http://tarpley.net/2010/05/23/reply-to-the-attack-on-economic-populism/
“The Market” is a Reactionary Mystification: Reply to the Attack on Economic Populism from Franco Debenedetti and other Italian Economists
Webster G. Tarpley
TARPLEY.net
May 23, 2010
A group of Italian economists led by Franco Debenedetti of the famous financier clan and the banker Paolo Savona, obviously fearful that the Berlusconi-Tremonti government of Italy will join last Tuesday’s successful German ban on the type of toxic derivative known as the naked credit default swap, have sent an alarmed warning to the Corriere della Sera of Milan1. Debenedetti has contributed an article expressing similar sentiments to the Italian business newspaper Il Sole 24 Ore in which he rails at the “Mrs. Merkel market” now in force in Germany2. These economists, obviously inspired by the doctrines of Friedrich von Hayek and the Austrian school, want Italy to remain faithful no matter what to the widely discredited ideas of laissez-faire economics, even as those doctrines are everywhere under attack for having caused the current world economic depression. For these neoliberal and monetarist thinkers, any attempt to ban derivatives or tax speculation must be condemned as “economic populism,” which for these writers is a term of opprobrium.
These anti-populist economists need to be reminded of some basic facts about derivatives. The collapse of the Central European banking system in the summer of 1931 was decisively enabled by derivatives – specifically by speculation in wool futures by a north German textile company which brought down the Danat Bank, leading to panic runs on all German banks. Thanks to the American New Deal of Franklin D. Roosevelt, most over-the-counter and exchange-traded derivatives were illegal from 1936 to 1982 under the Commodities Exchange Act, which was repealed by the free-market enthusiast Ronald Reagan. During those years, US rates of economic growth and real wages were far superior to what they have been any time since, and financial panics were much more limited than they had been before or have become since. Presumably, FDR would be dismissed as a mere populist.
In today’s crisis, we are confronted at every turn with the fatal combination of deregulated hedge funds plus these now-rehabilitated derivatives, which in the meantime amount to a world speculative bubble of some $1.5 quadrillion of notional value. Lehman Brothers, Citibank, and Merrill Lynch were destroyed by derivatives in the form of a combination of their issuance of synthetic collateralized debt obligations based on mortgages and consumer debt, together with the credit default swaps used by hedge funds to attack these banks. The insurance company AIG had a hedge fund in London which issued $3 trillion worth of derivatives (more than the GDP of France), featuring a very toxic portfolio of credit default swaps. The failure of AIG caused by these toxic bets has now cost the US taxpayer $180 billion and counting. The attack on Greece, as these economists seem to recognize, was organized during a dinner party in Manhattan on February 8, 2010, leader reported in the headline story of the Wall Street Journal on February 26, 20103. European taxpayers are now on the hook for almost $1 trillion in bailouts as a result of this speculation. That Manhattan hedge fund dinner seems to fulfill the prima facie specifications of an illegal conspiracy in restraint of trade under the terms of the US Sherman Antitrust Act of 1890, a law proposed all those years ago by a very Republican senator and signed by Benjamin Harrison, a very Republican president. Were they populists too?
The May 6, 2010 1,000-point fall of the Dow Jones Industrial Average was the result of a speculative bet using options (i.e., derivatives) against the Standard & Poor’s 500 stock index placed by the Universa Investments hedge fund, advised by “Black Swan” theorist Nassim Taleb – according to the Wall Street Journal of May 11, 2010. That thousand point plunge, it is estimated, wiped out about $1 trillion worth of paper wealth in about 20 minutes. What with a trillion here and a trillion there, derivatives and the regulated hedge funds are becoming a prohibitively expensive luxury.
Debenedetti and his friends wish to save credit default swaps at all costs. In this they face serious problems. On one level, credit default swaps are bets, wagers, and therefore illegal under the gambling laws in many countries. If it is argued that credit default swaps are insurance, then they are also illegal, since most of the issuers are not insurance companies, and have no intention of meeting the legal requirements to underwrite insurance policies, such as legal registration, capital requirements, etc. Are credit default swaps such a glorious benefit to society that they should enjoy exemption from laws and regulations? Recent history indicates that derivatives do not merit such special treatment.
Debenedetti and his friends are also opposed to a Tobin tax, otherwise known as a Wall Street sales tax, financial transaction tax, securities transfer tax, trading tax, or Robin Hood tax, which would be levied on the financial transactions of market players. Debenedetti & Co. therefore want derivatives and other financial instruments to enjoy yet another exemption. In Italy, the vast majority of goods and services must pay a hefty Value Added Tax (VAT or IVA). Parents who want to buy shoes, clothing, and school supplies for their children must pay this tax. But for some strange reason, banks and hedge funds do not pay on their flash trading, program trading, and high-frequency trading. We can guess that the total deficit of governments at all levels in Europe, the United States, and Japan is closely correlated to the total exemption of financial institutions from IVA or sales tax on their turnover. To argue that this de facto public subsidy for speculation should be continued in an era when so many other activities are being heavily taxed or subjected to austerity cuts is reminiscent of the mentality of the French aristocracy under the pre-1789 ancien régime, which claimed that it had the divine right not be taxed under any circumstances. This claim, as we know, did not hold up.
At the heart of the arguments put forward by Debenedetti and his friends is the notion that human reason is very weak indeed, and cannot attain a practical understanding or overview of how political economy works. Only the market, they claim, can do with this by totalizing so many separate facts. But they are not arguing from any empirical observation of how markets really work, but expressing the fetishism of an efficient market which was typical of von Hayek and other Austrians. They tried to portray markets as genuine epistemological tools, which provided knowledge which could not be obtained any other way. Even the Ayn Rand devotee Alan Greenspan has backed away from this extravagant claim in the wake of the catastrophic collapse of the New York banks in October 2008. When asked whether he had been led astray by his market ideology, Greenspan told a Congressional hearing: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.” (New York Times, October 23, 2008) Debenedetti does not share this distress. At the same time, the successful history of the Bank of the United States under Alexander Hamilton, the French Commissariat du Plan under DeGaulle, and the Japanese Ministry of International Trade and Industry (MITI)) makes clear to human reason is indeed capable of determining the main priorities of national economies.
Market fetishism is radically anti-historical. Everyone is aware of speculative manias, bubbles, panics, and the other recurring psychoses which make the judgment of any market totally unreliable in many critical moments. And what if there are monopolies, duopolies, oligopolies, trusts, combinations, or cartels of the February 8 type? Then the market is permanently distorted, which is what we have been seeing for decades.
Debenedetti wants “the market” to be seen as objective and impersonal, but it is not. “The market” has names and faces. If we find that half a dozen of the largest US banks control about 60% of all assets in the entire United States economy, then we can make that exorbitant control very personal and concrete. The owners of a majority share of the United States are bankers like Jamie Dimon of J.P. Morgan Chase, Vikram Pandit of Citibank, Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, and Brian Moynihan of Bank of America/Merrill Lynch, and their respective boards. We can even know how many billions each one has been given in the form of bailouts at public expense.
The Austrian school makes the market into a metaphysical abstraction, a force above the rest of history, because it needs this mystification in order to defend the very concrete privileges of some very sleazy individuals who are the speculators. Some early Protestants tried to argue that the success of the speculator had been instituted by God. When this idea lost traction, apologists for speculation tried to argue that the speculators were morally or intellectually superior to the rest of humanity. When that did not work either, the Austrian school hit upon the trick of removing the speculators from consideration altogether by hiding them from view behind the anonymous and impersonal abstraction of “the market.” As the case of Greenspan suggests, this argument has also become untenable, and the entire edifice of Austrian thought is falling to the ground.
Debenedetti and his co-thinkers suggest that “the market” is able to detect the secret financial weaknesses of nations. But surely the shoe is on the other foot. The major US banks listed above were all, without exception, bankrupt and insolvent before US government intervention in the form of the bailout of October 2008. Today, any objective appraisal would conclude that Greece is far more economically viable and solvent then Citibank. Portugal is more viable than Goldman Sachs. Italy has a brighter economic future by far than J.P. Morgan.
The situation today would therefore seem to offer the following alternative. The speculative assault of the zombie banks and hedge fund speculators may succeed in bankrupting the modern nation state at all levels, in which case we will be dealing with the collapse of civilization as we have known it since the first prototype of the modern state emerged in Milan in the late 14th century under Giangaleazzo Visconti, who offered debt relief to strapped farmers. The better alternative is that the nation state will use its inherent sovereign powers to liquidate the bankrupt zombie banks and regulate many of the predatory activities of hedge funds out of existence, while banning the most toxic forms of derivatives and forcing speculators to share in the general tax burden of society.
Those who want the second of these alternatives must get to work here and now. The most obvious way to begin is for the present Italian government of Berlusconi and Tremonti to join the measures instituted by the German government last Tuesday. Italy should also go beyond these tentative initial German measures by banning all forms of credit default swaps, which are already inherently illegal under existing laws. Then there are those extremely dangerous synthetic collateralized debt obligations, which even Blankfein of Goldman Sachs has suggested might be done away with. They should indeed be totally banned at once. Antitrust investigations could be opened against the Feb. 8 hedge fund group by the Italian magistrates, whose independence has become world-famous. The Tobin tax should also be instituted on an emergency measure for financial stability and revenue enhancement on a purely national basis, with the revenue being retained for the benefit of the national budget.
Additional countries may soon join in the German ban. Likely candidates are the nations that were closely associated with the D-Mark in the old “snake in a tunnel” currency bloc starting in the 1970s. These would include Belgium and the Netherlands. The Czech Republic is another possibility, as is Sweden. Soon we may have a pro-derivatives bloc led by the US and the UK confronting an anti-derivatives bloc led by Germany. On the eve of the Washington Economic Conference of November 2008, I wrote: “The best we can hope for … is … dividing the world between a US-UK dominated derivatives bloc and a Brazil-India-Russia-China-South Africa anti-derivatives bloc interested in real physical commodity production, not fictitious capital.” The surprise is that the leadership of the anti-derivatives forces has actually been seized by Germany.
____________________________________
[1] Franco Debenedetti, Oscar Giannin, Antonio Martino, Roberto Perotti, Nicola Rossi, Paolo Savona, Vito Tanzi, Alberto Mingardi, “In difesa del mercato e degli operatori i responsabili veri e presunti della crisi,” Corriere della Sera, May 21, 2010, http://archiviostorico.corriere.it/2010/maggio/21/difesa_del_mercato_degli_operatori_co_9_100521085.shtml
[2] Franco Debenedetti, “È il mercato signora Merkel,” Il Sole 24 Ore, May 21, 2010, http://www.ilsole24ore.com/art/SoleOnLine4/Editrice/IlSole24Ore/2010/05/21/Italia/17_A.shtml
[3] See “Financial Warfare Exposed: Soros, Goldman Sachs, Hedge Funds Attack Greece to Smash Euro,” http://tarpley.net/2010/03/04/financial-warfare-exposed-soros-goldman-sachs-hedge-funds-attack-greece-to-smash-euro/
Showing posts with label Lehman Brothers. Show all posts
Showing posts with label Lehman Brothers. Show all posts
Monday, May 31, 2010
Saturday, April 24, 2010
Big Banks Mask Risk Levels
http://online.wsj.com/article/SB10001424052702304830104575172280848939898.html
APRIL 9, 2010
Big Banks Mask Risk Levels
Quarter-End Loan Figures Sit 42% Below Peak, Then Rise as New Period Progresses; SEC Review
By KATE KELLY, TOM MCGINTY and DAN FITZPATRICK
Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.
A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.
Citi Execs Deny Responsibility Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.
That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.
Major banks masked their risk levels during the most recent five quarters by lowering debt levels just before announcing quarterly earnings, according to data from the New York Federal Reserve Bank. Kate Kelly and Evan Newmark discuss.
"You want your leverage to look better at quarter-end than it actually was during the quarter, to suggest that you're taking less risk," says William Tanona, a former Goldman analyst who now heads U.S. financials research at Collins Stewart, a U.K. investment bank.
Though some banks privately confirm that they temporarily reduce their borrowings at quarter's end, representatives at Goldman, Morgan Stanley, J.P. Morgan and Citigroup declined to comment specifically on the New York Fed data. Some noted that their firm's financial filings include language saying borrowing levels can fluctuate during the quarter.
"The efforts to manage the size of our balance sheet are appropriate and our policies are consistent with all applicable accounting and legal requirements," a Bank of America spokesman said.
Masking Risk
An official at the Federal Reserve Board noted that the Fed continuously monitors asset levels at the large bank-holding companies, but the financing activities captured in the New York Fed's data fall under the purview of the Securities and Exchange Commission, which regulates brokerage firms. The New York Fed declined to comment.
The data highlight the banks' levels of short-term financing in the repurchase, or "repo," market. Financial firms use cash from the loans to buy securities, then use the purchased securities as collateral for other loans, and buy more securities. The loans boost the firms' trading power, or "leverage," allowing them to make big trades without putting up big money. This amplifies gains—and losses, which were disastrous in 2008.
According to the data, the banks' outstanding net repo borrowings at the end of each of the past five quarters were on average 42% below their peak in net borrowings in the same quarters. Though the repo market represents just a slice of banks' overall activities, it provides a window into the risks that financial institutions take to trade.
The SEC now is seeking detailed information from nearly two dozen large financial firms about repos, signaling that the agency is looking for accounting techniques that could hide a firm's risk-taking. The SEC's inquiry follows recent disclosures that Lehman used repos to mask some $50 billion in debt before it collapsed in 2008.
The practice of reducing quarter-end repo borrowings has occurred periodically for years, according to the data, which go back to 2001, but never as consistently as in 2009.
The repo market played a role in recent accusations leveled by an examiner in Lehman's bankruptcy case. But rather than reducing quarter-end debt, Lehman took steps to hide it.
Anxious to maintain favorable credit ratings, Lehman engaged in an accounting device known within the firm as "Repo 105" to essentially park about $50 billion of assets away from Lehman's balance sheet, according to the examiner. The move helped Lehman look like it had less debt on its books, the examiner said.
Other Wall Street firms, including Goldman and Morgan Stanley, have denied characterizing their short-term borrowings as sales, the way Lehman did in employing Repo 105. Both of those firms also make standard disclaimers about debt.
For instance, Goldman disclosed in its 2009 annual report that although its balance sheet can "fluctuate," asset levels at the ends of quarters are "typically not materially different" from their levels in the midst of the quarter. Total assets at the end of 2009 were 7% lower than average assets during the year, the report states.
Some banks make big trades that don't show up in quarter-end balance sheets. That is what happened recently at Bank of America involving a trade designed to mature before the end of 2009's first quarter, people familiar with the matter say.
Two Bank of America traders bought $40 billion of mortgage-backed securities from clients for one month, while at the same time agreeing to sell the securities back before quarter's end, according to people familiar with the matter. This "roll" trade provided the clients with cash and the bank with fees.
Robert Qutub, then Bank of America's chief financial officer for global markets, told Michael Nierenberg, a former Bear Stearns trader who oversaw the traders who made the roll trade, to cap the size of the short-term transaction, people familiar with the matter say.
A week later, however, the amount tied to the trade shot up to $60 billion, these people say, before dropping to $25 billion, one of these people said, appearing to some at headquarters that the group had defied the order to cap the trade.
A bank spokeswoman said "the team was aware of and worked within its risk limits."
Write to Kate Kelly at kate.kelly@wsj.com, Tom McGinty at tom.mcginty@wsj.com and Dan Fitzpatrick at dan.fitzpatrick@wsj.com
APRIL 9, 2010
Big Banks Mask Risk Levels
Quarter-End Loan Figures Sit 42% Below Peak, Then Rise as New Period Progresses; SEC Review
By KATE KELLY, TOM MCGINTY and DAN FITZPATRICK
Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.
A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.
Citi Execs Deny Responsibility Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.
That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.
Major banks masked their risk levels during the most recent five quarters by lowering debt levels just before announcing quarterly earnings, according to data from the New York Federal Reserve Bank. Kate Kelly and Evan Newmark discuss.
"You want your leverage to look better at quarter-end than it actually was during the quarter, to suggest that you're taking less risk," says William Tanona, a former Goldman analyst who now heads U.S. financials research at Collins Stewart, a U.K. investment bank.
Though some banks privately confirm that they temporarily reduce their borrowings at quarter's end, representatives at Goldman, Morgan Stanley, J.P. Morgan and Citigroup declined to comment specifically on the New York Fed data. Some noted that their firm's financial filings include language saying borrowing levels can fluctuate during the quarter.
"The efforts to manage the size of our balance sheet are appropriate and our policies are consistent with all applicable accounting and legal requirements," a Bank of America spokesman said.
Masking Risk
An official at the Federal Reserve Board noted that the Fed continuously monitors asset levels at the large bank-holding companies, but the financing activities captured in the New York Fed's data fall under the purview of the Securities and Exchange Commission, which regulates brokerage firms. The New York Fed declined to comment.
