TARP Circulation

[hippifried]

I can't get into all the economic doom & gloom. I just refuse to be a defeatist, & I'm really sick & tired of ideologues from all angles promoting policies that have already proven ineffective. The problem I see is that while everybody's talking about not wanting to be Herbert Hoover, it would seem that the Hoover doctrine is still in effect. Nobody want's a direct infusion of cash into the system. Why?

I don't have a problem with the stimulous. All this stuff needs to be done anyway. I'm sure the President would rather have been able to take his time, but it looks we're going to have to do a major catchup all at once just to stave off the results of stupidity. It'd be nice if there weren't so many skimming hands between the feds & the folks who are expected to sp0end the cash. The problem with the stimulous is the time lag. Things are going to get continuously worse until money actually gets flowing into the system. The TARP can bridge the lag.

It's apparent that we're not going to be able to bribe the banking industry into doing their job. They're just going to sit on their thumbs & wait for the second half of their welfare check so they can start making more demands. Time to step away from the conventional BS. The TARP is already allocated, with a wide discretionary range of how to use it. Give it to the American people as a dividend. Not a tax rebate. No griping about who deserves what. No sliding scale. No strings. No attachments. No addendums. No targets. No income tax on it. No social security or medicare payments. No requirement to claim it as income. No skimming by middlemen. No sting operations allowed. No interference with the capital markets. No messing around with the free market at all. A share dividend just for having a social security number. There's enough money left in the TARP to put $1000 in the hands of every man, woman, & child in the US. Got a number, here's a check. Just like that. Young, old, rich, poor, regardless. It could be over 90% distributed in 2 to 4 weeks. It can all be done through the treasury, & I don't see why it would require another Act of Congress. Consumer spending accounts for over 70% of GDP. This would be an immediate shot in the arm where it does the most good.

Now I know there's going to be somebody coming up with potential snags, but even snags won't create delays so long that it would alter the effectiveness. I don't see a downside.

Age issue? I understand that you can't just give $1000 to little kid. Just put on an arbitrary number. I favor a sliding number. Under 13, parents get full control of the payout. 13 & 14 year olds get a third with 2/3 to the parents. 15 & 16 year olds get 2/3. 17 & up gets the full amount. Sucks to be a kid sometimes, but oh well, problem solved.

Inflation? Got that. Got inflation happening in the middle of a nasty recession. I keep hearing about this phantom expanded money supply. So where is it? It's certainly not in the hands of the consumers & businesses that actually produce this country's wealth. I think we've had about enough of theoretical doom & gloom scenarios justifying the Hoover doctrine. Money needs to circulate. If the professional circulators can't do it or refuse to do it, then get somebody else to do it. The American people are ready willing & able to take on the task. Show me someone who would say "Oh no, that's theoretically wrong & I won't take the money.". The theories aren't working & it's our money. Anybody got a better idea?

Oh noooooo... It's a commie idea! Bullshit! What's more capitalist than paying out a dividend to shareholders? This is a democratic republic. Everybody owns an equal share.

As for the banks: I'm all out of sympathy. Their problems are of their own doing. Nobody forced these "financial institutions" to leverage themselves to the point where they could never get out from under it. They can sink or swim.

[thx1138]

Banks won't lend to people who have no chance of repaying the loan. The Banks can't lend to people who don't want to borrow. The economy will turn around when employers run out of people to lay off.

[thx1138]

U.S. heading for Japan style two decade long economic depression: http://www.marketoracle.co.uk/Article8541.html

[hippifried]

Banks won't lend to people who have no chance of repaying the loan. The Banks can't lend to people who don't want to borrow. The economy will turn around when employers run out of people to lay off.
Hmmmm... Well that's nicely cynical & all, but I still have no clue where you stand on my TARP proposal. That tells me it's something that Alex Jones hasn't been confronted with yet. Ergo, no preboxed talking points to memorize. So why don't you try to give me a thx1138 viewpoint on the topic?

[chefmike]

Banks won't lend to people who have no chance of repaying the loan. The Banks can't lend to people who don't want to borrow. The economy will turn around when employers run out of people to lay off.
Hmmmm... Well that's nicely cynical & all, but I still have no clue where you stand on my TARP proposal. That tells me it's something that Alex Jones hasn't been confronted with yet. Ergo, no preboxed talking points to memorize. So why don't you try to give me a thx1138 viewpoint on the topic?

LMAO...he'll get back to you...I brought up this idea in a semi-serious thread in the general section when the bailout started...why not?...at this point all the "economic experts" are doing is throwing shit against the wall and seeing if it sticks...

BTW...that's NOT how you tell if your pasta is done...

[hippifried]

I brought up this idea in a semi-serious thread in the general section when the bailout started...why not?...at this point all the "economic experts" are doing is throwing shit against the wall and seeing if it sticks...
Sorry I missed that. I knew I couldn't be the only one thinking this way. I've posed this in a few other forums around the net & gotten both positive & negative reactions from all over & through the political sphere. Mostly though, I've gotten silence, or simplistic derision & hyperbole that has nothing to do with the topic.


BTW...that's NOT how you tell if your pasta is done...
Speak for yourself.
Well... I guess it all depends on who has to clean it up. :lol:

[chefmike]

But we both know that ain't gonna happen, so as far as the actual stimulous bill itself goes, I'd like to see a lot more spending on infrastructure than the amounts I've heard mentioned.

[hippifried]

Yeah me too. But republicans are locksteppers (see the house vote) & there isn't enough votes to break a filibuster. If it works even a little bit, more can be added & the republicans won't have a leg to stand on.

I just wish everybody'd stop screwing with the tax codes for a while. You need a bank of lawyers to keep up with the constant changes. Give it a 2 year rest.

[trish]

James K. Galbraith recently wrote an article in Mother Jones. Thought some people here might appreciate the accompanying chart indicating our economic return on the type of dollar spent :arrow:

[chefmike]

That's a pretty neat chart, trish. Very informative. I emailed it to a couple of folks.

[chefmike]

SMDH...check this out:

http://theplumline.whorunsgov.com/stimulus-package/latest-cuts-to-the-stim-package-head-start-child-nutrition-food-stamps-public-transit/

[beandip]

One has to look at the underlying systemic problems of the FED to understand what is going on. What you see on CNN / and faux news is pure unadulterated bullshit. This disaster is manufactured. The underlying problem is greed. The sub-prime / mortgage "problem" is like a gnat on an elephants ass....it is what is being "sold" to J6P as a deflection to the real problem. The sub-prime bullshit is just a blip on the financial radar that J6P can wrap his sooperbowl watchin' / beer swillin / American Idol leech-fucking sponge headed brain around....as he watches a few of his neighbors lose their homes and figures...."whew...I dodged a bullet"....LOL

The real problem is the 60 trillion dollars of CDS's lurking out there.....that's 60T of bad paper. To put this in perspective 60T is literally more than the value of EVERY SINGLE THING on this PLANET. Wrap your head around that idea for a moment. Remember Warren Buffet stated a few years ago that derivatives were a "financial Armageddon.

You must understand that firstly the Fed is insolvent.

The Fed is a private banking conglomerate. The Fed could not care less what happens to the US or it's citizens. The Fed 's only concern now is the preservation of the Fed. What you're seeing is a financial chess game being played by the worlds banksters. Make no mistake....this is all or nothing.

