Wednesday, November 25, 2009

Climate Gate and Man Made Climate Change

In 1836 Charles Darwin was a 27 year old scientist of growing esteem. One of the burning geological question of the day involved a group of valleys in Scotland called Glen Roy. The location has a three shelves at different levels and the only theory at the time was they were roads built by giants. It was suspected they where actually beaches at three different levels, but the location was open at one end, so it did not lend itself to a theory that the location had contained a lake. Darwin theorized that the location was once under the ocean and was raised by three separate “crustal uplifts”. A short time later another scientist theorized the valleys had been damned by glaciers, which has been the accepted theory since. However, Darwin refused to admit his flawed theory and carried the foolishness to his grave.

The original concept of the planetary “Greenhouse Effect” was been accepted climate theory for over 50 years. However, that is quite different than the theory, once called Global Cooling, then Global Warming and now Man Made Climate Change. The Greenhouse Effect, simply put, is the atmosphere catches heat, reflected from the earth's surface and recycles it, giving earth relatively mild temperatures. The atmosphere also filters out much of the radiation emitted from the sun, that otherwise would make life on earth impossible. In the 70's, there was mounting scientific theory that we were heading toward another ice age and “Global Cooling” was termed; the result of this global cooling was to be extreme weather on the planet, leading to crop failures and millions of deaths from sickness and starvation. Then came the 80's, where there was mounting scientific theory that man was releasing atmosphere (or ozone) destroying gases (chlorofluorocarbons) into the air, which would soon deplete the atmosphere's ability to screen radiation. The evidence for this were termed “holes” in the ozone, which were later determined to be seasonal. Then in the 1990's we started hearing about Man Made Climate Change (MMCC). The mounting scientific theory was that man's presents on the planet was causing increases in the carbon dioxide levels in the atmosphere and the rising levels was resulting in rising temperatures, that would lead to extreme weather on the planet, crop failures and millions of deaths from sickness and starvation.

First, you need to understand what MMCC is not. MMCC is not about curbing pollution or cleaning up the environment. MMCC is not about rationing the earths resources for future generations. MMCC has nothing to to do creating new “clean” jobs or investing in new green technology. What MMCC is, is a sudo-science that has been driven by a political agenda. The science of MMCC has a very narrow focus and has three legs. The first leg is that rising carbon dioxide levels in the earth's atmosphere has resulted in raising global temperatures. The second is these resulting rising temperatures are melting the polar ice caps and causing increasingly violent weather that lead to mass deaths and destruction worldwide. The third leg is that the rising carbon dioxide levels are man made. Now one would think that if this were true, that there would be a plan to lower mankind's production of carbon dioxide. This however is not the case; the political side has instead called for a system of “Carbon Credits”. Under the Carbon Credit system, referred to in the US as “Cap and Trade”, a world governing body will determine an arbitrary level of carbon dioxide production. Each country will monitor the carbon dioxide production of it's citizens and penalize them if they exceed their “cap”. Countries that produce low levels of carbon dioxide will be awarded credits that they can sell on the world market to citizens of other countries who have exceeded their cap limits; hence Cap and Trade. So, as you can see, MMCC is designed as a world tax and a mechanism for the redistribution of wealth. The likes of Al Gore has already invested heavily in the institution of a World bank, that would profit as a middle man for buying and selling of Carbon Credits.

As I said before, the first leg of the MMCC theory, is that rising carbon dioxide causes temperatures to go up (it should be noted that carbon dioxide is released any time energy is produced). What is known, is the opposite, that rising temperatures result in higher carbon dioxide levels from the oceans evaporating. In the 1990's the MMCC theory took off with the stewardship of Al Gore, who almost immediately announced that MMCC was no longer a theory, but a scientific fact, and that anyone who purported to question the theory, was a hack and no doubt in the pocket of the oil industry. This was partly due to his continually mis-stating known science (that CO2 levels rise with higher temps) with his Global Warming theory (that temps rise with increased C02). During the 90's the weather cooperated with the MMCC theory, as temperature raised about .5 deg. The result was Al Gore and the United Nations starting to build the framework of the world currency of Carbon Credits designed to balance out the production of carbon dioxide (i.e. carbon footprint). However, the new millennium was not so kind to the MCCC theory. Temperatures leveled out and in some cases actually went down; this is were the MCCC science really started breaking down.

