December 28, 2007, 6:52 pm
The Airport Security Follies
By Patrick Smith
Six years after the terrorist attacks of 2001, airport security remains a theater of the absurd. The changes put in place following the September 11th catastrophe have been drastic, and largely of two kinds: those practical and effective, and those irrational, wasteful and pointless.
The first variety have taken place almost entirely behind the scenes. Explosives scanning for checked luggage, for instance, was long overdue and is perhaps the most welcome addition. Unfortunately, at concourse checkpoints all across America, the madness of passenger screening continues in plain view. It began with pat-downs and the senseless confiscation of pointy objects. Then came the mandatory shoe removal, followed in the summer of 2006 by the prohibition of liquids and gels. We can only imagine what is next.
To understand what makes these measures so absurd, we first need to revisit the morning of September 11th, and grasp exactly what it was the 19 hijackers so easily took advantage of. Conventional wisdom says the terrorists exploited a weakness in airport security by smuggling aboard box-cutters. What they actually exploited was a weakness in our mindset — a set of presumptions based on the decades-long track record of hijackings.
In years past, a takeover meant hostage negotiations and standoffs; crews were trained in the concept of “passive resistance.” All of that changed forever the instant American Airlines Flight 11 collided with the north tower. What weapons the 19 men possessed mattered little; the success of their plan relied fundamentally on the element of surprise. And in this respect, their scheme was all but guaranteed not to fail.
For several reasons — particularly the awareness of passengers and crew — just the opposite is true today. Any hijacker would face a planeload of angry and frightened people ready to fight back. Say what you want of terrorists, they cannot afford to waste time and resources on schemes with a high probability of failure. And thus the September 11th template is all but useless to potential hijackers.
No matter that a deadly sharp can be fashioned from virtually anything found on a plane, be it a broken wine bottle or a snapped-off length of plastic, we are content wasting billions of taxpayer dollars and untold hours of labor in a delusional attempt to thwart an attack that has already happened, asked to queue for absurd lengths of time, subject to embarrassing pat-downs and loss of our belongings.
The folly is much the same with respect to the liquids and gels restrictions, introduced two summers ago following the breakup of a London-based cabal that was planning to blow up jetliners using liquid explosives. Allegations surrounding the conspiracy were revealed to substantially embellished. In an August, 2006 article in the New York Times, British officials admitted that public statements made following the arrests were overcooked, inaccurate and “unfortunate.” The plot’s leaders were still in the process of recruiting and radicalizing would-be bombers. They lacked passports, airline tickets and, most critical of all, they had been unsuccessful in actually producing liquid explosives. Investigators later described the widely parroted report that up to ten U.S airliners had been targeted as “speculative” and “exaggerated.”
Among first to express serious skepticism about the bombers’ readiness was Thomas C. Greene, whose essay in The Register explored the extreme difficulty of mixing and deploying the types of binary explosives purportedly to be used. Green conferred with Professor Jimmie C. Oxley, an explosives specialist who has closely studied the type of deadly cocktail coveted by the London plotters.
“The notion that deadly explosives can be cooked up in an airplane lavatory is pure fiction,” Greene told me during an interview. “A handy gimmick for action movies and shows like ‘24.’ The reality proves disappointing: it’s rather awkward to do chemistry in an airplane toilet. Nevertheless, our official protectors and deciders respond to such notions instinctively, because they’re familiar to us: we’ve all seen scenarios on television and in the cinema. This, incredibly, is why you can no longer carry a bottle of water onto a plane.”
The threat of liquid explosives does exist, but it cannot be readily brewed from the kinds of liquids we have devoted most of our resources to keeping away from planes. Certain benign liquids, when combined under highly specific conditions, are indeed dangerous. However, creating those conditions poses enormous challenges for a saboteur.
“I would not hesitate to allow that liquid explosives can pose a danger,” Greene added, recalling Ramzi Yousef’s 1994 detonation of a small nitroglycerine bomb aboard Philippine Airlines Flight 434. The explosion was a test run for the so-called “Project Bojinka,” an Al Qaeda scheme to simultaneously destroy a dozen widebody airliners over the Pacific Ocean. “But the idea that confiscating someone’s toothpaste is going to keep us safe is too ridiculous to entertain.”