Does anyone know that Bernanke went to Asia back in March of 2008...with his tin cup out and actually got 600B cash infusion for the Fed....at the same time that he was on TV telling everyone that the economy was doing fine? During the whole summer of 2008 he was lying like the shit bag that he is.

Why did he do this? Because the FED was running out of time to comply with the BASEL II agreement. All banksters know that they are lying sacks of shit. They all have "off market" books.... essentially a second set of books that they are not yet obligated to show anyone. BASEL II was an agreement signed by all of the worlds banksters years ago to slowly pry open their books open to each other. It's like this... since the FED was and still is a broke-ass organization...they need serious cash infusion to fill their drawers. failing to do so would be in violation of BASEL II thus they would essentially "default" on the agreement....and lordy, lordy, lordy.....they'd have to open their shit filled books all at once and let the rest of the world know that they are insolvent.

So the time line is this.... bernanke got a 600B "loan" from the Asian banks......in march.....that was not enough. When he made his now famous "We're 5 hours away from a complete financial meltdown" speech in front of congress......well, the real deal was he was 48 hours away from defaulting AGAIN on the BASEL II agreement !!!!!

So he got his 600B....and he and Paulson (another total leech-fuck crook, but alas...let's not get side tracked here)......basically bought a few more months of time. All they're doing is kicking the can further on down the road.
Look at what's happening now. China and Japan, who have been funding the US through the purchase of T-bonds..... are purchasing them at an ever decreasing rate. They see the Fed is broke with no way for the US to ever pay this money back. Never. We can not "grow" our way out of this economy. It is simply not mathematically possible. So Bernanke knows this, hence his bullshit idea he floated 3 weeks ago for the FED to issue it's own form of T-bonds.....but this is a phucking joke too. All the worlds banksters see now that the FED has no money. So what does this shit stain Bernanke want to do now? He wants another 900B to fill the FED's cash drawers for another 3 months....again kicking the can a teeny bit further on down the road. His only hope now it to take down every other baning institution OTHER than the FED..... the plan is to fuck everyone else up.... all the while hoping the FED will be just a little bit LESS fucked up.....thus having peoples / investors / organizations around the world flood the US with investment dollars.... both in businesses as well as purchases of more useless paper (T-bonds). Remember, it's "all in"now....

Bernanke wants to start and fund a "bad bank" with TARP II (Taxpayers Ass Raping Program). Here's the problem. We already HAVE a fucking "bad bank"....it's called the FED. Bernanke wants to wipe the FED's red ink off the books....and monetize the shit paper with our tax dollars. How fucked up is THAT?

Remember that Bernanke / the FED OWNS the US government...at least on paper. Our constitution states that only congress has the power to mint / regulate money (through the Treasury).....where as in actuality.... that "right" has been given to the FED.

Think about this: Does Congress or the Treasury set interest rates? No.

Bernanke is in the cat bird seat. All he has to do is to stall.....and stall....and stall....and let the economy tank....and J6P will be begging for him to do what ever it takes to "fix" this problem. One of the biggest problems is that his last tool left in his tool kit is again.....to monetize this debt. how does one do this? You print money. You stick a turbo and a nitrous bottle on the printing presses over at the US mint..... and get those ball bearings glowing cherry red. What is the result of this?

Hyperinflation.

Worse than in Argentina in the 1980's......much worse.

Get ready to get fisted with no lube..... 'cause this is what's coming down the Hershey Highway.

How phucked is the FED? Consider this tidbit of information. Even before TARP was passed Fannie / Freddie Mac was leveraged at 20/1 ratio. The FED...."bailed them out' LOL. To bad that at that time the FED was leveraged at over 50/1. Go figure. How is that even possible. Remember .... this problem was known for years. Remember when Shrub ordered that the M3 numbers STOP being made public? That was about 2 years ago. Everyone in the know....knew this shit storm was a cummin'......
M3 numbers are the official numbers that the government used to put out that lets the world know how many dollars were being printed for that quarter.

So anyway..... back to the fun stuff at hand. A few smart economists recently got together and figured out that the only likely solution would be to take a trillion or so of the taxpayers money....in a "loan" and start a "good bank". Bernanke is shitting his pants at the thought of this. Remember he's in this "all or nuthin". Starting a "good bank" means that he's outta bidness.....the FED goes Kaput.

So, you take a trillion...start a good bank.....say ten regional nationalized banks with OPEN BOOKS~~~!!!!! The Trillion dollars is deposited in the ten regional banks....and makes up 25% of the beans in the bowl. Then you offer 75% of the remaining interest as common stock....so anyone can buy into it. There is your 100% funding. This bank is solvent. Incremental banking laws allow banks to loan out 9 dollars for every dollar deposited. No, money does not just come off the printing presses. Most money is made.... or produced by this very law. Anyway, since this new "good bank" was paid for initially by US tax payer money.....it would only seem fitting that only US investors should be allowed to invest in it. Once this bank is working it can begin to actually pay back the T borrowed from J6P.

The above "solution" is a simplified plan being bandied about by economists not affiliated with the FED. Would it work? On paper it sure seems so. Will it ever happen? Never. Blood will spill before the US regains it's sovereignty from the FED. Remember Bernanke wanted to completely usurp the US sovereignty by having the FED issure it's own form of T-bonds.....He...and / or the FED doesn't give a rat's azz about you or I.... the FED wants 100% complete control over the US, lock, stock and barrel.

back to Shrub..... remember about early Sept....when all the Euro-peeeeeon banksters and leaders were flying into Washington to visit with him? Do you think they were there for the food and drink? Nope..... they saw this shit storm coming and they read him the fucking riot act. What was Shrub's response? "I'll let the experts handle this economic problem". Those experts at the time being Bernanke and Paulson. bush basically pleaded with the Euro-weenies...... "You can do what ever the fuck you want....just wait until I'm out of office".

Now the O-man is POTUS. You want change? hahahahaha don't kid yourself. What Senator got the most contributions from banks?

Ding, sing, ding...... we have a winnaaaaaaaaaa~
Obamamamamamama did. He is bought and paid for he'll do what he's told...just like Shrub.

anyway.... there's a shit storm coming that will make the Depression of old look like a walk in the park.

Already we're seeing the supply chain broken for "parts". This is just a simple example I'm using that J6P can relate too. What happens when 15-20% of OTR trucks are out of service? Food shortages. food rationing.

stay tuned.... the fun is just about to begin.

;)

[beandip]

oh yea....anyone see the headline on Drudge yesterday?

The O-man was parroting Bernanke...."We need to pass this stimulus bill or else"

LOL

Meet the new boss........ same as the old boss.....La-dee-da

:)


only 7% of the bill was for stimulus. The rest was pure pork byproduct.

talk about denial.

[beandip]

hippifried your TARP proposal does nothing to correct the systemic problem(s) in the banking industry.

The problem is not unemployment. That is but one of many detrimental results of the problem.

[thx1138]

You sure Moody's doesn't work for Alex Jones too?

[hippifried]

Well... Reading all that tripe was certainly a waste of time.

This isn't about the Fed. It's not about monetary policy. It's not an inflation issue. It's not mortgages. It's not about Mexicans, outsourcing, China, the wars, oil, or globalism. If you strip away the "gee I'm so smart" economic jargon, the circular rhetoric, & the ideological rants, what's left is an insurance fraud. Insurance is just a hedge bet. That's what all these fancy credit default swaps & most other derivatives are too.

