Who's Buying This Cooked Market? Crooks, Computers, and the Coming Crash

I certainly respect Obama's ability to speak softly and try to work with those across the aisle (although I wish his big stick were more in evidence on the health care finance reform bill), but I become more and more concerned every day.

I know you've thought of this recently, but Graham Summers has done more than merely think about it (he's documented it). I'll admit that most of this compendium was already known to me (as the facts were published in a timely manner (or maybe not)).

Only one thought occurs now though "Whom to trust?"

Hank Paulson, Tim Geithner, banksters, traders or my growing sense of really needing to move? (And what's happened to the Rude Pundit's blog today?)

As stocks continued to rally into September, one has to ask one’s self, “just who’s buying this rally?” The answer? Computers and no one else. I’ve written extensively about the computer trading programs thatare dominating this market. All told, High Frequency Trading Programs (HFTP) control 70% of trading volume on the NYSE. However, at this point, five stocks (yes only five) account for 40% of the trading volume on the market. Those five stocks: Citigroup, CIT Group, Fannie Mae, Freddie Mac, and AIG. Think about that, five stocks out of several thousand, are accounting for 40% of ALL trading. And which five are they? Five that are virtually guaranteed to be propped up by the government in one way or another (CIT indirectly through Goldman and other government-aligned groups). This summates today’s market like nothing else: folks are ONLY trading the investments that they know are on life support from the government. That metaphor extends to the entire economy. Nearly 20% of incomes come from the government. More than 34 million Americans are on food stamps. This will continue. The government will extend unemployment and every other short-term “fix” it can. But it won’t do ANYTHING to create real job growth. The life support metaphor extends to the financial system as well. The Fed has extended TRILLIONS to support virtually everything out there. Here’s a brief list of some of the more major items: The Federal Reserve cutting interest rates from 5.25-0.25% (Sept ’07-today) Bear Stearns/the Fed taking on $30 billion in junk mortgages (March ’08)

The Fed opens up various lending windows to investment banks (March ’08)

The SEC proposes banning short-selling on financial stocks (July ’08)

Hank Paulson uses the blank check with Fannie/Freddie spending $400 billion in the process (Sept ’08).

The Fed takes over insurance company AIG (Sept ’08) for $85 billion.

The Fed doles out $25 billion for the auto makers (Sept ’08)

The Feds kick off the $700 billion Troubled Assets Relief Program (TARP) with the Government taking stakes in private banks (Oct ’08)

The Fed offers to buy commercial paper (non-bank debt) from non-financial firms (Oct ’08)

The Fed offers $540 billion to backstop money market funds (Oct ’08)

The Feds agree to back up to $280 billion of Citigroup’s liabilities (Oct ’08).

$40 billion more to AIG (Nov ’08)

Feds agree to back up $140 billion of Bank of America’s liabilities (Jan ’09)

Obama’s $787 Billion Stimulus (Jan ’09)

Fed announces its plans to buy $300 billion of Treasuries (Mar ’09)

Most if not ALL major banks, the stock market, the debt market, and more are on Fed life support right now in one form or another. Take this life support away, and you have a full-scale collapse. I’m talking about 300 on the S&P 500 and 3,000 on the Dow.

And what a life support it is:

Please read the rest if you have the time. Suzan _____________________

"Paulson's Stunning Use of Federal Power"

I'm not happy with the information we are receiving from the MSM and others who have reported on the U.S. government's actions regarding where the ultimate responsibility lies for the Fannie Mae/Freddy Mac debacle (if they bothered to do so at all). It seems to me that this has become just another in a long line of unexpected financial events, stemming from the deregulation madness brought by Congressional Rethuglicans gone wild that taxpayers are supposed to think is only one more "nothing to see here, move along" occurrence - a regular part of the business cycle (or at least what has happened to the business cycle under Rethuglican Congressional control). The fishiest part this time is that taxpayers, who have been expected to accept with great humility questionable business/accounting practices for over a decade now (or much longer if you are old enough to remember the financial chicanery that began in the early 1980's during Reagan's tender embrace and has extended through both Bushes and Clinton), have begun to notice that the chickens have found themselves a roost in the taxpayers' savings, as there is no other way to define what happens when the taxpayers have to pick up the bills (and make them good) for the risk taking gone bad of their betters: the financial movers and shakers (remember Phil Gramm recently deigning to call anyone complaining about this loss of purchasing power "whiners?"). (Emphasis marks and some editing are mine.) Steven Pearlstein reports for The Washington Post his view of what it means and why the Treasury has purchased the mortgage-backed securities of Fannie Mae and Freddie Mac with "a tidal surge of federal cash . . . . changing the landscape of housing finance in America."

