Defaulting banks - where will it stop?

[David Guyatt]

Defaulting banks - where will it stop?

Will it stop at all?

The shock news today that Wall Street giant Lehman Brothers have filed for Chapter 11 bankruptcy, has left world banking community dazed. It took less than a week for the market to bring this giant to its knees. The whisperers in the market repeat the word catastrophe.

Urgent, if not desperate discussions resulted in the announcement that Merrill Lynch is to be taken over by Bank of America. The fact though, is that this is less of a takeover and more of a vital rescue package.

Next in line are AIG and Morgan Stanley. CD trading in the latter opened today with a spread of 120 basis points, a sure sign of imminent danger. Meanwhile it is reported that AIG have knocked on the door of the Fed seeking an urgent infusion of $40 billion (although the figure I have heard is $50 billion).

Rating agencies like Standard & Poors and Moody are a spent force. From a vantage point of credit rating supremacy a decade ago, to today when no one in their right minds takes the slightest notice of their wacky self congratulating analysis.

And so decades of unadulterated greed, weak oversight an other dysfunctions are finally coming home to roost. I say this not with glee but with sadness for the tens of thousands of families who will suffer from sudden unemployment at the worst possible time in the last 80 years (members of my own family are hanging on a knife-edge, in fact).

But this, as bad as it is, is still a long way short of what market insiders regard as the true bubbling danger that faces the community of world bankers. Thee collapse of the US banking industry could trigger a complete loss of confidence in the dollar. And the sad fat is that the only ting holding the dollar is confidence. There is not a spanner of tinkering screwdriver left in the toolbox for the authorities to grasp hold of. They have all been used already.

And if the dollar goes...

[Magda Hassan]

Capital Punishment: Lehman on its way to the Gallows?

By Mike Whitney

15/09/08 "ICH" -- - Bank of America is buying Merrill Lynch for $45 billion, AIG needs an emergency $40 billion bail-out from Uncle Sam to stay afloat, and Lehman Bros is kaput. Whew! The financial world has been turned upside-down overnight and the opening bell hasn't even rung at the NYSE. It'll be a rough day of trading ahead. Paul Krugman summed up the prevailing feeling of anxiety on Wall Street like this:

"Will the U.S. financial system collapse today, or maybe over the next few days? I don’t think so — but I’m nowhere near certain. You see, Lehman Brothers, a major investment bank, is apparently about to go under. And nobody knows what will happen next."

The news of Wall Street's Sunday night massacre has already send foreign stock markets into a deep swoon. Shares tumbled in Asia and dropped more than 4 per cent in Europe. The dollar is steadily losing ground to the euro and gold is on the rise. The question is not whether the Dow will fall, but "how far" and what affect that will have on increasingly fragile financial institutions.


Lehman Brothers, the 158 year old Wall Street warhorse, announced Sunday that it will file for bankruptcy after weekend rescue plans broke down without finding a buyer. Fears of credit contagion and a global recession have resurfaced and become more widespread. Lehman's failure suggests that that the other Wall Street giants will soon be following the same path to extinction. Economist Nouriel Roubini put it like this:

"All of the independent broker dealers are going to disappear. In March it was Bear Stearns. Tonight it was Lehman and Merrill Lynch. Morgan Stanley and Goldman Sachs should go find a buyer tomorrow. The business model of broker dealers is fundamentally flawed. They cannot survive."


Roubini may be right. The funny thing about capitalism is that you need capital to play. When the bank-vault is full of nothing but worthless mortgage-backed securities (MBS) and overvalued junk bonds; the whole thing goes belly-up fast. That appears to be the case with Lehman Bros, the century-old Wall Street warhorse that has joined the long procession of underwater banking establishments now ambling lemming-like towards the cliff. Lehman had a great go of it during the boom times when all it took to make oodles of money was a predictable flood of low interest credit from the Fed and a compliant ratings agency that would stamp every crappy securitized pool of mortgages with a big Triple A before hawking it to some gullible investor in Shanghai or Heidelberg. Lehman travails are not much different from anyone else in the banking fraternity. The problem is that the entire system is under-capitalized and over-leveraged. When Bear Stearns went down last year, it was levered at a ratio of 26 to 1. When Hedgie Carlyle Capital blew up, it was levered at 32 to 1. And when Fannie and Freddie were finally subsumed by the US Treasury; the two behemoths were levered at a whopping 80 to 1, which is to say that they had a paltry one dollar capital cushion for every $80 they had loaned out. That's no way to run a business. They would have continued on the same erratic path---buying up toxic mortgages and MBS from people who had no chance of ever repaying their loans--had they not been taken into federal "conservatorship", which is a fancy way of saying they were insolvent. Treasury Secretary Henry Paulson unwisely attached a 6 inch-wide money-hose from the bowels of the Treasury to Fannies front office so the two mortgage giants could continue to teeter-along at taxpayer expense regardless of the fact that the securitization business model has completely broken down and foreign investors--including China--have already started cutting back on their purchases of GSE debt. This is no laughing matter. The $700 billion US current account deficit is financed through the generosity of foreign investors who are getting increasingly jittery about sinking money into a system that looks more like casino-poker all the time. Here's a clip from China daily on Friday:

"China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars, according to China International Capital Corp (CICC), one of the nation's biggest investment banks.