With the daisy chain of uncollateralized borrowing going on between brokers, they needed some way of showing a reserve in the daily accounting. They aren't banks, so they can't borrow from the fed discount overnights, & the Fed demands an audit when you borrow at the discount rate anyway. Since all the new debt was unsecured & nobody wanted to underwrite it, in steps AIG with a whole series of fuzzy "market instruments" to mitigate the risk. Hedge bets. By brokering the hedges & the hedges on the hedges & so forth, it's like selling insurance on the loans without haveing to actually underwrite them. It all looks good on paper, & everybody jumped on the bandwagon, but nobody can explain how these swaps are supposed to pay off when called on to do so. Not even the boys over at AIG who dreamed them up & pulled them out of their asses. It's just gambling, & everybody welched on the bets because there's no rules or object to the game. Ergo, insurance fraud.

None of this had anything to do with the Fed. Not in their purview. These weren't banks. They were brokerages. They were calling themselves "investment banks" because they were loaning money to their clients to buy stock in the brokerage along with pieces of all these derivatives they were selling. Big oops for their clients. It was the SEC that fell down on the job.

There's probably enough printed dollars of all denominations to equal less than a grand for each American. The presses at the mint have no effect on anything. They merely replace the worn out currency that gets collected each night from banks all over the country & shredded. Printing money is a non-issue regardless of Glen Beck's rantings. It's just hyperbole.

Money is just numbers on a ledger. It's created out of thin air by debt. It's wiped off the books on payoff, sans interest, which is the permanent growth in the money supply. Welcome to Fiatland. The system works fine as long as there's regulation of those who play with other people's money.

So now we have over $50 trillion floating around out there in credit default swaps alone, just in the US. It's funny money that's burning holes in the economy because nobody knows how to clear it off the books. It's already been skimmed & now it's just floating in the ether. No rules or object to the game.

These clowns on Wall Street ran up gambling debts that dwarf the entire gross product of the planet, just because nobody told them not to. I'll start feeling better about all of this when I see all the executives at AIG, for the last 25 years, clapped in irons & doing the perp walk.

Basel II is just a standardization of the required reserves in the banks that are regulated by the central banks. It came too late.

[beandip]

"what's left is an insurance fraud. Insurance is just a hedge bet. That's what all these fancy credit default swaps & most other derivatives are too."

We are in agreement.

CDS = basically insurance fraud.

It does however totally revolve around The FED. Look at what banks comprise of the FED. Investment banks. JPM ring a bell? JPM = investment bank.

So apparently you agree with my "tripe"

LOL
Thanks

"The presses at the mint have no effect on anything."

Soon they will, Bernanke is taking an Epic Fail play from Argentine s playbook. Wait and see. He's either gonna ass rape us for what was 900B last week, 1.3 T yesterday and amazingly enough has swelled to 6.3 T today, in less than 24 hours.

Grab the popcorn. The Obamatron is just doin' what he's told at this point.

On another funny note, notice how now the POB are separating the "stimulus plan" from the bank bail out.

Tonight we get to listen to the little puppet try to scare us silly so tomorrow the Fed gets what they want. These things are unrelated. It is sheer genius in marketing skills though...I'll give 'em that much.

[trish]

...we have over $50 trillion floating around out there in credit default swaps alone, just in the US. It's funny money that's burning holes in the economy because nobody knows how to clear it off the books. It's already been skimmed & now it's just floating in the ether. No rules or object to the game.


Nail on the head. Thanks hippiefried.

[hippifried]

It does however totally revolve around The FED. Look at what banks comprise of the FED. Investment banks. JPM ring a bell? JPM = investment bank.
JP Morgan has always been a commercial bank. They got bought by Chase. You don't know what you're talking about.


So apparently you agree with my "tripe"
Not at all. You don't know what you're talking about.


On another funny note, notice how now the POB are separating the "stimulus plan" from the bank bail out.
There's no stimulous yet. The TARP was passed by the previous Congress & signed by the previous president. All to the same end, but 2 whole different projects to attack 2 different aspects of the same overall problem. You don't know what you're talking about.

-----------------------------------------------------------

Thanks Trish. I'm no accountant, but I can't help but think that there has to be a way to clear all this bad paper without crashing everything. The President has surrounded himself with some pretty smart people. If they can't figure it out, maybe they should hire some of the crooks who know how to think outside the box.

The economic theories ain't workin'. We need a rethink.

[beandip]

From this site:

http://www.federalreserveeducation.org/fre_director/print.cfm?theURL=/fed101_html/structure/tour/tour.htm

"Member Banks

Approximately 38 percent of the 8,039 commercial banks in the United States are members of the Federal Reserve System. National banks must be members; state-chartered banks may join if they meet certain requirements. The member banks are stockholders of the Reserve Bank in their District and as such, are required to hold 3 percent of their capital as stock in their Reserve Banks"

JPM is a member

From this site:

http://www.save-a-patriot.org/files/view/whofed.html

"Chart 1 reveals the linear connection between the Rothschilds and the Bank of England, and the London banking houses which ultimately control the Federal Reserve Banks through their stockholdings of bank stock and their subsidiary firms in New York. The two principal Rothschild representatives in New York, J. P. Morgan Co., and Kuhn,Loeb & Co."

Interesting chart there...not completely up to date though....


http://www.streetinsider.com/Corporate+News/J.P.+Morgan+(JPM)+Selected+by+the+Federal+Reserve+ as+Custodian+for+Its+Mortgage-Backed+Securities+Purchase+Program/4352425.html

"J.P. Morgan (JPM) Selected by the Federal Reserve as Custodian for Its Mortgage-Backed Securities Purchase Program"

Two peas in a pod. Left hand washes the right hand.

again, more collusion:

http://www.globalresearch.ca/index.php?context=va&aid=8974

"The “rescuer” was not actually JPMorgan but was the Federal Reserve, the “bankers’ bank” set up by J. Pierpont Morgan to backstop bank runs; and the party “rescued” was not Bear Stearns, which wound up being eaten alive. The Federal Reserve (or “Fed”) lent $25 billion to Bear Stearns and another $30 billion to JPMorgan, a total of $55 billion that all found its way into JPMorgan’s coffers. It was a very good deal for JPMorgan and a very bad deal for Bear’s shareholders, who saw their stock drop from a high of $156 to a low of $2 a share. Thirty percent of the company’s stock was held by the employees, and another big chunk was held by the pension funds of teachers and other public servants. The share price was later raised to $10 a share in response to shareholder outrage and threats of lawsuits, but it was still a very “hostile” takeover, one in which the shareholders had no vote.

The deal was also a very bad one for U.S. taxpayers, who are on the hook for the loan. Although the Fed is privately owned, the money it lends is taxpayer money, and it is the taxpayers who are taking the risk that the loan won’t be repaid. The loan for the buyout was backed by Bear Stearns assets valued at $55 billion; and of this sum, $29 billion was non-recourse to JPMorgan, meaning that if the assets weren’t worth their stated valuation, the Fed could not go after JPMorgan for the balance. The Fed could at best get its money back with interest; and at worst, it could lose between $25 billion and $40 billion.4 In other words, JPMorgan got the money ($55 billion) and the taxpayers got the risk (up to $40 billion), a ruse called the privatization of profit and socialization of risk. Why did the Fed not just make the $55 billion loan to Bear Stearns directly? The bank would have been saved, and the Fed and the taxpayers would have gotten a much better deal, since Bear Stearns could have been required to guaranty the full loan"

I never said JPM was not a commercial bank, they are the largest "member" of the FED. Essentially one and the same......if it walks like a duck and quacks like a duck....

