• Sprott Money
    05/06/2016 - 06:03
    The US, in its own decline, is showing this same self-destructive tendency. The worse things get, the greater the inclination of the citizenry to say, “Carry on, everything’s fine.”

Guest Post: The World's Largest Money-Laundering Machine: The Federal Reserve

Tyler Durden's picture




 

Submitted by Charles Hugh Smith from Of Two Minds

The World's Largest Money-Laundering Machine: The Federal Reserve

The Fed policy's first-order effect is to issue hundreds of billions in "free money" to banks; the second-order effect is to destroy the rule of law in the U.S.

Let's start with a few questions about the proper role of the Central State and Central Bank: why should they bail out private banks? The answer boils down to something like this: "If the private banks absorbed the losses that are rightly theirs in a capitalist system, they would implode. Since the State and Central Bank have enabled these private banks to infiltrate and dominate the nation's financial system, that system is now hostage to these private 'too big to fail' banks."

In other words, "capitalism" in America now means socializing losses and privatizing profits generated by State and Central Bank intervention. Imagine for a moment the "beauty" of this system for owners of private banks: in a truly socialized banking system, the taxpayers would absorb any losses, but the State would also benefit from any future bank-sector profits. In the U.S. system, the losses are socialized but the people draw no benefit; the profits flow to the top 1/10th of 1% private financiers.

This is the perfection of State-financier crony capitalism.

Let's next ask why the Central State and Central Bank should subsidize and bail out the mortgage industry, a major component of private banking. Once again we find losses are neatly distributed to the citizenry while the profits all flow to private hands. Given that 98% of all mortgages are backed or guaranteed by Federal agencies (Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA, FmHA, etc.), the mortgage market is already completely socialized: the taxpayers are on the hook for any and all losses, but the profits from originating and servicing the loans are all private.

Meanwhile, 1 out of 6 FHA insured loans are are delinquent, and everyone who cares to examine the ledger knows the taxpayers will soon be bailing out FHA just as they did Fannie Mae and Freddie Mac.

But the socialization of losses and privatizing of profits is only the first-order effect of the banks' capture of the State. The second-order effect is even more destructive: the rule of law has been subverted by the world's largest money-laundering machine, the Federal Reserve.

Once again we can start by asking why a nation's Central Bank should buy mortgages from private financial institutions. Once again the first answer is a variation on the same theme: the Central Bank prints money and buys the mortgages as a way of socializing private losses and passing through billions of dollars in "free money" to private hands.

The newly printed money robs purchasing power from every holder of the currency (the socialization of costs) while the immense flood of "free money" flows to private hands.

Here's how it works. We know Fannie Mae is absorbing losses of 50% to 65% on its foreclosed properties (Nearly half of Fannie Mae REO unable to reach market, via U. Doran), and we also know that 31% of all homeowners with mortgages are "underwater," owing more than their house is worth (Housing, Diminishing Returns and Opportunity Cost).

We also know the Federal Reserve bought $1.1 trillion in MBS (mortgage-backed securities) in 2009-10, and the Fed has announced its intention to buy $40 billion more MBS a month until the housing bubble re-inflates or Doomsday, whichever comes first.

The Fed also bought $1 trillion in Treasury bonds, monetizing Federal debt:

Let's say you own a portfolio of mortgage-backed securities and your pals at the Fed are willing to buy the garbage at full price, no questions asked: are you going to sell your few AAA-rated MBS, the good stuff, or are you going to sell them the absolute dregs, the MBS so stuffed with defaulted mortgages that you've never dared to even do a mark-to-market estimate of their real worth?

You dump the worst of your portfolio, naturally, and so in effect the $1.1 trillion in MBS the Fed bought with newly created cash was probably worth (charitably) $600 billion at best. That means the Fed not only wiped out the losses that should have accrued to the owners of the impaired mortgages by removing the MBS from their books, it handed the owners (banks, pension funds, etc.) a cool $500 billion in "free money" by paying full value for massively impaired assets.

Since there is about $9.7 trillion outstanding mortgages (down from $10.3 trillion at the top of the bubble--not much deleveraging going on here), the Fed could have paid off 10% of every outstanding mortgage in the country with that $1.1 trillion. The one-time payment of principle would have flowed right to the mortgage owners, just like the Fed's "gift purchase" did, but in this case the money would have reduced the principle owed by homeowners, reducing their debt directly.

Setting aside the ethical implications (what about those who have no mortgage, etc.), the difference between the way the $1 trillion flows to the mortgage owners is remarkably different: in the first case, the homeowners get nothing and the banks get $500 billion in free money. In the second case, the banks still get the $1 trillion, but because it flowed through the borrowers, it reduces the mortgage principle.

