Chris Whalen Welcomes Our New Tyrannical Overlords, Prepares For The Taxpayer Funded Mortgage Insurer Bailout

Tyler Durden's picture

Chris Whalen's latest Institutional Risk Analytics is a must read letter as it highlights yet another aspect of foreclosure fraud, one which finds various analogues in the way the MBS originating banks took advantage of AIG, knowing full well it was stuffed to the gills with worthless pieces of paper and taking out enough insurance on it to require a federal bailout when mark to fraud failed and mark to market finally worked for a very short period of time. Now, it seems, it is the mortgage insurers turn: "So today the MIs are still operating, though they are not providing insurance because they can't. Observers in the operational trenches tell The IRA that virtually no MI claims are being paid - even if the claim is legitimate. The MIs are very undercapitalized and still bleeding heavily. But they get continued business because the GSEs demand MI on high LTV loans. Lenders are forced to use the MIs and consumers are made to pay the premium. Thus the auditors of the GSE continue to respect the cover from the MIs, even though the entire industry is arguably insolvent." The question is how many CDS have Goldman et al purchased in bulk in anticipation of the imminent wholesale MI Event of Default, which will force Geithner to once again use the Mutual Assured Destruction wildcard and force taxpayers to bail out those holding MI insurance, especially if the originators and servicers end up being one and the same...

From Whalen's latest:

Several mortgage market observers describe the current private mortgagre insurance market in the U.S. as a regulatory artifice -- or more accurately regulatory arbitrage. MI was re-created expressly for the GSEs to provide cover for loans with an LTV greater than 80%. It was a simple business and, if the management of an MI underwriter was not too stupid, it could make a decent return. The problem is that management of the old line MIs typically did a lot of very stupid things, acts of idiocy that were encouraged by the GSEs and their allies in Congress. A handful of the more egregious lapses in judgment by the MIs and the GSE included risk management changes that come under the familiar story of "innovation," a familiar ruse that was a key part of the push by both political parties for affordable housing going back decades:

(1) Eliminating independent risk management departments; line managers in the MIs were allowed to override corporate risk departments, particularly when insuring large bulk deals.

(2) Signing fraud, and documentation (completion) waivers in order to land large bulk deals from the largest producers.

(3) Insuring bulk deals without performing random inspections to (a) keep lenders honest and (b) assess underwriting quality.

(4) Insuring subprime loans (non GSE loans) without proper credit models; and insuring production from lenders with questionable credentials.

(5) Insuring large quantities mortgage product that was outside the knowledge base of the MIs. Remember that the MIs had almost 40 years of insuring plain vanilla F&F product. Now they were insuring 220's and every other kind of crappy paper the lenders threw at them. They had no clue how this stuff would perform. No attempt was made to model it properly.

So what happened? By summer of 2007 most of the bulk GSE pools underwritten by the MIs started to experience extremely high levels of delinquencies. But rather than curtail MI operations and shore up underwriting, the MIs made a big push and increased subprime production insuring large amounts of subprime product (lots of 220s) all the way into first quarter 2008.

The MIs tripled down and did so in hopes of making enough fee income to (1) meet plan and (2) shore up capital that had started to bleed. This push, which was not always reported honestly to share and bond holders, signed the respective death warrants for Fannie and Freddie. But the zombie dance party rocks on.

So today the MIs are still operating, though they are not providing insurance because they can't. Observers in the operational trenches tell The IRA that virtually no MI claims are being paid - even if the claim is legitimate. The MIs are very undercapitalized and still bleeding heavily. But they get continued business because the GSEs demand MI on high LTV loans. Lenders are forced to use the MIs and consumers are made to pay the premium. Thus the auditors of the GSE continue to respect the cover from the MIs, even though the entire industry is arguably insolvent.

Thus we go back to the low-income borrower, who is forced by the GSEs to pay for private mortgage insurance that will never pay out. The relationship between the GSEs and the MIs is identical to the "side letter" insurance transactions between AIG and Gen Re, and come to think of it, the AIG credit default swaps trades with Goldman Sachs (GS) and various other Wall Street dealers. In each case the substance of the transaction is to falsify the financial statements of the participants. And in each case, the acts are arguably criminal fraud. And in the case of the zombie banks, the GSEs and the MIs, the fraud is being actively concealed by Congress, the White House and agencies of the U.S. government led by the Federal Reserve Board. Is this not tyranny?

Look for topical comparisons of fraudclosure to the AIG implosion to gain far more prominence as the mortgage fraud topic just refuses to go away, and has the big 3 holders, Paulson, Och Ziff, and Caxton, cowering in semi-lit rooms, thinking of effective exit strategies that, for now, do not involve wholesale middle-class bailouts. Also look for the Treasury to soon disclose just how profitable its imminent bail out of the mortgage insurers will end up being for taxpayers...

