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From: Paul Robinson <paul@paul-robinson.us>
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Subject: {ASSM} The Federal Bank Bailout,or how to get away with writing a sex story  that can't be declared 'obscene' (n/c)
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Date: Tue, 07 Oct 2008 20:10:02 -0400
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There is a sex story in this article after I explain the following.

So maybe you've decided to write a porno story or even a porn book.
If it's really loaded with sex, you have the possibility that the
authorities might try to declare it obscene and ban it.  Especially if
you get into some of the bible belt.  So how do you get around it?
You sneak some content of importance into it so that it fails the
"Miller" test outlined by the U.S. Supreme Court in *Miller v.
California".

There are three tests to determine whether a work is obscene. Obscene
materials are defined as those that
* the average person, applying contemporary community standards, find,
taken as a whole, appeal to the prurient interest;
* that depict or describe, in a patently offensive way, sexual conduct
specifically defined by applicable state law; and
* that, taken as a whole, lack serious literary, artistic, political,
or scientific value.

So if you put some serious content which is non-sexual, you defeat the
Miller test and the work can't be declared obscene.  If you find some
way to embed it into your sex scenes it works even better.  It doesn't
even have to be related to the material, you just have to find some
way to stick it in (the story).

So let's give an example of how we might do this.  Now, I'm,using this
in order to insert a full article, but nothing says it has to be this
long, I just happen to have a spare article to use.

----

He hung around the mall, watching for the type of woman he was
interested in.  Then he saw her, nice tits, nice ass, young and
pretty.  He was really going to enjoy this one.  When no one was
looking, he quickly grabbed her and stashed her in his van, gagging
and handcuffing her so she couldn't escape.

They got to his shack in the woods, and he dragged her into the
basement, where a bed awaited.  Pulling her clothes off, he dropped
his, got into bed, climbed on top of her, and prepared to enter her,
when he heard the radio announce a show he liked.

He decided to stop and go back upstairs to listen to the show.  He got
out of bed, went back upstairs, turned the volume up and she could
hear the program:

"And now, The Paul Robinson Show where Paul provides with his
commentary on the bank bailout."

"Hi, I'm Paul Robinson.  This is my story and I'm sticking to it.  If
you've no doubt heard Bush Junior talk about how his administration
pushed to get a $700,000,000,000 bailout and his yak-yak about how
important it was for the economy.  And now I'll tell you why they did
this, and how it happened that we got into this mess.  So to do that,
we have to go back a long time, maybe a hundred years or more.

"If you go far enough back (18th century) you find the U.S. looked
very much like a small country, because it was one. There was no
central bank, every bank issued its own bank notes, each state might
issue its own currency, etc.

"The U.S. Civil War was was a debate over states rights, in which the
Federal Government forcibly informed them that it had the final say
over certain matters. Among these are fiscal policy and money.

"At one time or another, the state of Nevada has wanted to issue a
commemorative silver coin, but it has been unable to do so,
specifically because the U.S. Constitution specifically forbids the
states from coining money. Also, since states can't run deficits
forever - and can't print money - states have to balance their books.
The federal government does not have these restrictions, which is why
the U.S. government constantly runs a deficit and prints money (or
sells debt in the form of treasury bills and treasury notes, which is
almost the same thing).

"Upton Sinclair's famous 1907 book The Jungle showed that there were
major deficiencies in inspection of food products. The "Pure Food and
Drug Act" and other laws changed this. The occurrence of severe local
depressions caused the 1913 "Federal Reserve Act" to establish a
national bank so that now, the Federal government had the power to
change what would be local depressions into national ones. In fact,
the term depression was developed because it didn't sound as bad as
panic, the former term. Now, politicians say recession because
depression is too scary.

"The depression of (depending on whom you ask) 1929 or 1933 wasn't
solved by President Franklin Delano Roosevelt's attempts to socialize
the economy, it was solved when World War II reached America on
December 8, 1941. (We declared war the day after Pearl Harbor.)

"During the depression, a lot of people went to their bank to get
their money out. Well, if you ever saw the bank run as shown in Its A
Wonderful Life (which was actually a "Building and Loan" or what we
would call a Savings and Loan or S&L today), a bank doesn't have the
deposits in the vault, they've loaned out their depositors money.
Before there was deposit insurance, if too many depositors show up,
the bank closes its doors, and the banker tries to run out of town
before the angry depositors lynch him. The bank is broke and the
depositors who get there late probably won't get their money back.