The data highlight the banks' levels of short-term financing in the repurchase, or "repo," market. Financial firms use cash from the loans to buy securities, then use the purchased securities as collateral for other loans, and buy more securities. The loans boost the firms' trading power, or "leverage," allowing them to make big trades without putting up big money. This amplifies gains—and losses, which were disastrous in 2008.
According to the data, the banks' outstanding net repo borrowings at the end of each of the past five quarters were on average 42% below their peak in net borrowings in the same quarters. Though the repo market represents just a slice of banks' overall activities, it provides a window into the risks that financial institutions take to trade.
The SEC now is seeking detailed information from nearly two dozen large financial firms about repos, signaling that the agency is looking for accounting techniques that could hide a firm's risk-taking. The SEC's inquiry follows recent disclosures that Lehman used repos to mask some $50 billion in debt before it collapsed in 2008.
The practice of reducing quarter-end repo borrowings has occurred periodically for years, according to the data, which go back to 2001, but never as consistently as in 2009.
The repo market played a role in recent accusations leveled by an examiner in Lehman's bankruptcy case. But rather than reducing quarter-end debt, Lehman took steps to hide it.
Anxious to maintain favorable credit ratings, Lehman engaged in an accounting device known within the firm as "Repo 105" to essentially park about $50 billion of assets away from Lehman's balance sheet, according to the examiner. The move helped Lehman look like it had less debt on its books, the examiner said.
Other Wall Street firms, including Goldman and Morgan Stanley, have denied characterizing their short-term borrowings as sales, the way Lehman did in employing Repo 105. Both of those firms also make standard disclaimers about debt.
For instance, Goldman disclosed in its 2009 annual report that although its balance sheet can "fluctuate," asset levels at the ends of quarters are "typically not materially different" from their levels in the midst of the quarter. Total assets at the end of 2009 were 7% lower than average assets during the year, the report states.
Some banks make big trades that don't show up in quarter-end balance sheets. That is what happened recently at Bank of America involving a trade designed to mature before the end of 2009's first quarter, people familiar with the matter say.
Two Bank of America traders bought $40 billion of mortgage-backed securities from clients for one month, while at the same time agreeing to sell the securities back before quarter's end, according to people familiar with the matter. This "roll" trade provided the clients with cash and the bank with fees.
Robert Qutub, then Bank of America's chief financial officer for global markets, told Michael Nierenberg, a former Bear Stearns trader who oversaw the traders who made the roll trade, to cap the size of the short-term transaction, people familiar with the matter say.
A week later, however, the amount tied to the trade shot up to $60 billion, these people say, before dropping to $25 billion, one of these people said, appearing to some at headquarters that the group had defied the order to cap the trade.
A bank spokeswoman said "the team was aware of and worked within its risk limits."
Write to Kate Kelly at kate.kelly@wsj.com, Tom McGinty at tom.mcginty@wsj.com and Dan Fitzpatrick at dan.fitzpatrick@wsj.com
Friday, September 18, 2009
The Continuing Disaster of Wall Street
http://robertreich.blogspot.com/2009/09/continuing-disaster-of-wall-street-one.html
Robert Reich's Blog
Robert Reich was the nation's 22nd Secretary of Labor and is a professor at the University of California at Berkeley. His latest book is Supercapitalism.
Sunday, September 13, 2009
The Continuing Disaster of Wall Street, One Year Later
As he attempted to do with health care reform last week, the President is trying to breathe new life into financial reform. He's using the anniversary of the death of Lehman Brothers and the near-death experience of the rest of the Street, culminating with a $600 billion taxpayer financed bailout, to summon the political will for change. Yet the prospects seem dubious. As with health care reform, he has stood on the sidelines for months and allowed vested interests to frame the debate. Nor has he come up with a sufficiently bold or coherent set of reforms likely to change the way the Street does business, even if enacted.
Let's be clear: The Street today is up to the same tricks it was playing before its near-death experience. Derivatives, derivatives of derivatives, fancy-dance trading schemes, high-risk bets. “Our model really never changed, we’ve said very consistently that our business model remained the same,” says Goldman Sach's chief financial officer.
The only difference now is that the Street's biggest banks know for sure they'll be bailed out by the federal government if their bets turn sour -- which means even bigger bets and bigger bucks.
Meanwhile, the banks' gigantic pile of non-performing loans is also growing bigger, as more and more jobless Americans can't pay their mortgages, credit card bills, and car loans. So forget any new lending to Main Street. Small businesses still can't get loans. Even credit-worthy borrowers are having a hard time getting new mortgages.
The mega-bailout of Wall Street accomplished little. The only big winners have been top bank executives and traders, whose pay packages are once again in the stratosphere. Banks have been so eager to lure and keep top deal makers and traders they've even revived the practice of offering ironclad, multimillion-dollar payments – guaranteed no matter how the employee performs. Goldman Sachs is on course to hand out bonuses that could rival its record pre-meltdown paydays. In the second quarter this year it posted its fattest quarterly profit in its 140-year history, and earmarked $11.4 billion to compensate its happy campers. Which translates into about $770,000 per Goldman employee on average, just about what they earned at height of boom. Of course, top executives and traders will pocket much more.
Every other big bank feels it has to match Goldman's pay packages if it wants to hold on to its "talent." Citigroup, still on life-support courtesy of $45 billion from American taxpayers, has told the White House it needs to pay its twenty-five top executives an average of $10 million each this year, and award its best trader $100 million.
A few banks like Goldman have officially repaid their TARP money but look more closely and you'll find that every one of them is still on the public dole. Goldman won't repay taxpayers the $13 billion it never would have collected from AIG had we not kept AIG alive. (In one of the most blatant conflicts of interest in all of American history, Goldman CEO Lloyd Blankfein attended the closed-door meeting last fall where then Treasury Secretary Hank Paulson, who was formerly Goldman's CEO, and Tim Geithner, then at the New York Fed, made the decision to bail out AIG.) Meanwhile, Goldman is still depending on $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation. Which means you and I are still indirectly funding Goldman's high-risk operations.
So will the President succeed on financial reform? I wish I could be optimistic. His milktoast list of proposed reforms is inadequate to the task, even if adopted. The Street's behavior since its bailout should be proof enough that halfway measures won't do. The basic function of commercial banking in our economic system -- linking savers to borrowers -- should never have been confused with the casino-like function of investment banking. Securitization, whereby loans are turned into securities traded around the world, has made lenders unaccountable for the risks they take on. The Glass-Steagall Act should be resurrected. Pension and 401 (k) plans, meanwhile, should never have been allowed to subject their beneficiaries to the risks that Wall Street gamblers routinely run. Put simply, the Street has been given too many opportunities to play too many games with other peoples' money.
But, like the health care industry, Wall Street has platoons of lobbyists and an almost unlimited war chest to protect its interests and prevent change. And with the Dow Jones Industrial Average trending upward again -- and the public's and the media's attention focused elsewhere, especially on health care -- it will be difficult to summon the same sense of urgency financial reform commanded six months ago.
Yet without substantial reform, the nation and the world will almost certainly be plunged into the same crisis or worse at some point in the not-too-distant future. Wall Street's major banks are already en route to their old, dangerous ways -- now made more dangerous by their sure knowledge that they are too big to fail.
Robert Reich's Blog
Robert Reich was the nation's 22nd Secretary of Labor and is a professor at the University of California at Berkeley. His latest book is Supercapitalism.
Sunday, September 13, 2009
The Continuing Disaster of Wall Street, One Year Later
As he attempted to do with health care reform last week, the President is trying to breathe new life into financial reform. He's using the anniversary of the death of Lehman Brothers and the near-death experience of the rest of the Street, culminating with a $600 billion taxpayer financed bailout, to summon the political will for change. Yet the prospects seem dubious. As with health care reform, he has stood on the sidelines for months and allowed vested interests to frame the debate. Nor has he come up with a sufficiently bold or coherent set of reforms likely to change the way the Street does business, even if enacted.
Let's be clear: The Street today is up to the same tricks it was playing before its near-death experience. Derivatives, derivatives of derivatives, fancy-dance trading schemes, high-risk bets. “Our model really never changed, we’ve said very consistently that our business model remained the same,” says Goldman Sach's chief financial officer.
The only difference now is that the Street's biggest banks know for sure they'll be bailed out by the federal government if their bets turn sour -- which means even bigger bets and bigger bucks.
Meanwhile, the banks' gigantic pile of non-performing loans is also growing bigger, as more and more jobless Americans can't pay their mortgages, credit card bills, and car loans. So forget any new lending to Main Street. Small businesses still can't get loans. Even credit-worthy borrowers are having a hard time getting new mortgages.
The mega-bailout of Wall Street accomplished little. The only big winners have been top bank executives and traders, whose pay packages are once again in the stratosphere. Banks have been so eager to lure and keep top deal makers and traders they've even revived the practice of offering ironclad, multimillion-dollar payments – guaranteed no matter how the employee performs. Goldman Sachs is on course to hand out bonuses that could rival its record pre-meltdown paydays. In the second quarter this year it posted its fattest quarterly profit in its 140-year history, and earmarked $11.4 billion to compensate its happy campers. Which translates into about $770,000 per Goldman employee on average, just about what they earned at height of boom. Of course, top executives and traders will pocket much more.
Every other big bank feels it has to match Goldman's pay packages if it wants to hold on to its "talent." Citigroup, still on life-support courtesy of $45 billion from American taxpayers, has told the White House it needs to pay its twenty-five top executives an average of $10 million each this year, and award its best trader $100 million.
A few banks like Goldman have officially repaid their TARP money but look more closely and you'll find that every one of them is still on the public dole. Goldman won't repay taxpayers the $13 billion it never would have collected from AIG had we not kept AIG alive. (In one of the most blatant conflicts of interest in all of American history, Goldman CEO Lloyd Blankfein attended the closed-door meeting last fall where then Treasury Secretary Hank Paulson, who was formerly Goldman's CEO, and Tim Geithner, then at the New York Fed, made the decision to bail out AIG.) Meanwhile, Goldman is still depending on $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation. Which means you and I are still indirectly funding Goldman's high-risk operations.
So will the President succeed on financial reform? I wish I could be optimistic. His milktoast list of proposed reforms is inadequate to the task, even if adopted. The Street's behavior since its bailout should be proof enough that halfway measures won't do. The basic function of commercial banking in our economic system -- linking savers to borrowers -- should never have been confused with the casino-like function of investment banking. Securitization, whereby loans are turned into securities traded around the world, has made lenders unaccountable for the risks they take on. The Glass-Steagall Act should be resurrected. Pension and 401 (k) plans, meanwhile, should never have been allowed to subject their beneficiaries to the risks that Wall Street gamblers routinely run. Put simply, the Street has been given too many opportunities to play too many games with other peoples' money.
But, like the health care industry, Wall Street has platoons of lobbyists and an almost unlimited war chest to protect its interests and prevent change. And with the Dow Jones Industrial Average trending upward again -- and the public's and the media's attention focused elsewhere, especially on health care -- it will be difficult to summon the same sense of urgency financial reform commanded six months ago.
Yet without substantial reform, the nation and the world will almost certainly be plunged into the same crisis or worse at some point in the not-too-distant future. Wall Street's major banks are already en route to their old, dangerous ways -- now made more dangerous by their sure knowledge that they are too big to fail.
Sunday, March 1, 2009
The Language of Looting
http://www.blackagendareport.com/index.php?option=com_content&task=view&id=1039&Itemid=1
The Language of Looting
Wednesday, 25 February 2009
by Michael Hudson
In order to steal literally everything, the Lords of Finance must render language incapable of describing the crime. "Society's basic grammar of thought, the vocabulary to discuss political and economic topics, is being turned inside-out." The banksters still think they can rule from the center of confusion. "Today's policy is to ‘rescue' these giant bank conglomerates by enabling them to ‘earn' their way out of debt - by selling yet more debt to an already over-indebted U.S. economy. The hope is to re-inflate real estate and other asset prices."
"Banking shares began to plunge Friday morning after Senator Dodd, the Connecticut Democrat who is chairman of the banking committee, said in an interview with Bloomberg Television that he was concerned the government might end up nationalizing some lenders "at least for a short time." Several other prominent policy makers - including Alan Greenspan, the former chairman of the Federal Reserve, and Senator Lindsey Graham of South Carolina - have echoed that view recently." -- Eric Dash, "Growing Worry on Rescue Takes a Toll on Banks," The New York Times, February 20, 2009
How is it that Alan Greenspan, free-market lobbyist for Wall Street, recently announced that he favored nationalization of America's banks - and indeed, mainly the biggest and most powerful? Has the old disciple of Ayn Rand gone Red in the night? Surely not.
The answer is that the rhetoric of "free markets," "nationalization" and even "socialism" (as in "socializing the losses") has been turned into the language of deception to help the financial sector mobilize government power to support its own special privileges. Having undermined the economy at large, Wall Street's public relations think tanks are now dismantling the language itself.
Exactly what does "a free market" mean? Is it what the classical economists advocated - a market free from monopoly power, business fraud, political insider dealing and special privileges for vested interests - a market protected by the rise in public regulation from the Sherman Anti-Trust law of 1890 to the Glass-Steagall Act and other New Deal legislation? Or is it a market free for predators to exploit victims without public regulation or economic policemen - the kind of free-for-all market that the Federal Reserve and Security and Exchange Commission (SEC) have created over the past decade or so? It seems incredible that people should accept today's neoliberal idea of "market freedom" in the sense of neutering government watchdogs, Alan Greenspan-style, letting Angelo Mozilo at Countrywide, Hank Greenberg at AIG, Bernie Madoff, Citibank, Bear Stearns and Lehman Brothers loot without hindrance or sanction, plunge the economy into crisis and then use Treasury bailout money to pay the highest salaries and bonuses in U.S. history.
"Having undermined the economy at large, Wall Street's public relations think tanks are now dismantling the language itself."
Terms that are the antithesis of "free market" also are being turned into the opposite of what they historically have meant. Take today's discussions about nationalizing the banks. For over a century nationalization has meant public takeover of monopolies or other sectors to operate them in the public interest rather than leaving them to special interests. But when neoliberals use the word "nationalization" they mean a bailout, a government giveaway to the financial interests.
Doublethink and doubletalk with regard to "nationalizing" or "socializing" the banks and other sectors is a travesty of political and economic discussion from the 17th through mid-20th centuries. Society's basic grammar of thought, the vocabulary to discuss political and economic topics, is being turned inside-out in an effort to ward off discussion of the policy solutions posed by the classical economists and political philosophers that made Western civilization "Western."
Today's clash of civilization is not really with the Orient; it is with our own past, with the Enlightenment itself and its evolution into classical political economy and Progressive Era social reforms aimed at freeing society from the surviving trammels of European feudalism. What we are seeing is propaganda designed to deceive, to distract attention from economic reality so as to promote the property and financial interests from whose predatory grasp classical economists set out to free the world. What is being attempted is nothing less than an attempt to destroy the intellectual and moral edifice of what took Western civilization eight centuries to develop, from the 12th century Schoolmen discussing Just Price through 19th and 20th century classical economic value theory.
"What we are seeing is propaganda designed to deceive, to distract attention from economic reality."
Any idea of "socialism from above," in the sense of "socializing the risk," is old-fashioned oligarchy - kleptocratic statism from above. Real nationalization occurs when governments act in the public interest to take over private property. The 19th-century program to nationalize the land (it was the first plank of the Communist Manifesto) did not mean anything remotely like the government taking over estates, paying off their mortgages at public expense and then giving it back to the former landlords free and clear of encumbrances and taxes. It meant taking the land and its rental income into the public domain, and leasing it out at a user fee ranging from actual operating cost to a subsidized rate or even freely as in the case of streets and roads.
Nationalizing the banks along these lines would mean that the government would supply the nation's credit needs. The Treasury would become the source of new money, replacing commercial bank credit. Presumably this credit would be lent out for economically and socially productive purposes, not merely to inflate asset prices while loading down households and business with debt as has occurred under today's commercial bank lending policies.
How neoliberals falsify the West's political history
The fact that today's neoliberals claim to be the intellectual descendants of Adam Smith make it necessary to restore a more accurate historical perspective. Their concept of "free markets" is the antithesis of Smith's. It is the opposite of that of the classical political economists down through John Stuart Mill, Karl Marx and the Progressive Era reforms that sought to create markets free of extractive rentier claims by special interests whose institutional power can be traced back to medieval Europe and its age of military conquest.
Economic writers from the 16th through 20th centuries recognized that free markets required government oversight to prevent monopoly pricing and other charges levied by special privilege. By contrast, today's neoliberal ideologues are public relations advocates for vested interests to depict a "free market" is one free of government regulation, "free" of anti-trust protection, and even of protection against fraud (as evidenced by the SEC's refusal to move against Madoff, Enron, Citibank et al.). The neoliberal ideal of free markets is thus basically that of a bank robber or embezzler, wishing for a world without police so as to be sufficiently free to siphon off other peoples' money without constraint.
