Monday, September 29, 2008

Bank Job - "BAIL OUT" NOW! ! ! ! ! ! ! ! ! ! ! ! ! (Black Monday/Tuesday)

Watching late-night public TV has been surreal. The BBC had announcers for what is probably the most important story of the century, who seemed not to understand the economic consequences of what they were reading, and no idea as to how to give the developments the significance that even they knew they must find some way to connote the harsh implications of (and I had always thought better of them than that (I don't know why right now though)). And the final blow (at this most important moment in TV coverage) from "Charlie Rose" was his having Al Hunt, who has been exposed during the Presidential debate cycle as just one more ex-liberal/progressive/whatever-is-not-really-a-Rethugli-Con who became at least a "fellow traveler" (as the McCarthyites of the 50's used to call progressives whose politics were slightly left of center) - who Charlie said he asked in because Al knew the people in D.C. - being questioned as though he had more than a thimbleful of knowledge about markets and banking. I think of Al now as just a little bit to the left of that self-proclaimed moderate good-ole-boy Tim Russert, he of the self-serving Cheney interviews whenever the administration needed that extra lift when they were caught red-handed with the dirty laundry. So Charlie had clueless Al (who thought the bill would pass until it didn't) for his inside expert. Floyd Norris, chief financial correspondent of The New York Times and The International Herald Tribune seemed a bit more knowledgeable, but also unbelievably a lately-come-aboard-the-reality-express reporter as he talked of what he deemed the "mistake of letting Lehman go down because it was looked at as not being as important as other institutions," and thereby letting the money market funds go under with it (an international banking confidence killer which led to the later debacle in the Asian markets), and that "the creditors of Bear Stearns were taken care of, but not the stockholders - giving the public the message that the people at the bottom" had been abandoned. But not one word was mentioned laying this at the feet of Paulson and Bernanke. Tell me again what type people are asked on these shows to comment? I tend to get a little confused trying to remember what the premise had been for their presence in this mediocre (lovefest) press chat. The smartest thing Al Hunt said was that John McCain had damaged himself "because of his erratic behavior" in the days before the vote, and that "this might hurt his Presidential run" as it belied his ability to handle this most serious situation; also that "Bush was not a factor in this at all" as even the "Texas representatives voted against the bailout." Both Charlie and Al agreed that it wasn't any one part of the Paulson plan that deemed it a failure, but "a darker fear" on the part of the citizens who registered their doubts. Gee, ya think? (At all?) Norris, a supposedly knowledgeable and well-educated writer, finally mentioned the fact offhandedly that the "entire shadow financial system was allowed to grow up without regulation in the name of 'free enterprise,' which brought all this trouble - 'reaping the whirlwind'" and that the message "'you bail me out or I'll destroy your economy' is offensive to a lot of people, although it is probably true." (Could you cram another cliché in there?) I couldn't believe that he then used the analogy of "If you jump out the third floor window, will you make it? I can't prove that you won't, but do you want to risk it?" After which he then noted that foreign sovereign funds had lost money by investing in American banks previously, and that this lack of bailout passage did not urge them to do so again. The most interesting item in Norris' reporting was "The markets were down this morning when we thought it (the bailout) would pass, and that we are in a time of deleveraging and who is going to buy?" Paulson's plan to buy the debts with public money was the answer to this problem. But, Norris said, "The market is stunned, scared . . . the banks are scared, and they've gotten a number of politicians like Newt Gingrich" to agree that they should change the way they "mark" their assets in order to "hide the bad news from the public" so they can still be viable. Great insider conversation? Or obvious factoid known to everyone by now? With great on-the-site reporting like this, it's no wonder the average American is so well-informed. Charlie Rose (who pretends to understand everything, except economics) says (essentially) that he has no idea what is happening but wants to ask everyone he's ever known if they do. Then Charlie, who at the end of the show looks like a man who has lost a lot of money in the shuffle and is terminally confused, changes the subject by using a previously taped interview, from before the current market crash, with Dexter Filkins, a correspondent for The New York Times and author of The Forever War. Unfortunately for viewers who have actually followed (closely) what has happened in the last two years (since the so-called surge), Dexter wants to tell us how marvelously "things have changed" for the neighborhoods in Baghdad (as a result of the surge). When he, in the next breath, begins to seriously relate the facts about all the Iraqis that are now on the American payroll, it's hard to piece the initial breathlessness together with the head-lowering seriousity of the facts "on the ground" (as they say). He finally admits that the peace is "fragile" and that "for $300/month we are paying even many ex-Al Qaeda," for many months now, to keep the peace - a fragile peace. "Sunnis and Shiites want the Americans to stay" he says. Nice that everyone's mouthing Cheney's arguments now, isn't it? And they probably won't continue to be paid if the Americans leave soon, so the U.S. must stay. His book, by the way, is dedicated to Americans and an Iraqi who were killed in the wars, which I guess let's us know he's a little bit more serious than he sounds about the price of the current victory. Then we get more talk about his excitement over how "things are totally calm now!" He even told about a 3-mile-long wall, which was built by the U.S. forces (Halliburton?) in a Shiite enclave, victims of ethnic cleansing by the Sunnis, that now had Shiite families returning due to the paid-off Iraqis guarding it. Like this is a positive thing. And the American troops, carrying around M16's and killing people almost every day, who were in Junior High when the war started. If you wonder where the rest of your money is going/has gone, pay attention to his story about how the Iraqi troops pass out money and pamphlets every time their HumVee stops in a crowd of people who feel they've been mistreated (or blown apart?). On a less pleasant note we have the news update that Nancy Pelosi's blow up (after it became apparent that the bailout wasn't going to get enough Rethugli-Con votes for passage) proved that the Democrats in Congress were not properly prepared or politically wise enough to be able to craft a plan that could be sold to the Rethugs (or even a few moderate independents (or regular Dems?)). For myself, the (probably apocryphal) story about the taxpayer calls coming in to the Congressional offices as being 50% "No," and 50% "Hell, No!" was perfectly apt. The rest of the news:

