Defaulting banks - where will it stop?

[David Malone]

Jan and others, I’m very sorry to post twice. Being new I have no right. I apologize now. But this thought won’t go away.

I won’t make a habit of this I promise.

What is the bail out bill for? I know it seems like a stupid question. But everyone I know and read is of the opinion that it cannot work.

It will not restore confidence in the markets. There is still far too much bad paper out there on and off balance sheets. There is still far too much leverage. There is far, far too much fear about the size and stability of the Credit default swap market.

Do Paulson, Berneke and the leaders of the big investment banks not see these things? It is amusing to deride them all as stupid. But I find that difficult to believe.

Is there another possibility? The idea, and it is only the germ of an idea, came to me when I thought about the way the ‘Great Powers’ had all roped themselves into a web of alliances before WW1. It was designed to make the chances of war unthinkable. But of course it had the effect of making the whole system unstable.

Here is my thought. This isn’t about liquidity. It isn’t even about solvency. It isn’t about confidence. I think it’s about instability, specifically, creating instability.

Could it be that the Paulson/Berneke plan is not primarily about saving the system, nor primarily about bailing out the banks. Too many prominent people have pointed out other ways of doing those things that are less burdensome than the plan that is going to be enacted. I feel sure Paulson, Berneke and others are aware of the other ideas. So why have they ignored them and argued so single- mindedly for their risky and politically almost suicidal plan ? I say suicidal on the basis that when voters realize there is no money for welfare help, or Obama’s CHANGE – because it has all been spent on bailing out the bankers there will be civil unrest – and they must know it. Why are they advocating a plan that makes the American tax-payer foot the bill for a global bail out? Risk civil unrest. Black mail by the Chinese? Frightening, but is that enough? Shock therapy? What for?

If we start from the assumption that these are not stupid people and they have fashioned their plan do achieve a goal – then what is that goal.

OK it’s not a simple bail out - It won’t work. We know it. Let’s assume they know it. It risks crashing both the dollar and the international bond market as well. High stakes indeed. So what does it achieve?

I think the Paulson/Berneke plan is geopolitical more than financial. It is about creating more systemic risk not less.

America does not want to save a system if the cost, is they loose their pre-eminent position in that system. There is a risk if the system is re-capitalized or reformed in certain ways that the dollar might no longer be the reserve currency and economic power might shift from the dollar to the Euro, or a new Asian reserve currency.

By getting the American tax payer to foot the bill, in the form of a huge increase in American debt bonds, they effectively rope everyone even more firmly to America. It would be painful indeed for America to default on their debt. How much more unimaginable IF institutions and nations buy another $700B bail out bonds on top of $800B in Fannie and Freddie bonds?


If we buy any of this new debt we are roping ourselves to a man already carrying an anvil and we are all on thin ice as it is.

The danger the Paulson/Berneke pan averts is the possibility that someone might not get pulled in if America fell into the crevasse. This plan ropes us all together. If America goes, this plan assures that everyone gets pulled down. This is Mutually Assured Destruction for global finance.

If we buy-in we’re doomed.

[David Guyatt]

It really is just a ponzi scheme that I am seeing. Even when it's respectable.

Quite right Magda, banking is a giant Ponzi scheme. The pudding proof of this is revealed in the year on year growth of American gross debt as a percentage of GDP - which now rests at around 70% of GDP (excluding the bail out).

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[Jan Klimkowski]

Mr D Malone (in jest, to distinguish you from Mr D Guyatt), I suspect you're right. There may well be a deliberate attempt to ensure Mutually Assured Destruction of the global financial system, which no "First World" economy can escape. However, in looking for Their endgame, I would search for a remodelling of the world into one which is even more to Their liking, and ever more under Their control.

In other words, Ewen Cameron-style "shock therapy" to produce a tabula rasa which can be rewritten.

Naomi Klein says the following in Peter's post #32:

I start the book with a quote from Milton Friedman that has really made the rounds a lot lately, which is that—and this is a Friedman quote—that “only a crisis, actual or perceived, produces real change. And when the crisis occurs, the change depends on the ideas that are lying around." And then he goes on to say, “That, I believe, is our basic function: to keep the ideas ready until the politically impossible becomes politically inevitable.” So I think it’s really important for people to look at the ideas that are lying around.

There’s enormous corporate lobbying going on to, for instance, eliminate the post-Enron collapse regulations, to actually say that the way to save the American economy—you know, you heard Henry Paulson equating—still equating the interests of the financial sector with the interests of everyone else. We know that’s simply not true. But it’s that—precisely that logic that then is used to say, OK, these are the—this is what the financial community, this is what the corporate world needs in order to revive the economy: they need less regulation, they need less taxation.