The Chicago Boys in Chile realized that markets free for predatory finance and insider privatization could only be imposed at gunpoint. These free-marketers closed down every economics department in Chile, every social science department outside of the Catholic University where the Chicago Boys held sway. Operation Condor arrested, exiled or murdered tens of thousands of academics, intellectuals, labor leaders and artists. Only by totalitarian control over the academic curriculum and public media backed by an active secret police and army could "free markets" neoliberal style be imposed. The resulting privatization at gunpoint became an exercise in what Marx called "primitive accumulation" - seizure of the public domain by political elites backed by force. It is a free market William-the-Conqueror or Yeltsin-kleptocrat style, with property parceled out to the companions of the political or military leader.
"The neoliberal ideal of free markets is basically that of a bank robber or embezzler, wishing for a world without police."
All this was just the opposite of the kind of free markets that Adam Smith had in mind when he warned that businessmen rarely get together but to plot ways to fix markets to their advantage. This is not a problem that troubled Mr. Greenspan or the editorial writers of the New York Times and Washington Post. There really is no kinship between their neoliberal ideals and those of the Enlightenment political philosophers. For them to promote an idea of free markets as ones "free" for political insiders to pry away the public domain for themselves is to lower an intellectual Iron Curtain on the history of economic thought.
The classical economists and American Progressives envisioned markets free of economic rent and interest - free of rentier overhead charges and monopoly price gouging, free of land-rent, interest paid to bankers and wealthy financial institutions, and free of taxes to support an oligarchy. Governments were to base their tax systems on collecting the "free lunch" of economic rent, headed by that of favorable locations supplied by nature and given market value by public investment in transportation and other infrastructure, not by the efforts of landlords themselves.
The argument between Progressive Era reformers, socialists, anarchists and individualists thus turned on the political strategy of how best to free markets from debt and rent. Where they differed was on the best political means to achieve it, above all the role of the state. There was broad agreement that the state was controlled by vested interests inherited from feudal Europe's military conquests and the world that was colonized by European military force. The political question at the turn of the 20th century was whether peaceful democratic reform could overcome the political and even military resistance wielded by the Old Regime using violence to retain its "rights." The ensuing political revolutions were grounded in the Enlightenment, in the legal philosophy of men such as John Locke, political economists such as Adam Smith, John Stuart Mill and Marx. Power was to be used to free markets from the predatory property and financial systems inherited from feudalism. Markets were to be free of privilege and free lunches, so that people would obtain income and wealth only by their own labor and enterprise. This was the essence of the labor theory of value and its complement, the concept of economic rent as the excess of market price over socially necessary cost-value.
Although we now know that markets and prices, rent and interest, contractual formalities and nearly all the elements of economic enterprise originated in the "mixed economies" of Mesopotamia in the fourth millennium BC and continued throughout the mixed public/private economies of classical antiquity, the discussion was so politically polarized that the idea of a mixed economy with checks and balances received scant attention a century ago.
"Power was to be used to free markets from the predatory property and financial systems inherited from feudalism."
Individualists believed that shrinking central governments would shrink the control mechanism by which the vested interests extracted wealth without work or enterprise of their own. Socialists saw that a strong government was needed to protect society from the attempts of property and finance to use their gains to monopolize economic and political power. Both ends of the political spectrum aimed at the same objective - to bring prices down to actual costs of production. The common aim was to maximize economic efficiency so as to pass on the fruits of the Industrial and Agricultural Revolutions to the population at large. This required blocking the rentier class of interlopers from grabbing the public domain and controlling the allocation of resources. Socialists did not believe this could be done without taking the state's political and legal power into their own hands. Marxists believed that a revolution was necessary to reclaim property rent for the public domain, and to enable governments to create their own credit rather than borrow at interest from commercial bankers and wealthy bondholders. The aim was not to create a bureaucracy but to free society from the surviving absentee ownership power of the vested property and financial interests.
All this history of economic thought has been as thoroughly expunged from today's academic curriculum as it has from popular discussion. Few people remember the great debate at the turn of the 20th century: Would the world progress fairly quickly from Progressive Era reforms to outright socialism - public ownership of basic economic infrastructure, natural monopolies (including the banking system) and the land itself (and to Marxists, of industrial capital as well)? Or, could the liberal reformers of the day - individualists, land taxers, classical economists in the tradition of Mill, and American institutionalists such as Simon Patten - retain capitalism's basic structure and private property ownership? If they could do so, they recognized that it would have to be in the context of regulating markets and introducing progressive taxation of wealth and income. This was the alternative to outright "state" ownership. Today's extreme "free market" idea is a dumbed-down caricature of this position.
"A ‘free market' was an active political creation and required regulatory vigilance."
All sides viewed the government as society's "brain," its forward planning organ. Given the complexity of modern technology, humanity would shape its own evolution. Instead of evolution occurring by "primitive accumulation," it could be planned deliberately. Individualists countered that no human planner was sufficiently imaginative to manage the complexity of markets, but endorsed the need to strip away all forms of unearned income - economic rent and the rise in land prices that Mill called the "unearned increment." This involved government regulation to shape markets. A "free market" was an active political creation and required regulatory vigilance.
As public relations advocates for the vested interests and special rentier privilege, today's "neoliberal" advocates of "free" markets seek to maximize economic rent - the free lunch of price in excess of cost-value, not to free markets from rentier charges. So misleading a pedigree only could be achieved by outright suppression of knowledge of what Locke, Smith and Mill really wrote. Attempts to regulate "free markets" and limit monopoly pricing and privilege are conflated with "socialism," even with Soviet-style bureaucracy. The aim is to deter the analysis of what a "free market" really is: a market free of unnecessary costs: monopoly rents, property rents and financial charges for credit that governments can create freely.
Political reform to bring market prices in line with socially necessary cost-value was the great economic issue of the 19th century. The labor theory of intrinsic cost-value found its counterpart in the theory of economic rent: land rent, monopoly price gouging, interest and other returns to special privilege that increased market prices purely by institutional property claims. The discussion goes all the way back to the medieval churchmen defining Just Price. The doctrine originally was applied to the proper fees that bankers could charge, and later was extended to land rent, then to the monopolies that governments created and sold off to creditors in an attempt to extricate themselves from debt.
Reformists and more radical socialists alike sought to free capitalism of its egregious inequities, above all its legacy from Europe's Dark Age of military conquest when invading warlords seized lands and imposed an absentee landlord class to receive the rental income, which was used to finance wars of further land acquisition. As matters turned out, hopes that industrial capitalism could reform itself along progressive lines to purge itself of its legacy from feudalism have come crashing down. World War I hit the global economy like a comet, pushing it into a new trajectory and catalyzing its evolution into an unanticipated form of finance capitalism.
"Instead of industrial capitalism increasing capital formation we are seeing finance capitalism strip capital."
It was unanticipated largely because most reformers spent so much effort advocating progressive policies that they neglected what Thorstein Veblen called the vested interests. Their Counter-Enlightenment is creating a world that would have been deemed a dystopia a century ago - something so pessimistic that no futurist dared depict a world run by venal and corrupt bankers, protecting as their prime customers the monopolies, real estate speculators and hedge funds whose economic rent, financial gambling and asset-price inflation is turned into a flow of interest in today's rentier economy. Instead of industrial capitalism increasing capital formation we are seeing finance capitalism strip capital, and instead of the promised world of leisure we are being drawn into one of debt peonage.
The financial travesty of democracy
The financial sector has redefined democracy by making claims that the Federal Reserve must be "independent" from democratically elected representatives, in order to act as the bank lobbyist in Washington. This makes the financial sector exempt from the democratic political process, despite the fact that today's economic planning is now centralized in the banking system. The result is a regime of insider dealings and oligarchy - rule by the wealthy few.
The economic fallacy at work is that bank credit is a veritable factor of production, an almost Physiocratic source of fertility without which growth could not occur. The reality is that the monopoly right to create interest-bearing bank credit is a free transfer from society to a privileged elite. The moral is that when we see a "factor of production" that has no actual labor-cost of production, it is simply an institutional privilege.
So this brings us to the most recent debate about "nationalizing" or "socializing" the banks. The Troubled Asset Relief Program (TARP) so far has been used for the following uses that I think can be truly deemed anti-social, not "socialist" in any form.
By the end of last year, $20 billion was used to pay bonuses and salaries to financial mismanagers, despite the plunge of their banks into negative equity. And to protect their interests, these banks continued to pay lobbying fees to persuade legislators to give them yet more special privileges.
"Do we really want to let banks 'pay back taxpayers' by engaging in yet more predatory financial practices."
While Citibank and other major institutions threatened to bring the financial system crashing down by being "too big to fail," over $100 billion of TARP funds was used to make them even bigger. Already teetering banks bought affiliates that had grown by making irresponsible and outright fraudulent loans. Bank of America bought Angelo Mozilo's Countrywide Financial and Merrill Lynch, while JP Morgan Chase bought Bear Stearns and other big banks bought WaMu and Wachovia.
Today's policy is to "rescue" these giant bank conglomerates by enabling them to "earn" their way out of debt - by selling yet more debt to an already over-indebted U.S. economy. The hope is to re-inflate real estate and other asset prices. But do we really want to let banks "pay back taxpayers" by engaging in yet more predatory financial practices vis-à-vis the economy at large? It threatens to maximize the margin of market price over direct costs of production, by building in higher financial charges. This is just the opposite policy from trying to bring prices for housing and infrastructure in line with technologically necessary costs. It certainly is not a policy to make the U.S. economy more globally competitive.
The Treasury's plan to "socialize" the banks, insurance companies and other financial institutions is simply to step in and take bad loans off their books, shifting the loss onto the public sector. This is the antithesis of true nationalization or "socialization" of the financial system. The banks and insurance companies quickly got over their initial knee-jerk fear that a government bailout would occur on terms that would wipe out their bad management, along with the stockholders and bondholders who backed this bad management. The Treasury has assured these mismanagers that "socialism" for them is a free gift. The primacy of finance over the rest of the economy will be affirmed, leaving management in place and giving stockholders a chance to recover by earning more from the economy at large, with yet more tax favoritism. (This means yet heavier taxes shifted onto consumers, raising their living costs accordingly.)
"The Treasury has assured these mismanagers that ‘socialism' for them is a free gift."
The bulk of wealth under capitalism - as under feudalism -always has come primarily from the public domain, headed by the land and formerly public utilities, capped most recently by the Treasury's debt-creating power. In effect, the Treasury creates a new asset ($11 trillion of new Treasury bonds and guarantees, e.g. the $5.2 trillion to Fannie and Freddie). Interest on these bonds is to be paid by new levies on labor, not on property. This is what is supposed to re-inflate housing, stock and bond prices - the money freed from property and corporate taxes will be available to be capitalized into yet new loans.
So the revenue hitherto paid as business taxes will still be paid - in the form of interest - while the former taxes will still be collected, but from labor. The fiscal-financial burden thus will be doubled. This is not a program to make the economy more competitive or raise living standards for most people. It is a program to polarize the U.S. economy even further between finance, insurance and real estate (FIRE) at the top and labor at the bottom.
Neoliberal denunciations of public regulation and taxation as "socialism" is really an attack on classical political economy - the "original" liberalism whose ideal was to free society from the parasitic legacy of feudalism. A truly socialized Treasury policy would be for banks to lend for productive purposes that contribute to real economic growth, not merely to increase overhead and inflate asset prices by enough to extract interest charges. Fiscal policy would aim to minimize rather than maximizing the price of home ownership and doing business, by basing the tax system on collecting the rent that is now being paid out as interest. Shifting the tax burden off wages and profits onto rent and interest was the core of classical political economy in the 18th and 19th centuries, as well as the Progressive Era and Social Democratic reform movements in the United States and Europe prior to World War I. But this doctrine and its reform program has been buried by the rhetorical smokescreen organized by financial lobbyists seeking to muddy the ideological waters sufficiently to mute popular opposition to today's power grab by finance capital and monopoly capital. Their alternative to true nationalization and socialization of finance is debt peonage, oligarchy and neo-feudalism. They have called this program "free markets."
Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com
The Language of Looting
Wednesday, 25 February 2009
by Michael Hudson
In order to steal literally everything, the Lords of Finance must render language incapable of describing the crime. "Society's basic grammar of thought, the vocabulary to discuss political and economic topics, is being turned inside-out." The banksters still think they can rule from the center of confusion. "Today's policy is to ‘rescue' these giant bank conglomerates by enabling them to ‘earn' their way out of debt - by selling yet more debt to an already over-indebted U.S. economy. The hope is to re-inflate real estate and other asset prices."
"Banking shares began to plunge Friday morning after Senator Dodd, the Connecticut Democrat who is chairman of the banking committee, said in an interview with Bloomberg Television that he was concerned the government might end up nationalizing some lenders "at least for a short time." Several other prominent policy makers - including Alan Greenspan, the former chairman of the Federal Reserve, and Senator Lindsey Graham of South Carolina - have echoed that view recently." -- Eric Dash, "Growing Worry on Rescue Takes a Toll on Banks," The New York Times, February 20, 2009
How is it that Alan Greenspan, free-market lobbyist for Wall Street, recently announced that he favored nationalization of America's banks - and indeed, mainly the biggest and most powerful? Has the old disciple of Ayn Rand gone Red in the night? Surely not.
The answer is that the rhetoric of "free markets," "nationalization" and even "socialism" (as in "socializing the losses") has been turned into the language of deception to help the financial sector mobilize government power to support its own special privileges. Having undermined the economy at large, Wall Street's public relations think tanks are now dismantling the language itself.
Exactly what does "a free market" mean? Is it what the classical economists advocated - a market free from monopoly power, business fraud, political insider dealing and special privileges for vested interests - a market protected by the rise in public regulation from the Sherman Anti-Trust law of 1890 to the Glass-Steagall Act and other New Deal legislation? Or is it a market free for predators to exploit victims without public regulation or economic policemen - the kind of free-for-all market that the Federal Reserve and Security and Exchange Commission (SEC) have created over the past decade or so? It seems incredible that people should accept today's neoliberal idea of "market freedom" in the sense of neutering government watchdogs, Alan Greenspan-style, letting Angelo Mozilo at Countrywide, Hank Greenberg at AIG, Bernie Madoff, Citibank, Bear Stearns and Lehman Brothers loot without hindrance or sanction, plunge the economy into crisis and then use Treasury bailout money to pay the highest salaries and bonuses in U.S. history.
"Having undermined the economy at large, Wall Street's public relations think tanks are now dismantling the language itself."
Terms that are the antithesis of "free market" also are being turned into the opposite of what they historically have meant. Take today's discussions about nationalizing the banks. For over a century nationalization has meant public takeover of monopolies or other sectors to operate them in the public interest rather than leaving them to special interests. But when neoliberals use the word "nationalization" they mean a bailout, a government giveaway to the financial interests.
Doublethink and doubletalk with regard to "nationalizing" or "socializing" the banks and other sectors is a travesty of political and economic discussion from the 17th through mid-20th centuries. Society's basic grammar of thought, the vocabulary to discuss political and economic topics, is being turned inside-out in an effort to ward off discussion of the policy solutions posed by the classical economists and political philosophers that made Western civilization "Western."
Today's clash of civilization is not really with the Orient; it is with our own past, with the Enlightenment itself and its evolution into classical political economy and Progressive Era social reforms aimed at freeing society from the surviving trammels of European feudalism. What we are seeing is propaganda designed to deceive, to distract attention from economic reality so as to promote the property and financial interests from whose predatory grasp classical economists set out to free the world. What is being attempted is nothing less than an attempt to destroy the intellectual and moral edifice of what took Western civilization eight centuries to develop, from the 12th century Schoolmen discussing Just Price through 19th and 20th century classical economic value theory.
"What we are seeing is propaganda designed to deceive, to distract attention from economic reality."
Any idea of "socialism from above," in the sense of "socializing the risk," is old-fashioned oligarchy - kleptocratic statism from above. Real nationalization occurs when governments act in the public interest to take over private property. The 19th-century program to nationalize the land (it was the first plank of the Communist Manifesto) did not mean anything remotely like the government taking over estates, paying off their mortgages at public expense and then giving it back to the former landlords free and clear of encumbrances and taxes. It meant taking the land and its rental income into the public domain, and leasing it out at a user fee ranging from actual operating cost to a subsidized rate or even freely as in the case of streets and roads.
Nationalizing the banks along these lines would mean that the government would supply the nation's credit needs. The Treasury would become the source of new money, replacing commercial bank credit. Presumably this credit would be lent out for economically and socially productive purposes, not merely to inflate asset prices while loading down households and business with debt as has occurred under today's commercial bank lending policies.
How neoliberals falsify the West's political history
The fact that today's neoliberals claim to be the intellectual descendants of Adam Smith make it necessary to restore a more accurate historical perspective. Their concept of "free markets" is the antithesis of Smith's. It is the opposite of that of the classical political economists down through John Stuart Mill, Karl Marx and the Progressive Era reforms that sought to create markets free of extractive rentier claims by special interests whose institutional power can be traced back to medieval Europe and its age of military conquest.
