Transcript of Puplava Catherine Austin Fitts interview on Mortgage & Financial Market Manipulation - Part I.
[My note: Hopefully from reading this transcript of about 1/3 of the interview, one can determine whether one is interested in the topic, and in listening to the remainder of the interview. I plan to capture in transcript most of the remaining interview, and then provide a few comments.]
JP: Catherine, we’ve seen a lot of information and a lot of concern on Wall St. about the Mortgage markets. We’ve seen consumers take on more debt when it comes to taking on bigger mortgages, refinance. But this story gets much bigger than just the credit itself.
CA: Sure. Where would you like to start?
JP: (Laughter) Well, let’s talk about black budgets and how the manipulation takes place in the mortgage and financial markets.
CA: OK. Let me start off with a story. When I became Assistant Secretary of Housing, I left Wall St. and went to Washington in 1989, and I walked into the SHA Jim, which at the time was a $300 billion portfolio of mortgage insurance, about 80% of that was single family. So it’s homes, homes that Americans buy, and it’s sort of broad middle class/lower middle class. And I walked in and I said to the guy who was supposed to be the Controller, and I said I’d like to see our financial statements.
So he delivered to my office about 20 pounds of books all on the budget, and I read it twice, and I called him and said “Look, I’ve read this thing twice – a couple of thousand pages – and I can’t find out how much we are making or losing in the single family fund." By law, the SHA commissioner has sole fiduciary responsibility to make sure that the $50 to $100 billion of mortgage insurance originated is self-sustainable. So the premiums are supposed to fund whatever the defaults and losses are. So I said, “I can’t find out how much money we’re making or losing”. “Well that’s because”, he said, “It’s not in the budget”. And I said, “Well where is it?” And he said, “Well the Accountants have it”. And I said, “Well where can I find them?” And he said, “They report to a different Assistant Secretary, you’re not allowed to speak to them”.
JP: (Laughter)
CA: So I was a little bit taken aback. And to make a long story short, I had raised a lot of money for the first Bush, and so I lobbied extensively, and what I got was a pair of cufflinks, and the accountants moved over to report to me, it took about 2 months. And so I could finally talk to the accountants, and they came in and I said, “How much are we making or losing in the single family fund?” And they said, “We’re losing $11 million a day.”
JP: Wow.
CA: Exactly, so I said, “Well we have 10 regions and 80 field offices, where are we making or losing money?” And they said, “We don’t know that.” And I said, “We mail out cheques, we have zip codes, so it’s a crash emergency go-find-out.” And they came back 2 months later, and it turned out we were making money in 8 regions, and losing money in 2 regions.
And I was also on the oversight board through the Secretary of the RTC, which was the cleanup of the S&L’s, and it was very much the same pattern. It turned out that the two regions – 1 was Texas, which included Arkansas, so you had both the Bush’s and the Clinton’s in the same region, and the second was in Colorado. And what had happened, a significant part of what they called the S&L scandal and the HUD scandal was you literally had a financial fraud epidemic – it was called, some people call it Iran-Contra, but after you work through it and learned all about it, we had a significant black budget financial operation financing black budget projects with financial fraud, whether it was through the S&L’s or HUD. And all of that could happen because you did not have transparency.
So one of the things I got passed when I worked with a group of people in the Administration was a requirement that you produce audited financial statements for the 24 agencies of government. One of the things I’d like to do is go through a little bit about that and tie it back to the mortgage bubble.
And so we got in the first Bush administration a law required that the Federal government had to produce audited financial statements, which went into operation in 1995, they had about 4 years before they were required. And what happened when the first financial statements came out, was essentially most agencies could not comply, or produce audited financial statements. And as of today Jim, in 2004, the Federal government has yet to comply with the laws requiring audited statements for those 24 agencies, and the Treasury consolidated.
JP: And yet they always need more money, but they can’t account for where the money that they have goes.
CA: Right. In fact, in 2001 we did an estimate, and it turned out that 85% of the first Bush administration budget [was] going to agencies that weren’t in compliance with the audited financial statements rules and reliable financial systems.
