Did Heartland CEO Make Insider Stock Trades?

By  Anthony M. Freed, Information-Security-Resources.com Financial Editor

Heartland Payment Systems (HPY) and Federal investigators have released more details about the technical nature of the massive financial data breach made public last week, but have refused to pinpoint the exact date that Heartland first became aware there may have been a problem with their network security.

The date they settle on may well be the difference between market serendipity and an SEC investigation for insider trading, as an examination of stock sales made by Heartland CEO Robert O. Carr in the second half of 2008 raises some serious questions about just who knew what and when in the latest version of the worst-ever information security breach which has now spawned a class action lawsuit.

Chart:  http://information-security-resources.com/wp-content/uploads/2009/01/heartland-stock-sales.gif

Federal investigators and the Secret Service have apparently traced the Heartland data breach to sources outside of North America, with some reports indicating Eastern Europe as being the most likely origin of the unauthorized access.

The principles and methods used by the perpetrator(s) have been uncovered, with evidence that is somewhat contradictory in nature, some of which is suspected of being nothing more than red haring planted by the hacker(s) to throw investigators off their trail.

Excerpts from Evan Schuman:

The sniffer malware that surreptitiously siphoned tons of payment card data from card processor Heartland Payment Systems hid in an unallocated portion of a server’s disk. The malware, which was ultimately detected courtesy of a trail of temp files, was hidden so well that it eluded two different teams of forensic investigators brought in to find it after fraud alerts went off at both Visa (V) and MasterCard (US:MA) according to Heartland CFO Robert Baldwin.

“A significant portion of the sophistication of the attack was in the cloaking,” Baldwin said.

Another consultant-who also wanted his name left out-said the ability to write directly to specific disk sectors is frightening. “Somehow, these guys went directly to the base level of the machine (to an area) that was not part of the file table for the disk,” he said. “Somehow, they got around the operating system. That’s a scary mother in and of itself.”

Other industry brains were less impressed. One nationally recognized and certified information security expert who I corresponded with Wednesday evening regarding the breach indicated that the hackers exploited a system weakness that should have been well known to Heartland, for which protocols issued several years ago.

From my email conversation:

“This was an ‘I told you so’ moment for me. I know exactly which part of the process got hit. It was the un-encrypted Point-to-Point connection which occurs between the Host Security Module (HSM) and the Application Security Module (ASM).

“But that means that they had to have had a hole in their firewall to insert the sniffer into unallocated disk space. “

“Now Heartland is crying poor me, and the making it sound like they are heroes by claiming that they are going to ‘develop’ end to end encryption. They should have been using the ISO Banking Security Standards which were promulgated in 2004/2005. They should be expected to uphold the standard.”

It looks as if the techies have already dissected the mechanics of this modern day cyber-cat-burglar, but ten days later we still have no clear idea of how long the sensitive data was exposed or when Carr and other Heartland executives first had an indication that something was not as it should be.

More from Evan Schuman:

Heartland CFO Robert) Baldwin also added more details to the sketchy timeframes that have been revealed thus far about the attacks, specifying that Heartland was contacted by Visa and MasterCard “in very late October,” possibly October 28.

Given that authorities are conducting an investigation, it is understandable that many details will not be released until after an arrest is made, but given the nature of the details that have and have not been revealed, one has to wonder who all is actually under investigation here.

Usually in an on-going criminal investigation, details are withheld from the press and public for many different reasons, but generally it is the mechanistic details of the crime, and often all the press has to report on is the headline and a timestamp.

Oddly enough it is the those details of the crime that have been trickling out that one would not expect – including the suspects possible location – but yet the generalities are being obscured, like what was stolen when did they steal it?

The answer to the latter of the two questions is of particular issue.

If Heartland personnel, and particularly Bob Carr, had absolutely no indication that something was awry with their processing system security until they were alerted by Visa and MasterCard at the end of October, then there is no problem.

Under this scenario, according to the chart above, Carr just happened to be in the middle of a major sell off of Heartland stock unlike any he has ever undertaken before when he found out “late in the fall” about the existence of problems.

It could simply be the case that Carr just happen to decide to sell 80,000 shares of Heartland stock for roughly $1.6 Million a pop on nine separate occasions about every other week in the four month period leading up to the announcement of the breach. These uncharacteristically large and more than frequent liquidations just happen to have occurred while the company was in the middle of an expensive acquisition and expansion of services push, all of course while the credit markets were in total dysfunction.

If on the other hand, company communiqué and records reveal that Heartland knew of possible anomalies in the processing security at the end of August instead of at the end of October, then we have a whole other scenario to apply the data to.

Under this hypothetical situation, Heartland may have discovered problems prior to end of August and may have known it was something serious simply because no one could figure it out. According to the official company statements, this was a difficult intrusion to detect, one that was missed more than once.

Again from Evan Schuman:

The initial internal conclusion was that “it looked most likely that it would be in a certain segment of our processing platform,” said Baldwin, adding that Heartland does not want to identify what that segment was. The company hired a forensic investigation team to come in and focus solely on that one area, an effort that ultimately proved fruitless. “We found issues in a large segment of our processing environment. The one that looked like the most promising turned out to be clean,” he said.

That second team “was nearing conclusion” and was about to make the same assessment the first team did: clean bill of health. But one of the last things that external, qualified risk assessor did was to try and match various temp files with their associated application. When some orphans-.tmp files that couldn’t be matched to any application or the OS-were turned over to Heartland’s internal IT group, they also couldn’t explain them, saying that it was “not in a format we use,” Baldwin said. More investigation ultimately concluded that those temp files were the byproduct of malware, and more searching eventually located the files in the unallocated portions of server disk drives.

So, continuing with the hypothetical scenario, Heartland would have had inside personnel looking for the problem when they get a call of Visa and MasterCard with the friendly heads-up. Heartland could have just not acknowledged the problem until their business partners forced them to.