Economic writers from the 16th through 20th centuries recognized that free markets required government oversight to prevent monopoly pricing and other charges levied by special privilege. By contrast, today's neoliberal ideologues are public relations advocates for vested interests to depict a "free market" is one free of government regulation, "free" of anti-trust protection, and even of protection against fraud (as evidenced by the SEC's refusal to move against Madoff, Enron, Citibank et al.). The neoliberal ideal of free markets is thus basically that of a bank robber or embezzler, wishing for a world without police so as to be sufficiently free to siphon off other peoples' money without constraint.
The Chicago Boys in Chile realized that markets free for predatory finance and insider privatization could only be imposed at gunpoint. These free-marketers closed down every economics department in Chile, every social science department outside of the Catholic University where the Chicago Boys held sway. Operation Condor arrested, exiled or murdered tens of thousands of academics, intellectuals, labor leaders and artists. Only by totalitarian control over the academic curriculum and public media backed by an active secret police and army could "free markets" neoliberal style be imposed. The resulting privatization at gunpoint became an exercise in what Marx called "primitive accumulation" - seizure of the public domain by political elites backed by force. It is a free market William-the-Conqueror or Yeltsin-kleptocrat style, with property parceled out to the companions of the political or military leader.
"The neoliberal ideal of free markets is basically that of a bank robber or embezzler, wishing for a world without police."
All this was just the opposite of the kind of free markets that Adam Smith had in mind when he warned that businessmen rarely get together but to plot ways to fix markets to their advantage. This is not a problem that troubled Mr. Greenspan or the editorial writers of the New York Times and Washington Post. There really is no kinship between their neoliberal ideals and those of the Enlightenment political philosophers. For them to promote an idea of free markets as ones "free" for political insiders to pry away the public domain for themselves is to lower an intellectual Iron Curtain on the history of economic thought.
The classical economists and American Progressives envisioned markets free of economic rent and interest - free of rentier overhead charges and monopoly price gouging, free of land-rent, interest paid to bankers and wealthy financial institutions, and free of taxes to support an oligarchy. Governments were to base their tax systems on collecting the "free lunch" of economic rent, headed by that of favorable locations supplied by nature and given market value by public investment in transportation and other infrastructure, not by the efforts of landlords themselves.
The argument between Progressive Era reformers, socialists, anarchists and individualists thus turned on the political strategy of how best to free markets from debt and rent. Where they differed was on the best political means to achieve it, above all the role of the state. There was broad agreement that the state was controlled by vested interests inherited from feudal Europe's military conquests and the world that was colonized by European military force. The political question at the turn of the 20th century was whether peaceful democratic reform could overcome the political and even military resistance wielded by the Old Regime using violence to retain its "rights." The ensuing political revolutions were grounded in the Enlightenment, in the legal philosophy of men such as John Locke, political economists such as Adam Smith, John Stuart Mill and Marx. Power was to be used to free markets from the predatory property and financial systems inherited from feudalism. Markets were to be free of privilege and free lunches, so that people would obtain income and wealth only by their own labor and enterprise. This was the essence of the labor theory of value and its complement, the concept of economic rent as the excess of market price over socially necessary cost-value.
Although we now know that markets and prices, rent and interest, contractual formalities and nearly all the elements of economic enterprise originated in the "mixed economies" of Mesopotamia in the fourth millennium BC and continued throughout the mixed public/private economies of classical antiquity, the discussion was so politically polarized that the idea of a mixed economy with checks and balances received scant attention a century ago.
"Power was to be used to free markets from the predatory property and financial systems inherited from feudalism."
Individualists believed that shrinking central governments would shrink the control mechanism by which the vested interests extracted wealth without work or enterprise of their own. Socialists saw that a strong government was needed to protect society from the attempts of property and finance to use their gains to monopolize economic and political power. Both ends of the political spectrum aimed at the same objective - to bring prices down to actual costs of production. The common aim was to maximize economic efficiency so as to pass on the fruits of the Industrial and Agricultural Revolutions to the population at large. This required blocking the rentier class of interlopers from grabbing the public domain and controlling the allocation of resources. Socialists did not believe this could be done without taking the state's political and legal power into their own hands. Marxists believed that a revolution was necessary to reclaim property rent for the public domain, and to enable governments to create their own credit rather than borrow at interest from commercial bankers and wealthy bondholders. The aim was not to create a bureaucracy but to free society from the surviving absentee ownership power of the vested property and financial interests.
All this history of economic thought has been as thoroughly expunged from today's academic curriculum as it has from popular discussion. Few people remember the great debate at the turn of the 20th century: Would the world progress fairly quickly from Progressive Era reforms to outright socialism - public ownership of basic economic infrastructure, natural monopolies (including the banking system) and the land itself (and to Marxists, of industrial capital as well)? Or, could the liberal reformers of the day - individualists, land taxers, classical economists in the tradition of Mill, and American institutionalists such as Simon Patten - retain capitalism's basic structure and private property ownership? If they could do so, they recognized that it would have to be in the context of regulating markets and introducing progressive taxation of wealth and income. This was the alternative to outright "state" ownership. Today's extreme "free market" idea is a dumbed-down caricature of this position.
"A ‘free market' was an active political creation and required regulatory vigilance."
All sides viewed the government as society's "brain," its forward planning organ. Given the complexity of modern technology, humanity would shape its own evolution. Instead of evolution occurring by "primitive accumulation," it could be planned deliberately. Individualists countered that no human planner was sufficiently imaginative to manage the complexity of markets, but endorsed the need to strip away all forms of unearned income - economic rent and the rise in land prices that Mill called the "unearned increment." This involved government regulation to shape markets. A "free market" was an active political creation and required regulatory vigilance.
As public relations advocates for the vested interests and special rentier privilege, today's "neoliberal" advocates of "free" markets seek to maximize economic rent - the free lunch of price in excess of cost-value, not to free markets from rentier charges. So misleading a pedigree only could be achieved by outright suppression of knowledge of what Locke, Smith and Mill really wrote. Attempts to regulate "free markets" and limit monopoly pricing and privilege are conflated with "socialism," even with Soviet-style bureaucracy. The aim is to deter the analysis of what a "free market" really is: a market free of unnecessary costs: monopoly rents, property rents and financial charges for credit that governments can create freely.
Political reform to bring market prices in line with socially necessary cost-value was the great economic issue of the 19th century. The labor theory of intrinsic cost-value found its counterpart in the theory of economic rent: land rent, monopoly price gouging, interest and other returns to special privilege that increased market prices purely by institutional property claims. The discussion goes all the way back to the medieval churchmen defining Just Price. The doctrine originally was applied to the proper fees that bankers could charge, and later was extended to land rent, then to the monopolies that governments created and sold off to creditors in an attempt to extricate themselves from debt.
Reformists and more radical socialists alike sought to free capitalism of its egregious inequities, above all its legacy from Europe's Dark Age of military conquest when invading warlords seized lands and imposed an absentee landlord class to receive the rental income, which was used to finance wars of further land acquisition. As matters turned out, hopes that industrial capitalism could reform itself along progressive lines to purge itself of its legacy from feudalism have come crashing down. World War I hit the global economy like a comet, pushing it into a new trajectory and catalyzing its evolution into an unanticipated form of finance capitalism.
"Instead of industrial capitalism increasing capital formation we are seeing finance capitalism strip capital."
It was unanticipated largely because most reformers spent so much effort advocating progressive policies that they neglected what Thorstein Veblen called the vested interests. Their Counter-Enlightenment is creating a world that would have been deemed a dystopia a century ago - something so pessimistic that no futurist dared depict a world run by venal and corrupt bankers, protecting as their prime customers the monopolies, real estate speculators and hedge funds whose economic rent, financial gambling and asset-price inflation is turned into a flow of interest in today's rentier economy. Instead of industrial capitalism increasing capital formation we are seeing finance capitalism strip capital, and instead of the promised world of leisure we are being drawn into one of debt peonage.
The financial travesty of democracy
The financial sector has redefined democracy by making claims that the Federal Reserve must be "independent" from democratically elected representatives, in order to act as the bank lobbyist in Washington. This makes the financial sector exempt from the democratic political process, despite the fact that today's economic planning is now centralized in the banking system. The result is a regime of insider dealings and oligarchy - rule by the wealthy few.
The economic fallacy at work is that bank credit is a veritable factor of production, an almost Physiocratic source of fertility without which growth could not occur. The reality is that the monopoly right to create interest-bearing bank credit is a free transfer from society to a privileged elite. The moral is that when we see a "factor of production" that has no actual labor-cost of production, it is simply an institutional privilege.
So this brings us to the most recent debate about "nationalizing" or "socializing" the banks. The Troubled Asset Relief Program (TARP) so far has been used for the following uses that I think can be truly deemed anti-social, not "socialist" in any form.
By the end of last year, $20 billion was used to pay bonuses and salaries to financial mismanagers, despite the plunge of their banks into negative equity. And to protect their interests, these banks continued to pay lobbying fees to persuade legislators to give them yet more special privileges.
"Do we really want to let banks 'pay back taxpayers' by engaging in yet more predatory financial practices."
While Citibank and other major institutions threatened to bring the financial system crashing down by being "too big to fail," over $100 billion of TARP funds was used to make them even bigger. Already teetering banks bought affiliates that had grown by making irresponsible and outright fraudulent loans. Bank of America bought Angelo Mozilo's Countrywide Financial and Merrill Lynch, while JP Morgan Chase bought Bear Stearns and other big banks bought WaMu and Wachovia.
Today's policy is to "rescue" these giant bank conglomerates by enabling them to "earn" their way out of debt - by selling yet more debt to an already over-indebted U.S. economy. The hope is to re-inflate real estate and other asset prices. But do we really want to let banks "pay back taxpayers" by engaging in yet more predatory financial practices vis-à-vis the economy at large? It threatens to maximize the margin of market price over direct costs of production, by building in higher financial charges. This is just the opposite policy from trying to bring prices for housing and infrastructure in line with technologically necessary costs. It certainly is not a policy to make the U.S. economy more globally competitive.
The Treasury's plan to "socialize" the banks, insurance companies and other financial institutions is simply to step in and take bad loans off their books, shifting the loss onto the public sector. This is the antithesis of true nationalization or "socialization" of the financial system. The banks and insurance companies quickly got over their initial knee-jerk fear that a government bailout would occur on terms that would wipe out their bad management, along with the stockholders and bondholders who backed this bad management. The Treasury has assured these mismanagers that "socialism" for them is a free gift. The primacy of finance over the rest of the economy will be affirmed, leaving management in place and giving stockholders a chance to recover by earning more from the economy at large, with yet more tax favoritism. (This means yet heavier taxes shifted onto consumers, raising their living costs accordingly.)
"The Treasury has assured these mismanagers that ‘socialism' for them is a free gift."
The bulk of wealth under capitalism - as under feudalism -always has come primarily from the public domain, headed by the land and formerly public utilities, capped most recently by the Treasury's debt-creating power. In effect, the Treasury creates a new asset ($11 trillion of new Treasury bonds and guarantees, e.g. the $5.2 trillion to Fannie and Freddie). Interest on these bonds is to be paid by new levies on labor, not on property. This is what is supposed to re-inflate housing, stock and bond prices - the money freed from property and corporate taxes will be available to be capitalized into yet new loans.
So the revenue hitherto paid as business taxes will still be paid - in the form of interest - while the former taxes will still be collected, but from labor. The fiscal-financial burden thus will be doubled. This is not a program to make the economy more competitive or raise living standards for most people. It is a program to polarize the U.S. economy even further between finance, insurance and real estate (FIRE) at the top and labor at the bottom.
Neoliberal denunciations of public regulation and taxation as "socialism" is really an attack on classical political economy - the "original" liberalism whose ideal was to free society from the parasitic legacy of feudalism. A truly socialized Treasury policy would be for banks to lend for productive purposes that contribute to real economic growth, not merely to increase overhead and inflate asset prices by enough to extract interest charges. Fiscal policy would aim to minimize rather than maximizing the price of home ownership and doing business, by basing the tax system on collecting the rent that is now being paid out as interest. Shifting the tax burden off wages and profits onto rent and interest was the core of classical political economy in the 18th and 19th centuries, as well as the Progressive Era and Social Democratic reform movements in the United States and Europe prior to World War I. But this doctrine and its reform program has been buried by the rhetorical smokescreen organized by financial lobbyists seeking to muddy the ideological waters sufficiently to mute popular opposition to today's power grab by finance capital and monopoly capital. Their alternative to true nationalization and socialization of finance is debt peonage, oligarchy and neo-feudalism. They have called this program "free markets."
Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com
Wednesday, December 10, 2008
The truth behind the Citigroup nationalization
http://onlinejournal.com/artman/publish/article_4062.shtml
The truth behind the Citigroup nationalization
By F. William Engdahl
Online Journal Contributing Writer
Nov 27, 2008
On Friday, November 21, the world came within a hair’s breadth of the most colossal financial collapse in history, according to bankers on the inside of events with whom we have contact.
The trigger was the bank which only two years ago was America’s largest, Citigroup. The size of the US government de facto nationalization of the $2 trillion banking institution is an indication of shocks yet to come in other major US and perhaps European banks thought to be ‘too big to fail.’
The clumsy way in which US Treasury Secretary Henry Paulson, himself not a banker but a Wall Street ‘investment banker,’ whose experience has been in the quite different world of buying and selling stocks or bonds or underwriting and selling same, has handled the unfolding crisis has been worse than incompetent. It has made a grave situation into a globally alarming one.
‘Spitting into the wind’
A case in point is the secretive manner in which Paulson has used the $700 billion in taxpayer funds voted him by a pliable Congress in September. Early on, Paulson put $125 billion into the nine largest banks, including $10 billion for his old firm, Goldman Sachs. However, if we compare the value of the equity share that $125 billion bought with the market price of those banks’ stock, US taxpayers have paid $125 billion for bank stock that a private investor could have bought for $62.5 billion, according to a detailed analysis from Ron W. Bloom, economist with the United Steelworkers union, whose members as well as pension fund face devastating losses were GM to fail.
That means half of the public’s money was a gift to Paulson’s Wall Street cronies. Now, only weeks later, the Treasury is forced to intervene to de facto nationalize Citigroup. It won’t be the last.
Paulson demanded, and got from a pliable US Congress, Democrats as well as Republicans, sole discretion over how and where he can invest the $700 billion, to date with no effective oversight. It amounts to the Treasury secretary in effect ‘spitting into the wind’ in terms of resolving the fundamental crisis.
It should be clear to any serious analyst by now that the September decision by Paulson to defer to rigid financial ideology and let the fourth largest US investment bank, Lehman Brothers fail, was the proximate trigger for the present global crisis. Lehman Brothers’ surprise collapse triggered the current global crisis of confidence. It was simply not clear to the rest of the banking world which US financial institution bank might be saved and which not, after the government had earlier saved the far smaller Bear Stearns, while letting the larger, far more strategic Lehman Brothers fail.
Some Citigroup details
The most alarming aspect of the crisis is the fact that we are in an inter-regnum period when the next president has been elected but cannot act on the situation until after January 20, 2009, when he is sworn in.
Consider the details of the latest Citigroup government de facto nationalization (for ideological reasons Paulson and the Bush administration hysterically avoid admitting they are in the process of nationalizing key banks). Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got some $150 billion in US taxpayer funds in the past two months. Ironically, only eight weeks before, the government had designated Citigroup to take over the failing Wachovia Bank. Normally, authorities have an ailing bank absorbed by a stronger one. In this instance the opposite seems to have been the case. Now it is clear that the Citigroup was in deeper trouble than Wachovia. In a matter of hours in the week before the US government nationalization was announced, the stock value of Citibank plunged to $3.77 in New York, giving the company a market value of about $21 billion. The market value of Citigroup stock in December 2006 had been $247 billion. Two days before the bank’s nationalization, the CEO, Vikram Pandit, had announced a huge 52,000 job slashing plan. It did nothing to stop the slide.
The scale of the hidden losses of perhaps the 20 largest US banks is so enormous that if not before, the first presidential decree of President Barack Obama will likely have to be declaration of a US ‘Bank Holiday’ and the full nationalization of the major banks, taking on the toxic assets and losses until the economy can again function with credit flowing to industry once more.
Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses. After that, remaining losses will be split between Citigroup and the government, with the bank absorbing 10 percent and the government absorbing 90 percent. The US Treasury Department will use its $700 billion TARP or Troubled Asset Recovery Program bailout fund, to assume up to $5 billion of losses. If necessary, the government’s Federal Deposit Insurance Corporation (FDIC) will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses. The measures are without precedent in US financial history. It’s by no means certain they will salvage the dollar system.
The situation is so intertwined, with six US major banks holding the vast bulk of worldwide financial derivatives exposure, that the failure of a single major US financial institution could result in losses to the OTC derivatives market of $300-$400 billion, a new IMF working paper finds. What’s more, since such a failure would likely cause cascading failures of other institutions. total global financial system losses could exceed another $1,500 billion according to an IMF study by Singh and Segoviano.