"Banks in the U.S. can be chartered either by a state government or by
the Federal Government, this is indicated by the bank having the word
"National" in its name or the abbreviation quot;N.A." for "National
Association" (e.g. the full name of Bank of America is "Bank of
America, National Trust and Savings Association" or "Bank of America,
N.T.S.A."). Savings and Loans that are federally chartered have the
word "Federal"; they do not have this word in their name if they are
state chartered.) Banks that are state chartered do not have the word
"National" in their name, e.g. the one-branch "Colfax National Bank"
of Denver, Colorado, is chartered by a federal agency, while the
twelve branch "Farmers and Merchants Bank of Long Beach, California,"
is a bank chartered by the Department of Banking and Finance of the
State of California. Before the 1930s, outside of chartering banks at
the Federal Level, the Federal government didn't really do much to
protect depositors if their bank or S&L went broke.

"One of the things that came out of the depression was the protection
of depositors from losing their money if their bank lost all of its
deposits due to bad investments. This is referred to as "Deposit
Insurance." Each type of financial institution would have deposit
insurance, from one of three agencies. Banks pay a fee to get it from
the Federal Deposit Insurance Corporation (FDIC). Savings and loans
would pay the Federal Savings and Loan Insurance Corporation (FSLIC).
Credit Unions would pay their deposit insurance premiums to the
National Credit Union Association (NCUA). Some states - Maryland and
Rhode Island, for example - would have their own state-run insurance
programs.

"Before the war, either most people had very little money or were
afraid to buy anything. During the war, there either was severe
rationing, things weren't being made because the plants that made them
had been converted to producing war materiel, or you were encouraged
not to buy them on certain days in order to conserve them for the war
effort. Or you were out of the country in a foxhole in Europe or Asia
fighting the war. So you couldn't buy much during the war either. Once
World War II ended, the troops came home, and there was some 20 years
of pent-up demand and people had money to spend. This tremendously
increased the consumer demand and the interest in buying consumer
goods. Easy credit made it possible for people to buy their own homes.
In fact, that's worth a separate paragraph.

"A lot of people suffered loss of their houses when they could not
make payments during the depression. As I mentioned earlier, banks
were hit by runs and had no choice but to liquidate the houses people
had borrowed money against in order to pay back depositors who were
screaming for their money. In fact, Upton Sinclair's 1907 book The
Jungle tells of a scam that mortgage brokers used on unsuspecting
immigrants. (That it doesn't look much different from the scams
mortgage brokers use today shows how little imagination mortgage
brokers have.) A person or family would buy their own homes by paying
no down payment - or a very low down - and $7 a month (equivalent to a
typical $700 monthly mortgage today), but the contract was a rent
payment, unless you made all of the payments all the way to the end of
the contract, they were effectively rent payments, which meant you had
no equity at all. So if the house was priced at, say, $406 (equivalent
to perhaps $40,600) and you've been paying $7 a month plus taxes and
utilities (maybe another $50 a year), and even if you get to the point
after 55 months - 6 1/2 years - that you owe two months payments, say
$14, but you can't make your rent payment, you're in default and you
lose everything. Since you didn't really own the place until after you
made your last payment, you didn't even have the option of perhaps
selling your house and maybe getting something back; it wasn't your
house. They evict you, and put another sucker, err I mean family in
who start the payment for the whole $406 all over again.

"Prior to Federal programs of the late 1940s and 1950s, the only way
someone could buy a house was to save 20 to 25% of the price, and if
they were lucky, they could get a loan for five years.

"After programs like federal loan guarantees for veterans, then
Federal Home Administration (FHA) and federal mortgage buying
organizations such as the Federal National Mortgage Association (FNMA)
or ("Fanny Mae") and its sister, (or brother) the Federal Home Loan
Mortgage Corporation ("Freddie Mac") it was possible for people to buy
houses with only 5% down, and pay the rest over 30 years. A lot of
ordinary people who couldn't afford to raise 20% of the purchase price
were now able to buy their own homes instead of paying rent. In the
days of 20% down and five year mortgages, second and third mortgages
were extremely common. It was often the reason you had grandparents
and parents living in the same house: it took that many people to
afford to raise the money to purchase the house.

"So, with the 1950s rolling around, and federal programs made it
possible for a husband and wife to buy a house on their own, and
people now having money they couldn't spend because of the depression
and the war, a consumption boom exploded. Millions of people bought
"the American Dream," a house in the suburbs, two cars in the garage
and a stay-at-home wife who raised their 2.5 children.

"Actually, it wasn't too bad. An example someone gave was that in the
early 1950s, a man working in a steel mill made the equivalent, in
purchasing power, of someone in 1980 making about $90,000 a year. So
people did have significant income and prices weren't very expensive.
On the TV show Dragnet, Detective Gannon admits to Detective Friday
that he bought the house he owns, with a garage and a driveway, for
(presumably a mortgage of) $8,000 in 1967. Flash forward 40 years
later, and that same house in a good part of Los Angeles could
probably sell for $400,000. Hell, in a bad part of L.A. it could
probably sell for almost that much.