The Dow Jones industrials plunged 777 points, the most ever for a single day. In London, one man approached about his view of the situation remarked logically "The cupboard is bare. . . . If you pay yourself far more than anyone else does and you get in trouble, prepare to lose it."
From BBC World News (11:30 PM EDT) we heard that the Asian stock market is being battered black and blue (down 4 - 5%), weaker commodity prices, short-selling ban by Taiwanese stock market (which reminds me that the short-selling ban on the NYSE is supposed to be lifted tomorrow - shades of Black Tuesday returning?). No Asian banks were in crisis though (not like in the U.S. anyway) as they are all pretty much healthy and in very good shape (wonder why?). Mitsubishi paid $9 Billion for a 21% stake of Morgan Stanley Chase.

UK Mortgage lender Bradford & Bingley confirmed Monday it is to become the second bank nationalized by the British government since the financial crisis began. In a deal hammered out with Spanish bank Santander, B&B was being taken into public ownership after uncertainty over its future prompted savers to withdraw "tens of millions of pounds." British Finance Minister Alistair Darling said B&B assets were sold to Santander's Abbey division for just over £600 million pounds, or about $1.1 billion.

Wachovia sold $2.1 Billion worth of its banking operations to Citigroup "making the Charlotte-based bank the latest casualty of the widening global financial crisis. In addition to assuming $53 billion worth of debt, Citigroup will absorb up to $42 billion of losses from Wachovia's $312 billion loan portfolio, with the Federal Deposit Insurance Corp. agreeing to cover any remaining losses. Citigroup also will issue $12 billion in preferred stock and warrants to the FDIC. The remainder of Wachovia will include its asset management, retail brokerage and certain select parts of its wealth management businesses, including the Evergreen and Wachovia Securities franchises. It will continue to be a public company under the Wachovia name."

