Wednesday, August 31, 2011

Battling the Kleptocracy - Part 1

Editor's Note: In an effort to provide some clarity for regular people (working types or entrepreneurs, with incomes under $100,000, often well under) on the rigors of the modern economy, this blog will devote itself in part to coverage of markets (stocks, bonds, commodities), but more to an understanding of how the US economy, since the 1980s, has become unfair to the middle class, biased against wage earners and how it promotes a gross inequality of class, income and privilege, favoring the ultra-wealthy.

It is the intent of the author to offer constructive advice to millions of Americans who unknowingly and unwittingly submit to this poorly-conceived construct of economy and methods and practices to thwart and escape the clutched of a debt-driven fiat money environment.

The "Battling the Kleptocracy" series shall be composed of posts containing two parts: first, an overview of the day's events on the markets; second, an informational section of practical ideas to help foster a counter-cultural movement away from the status quo.

The Markets

Despite the usual non-eventful numbers from the ADP private employment report (+91,000 for August, on expectations of 100K) and another downward drift in the Chicago Purchasing Managers' Report (PMI) reading of 56.5, from 58.8, stocks blew out in the morning and drifted lower throughout the day. Only a desperate, late rally saved the major indices from posting negative returns on the session.

Dow 11,613.53, +53.58 (0.46%)
NASDAQ 2,579.46, +3.35 (0.13%)
S&P 500 1,218.89, +5.97 (0.49%)
NYSE Composite 7,528.39, +64.39 (0.86%)
Combined NYSE/NASDAQ advance-decline: 3936-2651
Combined NYSE/NASDAQ new highs - new lows: 66-19
NASDAQ Volume 1,986,423,750
NYSE Volume 5,188,927,500
WTI crude oil futures: 88.85 -0.05
Gold: 1824.50 -10.60
Silver: 41.58 +0.23

Comment: Blah. The usual churn in the face of overwhelming debt pressure and stagnation in developed nations.

Idea: Get your money out of Bank of America

There once was a time when banks were trusted pillars of society, mostly local and involved in the communities they served. With the advent of computerization, globalization and the rise of a mendacious class of ultra-wealthy supra-nationalists, circa 1980, the repeal of Glass-Steagall (1999) and the overwhelming force of mass media and central bank control (Federal Reserve Act of 1913), the common notion that banks served communities was no longer valid.

Not to put too fine a point on it, but banks have probably always been rooted in deception and money-grubbing, but banking and legislative activity of the past 30 years provides an excellent background to the root evil of the Kleptocracy, which, loosely defined, is a societal/economic system which routinely skims wealth from those who least can afford it, to the benefit of those who need it the least.

In 2008, Bank of America, under the guidance of the since-discredited Ken Lewis, purchased Countrywide Financial Corporation, at the time the largest originator of residential mortgages in the United States.

Guided mainly by greed and without proper due diligence, Bank of America blundered into (or possibly under influence and threats from the Federal Reserve) what will go down in history as one of the worst corporate deals of all time. The purchase price for Countrywide was reported at $4.0 billion, though some analysts, notably those employed by Bloomberg, put the figure at $2.5 billion, as BofA was already carrying some of Countrywide's portfolio. The bank also purchased once-heralded brokerage firm, Merrill-Lynch, in another bad deal, at the height of the financial collapse of 2008, though that purchase is a topic for another time.

Countywide's portfolio of mortgages turned out to be so rotten, loaded with no-doc loans, NINJA (No Income No Job Application) loans and other variable-rate and exotic mortgage flavors that BofA soon had a mess on their hands, though the executives of the bank were loathe to mention that fact to shareholders. Thus, we experienced the sub-prime meltdown, the financial crisis and more, that continues to this day.

Bank of America was insolvent and only was salvaged via underhanded loans, guarantees and bond repurchases from the Federal Reserve. Their losses on soured mortgages are so deep and so broad, that even these infusions cannot and will not prevent Bank of America from falling into deep default at some point (probably already happened a few times already) and eventually being broken up or forced into bankruptcy.

The bank is the largest in the United States as measured by deposits, but the costs of litigation from the Countrywide deal will eventually sink it. The following are stories from just the past three days, with more to come.

It is advisable to pull all funds from Bank of America as quickly and as quietly as possible. They do not abide by any laws, much as a cornered wild animal might act in rash and irrational manners. They are doomed, and with them, other financial institutions will be ruined or significantly impaired. You do not have to face ruin along with them. Put your money in a local credit union or sound local or regional bank. Avoid other mega-banks like JP Morgan Chase, Wells-Fargo and Citi. They are part of the counterparty risk which will be destroyed when Bank of America falls off the shelf.

Bank of America hid the potential of an AIG lawsuit from regulators and investors, knowing about the possibility of an extensive and expensive legal undertaking, as far back as January of 2011.

CEO Brian Moynihan is selling off parts of the bank piecemeal in order to raise cash.

On Tuesday, Bank of America announced plans to shed another piece of its mortgage business.

The $8.5 billion settlement which the bank secured in federal court is being challenged on a number of fronts, including the FDIC, FHFA, a homeowner's group, the NY state Attorney General and even Goldman Sachs. The settlement was supposed to put to rest claims on over $170 billion in bad loans, but has since fallen apart due to these and other objections. Litigation, which BofA hoped to have settled in one fell swoop, will likely take years and add billions to the bank's continuing mortgage miasma.

Additionally, a 2008 ruling is being challenged by the state of Nevada which would void an agreement on loan modifications which Nevada officials say the bank did not honor.

And, just today, US Bancorp sued Bank of America for $1.75 billion over loans it purchased in 2005, citing faulty underwriting.

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