The madness over a Detroit GM rescue deal
The health of Citigroup is not the only gripping crisis that must be dealt with. At this point, political and ideological bickering in the US Congress has so far prevented a simple emergency $25 billion loan extension to General Motors and others of the US Big Three automakers -- Ford and Chrysler. The absurd spectacle of US congressmen attacking the chairmen of the Big Three for flying to the emergency congressional hearings on a rescue loan in their private company jets, while largely ignoring the issue of consequences to the economy of a GM failure underscores the utter lack of touch with reality that has overwhelmed Washington in recent years.
For GM to go into bankruptcy risks a disaster of colossal proportions. Although Lehman Brothers, the biggest bankruptcy in US history, appears to have had an orderly settlement of its credit defaults swaps, the disruption occurred beforehand, as protection writers had to post additional collateral prior to settlement. That was a major factor in the dramatic global market selloff in October. GM is bigger by far, meaning bigger collateral damage, and this would take place when the financial system is even weaker than when Lehman failed.
In addition, a second, and potentially far more damaging issue, has been largely ignored. The advocates of letting GM go bankrupt argue that it can go into Chapter 11 just like other big companies that get themselves in trouble. That may not happen however, and a Chapter 7 or liquidation of GM that would then result would be a tectonic event.
The problem is that under Chapter 11, it takes time for the company to get the protection of a bankruptcy court. Until that time, which may be weeks or months, the company would need urgently ‘bridge financing’ to continue operating. This is known as ‘Debtor-in-Possession’ or DIP financing. DIP is essential for most Chapter 11 bankruptcies, as it takes time to get the plan of reorganization approved by creditors and the courts. Most companies, like GM today, go to bankruptcy court when they are at the end of their liquidity.
DIP is specifically for companies in, or on the verge of bankruptcy, and the debt is generally senior to other outstanding creditor claims. So it is actually very low risk, as the amount spent is usually not large, relatively speaking. But DIP lending is being severely curtailed right now, just when it is most needed, as healthier banks drastically curtail loans in the severe credit crunch situation.
Without access to DIP bridge financing, GM would be forced into a partial, or even a full liquidation. The ramifications are horrendous. Aside from loss of 125,000 US jobs at GM itself, GM is critical to keeping many US auto suppliers in business. If GM failed, soon most, possibly even all, of the US and even foreign auto suppliers will go under. Those parts suppliers are important to other automakers. Many foreign car factories would be forced to close due to loss of suppliers. Some analysts put 2009 job losses from a GM failure as high as 2.5 million jobs due to the follow-on effects. If the impact of that 2.5 million job loss is seen in terms of the overall losses to the economy of non-auto jobs such as services, home foreclosures caused and such, some estimate total impact would be more than 15 million jobs.
So far in the face of this staggering prospect, the members of the US Congress have chosen to focus on the fact the GM chief, Rick Wagoner, flew in his private company jet to Washington. The congressional charade conjures up the image of Nero playing his fiddle as Rome goes up in flames. It should not be surprising that at the recent EU-Asian Summit in Beijing, Chinese officials floated the idea of trading between the EU and Asian nations such as China in euros, renminbi, yen or other national currencies other than the dollar. The Citigroup bailout and GM debacle has confirmed the death of the post-1944 Bretton Woods Dollar System.
The truth behind Citigroup bailout
What neither Paulson nor anyone in Washington is willing to reveal is the truth behind the Citigroup bailout. By his and the Republican Bush administration’s adamant earlier refusal to take an initial resolute action to immediately nationalize the nine or so largest troubled banks, he has created the present debacle. By refusing, on ideological grounds, to instead reorganize the banks’ assets into some form of ‘good bank’ and ‘bad bank,’ similar to what the government of Sweden did with what it called Securum, during its banking crisis in the early 1990s, Paulson and company have created a global financial structure on the brink.
A Securum or similar temporary nationalization would have allowed the healthy banks to continue lending to the real economy so the economy could continue operating, while the state merely sat on the undervalued real estate assets of the Swedish banks for some months until the recovering economy made the assets again marketable to the private sector. Instead, Paulson and his ‘crony capitalists’ in Washington have turned a bad situation into a globally catastrophic one.
His apparent realization of the error of his initial refusal to nationalize came too late. When Paulson reversed policy on September 19 and presented the nine largest banks with an ultimatum to accept partial government equity ownership, abandoning his original bizarre plan to merely buy up the toxic waste asset-backed securities of the banks with his $700 billion TARP taxpayer money, he never revealed why.
Under the original Paulson Plan, as Dimitri B. Papadimitriou and L. Randall Wray of the Jerome Levy Institute at Bard College in New York point out, Paulson sought to create a situation in which the US ‘Treasury would become an owner of troubled financial institutions in exchange for a capital injection -- but without exercising any ownership rights, such as replacing the management that created the mess. The bailout would be used as an opportunity to consolidate control of the nation’s financial system in the hands of a few large [Wall Street] banks, with government funds subsidizing purchases of troubled banks by “healthy” ones.’
Paulson soon realized the scale of crisis, largely triggered by his inept handling of the Lehman Brothers case, had created an impossible situation. Were Paulson to use the $700 billion to buy up toxic waste ABS from the select banks at today’s market price, the $700 billion would be far too little to take an estimated $2 trillion ($2,000 billion) in Asset Backed Securities off the books of the banks.
The Levy Economics Institute economists state, ‘It is probable that many and perhaps most financial institutions are insolvent today -- with a black hole of negative net worth that would swallow Paulson’s entire $700 billion in one gulp.’
That reality is the real reason Paulson was forced to abandon his original ‘crony bailout’ TARP plan and opt to use some of his money to buy equity shares in the nine largest banks.
That scheme as well is ‘dead on arrival,’ as the latest Citigroup nationalization scheme underscores. The dilemma Paulson has created with his inept handling of the crisis is simple: If the US government paid the true value for these nearly worthless assets, the banks would have to write down huge losses, and, as Levy economists put it, ‘announce to the world that they are insolvent.’ On the other hand, if Paulson raised the toxic waste purchase price high enough to protect the banks from losses, $700 billion ‘will buy only a tiny fraction of the ‘troubled’ assets.’ That is what the latest nationalization of Citigroup is about.
It is only the beginning. The 2009 year will be one of titanic shocks and changes to the global order of a scale perhaps not experienced in the past five centuries. This is why we should speak of the end of the American Century and its Dollar System.
How destructive that process will be to the citizens of the United States who are the prime victims of Paulson’s crony capitalists, as well as to the rest of the world, depends now on the urgency and resoluteness with which heads of national governments in Germany, the EU, China, Russia and the rest of the non-US world react. It is no time for ideological sentimentality and nostalgia of the postwar old order. That collapsed this past September along with Lehman Brothers and the Republican presidency. Waiting for a ‘miracle’ from an Obama presidency is no longer an option for the rest of the world.
F. William Engdahl is author of the book, ‘A Century of War: Anglo-American Oil Politics and the New World Order.’ He is completing work on a new book, ‘Power of Money: The Rise and Decline of the American Century’ due to be released in late Spring 2009. He may be contacted through his website, www.engdahl.oilgeopolitics.net.
The truth behind the Citigroup nationalization
By F. William Engdahl
Online Journal Contributing Writer
Nov 27, 2008
On Friday, November 21, the world came within a hair’s breadth of the most colossal financial collapse in history, according to bankers on the inside of events with whom we have contact.
The trigger was the bank which only two years ago was America’s largest, Citigroup. The size of the US government de facto nationalization of the $2 trillion banking institution is an indication of shocks yet to come in other major US and perhaps European banks thought to be ‘too big to fail.’
The clumsy way in which US Treasury Secretary Henry Paulson, himself not a banker but a Wall Street ‘investment banker,’ whose experience has been in the quite different world of buying and selling stocks or bonds or underwriting and selling same, has handled the unfolding crisis has been worse than incompetent. It has made a grave situation into a globally alarming one.
‘Spitting into the wind’
A case in point is the secretive manner in which Paulson has used the $700 billion in taxpayer funds voted him by a pliable Congress in September. Early on, Paulson put $125 billion into the nine largest banks, including $10 billion for his old firm, Goldman Sachs. However, if we compare the value of the equity share that $125 billion bought with the market price of those banks’ stock, US taxpayers have paid $125 billion for bank stock that a private investor could have bought for $62.5 billion, according to a detailed analysis from Ron W. Bloom, economist with the United Steelworkers union, whose members as well as pension fund face devastating losses were GM to fail.
That means half of the public’s money was a gift to Paulson’s Wall Street cronies. Now, only weeks later, the Treasury is forced to intervene to de facto nationalize Citigroup. It won’t be the last.
Paulson demanded, and got from a pliable US Congress, Democrats as well as Republicans, sole discretion over how and where he can invest the $700 billion, to date with no effective oversight. It amounts to the Treasury secretary in effect ‘spitting into the wind’ in terms of resolving the fundamental crisis.
It should be clear to any serious analyst by now that the September decision by Paulson to defer to rigid financial ideology and let the fourth largest US investment bank, Lehman Brothers fail, was the proximate trigger for the present global crisis. Lehman Brothers’ surprise collapse triggered the current global crisis of confidence. It was simply not clear to the rest of the banking world which US financial institution bank might be saved and which not, after the government had earlier saved the far smaller Bear Stearns, while letting the larger, far more strategic Lehman Brothers fail.
Some Citigroup details
The most alarming aspect of the crisis is the fact that we are in an inter-regnum period when the next president has been elected but cannot act on the situation until after January 20, 2009, when he is sworn in.
Consider the details of the latest Citigroup government de facto nationalization (for ideological reasons Paulson and the Bush administration hysterically avoid admitting they are in the process of nationalizing key banks). Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got some $150 billion in US taxpayer funds in the past two months. Ironically, only eight weeks before, the government had designated Citigroup to take over the failing Wachovia Bank. Normally, authorities have an ailing bank absorbed by a stronger one. In this instance the opposite seems to have been the case. Now it is clear that the Citigroup was in deeper trouble than Wachovia. In a matter of hours in the week before the US government nationalization was announced, the stock value of Citibank plunged to $3.77 in New York, giving the company a market value of about $21 billion. The market value of Citigroup stock in December 2006 had been $247 billion. Two days before the bank’s nationalization, the CEO, Vikram Pandit, had announced a huge 52,000 job slashing plan. It did nothing to stop the slide.
The scale of the hidden losses of perhaps the 20 largest US banks is so enormous that if not before, the first presidential decree of President Barack Obama will likely have to be declaration of a US ‘Bank Holiday’ and the full nationalization of the major banks, taking on the toxic assets and losses until the economy can again function with credit flowing to industry once more.
Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses. After that, remaining losses will be split between Citigroup and the government, with the bank absorbing 10 percent and the government absorbing 90 percent. The US Treasury Department will use its $700 billion TARP or Troubled Asset Recovery Program bailout fund, to assume up to $5 billion of losses. If necessary, the government’s Federal Deposit Insurance Corporation (FDIC) will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses. The measures are without precedent in US financial history. It’s by no means certain they will salvage the dollar system.
The situation is so intertwined, with six US major banks holding the vast bulk of worldwide financial derivatives exposure, that the failure of a single major US financial institution could result in losses to the OTC derivatives market of $300-$400 billion, a new IMF working paper finds. What’s more, since such a failure would likely cause cascading failures of other institutions. total global financial system losses could exceed another $1,500 billion according to an IMF study by Singh and Segoviano.
The madness over a Detroit GM rescue deal
The health of Citigroup is not the only gripping crisis that must be dealt with. At this point, political and ideological bickering in the US Congress has so far prevented a simple emergency $25 billion loan extension to General Motors and others of the US Big Three automakers -- Ford and Chrysler. The absurd spectacle of US congressmen attacking the chairmen of the Big Three for flying to the emergency congressional hearings on a rescue loan in their private company jets, while largely ignoring the issue of consequences to the economy of a GM failure underscores the utter lack of touch with reality that has overwhelmed Washington in recent years.
For GM to go into bankruptcy risks a disaster of colossal proportions. Although Lehman Brothers, the biggest bankruptcy in US history, appears to have had an orderly settlement of its credit defaults swaps, the disruption occurred beforehand, as protection writers had to post additional collateral prior to settlement. That was a major factor in the dramatic global market selloff in October. GM is bigger by far, meaning bigger collateral damage, and this would take place when the financial system is even weaker than when Lehman failed.
In addition, a second, and potentially far more damaging issue, has been largely ignored. The advocates of letting GM go bankrupt argue that it can go into Chapter 11 just like other big companies that get themselves in trouble. That may not happen however, and a Chapter 7 or liquidation of GM that would then result would be a tectonic event.
The problem is that under Chapter 11, it takes time for the company to get the protection of a bankruptcy court. Until that time, which may be weeks or months, the company would need urgently ‘bridge financing’ to continue operating. This is known as ‘Debtor-in-Possession’ or DIP financing. DIP is essential for most Chapter 11 bankruptcies, as it takes time to get the plan of reorganization approved by creditors and the courts. Most companies, like GM today, go to bankruptcy court when they are at the end of their liquidity.
DIP is specifically for companies in, or on the verge of bankruptcy, and the debt is generally senior to other outstanding creditor claims. So it is actually very low risk, as the amount spent is usually not large, relatively speaking. But DIP lending is being severely curtailed right now, just when it is most needed, as healthier banks drastically curtail loans in the severe credit crunch situation.
Without access to DIP bridge financing, GM would be forced into a partial, or even a full liquidation. The ramifications are horrendous. Aside from loss of 125,000 US jobs at GM itself, GM is critical to keeping many US auto suppliers in business. If GM failed, soon most, possibly even all, of the US and even foreign auto suppliers will go under. Those parts suppliers are important to other automakers. Many foreign car factories would be forced to close due to loss of suppliers. Some analysts put 2009 job losses from a GM failure as high as 2.5 million jobs due to the follow-on effects. If the impact of that 2.5 million job loss is seen in terms of the overall losses to the economy of non-auto jobs such as services, home foreclosures caused and such, some estimate total impact would be more than 15 million jobs.
So far in the face of this staggering prospect, the members of the US Congress have chosen to focus on the fact the GM chief, Rick Wagoner, flew in his private company jet to Washington. The congressional charade conjures up the image of Nero playing his fiddle as Rome goes up in flames. It should not be surprising that at the recent EU-Asian Summit in Beijing, Chinese officials floated the idea of trading between the EU and Asian nations such as China in euros, renminbi, yen or other national currencies other than the dollar. The Citigroup bailout and GM debacle has confirmed the death of the post-1944 Bretton Woods Dollar System.
The truth behind Citigroup bailout
What neither Paulson nor anyone in Washington is willing to reveal is the truth behind the Citigroup bailout. By his and the Republican Bush administration’s adamant earlier refusal to take an initial resolute action to immediately nationalize the nine or so largest troubled banks, he has created the present debacle. By refusing, on ideological grounds, to instead reorganize the banks’ assets into some form of ‘good bank’ and ‘bad bank,’ similar to what the government of Sweden did with what it called Securum, during its banking crisis in the early 1990s, Paulson and company have created a global financial structure on the brink.
A Securum or similar temporary nationalization would have allowed the healthy banks to continue lending to the real economy so the economy could continue operating, while the state merely sat on the undervalued real estate assets of the Swedish banks for some months until the recovering economy made the assets again marketable to the private sector. Instead, Paulson and his ‘crony capitalists’ in Washington have turned a bad situation into a globally catastrophic one.
His apparent realization of the error of his initial refusal to nationalize came too late. When Paulson reversed policy on September 19 and presented the nine largest banks with an ultimatum to accept partial government equity ownership, abandoning his original bizarre plan to merely buy up the toxic waste asset-backed securities of the banks with his $700 billion TARP taxpayer money, he never revealed why.
Under the original Paulson Plan, as Dimitri B. Papadimitriou and L. Randall Wray of the Jerome Levy Institute at Bard College in New York point out, Paulson sought to create a situation in which the US ‘Treasury would become an owner of troubled financial institutions in exchange for a capital injection -- but without exercising any ownership rights, such as replacing the management that created the mess. The bailout would be used as an opportunity to consolidate control of the nation’s financial system in the hands of a few large [Wall Street] banks, with government funds subsidizing purchases of troubled banks by “healthy” ones.’
Paulson soon realized the scale of crisis, largely triggered by his inept handling of the Lehman Brothers case, had created an impossible situation. Were Paulson to use the $700 billion to buy up toxic waste ABS from the select banks at today’s market price, the $700 billion would be far too little to take an estimated $2 trillion ($2,000 billion) in Asset Backed Securities off the books of the banks.
The Levy Economics Institute economists state, ‘It is probable that many and perhaps most financial institutions are insolvent today -- with a black hole of negative net worth that would swallow Paulson’s entire $700 billion in one gulp.’
That reality is the real reason Paulson was forced to abandon his original ‘crony bailout’ TARP plan and opt to use some of his money to buy equity shares in the nine largest banks.