The end of August is of interest because this is when Carr began to sell of large blocks of stock about every other week, and this was a significantly different trading pattern than Carr had engaged in previously.

If documentation turns up that indicates Heartland knew of serious problems with their network security prior to August 28th, these huge and rapid sell-offs by Carr may look more than suspect to the SEC.

I can not see the strategic value of withholding an accurate timeline of what exactly the company and Carr knew, and when exactly they knew it. But, if it turns out that everything is kosher here and all is as Heartland has indicated so far – which is very little – then I guess I just don’t understand Carr’s trading strategy over the last half of 2008 and how it related to his goals as a CEO for the growth an performance of his company.

They seem to be at odds, but that is no crime, just ask anyone who shorts their own company from time to time. It just needs to be cleared up. Not to worry though, as this is nothing that a solid and well documented timeline won’t be able to take care of (hint hint).

Meanwhile, Heartland’s stock (HPY) bounced back a little Wednesday, but is still trading at nearly half of it’s value prior to the breach announcement.

The data loss debacle at Heartland highlights the fact that the failure to secure information is a growing national security threat, and will be the next major shareholder derivative, director and officer liability, regulatory, consumer product safety, and class-action issue to impact our economy. 

By  Anthony M. Freed, Information-Security-Resources.com Financial Editor. Anthony is a researcher, analyst and freelance writer who worked as a consultant to senior members of product development, secondary, and capital markets from the largest financial institutions in the country during the height of the credit bubble. Anthony’s work is featured by leading Internet publishers including Reuters, The Chicago Sun-Times, Business Week’s Business Exchange, Seeking Alpha, and ML-Implode.

The Author gives permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author and  Information-Security-Resources.com

Heartland CEO: Breach as Bad as Tylenol Poisonings

 

By Anthony M. Freed, Information-Security-Resources.com Financial Editor

Heartland Payment Systems stock (HPY) was hit hard in the wake of what is being described as the biggest single breach of consumer and financial data security ever. The company issued statements Friday (1/23) in an effort at damage control in which the CEO compares the potential industry-wide impact of the breach to none other than that of the Tylenol poisonings of some twenty-five years ago that nearly brought down the drug maker.

Not the kind of association I would want to make for my company, but then it’s not my company.

Worse yet, Heartland’s press release was crafted with the kind of classic crisis-response-mode denials, deflections, and spin that we have all become so accustomed to in other sectors of the financial industry.

The data loss debacle at Heartland highlights the fact that information security will be the next major shareholder derivative and D&O liability issue, regulatory, consumer, and national security threat, and class-action litigation subject to impact our ailing economy.

Heartland CEO Robert O. Carr’s statements do not contain any details of the breach or anything resembling an apology to consumers and shareholders. Instead, Carr gave himself a pat on the back for expanding Heartland’s client base in spite of exposing millions of people and hundreds of banks to fraud and losses.

“Despite the headwinds of the economy and attacks by some of our competitors, we have installed new merchants, new payroll clients and new check management clients since our disclosure of the breach on Tuesday morning,” Carr stated.

The press release further states “Heartland Payment Systems added more than 400 merchants to its client base in the past few days – exceeding results for the same period from last year.”

When Carr does finally address the breach, he seems to imply that the lapse in data security is some kind of validation of Heartland’s capacity to respond to threats to its customer base and stakeholders, but only after a breach is uncovered.  Carr even managed to sound almost self-congratulatory in the process:

“Our energized organization called on the owners of more than 150,000 business locations these past three days to help them understand the breach and what it means to them. I couldn’t be prouder of our entire organization for the way everyone has pulled together to help.”

Kudos Heartland? No.  The congratulations should instead go to the kind of executives who are proactive enough to make sure that the measures are in place from day one of contract negotiations with the systems and security providers to insure these kinds of problems never materialize.

As soon as Heartland’s stock began to tank in earnest late this week, leadership chose to respond to this breathtaking lapse in security and due diligence by acting first to reassure their clients and shareholders that all was well at the company, even a bit exciting lately – what with the opportunities the new security vulnerability will give those in the payment industry to share ideas with one another.

Now what about that data breach?  You know, the whole reason for the press release in the first place? Little was offered in the press release:

“No confidential merchant data, Social Security numbers, unencrypted personal identification numbers (PIN), addresses or telephone numbers were retrieved in what is believed to be a global cyber-fraud operation.”

If no critical data was exposed, what’s the real problem then?  Well, there are many.

First and most obviously is that for an unknown period of time some consumer and merchant data worthy of encryption were exposed to hackers and thieves when the data were briefly unencrypted and encrypted again during processing, according to bankinfosecurity.com.

Card reissue would solve that problem, albeit at some expense to the companies. I say companies (plural) because if Heartland’s system was exposed then it can be expected that the same vulnerabilities have been exploited in systems at other companies, perhaps even in other industries with similar data security software and systems.

Hence the scramble by law enforcement (FBI) and the entire financial industry to figure out what happened.

Also of note is a problem that has been at the forefront of information security from the beginning: The bad guys tend to know more than we do about the vulnerabilities in our data systems because it is worth a lot of money to them.

Aside from network audits and professionals who hunt for holes in security systems for a living (some of whom where at one time themselves hackers), most companies find out about information security issues after their networks are breached.

Even though industry leaders can show that they spend hundreds of millions of dollars on cyber-security, more and more resources – time, talent, money, reputation – are all being lost by reacting to threats after the fact.

There has been a marked increase in attempted and successful attacks on corporate, government, and military systems, yet the looming economic realities today are forcing information security executives and IT departments to try to do more protecting at less cost.

This situation poses a threat to the security of I call our financial identities, which are made up of the ever-accumulating bits of electronic information that increasingly represent the bulk of our identity and net worth, which can disappear in minutes from a sharp dip in the markets, or in the blink of eye with just the click of a mouse.