Anyway, let me fast forward. In 1995, when HUD produced the first audited financial statements, they were published, and a fellow came to see me, and he said, “Look, there’s been a terrible mistake. You don’t understand, my family’s been in business for many generations, and we’ve been tracking all the SHA mortgage insurance outstanding in the market since the FHA went into existence in 1934, and there’s a terrible mistake – the amount of outstanding FHA mortgage insurance in the markets is significantly more that is shown in these financial statements …
Now when the fellow came to see me, Jim I thought he was crazy because what he was saying was that the U.S. Treasury and the FHA were engaged in significant securities fraud. In other words, what he was saying was that there was a significant amount of FHA & Ginnie Mae (or FHA related) securities outstanding than was shown in the financial statements.
Now, that’s what I’ve come to believe is true. In 1995, I thought the guy was nuts. What has been evidenced over the last 7 years, is that there is a pattern that suggests there is very significant financial fraud in the mortgage markets. And let me tell you a little bit about why I believe that to be true.
After I left the Bush administration, the Secretary of Treasury asked me to go back in as a Governor of the Federal Reserve. But I discovered the Internet when I was in HUD, and decided that I wanted to create my own securities firm that specialized in financial software. And I was convinced there was a tremendous opportunity to finance neighborhoods and places, and securitize small businesses and small real estate income and finance in the equity markets. In other words, in a world of privatization, there’s no reason why you can’t finance a lot of municipal functions with equity. …
So we wanted to do that, but a lot of it depended on creating the software tools to let you really see how the money works by place. And part of what I discovered when I was Assistant Secretary is, because there’s no transparency in how the money works by place for government money, there’s tremendous opportunities. There’s neighborhoods where, for example, HUD is spending $250,000 per unit to rehab public housing, but you can buy a rehab single family in the same 3 or 4 block area for $50,000. So, to the extent that you can reengineer government money within a place, there’s tremendous arbitrage opportunities if you combine that with financing places with equity. So we got very interested in doing that.
One of the things that happened was HUD later hired the [i.e. Catherine’s software] company back on competitive contract, to help with $12 billion of defaulted mortgage auctions. HUD was the last of the RTC and the private financial institutions auctioned all their mortgages. But HUD was kind of the Johnny-come-lately, and so hadn’t done that, and we helped them do that between 1994 and ’95 & ’96. They auctioned successfully about $10 billion of mortgages. What happened in that process was we were able to get the recovery rates, which had traditionally been about 35 cents on the dollar, beyond the industry standards which was about 75 cents on the dollar, we got it up to about 70-90 cents on the dollar [I think this statement came out wrong, as it seems non-sensical to me, but it is the direct transcription].
And then in 1996, [we] were targeted by … the only way I can describe it, have you ever heard of the move “Enemy of the State”?
JP: Oh sure.
CA: OK. Well I have someone who introduces me at conferences and says “This woman played Will Smith in real life.” Do you remember the role that Will Smith played?
JP: Oh absolutely.
CA: OK. Well what happened was we were targeted in a process where we went through a period of having 18 audits and investigations, and 12 pieced of litigation, and through that whole sort of enforcement process, the honest people were pushed out of HUD. And they pushed my company, and a series of other honest contractors and government officials out. And what happened in the year following that is HUD failed to produce audited financial statements, and reported undocumentable adjustments of $59 billion, that was in fiscal 1999. And throughout government in fiscal 1999 thru 2000/2001, there were reports of not only failure to produced audited financial statements, but about $3.4 trillion of undocumentable adjustments. Very, very significant. That works out to about $11,000 per American resident.
JP: Where do all these losses get booked?
CA: What was happening [was that] annually, starting in 1995, the Federal government, the auditors underneath the auspices of each agency’s Inspector General, would come forward and say, “This year we could or could not produce audited financial statements, ... and part of the reason is that we have undocumentable adjustments of $59 billion or whatever the number was.” And so in this annual sweep up whereby the individual Inspector Generals would report into the Secretary of the Treasury and to the General Accounting Office (which is the auditor for Congress), it would come in through this annual sweep, and they would come in and say, “OK, we can’t produce audited financial statements, and we have this much of undocumentable adjustments.” At some point after the numbers got really crazy, they just decided after 9-11 to stop reporting them.
Now, when people say to me “What is $3.3 trillion of undocumentable adjustments?”, let me give you an example. In fiscal 2000, the Department of Defense had $2.3 trillion in undocumentable adjustments. OK now, there’s no way for us to know Jim, how much of that translates into cash. ‘Cause $2.3 trillion is more than total taxes paid in a year by … say tax payers in that year would have paid taxes of about $1.6 trillion. So, there’s no way to know if $2.3 trillion translates into how much cash, or how much cash is missing.
