What Caused the Economic Crisis? What is So Powerful About the letters "C & D & S" & Whither Y-O-U & Bank of America NOW?

C D S. Three little letters - which are the acronym for Credit Default Swaps. In the hands of very dangerous, self-serving men.

CDS are like an insurance contract, where the purchaser buys "insurance" that a company won't go out of business from a seller. If the company stays in business, the purchaser pays premiums to the seller, but if the company goes belly up, the seller has to pay the face value of the CDS "policy".

Yes, Warren Buffett said they were “Weapons of Mass Destruction” in 2003. And he would have known. He got as far away from those businesses as his investment steeds would carry him.

Former Federal Reserve Chairman Alan Greenspan - after being one of their biggest cheerleaders - now says they are dangerous.

CDS's have been credited with bringing down Bear Stearns, AIG and other giant financial companies. But were three little letters really the culprit for what brought us this worldwide financial crisis? Alexander Floum says what's dangerous about them is that they allow "the financial players to pretend that they had less risk, less stretched-too-thin leverage, and more stability then they really did." And is this part of the debacle now in check?

Not exactly . . . Credit default swaps continue to bring down large companies, partly because they make it less likely that the companies can restructure. And one of the main reasons that banks have been hoarding the bailout money instead of lending to consumers it because of CDS. Wall Street firms and banks have been hoarding cash. As the Financial Times wrote on October 7th: Banks are hoarding cash in expectation of pay-outs on up to $400bn (£230bn) of defaulted credit derivatives linked to Lehman Brothers and other institutions, according to analysts and -dealers. . . . Massive positions are just starting to be unwound in the Credit Default Swaps market as tens of billions of dollars worth of these contracts are now getting settled in the aftermath of several high-profile flops. Banks are hoarding cash in expectation of expected payouts on anywhere from $200 Billion to $1 Trillion – no one knows the amount, adding to volatility – for defaulted credit derivatives linked to the collapse of Lehman Brothers, the government’s seizure of mortgage giants Fannie Mae and Freddie Mac, the government’s rescue of American International Group, and the failure of Washington Mutual. And guess where most of the AIG bailout went? Yup - to corporations which bought CDS from AIG. $13 billion dollars worth of the bailout money paid to AIG went to Goldman Sachs for CDS contracts. $40 billion dollars worth of AIG's bailout money (and see this) went to foreign banks for CDS contracts. (Even AIG's former chief said that the government used AIG "to funnel money to other institutions, including foreign banks"). Unless something is done to change things, taxpayers may have to continue shelling out bailout money to keep bailing out CDS contract-holders.

And have the regulators brought this situation under control so that it can't continue causing financial damage indefinitely?

Unfortunately, regulators have so far caved into lobbying pressure from those in the CDS industry, and have failed to take any decisive action to reign CDS in.

In Newsweek we read (and if Newsweek says this without fear of retribution, how much power do you think these guys have solidified already?):

Major Wall Street players are digging in against fundamental changes. And while it clearly wants to install serious supervision, the Obama administration—along with other key authorities like the New York Fed—appears willing to stand back while Wall Street resurrects much of the ultracomplex global trading system that helped lead to the worst financial collapse since the Depression. At issue is whether trading in credit default swaps and other derivatives—and the giant, too-big-to-fail firms that traded them—will be allowed to dominate the financial landscape again once the crisis passes. As things look now, that is likely to happen. And the firms may soon be recapitalized and have a lot more sway in Washington—all of it courtesy of their supporters in the Obama administration... The financial industry isn't leaving anything to chance, however. One sign of a newly assertive Wall Street emerged recently when a bevy of bailed-out firms, including Citigroup, JPMorgan and Goldman Sachs, formed a new lobby calling itself the Coalition for Business Finance Reform. Its goal: to stand against heavy regulation of "over-the-counter" derivatives, in other words customized contracts that are traded off an exchange . . . . Geithner's new rules would allow the over-the-counter market to boom again, orchestrated by global giants that will continue to be "too big to fail" (they may have to be rescued again someday, in other words). And most of it will still occur largely out of sight of regulated exchanges... The old culture is reasserting itself with a vengeance. All of which runs up against the advice now being dispensed by many of the experts who were most prescient about the crash and its causes—the outsiders, in other words, as opposed to the insiders who are still running the show.