The economic downturn is further exposing our financial identities to fraud and exploitation from external threats such as criminally intent hackers, as well as from internal threats like budget cuts, cutting corners on security due diligence, or cash-hungry employees who may succumb to the temptation to sell sensitive datain the lucrative information and identity black-markets that thrive on the Internet.

Another big problem is that despite Heartland’s assurances, the company understands neither the size nor scope of the breach, let alone how it happened.

“Heartland does not yet know how many card numbers were obtained. Many reports in the press are speculative,” the press release states.

Well, there is a lot to speculate about.

Given the financial industry’s record of not fully disclosing damaging information to consumers or shareholders, even as required by law, it can be expected that further details of this case will reveal this breach is much worse than anyone is letting on, especially Heartland executives.

Heartland is the sixth-largest payment processor in the country, with as many as a quarter of a million payment and payroll clients, and they may be only one of many similar companies targeted in a broader criminal activity meant to defraud through malicious software known as “malware.”

Visa and MasterCard, who first recognized discrepancies in their own records, notified Heartland of a potential problems late in 2008.

“Visa and Mastercard instructing many card issuers to offer fraud-monitoring protection, replace cards, or do a combination of both for customers whose card purchases were processed by Heartland.”

Visa and MasterCard wouldn’t elaborate, citing an ongoing FBI criminal investigation. 

“Heartland should feel urgency to notify everyone who could be a victim, says Todd Davis, CEO of LifeLock, a fraud-monitoring service. “Victims are sitting naked, not knowing whether to take extra steps to protect themselves,” he says. “The default should be toward notifying all possible victims,” according to the Detroit Free Press.

Oh yes! The victims of this fiasco – what is on the agenda for them? Heartland’s press release instructs them to basically fend for themselves for now, which is a fairly typical response to consumer data breaches. 

“Consumers will know if their card account numbers have been used by reviewing their monthly statements. Cardholders should report suspicious activity to their issuing banks (the bank that issued the card, not the card brand). If unauthorized use is confirmed, cardholders are reimbursed for the fraudulent purchases and are not held financially responsible,” Heartland assures in their press release. 

Sounds painless enough, but I really doubt it will be pain free for those who will have to deal with it. 

Not only will this be a tremendously stressful and potentially time consuming endeavor for the affected cardholders, this is also a tremendous drain on the financial resources of an already troubled industry.

Heartland (HPY)‘s stock value has lost more than 50% of it’s twelve-month high. Visa (V) and MasterCard (US:MA) have seen similar declines. Ultimately, the lawyers will join the fray, multiple lawsuits will be filed, the costs will continue to climb, and shareholder value will continue to decline.

Information and data security are essential to protecting every single individuals financial identity, and every corporation’s value from falling prey to the most sophisticated forms of cyber-attack conceivable.

President Obama has indicated he is taking cyber-security very seriously, going so far as to announce the pending appointment of a cyber-advisor to spearhead efforts.

In this age of electronic everything, more than at any other time in history, losing data translates in very real terms to losing dollars, and that is widely accepted across most industries.

Moving forward, we should also start thinking of our financial identities, our investments, our assets, and all of our wealth as really being nothing more than data. Data to be to be kept safely, not lost or stolen.

Carr concluded, “Just as the Tylenol(R) crisis engendered a whole new packaging standard, our aspiration is to use this recent breach incident to help the payments industry find ways to protect its data – and therefore businesses and consumers – much more effectively.”

If Carr is comparing this breach to the Tylenol poisonings, a textbook commercial and consumer nightmare of epic proportion – including multiple deaths – then you know this breach is going to be something really, really big in the end.

The Authors give permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is given to Information-Security-Resources.com.

Anthony M. Freed, Information-Security-Resources.com Financial Editor, researcher, analyst and freelance writer who worked as a consultant to senior members of product development, secondary, and capital markets from the largest financial institutions in the country during the height of the credit bubble. Anthony’s work is featured by leading Internet publishers including Reuters, The Chicago Sun-Times, Business Week’s Business Exchange, Seeking Alpha, and ML-Implode. 

Rapacious Greed Reveals Banking’s Global Confidence Scheme

By Guest Author Nicholas Windrum

You might have noticed how, when the ludicrously described ‘Credit Crunch’ began a little while ago it was all blamed by the banks on those feckless individuals who took out laughingly called ‘sub-prime’ mortgages to buy houses. 

But now the entire World financial system is in collapse with the global economy grinding to a halt, companies going bust and millions of people losing their jobs and houses with cataclysmic poverty stalking the Globe. 

It is no longer just ‘those feckless individuals‘ with sub-prime mortgages who are unable to pay their debts. It is viable, previously profitable businesses all over the World, even whole countries going bankrupt; forced into financial chaos by banks interfering and controlling borrower’s affairs, as the banks panic at the sheer enormity of what they have contrived to destroy through their greed and fraud. 

Now the banks seem to be blaming each other, because the sheer scale of the Worldwide financial collapse has simply dwarfed the number of genuinely ‘feckless’ people who shouldn’t have taken out loans to buy their houses . There never were really that many people who were genuinely unreliable about paying their mortgages in the first place. 

A closer look at what is now going on reveals that banks misused the power they gained over any group of people they persuaded to borrow money from them. The banks manipulated whole populations of borrowers created out of the banks brutal use of the psychology of persuasion. 

Everyone was ruthlessly conned and brainwashed by the banks into imagining that it was OK, even necessary, to spend nothing but borrowed money for absolutely every purchase. All the ‘real’ money people and businesses actually earned for themselves was therefore controlled by the banks. All earned money was already fully committed to the banks to pay off existing bank loans before it was even earned. 

