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Old 03-12-2007, 03:42 PM   #1
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Default The Financial Tsunami


The Financial Tsunami: Sub-Prime Mortgage Debt is but the Tip of the Iceberg
by F. William Engdahl

Global Research, November 23, 2007

Part 1: Deutsche Bank’s painful lesson

Even experienced banker friends tell me that they think the worst of the US banking troubles are over and that things are slowly getting back to normal. What is lacking in their rosy optimism is the realization of the scale of the ongoing deterioration in credit markets globally, centered in the American asset-backed securities market, and especially in the market for CDO’s—Collateralized Debt Obligations and CMO’s—Collateralized Mortgage Obligations. By now every serious reader has heard the term “It’s a crisis in Sub-Prime US home mortgage debt.” What almost no one I know understands is that the Sub-Prime problem is but the tip of a colossal iceberg that is in a slow meltdown. I offer one recent example to illustrate my point that the “Financial Tsunami” is only beginning.

Deutsche Bank got a hard shock a few days ago when a judge in the state of Ohio in the USA made a ruling that the bank had no legal right to foreclose on 14 homes whose owners had failed to keep current in their monthly mortgage payments. Now this might sound like small beer for Deutsche Bank, one of the world’s largest banks with over €1.1 trillion (Billionen) in assets worldwide. As Hilmar Kopper used to say, “peanuts.” It’s not at all peanuts, however, for the Anglo-Saxon banking world and its European allies like Deutsche Bank, BNP Paribas, Barclays Bank, HSBC or others. Why?

A US Federal Judge, C.A. Boyko in Federal District Court in Cleveland Ohio ruled to dismiss a claim by Deutsche Bank National Trust Company. DB’s US subsidiary was seeking to take possession of 14 homes from Cleveland residents living in them, in order to claim the assets.

Here comes the hair in the soup. The Judge asked DB to show documents proving legal title to the 14 homes. DB could not. All DB attorneys could show was a document showing only an “intent to convey the rights in the mortgages.” They could not produce the actual mortgage, the heart of Western property rights since the Magna Charta of not longer.

Again why could Deutsche Bank not show the 14 mortgages on the 14 homes? Because they live in the exotic new world of “global securitization”, where banks like DB or Citigroup buy tens of thousands of mortgages from small local lending banks, “bundle” them into Jumbo new securities which then are rated by Moody’s or Standard & Poors or Fitch, and sell them as bonds to pension funds or other banks or private investors who naively believed they were buying bonds rated AAA, the highest, and never realized that their “bundle” of say 1,000 different home mortgages, contained maybe 20% or 200 mortgages rated “sub-prime,” i.e. of dubious credit quality.

Indeed the profits being earned in the past seven years by the world’s largest financial players from Goldman Sachs to Morgan Stanley to HSBC, Chase, and yes, Deutsche Bank, were so staggering, few bothered to open the risk models used by the professionals who bundled the mortgages. Certainly not the Big Three rating companies who had a criminal conflict of interest in giving top debt ratings. That changed abruptly last August and since then the major banks have issued one after another report of disastrous “sub-prime” losses.

A new unexpected factor

The Ohio ruling that dismissed DB’s claim to foreclose and take back the 14 homes for non-payment, is far more than bad luck for the bank of Josef Ackermann. It is an earth-shaking precedent for all banks holding what they had thought were collateral in form of real estate property.

How this? Because of the complex structure of asset-backed securities and the widely dispersed ownership of mortgage securities (not actual mortgages but the securities based on same) no one is yet able to identify who precisely holds the physical mortgage document. Oops! A tiny legal detail our Wall Street Rocket Scientist derivatives experts ignored when they were bundling and issuing hundreds of billions of dollars worth of CMO’s in the past six or seven years. As of January 2007 some $6.5 trillion of securitized mortgage debt was outstanding in the United States. That’s a lot by any measure!

In the Ohio case Deutsche Bank is acting as “Trustee” for “securitization pools” or groups of disparate investors who may reside anywhere. But the Trustee never got the legal document known as the mortgage. Judge Boyko ordered DB to prove they were the owners of the mortgages or notes and they could not. DB could only argue that the banks had foreclosed on such cases for years without challenge. The Judge then declared that the banks “seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test,” the Judge concluded, “their weak legal arguments compel the court to stop them at the gate.” Deutsche Bank has refused comment.

What next?

As news of this legal precedent spreads across the USA like a California brushfire, hundreds of thousands of struggling homeowners who took the bait in times of historically low interest rates to buy a home with often, no money paid down, and the first 2 years with extremely low interest rate in what are known as “interest only” Adjustable Rate Mortgages (ARMs), now face exploding mortgage monthly payments at just the point the US economy is sinking into severe recession. (I regret the plethora of abbreviations used here but it is the fault of Wall Street bankers not this author).