Since the Fed can create unlimited money, why not pay off every mortgage in the land? That's only $9.7 trillion, and if the Fed wanted to unleash an orgy of spending, that would certainly do it. Trillions in losses would be filled with "free money," since the Fed would pay the full value of all mortgages.

This thought experiment reveals the real agenda of the Fed's asset purchases: it's not about aiding the nation or borrowers, it's all about funneling "free money" to the banks to restore their balance sheets and profits.

There's another reason, one outlined by Catherine Austin Fitts: QE3 – Pay Attention If You Are in the Real Estate Market. Correspondent Jim S. has alerted me to the wide-ranging consequences of the Fed's money-laundering, and correspondents Chad D. and Stephen N. also directed me to this article.

The second-order purpose of the Fed's mass purchases of mortgages is to recycle dodgy phantom mortgages--in effect laundering the debt and money on a vast scale. Here is an excerpt from Fitts' analysis:

 

The Fed is now where mortgages go to die. Thousands of mortgages on homes that do not exist or on homes that have more than one “first” mortgage are now going to the Fed to disappear. Thousands of multifamily and commercial mortgages will be bought up as well. As this happens, trillions of dollars that have been amassed offshore will be free to come back into the US to buy up and reposition land, farmland, residential and commercial real estate and other tangibles.

 

With documents shredded, criminal liabilities extinguished and financial institutions made whole, funds can return without fear of seizure.

 

QE3 proves beyond any shadow of a doubt that the extent of the fraud was as bad as I said it was. You can count up the bailouts and QE1, QE2, QE3 the numbers speak for themselves. The fraud was indeed in the many trillions of dollars.

In a nation in which rule of law existed in more than name, here's what should have happened:

1. The scam known as MERS, the mortgage industry's placeholder of fictitious mortgage notes, would be summarily shut down.

2. All mortgages in all instruments and portfolios, and all derivatives based on mortgages, would be instantly marked-to-market.

3. All losses would be declared immediately, and any institution that was deemed insolvent would be shuttered and its assets auctioned off in an orderly fashion.

4. Regardless of the cost to owners of mortgages, every deed, lien and note would be painstakingly delineated or reconstructed on every mortgage in the U.S., and the deed and note properly filed in each county as per U.S. law.

That none of this has happened is proof-positive that the rule of law no longer exists in America. The term is phony, a travesty of a mockery of a sham, nothing but pure propaganda. Anyone claiming otherwise: get the above done. If you can't or won't, then the rule of law is merely a useful illusion of a rapacious, corrupt, extractive, predatory neofeudal Status Quo.

The essence of money-laundering is that fraudulent or illegally derived assets and income are recycled into legitimate enterprises. That is the entire Federal Reserve project in a nutshell. Dodgy mortgages, phantom claims and phantom assets, are recycled via Fed purchase and "retired" to its opaque balance sheet. In exchange, the Fed gives cash to the owners of the phantom assets, cash which is fundamentally a claim on the future earnings and productivity of American citizens.

Some might argue that the global drug mafia are the largest money-launderers in the world, and this might be correct. But $1.1 trillion is seriously monumental laundering, and now the Fed will be laundering another $480 billion a year in perpetuity, until it has laundered the entire portfolio of phantom mortgages and claims.

The rule of law is dead in the U.S. It "cost too much" to the financial sector that rules the State, the Central Bank and thus the nation. Once the Fed has laundered all the phantom assets into cash assets and driven wages down another notch, then the process of transforming a nation of owners into a nation of serfs can be completed.

Here's the Fed's policy in plain English: Debt-serfdom is good because it enriches the banks. All hail debt-serfdom, our goal and our god!

In case you missed this:

The Royal Scam (August 9, 2009):

Once all the assets in the country had been discounted, the insiders then repatriated their money and bought their neighbor's fortunes for pennies on the dollar, finding cheap, hungry, competitive labor, ready to compete with even 3rd world wages. The prudent, hard-working, and savers (the wrong people) were wiped out, and the money was transferred to the speculators and insiders (the right people). Massive capital like land and factories can not be expatriated, but are always worth their USE value and did not fall as much, or even rose afterwards as with falling debt ratios and low wages these working assets became competitive again. It's not so much a “collapse” as a redistribution, from the middle class and the working to the capital class and the connected. ...And the genius is, they could blame it all on foreigners, “incompetent” leaders, and careless, debt-happy citizens themselves.