"So houses were affordable back in the 1950s and 1960s and it was
possible for ordinary people to buy them.

"In 1969, Bank of America developed the BankAmericard in which you
could purchase things and pay them off over time. United California
Bank, Bank of America's biggest competitor at the time, decided to
come out with a competing product which it licensed to other banks:
Master Charge. (Over time these would become known as Visa and
MasterCard.) Originally, you had to have a good job and good credit to
get credit cards; if you didn't, your friendly neighborhood ghetto
department store sold you junk and financed you at rates that, until
now, were basically just south of usury. Today you can get over-the-
phone loans from companies that advertise on TV at interest rates that
would embarrass a loan shark.

"During the 1980s, a combination of what some consider blunders by
Federal Reserve Chairman Paul Volker, plus actions which are agreed to
be blunders by Presidents Gerald Ford and Jimmy Carter, inflation and
interest rates went skyrocketing. In Ghost Busters one of the
characters points out he had to refinance his house to raise the money
to start their new business and the rate the bank demanded was 21%.
But a number of banks or savings and loans weren't so lucky and had
the amount they could charge restricted. In some cases, because of
federal mandated interest caps, someone could borrow money from a
bank, at say, 6% interest, and then purchase a Certificate of Deposit
(CD) or other investment from the same bank that it had to pay them
12% interest.

"One salvation for banks was those juicy checking accounts, which,
because of federal law, they were specifically forbidden to pay
interest on. At least, they were.

"In the 1980s, some banks which were state chartered discovered that
under their state's laws, they could, if they called them something
else, offer checking accounts that paid interest. So they developed a
type of account called a "Negotiable Order of Withdrawal," or N.O.W.
account. Since they weren't federally chartered, they could now
effectively pay interest on their checking NOW accounts. And they
could advertise for, and accept, depositors who wanted accounts and
were outside of the state they were chartered in.

"Federal banks screamed bloody murder; their deposits were flowing out
to these state chartered banks. Then someone got the bright idea they
could tie a savings account to a checking account in what was called a
"sweep account." The bank would move all of your money out of your
(non-interest bearing) checking account above $100 into your (interest
bearing) savings account. As you wrote a check and it was received by
the bank they would then transfer money back in blocks of $100 to
cover the checks you wrote. Once you had more than $100, they'd sweep
the money remaining above that back into your savings account.
Eventually the rule forbidding banks from paying interest on checking
accounts was scrapped, so sweep accounts were more-or-less eliminated.
(Except for people who have them to cover overdrafts.)

"So banks, wanting fees, and no longer having "free" money from non-
interest bearing checking accounts, started offering credit cards to
people who might not otherwise qualify, either because they already
had several credit cards, or because their income levels were too low
to justify having credit (in times when bankers had sanity). So now,
virtually anyone who had a pulse could easily get themselves into
crippling levels of debt, which they basically would be paying lots of
profitable interest to banks.

"Nowadays your average person has anywhere from six to ten credit
cards, and some people have upwards of five figures of very expensive
credit card debt.

"Up until the 1980s, people who worked for very large companies had a
pension plan. You contributed money to it and after a certain number
of years you would be guaranteed a pension for the rest of your life,
but only for your life; once you die, your pension ends unless it
includes some provision for your widow/widower. This is called a
"defined benefit" (DB) pension. It's how Social Security works; you
get a benefit for life, you can never outlive your pension but you
can't transfer it to your heirs when you die because it's not an asset
you own. I will repeat that. You do not own the money in your DB
pension.

"In the 1970s, the Penn Central Railroad went bankrupt, and a lot of
railroad employees had pensions that might not be paid, so Congress
created the Pension Benefit Guarantee Corporation (PBGC), so that if a
company offering a DB pension goes broke, the pensions will still be
paid, the way the FDIC protect bank depositors, the FSLIC protects
Savings and Loan depositors, and NCUA protects credit union
depositors, PBGC protects pension holders. Chrysler almost went
bankrupt and the prime reason that it got federal loan guarantees is
because its pensions were insured by the Pension Benefit Guarantee
Corporation; if Chrysler had gone under the underfunded pension
liabilities it owed might actually have bankrupted PBGC.