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Gubbmint Cheese's picture

God love ya Turd I thought of exactly the same thing - thx also to Tyler for the set up.

plocequ1's picture

Here we go with that fictitious word " TAXPAYER" again. Will they finally get it over with already? I feel my $300 paycheck is too much. Please Mr Taxman, take it all . Its yours. Just leave me enough for my Cablevision. I needs my WiFi and American Idol

plocequ1's picture

Shit, Now that brings back memories. I used to watch that show when i was a kid way back in the 70s. I loved the opening

Thanks for the memories.. I remember guarding my Sgt Pepper Vinyl album with my life

Return2Sanity's picture

The taxpayer too has ceased to function, but the government is covering it up by continuing to loan money to itself and pretending like it's real.

Joe Davola's picture

Or selling erstwhile assets:


As a PA resident and occasional turnpike traveller, I am willing to let someone else have the turnpike - real cheap.

ILikeBoats's picture

Not sure what you mean about the PA turnpike - if you read their CAFR, they make as big or bigger a gross profit margin as any high tech company such as Google, Microsoft, or Apple.

Hollywood's picture

What's wrong with loaning money to yourself?  Oh, wait a minute...

kaiserhoff's picture

You want clear, obvious fraud involving nearly all of the major players?  This is it.  I've said for a while now that these zombies are only being kept alive for fraudulent purposes, to make it appear that insurance is in place, when all the players know that the opposite is true.

unwashedmass's picture


can we just call this what it is, "extortion"

Joe Davola's picture

I'm beginning to think it would actually be cheaper to let the deadbeats keep the $800k homes that they owe $1mil on.


Unfortunately, that wouldn't bail out the banks.

cougar_w's picture

MIs will be the first to go, but not the last. Once that domino falls I don't see how the hell this train wreck stays on the rails.

TheMonetaryRed's picture

Of course Whalen can't bring himself to blame the private sector MI's themselves for being anything more than "stupid' rather than the blatant insurance frauds they are. He has to somehow blame the GSEs and government for everything so he can cling to efficient markets theory. That said, this article was very informative. 

ghostfaceinvestah's picture

Agreed, he gives them too much credit - go back to the earnings calls circa 2007 - their managements were BRAGGING about how much business they were getting.

The 2007 vintage loans will probably end up with 30%+ losses - almost a third of all those mortgages will go to foreclosure.

That wasn't stupidity, that was gambling that the housing bubble wouldn't burst.

malek's picture

Have you read the full original article?

Whalen is putting a huge "fraud" tag on pretty much everything there.

DB Cooper's picture

Treason in addition to tyranny.

Turd Ferguson's picture

"Treason doth never prosper: what's the reason? Why if it prosper, none dare call it treason." 

Hansel's picture

Yes, this is tyranny.

moofph's picture

...yes, i very much agree. but, yet, it feels like such a virtual tyranny, because only the ones that know the truth to what is unraveling see it that way...everyone else is still in their virtual freedom.

the real SHTF will follow the virtual SHTF...prepare for both.

Wyndtunnel's picture

When will Americans finally have enough of this shit and tweet each other to spontaneously overrun Capital Hill and dare the military to shoot them dead!  Think DC is ready for such a flash revolt?? They must be...  Something will have to trigger it...but what?  The Internet going down across the board for more than a few hours? MTV going off the air? Glee being cancelled? It is getting surreal how much abuse Americans are taking sitting down.

Oh regional Indian's picture

It is getting surreal how much abuse Americans are taking sitting 

But the reason is obvious enough, isn't it Wynd? It was to me while I was there:

1) Programming (literal through TV and now computers and by every form of media and every kind of sterotype you can imagine, and then some. Look at all hollywood creations and then see how every following generation absorbed and emitted those archetypes (as far back as mass media, ie. Radio actually and magazines before that).

2) Bad, often poisoned food. I remember a drive through Illinois and Indiana. Through the great breadbasket of America. Indianapolis was weird. Everyone looked fat and happy. ANd all along the highway: this farm proudly uses (insert cargill, monsanto et. al.) I would highly recommend a book "My year in Meats" by I forget who. Tells a real story about the use of propaganda in food habit alteration.

3) Pathetic education system, especially public schools.

4) Fluoride in your water

5) For effect, once again with a drum roll: TV! Tee Vee! TV has the masses hooked by thier balls/hair/brains, depending.  Think Jackass. Enough Said.

and about a dozen more.



MeTarzanUjane's picture

Long live ballywood, indians trying to replicate the worst parts of America. Fluoride in our water, copious amounts of human waste in yours.

I've met enough indians in the US who despite what their resumes claim suffer from an even worse education than rural Mexicans.


CH1's picture

They don't want to face it... will do or believe almost anything rather than facing it.

Why? Because if they do face it, responsibility reverts to them. They'll take ANYTHING but that!

Aristarchan's picture

One way to stop the incestuous linkage (too interconnected to fail) is simply to ban the insuring of financial instruments. I have no problem with hedging with a derivative trade, but all this interlinked trading/insuring between firms was a distaster from the beginning.

doolittlegeorge's picture

Of course "Social Security is an insurance progam" too.  As I have been told "there's no such thing as a government entitlement."  So "bail 'em out because we're already Throwing Mama from the Train."  Utica NY?  "49% property tax increase."  Just for starters....

Aristarchan's picture

Theoretically pre-funded by its participants. I am not a big fan of SS, but, can you imagine a system where SS retirement monies is directly handled by Wall Street?