Secretary Henry M. Paulson Jr. has taken responsibility for assuring that low-interest loans will continue to flow into the country's hard-hit housing markets. Not since the early days of the Roosevelt administration, at the depth of the Great Depression, has the government taken such a direct role in the workings of the financial system. Although the details of yesterday's takeover are complex, the rationale is quite simple: to restore some semblance of normalcy to the housing market. Paulson and other policymakers think that until that happens, neither financial markets nor the wider economy will be able to regain their footing. Fannie and Freddie did not go gently into conservatorship. Although their access to badly needed equity capital had dried up and their borrowing costs had increased, they had hoped that they could muddle through by raising fees and demanding higher interest rates from borrowers. But that plan was cut short when Paulson, backed by Fed Chairman Ben Bernanke and their newly empowered regulator, James Lockhart, concluded that Fannie and Freddie could no longer reconcile their sometimes-conflicting obligations to shareholders and homeowners without posing additional risks to an already shaken financial system. . . . . . . . Under the deal they could not refuse, Fannie and Freddie directors and top executives will lose their jobs. Shareholders will lose their dividends, voting rights and most of their ownership stake, while agreeing to pay dearly for the government's money and backing. Left unharmed will be holders of trillions of dollars in Fannie and Freddie debt - or securities backed by mortgages that Fannie and Freddie have insured against default - who will get all their money back, with interest. In figuring out where all this goes, it is useful to understand how we got to this point. Until this weekend, Fannie and Freddie have been unique entities - for-profit, shareholder-owned companies that were required by government charters to provide low-cost capital to secondary mortgage markets in good times and bad. And for most of the past 40 years, the companies have managed to balance those missions fairly successfully. Shareholders have earned a better-than-average return on their investment, while homeowners have had access to mortgages that not only have lower rates than in other countries, but rates that they can lock in for up to 30 years. But in the mid-1990s, things began to change. Rather than being satisfied with modest growth, Fannie and then Freddie began promising Wall Street double-digit earnings growth, which required them to grow their balance sheets well beyond what was necessary to assure liquidity in the mortgage market. Instead of just buying mortgages, insuring them and selling them in packages to investors, they bought more of them for their own portfolios, using ever-increasing amounts of borrowed money. Buying their own securities was profitable, but it left them highly exposed if anything went really wrong with the housing market, which is exactly what has happened. By 2005, however, Fannie and Freddie found they were losing market share to private competitors offering new, highly profitable mortgage products that they had generally ignored - variable-rate mortgages to homeowners with poor credit histories who offered little or no documentation and borrowed more than 80 percent of the estimated value of their property. To varying degrees, Fannie and Freddie decided to jump into these markets, both by insuring and packaging these mortgages and keeping some of them on their own books. That decision, too, has now come back to haunt them. It is fair to blame Fannie and Freddie executives for these misjudgments, although they were no more misguided than others in the industry. Some of the blame also goes to Fannie and Freddie's regulators - both Lockhart and his predecessor - who failed to use their limited powers to rein in the companies' growth. . . . . . . . It will now take several years at least for Fannie and Freddie to dig out of their financial holes, even with the infusion of taxpayer money. But that will not resolve the long-standing question of whether a for-profit company with some sort of government backing is the best way to assure a steady flow of low-cost capital to the housing markets. The crisis reminds us that, left on its own, the private sector will over-invest when the housing market is hot and then abandon the market when boom turns to bust. That's why Fannie and Freddie were invented, and why keeping them afloat now is crucial. But the lesson from the recent debacle is that if we are going to rely on government to bail out private entities, then government ought to have a much stronger hand in making sure a rescue is never needed.

- - - - - - - Meanwhile, back at the ranch, Sarah Palin continues to avoid all serious questions about her truthiness quotient as she skulks under "the protective bubble of the" non-"Straight Talk Express." And does she know "that in the days prior to Roe v. Wade, being an unwed mother was not publicly acceptable?" Perhaps someone should explain to her that:

Only since the women’s movement and the availability of legal abortion has the terrible stigma that was unmarried motherhood been eased, if not erased. As an advisory group to the Carter administration found, the only alternative to abortion in cases of unwanted pregnancy was motherhood, suicide or madness. Suicide was not uncommon in the face of disgrace, family shunning and abandonment. Many women died from back alley or self-inflicted abortions, and even more were maimed. Anti-abortionists only began embracing “fallen women” when they became rare due to safe, legal abortion.

- - - - - - - And I may be sorry that I am quoting this article from This Can't Be Happening's web site, but it certainly seems to present some solid reporting based on what we know of recent events.

According to reporting in the latest edition of the National Enquirer, a paper routinely maligned as a grocery-store scandal sheet, but actually boasting a skilled investigative reporting team that, as the New York Times admits, makes what passes for investigative reporting these days at most corporate media shops look like bad jokes . . . Palin sought to cover up, perhaps even from John McCain, her 17-year-old daughter’s pregnancy until after she was safely nominated. Her plan, says the Enquirer, which spoke to acquaintances and neighbors in Palin’s hometown of Wasilla, Alaska, had been to get through the convention, then get daughter Bristol married off to the infant-to-be’s father, 18-year-old Levi Johnston, and only then disclose the pregnancy. That devious scheme was reportedly scotched by Bristol, who the Enquirer reports was “at war” with her mother over the idea of a politically motivated shotgun wedding. According to the Enquirer, it was that paper’s disclosure to both Palin and the parents of Johnston, that it was ready to publish the pregnancy story, that led Palin to break the bombshell news about the pregnancy ahead of her nomination — a move that left the McCain campaign embarrassed and exposed to ridicule over its obvious haste and undeniable lack of any vetting of its vice presidential nominee. Why should we care about this domestic melodrama? Because, besides revealing the casualness with which the 72-year-old, health-impaired McCain is willing to treat the job of picking his alternate and likely mid-term successor, it reveals the deceptiveness and the inhumane, ruthless fanaticism of Palin, a candidate who is trying to market herself to voters as “Everymom.” Few real moms or dads in their right mind would try to force a 17-year-old daughter and an 18-year-old boy to get married, simply because they had accidentally conceived a baby. All the odds predict that such parentally imposed pairings are doomed to failure, with much unnecessary trauma and psychic damage to both kids and to their future child along the way. Is Palin afraid her fellow believers on the religious Right would condemn her if her daughter were allowed to bear her child as a single parent? Is she afraid the child would be a (gasp) “bastard”? This kind of religious fanaticism, in which the welfare of young children is run roughshod over for the sake of biblical correctness, has been evident and roundly condemned by Americans when practiced in Taliban-run Afghanistan, or Wahabi-run Saudi Arabia, where women don’t get any choices about their futures. We don’t need it coming from the White House.

