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Obama, Market Manipulator

Via HotAir and others, we had the news last week that:

The Justice Department sued Standard & Poor’s Ratings Services late Monday, alleging the firm ignored its own standards to rate mortgage bonds that imploded in the financial crisis and cost investors billions. The government was seeking penalties of more than $1 billion…which would be the biggest sanction imposed on a firm related for its actions in the crisis.

This is market manipulation at its dirtiest. I’ll explain.

During the housing bubble, the government’s mortgage finance agencies, FNMA (Fannie Mae) and FHLMC (Freddie Mac), securitized scads of mortgages. That means they re-packaged them as securities – in this case, as bonds – which could be traded on Wall Street. And that helped the bubble along, because it made a lot more money available for people’s mortgages, especially sub-prime mortgages.

All three of the major U.S. bond ratings agencies – S&P, Moody’s and Fitch – gave the ‘securitized mortgage’ bonds the safest rating, AAA, which helped keep the housing bubble going. And that was what almost everyone wanted at the time, including the government.

Later, when the housing bubble burst, it was clear that these bonds did not deserve an AAA rating, and probably never had. The ratings agencies had been wrong, along with everyone else.

One question to ask is: why is S&P the first ratings agency, and so far the only one, to be punished after all this time? What distinguishes S&P? The answer seems fairly obvious: In August 2011, S&P downgraded the U.S. government’s own bonds, which remains a huge blow to Obama’s reputation.

Reports indicate that the government may also sue Moody’s. But they haven’t yet; any efforts there “are in the early stages, largely because state and federal authorities have dedicated more resources to the S&P lawsuit.” Golly, ya think?

So far, then, the moral of the story is: Don’t criticize Obama. Nice business you got there; would be a shame if anything happened to it.

But there is a deeper story: how market manipulation by the government causes bad outcomes; for which politicians (and other supporters of Big Government) always blame the market’s players, rather than themselves.

It was government which created Fannie and Freddie and had them massively support the sub-prime mortgage market. (For which GayPatriot has criticized Barney Frank’s involvement; see here, here, here, here, here, here, here and here.)

Moreover, as Peter Schiff reminds us, it was government which established the Big 3 ratings agencies in positions free from ‘consumer’ pressure, where they would descend into a culture of complacent groupthink that favored, not the small investor, but the big players:

In 1973, in order to “protect” investors from unregulated markets, the SEC designated certain ratings firms as “Nationally Recognized Statistical Ratings Organizations.” Thereafter, only bonds rated by sanctioned firms could be purchased by pension funds and federally insured banks. Before that time the ratings agencies were paid for their advice by bond investors. As the rule change limited the abilities of investors to choose who to ask, the ratings firms began charging bond issuers instead. This arrangement meant that interests of investors would be subordinated.

…to the interests of the bond issuers. In short, in 1973 the government gave the watchdogs secure, protected positions. Over time, they were no longer paid to remain good watchdogs. Due largely to government action, they evolved into salesmen for the wolves (including the government). And then we had a housing bubble.

The crimes continue. For the past few years, we have been in a new financial bubble centered on U.S. Treasury bonds. The Obama administration, needless to say, can’t afford to let that bubble burst. So, it wants the bond agencies to give U.S. Treasury bonds the highest possible rating, denying that anything is wrong with the U.S. government’s finances. As Schiff says:

Smaller ratings agency Egan Jones (which never had the [government’s protection]) issued harsher reports about government debt, and they have also been duly punished for their candor.

And that’s the real message of the government’s selective punishment of S&P: Play ball. Do not downgrade U.S. debt, no matter how much reason we give you to. As Schiff observes:

In 2011 the other major ratings agency, Moody’s, argued that the fiscal cliff deal agreed to by Congress and the President improved the country’s fiscal position and forestalled any need to downgrade Treasury debt. However, since we never actually went over that conveniently erected fiscal cliff, why has Moody’s not responded with a downgrade [now]? Perhaps they want to stay out of court?

I believe that all the ratings agencies have reason to (further) downgrade U.S. bonds. But I will be surprised, if any of them do it soon.



  1. The sad thing here is that I don’t think the average person understands just how dirty this move is.

    The press certainly won’t go out of its way to inform them either. The press will probably march in lockstep praising Obama for suing the evil Wall Street fat cats.

    Comment by Just Me — February 13, 2013 @ 8:55 am - February 13, 2013

  2. Another sad thing is, after the Treasury bubble bursts (as it will eventually; history says that 0% interest rates will not be around forever), people will be saying “Why did the ratings agencies keep rating U.S. debt AA+/AAA, when it wasn’t? Why didn’t they warn us that these bonds could go way down?” Just like the housing bubble.