"The crisis has made Chinese officials realize it's a bad idea to put all their eggs in one basket," wrote CICC Chief Economist Ha Jiming. "This will likely lead to greater diversification of foreign exchange reserve investments." China held $447.5 billion of US agency bonds as of June 2008, according to the CICC calculations using disclosures by the US Treasury. It is likely to reduce the portion of reserves in dollar assets from the current 60 percent by purchasing more non-dollar assets with new reserves, he said." (China Daily)

Naturally, foreign investors and central banks will curtail their purchases of US securities and Treasuries until there's some indication that US markets have stabilized and will be able to withstand the ferocious headwinds of the biggest housing crash in history, a frozen corporate bond market, a paralyzed banking system, and steadily waning consumer demand. But Americans still seem breezily unaware of what all this means for the country's future. They'd rather savor every new bit of gossip about some Bible beating, Grizzly-hunting prom queen who wants to lead the country back to the glory days of the 13th century than learn about the about the firestorm raging through the financial markets.



When the net foreign purchases of US financial assets begin to slow; the game is over. The Fed will be forced to raise interest rates to attract foreign capital which will put downward pressure on the economy and accelerate the housing crash. Paulson's decision to provide unlimited capital to Fannie and Freddie, will stack more and more debt atop the faltering dollar and US Treasuries. It is the equivalent of lashing the greenback to an anvil and tossing it overboard. Paulson's attempts to stave off a systemic banking crisis ensures that the federal government will undergo an unprecedented funding crisis sometime in the near future. There will be higher taxes for the battered middle class and higher interest rates for businesses and consumers. This will trigger a protracted economic slowdown and weaker growth. Credit will get tighter, banks will default, unemployment will soar and GDP will shrivel. A negative feedback loop will develop from the faltering financial system to the real economy; a vicious circle ending in massive layoffs, weakening demand, falling stock prices, and withering consumer confidence. Welcome to Soup kitchen USA.

Presently, Paulson and New York Fed chief Timothy Geithner are pressing Wall Street banking elites to pony-up enough money to buy up Lehman's devalued real estate assets. The Fed's proposal is similar to Greenspan's rescue of Long-Term Management LP (LTCM) which roiled financial markets in the late 1990s. Paulson has signaled that there be NO government bailout like Bear Stearns when the Fed bought up $29 billion in mortgage-related assets. The Fed is tapped-out having already committed half of its balance sheet--nearly $500 billion-- in repos through its "auction facilities" which have recently skyrocketed to record highs of $19 billion per week for the last 3 weeks. The crisis is deepening by the day. Similarly, the Treasury has hitched its wagon to Fannie and Freddie which expands the National Debt by another $5.2 trillion and seriously undermines the "full faith and credit" of the US in the process. Keep in mind, the biggest source of American power is its access to cheap capital via the US taxpayer. Paulson has now put that source of revenue at risk by nationalizing the housing industry and burdening the taxpayer with (potentially) astronomical future obligations, even though he knows full-well that the market could drop another 15 to 20% before the end of 2010. Paulson's recklessness has doomed the country to years of struggle.

As of Sunday afternoon, no deal had been struck to buy Lehman Bros. and it looked like the bank was headed for bankruptcy. Wall Street is preparing for the worst. Many of the big players are busy working out the details on thorny derivatives contracts to avoid a sudden shock to the market. The fear is palpable and there's no way of knowing what will happen when the Asia markets open in just a few hours. It could be nothing more than a hiccup or it could be utter pandemonium ; nobody knows. Nouriel Roubini gave a particularly grim assessment of a Lehman default in his latest post on his blogsite Global EconoMonitor:

"It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday, you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers...Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer." (Nouriel Roubini's Global EconoMonitor)

Roubini may be right if the Big Boyz fail to intervene, but will they really risk everything just to force the Treasury's hand and get Uncle Sam to pick up the tab for Lehman's bad paper? After all, the giant investment banks are inescapably trapped in a net of complex, unregulated, over-the-counter derivatives contracts which--given the right conditions---could bring every skyscraper in lower Manhattan crashing to earth in one bloody afternoon of trading on the NYSE. But, that probably won't happen. It's more likely that cooler heads will prevail as the big-hand inches closer to midnight.