Yet that’s exactly what we’ve been doing. The three-ounce container rule is silly enough — after all, what’s to stop somebody from carrying several small bottles each full of the same substance — but consider for a moment the hypocrisy of T.S.A.’s confiscation policy. At every concourse checkpoint you’ll see a bin or barrel brimming with contraband containers taken from passengers for having exceeded the volume limit. Now, the assumption has to be that the materials in those containers are potentially hazardous. If not, why were they seized in the first place? But if so, why are they dumped unceremoniously into the trash? They are not quarantined or handed over to the bomb squad; they are simply thrown away. The agency seems to be saying that it knows these things are harmless. But it’s going to steal them anyway, and either you accept it or you don’t fly.
But of all the contradictions and self-defeating measures T.S.A. has come up with, possibly none is more blatantly ludicrous than the policy decreeing that pilots and flight attendants undergo the same x-ray and metal detector screening as passengers. What makes it ludicrous is that tens of thousands of other airport workers, from baggage loaders and fuelers to cabin cleaners and maintenance personnel, are subject only to occasional random screenings when they come to work.
These are individuals with full access to aircraft, inside and out. Some are airline employees, though a high percentage are contract staff belonging to outside companies. The fact that crew members, many of whom are former military fliers, and all of whom endured rigorous background checks prior to being hired, are required to take out their laptops and surrender their hobby knives, while a caterer or cabin cleaner sidesteps the entire process and walks onto a plane unimpeded, nullifies almost everything our T.S.A. minders have said and done since September 11th, 2001. If there is a more ringing let-me-get-this-straight scenario anywhere in the realm of airport security, I’d like to hear it.
I’m not suggesting that the rules be tightened for non-crew members so much as relaxed for all accredited workers. Which perhaps urges us to reconsider the entire purpose of airport security:
The truth is, regardless of how many pointy tools and shampoo bottles we confiscate, there shall remain an unlimited number of ways to smuggle dangerous items onto a plane. The precise shape, form and substance of those items is irrelevant. We are not fighting materials, we are fighting the imagination and cleverness of the would-be saboteur.
Thus, what most people fail to grasp is that the nuts and bolts of keeping terrorists away from planes is not really the job of airport security at all. Rather, it’s the job of government agencies and law enforcement. It’s not very glamorous, but the grunt work of hunting down terrorists takes place far off stage, relying on the diligent work of cops, spies and intelligence officers. Air crimes need to be stopped at the planning stages. By the time a terrorist gets to the airport, chances are it’s too late.
In the end, I’m not sure which is more troubling, the inanity of the existing regulations, or the average American’s acceptance of them and willingness to be humiliated. These wasteful and tedious protocols have solidified into what appears to be indefinite policy, with little or no opposition. There ought to be a tide of protest rising up against this mania. Where is it? At its loudest, the voice of the traveling public is one of grumbled resignation. The op-ed pages are silent, the pundits have nothing meaningful to say.
The airlines, for their part, are in something of a bind. The willingness of our carriers to allow flying to become an increasingly unpleasant experience suggests a business sense of masochistic capitulation. On the other hand, imagine the outrage among security zealots should airlines be caught lobbying for what is perceived to be a dangerous abrogation of security and responsibility — even if it’s not. Carriers caught plenty of flack, almost all of it unfair, in the aftermath of September 11th. Understandably, they no longer want that liability.
As for Americans themselves, I suppose that it’s less than realistic to expect street protests or airport sit-ins from citizen fliers, and maybe we shouldn’t expect too much from a press and media that have had no trouble letting countless other injustices slip to the wayside. And rather than rethink our policies, the best we’ve come up with is a way to skirt them — for a fee, naturally — via schemes like Registered Traveler. Americans can now pay to have their personal information put on file just to avoid the hassle of airport security. As cynical as George Orwell ever was, I doubt he imagined the idea of citizens offering up money for their own subjugation.
How we got to this point is an interesting study in reactionary politics, fear-mongering and a disconcerting willingness of the American public to accept almost anything in the name of “security.” Conned and frightened, our nation demands not actual security, but security spectacle. And although a reasonable percentage of passengers, along with most security experts, would concur such theater serves no useful purpose, there has been surprisingly little outrage. In that regard, maybe we’ve gotten exactly the system we deserve.
Sunday, December 30, 2007
Agreed in spades. If it so urgent to intercept potential bombs being smuggled onto our aircraft, why do we hire $5/hour TSA agents to do the job rather than highly trained bomb detection and disposal agents? New York Times
Posted by Humbug at 10:10 PM
Tuesday, December 11, 2007
Sean Olender in SF Chronicle:
New proposals to ease our great mortgage meltdown keep rolling in. First the Treasury Department urged the creation of a new fund that would buy risky mortgage bonds as a tactic to hide what those bonds were really worth. (Not much.) Then the idea was to use Fannie Mae and Freddie Mac to buy the risky loans, even if it was clear that U.S. taxpayers would eventually be stuck with the bill. But that plan went south after Fannie suffered a new accounting scandal, and Freddie's existing loan losses shot up more than expected.