Iceland's third largest bank was nationalized. _________________________________________ Our friend, Mike Whitney, reports that "House and Global Investors Vote 'No' on Paulson Bailout: Black Monday?" (and finally, we find out "Why?"). (Emphasis marks are mine.)
Today the US House rejected Treasury Secretary Paulson's $700 billion Emergency Economic Stabilization Act of 2008. Paulson said he has the votes, but Paulson was wrong. The House bucked the Paulson's claim that buying up the illiquid mortgage-backed assets from the nation's banks would be enough to save the financial system from an impending meltdown. The jury remains out on that question, too. Professor Nouriel Roubini, chairman of Roubini Global Economics, summed it up like this, "You're not resolving the two fundamental issues: You still have to recapitalize the banking system, and household debt is going to stay high". A large number of economists believe Roubini is right. The bill would not solve the underlying problems. There is a crisis. The banking system is undercapitalized, the credit markets are frozen, and foreign creditors are beginning to slow their purchases of US debt. It's all bad. At the same time the number of casualties among the financial giants--Bear Stearns, Indymac, AIG, Lehman, Washington Mutual--continues to grow. Three more struggling European banks were added to the list of financial institutions that needed emergency government assistance this past weekend. It's no wonder Congress feels like they have to do something to stop the bleeding. . . . Paulson's bill was designed to avert a system-wide crash by clearing the banks' balance sheets so they could resume extending credit to consumers and businesses. The hope was that massive infusion of capital would "turn back the clock" to the happy days of low interest speculation and bubble economics. Paulson is a "one trick pony" who firmly adheres to the belief that wealth creation depends on maximum leverage and an ever-weakening currency. But that world view is no longer applicable after reaching Peak Credit, where consumers are no longer able to make the interest payments on their loans and businesses and financial institutions are forced to curb their spending and dump their toxic assets at firesale prices. The system is deleveraging and nothing can stop it. Paulson has yet to accept the new reality. Besides, there was no guarantee that the banks would use the money in the way that Paulson imagines. As one Wall Street veteran explained to me, "I don't see one penny of that $700 billion ending up helping the broader economy. I see it being used to prop up share prices so the insiders can salvage as much as possible when dumping their shares". Indeed, the $700 billion is just part of a massive "pump and dump" scheme engineered with the tacit approval of the US Treasury and the Federal Reserve. Once the banksters have offloaded their fraudulent securities and crappy paper on Uncle Sam, they will do whatever they need to do pad the bottom line and drive their stocks up. That means they will shovel capital into hard assets, foreign currencies, gold, interest rate swaps, carry trade swindles, and Swiss bank accounts. The notion that they will recapitalize so they can provide loans to US consumers and businesses in a slumping economy is a pipedream. The US is headed into its worst recession in 60 years. The housing market is crashing, securitzation is kaput, and the broader economy is drifting towards the reef. The banks are not going to waste their time trying to revive a moribund US market where consumers and businesses are already tapped out. No way; it's on to greener pastures. They'll move their capital wherever they think they can maximize their profits. In fact, a sizable portion of the $700 billion will likely be invested in commodities, which means that we'll see another round of hyperbolic speculation in food and energy futures pushing food and fuel prices into the stratosphere. Ironically, the taxpayers’ largesse will be used against them, making a bad situation even worse. Then again, if a rehabbed bill isn't passed, no one can predict with certainty what will happen.
Read the rest of this scintillating essay here. _______________________________________________ Even before the bailout was flushed, Michael Hudson had dissected the shill down to its core in "The Big Bank Job: The Insanity of the $700 Billion Giveaway." (Emphasis marks and some editing are mine.)