So, three little very powerful letters (and their promulgators) still rule over a weak, unorganized and relatively out-of-financial-luck electorate. With this situation continuing unchecked, you can bet on a deepening economic crisis with recovery being put off many more years in the future for those at the bottom of the payout pyramid. Thank you Mr. and Ms. Lobbyists (who must already live on secure, secret islands). And speaking of those who don't worry about living among the taxpaying masses:

Bank of America 'forced to conceal' Merrill rescue facts Pressure from Fed and Treasury chiefs to complete purchase of Merrill Lynch despite 'staggering' losses . . . Ken Lewis's position at the helm of Bank of America looked increasingly uncertain on Thursday after it emerged he stopped short of pulling out of the deal to buy loss-making Merrill Lynch after Treasury Secretary Hank Paulson threatened to oust him and his entire board. Mr Lewis BoA's chairman and chief executive, also knowingly hid the state of Merrill Lynch's "staggering" losses from shareholders at the behest of former Treasury Secretary Paulson and Federal Reserve chairman Ben Bernanke. The revelations were contained in a batch of BoA board minutes and testimony from Mr Lewis and Mr Paulson sent by New York Attorney General Andrew Cuomo to the Securities and Exchange Commission and Congressional leaders Chris Dodd and Barney Frank. Mr Cuomo, who released details of the exchanges yesterday, has been investigating BoA after Merrill paid $3.6bn (£2.45bn) of bonuses to its staff just days before the acquisition was completed on January 1. He believes he has uncovered "facts that raise questions about the transparency" of the Treasury's $700bn bank bail-out programme "as well as about corporate governance and disclosure practices at Bank of America." Investors have already expressed serious concern that BoA did not attempt to pull out of the merger with Merrill, given the investment bank racked up losses of $15.84bn in the fourth quarter of 2008. The loss required BoA to take on an extra $20bn of Treasury funding as well as an $118bn loan-loss guarantee. The documents paint all three men in a bad light. Mr Lewis, though initially keen to pull out of the Merrill deal after revealing the extent of what he calls the "staggering amount of deterioration in its finances," claimed he caved in after being threatened by Mr Paulson on December 21, ten days before the sale was due to complete. "That makes it simple. Let's deescalate," Mr Lewis told Mr Paulson, with reference to his original plan to invoke a Material Adverse Clause (MAC) to get out of the Merrill deal. Mr Paulson later testified to Mr Cuomo that he only threatened Mr Lewis "at the request of Chairman Bernanke." As part of his testimony, Mr Lewis claimed that he was told by the two men not to disclose that he had considered invoking the MAC, and admitted that over the short term BoA shareholders were being asked to shoulder some of the damage from the Merrill losses. At a later board meeting, on December 30, the BoA board stressed it was not influenced by the threat of removal and that it was only going along with the government's requests because of "serious concerns regarding the status of the US financial services system" were it to pull out of the Merrill deal. The disclosures will provide investors already seeking to oust Mr Lewis at next week's annual general meeting on April 29 extra ammunition. A BoA spokesman said: "We believe we acted legally and appropriately with regard to the Merrill Lynch transaction."

Dr. Michael Hudson informs us that "The Financial Barbarians" are already "at the Gate." You are making a mistake if you don't click on the link above. Self defense you know. Suzan ________________________

Offshore Tax Havens Scandal Makes New York Times Coverage (Finally!)

If you've noticed and been following the developments concerning the much-needed publicization of the political/economic issue noted on the left column of my site entitled "Offshore Tax Havens' Scandals Ensured Bailout B/Tr/illions (See Citigroup/Rubin Resignation)," you will not be surprised at what received the top editorial placement in The New York Times this morning. Of course, it's only become reaaaaalllly necessary to research this phenomena now since Obama "stole" the Presidency from its real owners as it's just one more thing that's Obama's fault.

Senate investigators estimate that Americans who hide assets in offshore bank accounts are failing to pay about $100 billion a year in taxes. In good times, that’s grossly unfair and bad for the country. In times like these, it should be intolerable. The government not only needs the money, but closing down such tax scams is essential for President Obama’s rescue effort to retain public support and credibility. Some of the banks at the center of the global financial meltdown are prominent purveyors of evasion services. UBS of Switzerland has acknowledged that as of Sept. 30, it held about 47,000 secret accounts for Americans. It has refused to disclose the names of all but a tiny number of the account holders, arguing that it would be a breach of Swiss law. But last month — after UBS got caught soliciting business in the United States — it admitted to breaking federal law by helping Americans hide assets, and the bank agreed to pay $780 million in fines and restitution. The United States Treasury isn’t the only one being shorted. The Tax Justice Network, a research and advocacy organization, estimates $11.5 trillion in assets from around the world are hidden in offshore havens.