So, the banks controlled ever more of the economy, both individual’s personal domestic expenditure and also that of every business. Everyone was expected to constantly increase their borrowing to enable the banks to create more money so the banks could take ever larger profits for themselves. Pure, raw greed ruled throughout the entire financial industry. Fraud became something institutionalized in virtually every part of financial services as the scale of dishonesty and graft grew larger day by day. 

What has happened is the banks have been caught trying to lie their way out of a problem entirely of their own creation. It never was a situation caused by sub-prime mortgages and hordes of dishonest home owners as the banks would like us all to believe. 

The fact is the entire World economy is completely dependant on a system of money which very few people understand. Governments mostly don’t understand it and certainly few ordinary individuals understand it. Even most of the people working for banks don’t understand it, and even economists don’t seem to understand it as they often argue amongst themselves about how economics actually work. 

Banks are entirely responsible for shaping the economic system and are the only custodians of the system of money. It is something they, themselves, designed in the first place. They designed it as an immense confidence trick which they could only get away with if they displayed reliability, probity and apparent total honesty of the highest degree. 

The system relied on the banks restraining their greed; and so it worked more or less reasonably well when a fundamental requirement of working for a bank was honesty and integrity. Integrity, honesty and reliability have now been entirely swept into oblivion by the banks. ‘Greed is good’, they trumpet self righteously from their pompous, rubbery, bloated, personages as they pocket their enormous bonuses. 

Greed and dishonesty took hold of the banks in recent years as they corrupted the entire financial system with a moral degradation of breathtaking dimensions. 

It was they who invented the sub-prime mortgage as a device to milk even more money from their increasingly hard pressed population of modern customer-serfs now owned by the banks instead of mediaeval robber barons. 

The banks simply devised one scheme after another to tighten their stranglehold over every single financial transaction made. The banks made it increasingly impossible for anyone to escape their clutches or for anyone to avoid using them for even the pettiest of financial transactions. 

The beauty of that was that the banks could increasingly justify taking a cut of every transaction they were involved in. Their ‘cut’ became larger and larger as they discovered they could push the limits of credulity beyond their wildest dreams of greed. 

They brainwashed everyone into believing it was a normal way of life to routinely use ‘credit cards’ (simply a clever device to force loans onto people who neither wanted them or needed them). They invented the quaint idea of ‘penalty’ charges that could run into thousands of per cent in annual interest terms. No one questioned them, let alone stopped their rapacious, destructive, nasty greed. 

We were all completely bemused and baffled – caught like rabbits in the headlights of confabulated nonsense jargon and incomprehensible, arcane, rubbishy, banking language used to disguise the reality of blatant theft. 

They further brainwashed people into believing it was somehow a good idea to borrow money to buy all the usual everyday things of life immediately and pay for them later. This way the banks could take a percentage of everything anyone spent on absolutely anything at all. 

They neglected to inform people it would mean they would be paying for everything twice or three times over. The banks didn’t want anyone to realize it was much cheaper to actually save up to buy everyday domestic items. 

As the banks conned every increasingly gigantic amounts of money out of the population, they had to keep on lending ever larger sums somewhere as the last thing you can do with money is store it inertly in a bank vault or under your bed where it is of no earthly use to anyone. 

So the banks invented ever more abstract forms of money and lending that flew around the World financial systems from bank to bank like an insane, manic pass the parcel game as the minute any bank was in possession of any actual money it had to get rid of it as fast as possible in the form of a loan to someone, somewhere. It didn’t matter who or where as long as they got rid of the cash as fast as possible – anywhere. 

So, larger and larger mountains of cash were manufactured by the banks originally designed confidence trick of ‘Fractional Reserve Banking’ successfully foisted on Governments and populations the World over. 

No one seemed to understand that it meant banks had the ability literally manufacture unlimited amounts of money as long as they could find someone to lend it to, meanwhile shaving off their own cut. More loans made, more of a cut for the banks – more profit, bigger bonuses. No loans, no banker’s cut; simple. 

And now the banks have found it is wildly out of control. Their inherent dishonesty means they can no longer even trust each other. If honesty and integrity had been maintained there would have been no financial crisis. It was entirely caused by banker’s greed and manipulation of the system of money away from reality and into the realms of pure fantasy. 

It is the banks, and the banks alone who are responsible for the awful consequences of global Economic meltdown. 

The banks have destroyed everyone’s confidence in money and the financial system as a whole. Isn’t it about time someone did something about them ?

Nicholas Windrum is a thinker and writer living somewhere in the UK…

Foreclosure Oncology: Separating Facts From Fixins

By Guest Author Fritz Pfister 

Solutions to the Foreclosure Dilemma

The news is full of stories about the impending explosion of foreclosures when homeowners who have adjustable rate mortgages have their rates increased under the terms of the mortgages they voluntarily signed at purchase. Let’s examine this phenomenon.

The country experienced the greatest real estate market for the number of sales in history from 2001 through 2005. The Fed lowered interest rates to levels of the 1960′s in an effort to pull the country out of mild recession, and the financial shock of 9-11. The Bush tax cuts simultaneously pumped money into the economy when families were allowed to keep more of the money they earned. This combination established a recipe for growth. It succeeded, and the government now has more revenue flowing into D.C. than ever before in our history, only to be squandered by over spending.

During this period of growth money was cheap to obtain and consumers that had been priced out of the housing market could then afford to purchase a home. During this five year record spurt in home sales the buyer pool was made up of a majority of well qualified buyers. When demand started to become satisfied as a natural consequence of record numbers of buyers purchasing, the credit quality of the buyer pool was lowered.

To keep the loan machine pumping out loans many lenders lowered qualification standards and made millions of loans to people that normally would not qualify. An untold number of people were made loans that should not have been buying a home. That is what is known as the sub prime market.