"When you hear about "underfunded pensions" they're referring to a
company that has not made enough contributions to its (DB) pension
plans to bring them up to the amount it's expected to pay out, based
on actuarial tables that estimate how many of their pensioners will
die and they stop paying them, e.g. if you're a man who is 60 years
old and you retire, it's estimated that you will live to be 75, so
whatever assets are in your pension plan have to be able to cover your
pension payments for 15 years. If he's 78 years old and retires, the
estimate might be he has two years to live, and so on. Average this
out over everyone in the plan, and you have an idea of how much money
you're going to have to pay out over the expected lifespan of the
employees enrolled in the plan. From this, figure out how much
interest you can earn from investing the money you have, plus
liquidating the assets from time to time, and you know how much money
has to be in the plan. If you can find ways to shorten people's
expected lifespan, increase the amount you're going to earn in
investments, or both, you can reduce the amount of money that the
company has to contribute to keep its pension fully funded. That's why
actuaries are one of the highest paid mathematical disciplines; a good
one can make (or save) a pension plan or insurance company millions.

"This sort of DB pension is expensive; in fact it's so expensive some
large companies got in trouble over it (Requiesiat en pace Penn
Central). With the competition from other countries where competitors
to American companies don't have such generous pension plans,
businesses had to find a cheaper way to do it.

"So businesses were allowed to change over to a new type of pension.
You as a potential pensioner would put money into it tax free, as
payroll deductions, and could withdraw when you retired. It was named
after the section of the tax code that created it: 401K. The company
could also contribute to your pension if it wanted to, but it didn't
have to. This type of pension is called a Defined Contribution or DC
pension.

"The difference is, you own the money in a DC pension. If you don't
spend it all before you die, you can will whatever is left to your
heirs. But unlike a DB pension, you can outlive it. You can use up all
of your DC pension and not have enough money left to live on. But a DC
pension is so much cheaper for an employer, that's basically the only
pension plan available except for Social Security, which is a very
expensive DB plan that is expected to go broke by 2025.

"But let's go back to all those houses built in the 1950s and later. A
lot of people lived in them for years, lived through the depression
and didn't get into buying things, and had paid off their mortgage;
this was a big thing, people would have a "burning the mortgage" party
where, they took the mortgage document stamped "paid in full" and
burned it in the fireplace; their home was theirs, all theirs. No more
mortgage payments. But not everyone had this luxury.

"For more than 100 years, in general, housing prices tended to go up
over time, so thanks to mortgage brokers, people started to see their
house as a form of "ATM machine," in which, as it became worth more,
they could refinance and draw off some of the money that they had
accumulated as equity (the difference between what the house could
conceivably sell for if it was placed on the market, and the amount
they owed on the mortgage (or mortgages)).

"This works fine as long as the market continues to go up, or you can
afford the new payments even if it doesn't. Well, with the purchase of
a third car, a pickup truck, an RV, a boat and/or a Jetski, a vacation
home, a pool in the back yard, taking vacations, plus credit card
debt, most people tended to spend more money than they make and didn't
save anything. They depended upon the estimate that their house would
sell for in the market place to be able to borrow money to finance
their lifestyle.

"Beyond that, all of that interest you paid on everything was tax
deductible. Then, President Reagan came along and changed things. The
federal tax on incomes, at high levels, theoretically could be more
than 80%. This encouraged rich people to hide income or get into "tax
shelters" in order to reduce how much they pay. He decided to cut the
actual maximum tax rate way down, to something like 30%, but a lot of
exemptions were eliminated. While the tax deductibility of mortgage
interest remained, almost all other interest payments stopped being
deductible.

"But that's okay, someone got the idea of creating the Home Equity
Line of Credit (HELOC) in which you got a credit card or a checkbook
and could use the equity in your house - again, "equity" means the
amount you owe on it subtracted from the estimate of what your house
would sell for on the open market - to pay off your credit cards, or
spend it on big ticket items. So some people still kept balances on
credit cards and used HELOCs for purchases. Interest paid on a HELOC
is generally tax deductible.

"Well, consider that a credit card is what is called unsecured debt,
if you don't pay your credit card, they have to sue you if they want
to collect. A HELOC is secured debt, if you don't pay it, they can
foreclose on your house to collect. They do not have to sue you; they
put your house up for auction on the courthouse steps, then proceed to
evict you. The process can be very fast; a bank or mortgage company
that follows the rules can have the property back and the former owner
evicted as quick as 5 or 6 months from the first missed payment.

"But again, it's not a problem as long as you can refinance. Real
estate prices always go up, right? It's been that way for over a
hundred years. Yes, over time real estate prices have gone up, but at
times they do go down, and sometimes they stay down, sometimes for
years.

"In the 1980s, oil prices collapsed and real estate prices in Texas
collapsed. Some say the collapse in prices was triggered by the S&L
Crisis. And maybe I'd better explain that, too.