[El Nino]

nice research

[ALYSINCLAIRxxx]

This is the best thread I have read in weeks. Good job, beandip and guys!

[hippifried]

Bean,

Its difficult to read conversational inflections in a written post, but it seems that you think it's some kind of revelation that Morgan would be a member of the Fed. Of course they are. The Fed's the central bank of the US. Morgan was acquired by Chase. They're a national bank, with branches everywhere. Membership is required.

Where I think so many people get discombobulated is with all this John Birch crap about foreign "ownership" of the Fed, by the Rothchilds & Warbergs et al. We own the Fed. It's a quasi-private government agency. It's complex because banking is complex, & it's a bank. Everything about the Fed is public record:
http://www.federalreserve.gov/
http://www2.fdic.gov/idasp/index.asp

But since this is about the TARP, & that's not being run through the Fed, What's your point?

----------------------------------------------------------------

Oh well... It looks as though my grandiose scheme of getting a direct cash infusion into the hands of consumers, where it belongs, isn't happening this time either. I just hope Geithner's as smart as everybody seems to think he is.

[qeuqheeg222]

dump liquidity into the ponzi scheme that banking has become...the picture of dorian grey??

[El Nino]

Hippifried, the Fed can not be audited... What do you mean everything is available for us to see? Ha! And by the way, it is run by private banksters.

[chefmike]

Bean,
....Where I think so many people get discombobulated is with all this John Birch crap about foreign "ownership" of the Fed, by the Rothchilds & Warbergs et al.

It does sound like beandip might be headed in that direction, but I'm not going to associate him with such El Ninian nonsense without further confirmation....although I notice he didn't find his way back to the 'science returns to the oval office' thread after trish schooled him on global warming...she blinded him with science...you go girl...

[hippifried]

Hippifried, the Fed can not be audited... What do you mean everything is available for us to see? Ha! And by the way, it is run by private banksters.The Fed is under constant audit. It's all public record. They're the government's bank. It's all right there if you look. This isn't the CIA, but even their budget is public.

The Fed is run by the board of governers, Presidential appointees all. It's a full time job. They're in our employ. Some come from private banking, some from academe, some from other agencies, etc... Everybody comes from somewhere. They get their expertize from somewhere. We don't grow bureaucrats in a garden in back of the Whitehouse.

[El Nino]

According to the 16th Amndment, the government shouldn't have a bank; rather, they should be the central bank (prints and issues currencies etc.) I will not debate this issue any longer. The Federal Reserve is a private organisation that is a conglomerate of foreign and some domestic bankers. There is nothing "federal" about it. Nothing is transparant regarding their records. They do in fact print money out of virtual thin air, loan it to the government for public circulation with a heavy interest (in the form of our Federal Income Tax), and then enforce the whole scam with the brutal IRS. We get screwed over and over. It is a perpetual debt machine. If congress would take back the Constitutinal role, stop subbing out the task and print money like they did before 1913, things would actually change for people... I am talking REAL CHANGE. Not just color of skin change. Most people have no idea about the biggest monetary scam in the history of the world. What is the end result of all this? Why Hyper-Inflation of course. Not to mention compounded debt leading to depressions like the one we are so currently immersed in. But if you want to go on and support the "Fed"... hey, be my guest.

If you want to learn the history, please get the book, The Creature from Jekyll Island : A Second Look at the Federal Reserve (Paperback) http://www.amazon.com/Creature-Jekyll-Island-Federal-Reserve/dp/0912986212

Google vid lecture link, http://video.google.com/videoplay?docid=-8484911570371055528

[trish]

"The Federal Reserve System is not "owned" by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects." __
http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm#5

"The Federal Reserve's ultimate accountability is to Congress, which at any time can amend the Federal Reserve Act. Legislation requires that the Fed report annually on its activities to the Speaker of the House of Representatives, and twice annually on its plans for monetary policy to the banking committees of Congress. Fed officials also testify before Congress when requested.

To ensure financial accountability, the financial statements of the Federal Reserve Banks and the Board of Governors are audited annually by an independent outside auditor. In addition, the Government Accountability Office, as well as the Board's Office of Inspector General, can audit Federal Reserve activities. " ___
http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm#8

[El Nino]

Oh come on Trish... you're linking straight to the belly of the beast. It IS private and it DOES print money out of thin air.. Prominant individuals who run the FED are not billionaires, but TRILLIONAIRES. HAHA puh-lease.

Um, sure, central banks are "non-profit" organizations. The founding fathrs of this Republic are most assuredly rolling around in their graves right now.

[trish]

I always check the primary sources first.

[El Nino]

Who Owns The Federal Reserve?
The Fed is privately owned. Its shareholders are private banks
by Ellen Brown

http://www.globalresearch.ca/index.php?context=va&aid=10489

Well, Trish someties you have to divesify your sources of informaton in case of, you know... bias.

"GIVE ME LIBERTY, OR GIVE ME DEATH"
Does this exclude economic slavery?

[trish]

I'd feel better about a source that's not shilling books about various conspiracies while I'm trying to read...oh and then when I get to the end of the post, I find out the entire post was just an advertisement for another book. We must suspect bias where ever we look.

I would like to see the an actual audit of the FED by a independent firm. Can anyone provide such a link? That would pretty much settle the issue of whether it can be audited or not.

[El Nino]

Here is the article for everybody's eyes to see. The numbers are boiled down.

Who Owns The Federal Reserve?
The Fed is privately owned. Its shareholders are private banks


by Ellen Brown

"Some people think that the Federal Reserve Banks are United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lenders."


– The Honorable Louis McFadden, Chairman of the House Banking and Currency Committee in the 1930s



The Federal Reserve (or Fed) has assumed sweeping new powers in the last year. In an unprecedented move in March 2008, the New York Fed advanced the funds for JPMorgan Chase Bank to buy investment bank Bear Stearns for pennies on the dollar. The deal was particularly controversial because Jamie Dimon, CEO of JPMorgan, sits on the board of the New York Fed and participated in the secret weekend negotiations.1 In September 2008, the Federal Reserve did something even more unprecedented, when it bought the world’s largest insurance company. The Fed announced on September 16 that it was giving an $85 billion loan to American International Group (AIG) for a nearly 80% stake in the mega-insurer. The Associated Press called it a "government takeover," but this was no ordinary nationalization. Unlike the U.S. Treasury, which took over Fannie Mae and Freddie Mac the week before, the Fed is not a government-owned agency. Also unprecedented was the way the deal was funded. The Associated Press reported:

"The Treasury Department, for the first time in its history, said it would begin selling bonds for the Federal Reserve in an effort to help the central bank deal with its unprecedented borrowing needs."2

This is extraordinary. Why is the Treasury issuing U.S. government bonds (or debt) to fund the Fed, which is itself supposedly "the lender of last resort" created to fund the banks and the federal government? Yahoo Finance reported on September 17:

"The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters."