We now know, from emails hacked from Climatic Research Unit in England, that the world's top scientist in the field of MMCC, have been “helping the science” by fudging the data and sabotaging the peer review system. The later can not be emphasized enough. The way scientific theory is scrutinized and legitimized is through peer review. A scientist will write papers to explain his reasoning and views of theories and these papers are published. Other scientists will read the papers and comment on it's strengths and weakness. The emails captured from the CRU, show a cabal by the leading Climate Change scientists, to block the publication of any dissenting view of MMCC, a refusal to respond to any of dissenting papers if they were published, and finally to “change the definition of peer review" if necessary. You must remember here, that one of the most often cited issues with dissenting views of MMCC, is a lack of peer review! Now we know why. Even worse for the scientist, attempting to question the data and results (that we now know were fraudulent), resulted in these CRU connected scientist personally attacking the dissenting scientist, even to the point of pressuring academia to strip the scientist of their tenure and revoke their credentials.

As the realization that MMCC science is reluctantly accepted, there will be attempts by the powers that be to mitigate the level of fraud that was perpetrated on the citizens of the world, and try and save themselves from the fallout. They will no doubt fall back on all they were trying to do is save the world and the basic precept, that we need to take care of our planet and clean up the environment. But remember as I said before, that has never been the objective of the MMCC agenda. As a matter of fact, much of the money originally slated toward true clean technology, has been diverted to pay for Carbon Credits. There is also little doubt that these scientists didn't start out planning to destroy their careers for a few dollars or some fudged numbers. But, modern society has falsely looked upon science as the last bastion of incorruptibility. However, the history of science is rift with examples of egotistical scientists who refuse to admit fatal flaws when they surface in their theories. In the end, they were simply trying to cover up junk science and to try and save themselves from humiliation and loss of reputation and esteem. One can only hope that the scientific community will react to this crisis with transparency; unless your making an atomic bomb, science should not be a secretive process behind closed doors. Science is a process that is supposed to be democratic in nature, where the only objective is contextual knowledge. But, as Benjamin Franklin once wrote, “Democracy is two lions and goat talking about what's for dinner.” So, just as democracy needs a value system to survive, so does science; and when that value system breaks down you end up with a half eaten goat and a lot finger pointing.

Friday, November 6, 2009

Nomenclature of the Sub-prime Meltdown

Please don’t let your eyes glaze over when you read this. I am the type that needs to know what happened. At first I thought it was Congress and Fannie Mae; but it really wasn’t. It was Wall Street greed and it’s far from over.

Credit Default Swap (CDS)- A private unregulated insurance policy originally created to as a hedge bet on risky investment. Due to the fact that they are unregulated, there is no requirement that the seller have the funds on reserve to pay the CDS if the insured investment fails. Further, since you can purchase a CDS without actually investing, it is the functional equivalent of walking into a retirement center and buying life insurance policies on those you think will die the soonest.

Mortgage Backed Securities (MBS) – Using the worth of numerous Mortgages, bundled together as collateral for a loan.

Derivative- A financial contract whose value is derived from the value of something else than the asset or index on which it is based. For the purposes of this discussion, mortgages of various risk and value are combined using mathematical formulas that take into account past rates of default and interest rates and a guarantee that home values will always increase. The idea is to mitigate the risk of economic loss arising from changes in the value of individual mortgages, known in the Derivative world as the “underlying”. These investments are defined as a Derivative because it’s worth is not determined by the worth of the mortgages, but the result the formula used to derive it’s value.

Government Sponsored Enterprise (GSE) A financial corporation crated by Congress. The primary purpose here, is to buy up mortgages from banks so they will have the capital to continue to lend and create new mortgages. Prior to Glass Stegal Act mortgages were bought and made in to MBS by private investments banks. Since a lack of regulation with these securities were part of the 1929 economic collapse, Congress created GSEs (i.e. Frederal Home Loan Bank, Fannie Mae, Freddie Mac) to regulate the home securities market. After the Glass Stegal Act was repealed, private investments banks could once again issue unregulated MBS.

