It was not long ago in fall 2010 that I was a senior congressional staffer financial economist at the Congressional Budget Office (CBO) when I was fired after 2 ½ months for writing about the damage from the banking and financial system collapse since fall 2008. The writings included ‘robo-signing’ foreclosures as symptomatic of deeper problems in the securitization of $7 trillion mortgage bonds that CBO denied was a problem and the condition of the nation’s banks.
I was told that CBO should take the lead in treating foreclosure problems as “the kind of event of the moment where we should be adding skepticism, not just repeating the hype in the press” and my writing about it showed “poor judgment about what is important and what isn’t.” This came from my direct report, then-CBO assistant director and chief economist, currently MIT Professor of Finance Deborah Lucas who was called by the U.S. President in 2009 to serve in a leadership role at CBO. CBO Director Douglas Elmendorf, a Harvard Ph.D. economist, agreed that such writings lacked knowledge of economics and poor communication skills for not understanding what it meant to remove them.
For those unfamiliar, CBO is a small federal agency that scores (produces cost estimates) Congress’s bills and can make or break them with its scoring. CBO’s panel of economic advisors includes Goldman Sachs, Morgan Stanley, former Federal Reserve economists, and distinguished economists from academia who are or were former scholars of the Federal Reserve.
Closure to the Congressional Inquiry
After over a year of congressional inquiry, my story was first made public in the Wall Street Journal, “Congress’s Number Cruncher Comes Under Fire,” (Feb. 2, 2012) what the Journal allowed the public to know. When the true nature of the issues would not come out, I was stunned that the congressional inquiry led by Senator Grassley, Ranking Member of the Senate Judiciary Committee, also declined to release my letter to the public to expose the issues. This happened during the week the New York Attorney’s General announced the lawsuit against MERS, but that too went silent a few days after the nationwide foreclosure settlement. All understood the ramifications of the NY AG lawsuit against MERS.
Two weeks after the Journal article, the congressional inquiry ended and after more than a year, they would not issue a statement nor finding about my case. The silence is interrupted only by media inquiry.
Intersections There were other issues that intersected mine. About the time of my firing CBO Director Elmendorf also fired the communications director, whose vetting he bypassed to discuss then-pending health care bill with the White House, which then coincided with CBO revising its cost estimates that led to the bill’s passage into law; the events are likely unrelated. Contrary to public reports, Director Elmendorf was quite pleased upon returning from the visit. Director Elmendorf replaced the communications director he fired with the New York Federal Reserve Bank’s vice president of media relations and installed a Federal Reserve economist to head macroeconomic forecasts for the nation. ABC News neglected to credit new New York Federal Reserve Bank CBO spokeswoman Deborah Kilroe for their collaboration on ABC News’s story following my public account.
If this is any indication, about two weeks ago the Associated Press reported that CBO underestimated by 50% the number of people who will face the health care tax penalty, most in the middle class.
At the White House meeting, CBO Director Elmendorf was reunited with Dr. Lawrence Summers, his Harvard Ph.D. advisor who sat across from him as the U.S. President’s chief advisor. Dr. Summers paved the way for the proliferation of derivatives and its payment by taxpayers when derivatives collapsed housing and the economy. It seems Director Elmendorf learned well from his mentor. Incidentally, Dr. Summers introduced derivatives to Harvard’s endowment fund and relieved the fund of about $2 billion in derivative losses after having a derivatives researcher from the fund fired for raising concerns about derivatives risks, as was similarly done to Brooksley Born, former head of the federal agency, the Commodities Futures and Trading Commission (CFTC), who pushed for regulations of the opaque OTC (over-the-counter) derivatives market.
At the time I did not realize that Senator Grassley (R-IA) and Senator Patrick Leahy (D-VT) were and are on the same U.S. Senate Judiciary Committee, the latter its chairman. Senator Leahy had quickly pushed through a unanimous midnight Senate vote that would make it more difficult for homeowners to challenge fraudulent foreclosures. This came as public knowledge and growing legal challenges to ‘robo-signing’ and MERS (banks using forged or defective documents to foreclose arising out of MERS – more on upcoming postings) led to foreclosures suspended nationwide in fall 2010 and continues to be litigated to the state supreme courts. I do not know if Senators Leahy and Grassley spoke to each other about my case.