Now, just unveiled Thursday, comes the "freeze," the brainchild of Treasury Secretary Henry Paulson. It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.
But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.
The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.
The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.
I can hear the hum of shredders working overtime, and maybe that is the new "hot" industry to invest in. There are lots of people who would like to muzzle subpoena-happy New York Attorney General Andrew Cuomo to buy time and make this all go away. Cuomo is just inches from getting what he needs to start putting a lot of people in prison. I bet some people are trying right now to make him an offer "he can't refuse."
Despite Thursday's ballyhooed new deal with mortgage lenders, does anyone really think that it can ultimately stop fraud lawsuits by mortgage bond investors, many of them spread out across the globe?
The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.
The problem isn't just subprime loans. It is the entire mortgage market. As home prices fall, defaults will rise sharply - period. And so will the patience of mortgage bondholders. Different classes of mortgage bonds from various risk pools are owned by different central banks, funds, pensions and investors all over the world. Even your pension or 401(k) might have some of these bonds in it.
Perhaps some U.S. government department can make veiled threats to foreign countries to suggest they will suffer unpleasant consequences if their largest holders (central banks and investment funds) don't go along with the plan, but how could it be possible to strong-arm everyone?
What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back. The time to look into this is before the shredders have worked their magic - not five years from now.
Those selling the "freeze" have suggested that mortgage-backed securities investors will benefit because they lose more with rising foreclosures. But with fast-depreciating collateral, the last thing investors in mortgage bonds ought to do is put off foreclosures. Rate freezes are at best a tool for delaying the inevitable foreclosures when even the most optimistic forecasters expect home prices to fall. In October, Goldman Sachs issued a report forecasting an incredible 35 to 40 percent drop in California home prices in the coming few years. To minimize losses, a mortgage bondholder would obviously be better off foreclosing on a home before prices plunge.
The goal of the freeze may be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing. If the investors agreed to loan modifications with the "real" wage and asset information from refinancing borrowers, mortgage originators and bundlers would have an excuse once the foreclosure occurred. They could say, "Fraud? What fraud?! You knew the borrower's real income and asset information later when he refinanced!"
The key is to refinance borrowers whose current loans involved fraud in the origination process. And I assure you it was a minority of borrowers whose loans didn't involve fraud.
The government is trying to accomplish wide-scale refinancing by tricking bond investors, or by tricking U.S. taxpayers. Guess who will foot the bill now that the FHA is entering the fray?
Ultimately, the people in these secret Paulson meetings were probably less worried about saving the mortgage market than with saving themselves. Some might be looking at prison time.
As chief of Goldman Sachs, Paulson was involved, to degrees as yet unrevealed, in the mortgage securitization process during the halcyon days of mortgage fraud from 2004 to 2006.
Paulson became the U.S. Treasury secretary on July 10, 2006, after the extent of the debacle was coming into focus for those in the know. Goldman Sachs achieved recent accolades in the markets for having bet heavily against the housing market, while Citigroup, Morgan Stanley, Bear Sterns, Merrill Lynch and others got hammered for failing to time the end of the credit bubble.
Goldman Sachs is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. The success of its strategy must have resulted from fairly substantial bets against housing, mortgage banking and related industries, which also means that Goldman Sachs saw this coming at the same time they were bundling and selling these loans.
If a mortgage bond investor sues Goldman Sachs to force the institution to buy back loans, could Paulson be forced to testify as to whether Goldman Sachs knew or had reason to know about fraud in the origination process of the loans it was bundling?
It is truly amazing that right now everyone in the country is deferring to Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it.
I suspect that such a group first sat down and tried to figure out how to protect their financial interests and avoid criminal liability. And then when they agreed on the plan, they decided to sell it as "helping working families stay in their homes." That's why these meetings were secret, and reporters and the public weren't invited.
The next time that Paulson is before the Senate Finance Committee, instead of asking, "How much money do you think we should give your banking buddies?" I'd like to see New York Sen. Chuck Schumer ask him what he knew about this staggering fraud at the time he was chief of Goldman Sachs.
The Goldman report in October suggests that rampant investor demand is to blame for origination fraud - even though these investors were misled by high credit ratings from bond rating agencies being paid billions by the U.S. investment banks, like Goldman, that were selling the bundled mortgages.