    The reason why is that the ratings agencies are established (in their market positions), AND are now intimidated, by government.

    Comment by ILoveCapitalism — February 13, 2013 @ 10:06 am - February 13, 2013

  3. This is a terrific summary of a complicated mess and I applaud ILC for bringing it here with such clarity.

    The Boston Fed and the New York Fed are also up to their ears in this charade along with a lot of familiar “players” who have gone through the revolving door between government, Goldman Sachs (in particular), the Fed and Freddie and Fannie.

    When you look for the money, you will keep discovering Geithner, Summers, Raines, Lew, and others who are still up to their ears in both the racket and the cover-up.

    ILC is being a gentlemen of reserve. I will take up where he left off. This is pure mafia style thuggery. Take the money, shift the blame, cover up and muscle those who are get nosey.

    Bernie Madoff got what he deserved. But his ponzi scheme and double accounting and shell game and flimflammery were only different in that he didn’t get the government printing presses behind him.

    Where, by the way, is Jon Corzine? What a great thimblerigger he was. Why, even the great and powerful Joe Biden was dazzled by him.

    Last night on Hannity, Dennis the Menace Kucinich went off against raising taxes and criticizing the whole FED system in a way that stunned Hannity and me as well.

    I don’t believe that the MSM could cover our financial mess if they cared to. We have a nation of dumb-downed bumper-sticker addicted mouth breathers who just don’t get it.

    Obama cut back Social Security withholding for several years, but it was reinstated at the beginning 2013. The workers were apoplectic to “discover” their pay checks had less take home pay. That is about as complicated a financial shift as most voters can handle.

    Comment by heliotrope — February 13, 2013 @ 10:23 am - February 13, 2013

  4. Why are the heads and Fannie and Freddie not in jail?
    Why are the LIBOR manipulators not in jail?
    Why are the Memebers of teh Fed not being investigated for coluusion?
    Why are the Boards and Chairman of GoldSachs, LehmanBros., Citi, Morgan and BankAmerica not in jail?
    Why has former-Gov. and former-Sen. Jon Corzine of GoldmanSachs not been indicted for stealing his clients’ money?

    We all know the answer…..

    Comment by Ted B. (Charging Rhino) — February 13, 2013 @ 2:21 pm - February 13, 2013

  5. I would love to see more spending reductions and tax increases to deal with our long-term debt issues (though I am sure we would differ on the particular components we would favor). However, the fact remains that people have not fled Treasuries in fear of default as some on the right predicted, even with interest rates at zero (and below zero in real terms) and even when we flirted with a self-inflicted default. The market does not seem to be as worried about the budget picture as some pundits — would you argue that the market is just wrong?

    Comment by Brubeck — February 13, 2013 @ 3:27 pm - February 13, 2013

  6. However, the fact remains that people have not fled Treasuries in fear of default as some on the right predicted, even with interest rates at zero (and below zero in real terms) and even when we flirted with a self-inflicted default. The market does not seem to be as worried about the budget picture as some pundits — would you argue that the market is just wrong?

    Comment by Brubeck — February 13, 2013 @ 3:27 pm – February 13, 2013

    And what do you mean by “people”?

    The central bank has already committed to purchasing $40 billion per month in mortgage backed securities well into 2014 through its separate, quantitative easing program. Extending the purchasing portion of Operation Twist adds an additional $45 billion per month, bringing the monthly price tag of these two programs to $85 billion—more than 46 times what’s needed to buy the New York Yankee franchise (valued at $1.85 billion).

    And that figure only accounts for the direct costs.

    By extending these practices, the Fed will no longer be able to simply transfer funds by selling one type of bond in order to buy another. It had a limited supply of short-term Treasuries in its portfolio. At some point during the next year, it will have to print new funds in order to purchase long-term Treasuries. This means increasing the total money supply in circulation and expanding the size of the Fed’s portfolio.

    It already increased its portfolio from $900 billion in early 2008 to $2.88 trillion today. It is not clear how big the portfolio will be with the planned purchase of new bonds, but some have suggested it could increase to $5 trillion. In fiscal year 2011 the Fed bought 77 percent of all additional debt issued by the Treasury. The Fed has already replaced the entire inter-bank money market and other markets with itself.

    In short, the US government, owned, operated, and controlled by the Obama Party, is securitizing its own debt for sale at a massive rate — and is then buying its own debt by selling other debt that it has already securitized, funded ultimately by money it prints.

    And as it turns out, people HAVE fled the bond market.

    We are already seeing the negative impact of Fed policies on the portfolios and investment decisions of millions of retirees. Retirees invest in Treasury bonds because these are considered safe investments. But as the Fed has driven interest rates on Treasuries below the inflation rate, retirees have sought higher returns in riskier investments, such as high yield bonds.