TheMonetaryRed's picture

Social Security was never pre-funded and it's not an insurance program. It was, is and always has been a transfer payment from younger to older workers that "saves" money in the Trust Fund only to compensate for demographic changes. 


DB Cooper's picture

SS is the King of all Ponzi schemes.

Aristarchan's picture

I agree with you guys.....but what is the alternative?.....does it make sense to put wage workers at the mercy of stocks?

Strongbad's picture

If we had sound money, people could simply save money for retirement on a 3-6% yield in CDs, bonds, savings accounts, etc. because inflation wouldn't eat them alive.  The only reason people "need" to buy stocks for retirement is because they need the capital gains on top of the dividends in order to beat inflation.

Aristarchan's picture

I agree, theoretically. However, there is a pervasive price creep that occurs independent of inflation, mainly in food, fees, services and the like. And, of course, there are always the potential of future events (wars, etc) that can drive inflation beyond our ability to control it.

CH1's picture

Actually, minus inflation, there is a negative price creep. As things are produced more efficiently - and presuming effective competition - prices gradually decline.

How much corn was produced per acre in 1900 as compared to now? How much cheaper is it to use robots in manufacturing? And so on. (Then consider electronics!)

Think about it a bit and see if you don't agree.

StychoKiller's picture

Yeah, but expanding the size of the Leviathan Govt cannot be justified if prices are continually falling due to productivity/efficiency increases!

Aristarchan's picture

I have no problem with a government-sponsored retirement program as long as it is managed properly. It is no different than what happens in other countries, for instance in most of Asia, where parents are taken in to live with their is just a different kind of wealth transfer. The problem is, banks, investment firms and companies cannot be trusted to handle other peoples money without ripping them off. I don't trust the government very far either....but give me a viable alternative? If you want to privatize retirement wealth, then I can go for that, if you also give me the legal right to hunt down the shithead that ripped me off and cut his fucking toes off till he makes it right, or gut the basterd like a chicken if he doesn't.

CH1's picture

I have a huge problem with government programs: They are paid for by taking money from people by force.

We have a name for such people!

StychoKiller's picture

But, but...I'm from the Govt, and I'm here to HELP! (help myself to some of your property, that is!)

sweaty7's picture

let's just drop the charades and nationalize all mortgages. Fed takes all mortgages and gives the banks treauries in return, let the FED then re-fi everyone out there a 2.5%. isn't that the end game anyway? the FED and the big banks have screwed this thing up so much, nothing short of a complete collapse will ever enable us a foundation to rebuild a sound ecnomic system.

Max Hunter's picture

nothing short of a complete collapse will ever enable us a foundation to rebuild a sound ecnomic system.

Indeed... Indeed

TheMonetaryRed's picture

Do major financial collapses generally result in "sound economic systems"? 

Let's look at history, shall we? 

Okay, we've got the 1) Fall of Rome - that produced the Dark Ages, so no luck there. 

2) The Fourth Crusade - caused the fall of the Byzantine Empire and assorted medieval chaos. 

3) Welsh Conquest - not bad, unless you were Welsh. 

4) Philip II of Spain default - 500 years of decline for Spain. 

5) The Darien Scheme - Battle of Culloden, destruction of the Scottish nation. 

6) John Law Bubble - French Revolution, invention of fascism under Napoleon.

7) Ottoman Default - WW1

8) Russian Default - Russian revolution. 

9) Weimar Default - Hitler

10) Panic of 1907 - The Federal Reserve system

11) Great Depression - WW2

Need I go on?

CH1's picture

No time for a real historical overview, but that's not quite right. The "Dark Ages", for example, were a slow reset after the distortions of Rome. Crop yields rose during that time, for example.

The 'history' you were taught in school was political more than historical. (Sorry.)

Of course, you are right that there are no guarantees. I do, however, have confidence in most Americans. They are good people... and shockingly effective, once they get the state out of their heads.

Tic tock's picture

This would easily swallow QE., it could be a credit event, one way or the other. ..should the govt. wish to hold this potato, it would become more than likely that housing in the US does eventually become a social provision.

MeTarzanUjane's picture

How is gold doing today? I can't get to my computer to check...

Let me know, OK? Sprot predicted a pop yesterday, he said there is be a great buy in the miners. So we bought a lot on the close. Did we get it?

Can I get a quote on spot?

Rainman's picture

PMI is just another fraudulent enterprise that must be sustained to keep the other fraudulent enterprises moving along. Why anyone would take a <80% LTV carrying an outrageous PMI vig in a market like this befuddles the hell out of me. The entire RE market is riddled with fraud and incompetence. Big Fail is unavoidable.

macholatte's picture


After the crash in 2008 I read somewhere that the total of all real estate loans was around $2T and the estimate of the total of MBS and/or CDO's was around $40T. Maybe someone here has better numbers.

But my point is this: the government via bail-outs and such cannot lay this entire thing onto the tax payer because it's simply too enormous. It needs to unwind and the last gang standing gets to go BK and not pass Go and not collect $200.

Had the government simply purchased ALL the mortgages and written them off to 50% then the country would be way ahead of the game at having only lost $1T.