Investors recognized the opportunity the real estate market offered and hence “flippers” became a household word across America. As in all run up economic opportunities there were savvy investors, and novice investors. Think of the tech bubble in the stock market that burst. Do you think the late comer novices were the biggest losers or the savvy investors who were selling as they sensed the top was near? Same true in the flipper markets.

The negative effect of the investor infusion into the single family market was the artificial run up in prices. While savvy investors made millions running up prices, because they could with demand at an all time high, and mortgage money cheap for prospective buyers to afford their overpriced products, it was the working family that got caught in the trap.

Prices had risen to such unrealistic levels that lenders then created loans such as 40 year mortgages, interest only mortgages, and adjustable rate mortgages with too good to be true beginning “teaser rates” for families to be able to qualify to purchase a home. 

There should be more investigation into foreclosed properties. It is my contention that the majority of foreclosed properties currently on the market were vacant before foreclosure and no family was put on the street. Most of the properties were owned by builders of new homes, or novice investors caught holding the bag at the end of the pyramid scheme built by savvy investors. Builders know the risks of the market, novice investors learned the hard way.

The president has proposed that lenders can voluntarily freeze the interest rate on adjustable mortgages for up to five years, for families that are current on their payments, and will be unable to afford the payments following the agreed upon increases at time of closing. I would add one more stipulation, the freeze can only be eligible on owner occupied properties. Investors that took out these mortgages should not receive special consideration, and I feel sorry for homeowners who were foolish enough to buy a home before they sold their current home.

I don’t believe freezing the rates is a viable long term solution. What happens when the rate freeze expires? Think of what is going to happen when the Bush tax cuts expire in 2010. In my opinion the vast majority of homeowners that have an adjustable rate mortgage could afford a fixed rate loan with interest rates falling to a two and one half year low the past couple of weeks.

Why don’t these families simply refinance? Because the amount owed that would need to be refinanced is greater than what the home is worth, resulting in the loan being denied due to the short appraisal. Solution; waive the appraisal requirement on refinance for owner occupied homes with adjustable rate mortgages. That won’t cost anyone a dime.

Personally I am against government intervention, however the reality is that this is a main stream media event due to the presidential election year. The media has their favorites they want to help win election. This past week was an example of politicians proposing bailouts for families in foreclosure in an attempt to buy votes. The proposal? Raise taxes on upper income families and then redistribute that money to help families in foreclosure.

I have a better idea. Instead of stealing money from responsible, productive citizens to be redistributed, try this; waive all federal taxes for families facing default if their loans will adjust to a level they cannot afford. These families would then be able to afford to pay for their homes instead of sending the difference making money they have earned to D.C. to be squandered on big government programs.

The result of the subprime collapse, when lenders foolishly lowered standards and made millions of loans to people who had no business buying a home, is being felt in the mortgage markets today with tougher lending standards rapidly falling into place. This will cause short term pain, however long term stability in the housing market.

The result of investors driving up prices that were unsustainable, making adjustable rate mortgages the working families only option for home ownership, is resulting in real hardship. If there is to be any intervention by the government into the foreclosure process, it should be limited to owner occupied homes, with adjustable rate mortgages, by waiving the appraisal requirement for refinancing. Period.

Families that were taken advantage of by predatory subprime lenders should receive their relief in court. That could be a challenge however, because the subprime lenders have disappeared. I feel empathy for these families however it should not be the taxpayers responsibility to pay for their decision to sign the loan papers at closing.

Government should not bail out any lender, or investor. They, of all people, should have understood the risks they were taking, and the taxpayers should not be punished for the risks taken by others.

The best way to avoid a foreclosure is for the homeowner to contact their lender as soon as they realize they will have difficulty making their payment. Lenders will work with these families. Lenders don’t want to foreclose. Lenders are willing to help. The problem is too many families wait until it’s too late for the lender to be able to help.

This entire situation could have been avoided if these troubled home owners would have had professional, ethical representation at the time of purchase from an agent that would have advised their clients to avoid the risks they were taking.

My advice, don’t buy another home until your current home is sold. Don’t finance your home with an adjustable rate mortgage, interest only mortgage, or 40 year mortgage. Don’t buy a home with damaged credit, to avoid paying too high an interest rate. Don’t buy an overpriced home. If you buy an overpriced home today, someday you’ll have to sell an overpriced home. Millions are learning that lesson today. Don’t invest in real estate with the expectation of making a quick buck. Interview and hire an experienced, ethical agent to advise you in your home purchase, or sale.

To do otherwise is risky, and the consequences dire. We are witnessing that today.

 

Fritz Pfister is a licensed Realtor with RE/MAX Professionals Springfield Illinois. Fritz is a leader in the local real estate market and hosts a live one hour radio program, now in its’ 13th year. Fritz’s website is SpringfieldHome.com

Omnipotent Property Depression: History’s Ominous Omniscience

By Guest Author Michael White

The Treasury, the Federal Reserve Bank, and the new administration are making two fundamental mistakes. They are failing to concentrate their minds on the value of our homes. And they are dumbly underestimating the size of the correct response. The first error leads to the second. How could you know what weapon to use when you don’t know what war you are fighting?

After reviewing a history of the relationship between banking crises and property losses (see graph), one reasonably concludes that we are now drowning in a worst case scenario. A nationwide loss in property values of 40% to 50% from the high is now a reasonable guess.

A loss of this magnitude cannot be less than devastating.

Banks in Crisis: Graphic History. The graphic below suggests we are going to incur an enormous and unprecedented loss in property values. We have already far surpassed the great depression in property value loss (measured as a percentage of the peak value). The first red box is total property value loss in the depression. The second red box is our present total loss. Practical steps based upon this projection follow later in the letter. The graph depicts property value losses in 21 different banking crises. Property loss is on the left. Duration of the fall is on the right. We appear to be at an early stage.