    In short, the only people who are stupid enough to buy US Treasuries at this point are government bureaucrats — who are purchasing them with printed money in order to keep the cost of borrowing down.

    The US government is essentially maxing out a credit card, flipping the balance onto a lower-interest card, spending more and maxing THAT card out, and trying to flip the balance again so that it can spend more.

    While all this time, the Barack Obama Party, led by Barack Obama who wants to assume dictatorial powers over the economy, supported by Nancy Pelosi and Harry Reid and their entire cohorts, are screaming at the top of their lungs that a) we don’t have a spending problem, b) we massively need to increase spending, c) we need to tax and confiscate peoples’ salaries, businesses, and savings at over 50%, and d) you want to kill children and the elderly if you disagree.

    You can’t spin this, Brubeck. Your Obama Party is completely out of control and in the process of crashing our economy because it has to purchase votes from people who demand unlimited food stamps, Obamaphones, abortions, birth control pills, housing subsidies, and welfare checks.

    It is patently stupid to go into debt to pay people not to work, not to produce, not to better themselves, and not to save. But that is all that your Barack Obama Party does.

    Comment by North Dallas Thirty — February 13, 2013 @ 4:05 pm - February 13, 2013

  7. the fact remains that people have not fled Treasuries in fear of default as some on the right predicted

    Default? Who predicted that? I know I didn’t. I have said, “if only we would default!” – because at least it would be an honest way of not paying our debts. What we are doing instead is running a Ponzi scheme with fake money, a doubly dishonest way of not paying our debts.

    First, as NDT rightly points out, we’re printing money. Printing money is a way of pretending that we can pay our debts, are solvent, etc… when in fact, we are repudiating (or defaulting on) the *real economic value* of those debts. We are going to repay our debts, if ever, with dollars that are vastly more numerous – and therefore, worth far less – than the dollars that we borrowed. It is as if you were allowed to pay your credit card bill with Monopoly money, or money that you printed on your computer at home. In terms of real economic value, that is a default! But it’s a default that pretends not to be.

    Second, even with all of the Fed’s newly-printed Monopoly money out there, we are so far away from actually paying our debts that it’s ridiculous. Under Obama, we add a trillion a year (or more) to our total debt balance. We borrow money from the investor Peter, just to pay what we owe the investor Paul; no, worse than that, just to pay Paul’s 0.25% interest, so that Peter and Paul will both be deceived that we are somehow solvent. That is the definition of a Ponzi scheme.

    The market does not seem to be as worried about the budget picture as some pundits —would you argue that the market is just wrong?

    Absolutely. That is what a “bubble” market is: a wrong one, a market detached from reality. As NDT pointed out, there is no real bond market any more; it’s a fake, a set of artificially-pumped up breast implants, because the Fed is “the bond market” now. The Fed routinely buys 50%, 70% or more of new Treasury bond issues. Weimar, here we come. “Don’t cry for me, Argentina” because we’re well on the path to becoming you.

    Comment by ILoveCapitalism — February 13, 2013 @ 4:54 pm - February 13, 2013

  8. ILoveCapitalism, so far inflation has been (in addition to interest rates) another dog that hasn’t barked.

    Comment by Brubeck — February 13, 2013 @ 8:51 pm - February 13, 2013

  9. That’s a great article by Peter Schiff. Thanks for pointing it out. I’ll have to add it to my list of useful articles for responding to the claims of unhinged leftists and Obama supporters who complain about “corporations,” “greed” and such.

    Comment by Kurt — February 13, 2013 @ 10:14 pm - February 13, 2013

  10. Hey, Brubeck:

    Google “Weimar Republic.” That’s our future. I’d buy a wheelbarrow NOW if I were you. You’re gonna need it.

    Comment by Bastiat Fan — February 13, 2013 @ 10:17 pm - February 13, 2013

  11. Brubaker,

    Looked at the price of gold? Oil? Gas? Food? Just because you don’t see it, doesn’t mean inflation isn’t out there.

    Comment by The_Livewire — February 14, 2013 @ 7:34 am - February 14, 2013

  12. so far inflation has been (in addition to interest rates) another dog that hasn’t barked

    Way to change the subject. But I’ll go with it. My answer it, it depends entirely on how you define ‘inflation’.

    You don’t think that a tripling of the ‘base money’ supply, with another doubling to come, is inflation. I do. “Inflation is always and everywhere a monetary phenomenon.” When base money goes up (far in excess of production), that is the inflation. What you’re looking for – official CPI inflation, wage hikes, etc. – are mere symptoms, which play out unevenly over time. Just like you can harbor the disease of cancer for years, and its symptoms play out unevenly.