Suzan

Woes Afflicting Mortgage Giants Raise Loan Rates

It seems to me that articles like this one are not being promoted by the MSM as they should be. (Wonder why?) I think anyone would agree that it's just a good self-defense policy to at least start reading about the economic catastrophes (especially in the housing market) that have befallen us in the U.S., but the guy who's getting ready to lose his house already knows this. It's the ones who will suffer the consequences of the increased loan rates who may not quite recognize the efficacy of such yet. Unfortunately, I can't help thinking that when you read deeply enough into these reports you might start to believe that it all sounds like funny-money shuffling (and the clamor of the money printing plants echoes in the background). (Emphasis marks are mine.) And don't forget the concurrent catastrophe afflicting banks that has only made itself clear to the people residing at the bottom of the pyramid with the recent write-downs from Wachovia, Washington Mutual and Bank of America (and the many others upcoming). Read about it here. My vote for best two paragraphs go to the following:

Kenneth D. Lewis, the chief executive of Bank of America, insisted this week that the industry was turning the corner, after his company reported a mere 41 percent drop in profit. Many investors seem to see signs of hope in red ink that once would have shocked them. But it has now been a year since the credit crisis erupted, and, so far, the optimists have been proven wrong time and again. Skeptics say it could take years for banks to recover from the worst financial crisis since the Depression. And even when things do improve, the pessimists maintain, banks’ profits will be a fraction of what they were before.

__________________________________________

Woes Afflicting Mortgage Giants Raise Loan Rates By Vikas Bajaj July 23, 2008 Mortgage rates are rising because of the troubles at the loan finance giants Fannie Mae and Freddie Mac, threatening to deal another blow to the faltering housing market. Even as policy makers rushed to support the two companies, home loan rates approached their highest levels in five years. The average interest rate for 30-year fixed-rate mortgages rose to 6.71 percent on Tuesday, from 6.44 percent on Friday, according to HSH Associates, a publisher of consumer rates. The average rate for so-called jumbo loans, which cannot be sold to Fannie Mae and Freddie Mac, was 7.8 percent, the highest since December 2000. Loan rates are rising because of concern in the financial markets about the future of Fannie Mae and Freddie Mac, which own or guarantee nearly half of the nation’s $12 trillion mortgage market. The federal government has proposed a rescue, and has urged Congress to approve it quickly. But bond investors, worried that the companies may not be as big a support to the market as they have been, are driving up interest rates on securities backed by home loans. That added cost is being passed on to consumers through the mortgage markets. For a $400,000 loan, the increase in 30-year rates in the last few days would add $71 to a monthly bill, or $852 a year. The rise in rates is of greatest concern for homeowners whose mortgages required them to pay only the interest on their loans for the first few years. If such borrowers are unable to refinance into lower-cost loans, many of them will face the prospect of having to pay both interest and principal at higher, adjustable rates. For borrowers with a $400,000 loan, such a jump could send their monthly payments to $2,338 from $1,417, estimates Louis S. Barnes, a mortgage broker at Boulder West Financial in Boulder, Colo. While mortgage rates approached these levels earlier this year and in 2007 during times of stress in the financial markets, the latest move adds urgency to the government’s efforts to restore confidence in Fannie Mae and Freddie Mac. Lawmakers are expected to vote this week on a measure that would give the Treasury Department authority to lend more money to the companies and buy shares in them if they falter. The uncertainty surrounding the two companies is the latest in a series of pressures bearing down on the housing market and the broader economy. Higher interest rates make it harder and more expensive to refinance existing debts and to buy homes. “When we get to rate levels like this, the market just shuts down,” Mr. Barnes said. While mortgage rates remain relatively low by historical standards, they are higher than what homeowners and the economy became accustomed to during the recent housing boom. Lending standards have also tightened significantly in the last 12 months, and many popular loans are no longer available. A government report based on data on Fannie Mae and Freddie Mac loans said on Tuesday that home prices fell 4.8 percent in May from a year earlier. That compared to a 4.6 percent decline in April. Other home price indexes that track a broader set of loans show much bigger declines. Worries about Fannie Mae and Freddie Mac have led to weaker demand for securities backed by home mortgages, analysts say. Inflation, which tends to send bond prices down and bond rates up, is another concern. In a securities filing released on Friday, Freddie Mac suggested that it might have to pare or slow the growth of its mortgage portfolio to bolster its capital. Freddie and Fannie together own about $1.5 trillion in mortgage securities and home loans, and they guarantee an additional $3.7 trillion in securities held by other investors. The companies had a combined net worth of $55 billion as of March. Analysts and critics say the companies need significantly more capital to cushion the blow of growing losses on the more-risky mortgages made during the boom. Important players in the mortgage market for decades, the two companies have become even more vital in the last year as several large lenders have gone out of business and investors have lost confidence in mortgage securities that are not backed by the government, or by Fannie or Freddie. This year, the regulator overseeing the companies gave them more leeway to use their capital and the companies responded by increasing their portfolios. Freddie’s holdings grew 6.9 percent in the first five months of the year from the end of 2007; Fannie’s portfolio increased 1.8 percent. But now it appears the companies, particularly Freddie Mac, might have to slow their purchases of mortgage securities. In its filing, Freddie Mac said it aims to increase its portfolio by a total of 10 percent in 2008. A spokeswoman for Fannie Mae declined to comment on its plans. “That’s one of the ways in which the agencies can increase capital, by slowing down their purchases,” said Derrick Wulf, a bond portfolio manager at Dwight Asset Management. “I don’t think the market expects a dramatic slowdown in purchases but there clearly is uncertainty about that.” Mortgage rates have been driven up in part by a rise in the yield on Treasury notes and bonds. On Tuesday, bond prices, which move in the opposite direction of the yields, slumped after the president of the Federal Reserve Bank of Philadelphia, Charles I. Plosser, said the central bank might need to raise interest rates to combat inflation “sooner rather than later.” Some analysts say the rise in mortgage rates can be explained by technical factors in the bond market that are forcing mortgage companies and banks to sell securities to manage their portfolios. These analysts add that at current prices the mortgage securities guaranteed by Fannie and Freddie should be attractive to investors. Mortgage bonds backed by Fannie Mae, for instance, are trading at a 2.1 percentage point premium to the 10-year Treasury note, up from 1.8 points on July 14. “I don’t see how anyone could argue that the fundamentals of mortgages are not attractive,” said Matthew J. Jozoff, an analyst at JPMorgan. In March, for instance, mortgage rates surged after some big investors were forced to sell billions in mortgage bonds. But rates fell back slowly in the spring after the selling pressure eased and other investors, including Freddie Mac and Fannie Mae, made big purchases. This time, the coming Congressional vote on the Treasury plan to support the companies could help allay investors’ fears, said W. Scott Simon, a managing director at Pimco Advisors, the giant bond fund firm, which owns mortgage securities. “It will go a long way toward reviving demand.”