"Some people got together and bought some small Savings and Loans,
then had their friends buy properties, use other friends to give an
inflated estimate as to the property value, and the Savings and Loan
would make a loan based on the inflated value. The S&L either raised
money by offering CDs with high interest rates, or borrowed from other
banks and savings and loans. Then if the property was defaulted, if
the S&L had too many bad loans, it went broke and the FSLIC (the
federal government agency that insured deposits in S&Ls) would end up
paying off the depositors. Most of the people involved got away with
it too; the joke at that time was if you wanted to rob a bank, you
were better off looting it, because armed robbery was a crime but
using your friends to loot a bank was likely to not be prosecuted.

"This was the "S&L Crisis," and it basically bankrupted the FSLIC.
Congress had to step in with $500 billion and the FDIC ended up
becoming the sole federal insurer for banks and savings and loans.
Some states still operated their own insurance systems, however.

"As far as the collapse of real estate prices in the 1980s in Texas is
concerned, it took over ten years for prices to climb back to what
they were. While it may have been the first place where prices
collapsed, it wasn't the last. If you were in a mortgage that was more
than your house was worth, and you were buried in debt and couldn't
afford it and couldn't refinance, you were in trouble. Deep trouble.

"Not all parts of the U.S. are the same. There might be huge demand
for houses in Las Vegas while lack of demand caused prices to fall in
Phoenix. Or people might be abandoning houses in Cincinnati in droves
(driving down prices), while the demand for houses continued to
skyrocket in San Francisco. One estimate is that the U.S. is not one
single economy, it's an integrated market of about 30 different
regional economies. I can testify to that; when a 2 bedroom home in
the Washington, D.C. suburbs was routinely selling for upwards of
$250,000, you could drive about 60 miles north to Baltimore, Maryland
or 70 miles south to Fredericksburg, Virginia and find the same kind
of house for less than $80,000.

"But this wasn't the only issue. Banks (and mortgage companies) were
still hungry for fees. Regular people who had houses already had their
own problems with their mortgages and might not be interested in
refinancing or might have kept their senses and didn't need to do so.
But then there were people who had bad credit scores, either they'd
not managed their credit cards properly, or had other problems, who
couldn't afford a regular mortgage but could afford one if the
interest rate was less.

"I'll mention "credit score" here. Fair, Isaac and Company developed
the "FICO" score; there are three national credit reporting companies
in the United States, all of them use it, some give it different
names. It's a secret mathematical formula in which how you pay your
bills and how much you owe is compared to people who always pay their
bills on time and other indications that you're a good borrower. Each
credit reporting company runs it differently so you might have a
perfect score at one reporting company and a lower score at another.
It ranges from a horrible 500 to a really good perfect 850; the higher
it is, the less you're going to pay in interest.

"Oh, Interest. If you're in the United States, and you have a mortgage
or a credit card where the interest rate can change, do you know who
sets the interest rate? If it's a federally insured mortgage, it's
based on what a government agency says it is. But if you have a non-
federally insured mortgage or a credit card, your interest rate is
what Dow Jones and Company says it is.

"All debts where you owe money where the interest rate can change, the
contract - whether it's a mortgage or the terms and conditions of your
credit card - uses a third-party to determine what the rate of
interest you are going to be charged is going to be. If your debt is
federally insured like an FHA loan, it has to use the current fed
funds rate which is what is being charged for loans. For everyone
else, the interest rate is whatever Dow Jones and Company lists on the
last day of the month of the Wall Street Journal. Remember that
sometime; Dow Jones & Company has just as much affect on what people's
interest rates will be as the Federal Reserve does when it raises or
lowers the fed funds rate.

"So people with bad (low) credit scores would be sold an adjustable
rate mortgage, with a rate much lower than normal for their score, but
it would "reset" after the second or third or fourth year, and could
reset any time interest rates changed. But, if you keep paying your
mortgage, what you owe goes down and as housing prices rise, what your
house is worth is a lower percentage of what you owe. This, of course,
ignores two things: your mortgage is 30 years long and it's paid for
under the "rule of 78."

"The rule of 78 works like this: let's say you loan someone money for
one year with the right to pay the loan off early, but you want to
make sure if they do pay you off early, most of their payments went
toward interest. So, in a 12-month year, they pay 12/78 of the
interest the first month of the loan, 11/78 of the interest the 2nd
month, 10/78 of the loan the 3rd month, and so on until they pay 1/78
of the interest on the 12th month, in addition to 1/12 of the
principal each month. Do this on a 360-month mortgage, and what
happens is, for the first three or four years, maybe 99% of your
payment is interest, and during the first 15 years, 90% or more of
your mortgage payment is interest.

"Let's make it simple, if you have a 30-year loan on a house with a
$200,000 mortgage, maybe your mortgage payments run $2000 a month, and
in two years, you've paid the bank or mortgage company $48,000 and
maybe $3000 of that is principal. You still owe $197,000. (Most people
are shocked to learn that, after 30 years, they will have paid three
times the amount they borrowed because 66% of what they paid went for
interest.)

