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Friday, December 12, 2008


madoff 'ponzi scheme'; deeper GSE fraud

via michael panzner -- another massive blow to trust in the securities industry, this one striking at big money.

The SEC's complaint, filed in federal court in Manhattan, alleges that Madoff yesterday informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.

but it might not have been the biggest financial fraud revealed this week, as the testimony of former fannie mae chief credit officer edward pinto directed attention to the massive role the GSEs played in financing the very alt-a and subprime mortgages they claimed to be uninvolved in and inoculated to. option armaggeddon calls paul krugman to task for his earlier defense of the now-nationalized GSEs.

This whitewashing of Fannie’s/Freddie’s role in the housing mess was proven absolutely false today when Krugman’s own paper reported on one insider’s account of the VERY LARGE extent to which Fan & Fred gorged on toxic mortgages:

Fannie Mae and Freddie Mac engaged in “an orgy of junk mortgage development” that turned the two mortgage-finance giants into vast repositories of subprime and similarly risky loans, a former Fannie executive testified on Tuesday…

The former executive, Edward J. Pinto, who was chief credit officer at Fannie Mae, [said] that the mortgage giants now guarantee or hold 10.5 million nonprime loans worth $1.6 trillion — one in three of all subprime loans, and nearly two in three of all so-called Alt-A loans, often called “liar loans.”…

Such loans now make up 34 percent of the total single-family mortgage portfolios at Fannie Mae and Freddie Mac, a level that will link them to eight million foreclosures, or one in six, in coming years.

The [new york times] article notes how Fan/Fred “adopted accounting practices that masked their subprime and Alt-A lending…[even while they] insisted that their involvement with subprime and other nonprime loans ha[d] been minimal.” Indeed despite the concerns of its own risk managers, Fannie “further increased its purchases of subprime loans, according to a January 2007 internal presentation.”

it's become very clear that fannie and freddie were killed by their massive and irresponsible leverage applied to loans of obviously terrible quality, bought with virtually no internal quality control or competence. plans for the government to use these two behemoths to bolster the housing market seem inoperable for so long as they are to be economic units unto themselves -- they must be insolvent to the tune of several hundreds of billions.


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