Suzan _____________________________________

Housing Scandal(s)

I read on another blog that Henry Paulson's (Treasury Secretary) son John made millions off the housing catastrophe (subprime fiasco). And, of course, no one's asking them to repay the taxpayers. Wonder why? (Jest kiddin'!) Also, only in blogtopia is anyone questioning the wisdom of not nationalizing these entities entirely, therefore safeguarding the public's payouts. As if this article from The New York Times isn't bad enough, be sure to check the first comment that runs under it. Right. That's spelled with a "tr" not a "b." (Emphasis marks are mine.)

Cost of Loan Bailout, if Needed, Could Be $25 Billion Tuesday 22 July 2008 David M. Herszenhorn, The New York Times Washington - The proposed government rescue of the nation's two mortgage finance giants will appear on the federal budget as a $25 billion cost to taxpayers, the independent Congressional Budget Office said on Tuesday even though officials conceded that there was no way of really knowing what, if anything, a bailout would cost. The budget office said there was a better than even chance that the rescue package would not be needed before the end of 2009 and would not cost taxpayers any money. But the office also estimated a 5 percent chance that the mortgage companies, Fannie Mae and Freddie Mac, could lose $100 billion, which would cost taxpayers far more than $25 billion. The House is expected to act this week on housing legislation that includes the proposed rescue plan. Legislative language has been finalized, but the Congressional Budget Office said its estimates were based on the plan by the Treasury Department and that it did not expect significant changes in the final bill. According to the estimate, which was delivered in the form of a letter to the House Budget Committee chairman, Representative John M. Spratt Jr., Democrat of South Carolina, the director of the budget office, Peter R. Orszag, predicted that "a significant chance, probably better than 50 percent, that the proposed new Treasury authority would not be used before it expired at the end of December 2009." Mr. Orszag, at a briefing with reporters, acknowledged that pinpointing the eventual cost of the package was impossible. "There is very significant uncertainty involved here," he said. The uncertainty runs in both directions, with some government officials and market analysts suggesting that Fannie Mae and Freddie Mac are fundamentally sound and will perform well over the long-term. Others, including some private equity managers, are pessimistic and predict heavy losses. The rescue plan, put forward last week by the Treasury secretary, Henry M. Paulson Jr., would allow the Treasury Department to spend hundreds of billions of dollars to shore up the mortgage companies should they be at risk of collapse, either by extending credit or by purchasing equity in the companies, which are publicly traded. Mr. Orszag said that the analysis by his office did not distinguish between the different forms of aid that might be offered - a credit line or a stock purchase - and that the analysis showed no short-term potential financial benefit for taxpayers even if Fannie Mae and Freddie Mac perform well. But he said the analysis found substantial risk for taxpayers if the companies had steep losses and would not say if his office had analyzed the implications of a full government takeover of the companies. How much the government will end up spending on a rescue, if one is needed, would depend on many factors, he said, including sentiment on Wall Street. "A key question becomes how does the market view the entities?" he said. Fannie Mae and Freddie Mac are commonly referred to as government-sponsored entities, because of the long implicit guarantee that the federal government would step in to save them if they were ever in danger of collapse. One thing that is certain as a result of the rescue proposal is that the guarantee of government aid is now much more explicit, and Mr. Orszag said that the government's assurance that it would not let the companies fail would have to be included in any analysis of their long-term financial prospects. Most immediately, the $25 billion cost estimate provides a precise amount that Congress will have to offset with spending cuts or tax increases if lawmakers intend to comply with "pay as you go" budget rules in the House. Lawmakers could also decide that the $25 billion should be viewed as emergency spending and simply added to the national debt. There was little immediate reaction to the projections on Capitol Hill as lawmakers and staff members reviewed the complicated calculations and the various assumptions they were based on. Mr. Spratt, the chairman of the Budget Committee, issued a statement praising the Congressional Budget Office for moving quickly to produce its analysis. "Estimating the fiscal impact of this proposal is complex and involves considerable uncertainty," Mr. Spratt said. "And not everyone will necessarily agree with every aspect of C.B.O.'s analysis." But he added: "C.B.O. is performing its important institutional role by providing in a timely manner its best professional and independent assessment." The analysis by the Congressional Budget Office also offered a sobering assessment of the mortgage giants based on several different metrics. Under generally accepted accounting principals, Mr. Orszag said that the net worth of the mortgage giants at the end of the first quarter of 2008 was about $55 billion. He also said that the companies held more than $80 billion in capital at the end of March and for regulatory purposes were considered to be "adequately capitalized" by the Department of Housing and Urban Development. But on a fair value basis, the value of the mortgage companies' assets exceeded their liabilities at the end of March by just $7 billion, a thin cushion considering liabilities at the time of $1.6 trillion, and an indication of why there have been numerous calls for the companies to raise additional capital. Mr. Orszag also noted that on July 11, before the Bush administration proposed its rescue plan, the total value of shares in Fannie Mae and Freddie Mac had fallen to a low of $11 billion. Shares in the companies are now worth about $20 billion. The House is expected to vote on the larger package of housing legislation, including the rescue plan for the mortgage companies, as early as Wednesday, and the Senate is expected to quickly follow and send the bill to President Bush. Among the issues that lawmakers have been debating is whether to exempt from the federal debt limit any expenditure that the Treasury Department makes on behalf of the mortgage companies. The current debt limit is $9.815 trillion and outstanding federal debt is roughly $9.5 trillion, leaving a cushion of $310 billion. Congressional Democrats have expressed opposition to exempting the rescue plan from the debt limit, saying administration officials should come back to Congress for emergency authorization if additional spending is needed. Officials said it was probable that a compromise would be reached and the debt limit would still apply. The housing legislation also includes the creation of a regulator for the mortgage companies, an agency apart from the Department of Housing and Urban Development, which oversees the mortgage giants. Some critics have questioned whether the new regulator would have sufficient authority to swiftly increase capital requirements - the amount of cash that the mortgage companies need to maintain to protect against losses. In his letter to Mr. Spratt, Mr. Orszag suggested that simply enacting the proposed rescue plan could bolster the confidence of Wall Street in Fannie Mae and Freddie Mac. "Private markets might be sufficiently reassured to provide the GSE's with adequate capital to continue operations without any infusion of funds from the Treasury," he wrote. "during that time, it is possible that expectations about the duration and depth of the housing market downturn may brighten." But Mr. Orszag said his office had also consulted with market investors with a different outlook. "Many analysis and traders believe there is a significant likelihood that conditions in the housing and financial markets could deteriorate more than already reflected on the GSEs' balance sheets," he wrote, "and such continuing problems would increase the probability that this new authority would have to be used." Taking into account all of the different possibilities and sentiments, and measuring them against the budget "scorekeeping" rules, Mr. Orszag said his office had concluded "that the expected value of the federal budgetary cost from enacting this proposal would be $25 billion over fiscal years 2009 and 2010." _______________________________ First commenter: These loss assumptions are ridiculous! Fannie and Freddie own outright or guaranty close to 50% of all 10 trillion US$ of outstanding US residential mortgages. One just has to look at the balance sheet increase (or increase in mortgage exposure) over the last 5 years. These mortgages represent the biggest risk since they have the lowest standards and represent bubble prices. Most likely home prices will fall back to at least the 2000 level over the next 2-3 years. Fannie and Freddies losses will easily reach 1 trillion US$ before this is over. Mark my words!!! Another commenter: It is insanity to bail out these inflationary cesspools. Any thought of a recovery is completely ridiculous until after all of these non producing, criminal 'banks' and corporations are reduced to their true value, which is pennies to the dollar.