Leveraging- Borrowing money to make investments. The idea is to borrow money at a lower interest rate than the return of an investment.
1907 New York outlawed Bucket Shops, (Credit Default Swaps). In 1933 the Glass Stegal Act also separated Commercial banking from Investment banking so you couldn’t bundle mortgages into securities. In 1938, since the investment banks could no longer buy up mortgages, GSE's (ie Fannie Mae) were created as a secondary market to buy mortgages and free up money to banks, so they could make loans to allow more home sales. Fannie Mae borrowed money from the Treasury to buy mortgages, thus it's portfolio showed up as part of the National Debt. In 1968, Fannie was privatized, becoming a Government Sponsored Enterprise (GSE) or stockholder based company. GSE's were also authorized as the only exception to Glass Stegal, and were allowed to create Mortgage Back Securities (MBS), first to replace treasury loans and later after 1968 to regulate the Home Securities Market. In 1970 Freddie Mac was created as a competitor to Fannie Mae as a GSE. Also, in 1968 Ginnie Mae was created by the government, however it remains wholly Government owned. It only holds government backed mortgages (VA & FHA). Historically, you can say that Ginnie Mae is the original Fannie Mae, though it only hold government back mortgages and only issues government backed MBS. Fannie Mae became a new and different entity, taking with it non-government backed mortgages.
 A Basic Time Table
In 1999, the Glass Stegal Act was repealed under the Financial Modernization Act (FMA), passed by the 107th Congress on its way out the door. A portion of the Act removed the separation of Commercial and Investment banking and another specifically denied the right of the states to declare CDS illegal gambling. Many of the previsions of the FMA were added under the last conference version of an Omnibus Appropriations Bill, meaning they were never voted on (This would become a major bone of contention when it was discovered that the so called Enron loophole was one of these additions). The same year Fanny Mae under the control of CEO Franklin Rains  (previously the Chairman of the US Office of Management and Budget under President Clinton)  launches the American Dream Commitment (ADC) with a stated goal of pledging $2 trillion dollars to increase home ownership for 18 million American families. Alan Greenspan then lowers the Federal Interest rate to 1%, guaranteeing low interest on Treasury bonds, CDs and the like and leveraging becomes the path to great wealth; everyone is taking out low interest loans and buying higher yield investments. This creates an increased demand on high yield mortgage securities. In 2004 Rains was forced into "early" retirement from Fannie May due to what was called accounting irregularities.The Office of Federal Housing Enterprise Oversight (OFHEO), the regulating body of Fannie Mae, of instituting  widespread accounting errors, which included the shifting of losses so senior executives, such as himself, could earn large bonuses.

Just prior to Franklin Rains departure, the sub-prime mortgage crisis began. With continuing pressure from HUD (The Department of Housing and Urban Development) and the (ADC) Fannie Mae was making a killing in the MBS market, so investment banks tried their own hand at issuing MSG, refereed to as "private label." These investment banks were willing to use lower standards, which produces riskier loans. These riskier loans were bundled as Derivatives. Using mathematical formulas only a physicist can understand, these Derivatives ratings are bumped from BBB to AAA. Investment banks leverage themselves to buy and sell these Derivatives as AAA investments and further sell a CDS to protect the investment. The CDS market then explodes from $100 billion to $100 trillion (or more). The GSE's (ie Fannie Mae), in an attempt to increase it's dwinding market share, also started buying these sub-prime mortgages.  The regulators (FDIC) start warning of a banking crisis but this shrugged off by Alan Greespan. The CDS market becomes so hot due to the toxic level (doomed to fail) of these Derivatives. There is a shortage of Derivatives, so Investment banks use the money from the CDS on an existing Derivatives to pay the interest of the actual CDS and than create a non-existent mirror Derivative so they can sell CDS on theses imaginary Derivatives. The world financiers leveraged 100 of Trillions of dollars to gamble on CDS.

Finally the mortgage bubble bursts when home values level off; the leverages are called and the CDS need to be paid. Most the investment banks are leveraged some 50 times their worth. The Derivative “Securities” held by the Investment banks are now worthless. Congress offers $700 billion dollars to back these Derivatives and try and open up the credit lines again, but these packaged Derivatives were put together by computer formulas and nobody really understands. Further there are still tens of trillions of unpaid CDS out there that must be paid before any of these Investment banks can become liquid again and there is a glut of unsold homes and still millions of foreclosures coming in the future, leaving home values sl low that many home owners will be underwater for years. Further the home construction industry and businesses that also profit from home construction will be flat for years to come.