But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime. Frederic Bastiat, 1850

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Mon, 10/08/2012 - 09:23 | 2867332 fightthepower
fightthepower's picture

Fuck you Bernanke!

Mon, 10/08/2012 - 09:27 | 2867358 LULZBank
LULZBank's picture

"Nobody puts Benny in the corner"

Playing song in the background: I have the time of my life and I owe it all to you...

Mon, 10/08/2012 - 09:31 | 2867372 GetZeeGold
GetZeeGold's picture

 

 

Well....our pet name for Ben Shalom is baby.

 

If you haven't seen the movie you totally won't get the reference.

 

Mon, 10/08/2012 - 09:45 | 2867403 vmromk
vmromk's picture

My name is Ben Shalom Bernanke, and I approved this article.

Mon, 10/08/2012 - 09:54 | 2867424 sickofthepunx
sickofthepunx's picture

this is why we need a man like mitt romney for president. 

Mon, 10/08/2012 - 10:01 | 2867442 Colombian Gringo
Colombian Gringo's picture

Banksters are like pedophiles, they won't stop until you lock them up. Bernanke needs to bunk in Rikkers with Bubba, LeRoy and Jose before he will learn his lessons.

Mon, 10/08/2012 - 12:21 | 2868283 economics9698
economics9698's picture

Printing money is more addictive than crack cocaine.  We need to admit there is a problem.  It’s a 12 step program to get back to gold.  We need to end the addition.

Mon, 10/08/2012 - 13:12 | 2868463 Pegasus Muse
Pegasus Muse's picture

Some people need hanging. 

http://www.youtube.com/watch?v=n8ejEZy4KvQ Except this time the SOB gets it in the balls.

Mon, 10/08/2012 - 10:04 | 2867444 GetZeeGold
GetZeeGold's picture

 

 

this is why we need a man like mitt romney for president.

 

You know it's bad when Chris Matthews changes sides.

Mon, 10/08/2012 - 10:08 | 2867467 FeralSerf
FeralSerf's picture

Chris Matthews is a tool, a no good fucking whore.  He possesses not a shred of integrity.

Mon, 10/08/2012 - 10:21 | 2867495 Landotfree
Landotfree's picture

Sorry guys... nothing Mitt is going to do to "turn things around".   The system will collapse and it doesn't matter who you elect.   The unfunded liabilities will have to taken off the books, I expect 1-3 billion of them to go in the liquidation.  

All that is going on is setting up the scapegoat, as the system was unsustainable from the start.  Nothing Mitt, Obama, or even Ross Perot is going to do to help.  

 

'Banksters are like pedophiles, they won't stop until you lock them up.'

There are about 7 billion of them walking on this floating rock looking for someone to blame.   Blaming Benny or the Fed is not going to help and certainly is not the problem.

 

Mon, 10/08/2012 - 10:27 | 2867519 GetZeeGold
GetZeeGold's picture

 

 

nothing Mitt is going to do to "turn things around".

 

He a hoe - Snoop Dog

Mon, 10/08/2012 - 10:53 | 2867597 LMAOLORI
Mon, 10/08/2012 - 13:54 | 2868605 fourchan
fourchan's picture

2015 100 years, the end date for the system, now we know what system stands for.

 

enslaving an entire nation of free people to debt and capturing all assets.

Mon, 10/08/2012 - 10:30 | 2867525 SanOvaBeach
SanOvaBeach's picture

Absolute best post so far..........

Mon, 10/08/2012 - 10:32 | 2867530 Spastica Rex
Spastica Rex's picture

I hope for change.

Mon, 10/08/2012 - 10:47 | 2867576 NidStyles
NidStyles's picture

You mean the guy who has been taking Bankster donations for his campaign?

Mon, 10/08/2012 - 16:22 | 2869044 Panafrican Funk...
Panafrican Funktron Robot's picture

Which one?

Oh shit, both.  Democracy.

Landofthefree has been repeating a pretty good and disconcerting point recently, which is that a bunch of people are going to die as a result of shit already in motion that literally can't be undone.  At this point we're really just talking about the mass, volume, and velocity of the shit hitting the fan.

Mon, 10/08/2012 - 12:51 | 2868377 vast-dom
vast-dom's picture

email this article DIRECTLY to The Fed:

 

Federal Reserve Consumer Help: ConsumerHelp@federalreserve.gov

 

Report the consumer fraud of The Fed to The Fed. 