What we do know is that under the laws of the Constitution, which say money cannot be spent unless it is appropriated. It is essentially a violation of the Constitution to do that, with one exception. And this is where the black budget comes up. There are provisions under the National Security Act of 1947 and the CIA Act of 1949 for military and military intelligence to crawl money from outside of different agencies’ budgets, and spend it on non-transparent purposes. That’s sometimes why it’s called the “black budget”.
And what I found out both as Assistant Secretary of Housing, and then what I found with my company … and with the group of honest guys kicked out of HUD, was you had an agency whose legal purpose and political purpose was to help finance the mortgage markets, whose mortgage insurance programs were increasingly caught up in financing black budget operations. And this is very much tied to what’s going on in the mortgage markets.
By any chance Jim, do you watch the Soprano TV show?
JP: I don’t watch television, but I’m aware of some of the themes and things that go on in the program.
CA: Congratulations on that, because I don’t watch TV either.
JP: (Laughter)
CA: Approximately 2 years ago, one of the things that developed on the Soprano TV show was that Tony Soprano’s new big business was HUD financial fraud. And it’s interesting that the financial fraud that Tony Soprano was doing was very much one of the predominant kinds of fraud in the HUD single family portfolio, but one of the one’s used to finance the black budget, and one of the models that was very prevalent during Iran-Contra.
JP: You know it’s amazing Catherine as we’ve seen the U.S. develop more into a financial economy, I guess a sign of the times the mob moves into mortgage finance.
CA: Yeah, it’s really simple. If you had a company Jim that was not being productive, the way that that would stop is that ultimately somebody would pull the financing on you. Your bank would pull your financing, the FEC would not let you finance in the stock market at some point. If you had a local or state government the credit agencies would pull the plug on you. But part of the problem we’ve had in this country is that we have a Federal Governmental apparatus that can be non-transparent, not follow the laws of how money is supposed to work, function outside the boundaries of the law, and yet continue to finance. The New York Fed and the Federal Reserve can continue to print currency, and continue to borrow a significant amount of money in the securities market outside the boundaries of the law.
And the problem we have as investors is … you know, one of my favorite people, and he’s been on your show before, is Bill Murphy and the guys at GATA. They’ve done a terrific job of documenting the manipulation in the gold markets. And for many years, I’ve tried to get Bill to understand that the manipulation in the gold markets that he’s dealing with is the same people and same players that are manipulating the mortgage markets and the mortgage bubble. And they can do it, whether they do it in the gold market or the mortgage markets because they have access to a Governmental apparatus and financing apparatus which is non-accountable and not transparent.
JP: Catherine, this raises another subject in addition to your own experience, this weekend’s edition of Barons did an article called “Swept Away” – it was how Fannie Mae keeps its losses from sullying the bottom line. And many investors may not be aware of the way the derivatives market works, but certain kind of investments, if they’re held for the long-term, or carried on the balance sheet at cost (you never market them to market), other investments that are considered for trading purposes are marked to market, but there are certain accounting rules that allow not only what you saw at HUD, but organizations like Fannie to sweep losses onto the equity statement of their balance sheet.
CA: Right. I think the hardest thing about being an investor today is how do you get accurate information about the real values … how do you understand what Fannie Mae or Freddie Mac’s portfolio is really worth? How do you trust the books? And it’s unnerving because the market … you know, part of the thing that’s keeping the stock prices where they are from what I see is tremendous manipulation within the markets. So we’re looking at and tracking a political economy, not something that behaves according to traditional economics. Because you’re not looking at honest books, and you’re dealing in a situation where … you know, if in 1 year the Federal Government is missing $2.3 trillion, where does that money go, and where is it being reinvested? That’s a huge cash flow that can take the markets one way or another.
JP: Well, the other thing that you have too is even if you were to come from an accounting background like myself or yourself, you look at Fannie Mae’s 10-K filings last year, they were 181 pages …
CA & JP: (Laughter)
JP: … I mean that’s become a novel! I mean it’s almost like you have to become Sherlock Holmes to really find out what it is that you’re looking at, and even then you don’t know what it is you have, because most people don’t realize that the bulk of the $200 trillion … and that number just astounds me in terms of its size …
… more to follow (this ends at approx 19 minutes into the 52 minute interview) |