It was then that I was compelled to make public the letter to Senator Grassley with a more complete account on Zero Hedge, “Terminated CBO Whistleblower Shares Her Full Story” (March 15, 2012). Among the responses were an article by Ms. Janet Tavakoli, an expert in structured finance in the Huffington Post, “Today’s Most Important Finance Story: Lan T. Pham, Ph.D., Told the CBO the Truth About Mortgage “Securities” and Was Fired for It” (March 16, 2012) and an interview with RT Capital Account (May 30, 2012).
I am grateful to many for putting the issues to the public, for doing what the establishment media could not do: journalism.
Why EconomicsVoodoo.com
I share this experience to give an indication of the concerted efforts to keep the public from understanding the depths of the problems we face and why, and the far-reaching consequences of what is unfolding.
Let’s review briefly what happened in the past four years. The collapse of the banking and financial system by fall 2008 is about derivatives wrapped around the largest market possible – then $12 trillion housing market – and quasi-private Fannie Mae and Freddie Mac, which guarantee the equivalent of about one-third of U.S. GDP, making them among the largest financial institutions in the world that collapsed. The largestbanks and financial institutions embedded more than $60 trillion in derivatives (credit default swaps) around $7 trillion of peoples’ homes at the time.
On this scale, credit default swaps (CDSs) were essentially “insurance bets” that homeowners would default on mortgages and institutions insuring or guaranteeing mortgage bonds would fail as a result. Why over $60 trillion to insure $7 trillion mortgages? Unbeknownst to most homeowners, there could be 5 or 10 insurance policies taken against their home (whose mortgage payments have been put inside the mortgage bond) the banks and financial institutions bought or sold to each other and others. That is why losses are exponential.
MERS is a private title registry database the largest banks, Fannie Mae and Freddie Mac created inside a mostly unknown what some would describe as a shell company that supplanted public county property recordings to slice-dice-cook or securitize the equivalent of about two-thirds of U.S. GDP’s worth of mortgages in the privacy of their MERS. ‘Robo-signing’ nationwide was a byproduct of the cooking in MERS and with it the chain of title on those mortgages, the truth of which can not survive daylight. The chefs knowing what was in MERS also took out insurance on their cooking. The Kansas State Supreme Court called MERS a “straw man” in rendering it invalid, as well as a similar recent ruling by the Washington State Supreme Court.
Outside of the derivatives lab, what had started as a subprime problem pales in comparison to the number of prime mortgage delinquencies that exceed the combined total of subprime, FHA and other mortgage delinquencies at the time of my firing. This is because prime is about two-thirds of the housing market. CBO assistant director/chief economist asked me for an extra copy of this chart before I was fired.
This takes us now to the Federal Reserve’s quantitative easing “QE 3∞” announcement on September 13, 2012 that it will print essentially unlimited quantities of dollars (or euros), which seems about the right number to purchase mortgage bonds and maintain nominal interest rates targeted at 0% (“ZIRP”) to keep borrowing costs reasonable for its member banks, among others, since the banking and financial system collapse in 2008.
My upcoming post, “Quantitative Easing (QE) 0-1-2-3∞ and the Federal Reserve’s Love Affair with Banks and Mortgage Bonds: Levitating The Black Hole”,expands on these issues and asks the question: When did QE stop? The data said a couple interesting things.
More broadly there seems to be a confluence of events as the American public and its treasury are being plundered in parallel to once-sovereign countries of the Eurozone, bound together by debt and much of the over $1,000 trillion in derivatives (money that does not exist). All based on a quasi-private Federal Reserve monetary system that prints dollars (or euros) from nothing in exchange for savings earned and countries as collateral for the privilege of its debt. Smoke plumes rise in the Middle East.
To see through the voodoo in the wise words of Yoda, “You must unlearn what you have learned.”
Welcome to Economics Voodoo.
Lan,
I am thrilled that you decided to do this blog. It will be interesting to read your thoughts on the intersections between how the markets (both domestic & international) really work, as opposed to how it is taught that they work.
h/t to Costata at FOFOA’s blog for pointing me over here. I will be following your work with great interest.
Milamber
Congratulations, I love your first posting, keep up the good work. I know how difficult it must be for you to have placed personal integrity above security, for I too walk a similar path. As a pupil of the Austrian school I am frustrated by the impossiblity of the current economic model surviving for much longer and fear the consequences for our children. Your words will help us understand on this side of the atlantic.
We believe that our patriotic duty is to save the UK from the unelected bureaucrats that signify the EU. Your exposures are valued because the same dynamics apply to the Anglo-American empire in general.