The peak period of the US real estate bubble which began in about 2002 when Alan Greenspan began the most aggressive series of rate cuts in Federal Reserve history was 2005-2006. Greenspan’s intent, as he admitted at the time, was to replace the Dot.com internet stock bubble with a real estate home investment and lending bubble. He argued that was the only way to keep the US economy from deep recession. In retrospect a recession in 2002 would have been far milder and less damaging than what we now face.
{ added to this the LTCM collpase aswell**

Of course, Greenspan has since safely retired, written his memoirs and handed the control (and blame) of the mess over to a young ex-Princeton professor, Ben Bernanke. As a Princeton graduate, I can say I would never trust monetary policy for the world’s most powerful central bank in the hands of a Princeton economics professor. Keep them in their ivy-covered towers.

Now the last phase of every speculative bubble is the one where the animal juices get the most excited. This has been the case with every major speculative bubble since the Holland Tulip speculation of the 1630’s to the South Sea Bubble of 1720 to the 1929 Wall Street crash. It was true as well with the US 2002-2007 Real Estate bubble. In the last two years of the boom in selling real estate loans, banks were convinced they could resell the mortgage loans to a Wall Street financial house who would bundle it with thousands of good better and worse quality mortgage loans and resell them as Collateralized Mortgage Obligation bonds. In the flush of greed, banks became increasingly reckless of the credit worthiness of the prospective home owners. In many cases they did not even bother to check if the person was employed. Who cares? It will be resold and securitized and the risk of mortgage default was historically low.

That was in 2005. The most Sub-prime mortgages written with Adjustable Rate Mortgage contracts were written between 2005-2006, the last and most furious phase of the US bubble. Now a whole new wave of mortgage defaults is about to explode onto the scene beginning January 2008. Between December 2007 and July 1, 2008 more than $690 Billion in mortgages will face an interest rate jump according to the contract terms of the ARMs written two years before. That means market interest rates for those mortgages will explode monthly payments just as recession drives incomes down. Hundreds of thousands of homeowners will be forced to do the last resort of any homeowner: stop monthly mortgage payments.

Here is where the Ohio court decision guarantees that the next phase of the US mortgage crisis will assume Tsunami dimension. If the Ohio Deutsche Bank precedent holds in the appeal to the Supreme Court, millions of homes will be in default but the banks prevented from seizing them as collateral assets to resell. Robert Shiller of Yale, the controversial and often correct author of the book, Irrational Exuberance, predicting the 2001-2 Dot.com stock crash, estimates US housing prices could fall as much as 50% in some areas given how home prices have diverged relative to rents.

The $690 billion worth of “interest only” ARMs due for interest rate hike between now and July 2008 are by and large not Sub-prime but a little higher quality, but only just. There are a total of $1.4 trillion in “interest only” ARMs according to the US research firm, First American Loan Performance. A recent study calculates that, as these ARMs face staggering higher interest costs in the next 9 months, more than $325 billion of the loans will default leaving 1 million property owners in technical mortgage default. But if banks are unable to reclaim the homes as assets to offset the non-performing mortgages, the US banking system and a chunk of the global banking system faces a financial gridlock that will make events to date truly “peanuts” by comparison. We will discuss the global geo-political implications of this in our next report, The Financial Tsunami: Part 2.

F. William Engdahl is the author of A Century of War: Anglo-American Oil Politics and the New World Order. He is a Research Associate of the Centre for Research on Globalization (CRG). His most recent book, which has just been released by Global Research is Seeds of Destruction, The Hidden Agenda of Genetic Manipulation.
http://synergy777.blogspot.com/ http://www.myspace.com/synergy777 http://www.zazzle.co.uk/synergy777

Fearlessness means faith in God: faith in His protection, His justice, His wisdom, His mercy, His Love, and His omnipresence… To be fit for Self-realization, man must be fearless.— Paramahansa Yogananda
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Old 03-12-2007, 03:57 PM   #2
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Default Sitting here...perusing

Nice Post Synergy,

Yes indeed Alan Greenspan..disciple of whom is ...GORDON BROWN.

Here it comes

If every single homeowner sat tight , there wouldn't be a single thing anyone could do about it


Last edited by niftygifter; 03-12-2007 at 03:59 PM.
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Old 03-12-2007, 04:03 PM   #3
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Yeah, it's coming.
Just look at how many BILLIONS they already need
for one bank alone. Northern Rock.

All by design. It's a circus.
Someday people will wake up up and ask?
Where's my money?