The banksters’ plan now is for icing on the cake – to take Mr. Paulson’s $700 billion and run. It’s not a “bailout of the financial system.” It’s a giveaway – to insiders, to sell out all their bad bets. Companies across the board will get rid of their bad mortgages, and also their bad car loans, furniture time payments, credit-card loans, student loans – all the debts that any competent actuary could have told them never could have been paid in the first place. This is not what Treasury Secretary Paulson is acknowledging, and shame on him for it. Last Friday, Sept. 26, he was joined by Fed Chairman Ben Bernanke singing in unison an advertising jingle for America’s new kleptocracy that rings so false that Congress and the American public must hear the off-notes. London’s Financial Times, as well as a host of Europeans realize it. That is what has been driving the dollar’s exchange rate this week. It seems easier for foreigners to recognize the threat to turn American democracy into a rapacious kleptocracy. This change always is sudden, arranged under emergency conditions. Those with a 12-year memory will see George Bush as playing the role of Boris Yeltsin in Russia in 1996, paying off his campaign contributors by giving them all the economic surplus that the government could expropriate in the notorious “loans for shares” plan applauded and supported by Clinton Treasury Secretary (and current Obama advisor) Robert Rubin. (The moral: do we have a Putin in our near future to lock in the anti-democratic coup?) How ironic all this is! Back in the 1970s there was theorizing that the Russian and American economies were converging. The idea was that both were moving toward more centralized state control, state financing, state subsidy, and a military-industrial complex. Nobody expected the convergence to occur Yeltsin-style in government giveaways to insiders to create a new group of financial billionaires – the “seven bankers” under Yeltsin in 1996, and Mr. Paulson’s Crony Capitalist gang today. Let’s look at the euphemisms as an exercise in doublethink. Mr. Paulson defended his “troubled asset relief program” (TARP) by claiming that “illiquid mortgage assets … have lost value … choking off the flow of credit that is so vitally important to our economy.” The credit that is “so vitally important” has taken the form of bad loans. Contra Mr. Paulson’s pretense, the problem is not that they are “illiquid.” If that were the problem, it would be merely temporary. The Federal Reserve banks are designed to provide liquidity – on good collateral, of course. As Financial Times columnist Martin Wolf noted on Wednesday, Sept. 24, the problem is that the face value of mortgage loans and a raft of other bad loans far exceeds current market prices or prices that are likely to be realized this year, next year or the year after that. They are packaged (as)what the financial press rightly calls “toxic.” The bailout is not efficient, he writes, “because it can only deal with insolvency by buying bad assets at far above their true value, thereby guaranteeing big losses for taxpayers and providing an open-ended bail-out to the most irresponsible investors.” “The simplest way to recapitalize institutions,” he concludes, is “by forcing them to raise equity and halt dividends. If that did not work, there could be forced conversions of debt into equity. The attraction of debt-equity swaps is that they would create losses for creditors, which are essential for the long-run health of any financial system.” This is the key: if debts cannot be paid, then creditors must take losses. These bad loans are toxic because they can only be sold at a loss – if at all, because foreign investors no longer trust the U.S. investment bankers or money managers to be honest. That is the problem that Congress is not willing to come out and face. Many of these loans are outright fraudulent. And they are being sold by crooks. Crooks who work for banks. Crooks who use accounting fraud – such as the fraud that led to the firing of Maurice Greenberg at A.I.G. and his counterparts at Fannie Mae, Freddie Mac and other companies engaging in Enron-type accounting. Pinochet and Thatcher: Friedmanite predatory capitalists who ruthlessly implemented “free market” economic policies. This is not what the magic of compound interest promised. But it is where it had to end up, with mathematical inevitability. It was an advertising come-on for Wall Street money managers and promoters of “pension-fund capitalism” (or “peoples’ capitalism” as it was called in Chile by the Chicago Boys working for General Pinochet’s murderous regime, and Margaret Thatcher’s Conservatives in England). The promise is that if people consign these funds to individuals who make much, much more than they do, but have the survival-of-the-fittest advantage of being much, much more greedy, they will receive a perpetual doubling of interest. That is how retirements for