Normally, the Fed swaps green pieces of paper called Federal Reserve Notes for pink pieces of paper called U.S. bonds (the federal government’s I.O.U.s), in order to provide Congress with the dollars it cannot raise through taxes. Now, it seems, the government is issuing bonds, not for its own use, but for the use of the Fed! Perhaps the plan is to swap them with the banks’ dodgy derivatives collateral directly, without actually putting them up for sale to outside buyers. According to Wikipedia (which translates Fedspeak into somewhat clearer terms than the Fed’s own website):

"The Term Securities Lending Facility is a 28-day facility that will offer Treasury general collateral to the Federal Reserve Bank of New York’s primary dealers in exchange for other program-eligible collateral. It is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. . . . The resource allows dealers to switch debt that is less liquid for U.S. government securities that are easily tradable."

"To switch debt that is less liquid for U.S. government securities that are easily tradable" means that the government gets the banks’ toxic derivative debt, and the banks get the government’s triple-A securities. Unlike the risky derivative debt, federal securities are considered "risk-free" for purposes of determining capital requirements, allowing the banks to improve their capital position so they can make new loans. (See E. Brown, "Bailout Bedlam," webofdebt.com/articles, October 2, 2008.)

In its latest power play, on October 3, 2008, the Fed acquired the ability to pay interest to its member banks on the reserves the banks maintain at the Fed. Reuters reported on October 3:

"The U.S. Federal Reserve gained a key tactical tool from the $700 billion financial rescue package signed into law on Friday that will help it channel funds into parched credit markets. Tucked into the 451-page bill is a provision that lets the Fed pay interest on the reserves banks are required to hold at the central bank."3

If the Fed’s money comes ultimately from the taxpayers, that means we the taxpayers are paying interest to the banks on the banks’ own reserves – reserves maintained for their own private profit. These increasingly controversial encroachments on the public purse warrant a closer look at the central banking scheme itself. Who owns the Federal Reserve, who actually controls it, where does it get its money, and whose interests is it serving?

Not Private and Not for Profit?

The Fed’s website insists that it is not a private corporation, is not operated for profit, and is not funded by Congress. But is that true? The Federal Reserve was set up in 1913 as a "lender of last resort" to backstop bank runs, following a particularly bad bank panic in 1907. The Fed’s mandate was then and continues to be to keep the private banking system intact; and that means keeping intact the system’s most valuable asset, a monopoly on creating the national money supply. Except for coins, every dollar in circulation is now created privately as a debt to the Federal Reserve or the banking system it heads.4 The Fed’s website attempts to gloss over its role as chief defender and protector of this private banking club, but let’s take a closer look. The website states:

* "The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation’s central banking system, are organized much like private corporations – possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year."

* "[The Federal Reserve] is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms."

* "The Federal Reserve’s income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. . . . After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury."5

So let’s review:

1. The Fed is privately owned.

Its shareholders are private banks. In fact, 100% of its shareholders are private banks. None of its stock is owned by the government.

2. The fact that the Fed does not get "appropriations" from Congress basically means that it gets its money from Congress without congressional approval, by engaging in "open market operations."

Here is how it works: When the government is short of funds, the Treasury issues bonds and delivers them to bond dealers, which auction them off. When the Fed wants to "expand the money supply" (create money), it steps in and buys bonds from these dealers with newly-issued dollars acquired by the Fed for the cost of writing them into an account on a computer screen. These maneuvers are called "open market operations" because the Fed buys the bonds on the "open market" from the bond dealers. The bonds then become the "reserves" that the banking establishment uses to back its loans. In another bit of sleight of hand known as "fractional reserve" lending, the same reserves are lent many times over, further expanding the money supply, generating interest for the banks with each loan. It was this money-creating process that prompted Wright Patman, Chairman of the House Banking and Currency Committee in the 1960s, to call the Federal Reserve "a total money-making machine." He wrote:

"When the Federal Reserve writes a check for a government bond it does exactly what any bank does, it creates money, it created money purely and simply by writing a check."

3. The Fed generates profits for its shareholders.

The interest on bonds acquired with its newly-issued Federal Reserve Notes pays the Fed’s operating expenses plus a guaranteed 6% return to its banker shareholders. A mere 6% a year may not be considered a profit in the world of Wall Street high finance, but most businesses that manage to cover all their expenses and give their shareholders a guaranteed 6% return are considered "for profit" corporations.

In addition to this guaranteed 6%, the banks will now be getting interest from the taxpayers on their "reserves." The basic reserve requirement set by the Federal Reserve is 10%. The website of the Federal Reserve Bank of New York explains that as money is redeposited and relent throughout the banking system, this 10% held in "reserve" can be fanned into ten times that sum in loans; that is, $10,000 in reserves becomes $100,000 in loans. Federal Reserve Statistical Release H.8 puts the total "loans and leases in bank credit" as of September 24, 2008 at $7,049 billion. Ten percent of that is $700 billion. That means we the taxpayers will be paying interest to the banks on at least $700 billion annually – this so that the banks can retain the reserves to accumulate interest on ten times that sum in loans.

The banks earn these returns from the taxpayers for the privilege of having the banks’ interests protected by an all-powerful independent private central bank, even when those interests may be opposed to the taxpayers’ -- for example, when the banks use their special status as private money creators to fund speculative derivative schemes that threaten to collapse the U.S. economy. Among other special benefits, banks and other financial institutions (but not other corporations) can borrow at the low Fed funds rate of about 2%. They can then turn around and put this money into 30-year Treasury bonds at 4.5%, earning an immediate 2.5% from the taxpayers, just by virtue of their position as favored banks. A long list of banks (but not other corporations) is also now protected from the short selling that can crash the price of other stocks.

Time to Change the Statute?

According to the Fed’s website, the control Congress has over the Federal Reserve is limited to this:

"[T]he Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute."

As we know from watching the business news, "oversight" basically means that Congress gets to see the results when it’s over. The Fed periodically reports to Congress, but the Fed doesn’t ask; it tells. The only real leverage Congress has over the Fed is that it "can alter its responsibilities by statute." It is time for Congress to exercise that leverage and make the Federal Reserve a truly federal agency, acting by and for the people through their elected representatives. If the Fed can demand AIG’s stock in return for an $85 billion loan to the mega-insurer, we can demand the Fed’s stock in return for the trillion-or-so dollars we’ll be advancing to bail out the private banking system from its follies.

If the Fed were actually a federal agency, the government could issue U.S. legal tender directly, avoiding an unnecessary interest-bearing debt to private middlemen who create the money out of thin air themselves. Among other benefits to the taxpayers. a truly "federal" Federal Reserve could lend the full faith and credit of the United States to state and local governments interest-free, cutting the cost of infrastructure in half, restoring the thriving local economies of earlier decades.

Ellen Brown, J.D., developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and "the money trust." She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her eleven books include the bestselling Nature’s Pharmacy, co-authored with Dr. Lynne Walker, and Forbidden Medicine. Her websites are www.webofdebt.com and www.ellenbrown.com .