"If your mortgage was 5%, and then resets because the rate has risen
to 7.5%, your payment is going to rise from $2,000 a month to $3,000 a
month. If you can afford the new payment, not a problem. If you can
refinance and get a new loan at the previous rate, not a problem
(which, if your credit score has improved, might be possible). If you
can't get a lower rate, but you can refinance to cover the difference
in cost, still not a problem. (Conceivably, in the future you'll have
a better job, will make more money and can afford a higher mortgage.)
If you can't refinance and can't afford the new rate, now you have a
problem.

"If your home is worth more than what you owe, it is possible you can
sell your current house, and move into a smaller and less expensive
house. But if you're in a down market, you might not be able to sell
your house except at a loss (it's overpriced), and you may have a
credit score that makes you ineligible to obtain financing for a new
place. Now you're in trouble.

"If you can't make your payments, you're in serious trouble. After 60
days of non-payments, you're in 'pre-foreclosure' and after 90, they
start to foreclose, which is a fancy name for repossessing your house.
Well, what you could do is, go bankrupt and go into court and the
court can change the terms of your loan, perhaps reduce your
principal.

"Enough people started doing that that the banks got the bankruptcy
laws changed so you can't do that for your first house. (Rich people
who have multiple houses who might need to go bankrupt later on got
the ability kept for the second and subsequent homes they owned.)
Those with money had a field day screwing around with the bankruptcy
laws to make them less favorable to the debtor and more favorable to
the guy who was owed money. Those of us who didn't have the money to
pay lobbyists to protect us got screwed.

"Well, anyway, since ordinary people weren't taking out mortgages, the
bankers and mortgage brokers starve if they don't develop fees, which
they make by closing loans. Ordinary people who had reasonable credit
would go to a bank and apply normally. People who had credit problems
might have trouble qualifying. So the finance people developed the
"low doc" (minimal documentation) and "no doc" (no documentation)
loans. "Documentation" means "proof of income." In short, if you had a
good credit rating, err I mean, a pulse, they'd loan you the money to
buy a house without you having proved you could afford the payments.
Sometimes referred to as "liars loans."

"Since there's more risk - these borrowers have lower credit scores -
which means the interest rate charged is higher, and since these loans
pay more interest, which means they're more profitable. So everybody
wins. The borrower gets a house they couldn't otherwise obtain, the
mortgage broker gets a fee for originating the mortgage, and the bank
or mortgage company gets a high rate of interest on the money they
loaned out.

"But where did the banks and mortgage companies get the money for
these new loans? They put bundles of loans into "packages", where,
say, 500 loans which average $250,000 amounts to $125,000,000 would be
sold to an investment broker, who might break the package up into
10,000 shares worth $12,500 and sell those. So everyone buys a piece
of risk, and everyone wins.

"As long as the majority of the borrowers can make their payments.
Which they can do as long as housing prices keep going up so they can
refinance, since when their loans reset, they probably can't afford
the new rate. So if they can't afford the loan, and can't refinance,
they're in trouble. Then their mortgage is foreclosed, and the bank
finds that the housing market has collapsed, and the house that has a
$200,000 mortgage might fetch $140,000. So now the bank who wrote up
the mortgage is out $60,000. Oh no, they're not. The investors who
bought the mortgage shares are out a piece of the $60,000. Which
investor(s) depends on whether the shares were a piece of all the
mortgages, or all and part of some of them. It might be that nobody
knows for sure who eats the $60,000.

"Some of those investors might be other American banks, and some might
be people or banks in other countries. And some of those mortgages
that have been defaulted on might not have been sold off.

"Well, in the U.S., banks do not loan their own money. They either
borrow it from other banks or they get it from depositors. But that's
not all; banks are allowed to create money out of thin air by a
practice called Fractional Reserve. It's like you put your furniture
in storage, and the storage company rents it out to someone else, and
while they're not using it, rents it to a third party. Not possible?
Guess again.

"U.S. Banks are required to deposit a portion of their assets with the
Federal Reserve and can loan out the difference. The portion they have
to deposit is called a reserve, it's used in case there's a run on the
bank, and also to cover checks their depositors write that get
deposited in other banks; I'll explain that part later. Well, let's
you and I open a bank with $1,000 between us. If there's a 5% reserve,
we have to deposit $50 with the Federal Reserve and can loan out $950.
That's how you might do it, but I'm smarter than that; I figured out a
way to legally loan out money we don't have, a practice that in other
industries would get you 3-5 in Baltimore's Supermax prison for fraud,
but perfectly legal as long as you're a bank.