My first thoughts about Bernie Madoff - someone who is being allowed to plead guilty to something that may not have really existed at all (that hard-to-discern Ponzi scheme) - seem to be coming online now . . . but I won't go on about this yet . . . although I do remember mentioning the phrase "due diligence" many months ago when first writing about that catchall term "Ponzi scheme." Joe Nocera, who thinks Madoff's only accomplices were his victims, has very little sympathy (and no empathy at all) for the suckers:

People did abdicate responsibility — and now, rather than face that fact, many of them are blaming the government for not, in effect, saving them from themselves. Indeed, what you discover when you talk to victims is that they harbor an anger toward the S.E.C. that is as deep or deeper than the anger they feel toward Mr. Madoff. There is a powerful sense that because the agency was asleep at the switch, they have been doubly victimized. And they want the government to do something about it. . . And yet, just about anybody who actually took the time to kick the tires of Mr. Madoff’s operation tended to run in the other direction. James R. Hedges IV, who runs an advisory firm called LJH Global Investments, says that in 1997 he spent two hours asking Mr. Madoff basic questions about his operation. “The explanation of his strategy, the consistency of his returns, the way he withheld information — it was a very clear set of warning signs,” said Mr. Hedges. When you look at the list of Madoff victims, it contains a lot of high-profile names — but almost no serious institutional investors or endowments. They insist on knowing the kind of information Mr. Madoff refused to supply. I suppose you could argue that most of Mr. Madoff’s direct investors lacked the ability or the financial sophistication of someone like Mr. Hedges. But it shouldn’t have mattered. Isn’t the first lesson of personal finance that you should never put all your money with one person or one fund? Even if you think your money manager is “God”? Diversification has many virtues; one of them is that you won’t lose everything if one of your money managers turns out to be a crook. “These were people with a fair amount of money, and most of them sought no professional advice,” said Bruce C. Greenwald, who teaches value investing at the Graduate School of Business at Columbia University. “It’s like trying to do your own dentistry.” Mr. Hedges said, “It is a real lesson that people cannot abdicate personal responsibility when it comes to their personal finances.” And that’s the point. People did abdicate responsibility — and now, rather than face that fact, many of them are blaming the government for not, in effect, saving them from themselves. Indeed, what you discover when you talk to victims is that they harbor an anger toward the S.E.C. that is as deep or deeper than the anger they feel toward Mr. Madoff. There is a powerful sense that because the agency was asleep at the switch, they have been doubly victimized. And they want the government to do something about it. I spoke, for instance, to Phyllis Molchatsky, who lost $1.7 million with Mr. Madoff — and is now suing the S.E.C. to recoup her losses, on the grounds the agency was so negligent it should be forced to pony up. Her story is sure to rouse sympathy — Mr. Madoff was recommended to her by her broker as a safe place to put her money, and she felt virtuous making 9 or 10 percent a year when others were reaching for the stars. The failure of the S.E.C., she told me, “is a double slap in the face.” And she felt the government owed her. Her lawyer, who represents several dozen Madoff victims, told me he “wouldn’t be averse” to a victims’ fund. Even Mr. Wiesel thought the government should help the victims — or at least the charitable institutions among them. “The government should come and say, ‘We bailed out so many others, we can bail you out, and when you will do better, you can give us back the money,’ ” he said at the Portfolio event. But why? What happened to the victims of Bernard Madoff is terrible. But every day in this country, people lose money due to financial fraud or negligence. Innocent investors who bought stock in Enron lost millions when that company turned out to be a fraud; nobody made them whole. Half a dozen Ponzi schemes have been discovered since Mr. Madoff was arrested in December. People lose it all because they start a company that turns out to be misguided, or because they do something that is risky, hoping to hit the jackpot. Taxpayers don’t bail them out, and they shouldn’t start now. Did the S.E.C. foul up? You bet. But that doesn’t mean the investors themselves are off the hook. Investors blaming the S.E.C. for their decision to give every last penny to Bernie Madoff is like a child blaming his mother for letting him start a fight while she wasn’t looking.

