US history when the biggest number of regular working people started participating in the market? Is it surprising that these “innovations” first appeared just as the dot.com boom was spiraling into a fiery crash?

I’m starting to think that Matt Tiabbi actually let Goldman Sachs off way too easy in his outstanding Rolling Stone article. I need to take a look at the University of Chicago School of Business course catalog to see if they’re also teaching how to shave dice and deal from the bottom of the deck. I’ve always wanted to learn how to set up a three-card monte game.

You are on. We form the First Mutual Bank of the Internet. It’s owned by depositors, because it Mutual, some precentage of deposits are allocated for Capital and are not FDIC insured. The balance of Deosits are FDIC insued. I know of a Bank License for sale.

For loans we isssue a credit card. For checks we issue a debit card. No paper checks, no paper anything.

Speaking of bonds:

2 July 2009
“Build America Bonds” Paying a Shocking Premium to Corporates

The “Build America Bonds” were created by Bill S.238 called “The Build America Bonds Act of 2009 which provides $50 billion of federal taxpayer funds to subsidize state and local government tax free bonds in support of ’shovel ready’ infrastructure projects.

The U.S. Government gives the issuing municipality or state a 35% rebate on the interest that the issuer pays to the bond holders. This is a huge benefit for local governments.

We have not yet found out why, but it is apparently giving a big benefit to the buyers of the bonds who are getting an income stream at well below market prices for comparable issues. In some cases the BAB bonds are pricing at 149 basis points over comparably rated corporate bonds.

Where is the inefficiency coming from in this bond offering? Who is taking the differential, the vigorish, being granted to the state and cities? Who are the underwriters and the market makers? Who are the big market makers besides Pimco? What are the fee structures being charged compared to the overall bond market?

Meredith Whitney, star analyst that she is, was the closest with her $4.65 prediction. She thinks the stock has lots of room to run, notes Fortune.
Goldman, in her mind, will surf the economic woes now roiling the country. Goldman is a top underwriter of municipal bonds and the No. 1 underwriter of Build America Bonds. “These are a new type of municipal bond, part of the Obama administration’s $787 billion stimulus plan. Cities, states, universities and government entities use BABs, as they’re known, to finance infrastructure projects. This is a potential $50 billion annual market, Whitney says, and Goldman currently holds a 25 percent share,” reports a Fortune article.

Jessie’s Cafe Americain
Oh now it all makes sense. Droit de Seigneur.