That scheme as well is ‘dead on arrival,’ as the latest Citigroup nationalization scheme underscores. The dilemma Paulson has created with his inept handling of the crisis is simple: If the US government paid the true value for these nearly worthless assets, the banks would have to write down huge losses, and, as Levy economists put it, ‘announce to the world that they are insolvent.’ On the other hand, if Paulson raised the toxic waste purchase price high enough to protect the banks from losses, $700 billion ‘will buy only a tiny fraction of the ‘troubled’ assets.’ That is what the latest nationalization of Citigroup is about.
It is only the beginning. The 2009 year will be one of titanic shocks and changes to the global order of a scale perhaps not experienced in the past five centuries. This is why we should speak of the end of the American Century and its Dollar System.
How destructive that process will be to the citizens of the United States who are the prime victims of Paulson’s crony capitalists, as well as to the rest of the world, depends now on the urgency and resoluteness with which heads of national governments in Germany, the EU, China, Russia and the rest of the non-US world react. It is no time for ideological sentimentality and nostalgia of the postwar old order. That collapsed this past September along with Lehman Brothers and the Republican presidency. Waiting for a ‘miracle’ from an Obama presidency is no longer an option for the rest of the world.
F. William Engdahl is author of the book, ‘A Century of War: Anglo-American Oil Politics and the New World Order.’ He is completing work on a new book, ‘Power of Money: The Rise and Decline of the American Century’ due to be released in late Spring 2009. He may be contacted through his website, www.engdahl.oilgeopolitics.net.
Thursday, November 6, 2008
Wall Street’s Great Heist of 2008
http://wsws.org/articles/2008/nov2008/pers-n01.shtml
Wall Street’s Great Heist of 2008
1st November 2008
The Wall Street Journal published a front-page article Friday reporting that the nine biggest US banks, which have received a combined $125 billion in taxpayer funds as part of the $700 billion bailout authored by Treasury Secretary Henry Paulson and passed by the Democratic Congress, owed their executives more than $40 billion for recent years’ compensation and pensions as of the end of 2007.
This means that nearly a third of the public funds given to these banks will ultimately be used to increase the private fortunes of a handful of multimillionaire Wall Street executives.
This revelation, the result of an analysis of the banks’ corporate reports by the American financial elite’s own chief organ, provides a stark exposure of the social interests that are being served by the government bailout. More generally, it provides an instructive insight into class relations in America.
It has already been widely reported that the banks are refusing to use their government windfalls to resume lending to other banks, businesses and consumers—the ostensible purpose of the cash injections—and are, instead, hoarding the money for the purpose of acquiring smaller and weaker banks. The so-called economic rescue plan is, in fact, a plan to effect a rapid consolidation of the US banking system, resulting in the domination of the economy by a few mega-banks, which will be free to set interest rates and lending standards as they see fit.
Far from opposing this development, Treasury Secretary Paulson and the Federal Reserve Board are encouraging it. They deliberately designed the bailout to place no restrictions on how the banks use their taxpayer money and then enacted changes in the tax code to give banks acquiring other banks a huge tax break. (See: “The ‘dirty little secret’ of the US bank bailout”)
As the Journal explains, the minimal restrictions on future executive compensation stipulated in the bailout bill do not affect deferred payments to executives accumulated over previous years. Since such deferred payment accounts are commonplace in the banking industry and are the preferred means by which top executives build up nest eggs in the hundreds of millions of dollars, those who are primarily responsible for the financial disaster and, in many cases, the ruin of their own companies, will emerge from the crisis richer than ever.
As the Journal puts it: “The deferred-compensation programs for executives are like 401(k) plans on steroids.” At some of the banks that have received government handouts, the newspaper notes, the total amounts previously incurred and owed to their executives exceed what they owe in pensions to their entire work forces.
The newspaper notes that at Goldman Sachs, formerly headed by Paulson, “the $11.8 billion obligation primarily for deferred executive compensation dwarfed the liability for its broad-based pension plan for all employees. That was just $399 million.”
Goldman received $10 billion of the $125 billion doled out to the biggest banks. JPMorgan Chase, which was granted $25 billion, owes its top officers $8.5 billion. Citigroup, another $25 billion recipient, owes $5 billion, and Morgan Stanley, which got $10 billion in taxpayer money, is in debt to its top executives to the tune of $10 to $12 billion.
A separate article in the same issue of the Journal amplifies this picture of parasitism and criminality. Headlined “Securities Firms Tackle Pay Issue,” it deals with discussions among the top executives of Wall Street firms such as Goldman Sachs, Morgan Stanley and Merrill Lynch over the advisability of paring down their traditional multimillion-dollar year-end bonuses in the face of growing public outrage.
The article notes that since the start of 2002, Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns have paid a total of $312 billion in compensation and benefits. It estimates that these firms have also paid out $187 billion in bonuses, for a grand total of $499 billion. Much of this staggering sum—more than five-and-a-half times the total income of the firms—has gone to the top echelon of executives.
The latter three firms have either disappeared or are in the process of being taken over. Bear Stearns was bought out by JPMorgan Chase last March in a deal subsidized by the government in the amount of $29 billion; Lehman Brothers filed for bankruptcy in September, and Merrill Lynch has agreed to sell itself to Bank of America in a government-brokered agreement.
While the bank executives were awarding themselves tens of millions in salaries and bonuses, their companies were being run into the ground. Since the start of 2007, for example, Merrill Lynch has had net losses of nearly $20 billion, or virtually all of the profits it made from 2003 to 2006. CEO John Thain took in $83 million in 2007. Now, thousands of Merrill employees are being laid off to cut $7 billion in costs as part of the takeover by Bank of America.
The events of the past two months have brought into sharper focus the naked power exercised by the American financial aristocracy over society and the state. All of the various schemes devised in response to the near-collapse of the financial system have had one thing in common: they proceed from the need to uphold the interests of the most powerful banks and the richest of the rich.
The combination of impotence, servility and duplicity of Congress and its Democratic leadership is being mercilessly exposed. Charles Schumer, the Democratic chairman of the Joint Economic Committee, said this week in regard to the banks’ refusal to use the government money to extend new loans, “There’s not much we can do other than jawbone.”
Christopher Dodd, the Democratic chairman of the Senate Banking Committee, blustered, “The intent here certainly wasn’t for healthy banks to buy healthy banks—it’s infuriating.”
Dodd, it would seem, is shocked to learn that the bailout plan he adamantly supported is being used to serve the narrow self-interest of the bankers. Even if one makes the implausible assumption that this veteran of Washington politics and favorite of Wall Street is not being disingenuous, that does not alter the fact of his utter prostration before the real power brokers in America.
Nothing is permissible that impinges on the basic prerogatives of the financial oligarchy, no matter the cost to the American people. On critical matters regarding the class interests of the ruling elite, the people have no say.
There is a ruling class in America. The administration, Congress, the courts—all of the agencies of the state—are, behind the trappings of democracy, instruments of its domination.
Barry Grey
Wall Street’s Great Heist of 2008
1st November 2008
The Wall Street Journal published a front-page article Friday reporting that the nine biggest US banks, which have received a combined $125 billion in taxpayer funds as part of the $700 billion bailout authored by Treasury Secretary Henry Paulson and passed by the Democratic Congress, owed their executives more than $40 billion for recent years’ compensation and pensions as of the end of 2007.
This means that nearly a third of the public funds given to these banks will ultimately be used to increase the private fortunes of a handful of multimillionaire Wall Street executives.
This revelation, the result of an analysis of the banks’ corporate reports by the American financial elite’s own chief organ, provides a stark exposure of the social interests that are being served by the government bailout. More generally, it provides an instructive insight into class relations in America.
It has already been widely reported that the banks are refusing to use their government windfalls to resume lending to other banks, businesses and consumers—the ostensible purpose of the cash injections—and are, instead, hoarding the money for the purpose of acquiring smaller and weaker banks. The so-called economic rescue plan is, in fact, a plan to effect a rapid consolidation of the US banking system, resulting in the domination of the economy by a few mega-banks, which will be free to set interest rates and lending standards as they see fit.
Far from opposing this development, Treasury Secretary Paulson and the Federal Reserve Board are encouraging it. They deliberately designed the bailout to place no restrictions on how the banks use their taxpayer money and then enacted changes in the tax code to give banks acquiring other banks a huge tax break. (See: “The ‘dirty little secret’ of the US bank bailout”)
As the Journal explains, the minimal restrictions on future executive compensation stipulated in the bailout bill do not affect deferred payments to executives accumulated over previous years. Since such deferred payment accounts are commonplace in the banking industry and are the preferred means by which top executives build up nest eggs in the hundreds of millions of dollars, those who are primarily responsible for the financial disaster and, in many cases, the ruin of their own companies, will emerge from the crisis richer than ever.
As the Journal puts it: “The deferred-compensation programs for executives are like 401(k) plans on steroids.” At some of the banks that have received government handouts, the newspaper notes, the total amounts previously incurred and owed to their executives exceed what they owe in pensions to their entire work forces.
The newspaper notes that at Goldman Sachs, formerly headed by Paulson, “the $11.8 billion obligation primarily for deferred executive compensation dwarfed the liability for its broad-based pension plan for all employees. That was just $399 million.”
Goldman received $10 billion of the $125 billion doled out to the biggest banks. JPMorgan Chase, which was granted $25 billion, owes its top officers $8.5 billion. Citigroup, another $25 billion recipient, owes $5 billion, and Morgan Stanley, which got $10 billion in taxpayer money, is in debt to its top executives to the tune of $10 to $12 billion.
A separate article in the same issue of the Journal amplifies this picture of parasitism and criminality. Headlined “Securities Firms Tackle Pay Issue,” it deals with discussions among the top executives of Wall Street firms such as Goldman Sachs, Morgan Stanley and Merrill Lynch over the advisability of paring down their traditional multimillion-dollar year-end bonuses in the face of growing public outrage.
The article notes that since the start of 2002, Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns have paid a total of $312 billion in compensation and benefits. It estimates that these firms have also paid out $187 billion in bonuses, for a grand total of $499 billion. Much of this staggering sum—more than five-and-a-half times the total income of the firms—has gone to the top echelon of executives.
The latter three firms have either disappeared or are in the process of being taken over. Bear Stearns was bought out by JPMorgan Chase last March in a deal subsidized by the government in the amount of $29 billion; Lehman Brothers filed for bankruptcy in September, and Merrill Lynch has agreed to sell itself to Bank of America in a government-brokered agreement.
While the bank executives were awarding themselves tens of millions in salaries and bonuses, their companies were being run into the ground. Since the start of 2007, for example, Merrill Lynch has had net losses of nearly $20 billion, or virtually all of the profits it made from 2003 to 2006. CEO John Thain took in $83 million in 2007. Now, thousands of Merrill employees are being laid off to cut $7 billion in costs as part of the takeover by Bank of America.
The events of the past two months have brought into sharper focus the naked power exercised by the American financial aristocracy over society and the state. All of the various schemes devised in response to the near-collapse of the financial system have had one thing in common: they proceed from the need to uphold the interests of the most powerful banks and the richest of the rich.
The combination of impotence, servility and duplicity of Congress and its Democratic leadership is being mercilessly exposed. Charles Schumer, the Democratic chairman of the Joint Economic Committee, said this week in regard to the banks’ refusal to use the government money to extend new loans, “There’s not much we can do other than jawbone.”
Christopher Dodd, the Democratic chairman of the Senate Banking Committee, blustered, “The intent here certainly wasn’t for healthy banks to buy healthy banks—it’s infuriating.”
Dodd, it would seem, is shocked to learn that the bailout plan he adamantly supported is being used to serve the narrow self-interest of the bankers. Even if one makes the implausible assumption that this veteran of Washington politics and favorite of Wall Street is not being disingenuous, that does not alter the fact of his utter prostration before the real power brokers in America.
Nothing is permissible that impinges on the basic prerogatives of the financial oligarchy, no matter the cost to the American people. On critical matters regarding the class interests of the ruling elite, the people have no say.
There is a ruling class in America. The administration, Congress, the courts—all of the agencies of the state—are, behind the trappings of democracy, instruments of its domination.
Barry Grey
Sunday, October 12, 2008
CNBC Confirms Lehman CEO Punched at Gym
http://www.businessandmedia.org/articles/2008/20081006150152.aspx
Knock Out: CNBC Confirms Lehman CEO Punched at Gym
Network verifies reports Richard Fuld was attacked for financial institution's bankruptcy.
By Jeff Poor
Business & Media Institute
10/6/2008
It seems anxiety from the financial crisis is reaching new highs, but the tipping point for one individual came at the Lehman Brothers gym in the midst of the company’s collapse.
While former Lehman CEO Richard Fuld was testifying before the House Oversight Committee Oct. 6, CNBC reported he had been punched in the face at the Lehman Brothers gym after it was announced the firm was going bankrupt. CNBC and Vanity Fair contributor Vicki Ward said Fuld was attacked at the gym on a Sunday following the bankruptcy.
“Frankly, I sat there and listened and I’m with the guy who apparently, the day before Barclays announced they were coming in and Lehman had already filed for bankruptcy, went over to him in the gym and punched him because that’s how I feel when I, you know, when I watched that,” Ward said on the Oct. 6 “Power Lunch.” “I didn’t think he was contrite at all, I thought he was arrogant.”
Ward confirmed previous reports about the incident that reportedly occurred Sept. 21 and said the information came from “two very senior sources.”
“From two very senior sources – one incredibly senior source – that he went to the gym after … Lehman was announced as going under. He was on a treadmill with a heart monitor on. Someone was in the corner, pumping iron and he walked over and he knocked him out cold. And frankly after having watched this, I’d have done the same too.”
Ward determined Fuld deserved the beating based on his testimony before the committee.
“I thought he was shameless,” Ward said. “I thought it was appalling. He blamed everyone. He blamed, as you say, ‘naked short sellers’ over and over in case we didn’t get the point, when in fact hedge funds like Harbinger had money locked up in Lehman and was shorting it to try and make the most of the money that they already had. He blamed everybody but himself.”
Lehman Brothers filed for bankruptcy in September 2008 and its assets were later snatched up by the British bank Barclays for $1.35 billion, which included Lehman’s Midtown Manhattan office tower with a $960 million price tag.
Wednesday, October 8, 2008
Paulson cannot be allowed a blank cheque
http://www.ft.com/cms/s/0/9973c5b0-8a6d-11dd-a76a-0000779fd18c.html
Paulson cannot be allowed a blank cheque
By George Soros
September 24 2008
Hank Paulson’s $700bn rescue package has run into difficulty on Capitol Hill. Rightly so: it was ill-conceived. Congress would be abdicating its responsibility if it gave the Treasury secretary a blank cheque. The bill submitted to Congress even had language in it that would exempt the secretary’s decisions from review by any court or administrative agency – the ultimate fulfillment of the Bush administration’s dream of a unitary executive.
Mr Paulson’s record does not inspire the confidence necessary to give him discretion over $700bn. His actions last week brought on the crisis that makes rescue necessary. On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG. By Tuesday he had to reverse himself and provide an $85bn loan to AIG on punitive terms. The demise of Lehman disrupted the commercial paper market. A large money market fund “broke the buck” and investment banks that relied on the commercial paper market had difficulty financing their operations. By Thursday a run on money market funds was in full swing and we came as close to a meltdown as at any time since the 1930s. Mr Paulson reversed again and proposed a systemic rescue.
Mr Paulson had got a blank cheque from Congress once before. That was to deal with Fannie Mae and Freddie Mac. His solution landed the housing market in the worst of all worlds: their managements knew that if the blank cheques were filled out they would lose their jobs, so they retrenched and made mortgages more expensive and less available. Within a few weeks the market forced Mr Paulson’s hand and he had to take them over.
Mr Paulson’s proposal to purchase distressed mortgage-related securities poses a classic problem of asymmetric information. The securities are hard to value but the sellers know more about them than the buyer: in any auction process the Treasury would end up with the dregs. The proposal is also rife with latent conflict of interest issues. Unless the Treasury overpays for the securities, the scheme would not bring relief. But if the scheme is used to bail out insolvent banks, what will the taxpayers get in return?
Barack Obama has outlined four conditions that ought to be imposed: an upside for the taxpayers as well as a downside; a bipartisan board to oversee the process; help for the homeowners as well as the holders of the mortgages; and some limits on the compensation of those who benefit from taxpayers’ money. These are the right principles. They could be applied more effectively by capitalising the institutions that are burdened by distressed securities directly rather than by relieving them of the distressed securities.
The injection of government funds would be much less problematic if it were applied to the equity rather than the balance sheet. $700bn in preferred stock with warrants may be sufficient to make up the hole created by the bursting of the housing bubble. By contrast, the addition of $700bn on the demand side of an $11,000bn market may not be sufficient to arrest the decline of housing prices.
Something also needs to be done on the supply side. To prevent housing prices from overshooting on the downside, the number of foreclosures has to be kept to a minimum. The terms of mortgages need to be adjusted to the homeowners’ ability to pay.