Should we let out a big "Hurrah" for Andrew Cuomo (our newest savior to emerge bigtime from the latest (to be exposed) financial gambit/fiasco?)?

Just how much of a secret are Merrill Lynch’s bonus numbers? As secret as, say, the recipe for Carvel’s ice cream? That was the comparison that Bank of America’s lawyers made Friday morning in a New York courtroom, as they tried to persuade a judge to let them keep private the investment bank’s information about its top-earning employees. The lawyers compared the legal battle over the pay data — which Andrew M. Cuomo, the attorney general of New York, is seeking as part of an investigation — to a lawsuit involving the secret formula for Carvel’s famous desserts, according to an audio feed of the testimony from the Courtroom View Network. In 1979, the New York State Supreme Court ruled that Carvel did not need to turn its secret formula over to the New York State attorney general’s office, which was investigating restraint-of-trade allegations at Carvel. But lawyers for Mr. Cuomo’s office weren’t buying the ice-cream argument. Speaking in court on Friday, they said that, unlike in the Carvel matter, pay scales aren’t a trade secret. They also argued that investment banks routinely call bankers at competing firms and ask about their compensation, in hopes of offering them a better package to encourage them to jump ship. “Bank of America top executives have acknowledged that they themselves get their competitors’ information,” said Eric O. Corngold, Mr. Cuomo’s executive deputy attorney general for economic justice. “Are they admitting that they themselves are taking trade secrets improperly?” Mr. Cuomo’s office is demanding the names of Merrill’s 200 most highly paid employees, as part of an investigation into Bank of America’s acquisition of Merrill. Merrill employees were collectively given billions of dollars in bonuses shortly before its sale to Bank of America closed. Around the same time, Bank of America learned that Merrill’s fourth-quarter loss would be much larger than expected, and the shortfall forced BofA to go to the government to seek more financial aid. Among other things, Mr. Cuomo has alleged that Merrill misled Congress about the timing of the bonuses. As part of his investigation, Mr. Cuomo’s office has interviewed Kenneth D. Lewis, Bank of America’s chief executive; John Finnegan, the chief executive of Chubb, who headed Merrill’s compensation committee; and John A. Thain, Merrill’s former chief executive. Bank of America has tried to prevent the names from being made public, arguing that it would cause the company “grave harm,” making it easier for rivals to poach employees and invading workers’ privacy.

And then we have my boy lollipop, Scott Ritter, divulging secrets again, that Obama

needs to learn the truth about Iran, and about the proposed missile defense system in Europe. This truth would be inconvenient, but it would also liberate him to develop meaningful solutions to serious problems in a manner that avoids a repeat of his embarrassing "Grand Bargain" gambit with Russia, trying to trade nothing for nothing in an effort to certify something for nothing.

Yum. Yum. And finally, another savior - Eric Margolis wants us to stay on our toes as he tells Obama

The American Rome Is Burning - So Let's Attack Iran Now, as the United States fights for its economic life, the Iran question and its alleged nuclear weapons program have again become an issue of major contention. Officials in the Obama administration and the media issued a blizzard of contradictory claims over Iran's alleged nuclear threat, leaving us wondering: who is really charge of U.S. foreign policy? This awkward question was underlined during a visit to Washington by British Prime Minister Gordon Brown. Britain is supposed to be America's most important ally and partner in their 'special relationship.' Brown's reception was dismal and Obama's obvious lack of interest in Britain's leader was quite embarrassing. The British media slammed America's cold reception as an 'insult,' and claimed that Brown had been treated like the leader of a 'minor African state.' White House aides excused the huge diplomatic faux pas by claiming President Obama was worn out from dealing with the financial and economic crisis. I'm sure he is worn out, but this still does not bode well for the conduct of US foreign policy. Much of the uproar over Iran's so-far non-existent nuclear weapons must be seen as part of efforts by neoconservatives to thwart President Obama's proposition to open Tehran and to keep up the pressure for an American attack on Iran. Israel's government and its American supporters insist Iran has secret nuclear weapons program that the West has not yet detected. We heard the same claims about Iraq before 2003. Israel certainly knows about covert nuclear programs, having run one of the world's largest and most productive ones.

I guess this is what passes for change now? Suzan __________________________