Susan

Wall Street's Great Deflation

Here's Bill Greider's astute take in The Nation on exactly what is happening in today's financial markets. (Emphasis marks are mine.) Wall Street's Great Deflation William Greider 07/14/2008 Phil Gramm, the senator-banker who until recently advised John McCain's campaign, did get it right about a "nation of whiners," but he misidentified the faint-hearted. It's not the people or even the politicians. It is Wall Street--the financial titans and big-money bankers, the most important investors and worldwide creditors who are scared witless by events. These folks are in full-flight panic and screaming for mercy from Washington, Their cries were answered by the massive federal bailout of Fannie Mae and Freddy Mac, the endangered mortgage companies. When the monied interests whined, they made themselves heard by dumping the stocks of these two quasi-public private corporations, threatening to collapse the two financial firms like the investor "run" that wiped out Bear Stearns in March. The real distress of the banks and brokerages and major investors is that they cannot unload the rotten mortgage securities packaged by Fannie Mae and banks sold worldwide. Wall Street's preferred solution: dump the bad paper on the rest of us, the unwitting American taxpayers. The Bush crowd, always so reluctant to support federal aid for mere people, stepped up to the challenge and did as it was told. Treasury Secretary Paulson (ex-Goldman Sachs) and his sidekick, Federal Reserve Chairman Ben Bernanke, announced their bailout plan on Sunday to prevent another disastrous selloff on Monday when markets opened. Like the first-stage rescue of Wall Street's largest investment firms in March, this bold stroke was said to benefit all of us. The whole kingdom of American high finance would tumble down if government failed to act or made the financial guys pay for their own reckless delusions. Instead, dump the losses on the people. Democrats who imagine they may find some partisan advantage in these events are deeply mistaken. The Democratic party was co-author of the disaster we are experiencing and its leaders fell in line swiftly. House banking chair, Rep. Barney Frank, announced he could have the bailout bill on President Bush's desk next week. No need to confuse citizens by dwelling on the details. Save Wall Street first. Maybe lowbrow citizens won't notice it's their money. We are witnessing a momentous event - the great deflation of Wall Street - and it is far from over. The crash of IndyMac is just the beginning. More banks will fail, so will many more debtors. The crisis has the potential to transform American politics because, first it destroys a generation of ideological bromides about free markets, and, second, because it makes visible the ugly power realities of our deformed democracy. Democrats and Republicans are bipartisan in this crisis because they have colluded all along over thirty years in creating the unregulated financial system and mammoth mega-banks that produced the phony valuations and deceitful assurances. The federal government protects the most powerful interests from the consequences of their plundering. It prescribes "market justice" for everyone else. Of course, the federal government has to step up to the crisis, but the crucial question is how government can respond in the broad public interest. Bernanke knows the history of the last great deflation in the 1930s - better known as the Great Depression - and so he is determined to intervene swiftly, as the Federal Reserve failed to do in that earlier crisis. By pumping generous loans and liquidity into the system, the Fed chairman hopes to calm the market fears and reverse the panic. So far, he has failed. I think he will continue to fail because he has not gone far enough. If Washington wants real results, it has to abandon the wishful posture that is simply helping the private firms get over their fright. The government must instead act decisively to take charge in more convincing ways. That means acknowledging to the general public the depth of the national crisis and the need for more dramatic interventions. Instead of propping up Fannie Mae or others, the threatened firm should be formally nationalized as a nonprofit federal agency performing valuable services for the housing market. That is the real consequence anyway if the taxpayers have to buy up $300 billion in stock. The private shareholders "are walking dead men, muerto," Institutional Risk Analytics, a private banking monitor, observed. Make them eat their losses, the sooner the better. The real national concern should be focused on the major creditors who lend to Fannie Mae and other US agencies as well as private financial firms. They include China, Japan and other foreign central banks. Foreign investors hold about 21 percent of the long-term debt paper issued by US government agencies--$376 billion in China, $229 billion in Japan. It is not in our national interest to burn these nations with heavy losses. On the contrary, we need to sustain their good regard because they can help us recover by bailing out the US economy with more lending. If these foreign creditors turn away and stop their lending now, the US economy is toast and won't soon recover. Americans should forget about whining; it's too late for that. People need to get angry--really, really angry--and take it out on both parties. What the country needs right now is a few more politicians in Washington with the guts to stand up and tell us the hard truth about out situation. It will be painful to hear. They will be denounced as "whiners." But truth might be our only way out. Comments (104) Suzan ________________________________