You are a gem. I hope your parents are very proud. Please keep writing. This stuff is hard for the layman to understand, but it is so important that you keep exposing it for what it is. We will hang in there with the reading if you hang in there with the writing… THANK YOU.
Thanks
Keep going.
Breton
Thank You for sticking your neck out to spread truth to the American Public. Your efforts are heroic, and I hope my daughters will see you as a role model one day. Between William K. Black’s work on bank fraud and your knowledge of the inner-workings of government, I feel very well educated on how/bywho/why the financial collapse occurred. Keep up the good work, your a breath of fresh air!
“The collapse of the banking and financial system by fall 2008 is about derivatives wrapped around the largest market possible – then $12 trillion housing market”
Didn’t all the fraud encrusted within the MBS trusts, which were either knowingly stuffed with garbage or empty altogether, cause the collapse all by itself? I know there were CDS riding all over the mortgage CDO’s, but (1) those products are, well, derivatives and (2) when you look at the 100% payouts to AIG’s counterparties, the largest one (which went to you know who, naturally) was around $13 billion–a drop in the bucket compared with the $12 trillion market.
Anyhow, I look forward to following your blog. The aroma from the events of Fall 2008 has gotten a lot more powerful despite the passage of 4 years due in large part to the lack of coverage, imo. The media’s hysterical pro-TARP campaign alone was enough to turn me into a hardened cynic, and I have next to nothing in the way of a finance background.
Thank you for your comments. They touch on tightly wound issues. You are right: the MBSs/CDOs are derivatives as their value is derived from the underlying mortgage debt which makes them a mortgage bond that is collateralized by the house should a homeowner default. Then there is the credit default swaps (CDSs) derivatives that are insurance against the default of mortgage bond derivatives (MBSs/CDOs) or their insurers. That is, a derivative within a derivative.
The idea is one house can burn down and insurers plan statistically for this event, but they did not plan on or have capital to pay out 5 or 10 policies taken against one house and multiply this by counterparty issues. The growth of CDSs leading up to 2008 suggests some knew what was coming, as some were the same ones who packaged the CDOs/MBSs and knew of their contents because they created MERS for the packaging, and the damage was multiplied with CDSs. The groundwork was in place in the late 1990s contrary to sloppy mistakes as portrayed by the media.
Right before the collapse in 2008 there were $62 trillion in notional CDSs. By 2009, there was a $23 trillion drop in notional CDSs. This indicates there were some net settlement on $23 trillion in notional CDSs. AIG may have gotten the spotlight, but the big ones were Fannie Mae and Freddie Mac that guaranteed the equivalent of one-third of GDP, whose conservatorship under the U.S. Treasury was defined as a credit event. This triggered CDS payments on perhaps the largest financial institutions in the world and taxpayers have continued to fund them since the collapse. Thus, the focus on Fannie Mac and Freddie Mac.
A preliminary calculation using mortgage data suggested the losses on the mortgages themselves would have been significant, several hundred billion dollars but the collateral (house) could be liquidated to recover some of the losses. Not a global systemic risk that requires the Federal Reserve to print trillions four years later. What was done inside MERS is itself a systemic risk in undermining the chain of title on more than half of the mortgages in the country, as problems emerged from the MBSs/CDOs. State supreme courts have struck down MERS, as in some states there are attempts to undo these decisions by working on the state legislatures. This is after working on both the House and Senate, followed by the U.S. Department of Justice (whose Attorney General is former partner of the law firm that the banks and Fannie & Freddie went to to create the legal framework for MERS in the late 1990s.)
All of this presumes the mortgage bonds have mortgages in them, non-duplicated mortgages, an actual mortgage, etc. but some court cases suggest that may be an incorrect assumption. This is the backdrop to my next post on the Federal Reserve’s love affair with its member banks and mortgage bonds. The data in the next post suggests the problems are of such magnitude that it is about the entire system
Thank you.
Just visited your site. Love the title. Looking forward to reading your posts! More people need to be aware of what’s going on behind the scenes in our government. We need more professionals with first-hand knowledge of the inner workings of the spin machine to help purge the truth to the American public. People like William K. Black, Neil Barofsky and Sheila Bair, Jesse and Yves are great sources of information, and I have no doubt that the list of truth-tellers will grow as more people wake up to the crony capitalist propaganda that is sucking the life out of the real economy.
Thank you for your comments. We will look at the basic premise for free markets or capitalism, whether that is reflected in reality to consider what system we currently have.