As is so often true....

By Carl

...whenever there is a windfall, we can expect the parasitic maggots to dig in as deeply as possible and try to find new ways to make even more money:

The FBI is investigating Countrywide Financial, the nation's largest mortgage lender, for possible securities fraud, said a person familiar with the probe.

Investigators are focusing on whether Countrywide officials misrepresented the firm's financial position and the quality of its loans in securities filings, said the person, who declined to be identified because he wasn't authorized to speak about the inquiry. He described the inquiry as preliminary.

Countrywide is among at least 14 companies the FBI is checking for possible accounting violations related to the subprime lending crisis, including mortgage lenders, housing developers and Wall Street firms that package loans as securities.

Granted, it's a preliminary investigation and granted, there's no conclusive evidence of securities fraud.

Past history, however, is rife with instances where, when markets are booming, someone will try to grab even more of the windfall in profits and money raining down than is necessary.

The junk bond scandals of the 80s would, you'd think, have alerted investigators overseeing other market bubbles, since in that scandal, several of the biggest names involved in the marketing of sub-prime (there's that word again!) corporate debt were eventually convicted of securities fraud: names like Ivan Boesky and Michael Milken stand out in the convictions from those heady days of Reganomics.

Yes, change the world, indeed!

During the dot-com bubble, we saw corporations like Merrill Lynch and Citigroup cited and fined by the SEC for fraudulently humping stocks of companies like WorldCom, JDS Uniphase, Global Crossing, Cisco, and Lucent, all of whom eventually had to answer for some of their own greed.

I personally recall wondering how Cisco Systems could continually make precisely one penny more per share than analysts' estimates each quarter and then realizing there had to be fraud involved. You can't get a much clearer sign than that.

So it's not surprising that, in this latest bubble, there would be fraud going on. Shady mortgages, shady repackaging of those mortgages to shed the risks of the shady mortgages, those stick out as the most obvious strategies a nefarious executive could do in order to squeeze the undeserved buck out of investors and mortgagors.

There's probably more. These things don't happen in a vacuum. I would expect some allegations to be made regarding at least collusion if not conspiracy to commit fraud amongst lenders like Countrywide, DiTech, and other mortgage brokerages and lenders.

Hey, it was practically free money that was lying there for the taking! Who among us wouldn't scoop a little up if we saw a pile of cash in our driveways?

On top of this news, comes some other distressing financial developments, courtesy of Southern Atlantis, we see that the "D" word might have to be used soon:

During the Depression in the 1930's, banks suffered or shut down because their cash amounts and revenues through loans could not meet the balances of their depositors. The Federal Reserve at that time countered the need for cash that remaining banks had through special loans to those institutions. The term auctions the Fed is holding now serve the same purpose, though the interested or borrowing member banks are not mentioned. That, of course, works in the banks' favor: their stock prices don't take a hit, or, at worst, there's no run on the institutions.

OK, so what evidence do we have for this happening now?

Just these:

1) Citi sees $9 bln writedowns at U.S. investment banks.

2) Goldman says can't rule out Fed emergency rate cut.

The combination of lowered interest rates as well as writedowns of that magnitude will create a deep uncertainty amongst bank account holders. Can you say "run on the bank"?

Too, inflation is already roused, and the rate cut will not help that. Add now the economic slow down we've been experiencing, and you're talking about stagflation, something I've warned about since November of last year.

Another piece of this very complex and ugly puzzle is our foreign relations stances will not be helping us this go-round. Most other developed and -ing nations seem to be doing fine or at least hanging on (there's some trouble in Japan, but growth continues in China and India and Europe).

Normally, we might browbeat some of our allies and trade partners, but I fear that Bush's hubris and naïveté has cost us that potential tool in limiting the damage from a depression that could be as deep as the Great Depression of the late 20s and 30s of the last century.

The real scary part about all this for me is, I can't see the end game to this dip. There's not much good news laying about, no uptick in productivity, no surge in hiring, no growth sector that can't be attributed to inflation or exports.

2008 will not be fun.

(Cross-posted to Simply Left Behind.)