The rescue package leaves this task undone. Making the necessary modifications is a delicate task rendered more difficult by the fact that many mortgages have been sliced up and repackaged in the form of collateralised debt obligations. The holders of the various slices have conflicting interests. It would take too long to work out the conflicts to include a mortgage modification scheme in the rescue package. The package can, however, prepare the ground by modifying bankruptcy law as it relates to principal residences.
Now that the crisis has been unleashed a large-scale rescue package is probably indispensable to bring it under control. Rebuilding the depleted balance sheets of the banking system is the right way to go. Not every bank deserves to be saved, but the experts at the Federal Reserve, with proper supervision, can be counted on to make the right judgments. Managements that are reluctant to accept the consequences of past mistakes could be penalised by depriving them of the Fed’s credit facilities. Making government funds available should also encourage the private sector to participate in recapitalising the banking sector and bringing the financial crisis to a close.
The writer is chairman of Soros Fund Management
Paulson cannot be allowed a blank cheque
By George Soros
September 24 2008
Hank Paulson’s $700bn rescue package has run into difficulty on Capitol Hill. Rightly so: it was ill-conceived. Congress would be abdicating its responsibility if it gave the Treasury secretary a blank cheque. The bill submitted to Congress even had language in it that would exempt the secretary’s decisions from review by any court or administrative agency – the ultimate fulfillment of the Bush administration’s dream of a unitary executive.
Mr Paulson’s record does not inspire the confidence necessary to give him discretion over $700bn. His actions last week brought on the crisis that makes rescue necessary. On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG. By Tuesday he had to reverse himself and provide an $85bn loan to AIG on punitive terms. The demise of Lehman disrupted the commercial paper market. A large money market fund “broke the buck” and investment banks that relied on the commercial paper market had difficulty financing their operations. By Thursday a run on money market funds was in full swing and we came as close to a meltdown as at any time since the 1930s. Mr Paulson reversed again and proposed a systemic rescue.
Mr Paulson had got a blank cheque from Congress once before. That was to deal with Fannie Mae and Freddie Mac. His solution landed the housing market in the worst of all worlds: their managements knew that if the blank cheques were filled out they would lose their jobs, so they retrenched and made mortgages more expensive and less available. Within a few weeks the market forced Mr Paulson’s hand and he had to take them over.
Mr Paulson’s proposal to purchase distressed mortgage-related securities poses a classic problem of asymmetric information. The securities are hard to value but the sellers know more about them than the buyer: in any auction process the Treasury would end up with the dregs. The proposal is also rife with latent conflict of interest issues. Unless the Treasury overpays for the securities, the scheme would not bring relief. But if the scheme is used to bail out insolvent banks, what will the taxpayers get in return?
Barack Obama has outlined four conditions that ought to be imposed: an upside for the taxpayers as well as a downside; a bipartisan board to oversee the process; help for the homeowners as well as the holders of the mortgages; and some limits on the compensation of those who benefit from taxpayers’ money. These are the right principles. They could be applied more effectively by capitalising the institutions that are burdened by distressed securities directly rather than by relieving them of the distressed securities.
The injection of government funds would be much less problematic if it were applied to the equity rather than the balance sheet. $700bn in preferred stock with warrants may be sufficient to make up the hole created by the bursting of the housing bubble. By contrast, the addition of $700bn on the demand side of an $11,000bn market may not be sufficient to arrest the decline of housing prices.
Something also needs to be done on the supply side. To prevent housing prices from overshooting on the downside, the number of foreclosures has to be kept to a minimum. The terms of mortgages need to be adjusted to the homeowners’ ability to pay.
The rescue package leaves this task undone. Making the necessary modifications is a delicate task rendered more difficult by the fact that many mortgages have been sliced up and repackaged in the form of collateralised debt obligations. The holders of the various slices have conflicting interests. It would take too long to work out the conflicts to include a mortgage modification scheme in the rescue package. The package can, however, prepare the ground by modifying bankruptcy law as it relates to principal residences.
Now that the crisis has been unleashed a large-scale rescue package is probably indispensable to bring it under control. Rebuilding the depleted balance sheets of the banking system is the right way to go. Not every bank deserves to be saved, but the experts at the Federal Reserve, with proper supervision, can be counted on to make the right judgments. Managements that are reluctant to accept the consequences of past mistakes could be penalised by depriving them of the Fed’s credit facilities. Making government funds available should also encourage the private sector to participate in recapitalising the banking sector and bringing the financial crisis to a close.
The writer is chairman of Soros Fund Management
Buffett backs Treasury plan
http://www.chron.com/disp/story.mpl/business/6021508.html
Buffett backs Treasury plan
Billionaire says market meltdown is 'an economic Pearl Harbor'
By ERIK HOLM Bloomberg News
Sept. 24, 2008
Billionaire Warren Buffett, calling turmoil in the markets an "economic Pearl Harbor," said his $5 billion investment in Goldman Sachs Group is an endorsement of the Treasury's $700 billion bank rescue plan.
"I am betting on the Congress doing the right thing for the American public and passing this bill," Buffett said on cable channel CNBC Wednesday. "I certainly have a vote of confidence in Goldman and vote of confidence in Congress."
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are pushing Congress to quickly approve the proposal to remove illiquid assets from the banking system. Buffett is buying a stake in New York-based Goldman after three of the investment bank's biggest competitors collapsed or were forced into emergency sales.
"I think the Treasury will pay back the $700 billion and make a considerable amount of money," Buffett said, adding that if he had $700 billion on the government's terms to buy distressed assets, he would. "Unfortunately, I'm tapped out."
74
Goldman's shares rose $4.95, or 4 percent, to $130 at 4 p.m. in New York Stock Exchange composite trading after the agreement with Buffett's Berkshire Hathaway was announced late Tuesday.
The perpetual preferred shares will pay 10 percent interest, and Buffett will get the right to buy $5 billion in common stock in the next five years at $115 a share.
Buffett, 78, has frequently scolded Wall Street for shoddy accounting and risky investments.
He invested in the most profitable U.S. investment bank a week after Lehman Brothers Holdings went bankrupt and Merrill Lynch & Co. sold itself to Bank of America Corp. Bear Stearns Cos. in March was absorbed by JPMorgan Chase & Co.
"It's not like Pearl Harbor where you could look at what happened with your own eyes and decide you had to do something that day," Buffett said on the cable channel. "This is sort of an economic Pearl Harbor we're going through."
The Goldman investment puts Berkshire back in an industry Buffett has mostly shunned since 1997, when Salomon Bros. was sold to Travelers Group. Buffett helped the firm fend off an unwanted takeover in 1987, only to see the New York securities firm trail every U.S. stock index for the next decade.
Buffett backs Treasury plan
Billionaire says market meltdown is 'an economic Pearl Harbor'
By ERIK HOLM Bloomberg News
Sept. 24, 2008
Billionaire Warren Buffett, calling turmoil in the markets an "economic Pearl Harbor," said his $5 billion investment in Goldman Sachs Group is an endorsement of the Treasury's $700 billion bank rescue plan.
"I am betting on the Congress doing the right thing for the American public and passing this bill," Buffett said on cable channel CNBC Wednesday. "I certainly have a vote of confidence in Goldman and vote of confidence in Congress."
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are pushing Congress to quickly approve the proposal to remove illiquid assets from the banking system. Buffett is buying a stake in New York-based Goldman after three of the investment bank's biggest competitors collapsed or were forced into emergency sales.
"I think the Treasury will pay back the $700 billion and make a considerable amount of money," Buffett said, adding that if he had $700 billion on the government's terms to buy distressed assets, he would. "Unfortunately, I'm tapped out."
74
Goldman's shares rose $4.95, or 4 percent, to $130 at 4 p.m. in New York Stock Exchange composite trading after the agreement with Buffett's Berkshire Hathaway was announced late Tuesday.
The perpetual preferred shares will pay 10 percent interest, and Buffett will get the right to buy $5 billion in common stock in the next five years at $115 a share.
Buffett, 78, has frequently scolded Wall Street for shoddy accounting and risky investments.
He invested in the most profitable U.S. investment bank a week after Lehman Brothers Holdings went bankrupt and Merrill Lynch & Co. sold itself to Bank of America Corp. Bear Stearns Cos. in March was absorbed by JPMorgan Chase & Co.
"It's not like Pearl Harbor where you could look at what happened with your own eyes and decide you had to do something that day," Buffett said on the cable channel. "This is sort of an economic Pearl Harbor we're going through."
The Goldman investment puts Berkshire back in an industry Buffett has mostly shunned since 1997, when Salomon Bros. was sold to Travelers Group. Buffett helped the firm fend off an unwanted takeover in 1987, only to see the New York securities firm trail every U.S. stock index for the next decade.
Thursday, September 25, 2008
Last major investment banks change status
http://news.yahoo.com/s/ap/bank_change
Last major investment banks change status
By MARTIN CRUTSINGER
Mon Sep 22, 2008
It was the end of an era on Wall Street as the Federal Reserve granted permission for the last two major investment banks — Goldman Sachs and Morgan Stanley — to become bank holding companies in order to stay in business.
The Fed announced late Sunday evening that it had approved the request, which will allow Goldman and Morgan Stanley to create commercial banks that can take deposits, bolstering the resources of both institutions.
The change is the latest seismic shift on Wall Street as the financial system tries to cope with mounting problems that began more than a year ago with the subprime mortgage crisis.
The Fed had originally said Sunday night that the change in status from investment banks to bank holding companies would not take place for five days, pending review on antitrust grounds. The Fed announced Monday, however, that after discussions with the Justice Department, the status change for both institutions could take place immediately.
After weekend meetings where the Treasury Department, Fed and congressional staff ironed out the program's details, Sen. Christopher Dodd said Monday it's equally important to act responsibly as it is to move quickly on the legislation needed to stabilize the country's troubled financial markets.
Dodd, chairman of the Senate Banking committee, said on CBS's "The Early Show" that many members of Congress believe a legislative relief package also should be tailored to protect taxpayers in the best way possible.
Democrats in Congress said they will add provisions in the bailout measure to protect people in danger of losing their homes and measures to cap executive compensation at firms who get to unload their bad mortgages debt onto the government.
But the proposal is still expected to win quick congressional passage because both parties are concerned about the adverse reaction in financial markets should the measure look like it is being delayed.
The Fed's board of governors granted the investment banks' requests by unanimous vote during a late Sunday meeting in Washington.
The change of status means both companies will come under the direct regulation of the Fed, which oversees the nation's bank holding companies. The banking subsidiaries of the two institutions will face the stricter regulations that commercial banks are required to meet. Previously, the primary regulator for Goldman and Morgan Stanley was the Securities and Exchange Commission.
Shares of both institutions had come under pressure ever since the bankruptcy filing last week by investment bank Lehman Brothers and the forced sale of investment bank Merrill Lynch to Bank of America.
Three people familiar with the matter said Monday that Japan's largest brokerage Nomura Holdings is buying Lehman's Asian assets. Britains Barclay's Bank received bankruptcy court approval early Saturday morning to purchase Lehman's North American brokerage operations.
Shares of Morgan Stanley rose 3.5 percent on word of a possible investment by a Japanese bank while Goldman's fell 3.6 percent in afternoon trading on Monday. Overall, U.S. stocks pulled back Monday. In early afternoon trading, the Dow fell 245.71, or 2.16 percent, to 11,142.73. Broader stock indicators also declined.
Investors feared that the last remaining independent investment banks would not be able to survive in their current form, especially after hedge funds saw some of their funds at Lehman Brothers frozen as part of its bankruptcy. There had been speculation that both institutions would be acquired by commercial banks, whose ability to take deposits would give them a stable source of funding.
In the surprise announcement late Sunday, the central bank said Goldman and Morgan Stanley would be allowed during a transition period to get short-term loans from the Federal Reserve Bank of New York against various types of collateral.
The decision means that Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed's emergency loan program.
After the collapse of Bear Stearns and its forced sale to JP Morgan Chase last March, the Fed used powers it had been granted during the Great Depression to extend its emergency loans to investment banks as well as commercial banks. However, that extension was granted on a temporary basis.
Last major investment banks change status
By MARTIN CRUTSINGER
Mon Sep 22, 2008
It was the end of an era on Wall Street as the Federal Reserve granted permission for the last two major investment banks — Goldman Sachs and Morgan Stanley — to become bank holding companies in order to stay in business.
The Fed announced late Sunday evening that it had approved the request, which will allow Goldman and Morgan Stanley to create commercial banks that can take deposits, bolstering the resources of both institutions.
The change is the latest seismic shift on Wall Street as the financial system tries to cope with mounting problems that began more than a year ago with the subprime mortgage crisis.
The Fed had originally said Sunday night that the change in status from investment banks to bank holding companies would not take place for five days, pending review on antitrust grounds. The Fed announced Monday, however, that after discussions with the Justice Department, the status change for both institutions could take place immediately.
After weekend meetings where the Treasury Department, Fed and congressional staff ironed out the program's details, Sen. Christopher Dodd said Monday it's equally important to act responsibly as it is to move quickly on the legislation needed to stabilize the country's troubled financial markets.
Dodd, chairman of the Senate Banking committee, said on CBS's "The Early Show" that many members of Congress believe a legislative relief package also should be tailored to protect taxpayers in the best way possible.
Democrats in Congress said they will add provisions in the bailout measure to protect people in danger of losing their homes and measures to cap executive compensation at firms who get to unload their bad mortgages debt onto the government.
But the proposal is still expected to win quick congressional passage because both parties are concerned about the adverse reaction in financial markets should the measure look like it is being delayed.
The Fed's board of governors granted the investment banks' requests by unanimous vote during a late Sunday meeting in Washington.
The change of status means both companies will come under the direct regulation of the Fed, which oversees the nation's bank holding companies. The banking subsidiaries of the two institutions will face the stricter regulations that commercial banks are required to meet. Previously, the primary regulator for Goldman and Morgan Stanley was the Securities and Exchange Commission.
Shares of both institutions had come under pressure ever since the bankruptcy filing last week by investment bank Lehman Brothers and the forced sale of investment bank Merrill Lynch to Bank of America.
Three people familiar with the matter said Monday that Japan's largest brokerage Nomura Holdings is buying Lehman's Asian assets. Britains Barclay's Bank received bankruptcy court approval early Saturday morning to purchase Lehman's North American brokerage operations.
Shares of Morgan Stanley rose 3.5 percent on word of a possible investment by a Japanese bank while Goldman's fell 3.6 percent in afternoon trading on Monday. Overall, U.S. stocks pulled back Monday. In early afternoon trading, the Dow fell 245.71, or 2.16 percent, to 11,142.73. Broader stock indicators also declined.
Investors feared that the last remaining independent investment banks would not be able to survive in their current form, especially after hedge funds saw some of their funds at Lehman Brothers frozen as part of its bankruptcy. There had been speculation that both institutions would be acquired by commercial banks, whose ability to take deposits would give them a stable source of funding.
In the surprise announcement late Sunday, the central bank said Goldman and Morgan Stanley would be allowed during a transition period to get short-term loans from the Federal Reserve Bank of New York against various types of collateral.
The decision means that Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed's emergency loan program.
After the collapse of Bear Stearns and its forced sale to JP Morgan Chase last March, the Fed used powers it had been granted during the Great Depression to extend its emergency loans to investment banks as well as commercial banks. However, that extension was granted on a temporary basis.
A $1.8 Trillion Bailout: Where the Money's Going
http://www.cnbc.com/id/26808715
A $1.8 Trillion Bailout: Where the Money's Going
By Reuters
21 Sep 2008
The U.S. Treasury Department is working through the weekend with Congress to craft a plan to spend as much as $700 billion to absorb bad mortgages and other assets from bank or other institution balance sheets to keep the financial system from collapsing.
The move comes close on the heels of an $85 billion Federal Reserve rescue of American International Group and the Treasury's takeover of housing finance firms Fannie Mae and Freddie Mac .
The Treasury plan, which follows a new federal guarantee for money market fund holdings, would push Washington's potential bailout tab to $1.8 trillion.
Following are details of actions, proposals and amounts:
—Up to $700 billion to buy assets from struggling institutions. The plan is aimed at sopping up residential and commercial mortgages from financial institutions but gives Treasury broad latitude.
—Up to $50 billion from the Great Depression-era Exchange Stabilization Fund to guarantee principal in money market mutual funds to provide the same confidence that consumers have in federally insured bank deposits.
—The Fed committed to make unspecified discount window loans to financial institutions to finance the purchase of assets from money market funds to aid redemptions.
—At least $10 billion in Treasury direct purchases of mortgage-backed securities in September. In doubling the program on Friday, the Treasury said it may purchase even more in the months ahead.
—Up to $144 billion in additional MBS purchases by Fannie Mae and Freddie Mac.The Treasury announced they would increase purchases up to the newly expanded investment portfolio limits of $850 billion each. On July 30, the Fannie portfolio stood at $758.1 billion with Freddie's at $798.2 billion.
—$85 billion loan for AIG, which would give the Federal government a 79.9 percent stake and avoid a bankruptcy filing for the embattled insurer. AIG management will be dismissed.