Mother's Milk of Politics Turns Sour

I saw Bill's show on PBS Friday night (click on the link for the best interview ever) where he spoke with Bill Grieder (with whom, yes, I am IN LOVE) and was briefly elated by the thought that it was broadcast to millions who could, upon listening and cogitating only a little, begin to put two and two together and decide to join our movement to end the madness inflicted on us by the BushLeagueCheneGang (sorry Terry, I like the spelling). Upon further thought, however, I realized just how hard it is for those ineluctably deaf to decide to hear and act. Would that they did. _________________________________________

Mother's Milk of Politics Turns Sour Friday 18 July 2008 Bill Moyers and Michael Winship Truthout - Perspective Once again we're closing the barn door after the horse is out and gone. In Washington, the Federal Reserve has finally acted to stop some of the predatory lending that exploited people's need for money. And like Rip Van Winkle, Congress is finally waking up from a long doze under the warm sun of laissez-faire economics. That's French for turning off the alarm until the burglars have made their getaway. Philosophy is one reason we do this to ourselves; when you worship market forces as if they were the gods of Olympus, then the gods can do no wrong - until, of course, they prove to be human. Then we realize we should have listened to our inner agnostic and not been so reverent in the first place. But we also get into these terrible dilemmas - where the big guys step all over everyone else and the victims are required to pay the hospital bills - because we refuse to recognize the connection between money and politics. This is the great denial in democracy that may ultimately mean our ruin. We just don't seem able to see or accept the fact that money drives policy. It's no wonder that Congress and the White House have been looking the other way as the predators picked the pockets of unsuspecting debtors. Mega banking and investment firms have been some of the biggest providers of the cash vital to keeping incumbents in office. There isn't much appetite for biting - or regulating - the manicured hand that feeds them. Guess who gave the most money to candidates in this 2007-08 federal election cycle? That's right, the financial services and real estate industries. They stuffed nearly $250 million into the candidate coffers. The about-to-be-bailed-out Fannie Mae and Freddie Mac together are responsible for about half the country's $12 trillion mortgage debt. Lisa Lerer of Politico.com reports that over the past decade, the two financial giants with the down-home names have spent nearly $200 million on campaign contributions and lobbying. According to Lerer, "They've stacked their payrolls with top Washington power brokers of all political stripes, including Republican John McCain's presidential campaign manager, Rick Davis; Democrat Barack Obama's original vice presidential vetter, Jim Johnson, and scores of others now working for the two rivals for the White House." Last Sunday's New York Times put it as bluntly as anyone ever has: "In Washington, Fannie and Freddie's sprawling lobbying machine hired family and friends of politicians in their efforts to quickly sideline any regulations that might slow their growth or invite greater oversight of their business practices. Indeed, their rapid expansion was, at least in part, the result of such artful lobbying over the years." What a beautiful term: "artful lobbying." It means honest graft. Look at any of the important issues bogged down in the swampland along the Potomac and you don't have to scrape away the muck too deeply to find that campaign cash is at the core of virtually every impasse. We're spending more than six percent of our salaries on gasoline, and global warming keeps temperatures rising, but the climate bill was killed last month and President Bush just got rid of his daddy's longtime ban on offshore drilling. Only in a fairy tale would anyone believe it's just coincidence that the oil and gas industries have donated more than $18 million to federal candidates this year, three-quarters of it going to Republicans. They've spent more than $26 million lobbying this year - that's seven times more than environmental groups have spent. Follow the money - it goes from your gas tank to the wine bars and steak houses of DC, where the payoffs happen. Or ponder that FISA surveillance legislation that just passed the Senate. It let the big telecommunications companies off the hook for helping the government wiretap our phones and laptops without warrants. Over the years those telecom companies have given Republicans in the House and Senate $63 million and Democrats $49 million. No wonder that when their lobbyists reach out and place a call to Congress, they never get a busy signal. Do the same without making a big contribution, and you'll be put on "hold" until the embalmer shows up to claim your cold corpse. The late journalist Meg Greenfield once wrote that trying to get money out of politics is akin to the quest for a squirrel-proof birdfeeder. No matter how clever and ingenious the design, the squirrels are always one mouthful ahead of you. Here's an example. Corporations are limited in how much they can contribute to candidates' campaigns, right? But someone's always figuring out how to open another back door. So Democrats have turned to Steve Farber. He's using the resources of his big K Street law and lobbying factory to help raise $40 million for the Democratic National Convention. Half a dozen of his clients have signed up, including AT&T, Comcast, Western Union and Google. Their presence at the convention will offer lots of opportunities to curry favors at private parties while ordinary delegates wander Denver looking for the nearest Wendy's. By the way, just as you pay at the gas pump for those energy lobbyists to wine and dine your representatives in Washington, you'll pay on April 15 for Denver - corporations can deduct their contributions. Another back door - one quite familiar to Steve Farber and his ilk - leads to presidential libraries. Bill Clinton's in Arkansas required serious political bucks, and we're not talking penny ante fines for overdue books. Again, there's no limit to the amount donors can give and no obligation to reveal their names. Clinton's cost $165 million and we still don't know the identities of everyone who put up the dough, even though four years ago a reporter stumbled on a list that included Arab businessmen, Saudi royals, Hollywood celebs and the governments of Dubai, Kuwait, Qatar, Brunei and Taiwan. Hmmm ... Once George W. is out of the White House, he, too, plans what one newspaper described as a "legacy polishing" institute - a presidential library and think tank at Southern Methodist University in Dallas costing half a billion dollars. Last Sunday, The Times of London released a remarkable video of one of the president's buddies and fund raisers - Stephen Payne, a political appointee named to the Homeland Security Advisory Council. The Times set him up in a video sting, and taped a conversation in which Payne offers an exiled leader of Kyrgyzstan meetings with such White House luminaries as Vice President Cheney and Condoleezza Rice - provided he makes a whopping contribution to the Bush Library, and an even bigger payment to Payne's lobbying firm. Payne tells him, "It will be somewhere between $600,000 and $750,000, with about a third of it going directly to the Bush Library.... That's gonna be a show of 'we're interested, we're your friends, we're still your friends.'" The White House denies any connection between library contributions and access to officials, and harrumphed at the preposterous idea that Payne had a close relationship with the president. Unfortunately, there's at least one photo of Payne with the president, cutting brush at Bush's Crawford ranch. There's also one of Payne demonstrating more guts than common sense, on a rifle range with Deadeye Dick Cheney. Payne, who now is supporting John McCain, says he's done nothing wrong, but a Congressional investigation intends to find out. So, from the financial meltdown brought on by predatory lending to global warming to tax breaks and other favors, the late California politician Jesse "Big Daddy" Unruh got it right: Money is the mother's milk of politics. He knew what he was talking about, because Big Daddy swigged it by the gallon. Now it has curdled into a witch's brew.

________________________________________ Bill Moyers is managing editor and Michael Winship is senior writer of the weekly public affairs program, Bill Moyers Journal, which airs Friday night on PBS. Check local airtimes or comment at The Moyers Blog at www.pbs.org/moyers. Enjoy Sunday! Suzan

Party Time! Call Indy, then Fanny & Freddy

First Indy, then Fanny, then Freddie. Then go to the Bank Implode-o-Meter spot. Wanna learn a little Economics on the cheap? As E.J. Dionne reported in "Capitalism's Reality Check" on Friday, July 11, 2008:

The biggest political story of 2008 is getting little coverage. It involves the collapse of assumptions that have dominated our economic debate for three decades. Since the Reagan years, free-market cliches have passed for sophisticated economic analysis. But in the current crisis, these ideas are falling, one by one, as even conservatives recognize that capitalism is ailing. You know the talking points: Regulation is the problem and deregulation is the solution. The distribution of income and wealth doesn't matter. Providing incentives for the investors of capital to "grow the pie" is the only policy that counts. Free trade produces well-distributed economic growth, and any dissent from this orthodoxy is "protectionism." The old script is in rewrite. "We are in a worldwide crisis now because of excessive deregulation," Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, said in an interview. He noted that in 1999 when Congress replaced the New Deal-era Glass-Steagall Act with a set of looser banking rules, "we let investment banks get into a much wider range of activities without regulation." This helped create the subprime mortgage mess and the cascading calamity in banking. While Frank is a liberal, the same cannot be said of Ben Bernanke, the chairman of the Federal Reserve. Yet in a speech on Tuesday, Bernanke sounded like a born-again New Dealer in calling for "a more robust framework for the prudential supervision of investment banks and other large securities dealers." Bernanke said the Fed needed more authority to get inside "the structure and workings of financial markets" because "recent experience has clearly illustrated the importance, for the purpose of promoting financial stability, of having detailed information about money markets and the activities of borrowers and lenders in those markets." Sure sounds like Big Government to me. This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled. The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era. Stagflation in the 1970s and early '80s undermined New Deal ideas and called forth a rebirth of radical free-market notions. What's becoming the Panic of 2008 will mean an end to the latest Capital Rules era. What's striking is that conservatives who revere capitalism are offering their own criticisms of the way the system is working. Irwin Stelzer, director of the Center for Economic Policy Studies at the Hudson Institute, says the subprime crisis arose in part because lenders quickly sold their mortgages to others and bore no risk if the loans went bad. "You have to have the person who's writing the risk bearing the risk," he says. "That means a whole host of regulations. There's no way around that." While some conservatives now worry about the social and economic impact of growing inequalities, Stelzer isn't one of them. But he is highly critical of "the process that produces inequality." "I don't like three of your friends on a board voting you a zillion dollars," Stelzer, who is also a business consultant, told me. "A cozy boardroom back-scratching operation offends me." He argues that "the preservation of the capitalist system" requires finding new ways of "linking compensation to performance." Frank takes a similar view, arguing that CEOs "benefit substantially if the risks they take pay off" but "pay no penalty" if their risks lead to losses or even catastrophe -- another sign that capitalism, in its current form, isn't living by its own rules. Frank also calls for new thinking on the impact of free trade. He argues it can no longer be denied that globalization "is a contributor to the stagnation of wages and it has produced large pools of highly mobile capital." Mobile capital and the threat of moving a plant abroad give employers a huge advantage in negotiations with employees. "If you're dealing with someone and you can pick up and leave and he can't, you have the advantage." "Free trade has increased wealth, but it's been monopolized by a very small number of people," Frank said. The coming debate will focus not on shutting globalization down but rather on managing its effects with an eye toward the interests of "the most vulnerable people in the country." (Read the rest of the article and weep anew.)

