KPIG Radio May 4

Despite decent economic data stocks fell hard erasing all of yesterdays gains. The March ISM Services Index increased to 55.4, better than expectations. New orders gained 7.3 points to 63.2 while employment advanced 1.2 points to 49.8 just below a neutral reading. Exports jumped 10.5 points to 57.5, overall a strong report, not as solid as manufacturing but services covers about 70% of the economy.

Yesterday’s Senior Loan Officer survey on the 1st Quarter showed that while some loosening in lending standards is occurring demand continues to slip. Even the improvement in residential prime loan demand seen in the 2nd through 4th quarters of 2009 has reversed. Take away the stimulus and fundamentals reassert themselves, just like Japan and true to the expected credit bust script as the fundamentals, primarily too much debt hasn’t really changed.

As shown by the 15% increase in personal bankruptcy fillings in April to 146,000 as per the American Bankruptcy Institute, the 4th highest month since the rush to file ahead of the 2005 Indentured Servitude Act, AKA Bankruptcy Abuse Prevention and Consumer Protection Act.

Its worth remembering that more or less everybody who’s anybody including Robert Rubin, Alan Greenspan, Timothy Geithner, Hank Paulson and others have been defending themselves saying, “who could have known?”, or words to that effect. As the credit and real estate bubbles inflated, popped and visited economic ruin worldwide that we are all paying for both directly and indirectly.

We find that during 2004 the Fed actually discussed the possibility, citing pricing driven by factors other than fundamentals, excessive building, reckless lending, a clear pattern of buying solely for speculation AKA flippers. All concerns raised by Atlanta Fed Governor Jack Guynn. Alan Greenspan’s response was essentially, let’s keep this secret because we don’t want to lose control of the discussion when the rabble gets involved because according to the Maestro only they really understood it. A number of other Fed Governors raised concerns along similar lines in 2004 as well. All of which come from the FOMC Meeting minutes released last Friday if your interested.

So while everybody claims they didn’t know about the real estate and credit bubble as it grew and ultimately exploded, delivering the fiasco we have today. It is clear that the Fed knew in 2004. The FBI warned of a mortgage fraud epidemic in 2004. The FDIC raised concerns regarding predatory lending in 2001. Greenspan’s good friend and former Fed governor Ed Gramlich knew and personally warned Greenspan of the surge in predatory lending that was apparent in 2003. The Mortgage Insurance Companies of America one of the nation’s biggest mortgage industry players repeatedly warned the Federal Reserve, the Federal Deposit Insurance Corp. and other bank regulators during the housing bubble that the U.S. faced an imminent housing crash in 2005. In 2003 the OCC or Office of the Comptroller of the Currency, a federal regulator, went out of its way creating new rules so that they could stop all 50 states Attorney Generals from trying to shut down predatory lending. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules, but failed.

William K. Black University of Missouri at Kansas City – School of Law and former regulator during the S&L Crises, points out that epidemics of ‘Control Fraud’ Lead to Recurrent, Intensifying Bubbles and Crises, which of course is exactly what this is. Something to keep in mind next time some big wheel says “I didn’t know” or words to that effect, because they most certainly did know.