In a typical bank crisis, property values fall for six years. We are now 2.5 years into this crisis. Let history be the guide and assume we are half way through the depression. And take great and determined notice of the frightening velocity of our property-value losses. Case-Shiller reports an 18% loss nationwide in 12 months based on comparing sale prices from September 2007 and September 2008 (released Nov 25, 2008).

Obviously the future is unknowable, but there can be reason in history, and the patterns suggest an answer. Better to follow the logic of the pattern than the prejudice and ignorance which guide almost all of us most of the time and in most matters.

The meaning of the pattern is simple.

Painting with a broad brush, assume a 40% loss in property values throughout the entire United States in a period ending in 2010 or 2011. This means eight trillion dollars of equity disappears. That’s a boatload of money to take away from somebody, but turns to catastrophe when you recognize borrowed money purchased this loss.

Assume mortgages of half of the eight trillion disappear. So four trillion dollars of mortgages burn and go away and are never paid and are a complete loss and write off.

This means the banks and other mortgage owners are bankrupt to the tune of $4 trillion dollars. So the owners of the mortgages need $4 trillion dollars of new capital to get back to square one.

The Treasury has thus far given away about $250 billion to commercial banks. I don’t know how much private-source new capital banks have raised during 2008. If it is a trillion dollars I would be shocked.

In any case, we are so far away from having raised $4 trillion of new capital for the banking industry that you must run your finances based upon the assumption that zombies are running the economy. Because if zombies are running the economy then zombies are running the economy. Putting $250 billion into a $4 trillion problem is not taking half measures, it is using a squirt gun on a burning home.

Take these practical steps to protect yourself.

Don’t buy real estate: Avoid buying real estate unless you drive an exceptional bargain and have a minimum ownership period of five years.

Sell real estate: If you are waiting for prices to improve, you may have to wait five or ten years. Assume the price of your home will fall 25% from its value today. Then make the decision of whether or not you should sell today: Do you want to own your home in two years when it is worth 25% less than it is worth today?

Sell stocks: Take all money out of equities unless you treat your stock investments like your budget for gambling and don’t care about losing it. Put your cash in dumb dull places like savings accounts and money markets. Avoid treasuries – the smartest investment by far last year, but far too popular to be stable.

Work hard. Pray for good things for your family and your country and the world. Pray that zombies may be enlightened. We do have a way out. It’s expensive, but smart. You will know the zombies are enlightened when they enact Plan Orange.

Read the details of Plan Orange here: 

http://www.thenewmortgagecompany.com/crisissolved.html

 

 

Michael White is the Managing Director at The New Mortgage Company in the Chicago Area. 

The Real Cause of the Financial Crisis: An MIT Blackjack Team Perspective

By Guest Author Semyon Dukach

The mathematics of probability that govern the trade-offs of risk and reward are fundamentally counter-intuitive. The reason that societies ban pyramid schemes outright, instead of relying on the market to make them unprofitable, is that most people trust their intuition, and their intuition leads them astray.

If you were to wait for the market to run its course on a pyramid scheme, the losses could devastate a whole country, as Albanians found out a few years ago.

In our (MIT Blackjack Team) days of outwitting casinos around the world, we have come across many people who thought that they also had a great system, but were in fact compulsive gamblers who eventually lost everything. Among the false systems that intuitively feel right, there is none as insidious and deadly as the Martingale, where a player doubles his bet after every loss.

The Martingale system works as follows: suppose you need an extra $100. You go down to your nearest casino, and bet $100 on a hand of blackjack, or on any other almost 50/50 proposition. Should you win right away, you have reached your goal and gotten your money.

Now if you lose, you bet $200. If you win the second bet, you’re up $100 over all and once again successful. But a little more than one out of four times you’ll lose both, and end up down $300. In that event you simply bet $400. If you lose again you bet $800, and you just keep doubling your bet until you win once.

Clearly you have to win at least once eventually, and with this system you end up with your $100 profit even if you start out losing for a while. If you’re willing to bet up to ten times for instance, your chance of losing all ten bets is close to one in a thousand. That means that with a probability of almost 99.9%, you will win one of those ten bets, and therefore walk away with your $100.

Of course there’s a catch that few people notice. When the unlikely one in a thousand event happens and you do lose ten in a row, the actual amount that you’ve lost is over $100,000, all risked to win a mere hundred bucks. You might not have any way of doubling up again. You might even need some sort of bailout.

In the world of investments, there are many ways more subtle than the Martingale to guarantee a better return over a period of months, years, and even decades, at the cost of certain ruin way down the road.

Let’s say for instance that you’re managing a hedge fund which invests in stocks. Your strategy of sound fundamental analysis is fairly well understood. You have found that you can generate an average return of 6% per year, and so can most of your equally qualified competitors who have access to the same talent pool and knowledge base as you do.

But then one of your competitors realizes that he can automatically increase his return to 9% by selling something called “out of the money puts” on the market. This means that the competitor’s fund essentially sells insurance against the market crashing dramatically. In normal times his fund will gain the premium from selling this insurance which boosts his returns.

However, in the rare event of an extreme market crash his investors will lose everything. This form of Martingale can be easily tuned to work for various time periods with various chances of collapse.

When investors see a fund manager generate a higher return than his competitors, they will move their money into that fund and out of the other ones. And money managers are rewarded based on the size of their fund, or the level of returns.

The managers do not risk their own money. If they can provide a bigger gain for a few years, they win everything. They might even be lucky enough to be retired by the time their investors are paying the piper. The managers who have the discipline to understand and avoid the Martingale tricks will not be able to compete on the basis of their returns over a few years, and will eventually lose their funds and their jobs.

But many people managing large funds are men and women of integrity. They will not willingly expose their investors to total loss in order to line their own pockets with cash. Yet the system as it presently works does not allow them to compete without some kind of trade-off of long term risk versus short term reward.