And it's gone....

Happens all the time. You work your whole life.
Think the future is secured.
The inflation bomb destroys it in no time.
Just ask the people in Russia, South America, Germany.

But the BRAINWASHERS in Hollywood have
convinced folks once again that AMERICA is Different...

It's only different because it WILL BE WORSE IN AMERICA.
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Old 03-12-2007, 04:38 PM   #4
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this article is one of the best. its from a good source and is in simple english, with market jargon in small doses. i love it when they say credit crunch, or downturn, downward pressure, i say call a spade a spade, they can't as it would rock consumer confidence.

posh words seem to placate the masses, its just window dressing.
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Fearlessness means faith in God: faith in His protection, His justice, His wisdom, His mercy, His Love, and His omnipresence… To be fit for Self-realization, man must be fearless.— Paramahansa Yogananda
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Old 03-12-2007, 11:54 PM   #5
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Morgan Stanley warns FTSE 100 may tumble
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 2:30pm GMT 03/12/2007

Morgan Stanley has advised clients to step back from Britain's debt-laden and badly managed economy, warning that the FTSE 100 index of stocks may fall by 16pc over the next year as the credit crunch forces banks to curb lending.
"The ongoing financial crisis will have a significant detrimental impact on economic growth," said the report by the bank's UK equity team, Graham Secker and Charlotte Swing. "We would not be surprised to see earnings contract over the next 12 months.

"We believe house prices will fall 10pc next year, with the possibility of further declines into 2009. Investors should beware those stocks exposed to a sharp slowdown in housing activity," they added.
The US bank said that the British Government squandered the chance to discipline public spending during the fat years and had allowed excesses to proliferate "across the system".

The UK budget deficit is now near 3pc at the top of the cycle (one of the worst in the OECD club), while household spending has reached 97pc of disposable income - matching the level last seen at the peak of the 1988 credit boom.

"As our Prime Minister has been so fond of telling us, the UK economy has enjoyed a record 15 years of economic growth," said the report. "However, instead of using this golden period to bolster savings and prepare for leaner times ahead, the public sector is in deficit."

Morgan Stanley concluded that both Mr Brown and British households had bet that the economic cycle would never turn against them, a bet they are likely to lose.
"The financial crisis is curtailing banks' lending volumes and has to have a serious impact on growth. Given the precarious position of many balance sheets, we do not think that there is any quick fix.

"We have serious concerns about the ability of central banks to reflate the consumer at this point given the excess gearing that already exists within many segments of the economy," said the report.

"While aggressive rate cuts may be able to prevent the worst of any growth slowdown, we doubt they can alleviate the problems entirely."

The bank said its "bear case" would see a fall in the FTSE from the current level of 6432 to 5350, although their target is for a flat year ending slightly down at 6300.

While at first sight the trailing price-to-earnings ratio on UK stocks may look appetising at 13, the ratio is distorted by the inflated return on equity, which has reached a record high of 20 and is poised to fall sharply.

"Our bear case is more plausible than our bull case. It reflects an economic and profits recession. We believe the probability of this outcome is as high as 35pc," said the report.

Optimists are still hoping that the world will see a replay of the 1998 scenario when a financial crisis in Asia and Russia was contained by aggressive US rate cuts, allowing the markets to roar back for another 18 months. However, that was in an era when oil was trading at near $10 a barrel and the "China effect" was holding down the price of manufactured goods, and the Fed was able to cut rates without fear of igniting inflation.

Alan Greenspan, who was then Fed chairman, recently said central banks are now hemmed in by rising commodity prices and face a far tougher choice today.

Morgan Stanley advised investors to "go defensive", sticking to "large cap" companies such as Vodafone, Tesco, BAT, Cable & Wireless, BG, Shire and International Power.
They should steer clear of the overvalued quartet of resources, chemicals, construction and travel, all hostages to the credit cycle.

The prognosis from Morgan Stanley comes as a chrous of top British economists call for immediate rate cuts from the Bank of England.

The plea for cuts follows figures from the Office for National Statistics data sourced to the Bank of England that show the volume of market loans in the banking system plunged from £640bn at the onset of the credit crunch in August to £249bn by the end of September, suggesting British lenders have been hit even harder than US banks in relative terms.

Total sterling assets dropped from £3,244bn to £2,876bn.
http://synergy777.blogspot.com/ http://www.myspace.com/synergy777 http://www.zazzle.co.uk/synergy777

Fearlessness means faith in God: faith in His protection, His justice, His wisdom, His mercy, His Love, and His omnipresence… To be fit for Self-realization, man must be fearless.— Paramahansa Yogananda
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