Tuesday, May 15, 2012

It's Simple - Think Like A Criminal

When you see that money is flowing to those who deal, not in goods, but in favors – when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you – when you see corruption being rewarded and honesty becoming a self-sacrifice – you may know that your society is doomed.  Ayn Rand, "Atlas Shrugged" (Francisco D'Anconia money speech)
A good friend and colleague asked me my thoughts on the recent blogosphere posting over the weekend about the disclosure in JPM's 10-Q of pending litigation related to mortgage originations at JPM, Bear Stearn and Wash Mutual totalling $120 billion.

The original source article which discusses this litigation is HERE

Let me be clear about one thing before I express my view on how this will turn out. I am 100% convinced that the housing bubble was precipitated and perpetrated by complete fraud, corruption, racketeering and felony activity. I think the people who were running the big banks involved like Countrywide, Washington Mutual, Bear Stearns, Merrill, Lehman, Bank of America, Wells Fargo and JP Morgan should be properly and rightfully investigated and prosecuted in criminal jurisdictional venues that are free from political influence and cronyism. Given that the Government, especially the Obama Justice Department, not only refuses to investigate and prosecute the big banks - thereby enabling the massive fraud and corruption to continue - we know this will never happen.

Many people over the past few years have asked me how I've been able to discern and predict the massive dislocations and events of collapse that have occurred and are unfolding. It's really quite simple. You just have to understand that our system has been taken over by, and is being run by, criminals. So you just have to think like a criminal. Once you free your thought process from any assumptions that people in power are "good" and our leaders are working for the people who voted them in office, then you can think objectively and thoughtfully about what is happening in the United States.

I read through the litigation disclosure in the footnotes to JPM's latest 10-Q. Here's the LINK

If you read carefully and between the lines in the sections preceding the part about the potential $120 billion face value liability, you'll see that much of JPM's recent mortgage-related litigation has ended in settlements or is being litigated with many plaintiff claims being denied or substantially reduced in scope. Part of the problem in litigating plaintiff claims of fraud is the law and legal precedence gives the courts a lot of leeway for interpretation in how legal theory and precedence is applied. For instance, if you read through the footnote that starts on pg 158 of the 10-Q, you'll see that plaintiffs named JP Morgan as a defendent on claims related to Bear Stearn and Wash Mutual on the theory that JPM was the successor to Wash Mutual. Claim denied.

Quite frankly knowing what I know about the legal process, especially at the District court level, plus hearing plenty of war stories from a good friend who is a trial attorney in Denver, most District court judges are the by-product of heavy political and economic influence. Why? Because in many States like Colorado, County court judges are appointed by the Mayor and District court judges are appointed by the Governor. In other words, the process of judicial appointment has been completely politicized. If you don't think that politicians' decisions about judicial appointments are influenced by economics, then you are miserably failing the requirement of thinking like a criminal in order to understand what is happening in this country. If you think like a criminal, you'll understand that in our current legal system judicial decisions at the District court level are heavily prejudiced in favor of the party with bigger economic influence.

Circling back to the $120 billion disclosure in JPM's 10-Q, understand that this is a number that JPM's auditor required JPM to disclose on the premise that there might be a 2% chance that JPM would ultimately be subjected to a claim this big. But also, per the previous comments, understand that the likelihood of ultimately seeing some kind of actual settlement of even 10% of this amount is quite low. Why? Again, think like a criminal. Does anyone really believe that a District court judge is going deny the many motions of objection or dismissal that JPM will inevitably file using tenuous legal arguments and barely relevant appellate court citations in order to object to most of the claims?

To be sure, ultimately there will likely be some kind of settlement. But it will be at a small fraction of the $120 billion total prima facie claim and it will ultimately be predicated on the ability of JPM's counsel, Sullivan and Cromwell and Greenberg Taurig, to beat down the plaintiffs with litigation chicanery. Greenberg Taurig specializes in buying politicians and influencing the Government. I'll take Greenberg's ability to maneuver the courts and defend JP Morgan over any plaintiff attorney in the country.


  1. Talk about a bloodbath today. I have multiple miners down double digit % points. I continue to think that the miners offer the best value in the entire market.