So, we should be really, really wary of this claim that we’re hearing that free market ideology is dead, that this marks the end of, you know, of capitalism. You know, I’m sorry, that is not the case. It may be going dormant for a little while to rationalize these massive bailouts, but it will come roaring back, and the crisis that is being deepened right now through these bailouts will be invoked for even more radical deregulation, privatization, tax cuts and so on.

[David Guyatt]

What is the bail out bill for? I know it seems like a stupid question. But everyone I know and read is of the opinion that it cannot work.

Welcome David. I am far from an economist (thankfully I say), but my guess is that we're seeing a small number of different strategies taking place here.

On the one hand I think it likely that the current crisis is a larger replica of the 1980's Savings & Loan crisis which, curiously, came to a head during the Administration of Poppy Bush. This turned out to be a more sophisticated version of the old mafia scam - a bank heist, albeit a multiple bank heist (over 700 of them in fact). Using a failing memory I seem to remember that that rescue figure was around $300-500 billion at the time, although the eventual net cost was somewhat lower. One of the key players in this decade-long affair was Silverado Savings & Loan which collapsed with debts in access of $1 billion. Neil Bush was a director of Silverado at the time.

I have grave doubts that the period of exceptional illiquidity that gave rise to this crisis was accidental or even (as some have opined) a "perfect storm." I think that in the months and years to come information will filter out to indicate that the unparalleled seizing up of the interbank market was a coordinated strategy. I may, of course, be proven wrong on this.

If our governments wished to curb this monster once and for all, they could simply enact legislation to completely restrict/outlaw or indeed separate the casino side of banking from the service side of banking. That they never do even think to do this speaks volumes, I think.

Finally, I have a suspicion that we probably will see this whole matter slowly begin to fade from the public mind over the coming months - which was the way things happened on the S & L crisis. I think that has been factored into the rescue plan.

One key will be whether the interbank market begins functioning again as it always has done until this year. Being a hardcore cynic I see no good reason for it to have seized up to begin with, so I expect it to start greasing the wheels of greed once more in the near future.

Another indicator will be if Chinese follow their threats and offload their dollar assets. They threaten to do this from time to time, but haven't yet -- and it is a rare thing for a sovereign to announce in advance their real strategy as the market immediately discounts it in their pricing. For the Chinese this would damage the value of their US Treasury assets.

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[David Malone]

Jan, Magda, Mr Guyatt,

Thank you for your replies and forbearance.

Of course you must be correct that more than one plan is being pursued here. And I also agree that Shock therapy must be part of it as it.

I don't think this is going to die down though. I think we will see civil disorder this winter in more than one US city. I think this one has got away.

I was in Amercia recently, in Cleveland and Detroit. I have been going to the US for many years and I have never encountered such anger as I did this time. Ordinary, working people - who are usually the 'my country right or wrong', 'America is the best' sort - this time they had the righteous anger that comes from feeling betrayed. They talked about being betrayed. They blamed the wealthy and the powerful.

A local councilman said to me, "What this country needs is a revolution." In two decades I have never heard any American use the world 'revolution' not even in jest. He was at pains to assure me he meant real revolution. He wanted me to know he was using the term, knowing what it meant. He said all this is the company of a local business leader and a local paper journalist.

It has stuck in my mind.

[Jan Klimkowski]

I don't think this is going to die down though. I think we will see civil disorder this winter in more than one US city. I think this one has got away.

I was in Amercia recently, in Cleveland and Detroit. I have been going to the US for many years and I have never encountered such anger as I did this time. Ordinary, working people - who are usually the 'my country right or wrong', 'America is the best' sort - this time they had the righteous anger that comes from feeling betrayed. They talked about being betrayed. They blamed the wealthy and the powerful.

A local councilman said to me, "What this country needs is a revolution." In two decades I have never heard any American use the world 'revolution' not even in jest. He was at pains to assure me he meant real revolution. He wanted me to know he was using the term, knowing what it meant. He said all this is the company of a local business leader and a local paper journalist.

It has stuck in my mind.

Interesting observations about the mood of ordinary Americans.

My fear, as ever, is that those ordinary Americans get suckered into channelling that revolutionary anger into, say, a faux McCain agenda of "dismantling Washingtonian pork barrel and liberal handouts to people too lazy to work". The end result of which would be zero "free" healthcare, the looting and destruction of social security and pensions, and Blackwater mercenaries sending the "genuine" revolutionaries to Halliburton's FEMA prison camps.