    But even looking at symptoms: See #11. Visit a grocery store. Look at how businesses are keeping prices the same for you, but trimming both size and quality of what you get.

    You don’t seem to think that oil and gold being 4-5 times what they were 10 years ago, and double what they were when Obama took office, is inflation; I do. You don’t think that the food commodities (like corn) being up 50-100% in the last 4 years is inflation; I do.

    You rely on the official CPI statistics. But the government has manipulated those in recent decades, to understate inflation. (Incidentally, even the understated government CPI will still tell you that U.S. bonds are a bad buy; that they fail to keep pace with inflation.) The government has huge reasons (incentives) to understate inflation. You prefer to ignore that and believe what Obama tells you. So be it. Even the CPI won’t be able to hide inflation, on the day to come (soon, in historical terms: probably before Obama leaves office) when the world recognizes that the debauched U.S. dollar is no longer workable as “the world reserve currency” and sends a wave of dollars back to the U.S. Good luck to you.

    Comment by ILoveCapitalism — February 14, 2013 @ 9:21 am - February 14, 2013

  13. If you google “Wiemar Republic”, pay close attention to January through March 1933 for parallels. We’re primed for our “Reichstag Fire”-moment…if it hasn’t already happened yet.

    As for our debauched currency, when the Fed was established, the US Dollar was 1/20th of one-ounce of Gold…payable on demand at any bank. Today it’s 1/1621th of an ounce-in-Gold…$0.0123 USD-1912 (1/82th is original value). And in actual purchasing-value, it’s 1/23rd of it’s pre-Fed value at $0.043 USD-1912.

    Comment by Ted B. (Charging Rhino) — February 14, 2013 @ 9:54 am - February 14, 2013

  14. Brubeck – Like so many liberals I run into, you have abolutely no clue on how the real world works. You all have your “bumper sticker” mentality, and a closed minded approach to learning and researching that “real world.”

    You have been properly chastised and corrected by many of the comments in this thread, for that I am amazed that you keep coming back for more.

    ILC has tried time after time to inform and warn you about the coming storm in bonds, inflation and interest rates. You and your ilk just refuse to heed what he has been correctly explaining,

    I am in the bond and stock trading business. I rec’d an email from one of my trading sources that runs a very sophisticated trading platform in New York. Her email said as follows:

    ” This is a good post regarding the end of the 30-year rally in bonds.”
    Here is a link to the article she was referring to:

    I know the article may be beyond your level of understanding. It is filled with jargon germane to my industry, but there are some REAL important points that even an ill informed liberal can garner. The author, Grant, says:
    “I could see a very quick and violent – and tradeable – upward move in rates. While it is anybody’s guess when that truely gets under way, there’s no shortage of poetic signs and portents that it most surely will.”

    In plain english, Grant is screaming at us that bond prices, interest rates, and their cousin, inflation, are about ready to explode. They are a powder keg ready to blow up. They are a 30 year bull market in rates ready to come to an end – and it ain’t going to be pretty. Call it a bubble if you will, ILC does, and this bubble is 30+ years in the making.

    What the author was telling us in the business is that there are ways to make money and take advantage of this pending end to the 30+ year bond rally. I fully intend to do just that, and I have, and still am having clients reduce their fixed income exposure – especially long end bond funds. By the way Brubeck, if you have any I would lighten up – even if it goes against your liberal “bumper sticker” belief system.

    We are about to experience an interes rate/inflationary period we have not seen since the last half of the 1970’s and early 1980’s. Hmmm, I wonder who our president was back then in the late 1970’s???? Brubeck, do you have a guess as to who that was???

    Comment by mixitup — February 14, 2013 @ 1:31 pm - February 14, 2013

  15. mixitup – Good comments, and thanks for the support. Grant is someone I respect a great deal.

    I just want to add a point here, about the perversity of markets. You’d know better than anyone, that markets embody the Heisenberg principle – the act of observing them changes them – or in everyday terms, “The watched pot never boils.” When lots of people see a crash (or for that matter, a boom) coming, that fact in itself delays the event, because markets by definition require two sides to every trade, which means that one-sided markets suffer perverse counter-trend events just to rebalance them.

    Right now, shorting Treasuries is getting more popular again. That, in itself, could delay their crash, or set off (yet another) short-covering rally. As Kyle Bass found when shorting the housing bubble, shorting a bubble is expensive because the bubble always takes longer to pop than you thought it would. Only if you have deep pockets (and deep conviction, as Bass had both), can you outlast the other shorts through the disappointing counter-trend rallies and be the one who collects when the bubble bursts.

    Comment by ILoveCapitalism — February 14, 2013 @ 1:50 pm - February 14, 2013

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