[trish]

Yeah, that's the ad for her book. You can buy it at
http://www.globalresearch.ca/index.php?context=va&aid=10489

Here's another site that sells books and says just the opposite.

http://www.publiceye.org/conspire/flaherty/flaherty6.html

[El Nino]

So what? She wrote a book based on her research, which actually may have a function other than strictly generating a few bills. Maybe she also wants to also inform the public so that they have divesified info on the subject. Info that isn't just Fedspeak crammed down peoples throats by talking heads. Read the article.

[trish]

What's this:

http://www.federalreserve.gov/oig/audits_reports/BOB_2007_%20Report_Final.pdf

and this

http://www.clevelandfed.org/about_us/annual_report/2007/auditors.pdf?WT.cg_n=General;Content%20Type;Page%2 0Type&WT.cg_s=About%20Us;Annual%20Report;pdf

[El Nino]

Those are both self produced data sheets. That's what they are. The references are self serving. The fact that those reports claim to be conducted by 'Independent Auditors' is just as preposterous as calling the Federal Reserve "Federal"... in terms of nomenclature

[trish]

I asked, because I wouldn’t know an authentic certificate of an audit report if you hit me in the face with one. So how did you know these don’t qualify? Did you just apply the general principle that audits of fed don’t exist and therefore these are fakes…or is there something particular about the reports that clued you in?

[thx1138]

Why economic deflation despite inflationary government intervention:
http://www.marketoracle.co.uk/Article8724.html

[Oli]

Those are both self produced data sheets. That's what they are. The references are self serving. The fact that those reports claim to be conducted by 'Independent Auditors' is just as preposterous as calling the Federal Reserve "Federal"... in terms of nomenclature

What you are reading is the Independent Auditor's report on the Fed. It is not a 'self produced data sheet'. Deloitte and Touche are a very large, well respected auditing and accounting firm.

http://www.deloitte.com/dtt/home/0%2C1044%2Csid%25253D2000%2C00.html

Perhaps you look into what an outside audit is, what the generally accepted accounting standards are, what a financial statement is meant to tell you instead of spouting the same tired refrains over and over and over and over and over again.

[El Nino]

Sure Oli, the Fed is not private, they have no power, they don't generate billions every year by skeeming American tax payers and they disclose all their financial info right out in the open with total transparancy... They are YOUR friend.

[Oli]

Sure Oli, the Fed is not private, they have no power, they don't generate billions every year by skeeming American tax payers and they disclose all their financial info right out in the open with total transparancy... They are YOUR friend.

So your saying your fluent in the language of finance?

Or, as I suspect, it might as well be Greek, and you have no intention of finding out what it says because you may have to expand your narrow viewpoint.

[El Nino]

I am fluent in not having the wool pulled over my eyes. I am also moderately proficient at detecting a rat when I see one...
No Oli, I just have the capacity to understand what is happening and clearly see how many gigantic financial burdens can be traced and rooted to certain kinds of central bank activity. Hey the good news is though; is that the only constant is change, right?
And what is this business of 'narrow' viewpoints?

[Oli]

No Oli

*Edited to actually answer the question posed to him*

[trish]

I think we've established the Federal Reserve has been audited by Deloitte and Touche. That's settles the question of whether the Federal Reserve can be and has been audited. It can be and it has.

Some may question the veracity of the audit, but that's a different issue.

There are two routes one might take to cast suspicion on the audit.

1) Invoke the general (if questionable) principle that there's a conspiracy afoot to pull some proverbial wool over our eyes. The danger here is that there's a temptation to argue circularly. The principle implies the audit is half-hearted. The questionable nature of the audit in turn re-enforces the principle. So if you invoke the general principle be careful in the future not to argue for the general principle on the basis that independent audits don't exist, or that they lack veracity. To do so would involve you in the fallacy known as "begging the question."

2) You could also question the veracity of the audit by actually looking into the details of the audit and demonstrating exactly where it is weak or wrong.

[hippifried]

Conspiracy theories are always entertaining if nothing else.

[El Nino]

Those audits are text-book whitewashes. We have certainly learned that the Fed is private, contrary to ignorant opinion here. We have also shown that it is an Unconstitutional monster and generates perpetual debt and hyper-inflation.

[trish]

Good. You can see upon examination that they're whitewashes. Now explain to the rest of us what you see. Why are they text-book whitewashes? Which pages, what paragraphs give it away?

[chefmike]

Good. You can see upon examination that they're whitewashes. Now explain to the rest of us what you see. Why are they text-book whitewashes? Which pages, what paragraphs give it away?

Good luck with that one, trish...he knows that you must already know what he knows because he knows that you must be one of them too because otherwise why would you want him to tell you what he knows about what you already know...

[hippifried]

Yeah. Ya know?

[trish]

I knew that (i think).

[beandip]

Trish, The FED has "off market books".....same as all other large banks. If one audits the FED, they go by the books that are made (somewhat) public.

Notice how in last weeks hearings on CSPAN not one single Congressman or Senator asked the bankers one simple question?

"Is your organization solvent"?

There's a reason for that.

Back to CDO's and CDS's. This is what I've been saying since the beginning of this thread.


http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all


It's a very interesting read....check it out.


Again the BASEL II agreement was supposed to crack open the FED's books incrementally.....but now this shit storm is hitting at an ever increasing rate...

The fun is just about to begin. We have 11 states now leaning towards secession and pushing Federalism.....

[beandip]

"hippifried wrote:
Bean,
....Where I think so many people get discombobulated is with all this John Birch crap about foreign "ownership" of the Fed, by the Rothchilds & Warbergs et al.


It does sound like beandip might be headed in that direction, but I'm not going to associate him with such El Ninian nonsense without further confirmation....although I notice he didn't find his way back to the 'science returns to the oval office' thread after trish schooled him on global warming...she blinded him with science...you go girl..."

__________________________________________


I'll dig back into that thread as soon as I get the chance.... seriously... I have a ton of good bookmarks from various scientific web sites.... I've been kinda studying the climate change stuff ( PLEASE do NOT call it global warming!!!!) for about 6 years now....

[beandip]

Road Map for Financial Recovery: Radical Transparency Now!

A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.

For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.

How could one formula pack such a devastating punch? The answer lies in the bond market, the multitrillion-dollar system that allows pension funds, insurance companies, and hedge funds to lend trillions of dollars to companies, countries, and home buyers.

A bond, of course, is just an IOU, a promise to pay back money with interest by certain dates. If a company—say, IBM—borrows money by issuing a bond, investors will look very closely over its accounts to make sure it has the wherewithal to repay them. The higher the perceived risk—and there's always some risk—the higher the interest rate the bond must carry.

Bond investors are very comfortable with the concept of probability. If there's a 1 percent chance of default but they get an extra two percentage points in interest, they're ahead of the game overall—like a casino, which is happy to lose big sums every so often in return for profits most of the time.

Bond investors also invest in pools of hundreds or even thousands of mortgages. The potential sums involved are staggering: Americans now owe more than $11 trillion on their homes. But mortgage pools are messier than most bonds. There's no guaranteed interest rate, since the amount of money homeowners collectively pay back every month is a function of how many have refinanced and how many have defaulted. There's certainly no fixed maturity date: Money shows up in irregular chunks as people pay down their mortgages at unpredictable times—for instance, when they decide to sell their house. And most problematic, there's no easy way to assign a single probability to the chance of default.