"The Federal Reserve says that we (as a bank) have to put 5% of what
we are going to loan out in reserves. So, instead of putting in $50,
and loaning $950, I'll put in $500, which means I can now loan out
twenty times that much, or $10,000. So I loan that out by letting
people open checking accounts. If one depositor of mine gets a loan
for $3,000 and writes a check on his account for $2,000, and another
depositor of mine deposits that check for $2,000, I collect interest
on the $2,000 that the first depositor has "borrowed" from me. Then I
pay some of that interest to the depositor who put the money in his
account.

"My books (as a bank) still balance. I have assets consisting of the
$500 in cash, the $3,000 that the first depositor has has borrowed (of
which he has spent $2,000). On the other side of the ledger I have
liabilities of the $2000 that the second depositor has left in the
bank and the $1,000 the first depositor has left in the bank. And if
you wonder how I can call money someone has borrowed and spent an
asset, and money that someone that has placed on deposit with me a
liability, you might start to understand why banks get into trouble.

"Just realize, this works all over town, if people write checks on my
bank, and then other people deposit those checks back into my bank, I
haven't had to pay any money. As long as I don't have to actually
convert the loans into real money, I can keep doing this all day long,
and collect interest on money that doesn't really exist. (Sweet deal,
isn't it?)

"Now let's say that one of my borrowers writes a check to a depositor
at another bank. What happens is, that bank goes to the Federal
Reserve and presents it to them; the Fed gives them part of the
reserve I have on deposit to match the amount of the check, and
reduces my reserve. They give the check to me and I reduce the
depositor's account, and I give them the cancelled check back. (Or I
used to before Check 2000; now I just send you a picture of the
check). If I take checks deposited from that bank, the reverse happens
and if everything clears, it may end up a wash, neither bank has to
pay the other. In any case, as long as my reserve is at least 5% of
the amount I have outstanding as loans I've issued, I'm okay.
Otherwise I have to bring my reserve back up to that 5%.

"It can get weirder, in which, in some cases, I can actually put some
of those fictional deposits up as reserve and increase the amount I
can loan still further; even I don't understand all of it. Basically
through what are called "multipliers" the amount loaned out can be
more than twenty times the amount of reserves.

"It's only when I have problems getting my loans paid or have to
foreclose. Because, remember, I only really have 5% of the money I
actually loaned out; the rest was created out of thin air, and that
money has actually been spent on houses. (Or on factories,
construction of office buildings, cars, boats and fur coats, or all
the other things people borrow money for, but remember, I want to keep
it simple so it's easy to understand.)

"This is the classic fatal scheme of "borrowing short and lending
long." The money which has been loaned out is on 30-year mortgages but
the deposits are due either immediately (for checking accounts) or
short term (90 days to five years). If too many people want "real"
money or I have too many defaults so that my reserve drops below 5%,
then I (as the bank) am in trouble.

"So take the one foreclosure where the bank has taken a $60,000
haircut (loss) and multiply it by 1000, and even a large bank might
not be able to bring their reserves up to cover that $60,000,000. So
this bank is now "bankrupt." If the public discovers this, they start
going to the bank en masse to withdraw their deposits before there is
no money left. That's where a "run on the bank" occurs. If the bank
decides to close before a run happens, there's a notice on the door,
then the next morning there's an announcement that the bank has been
placed in receivership. Which means the FDIC has to cover the bank for
the amount of deposits which are insured. In some cases, instead of
paying off all of the losses, the bank which has gone broke is taken
over by another bank that hasn't gone broke. Usually done over the
weekend because typically the bank is closed.

"This is why you'll often notice that a bank closes on Friday, there's
an announcement that the bank was taken over, and Monday morning your
friendly neighborhood "Bank of Your Town" changes its name and has a
sign over the door saying "Yourtown Branch, Eighth National Bank."
Bank Of Your Town went broke, the FDIC has sold the assets to the
other bank and now it's just another one of thousands of branches of
Eighth National Bank. What will then happen is that the new bank
(Eighth National) will negotiate with the FDIC over what loans it will
accept and which the FDIC will have to buy back from the (dead) Bank
of Your Town.

"If the bank that went broke is really bad, then the FDIC has no
choice, it liquidates the bankrupt bank, pays off the depositors,
sells the loans that haven't been foreclosed on to other banks, and
forecloses on the loans that have gone bad. That's when you get a new
set of coupons for your car loan because your loan held by Bank of
Your Town has been sold to Bank of Some Other Town. You make your
payments on time so your loan is one of those that has been sold.

