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alstry (< 20)

The Turkey Before Thanksgiving....



October 27, 2010 – Comments (4)

It is pretty funny that Bill Gross used a turkey analogy in his letter to clients describing The Fed as essentially the mother of all Ponzi Schemes........

for those of you who are regulars of this blog.....I was using the turkey analogy over a year ago right here on CAPS discussing the crazy turkey that ran up the hill everyday questioning the motives of the too nice farmer.....but I have to admit, I got the story from Nasim Taleb's book, The Black Swan.

Although one could guess that Mr. Gross is a regular reader of Alstry's blog...a much higher probability is that he read Nasim's book too.....and his comment about being successful for the past 35 years really avoids the issue of the fraud....a number of Bernie's clients were successful for 30 years...and as Pimco is in the system and there really is no way to exit it......HOWEVER...

here is the amazing part......America was told today its financial system is a Ponzi Scheme.....


I guess it took Madoff's clients a bit of time to fully accept the fact Bernie was a fraud............

Once they figured it out....they realized the impact of the fraud.........FLASH!!!!!!!!

4 Comments – Post Your Own

#1) On October 27, 2010 at 9:09 PM, alstry (< 20) wrote:

Still, while next Wednesday’s announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration. Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants, be they financial asset classes more adaptable to inflation such as stocks or commodities, or perhaps the average American on Main Street who might benefit from a hoped-for rise in job growth or simply a boost in nominal wages, however deceptive the illusion. Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.


Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.



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#2) On October 27, 2010 at 9:20 PM, alstry (< 20) wrote:


The data demonstrate conclusively that most liar’s loans were fraudulent, which means that there were millions of fraudulent mortgage loans because liar’s loans became common (Credit Suisse estimates that they represented 49% of new originations by 2006). The data also demonstrate that even minimal underwriting of the loan files was sufficient to detect the overwhelming majority of such fraudulent liar’s loans. No honest, rational lender would make large numbers of liar’s loans. The epidemic of mortgage fraud was so large that it hyper-inflated the housing bubble, which allowed refinancing to further extend the life of the bubble (and the depth of the ultimate Great Recession.





In the cases where there have been even minimal investigations (New Century, Aurora/Lehman, Citi, WaMu, Countrywide, and IndyMac) senior lender officials were aware that liar’s loans were typically fraudulent. The lenders could not make an honest business out of selling overwhelmingly fraudulent mortgages.

Liar’s loans were done for the usual reason – they optimized (fictional) short-term accounting income by creating a “sure thing” (Akerlof & Romer 1993). A fraudulent lender optimizes short-term fictional accounting income and longer term (real) losses by following a four-part recipe:

A. Extreme Growth
B. Making bad loans at a premium yield
C. Extreme leverage
D. Grossly inadequate loss reserves


Note that this same recipe maximizes fictional profits and real losses. This destroys the lender, but it makes senior officers that control the lender wealthy. This explains Akerlof & Romer’s title – Looting: The Economic Underworld of Bankruptcy for Profit. The failure of the firm is not a failure of the fraud scheme. (Modern bailouts may even recapitalize the looted bank and leave the looters in charge of it.)



The first two “ingredients” are related. Home lending is a mature, reasonably competitive industry. A lender cannot grow extremely rapidly by making good loans. If he tried, he’d have to cut his yield and his competitors would respond. His income would decline. But he can guarantee the ability to grow extremely rapidly by being indifferent to loan quality and charging weaker credit risks, or more naïve borrowers, a premium yield.


In order to become indifferent to loan quality the officers controlling the lender must eviscerate its underwriting.





There is no honest reason for a secured lender to seek or permit inflated appraisal values. This is a sure marker of accounting control fraud – a marker that juries easily understand.

Just like I have been saying all along....we are bailing out those that looted our nation.....Why is Bennie bailing out Bernie?

Now you tell me who wants to take away your "freedoms.?"

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#3) On October 28, 2010 at 12:58 AM, guiron (39.17) wrote:

It must be a tremendous burden to be the only person who grasps economic issues. I can see you strain every day from the weight of the world on your shoulders. I don't know how we would get from one day to the next without your invective.

Some people say you're a narcissist, but I just tell them you're a misunderstood genius who will be able to look down on all of us one day and say, "I TOLD YOU SO!" Oh, how satisfying it will be to see everyone suffer!

Well, that's my dream anyway. Don't listen to the naysayers who say you should be doing something productive. Calling attention to yourself by shouting daily rants about the world ending is always a great way to spend time!

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#4) On October 28, 2010 at 11:58 AM, mtf00l (43.80) wrote:

I still don't buy the "it's the citizens fault" argument. I didn't get to "vote" for any of it, I didn't benefit from any of it and I still have to pay for it.

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