The solution that they usually flock to is to create such a complex Martingale system that they themselves cannot understand the longer term risk implications. As long as the mathematical analysis of the risk of ruin lies beyond the understanding of the CEOs, the money managing organizations can stay competitive by employing their latest version of a return-boosting Martingale, without admitting to themselves or to others that they have been peer-pressured into the financial equivalent of selling their soul to the Devil.

In the 80′s the emerging Martingales were called junk bonds and LBO’s. In more recent times they are known as mortgage backed securities and credit default swaps.

You can regulate mortgages half to death and try to control what kind of risks various kinds of investment organizations are legally allowed to take. You can even forbid short selling and ban golden parachutes. But as long as managers are paid a percentage for managing other people’s money, they will compete with each other based on the returns they appear to generate.

The pressure to create out-sized returns will eventually force them to invent the latest complex scheme which will have the same effect: eventually the investors lose it all.

Complex financial structures will once again emerge that even the best professional investors cannot fully understand. People will always move their money into the places that give the best return over a few years, no matter how many times they are warned with the disclaimer that “past performance is no indication of future returns.” And eventually the crisis that results will reach global dimensions beyond the means of a government bailout, especially if part of the risk managing strategy becomes counting on bailouts happening every decade or so.

The only solution is to forbid money management as we know it.

We could certainly have people like Warren Buffet manage investors’ money alongside their own, with no additional percent-based compensation beyond their own investment gains. But we must remove the incentive to create Martingales, and protect people from their own intuitive desire to move their money into the funds which generate out-sized returns, without understanding the long term risks which create them.

In our globalized free market world, almost everyone is ultimately an investor, whether by owning a house or merely holding a job in a company which depends on access to capital. The scope of the current bailout has reached the point of real danger. We must fix the underlying problem before doubling down again as a society, or risk going the way of Albania.

—

Semyon Dukach is an angel investor, high tech entrepreneur, and former president of the MIT Blackjack Team.

Wall Street Hijackers and Hit Men Busy in 2008

By Guest Author Feather Crawford Freed, M.A.

Governors Gone Wild or Political Assassinations?

When I first heard of the arrest of Illinois Governor Rod Blagojevich, my only context for this information was the proposed boycott of Bank of America that Blagojevich passionately promoted. In the days before his arrest, the Governor had made headlines for supporting former employees of Republic Windows and Doors. 

Bank of America was refusing to fund the factory through January in order to allow the factory to give its employees adequate notice of closure and to pay final wages and severance packages. Former employees were in the midst of a 9 day sit-in, and Blagojevich had publicly stated:

“We, the state of Illinois, will suspend doing any business with the Bank of America.” 

The Chicago Sun-Times reported that the Governor, “flanked by union leaders, more than a dozen aldermen demanded that City Hall divest itself of funds deposited by Bank of America-and stop approving zoning changes sought by the bank and its subsidiaries.” 

I had seen clips of the protesting factory workers, and enjoyed their solidarity. I looked forward to seeing more of the protesting laborers, and the threat they posed to the status quo. 

B of A’s refusal to renegotiate Republic Windows and Doors debt in a way that allowed the factory to honor its obligations to hard-working employees right before Christmas seemed to exemplify the consequences of this global economic crisis and the immorality and culpability of the financial sector. 

Perhaps, I thought, the people will fill the streets, and alliances between labor and sympathetic executives like Blagojevich will allow for a public confrontation of a system that demands that the blue collar people who are losing their homes and jobs have to bankroll a “bailout” of the banks that are foreclosing on their homes and shuttering their factories. 

Instead, the day after Blagojevich called for a Boycott of Bank of America and threatened to oppose the bank’s zoning requests, the Governor was arrested for attempting to sell Barack Obama’s Senate seat. 

Stories about the factory workers fighting for their wages were relegated to the dust-bin, and Blagojevich’s “crime spree” became the hot news item. His dirty mouth, flamboyant hair, and careless arrogance inspired ire from everyone from Neil Cavuto to Rachel Maddow. 

Many lefties, myself included, were distracted by the possibility that Blagojevich’s graft might taint our beloved President-Elect. 

Over the course of the month that has passed, Blagojevich’s antics cheapened his support of the former factory employees. Blagojevich’s efforts to name Obama’s Senatorial replacement seem alternatively tone-deaf, ego maniacal, and embarrassing. Democrats in the Senate have refused to welcome Roland Burris, not because they find Burris an unacceptable replacement for Obama (although his pursuit of the death penalty against an obviously railroaded and innocent man shoud disqualify him), but to garner public approval. 

The noise created by this prolonged scandal drowns out lingering questions over Bank of America’s unethical behavior, and the potential fate of Americans working for companies that are devastated by falling demand and lack of credit. 

After hearing news-goddess Rachel Maddow repeatedly condemn Blagojevich, I doubted my original response to his arrest. Now that the dust has settled, I again question the timing and legitimacy of Blagovich’s arrest, and the marked similarity of the Blago debacle to Eliot Spitzer’s fall from grace last year: 

1.) Both men were taking on huge financial institutions and exposing the graft necessary to keep them afloat. (Before Spitzer was Ashly Dupre’s trick, he was known as a crusader who took on AIG, investigated Wall Street, and demanded better regulation of the financial sector.) 

2.) Both men appear to be completely guilty, yet while the crimes they committed are personally and politically devastating, they are ridiculous small-potatoes compared to the crimes committed by the billionaire grifters that they confronted and sought to expose. 

3.) Both men were effectively neutralized due to the embarrassing nature of their crimes, while the perpetrators of large-scale economic crimes against all American citizens go unpunished. 

Spitzer and Blagojevich are both deeply flawed public figures, but the scandals surrounding each of them do not distinguish them from their peers. Hubris, greed, and lust are native denizens of the waters in which both men swim. 

What made them different, and perhaps intolerable, was the threat they posed to the corrupt and precarious financial systems that were further enriching the Wall Street elite. Sure, they were guilty of dirty, shameful things, and that made their respective political assassinations that much easier.