Or, as Al Yoon in The Guardian so subtly put it (and our old friend Franklin Raines (Clinton's Budget Director) gets a quick nod here):

Debt of Fannie Mae and Freddie Mac soared in their best one-day gain in history on Friday amid speculation that a government takeover of the housing giants would make the bonds more like ultra-safe U.S. Treasuries. The prospects, sparked by deep consternation over the ability of the companies to survive on their own and a New York Times report saying the government is mulling a takeover, caused investors to flee the companies' stock, which some analysts said could be left worthless. Investors were selling shares of the congressionally chartered companies and buying their debt, which if assumed by the government would be seen as safe as Treasury bonds, said Michael Kastner, head of fixed-income at Sterling Stamos Capital Management in New York. Yield spreads on the corporate "federal agency" debt of the companies tightened as much as 29 basis points for five-year issues, according to broker GovPX/Garban-ICAP. The gapping eased to about 20 basis points, to 0.8 percentage point above Treasury notes, marking "unbelievable" shifts in a market that typically sees 1 to 2 basis point daily moves, a trader at a top-five bond dealer said in an e-mail. It was the most extreme narrowing of yield spreads ever, UBS Securities said in a report. "There's a closer linkage today with Fannie, Freddie and the U.S. government than ever before," said Jim DeMasi, chief fixed income strategist at Stifel Nicolaus & Co. in Baltimore. "It's a credit-quality upgrade." But that also means a credit-quality downgrade for U.S. Treasury debt, which slumped, investors said. For Treasury bond report see: [ID:nN11353603]. The health of Fannie Mae and Freddie Mac is seen as synonymous with the U.S. housing market since they own or guarantee more than $5 trillion in mortgages. The companies hold charters from Congress to raise money from investors by purchasing home loans and pooling them into mortgage-backed securities. They also have massive investment portfolios of home loans and MBS. Speculation that mounting losses at Fannie Mae and Freddie Mac would require billions of dollars in additional capital have fueled a firestorm of criticism this week, sending stock investors fleeing. Fear spread across financial markets after the government offered no hint that it would step in to help the companies. The companies combined have about $1.6 trillion in debt outstanding, much of which is held by central banks around the world. They use the money to fund the portfolios and securities that lawmakers have increasingly relied on to support the ailing housing market. Mortgage-backed securities issued by the companies also gained relative to Treasuries. But MBS issued by Ginnie Mae sharply lagged in price since their relative advantage of full government support over Fannie Mae and Freddie Mac issues would be diminished in a takeover. Stocks of the companies dropped for a third day since investors do not expect a bailout would extend to shareholders. Both fell more than 40 percent when trading opened in New York on Friday, but clawed back after a key senator said the Federal Reserve may allow the companies to borrow directly from the central bank. Investors also drubbed preferred shares of the companies, casting doubts that they would be able to raise the capital they need to avoid insolvency. "The equity market and the preferred markets are telling you nobody wants any part of it," said Julian Mann, a mortgage and asset-backed bond manager at Los Angeles-based First Pacific Advisors. Putting taxpayers on the hook for U.S. mortgages would upend the "entire free markets system," Mann said. "It's very disturbing." After the 4 p.m. New York market close, Freddie Mac and Fannie Mae sought to dispel that they face capital shortfalls. . . . Agency debt already holds the highest ratings, but investors have demanded a nominal spread over Treasury debt for perceived credit risk. The spreads are less than for other publicly traded companies since investors see government ties representing an implicit guarantee. Fannie Mae and Freddie Mac often pitched their debt in the late 1990s as an alternative to Treasuries, which were shrinking in supply due to a U.S. budget surplus. It coincided with the dawn of the housing boom and rapid growth in the portfolios under former Chief Executive Officer Franklin Raines.

And today the AP reports:

Freddie Mac (FRE) attracted more bidders Monday for a highly anticipated auction of $3 billion in short-term securities than it had nearly all year, a day after the federal government provided support for the mortgage giant. "This was a good auction result," said independent banking consultant Bert Ely. There had been fears all weekend about investors shying away from participating in the auction until the government stepped in and pledged to support the struggling mortgage financier.

Is your hand in the air yet? Suzan ______________________