American workers are still supposed to be paid – by magic, not by direct investment. Prospective retirees are supposed to ensure a good life by investing savings in loans to corporate raiders who fire, lay off, downsize and outsource these very workers. The trick is to persuade employees to hand retirement funding over to financial managers whose idea was to make money off the economy by extracting interest and dividends off workers, homeowners and companies being bought on debt leverage. In the final analysis it is debt leverage by itself that is supposed to fuel capital gains. This has led to madness. The maddest solution of all would be for the government to give the extractive financial sector even more money – funds that no private lenders have been willing to provide, not even vulture funds. No private firm has been able to discover what Mr. Paulson and the unfortunate Mr. Bernanke are sanctimoniously promising: that a viable deal, even an almost money-making one, can be made by buying junk now and waiting for “the economy” to make it good. Just what is “the economy” that is supposed to perform this remarkable feat, if not its mortgage debtors and corporate debtors? The government is to do what law enforcement officials have moved to prevent Countrywide Financial and other predatory lenders from doing: squeezing exploding Adjustable Rate Mortgages and “negative equity” mortgages out of debtors, on terms that often were bait-and-switch to begin with. Private companies could be challenged and their array of penalty fees thrown out of court. But perhaps Congress can craft a law imposing these harsh terms on voters. It is not as if we live in a system where people vote their self-interest. Promises that “taxpayers” will be able to recover a large part of this money are a fiction. If there were a hope of recovering this money, then investors abroad – foreign buyout funds, foreign banks, foreign sovereign wealth funds – would have been willing to buy Bear Stearns, Lehman Brothers, A.I.G. and other companies at some price. But they wouldn’t touch this at any price. Why then should the U.S. Treasury pay three times as much as the Iraq War for money that will end up being lost after paying off the gamblers from their own bad bets. These are the bankers who already have placed all the risk onto their clients and, by lobbying to rewrite the bankruptcy laws, onto debtors. As matters now stand, the $700 billion is to be used to finance this year’s annual bonuses, this year’s million-dollar salaries and sales commission, and to contribute yet more to the retirement funds for the golden parachutes that financial managers have siphoned off to provide a safety net for themselves. So we are back to the basic motto these days: “You only have to make a fortune once in a lifetime.” Now is the time to make these fortunes as big as they’re going to get. Because it’s all down hill from here. Why the banks won’t lend Here’s why the government giveaway logic is fallacious: It’s a giveaway, not a bailout. A bailout is designed to keep the boat afloat. But the existing Wall Street boat crafted by the investment bankers seeking to unload their junk must sink. The question as it sinks is simply who will be able to grab the lifeboats, and who drowns. Super Imperialism by Michael Hudson There is a reason why the banks won’t lend: Housing and commercial real estate already are so heavily mortgaged that there is no rental value available (over and above operating expenses, current taxes and debt service) to pledge to the banks. It still costs more to buy a house than to rent it. No increase in the amount of credit, short of hyper-inflation can cure this. No lowering of interest rate, will lead banks to risk making a bad new loan – that is, a loan that probably will go bad and end up with the bank taking a loss after the borrower walks away or defaults. Does Congress know what it is being told to do? Suppose that “taxpayers” are to squeeze money out of the “toxic” junk mortgages they buy from the investors that have bought these bad loans. The only way to do so would be for real estate prices to be raised to even higher levels. This means an even higher proportion of take-home pay by prospective homeowners. Mr. Paulson realizes this. That’s why he’s directed Fannie Mae and Freddie Mac to inflate real estate prices all the more. At least, by the existing mortgage-holders to get paid off by existing debtors selling to the proverbial “greater fool.” The hope in Mr. Paulson’s plan is that there are enough “greater fools” with enough money to borrow from yet more foolish new mortgage lenders. Only Fannie Mae, Freddie Mac and the Federal Housing Agency are willing to make such foolish loans, and that is only because they are being directed to act in a foolish way by Mr. Paulson.

Read even more here. Crossing our fingers it's not also Black Tuesday. Suzan

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