"But if too many banks have loans that have to be foreclosed upon
("bad paper") then even the FDIC is going to be in trouble. Remember,
the FSLIC went belly up when the S&L crisis happened. But there were
forewarnings. A small savings and loan in Maryland named Old Home
Savings went broke. It wasn't insured by the FSLIC, it was insured by
a Maryland state agency. It basically bankrupted the state-operated
insurer and the State of Maryland - in other words, the taxpayers of
Maryland - had to pick up the tab. After a similar incident broke
Rhode Island's bank insurance agency, the states got out of that
business, and now all banks and savings and loans are federally
insured.

"So now there are a lot of banks who are in trouble because of bad
loans that they may have to foreclose on, which could reduce their
reserves and leave them with insufficient assets. With a fall in
housing prices, those assets are now worth less. Plus, the banks need
to liquidate them fast (remember, they have to restore their reserves
to the 5% level, they need the money as soon as possible), so they may
have to take even further losses. (When you have to sell something in
a hurry, you don't have the luxury of time and it costs you money.)

"Well, thanks to Congress, when those loans go bad, banks can sell
them to the government. That's what the money is for. So now, if you
can't make your payment, a federal agency now owns your mortgage. And
a number of things can happen. First, they can foreclose, (or if it's
already foreclosed) and sell your property, same as the bank did, and
if, as in the example I cited above, the federal government takes the
$60,000 loss instead of the bank.

"Or, if the loan isn't foreclosed, they might change the terms of your
loan so now you can afford it. They may allow you to refinance it.
This is the only scenario where the government doesn't lose any money
or might conceivably make money off the deal.

"Or they might conceivably ''forgive'' your mortgage, and ''give'' you
your house. They may put some kind of name on this where very low
income people get foregiveness on their debt. Habitat for Humanity
does something this, but people have to work for it by providing free
labor on the house built for them and others, and they still have a
mortgage they have to make payments on.

"Don't be surprised of the idea of the government simply "giving"
people loans they end up not having to pay them back, there are some
programs where people were given huge loans to go to school, and in
exchange for being a doctor in some poorly served area in the U.S.,
like Alaska or other rural areas for a few years and setting up a
practice, (and charging people for medical services), the government
canceled their loan without their having to pay it. Their debt was
forgiven in exchange for taking a slot in a rural area for a while.
And sometimes home loans are used as bribes incentives to get people
to work as teachers or other low-pay jobs in some locations.

"And now you know why Congress had to create that huge bailout, so
that the banks which have spent all that money don't drop below their
reserve requirements (and can continue to make new loans). (A cynic
might add, "and continue to pay huge CEO salaries"). And maybe you
understand why this happened, and can understand why it will probably
happen again.

"Not to mention, we (as individuals) in the United States now have
lots more credit card debt, very little savings, a DC pension plan
that can go broke before we die (if you've chosen to contribute to a
401K, a lot of people don't), and a Social Security DB pension plan
that probably will go bankrupt before we die, means that we can expect
to see more troubles like this in the future.

"There's one small point of hope in this mess. Credit unions are not
insured by the FDIC, they are still insured by the NCUA. We've never
had the kind of messes at credit unions that banks and savings and
loans got into. Maybe it's because credit unions tend to be small,
they're non profit (all profits have to go back to the members), and
they tend to be involved in local issues. So they know their
customers, don't really have an incentive to take on a lot of risk,
and are more familiar with whom they deal with, and as a result,
credit unions have never had this kind of scandal that required bail
outs.

"Or, if you're a pessimist, you could say they've never had one yet."

"Paul's show returns tomorrow where he will discuss..."

She heard the radio shut off and the door to the basement open.  She
saw him coming  down the stairs.  He approached her, smiling, as he
got back into bed. He got on top of her, forced her legs apart, and
aimed for her crotch.

As he entered her, she screamed out in agony, most of it muffled by
the gag which covered her 19-year-old body as the man rammed his dick
in-and-out of her 19-year-old virgin pussy, to his delight as he felt
himself slice through her hymen and deliciously slide pleasurably
inside her very tight snatch.   He pounded her mercilessly as she
cried and strugged, which was even more pleasurable to him.

He gave a grunt as he came and poured his molten heat into her, then
rolled off her and went back upstairs.

----

So you get the point here.  I've, in theory, been able to post
something which might constitute obscenity.  But because it contains
an important article about a topical subject, it clearly rises above
the level of what otherwise would be obscene, because it has material
that has "redeeming social value."

Now, if I wanted to make it seem more like child pornography, I change
the age of the victim to 14.

So, if you do this sort of thing, you get the ability to sneak a work
that might be considered obscene into the class of works that aren't
obscene.  In my case, I'm doing the exact opposite; I'm sneaking an
article basically about finance into a sexually-oriented newsgroup and
making it relevant.

-- 
Pursuant to the Berne Convention, this work is copyright with all rights
reserved by its author unless explicitly indicated.
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