Mon, 10/08/2012 - 14:46 | 2868181 LMAOLORI
LMAOLORI's picture

 

 

The World's Largest Money-Laundering Machine is actually the U.S. Government

 

Bernanky Panky will continue until he is given the boot. The real cause of our problems are the politicians.  Interesting how so many see terrorism or al Qaeda as a boogey man threat used by politicians but all you free thinking folks are not too quick to catch on that the Fed exists ONLY WITH THE PERMISSION OF OUR POLITICIANS PERIOD. In other words the politicians have successfully misdirected the anger from themself's to the Fed. The Politician's aside from being able to spend with reckless abandon are also profiting from Real Estate as another poster pointed out yesterday.

A lot of those worthless mortgages were dumped on the taxpayer's already via the GSE's Fannie/Freddie and the practice continues to this day.  If the government wasn't in the home loan business to begin with this couldn't happen and you can bet the Banks would be careful who they loaned money to then. These giant government programs are prime for abuse and they distort the free market.

Treasury Fights Back Against “Backdoor Bailout” Portrayal

Mortgage Putback Threat Reduced for Lenders Under New Rules

GSEs Remain Backdoor Bailouts for Banks

 

Charles Hugh Smith fails to point out that when they nationialize the Banks that works both ways they SOCIALIZE ALL the losses which would mean all those houses purchased with ZERO down YOU the taxpayer would be paying 100% for. That is the flaw in liberal thinking there is NO FREE LUNCH someone is picking up the tab. Until people wise up and start laying the blame where it actually belongs there will be no resolution. The Statute of Limitations for criminal financial fraud is five years the people to hold accountable are the politicians who did nothing to bring them to justice. If you want to End the Fed go after the politicians otherwise you are just wasting your anger.

Mon, 10/08/2012 - 16:34 | 2869068 Panafrican Funk...
Panafrican Funktron Robot's picture

And how do you propose we "go after the politicians"?  Ask other politicians to get involved in prosecuting misconduct?  "Throw the bums out"?  Do either of these things actually work?  If not, why not?  

If you're not at the point of understanding where the only actual answer is nonviolent resistance, you are behind.

To those that think violent resistance is the answer,

I disagree, I don't think it's nearly as effective, and it costs a lot more innocent lives, including yours.  Yes, Ghandi and MLK were martyred, but a lot of other people didn't die because their method (which has Quaker roots, who I consider the "true patriots") is the correct method.

Mon, 10/08/2012 - 17:29 | 2869179 LMAOLORI
LMAOLORI's picture

 

 

I would say that enough people have to first understand who is responsible. Once that is accomplished people could work together to demand politicians do something about prosecuting fraud even if the laws have to be changed to accomplish that. For example the DOJ is responsible for criminal prosecution and the politicians should have oversight and severe enough penalties to ensure the job is done so that we actually have equal justice under the law. As it is now that's just a soundbite. If necessary an outside independent panel who assess's the situation coupled with the power to bring charges that could result in prison for those whose duties it was to prosecute if they failed to do so. I bet they would take their government job more seriously if that were the case if they were held accountable. That law should apply to our politicians as well. We have top rot and any politician who didn't do their job deserves to be thrown out or thrown in jail. I think those things could work if people let them know they were serious people have gotten laws changed or enacted on lot's of issues. I'm sure people working together could come up with good ideas.

Mon, 10/08/2012 - 10:15 | 2867485 Monedas
Monedas's picture

There goes your invite to the 2013 Fed Centennial dinner !       

Mon, 10/08/2012 - 10:35 | 2867537 True.North
True.North's picture

I enjoyed this, but am convinced the US residential real estate market is the world's largest money laundering machine (as covered extensively by Tyler/Zero Hedge). 

Mon, 10/08/2012 - 15:40 | 2868968 DaveyJones
DaveyJones's picture

screwed up in part by manipulated rates

Mon, 10/08/2012 - 10:39 | 2867550 WarriorClass
WarriorClass's picture

And yet, there has been no revolution.

Mon, 10/08/2012 - 12:12 | 2868251 illyia
illyia's picture

The propaganda has been very effective.

Mon, 10/08/2012 - 12:48 | 2868374 oldman
oldman's picture

Warrior,

Zombies don't revolt.

Look around, please, see where you are, see who lives here----where ya gonna find a revolucion?

It's zombietime, bro', on zombiehedge            om

Mon, 10/08/2012 - 13:26 | 2868506 Darth Rayne
Darth Rayne's picture

I agree, fuck Bernanke. But he was placed there to do what he is doing. Fuck who put him there!

Mon, 10/08/2012 - 09:24 | 2867333 LULZBank
LULZBank's picture

We dont wash, we create money Bitchezz!!!