I agree with David G that this is a bank heist. However, S&L was a bank heist that didn't destroy the system. Bush & Paulson's desperation to get the "bailout bill" through strikes me as one last plundering of a system which, as David M says, cannot be saved in this manner.

Indeed, as Magda points out, the MBS may not even be backed by mortgage deeds. David M's analysis - loosely, that a "debased currency" has been created and is now being dumped by the wheelbarrow load in exchange for "real" taxpayer money - strikes me as very powerful.

S&L was a heist that left the bank standing. This heist burns the bank down...

[David Guyatt]

It will be interesting to see if the election of a new president will lift the mood?

The other option that I have discussed privately is the possibility that this was, as Jan says, the last bank heist and the "boys" thereafter intend to decamp to other feeding grounds in the still emerging markets of the Southern hemisphere.

But my gut instinct stubbornly says there is still more to come and that the final departure of the American gravy train is yet to leave platform one.

Then there's also still that remaining 30% of GDP to be sucked up.

Maybe

[Jan Klimkowski]

Then there's also still that remaining 30% of GDP to be sucked up.

So FUBAR is postponed whilst They bury their snouts ever more deeply in the honey pot, greedily chowing on the traces left at the bottom of the jar...

[Linda Minor]

I don't understand what's happening by any means, but I have suspected for a long time that something was going to happen in real estate markets, and probably before the next presidential inauguration. I live in Texas, and the biggest construction corporation around here is Centex (CTX). If we look at the SEC filings, it shows the major owners are:

Fidelity Management & Research at 14.2%
AllianceBernstein L.P. at 9.2%
Barclays Global Investors N.A. at 5.6%
State Street Global Advisors (US) at 4.2%
Vanguard Group Inc. at 4%
D. E. Shaw & Co. L.P. at 3.6%
Columbia Management Advisors Inc. at 3.5%
Legg Mason Capital Management Inc. at 3.4%
Janus Capital Management LLC at 3.1%
Perkins Wolf McDonnell & Company LLC at 2.1%

These homes have been selling as soon as they are built, if not before. None remain vacant more than a month or so before they are occupied. I live in the county where the biggest military base in the world is located--Fort Hood in Texas--which means they probably sell to men and women who qualify for 100% loans guaranteed by the Veterans Administration or for FHA loans guaranteed by HUD.
It appears the same banks which own the stock equity in Centex are also invested in the secondary market which buys the mortgages (Fannie and Freddie and Ginnie). The 30-year loans secured by the mortgages are then repackaged and sold as derivative securities, likely to the same institutions. Every year since 1996 Fannie Mae has been issuing non-cumulative preferred stock which has had a yield of 14% until the last few months when red flags started being raised. How on earth could they be paying this kind of dividends without fail when most folks have done well to earn 4%?

My question is: Who has been getting these dividends, and is there some insider trading going on?

Since the U.S. President gets to appoint five people to sit on the board of Fannie Mae, and since officers and directors of the corporation are required to buy stock in the company, I'm wondering if they may have seen a change in in the political wind and started bailing out and trying to unload their shares before the regime change was final.

[Linda Minor]

It will be interesting to see if the election of a new president will lift the mood?

The other option that I have discussed privately is the possibility that this was, as Jan says, the last bank heist and the "boys" thereafter intend to decamp to other feeding grounds in the still emerging markets of the Southern hemisphere.

But my gut instinct stubbornly says there is still more to come and that the final departure of the American gravy train is yet to leave platform one.

Then there's also still that remaining 30% of GDP to be sucked up.

Maybe

I well remember the bank heist of the mid-1980's. I watched the real estate flips all around me as the local speculators went crazy, and I made out OK just drafting deeds and wrap-around deeds of trust out of my little office. There was a lot of fraud fueled just by high interest rates, which kept "values" going ever higher. It was a gamble on when the price would begin to fall, and who would be left holding the asset on which more was owed than could be recouped by sale. A lot of those, like poor Neil Bush (his Momma said he never did anything wrong!), raked in cash for holding the door open for their friends who were doing insider deals with no intention of repaying.

I got out of that end of real estate in time to spend the next three years foreclosing on family farms--probably the most distasteful three years of my career. Then I went to Houston just in time to work with a group of attorneys investigating an incident of alleged political bribery during that time and was present at an interview of a couple of fraudsters who were mentioned in Pete Brewton's book. While they were laughing about the title, Mafia, CIA and George Bush, one of them asked the other which entity he worked for--the Mafia or the CIA? The other just shook his head, and replied that Brewton just did not understand how it all works. I wish I had known enough at the time to ask them to explain it to me, but I was too afraid to hear the answer.