Common Sense Should Trump Expert Rhetoric

By Matthias Chang, prominent Barrister and Author based in Malaysia

Is it really so difficult to understand the current financial crisis? Many have expressed to me that they are overwhelmed by the complexity of the global financial tsunami, and are absolutely confused as to how to prepare and survive the crisis.

When I try to explain the predicament in simple terms, they dismiss the explanation as being “too simple.” The crisis must be really complicated, otherwise how can the crisis become a global fiasco? Right?

If we think about the nature of the crisis, and use simple common sense to address problem, we will be able to arrive at simple solutions. Unfortunately, our education system tortures us mentally and forces us to think in complicated ways. Our teachers, economists, politicians and so-called experts continually make mountains out of mole-hills, turning simple truths into complex arguments, theories and equations.

These experts need to make things look difficult to survive and to make sure that we have to rely upon them for solutions. It is often said that, “in the land of the blind, the man with one eye is the King.”

Thinking used to be a pleasure, but now the “experts” have ensured that critical thinking has become so difficult and tiring – even burdensome – that we don’t attempt to think at all. The result is that common sense has been thrown out of the window, and we have been conditioned to rely on our mental crutch, the so-called “experts,” to think for us.

How sad. Consider the following, my simple explanation of the financial crisis:

-Financial Engineering: Just new ways of gambling

-Investors: Gamblers

-Stock & Futures Markets: Casinos

-Financial Analysts: Casino sales

-Bonds: I.O.U’s

-Banks: Not really money lenders – actual money-lenders cannot create “money out of thin air,” they have to use 100% of their own capital to lend

-Currencies / fiat money toilet paper

-Derivative Markets: Legalized Ponzi Schemes

Even after the recent $50 Billion fraud by Bernard Madoff, the former chairman of NASDAQ, many people have difficulty accepting my explanations as the simple reality.

Let’s face it: Banks worldwide have already collapsed. Why?

Two reasons: First, they gambled at the casino and lost trillions. Second, almost all their borrowers are leveraged 30 times or more, and have since defaulted (i.e. if a borrower has $1 million capital, he can borrow $30 million).

Common sense tells us that if our income is only $X and we borrow 30 times in excess of $X, there is no way that we can repay the debt unless our gambling bets pay out in excess of 30 times the original amount of $X.

Common sense tells us that if our total family monthly income is e.g. RM3,500, we cannot afford a lifestyle that requires a monthly expenditure of RM10,000 financed by credit-cards with only 5% monthly payment on the outstanding. When interests start piling up on the accumulated monthly outstanding, a point will be reached whereby the cardholder cannot even keep up with the payment of the interests. The cardholder defaults and he gets sued by the lawyers acting for the credit-card companies and or banks.

Common sense tells us that if you are conned into buying something allegedly worth US$500,000 when its actual value is US$5,000 and you borrowed to buy the inflated “asset”, there is no way that you will continue paying the installments and the interests on such an acquisition. The bank on the other hand is stuck with an “asset” supposedly worth US$500,000 but its actual worth is only US$5,000 or less.

Common sense tells us that the banks and the governments (fearing a systemic banking collapse) will lie and cover up the con-game until it cannot cover up anymore as too many banks are having the same problems and more importantly, the con-game cannot be covered-up anymore because borrowers are walking away and saying to the banks and governments – “You conned us, you take the blame.”

Common sense tells us that these so-called assets which “investors” have invested cannot be real assets, but mere papers masquerading as assets (such as CDOs, synthetic CDOs and CDO Squared – toilet paper). Therefore, so-called sophisticated “investors” were borrowing toilet paper to “invest” in toilet paper assets!

Common sense tells us, and thinking naturally and in simple terms will enable us to conclude, that only greedy people can be lured by such con-games and that when gambling at such casinos, these so-called sophisticated investors were not using common sense.

Common sense tells us that we, the remaining hardworking people should not allow any government to use our tax revenue to bailout such reckless and greedy b@#st@#ds.

Common sense tells us that when gamblers lose millions at the Las Vegas, Macau or Genting Highlands casinos, no government would dare to bailout such stupid and greedy gamblers. They would be voted out of office.

Common sense tells us that all these “clever people” with their reckless, irresponsible and fraudulent conduct, have destroyed the economy and they should be prosecuted and sent to jail and the keys thrown away!

Common sense tells us that when common thieves rob a jewelry shop or a bank, they are sentenced to long terms of imprisonment, these sophisticated thieves should be likewise be whipped and sent to prison for life imprisonment, as their destruction is a million times more devastating than the common thieves!

Common sense tells us that when times are hard, we should be prudent and thrifty to overcome and survive the hardships, so why are we encouraged to borrow more and more and to spend, spend and spend?

Common sense tells us that when a shop is offering a discount, a reduction in the price of a product, the shop-keeper is encouraging us to spend and buy the goods.

Common sense tells us therefore, interest charges and penalty interests are the cost of a debt / borrowings from the perspective of the borrower and revenues and profits, when the debt is fully paid, from the point of view of the lender.

Common sense tells us that it is not out of kindness that banks lower interest charges. Like the shop-keeper, it is to encourage more borrowings. More borrowings mean more debts and ultimately more profits for the bankers.

Common sense tells us that we should not get into debts unnecessarily and not to borrow to purchase things that are not within our income and our ability to repay.

Common sense tells us that we should not commit fraud and or be a party to a fraud.

Common sense tells us more importantly, not to be greedy and lust for material wealth.

Common sense tells us that we should be angry, very angry with the so-called “sophisticated and up-right people” who commit fraud and the regulatory authorities and political leaders who cover-up their crimes.

Finally, common sense tells us that we should take action to put a stop to these crimes and scandals.

Please use common sense and do something before it is too late.