Mon, 10/08/2012 - 09:26 | 2867357 cossack55
cossack55's picture

Since, as you point out, that they are not "laundering", maybe 1 Hour Martenizing works better.

Mon, 10/08/2012 - 09:25 | 2867341 cossack55
cossack55's picture

When I used to surf, Hang 10 meant one thing. Now that I am a serf, well, Hang 10 means something else entirely.

Mon, 10/08/2012 - 09:28 | 2867363 sessinpo
sessinpo's picture

The proper title should be "The World's Largest Wealth Stealing Machine: The Federal Reserve"


Mon, 10/08/2012 - 09:31 | 2867371 Cognitive Dissonance
Cognitive Dissonance's picture

The Federal Reserve........where the Sublime meets the Stupid.

Or maybe I should say that the Fed is brilliant when it comes to financial slave manipulation and control and we are Sublimely Stupid for playing along as patsies.

Mon, 10/08/2012 - 10:15 | 2867483 DaveyJones
DaveyJones's picture

Where the slime meets the stupid

Mon, 10/08/2012 - 12:13 | 2868259 illyia
illyia's picture

CD - speak for yourself!

Mon, 10/08/2012 - 09:31 | 2867374 dbTX
dbTX's picture

It's simply a matter of time now.

Mon, 10/08/2012 - 09:47 | 2867408 LULZBank
LULZBank's picture

Black holes can slow down time, drastically.

Mon, 10/08/2012 - 10:53 | 2867599 NidStyles
NidStyles's picture

At least on paper they can.

Mon, 10/08/2012 - 15:35 | 2868953 DaveyJones
DaveyJones's picture

and we need more black on paper

Mon, 10/08/2012 - 09:33 | 2867378 Temporalist
Temporalist's picture
Eurozone rescue fund launch due

"The eurozone's new permanent fund to bail out struggling economies and banks will be launched later at a meeting of finance ministers.

The European Stability Mechanism (ESM) will have a full lending capacity of 500bn euros (£400bn; $650bn) by 2014.

It will initially run alongside, and then eventually replace, the European Financial Stability Facility (EFSF).

Europe's largest economy Germany will make the biggest contribution to the fund, about 27% of its total."

http://www.bbc.co.uk/news/business-19868868

Mon, 10/08/2012 - 10:11 | 2867469 falak pema
falak pema's picture

and the PIIGS make 25% of it; hilarious!

Lending to yourselves with money you don'ty have! 

Piggggy backing is getting to be a funny money game; all holy smoke from Pope of ECB! 

Mon, 10/08/2012 - 09:33 | 2867382 resurger
resurger's picture

"Fiat money benefits those who create it and receive it first, enriching government and its cronies. And the negative effects of fiat money are disguised so that people do not realize that money the Fed creates today is the reason for the busts, rising prices and unemployment, and diminished standard of living tomorrow."

Mon, 10/08/2012 - 10:44 | 2867570 ATM
ATM's picture

Section 8

1:  The Congress shall have Power To lay and collect Taxes, DutiesImposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all DutiesImposts and Excises shall be uniform throughout the United States;

2:  To borrow Money on the credit of the United States;

3:  To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

4:  To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

5:  To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

6:  To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;

 

Seems simple to me.

Mon, 10/08/2012 - 10:59 | 2867619 NidStyles
NidStyles's picture

It's just a piece of paper. You can think it's more, but that just makes you an idealist.

Mon, 10/08/2012 - 09:42 | 2867387 falak pema
falak pema's picture

I am confused between CHS and Mike "the Eurobike" Grant.

Who washes best with corporate (p)OMO handouts : Draghi of ECB or Bernanke of FED?

I'm lost in CB whitewashed trillionomics tribulation! 

Maybe its not size of the balance sheet spike that counts but who takes predence in "prima notte" rights to grill the world in fiat hopium/dopium.

First son gets the juciest breakfast buns when the bell of WS jingles every morning. 

 

Mon, 10/08/2012 - 10:34 | 2867534 Spastica Rex
Spastica Rex's picture

REFEUDALIZATION

Mon, 10/08/2012 - 09:37 | 2867389 AUD
AUD's picture

Since the Fed can create unlimited money

No it can't. It can however create unlimited credit, an important difference. Fed credit is not money. Once upon a time it may have been a quality monetary substitute but now it is junk.

The Fed's balance sheet is certainly opaque, but that's so none of you chumps realise it is junk.

Mon, 10/08/2012 - 09:58 | 2867436 dbTX
dbTX's picture

Good observation, their is a difference. Try to pring some of my shiney stuff.

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