This logic is like saying shoppers seeking bargain-priced soup encourage the grocery store owner to steal it. I mean, we're talking about criminal fraud here. We are on the cusp of a mammoth financial crisis, and the Federal Reserve and the U.S. Treasury are trying to limit the liability of their banking friends under the guise of trying to help borrowers. At stake is nothing short of the continued existence of the U.S. banking system.
Sean Olender is a San Mateo attorney. Contact us at email@example.com.
Posted by Humbug at 12:12 PM
Even before this mortgage mess started, one person who kept emailing me over and over saying that this is going to get real bad. He kept saying this was beyond sub-prime, beyond low FICO scores, beyond Alt-A and beyond the imagination of most pundits, politicians and the press. When I asked him why somebody from inside the industry would be so emphatically sounding the siren, he said, “Someobody’s got to warn people.”
Since then, I’ve kept up an active dialog with Mark Hanson, a 20-year veteran of the mortgage industry, who has spent most of his career in the wholesale and correspondent residential arena — primarily on the West Coast. He lives in the Bay Area. So far he has been pretty much on target as the situation has unfolded. I should point out that, based on his knowledge of the industry, he has been short a number of mortgage-related stocks.
His current thoughts, which I urge you to read:
The Government and the market are trying to boil this down to a ’sub-prime’ thing, especially with all constant talk of ‘resets’. But sub-prime loans were only a small piece of the mortgage mess. And sub-prime loans are not the only ones with resets. What we are experiencing should be called ‘The Mortgage Meltdown’ because many different exotic loan types are imploding currently belonging to what lenders considered ‘qualified’ or ‘prime’ borrowers. This will continue to worsen over the next few of years. When ‘prime’ loans begin to explode to a degree large enough to catch national attention, the ratings agencies will jump on board and we will have ‘Round 2′. It is not that far away.
Since 2003, when lending first started becoming extremely lax, a small percentage of the loans were true sub-prime fixed or arms. But sub-prime is what is being focused upon to draw attention away from the fact the lenders and Wall Street banks made all loans too easy to attain for everyone. They can explain away the reason sub-prime loans are imploding due to the weakness of the borrower.
How will they explain foreclosures in wealthy cities across the nation involving borrowers with 750 scores when their loan adjusts higher or terms change overnight because they reached their maximum negative potential on a neg-am Pay Option ARM for instance?
Sub-prime aren’t the only kind of loans imploding. Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure. The latter three loan types mostly were considered ‘prime’ so they are being overlooked, but will haunt the financial markets for years to come. Versions of these loans were made available to sub-prime borrowers of course, but the vast majority were considered ‘prime’ or Alt-A. The caveat is that the differentiation between Prime and ALT-A got smaller and smaller over the years until finally in late 2005/2006 there was virtually no difference in program type or rate.
The bailout we are hearing about for sub-prime borrowers will be the first of many. Sub-prime only represents about 25% of the problem loans out there. What about the second mortgages sitting behind the sub-prime first, for instance? Most have seconds. Why aren’t they bailing those out too? Those rates have risen dramatically over the past few years as the Prime jumped from 4% to 8.25% recently. seconds are primarily based upon the prime rate. One can argue that many sub-prime first mortgages on their own were not a problem for the borrowers but the added burden of the second put on the property many times after-the-fact was too much for the borrower.
Most sub-prime loans in existence are refinances not purchase-money loans. This means that more than likely they pulled cash out of their home, bought things and are now going under. Perhaps the loan they hold now is their third or forth in the past couple years. Why are bad borrowers, who cannot stop going to the home-ATM getting bailed out?
The Government says they are going to use the credit score as one of the determining factors. But we have learned over the past year that credit scores are not a good predictor of future ability to repay. This is because over the past five years you could refi your way into a great score. Every time you were going broke and did not have money to pay bills, you pulled cash out of your home by refinancing your first mortgage or upping your second. You pay all your bills, buy some new clothes, take a vacation and your score goes up!
The ’second mortgage implosion’, ‘Pay-Option implosion’ and ‘Hybrid Intermediate-term ARM implosion’ are all happening simultaneously and about to heat up drastically. Second mortgage liens were done by nearly every large bank in the nation and really heated up in 2005, as first mortgage rates started rising and nobody could benefit from refinancing. This was a way to keep the mortgage money flowing. Second mortgages to 100% of the homes value with no income or asset documentation were among the best sellers at CITI, Wells, WAMU, Chase, National City and Countrywide. We now know these are worthless especially since values have indeed dropped and those who maxed out their liens with a 100% purchase or refi of a second now owe much more than their property is worth.