Wall Street solved many of these problems through a process called tranching, which divides a pool and allows for the creation of safe bonds with a risk-free triple-A credit rating. Investors in the first tranche, or slice, are first in line to be paid off. Those next in line might get only a double-A credit rating on their tranche of bonds but will be able to charge a higher interest rate for bearing the slightly higher chance of default. And so on.
"...correlation is charlatanism"
Photo: AP photo/Richard Drew

The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.

But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are.

Investors like risk, as long as they can price it. What they hate is uncertainty—not knowing how big the risk is. As a result, bond investors and mortgage lenders desperately want to be able to measure, model, and price correlation. Before quantitative models came along, the only time investors were comfortable putting their money in mortgage pools was when there was no risk whatsoever—in other words, when the bonds were guaranteed implicitly by the federal government through Fannie Mae or Freddie Mac.

Yet during the '90s, as global markets expanded, there were trillions of new dollars waiting to be put to use lending to borrowers around the world—not just mortgage seekers but also corporations and car buyers and anybody running a balance on their credit card—if only investors could put a number on the correlations between them. The problem is excruciatingly hard, especially when you're talking about thousands of moving parts. Whoever solved it would earn the eternal gratitude of Wall Street and quite possibly the attention of the Nobel committee as well.

To understand the mathematics of correlation better, consider something simple, like a kid in an elementary school: Let's call her Alice. The probability that her parents will get divorced this year is about 5 percent, the risk of her getting head lice is about 5 percent, the chance of her seeing a teacher slip on a banana peel is about 5 percent, and the likelihood of her winning the class spelling bee is about 5 percent. If investors were trading securities based on the chances of those things happening only to Alice, they would all trade at more or less the same price.

But something important happens when we start looking at two kids rather than one—not just Alice but also the girl she sits next to, Britney. If Britney's parents get divorced, what are the chances that Alice's parents will get divorced, too? Still about 5 percent: The correlation there is close to zero. But if Britney gets head lice, the chance that Alice will get head lice is much higher, about 50 percent—which means the correlation is probably up in the 0.5 range. If Britney sees a teacher slip on a banana peel, what is the chance that Alice will see it, too? Very high indeed, since they sit next to each other: It could be as much as 95 percent, which means the correlation is close to 1. And if Britney wins the class spelling bee, the chance of Alice winning it is zero, which means the correlation is negative: -1.

If investors were trading securities based on the chances of these things happening to both Alice and Britney, the prices would be all over the place, because the correlations vary so much.

But it's a very inexact science. Just measuring those initial 5 percent probabilities involves collecting lots of disparate data points and subjecting them to all manner of statistical and error analysis. Trying to assess the conditional probabilities—the chance that Alice will get head lice if Britney gets head lice—is an order of magnitude harder, since those data points are much rarer. As a result of the scarcity of historical data, the errors there are likely to be much greater.

In the world of mortgages, it's harder still. What is the chance that any given home will decline in value? You can look at the past history of housing prices to give you an idea, but surely the nation's macroeconomic situation also plays an important role. And what is the chance that if a home in one state falls in value, a similar home in another state will fall in value as well?

Here's what killed your 401(k) David X. Li's Gaussian copula function as first published in 2000. Investors exploited it as a quick—and fatally flawed—way to assess risk. A shorter version appears on this month's cover of Wired.

Probability
Specifically, this is a joint default probability—the likelihood that any two members of the pool (A and B) will both default. It's what investors are looking for, and the rest of the formula provides the answer.
Survival times

The amount of time between now and when A and B can be expected to default. Li took the idea from a concept in actuarial science that charts what happens to someone's life expectancy when their spouse dies.

Equality

A dangerously precise concept, since it leaves no room for error. Clean equations help both quants and their managers forget that the real world contains a surprising amount of uncertainty, fuzziness, and precariousness.
Copula

This couples (hence the Latinate term copula) the individual probabilities associated with A and B to come up with a single number. Errors here massively increase the risk of the whole equation blowing up.

Distribution functions

The probabilities of how long A and B are likely to survive. Since these are not certainties, they can be dangerous: Small miscalculations may leave you facing much more risk than the formula indicates.

Gamma

The all-powerful correlation parameter, which reduces correlation to a single constant—something that should be highly improbable, if not impossible. This is the magic number that made Li's copula function irresistible.


Enter Li, a star mathematician who grew up in rural China in the 1960s. He excelled in school and eventually got a master's degree in economics from Nankai University before leaving the country to get an MBA from Laval University in Quebec. That was followed by two more degrees: a master's in actuarial science and a PhD in statistics, both from Ontario's University of Waterloo. In 1997 he landed at Canadian Imperial Bank of Commerce, where his financial career began in earnest; he later moved to Barclays Capital and by 2004 was charged with rebuilding its quantitative analytics team.

Li's trajectory is typical of the quant era, which began in the mid-1980s. Academia could never compete with the enormous salaries that banks and hedge funds were offering. At the same time, legions of math and physics PhDs were required to create, price, and arbitrage Wall Street's ever more complex investment structures.

In 2000, while working at JPMorgan Chase, Li published a paper in The Journal of Fixed Income titled "On Default Correlation: A Copula Function Approach." (In statistics, a copula is used to couple the behavior of two or more variables.) Using some relatively simple math—by Wall Street standards, anyway—Li came up with an ingenious way to model default correlation without even looking at historical default data. Instead, he used market data about the prices of instruments known as credit default swaps.

If you're an investor, you have a choice these days: You can either lend directly to borrowers or sell investors credit default swaps, insurance against those same borrowers defaulting. Either way, you get a regular income stream—interest payments or insurance payments—and either way, if the borrower defaults, you lose a lot of money. The returns on both strategies are nearly identical, but because an unlimited number of credit default swaps can be sold against each borrower, the supply of swaps isn't constrained the way the supply of bonds is, so the CDS market managed to grow extremely rapidly. Though credit default swaps were relatively new when Li's paper came out, they soon became a bigger and more liquid market than the bonds on which they were based.

When the price of a credit default swap goes up, that indicates that default risk has risen. Li's breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market. It's hard to build a historical model to predict Alice's or Britney's behavior, but anybody could see whether the price of credit default swaps on Britney tended to move in the same direction as that on Alice. If it did, then there was a strong correlation between Alice's and Britney's default risks, as priced by the market. Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).

It was a brilliant simplification of an intractable problem. And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.

The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.

As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked. The consequent pools were often known as collateralized debt obligations, or CDOs. You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A. You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared, which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included. But it didn't matter. All you needed was Li's copula function.

The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.

At the heart of it all was Li's formula. When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable. It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.

"The corporate CDO world relied almost exclusively on this copula-based correlation model," says Darrell Duffie, a Stanford University finance professor who served on Moody's Academic Advisory Research Committee. The Gaussian copula soon became such a universally accepted part of the world's financial vocabulary that brokers started quoting prices for bond tranches based on their correlations. "Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus," wrote derivatives guru Janet Tavakoli in 2006.

The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott wrote that "the correlations between financial quantities are notoriously unstable." Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. And he wasn't alone. During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial. Investment banks would regularly phone Stanford's Duffie and ask him to come in and talk to them about exactly what Li's copula was. Every time, he would warn them that it was not suitable for use in risk management or valuation.
David X. Li
Illustration: David A. Johnson

In hindsight, ignoring those warnings looks foolhardy. But at the time, it was easy. Banks dismissed them, partly because the managers empowered to apply the brakes didn't understand the arguments between various arms of the quant universe. Besides, they were making too much money to stop.