    Snapped up another 4,000 shares of AUMN today & doubled my position in PPP. Looks like it's going to be a long summer.

  2. Get in line behind me on that. The babies are being thrown out with the bath water. This could get very ugly. ALL of the markets. If the Fed doesn't unleash QE3 soon, we're going to see the Dow collapse down to 6,600 again.

  3. I do my best to try to approach investing with as little emotion as possible. Being a poker player I think that comes much easier to myself than others. I have been waiting for a down move to buy some of these stocks and now that it's here I find myself starting to second guess my strategy. Had to shake that thinking off and remind myself nothing has changed in the world. In fact we are in worse shape as non of the structural problems of our economy have been fixed and the debt is ever larger and growing more rapidly. Ultimately I see no way out for the Fed except to monetize. I hope my patience pays off as I have been sitting on a good bit of cash for many months now and I have started putting it to work now.

    Goodluck Dave & appreciate all your hard work and thoughts on the blog!

  4. So, I figured out that today's plunge puts the GDX where its low was on 2/5/2010 at $39.30. Amazingly, though, the GLD that day made a low at $105. Today, the GLD is down a touch below $150. So, while the GLD has risen 45% from the February 2010 low, the miners have gone nowhere.

    Is there any LOGICAL reason this makes sense, Dave?

    1. None. But when the HUI plunged from 480 to 150 in 2008 it didn't make any sense either. The whole market is dominated by hedge fund flows/activity on a short term basis. Everything. It's even more pronounced in mining stocks because institutions own very little in the way of mining stocks. So the % of the mining stock market controlled by hedge funds is massive vs. all other sectors.

      That dynamic causes excessive swings in mining stocks. Today was just ridiculous. AUMN/ECU has sold off to the equivalent of 21 cents/share in old ECU. The last time ECU traded at 21 cents was in 2005 when it had very little proved up other than hope and dreams. Now ECU has 400 mm in 43-101 silver ounces, produces silver, throws off cash flow and has $32mm in cash on the balance sheet.

      Does that make sense?

      As long as you have dry gunpowder, there are going to be some seriously compelling, no-brainer mining stock plays once the next round of QE3 is rolled out...

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  6. As bad as the miners have been acting, I don't think we're anywhere near 2008 sentiment. Back then, I bought numerous miners for less than the cash on their balance sheet. Every single one proceeded to at least triple. Even the crappy uranium miners that turned out to be worthless. A few of them, the companies with high quality assets, went up several thousand % such as Nevsun which I bought for $.53.

    I encourage all the discouraged speculators out there to man-up and put on limit orders for your favorite, high-quality companies at 20% lower prices than you're currently seeing. If they hit your bid, repeat the process. Don't go overboard though, a little bit of these goes a long, long way. And I'd personally skew toward gold miners rather than silver, I think gold is a no-brainer to be much higher in 5 years, but I've seen good arguments against silver going higher.

    1. PW, the valuation of mining equities in relation to the price of gold is lower than 2008. There are plenty of juniors that are not as low in price as in 2008, that is true. But I would argue sentiment is worse than in 2008 right now. A lot of us bought all the way down in 2008. Now no one is buying currently.

      There are no valid reasons for silver to not go higher. Silver is a currency, same as gold. Always has been. Read the constitution. It's in there as a currency. "Poor man's gold" effect on silver is happening big time, especially in India and China.

      Eventually we'll see at least a 16:1 gold/silver ratio, probably lower. So however high you think gold can go, divide that number by 16 and that's your target for silver.

      If this doesn't happen, then it means we're living in Mad Max/The Road.

  7. I hope you're correct about silver, just not my cup of tea right now. Until I see juniors selling for less than their cash, I won't believe valuation or sentiment is as bad as 2008. That was shooting fish in a barrel. Go back and look at the prices of FSM, AG & NSU in 12/2008. You could put on absurdly low limit orders and they'd get filled because there was panic and no buyers. I don't think we're quite there.

  8. I must admit, this is one of the most depressing postings I have read in a while. It looks like the decline is right on time. No wonder everyone wants to talk miners!