How are the banks going to get this junk second mortgage paper off their books? Moody’s is expecting a 15% default rate among ‘prime’ second mortgages. Just think the default rate in lower quality such as sub-prime. These assets will need to be sold for pennies on the dollar to free up capacity for new vintage paper or borrowers allowed to pay 50 cents on the dollar, for instance, to buy back their note.
The latter is probably where the ’second mortgage implosion’ will end up going. Why sell the loan for 10 cents on the dollar when you can get 25 to 50 cents from the borrower and lower their total outstanding liens on the property at the same time, getting them ‘right’ in the home again? Wells Fargo recently said they owned $84 billion of this worthless paper. That is a lot of seconds at an average of $100,000 a piece. Already, many lenders are locking up the second lines of credit and not allowing borrowers to pull the remaining open available credit to stop the bleeding. Second mortgages are defaulting at an amazing pace and it is picking up every month.
The ‘Pay-Option ARM implosion’ will carry on for a couple of years. In my opinion, this implosion will dwarf the ’sub-prime implosion’ because it cuts across all borrower types and all home values. Some of the most affluent areas in California contain the most Option ARMs due to the ability to buy a $1 million home with payments of a few thousand dollars per month. Wamu, Countrywide, Wachovia, IndyMac, Downey and Bear Stearns were/are among the largest Option ARM lenders. Option ARMs are literally worthless with no bids found for many months for these assets. These assets are almost guaranteed to blow up. 75% of Option ARM borrowers make the minimum monthly payment. Eighty percent-plus are stated income/asset. Average combined loan-to-value are at or above 90%. The majority done in the past few years have second mortgages behind them.
The clue to who will blow up first is each lenders ‘max neg potential’ allowance, which differs. The higher the allowance, the longer until the borrower gets the letter saying ‘you have reached your 110%, 115%, 125% etc maximum negative of your original loans balance so you cannot accrue any more negative and must pay a minimum of the interest only (or fully indexed payment in some cases). This payment rate could be as much as three times greater. They cannot refinance, of course, because the programs do not exist any longer to any great degree, the borrowers cannot qualify for other more conventional financing or values have dropped too much.
Also, the vast majority have second mortgages behind them putting them in a seriously upside down position in their home. If the first mortgage is at 115%, the second mortgage in many cases is at 100% at the time of origination — and values have dropped 10%-15% in states like California — many home owners could be upside down 20% minimum. This is a prime example of why these loans remain ‘no bid’ and will never have a bid. These also will require a workout. The big difference between these and sub-prime loans is at least with sub-prime loans, outstanding principal balances do not grow at a rate of up to 7% per year. Not considering every Option ARM a sub-prime loan is a mistake.
The 3/1, 5/1, 7/1 and 10/1 hybrid interest-only ARMS will reset in droves beginning now. These are loans that are fixed at a low introductory interest only rate for three, five, seven or 10 years — then turn into a fully indexed payment rate that adjusts annually thereafter. They first got really popular in 2003. Wells Fargo led the pack in these but many people have them. The resets first began with the 3/1 last year.
The 5/1 was the most popular by far, so those start to reset heavily in 2008. These were considered ‘prime’ but Wells and many others would do 95%-100% to $1 million at a 620 score with nearly as low of a rate as if you had a 750 score. No income or asset versions of this loan were available at a negligible bump in fee. This does not sound too ‘prime’ to me. These loans were mostly Jumbo in higher priced states such as California.
Values are down and these are interest only loans, therefore, many are severely underwater even without negative-amortization on this loan type. They were qualified at a 50% debt-to-income ratio, leaving only 50% of a borrower’s income to pay taxes, all other bills and live their lives. These loans put the borrower in the grave the day they signed their loan docs especially without major appreciation. These loans will not perform as poorly overall as sub-prime, seconds or Option ARMs but they are a perfect example of what is still considered ‘prime’ that is at risk. Eighty-eight percent of Thornburg’s portfolio is this very loan type for example.
One final thought. How can any of this get repaired unless home values stabilize? And how will that happen? In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.
Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.
What I am telling you is not speculation. I sold BILLIONs of these very loans over the past five years. I saw the borrowers we considered ‘prime’. I always wondered ‘what WILL happen when these things adjust is values don’t go up 10% per year’.
Posted by Humbug at 12:08 PM