—At least $87 billion in repayments to JPMorgan Chase for providing financing to underpin trades with units of bankrupt investment bank Lehman Brothers . Paulson said over the weekend he was adamant that public funds not be used to rescue the firm.
—$200 billion for Fannie Mae and Freddie Mac. The Treasury will inject up to $100 billion into each institution by purchasing preferred stock to shore up their capital as needed. The deal puts the two housing finance firms under government control.
—$300 billion for the Federal Housing Administration to refinance failing mortgage into new, reduced-principal loans with a federal guarantee, passed as part of a broad housing rescue bill.
—$4 billion in grants to local communities to help them buy and repair homes abandoned due to mortgage foreclosures.
—$29 billion in financing for JPMorgan Chase's government-brokered buyout of Bear Stearns in March. The Fed agreed to take $30 billion in questionable Bear assets as collateral, making JPMorgan liable for the first $1 billion in losses, while agreeing to shoulder any further losses.
—At least $200 billion of currently outstanding loans to banks issued through the Fed's Term Auction Facility, which was recently expanded to allow for longer loans of 84 days alongside the previous 28-day credits.
A $1.8 Trillion Bailout: Where the Money's Going
By Reuters
21 Sep 2008
The U.S. Treasury Department is working through the weekend with Congress to craft a plan to spend as much as $700 billion to absorb bad mortgages and other assets from bank or other institution balance sheets to keep the financial system from collapsing.
The move comes close on the heels of an $85 billion Federal Reserve rescue of American International Group and the Treasury's takeover of housing finance firms Fannie Mae and Freddie Mac .
The Treasury plan, which follows a new federal guarantee for money market fund holdings, would push Washington's potential bailout tab to $1.8 trillion.
Following are details of actions, proposals and amounts:
—Up to $700 billion to buy assets from struggling institutions. The plan is aimed at sopping up residential and commercial mortgages from financial institutions but gives Treasury broad latitude.
—Up to $50 billion from the Great Depression-era Exchange Stabilization Fund to guarantee principal in money market mutual funds to provide the same confidence that consumers have in federally insured bank deposits.
—The Fed committed to make unspecified discount window loans to financial institutions to finance the purchase of assets from money market funds to aid redemptions.
—At least $10 billion in Treasury direct purchases of mortgage-backed securities in September. In doubling the program on Friday, the Treasury said it may purchase even more in the months ahead.
—Up to $144 billion in additional MBS purchases by Fannie Mae and Freddie Mac.The Treasury announced they would increase purchases up to the newly expanded investment portfolio limits of $850 billion each. On July 30, the Fannie portfolio stood at $758.1 billion with Freddie's at $798.2 billion.
—$85 billion loan for AIG, which would give the Federal government a 79.9 percent stake and avoid a bankruptcy filing for the embattled insurer. AIG management will be dismissed.
—At least $87 billion in repayments to JPMorgan Chase for providing financing to underpin trades with units of bankrupt investment bank Lehman Brothers . Paulson said over the weekend he was adamant that public funds not be used to rescue the firm.
—$200 billion for Fannie Mae and Freddie Mac. The Treasury will inject up to $100 billion into each institution by purchasing preferred stock to shore up their capital as needed. The deal puts the two housing finance firms under government control.
—$300 billion for the Federal Housing Administration to refinance failing mortgage into new, reduced-principal loans with a federal guarantee, passed as part of a broad housing rescue bill.
—$4 billion in grants to local communities to help them buy and repair homes abandoned due to mortgage foreclosures.
—$29 billion in financing for JPMorgan Chase's government-brokered buyout of Bear Stearns in March. The Fed agreed to take $30 billion in questionable Bear assets as collateral, making JPMorgan liable for the first $1 billion in losses, while agreeing to shoulder any further losses.
—At least $200 billion of currently outstanding loans to banks issued through the Fed's Term Auction Facility, which was recently expanded to allow for longer loans of 84 days alongside the previous 28-day credits.
Paulson Commits Trillions of Tax Payer Dollars
http://www.marketoracle.co.uk/Article6355.html
Paulson Commits Trillions of Tax Payer Dollars to the Mother of All Bailouts
Stock-Markets / Government Intervention
Sep 19, 2008
Peter Schiff
Just three days ago, after looking at the prospect of bailing a string of distressed financial institution in the country, the government seemingly drew a line in the sand, and refused to bail out Lehman Brothers. The authorities clearly saw Lehman’s demise as a trial balloon to see how the markets would react if the government stayed on the sidelines. That trial balloon quickly turned into the Hindenburg. Immediately reversing course, the Government has decided to go “all in” and bail out every institution with financial exposure to U.S. mortgages.
Simply put, Americans will not be allowed to visibly suffer losses after the greatest asset bubble in U.S. history. But make no mistake, the losses are real and Americans will pay one way or another.
Moving beyond the guided munitions of selective bailouts, the Government is now trying the financial equivalent of carpet bombing (for AIG, Merrill Lynch, and especially Lehman Brothers, this gives new meaning to being a day late and a dollar short). To continue with the military analogies, Paulson's bazooka turned out to be a nuclear tipped ballistic missile.
By committing trillions of tax payer dollars (not the “hundreds of billions” that Paulson predicts), the plan will save commercial and investment banks from certain bankruptcy. In his statement today, Paulson made clear that Congress must pass new legislation to allow the Government to acquire even those loans too poorly collateralized to currently qualify for GSE or FHA absorption. The losses baked into these mortgage products, which Wall Street has been reluctant to even estimate, will now be borne wholly by taxpayers.
In his press conference, Paulson assured us that this plan was designed to safeguard our savings. But in typical government fashion, the plan will have the reverse effect as savings is wiped out through inflation. He also claims that the plan will safeguard home equity by keeping real estate prices high. Since when did high home prices become a strategic national priority? If the plan succeeds, the gains for home sellers will simply be matched by losses for homebuyers, who end up paying inflated prices, and taxpayers, who get stuck with the losses when those buyers default.
Paulson’s distress and confusion was clearly evident when he fielded questions from reporters. The first asked Paulson to describe his fears regarding the probable economic consequences of government inaction. Paulson provided no answer and promptly exited stage right.
When the U.S. government owns all mortgages, the real estate market will be completely subject to political, rather than financial, concerns. Will foreclosures be outlawed? Will loan term easements and principal reductions become standard campaign issues?
While it is dizzying to predict how this plan will be implemented, it is fairly simple to foresee the macroeconomic consequences. The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities. Interestingly, while both Paulson and President Bush acknowledge that the plan will put “significant amounts of taxpayer dollars on the line,” they did not mention any tax increases. Given the politics, no such move is forthcoming. The printing press is their only solution.
The government has also decided to insure all money market funds, adding trillions more in unfunded liabilities to the Federal balance sheet in the blink of an eye. Of course, since bad real estate loans are not the only toxic assets on the balance sheets of financial institution, we will also need to absorb other classes of asset-backed securities, such as those backed by credit card debt and auto loans. So while the move ensures that depositors will not lose money, is does insure that the money itself will lose value. Is the trade-off really worth it? Washington thinks so.
Further, since I assume the plan will apply to all mortgage debt, U.S. taxpayers will also be on the hook to bail out foreign institutions that loaded up on the financial sludge. However, once the government takes them off the hook, do not expect them to re-invest the windfall back into other U.S. dollar denominated assets. This get-out-of-jail free card will likely scare them straight. The global mass exodus from the U.S. dollar and Treasury debt is about to begin: do not get caught in the stampede.
Although gold initially sold off as the apparent need for a financial safe haven ebbed, look for a spectacular rally to commence as its traditional role as an inflation hedge returns with a vengeance.
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”
By Peter Schiff
Euro Pacific Capital
http://www.europac.net/
More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
Paulson Commits Trillions of Tax Payer Dollars to the Mother of All Bailouts
Stock-Markets / Government Intervention
Sep 19, 2008
Peter Schiff
Just three days ago, after looking at the prospect of bailing a string of distressed financial institution in the country, the government seemingly drew a line in the sand, and refused to bail out Lehman Brothers. The authorities clearly saw Lehman’s demise as a trial balloon to see how the markets would react if the government stayed on the sidelines. That trial balloon quickly turned into the Hindenburg. Immediately reversing course, the Government has decided to go “all in” and bail out every institution with financial exposure to U.S. mortgages.
Simply put, Americans will not be allowed to visibly suffer losses after the greatest asset bubble in U.S. history. But make no mistake, the losses are real and Americans will pay one way or another.
Moving beyond the guided munitions of selective bailouts, the Government is now trying the financial equivalent of carpet bombing (for AIG, Merrill Lynch, and especially Lehman Brothers, this gives new meaning to being a day late and a dollar short). To continue with the military analogies, Paulson's bazooka turned out to be a nuclear tipped ballistic missile.
By committing trillions of tax payer dollars (not the “hundreds of billions” that Paulson predicts), the plan will save commercial and investment banks from certain bankruptcy. In his statement today, Paulson made clear that Congress must pass new legislation to allow the Government to acquire even those loans too poorly collateralized to currently qualify for GSE or FHA absorption. The losses baked into these mortgage products, which Wall Street has been reluctant to even estimate, will now be borne wholly by taxpayers.
In his press conference, Paulson assured us that this plan was designed to safeguard our savings. But in typical government fashion, the plan will have the reverse effect as savings is wiped out through inflation. He also claims that the plan will safeguard home equity by keeping real estate prices high. Since when did high home prices become a strategic national priority? If the plan succeeds, the gains for home sellers will simply be matched by losses for homebuyers, who end up paying inflated prices, and taxpayers, who get stuck with the losses when those buyers default.
Paulson’s distress and confusion was clearly evident when he fielded questions from reporters. The first asked Paulson to describe his fears regarding the probable economic consequences of government inaction. Paulson provided no answer and promptly exited stage right.
When the U.S. government owns all mortgages, the real estate market will be completely subject to political, rather than financial, concerns. Will foreclosures be outlawed? Will loan term easements and principal reductions become standard campaign issues?
While it is dizzying to predict how this plan will be implemented, it is fairly simple to foresee the macroeconomic consequences. The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities. Interestingly, while both Paulson and President Bush acknowledge that the plan will put “significant amounts of taxpayer dollars on the line,” they did not mention any tax increases. Given the politics, no such move is forthcoming. The printing press is their only solution.
The government has also decided to insure all money market funds, adding trillions more in unfunded liabilities to the Federal balance sheet in the blink of an eye. Of course, since bad real estate loans are not the only toxic assets on the balance sheets of financial institution, we will also need to absorb other classes of asset-backed securities, such as those backed by credit card debt and auto loans. So while the move ensures that depositors will not lose money, is does insure that the money itself will lose value. Is the trade-off really worth it? Washington thinks so.
Further, since I assume the plan will apply to all mortgage debt, U.S. taxpayers will also be on the hook to bail out foreign institutions that loaded up on the financial sludge. However, once the government takes them off the hook, do not expect them to re-invest the windfall back into other U.S. dollar denominated assets. This get-out-of-jail free card will likely scare them straight. The global mass exodus from the U.S. dollar and Treasury debt is about to begin: do not get caught in the stampede.
Although gold initially sold off as the apparent need for a financial safe haven ebbed, look for a spectacular rally to commence as its traditional role as an inflation hedge returns with a vengeance.
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”
By Peter Schiff
Euro Pacific Capital
http://www.europac.net/
More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
Saturday, September 20, 2008
Barack Obama, Wall Street’s Go to Guy?
http://noquarterusa.net/blog/2008/09/17/who-was-in-wall-streets-pocket/
Barack Obama, Wall Street’s Go to Guy?
By Larry Johnson
Email: larry_johnson@earthlink.net
September 17, 2008
The turmoil in the capital markets is bad news and is forcing each candidate to reassess their current pronouncements on the economy. So, let’s ask some questions. Of the two candidates for President, who got the most money from the two financial giants now in the news–Lehman Brothers and AIG?
McCain received $117,500 from Lehman Bros.
Obama received $370,524 from Lehman Bros.
How about AIG?
John McCain got $36,875 from AIG
Barack Obama raked in $75,899 (+205%)
Got that? Barack Obama, the guy who supposedly is not beholden to special interests, took three times as much money from Lehman Brothers and more than twice as much from AIG.
Gee, and who did the now Government financed mortgage broker Fannie Mae give its money to when it wanted to influence a politician?
OpenSecrets lists the top three politicians in which FNMA “invested” from 1989 to 2008.
Top Recipients of Fannie Mae/Freddie Mac Campaign Contributions, 1989-2008
Name Office State Party Grand Total
Dodd, Christopher S CT D $165,400
Obama, Barack S IL D $126,349 ($6000 came from the PAC)
Kerry, John S MA D $111,000
What about McCain?
The folks at Fannie Mae didn’t show him a lot of love. According to Open Secrets:
McCain, John S AZ R $21,550 (all from individuals).
Oh yeah, and who tabbed the former head of Fannie Mae to head up his Vice Presidential search team? OBAMA, that’s who. Back in May Barack turned to Jim Johnson, former CEO of Fannie Mae. Who is Johnson?
Johnson served as Fannie Mae CEO from 1991 to 1998 and has a long history in both Washington politics and business. He served on the boards of numerous companies, including The Goldman Sachs Group, KB Home, and Target Corporation, and has been Vice Chairman of Perseus LLC. He also was a corporate finance managing director for Lehman Brothers. He was an executive assistant for Vice President Walter Mondale (1977-1981) and a U.S. Senate staff member. Johnson also helped screen running mates for Democratic presidential nominees Walter Mondale in 1984 and John Kerry in 2004.
When it came time for a tough decision who did Barack turn to? A former community organizer per chance? Hell no! He went with the inside the beltway uber lobbyist.
So, Obama bots, save your sanctimonious bullshit. When it comes to cozying up to big players and wealthy Wall Street types smack in the middle of the lastest scandals and crises, Barack Obama is in a league of his own. That is “change” you want to believe in? What a goddamned joke!!
Deal with reality, John McCain wisely was not in bed with these guys. Will the media ask Barack to explain? Probably not.
And to further drive home the point (hat tip to ivet for the link) here is John McCain back in 2006 railing against the power of lobbyists like Fannie Mae:
The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.
For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.
I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.
McCain’s last comment should lead his next batch of Presidential ads. Where was Barack? He was taking Fannie Mae money. Any questions?
Barack Obama, Wall Street’s Go to Guy?
By Larry Johnson
Email: larry_johnson@earthlink.net
September 17, 2008
The turmoil in the capital markets is bad news and is forcing each candidate to reassess their current pronouncements on the economy. So, let’s ask some questions. Of the two candidates for President, who got the most money from the two financial giants now in the news–Lehman Brothers and AIG?
McCain received $117,500 from Lehman Bros.
Obama received $370,524 from Lehman Bros.
How about AIG?
John McCain got $36,875 from AIG
Barack Obama raked in $75,899 (+205%)
Got that? Barack Obama, the guy who supposedly is not beholden to special interests, took three times as much money from Lehman Brothers and more than twice as much from AIG.
Gee, and who did the now Government financed mortgage broker Fannie Mae give its money to when it wanted to influence a politician?
OpenSecrets lists the top three politicians in which FNMA “invested” from 1989 to 2008.
Top Recipients of Fannie Mae/Freddie Mac Campaign Contributions, 1989-2008
Name Office State Party Grand Total
Dodd, Christopher S CT D $165,400
Obama, Barack S IL D $126,349 ($6000 came from the PAC)
Kerry, John S MA D $111,000
What about McCain?
The folks at Fannie Mae didn’t show him a lot of love. According to Open Secrets:
McCain, John S AZ R $21,550 (all from individuals).
Oh yeah, and who tabbed the former head of Fannie Mae to head up his Vice Presidential search team? OBAMA, that’s who. Back in May Barack turned to Jim Johnson, former CEO of Fannie Mae. Who is Johnson?
Johnson served as Fannie Mae CEO from 1991 to 1998 and has a long history in both Washington politics and business. He served on the boards of numerous companies, including The Goldman Sachs Group, KB Home, and Target Corporation, and has been Vice Chairman of Perseus LLC. He also was a corporate finance managing director for Lehman Brothers. He was an executive assistant for Vice President Walter Mondale (1977-1981) and a U.S. Senate staff member. Johnson also helped screen running mates for Democratic presidential nominees Walter Mondale in 1984 and John Kerry in 2004.
When it came time for a tough decision who did Barack turn to? A former community organizer per chance? Hell no! He went with the inside the beltway uber lobbyist.
So, Obama bots, save your sanctimonious bullshit. When it comes to cozying up to big players and wealthy Wall Street types smack in the middle of the lastest scandals and crises, Barack Obama is in a league of his own. That is “change” you want to believe in? What a goddamned joke!!
Deal with reality, John McCain wisely was not in bed with these guys. Will the media ask Barack to explain? Probably not.
And to further drive home the point (hat tip to ivet for the link) here is John McCain back in 2006 railing against the power of lobbyists like Fannie Mae:
The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.
For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.
I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.
McCain’s last comment should lead his next batch of Presidential ads. Where was Barack? He was taking Fannie Mae money. Any questions?
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