In finance, you can never reduce risk outright; you can only try to set up a market in which people who don't want risk sell it to those who do. But in the CDO market, people used the Gaussian copula model to convince themselves they didn't have any risk at all, when in fact they just didn't have any risk 99 percent of the time. The other 1 percent of the time they blew up. Those explosions may have been rare, but they could destroy all previous gains, and then some.

Li's copula function was used to price hundreds of billions of dollars' worth of CDOs filled with mortgages. And because the copula function used CDS prices to calculate correlation, it was forced to confine itself to looking at the period of time when those credit default swaps had been in existence: less than a decade, a period when house prices soared. Naturally, default correlations were very low in those years. But when the mortgage boom ended abruptly and home values started falling across the country, correlations soared.

Bankers securitizing mortgages knew that their models were highly sensitive to house-price appreciation. If it ever turned negative on a national scale, a lot of bonds that had been rated triple-A, or risk-free, by copula-powered computer models would blow up. But no one was willing to stop the creation of CDOs, and the big investment banks happily kept on building more, drawing their correlation data from a period when real estate only went up.

"Everyone was pinning their hopes on house prices continuing to rise," says Kai Gilkes of the credit research firm CreditSights, who spent 10 years working at ratings agencies. "When they stopped rising, pretty much everyone was caught on the wrong side, because the sensitivity to house prices was huge. And there was just no getting around it. Why didn't rating agencies build in some cushion for this sensitivity to a house-price-depreciation scenario? Because if they had, they would have never rated a single mortgage-backed CDO."

Bankers should have noted that very small changes in their underlying assumptions could result in very large changes in the correlation number. They also should have noticed that the results they were seeing were much less volatile than they should have been—which implied that the risk was being moved elsewhere. Where had the risk gone?

They didn't know, or didn't ask. One reason was that the outputs came from "black box" computer models and were hard to subject to a commonsense smell test. Another was that the quants, who should have been more aware of the copula's weaknesses, weren't the ones making the big asset-allocation decisions. Their managers, who made the actual calls, lacked the math skills to understand what the models were doing or how they worked. They could, however, understand something as simple as a single correlation number. That was the problem.

"The relationship between two assets can never be captured by a single scalar quantity," Wilmott says. For instance, consider the share prices of two sneaker manufacturers: When the market for sneakers is growing, both companies do well and the correlation between them is high. But when one company gets a lot of celebrity endorsements and starts stealing market share from the other, the stock prices diverge and the correlation between them turns negative. And when the nation morphs into a land of flip-flop-wearing couch potatoes, both companies decline and the correlation becomes positive again. It's impossible to sum up such a history in one correlation number, but CDOs were invariably sold on the premise that correlation was more of a constant than a variable.

No one knew all of this better than David X. Li: "Very few people understand the essence of the model," he told The Wall Street Journal way back in fall 2005.

"Li can't be blamed," says Gilkes of CreditSights. After all, he just invented the model. Instead, we should blame the bankers who misinterpreted it. And even then, the real danger was created not because any given trader adopted it but because every trader did. In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust.

Nassim Nicholas Taleb, hedge fund manager and author of The Black Swan, is particularly harsh when it comes to the copula. "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked," he says. "Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south. "Anything that relies on correlation is charlatanism."

Li has been notably absent from the current debate over the causes of the crash. In fact, he is no longer even in the US. Last year, he moved to Beijing to head up the risk-management department of China International Capital Corporation. In a recent conversation, he seemed reluctant to discuss his paper and said he couldn't talk without permission from the PR department. In response to a subsequent request, CICC's press office sent an email saying that Li was no longer doing the kind of work he did in his previous job and, therefore, would not be speaking to the media.

In the world of finance, too many quants see only the numbers before them and forget about the concrete reality the figures are supposed to represent. They think they can model just a few years' worth of data and come up with probabilities for things that may happen only once every 10,000 years. Then people invest on the basis of those probabilities, without stopping to wonder whether the numbers make any sense at all.

As Li himself said of his own model: "The most dangerous part is when people believe everything coming out of it."

__________________________________________

Please go to the actual web link to see the charts....it's good stuff.

[trish]

The FED has "off market books"

Show us one.

[beandip]

You will notice AGAIN!!!!!!! today less than an hour ago testifying before congress, Bernanke dancing around the subject about showing us the books.

Text here:

http://www.marketwatch.com/news/story/Text-Bernankes-testimony/story.aspx?guid={55274432-5B78-4553-94D2-499C1D4B9ABB}&dist=hplatest



on a funny side note..... would you give money to these banks?

LOL

http://bankimplode.com/list/troubledbanks.htm

Trish, "show me gravity" :)

peace,




Beandip.

[trish]

An "off market book" is just that, a book. I can show you books. Show me one of the FED's off market books.

[beandip]

You might get your wish sooner rather than later.

Notice how the shyster Bernanke flipped the fuck out yesterday testifying? He all but called AIG a zombie organization...meaning it is completely insolvent. Old Ben is between a rock and a hard place...the FED needs some serious cash infusion and fast....and that's why he's been crapping skittles at the thought of AIG getting money he thinks should be earmarked for the FED. Here's the rub.....LOL if AIG goes BK....by law they must open their books....and then down goes the FED.

When the Bond market suffers from dislocation it will collapse within a matter of hours and nothing the FED, PPT or anyone else on this side of the galaxy can do to stop it. So Trish, be patient....both of us might see those off market books within a few short months.

Another funny side note notice how the dumb-ass in charge of FDIC (Sheila Bair) came out today and said they'd be insolvent in a perhaps by the end of the year. Not the sharpest knife in the drawer there....ferchrissssakes how to initiate a friggin bank run!!!!!!

LOL

[trish]

Trish, be patient....both of us might see those off market books within a few short months.

Hey, I'm being patient. You're the one running out of patience shouting, "off market books, off market books," before the facts are in. You're the one jumping to conclusions based on speculation and what Bernanke says, or doesn't say or the way he says what he doesn't say.

Maybe the books are cooked and maybe they're not. I'm happy to wait and see. :)

BTW, you will note we have already settled one question raised by the tinfoil crowd. The FED can be audited and is audited. Your position in fact presumes this concession. Otherwise, why keep "off market" books? So the question you raise is a different one. You're asking, "Are they keeping "off market" books to fool the auditors?" To be fair, you're not asking it. You're claiming you know that the answer is, "Yes." Perhaps you should forward your accusation and proof directly to Deloitte and Touche.

[beandip]

Another interesting read....a long one but worth it. Notice the references made about the Fed.

http://market-ticker.org/

[beandip]

Another interesting read....a long one but worth it. Notice the references made about the Fed.

http://market-ticker.org/

[beandip]

This is gettin funny.....now they're trying to pass a law to have GOVERNMENT audit the Fed.



http://tickerforum.org/cgi-ticker/akcs-www?post=94007

[hippifried]

The Fed is a government agency. They should be constantly audited by the GAO. There's no reason to put blindfolds on the agencies that are supposed to be the eyes & ears of the US government & therefore us. Why funny?

[thx1138]

http://crooksandliars.com/john-amato/alan-grayson-what-real-accountability-f