A sizable portion of Lehman's $128 billion in long-term debt will probably be ring-fenced in a "bad bank" which will hold its toxic mortgage-backed assets and be financed by either the Treasury or the other Wall Street banks. The good assets can then be separated and sold off to either Bank of America or Barclays, the two prospective buyers. That way, according to Forbes, "the bad bank would be kept afloat while its assets could be unwound over a period of time in a way that wouldn't disrupt the financial system more than it already has been."

Some variation of the "Forbes solution" will probably be enacted, but, let's be clear; this is really no solution at all. It's just a way of buying time by rolling-over debt to avoid the ugly consequences of accounting for the massive losses. In other words, it is cheaper to keep burning up capital to prop up moribund assets than take the loss and make a genuine effort to restructure the dysfunctional system. Here's how former Fed chief Paul Volcker summed it up just two weeks ago:

"This bright new system, this practice in the United States, this practice in the United Kingdom and elsewhere, has broken down. Growth in the economy in this decade will be the slowest of any decade since the Great Depression, right in the middle of all this financial innovation. The current financial system is dysfunctional. That is a polite way of saying it failed.''

Securitization has failed. The cuts to the Fed's Funds rate have failed. The auction facilities--TAF, PDCF, and TSLF---have all failed. The off-balance sheets operations, the debt-pyramiding asset-inflation, the Enron-style accounting, the SIVs, the CP, MBS, CDOs, have failed. The subprimes, the piggybacks, the option-ARMs, the Alt-As have all failed. Structured finance has failed. The system doesn't work; won't work; can't work. It's built on the misguided assumption that capitalism can thrive without capital; that one dollar can be infinitely magnified by complex debt-instruments and mega-leveraging to generate real wealth and keep the wheels of finance and industry humming along. It can't be done. The system is under-water. Economist and author Henry Liu put it like this:

"Yet this approach is preferred by those in authority, trapped in self deception about unregulated market capitalism being still fundamentally sound. They try to calm markets by asserting that the current turmoil is merely a minor liquidity bottleneck that can be handled by the central bank releasing more liquidity against the full face value of collateral of declining worth. (There are) No signs of any coherent grand strategy or plan to save the cancerous system from structural self-destruction."


Instead, the marauding of a handful of Wall Street "innovators"--drunk with hubris and blinded by their own bizarre sense of entitlement---have thrust the financial markets to the brink of catastrophe and pushed the the broader "real" economy towards a painful retrenchment. Now everyone will pay for the greed of the few.

So, what's next?

An article in the Financial Times spells it out, but government officials will undoubtedly deny it until after the November presidential election.

From the Financial Times:

“The debate over whether an RTC-style (Resolution Trust Corporation)vehicle is needed – perhaps just to ring-fence troubled mortgage assets – also gained traction among central bankers at the Jackson Hole symposium hosted by the Federal Reserve Bank of Kansas City in August....
The problem that an RTC vehicle could help to solve is that there are very few buyers for troubled mortgage assets, and few investors now willing to inject fresh capital into the tattered balance sheets of the banks left holding them. As a result, banks such as Lehman and Washington Mutual have struggled to sell their soured mortgage portfolios, and to broker deals for fresh capital. The takeover of Fannie and Freddie, which virtually wiped out preferred equity holders, has also made banks’ access to the preferred capital market increasingly difficult. Through a new RTC, the government could provide financial support if needed in return for a share in potential profits once the assets were liquidated. “

What the Feds are refusing to admit, is that there is already a plan in place to make the government an an active, "shareholding" partner in failing commercial banks. (There's no way the FDIC could pay for all the projected losses anyway) That will give the US Treasury the authority to provide insolvent banks with enough capital to muddle through while their impaired assets are liquidated via the RTC; a morgue for distressed mortgage-backed garbage.

How this will affect the already-anemic dollar is anyone's guess. But it won't be pretty.

It might be a good time to stock up on Krugerrands and buy a rosary.

[David Guyatt]

I think it also worth pointing out the fact that it is the hedge funds who are driving this whole mess.

There are sound reasons to suppose that it was the hedge funds who were behind bringing down the Pacific Rim 'Tiger' economies in 1998, and that this was not a bad thing for US economic hegemony. Is it that they are "arms-length" vehicles for US covert financial warfare, or is it that they are simply an expedient market force?

All eyes are now on the survival - or not - of the giant insurance consortium AIG. If that goes, then a trillion dollar whirlwind will blow through the financial markets.

[Jan Klimkowski]

It's still very hard to peek behind the curtain at the back of the stage and definitively identify the ultimate puppetmaster villain, twirling his moustache and sniggering insanely.

Who is running this catastrophic game?

Is there a single cabal? Or are various powerful factions trying to get their share of the cake before we plunge into bank runs, currency collapses, anarchy and martial law?

Bush, with the full support of the supposed Democrat, Obama, has just handed Wall Street a trillion dollars of taxpayer money. This does nothing to solve the fundamental problem, which is overleverage, overlending and the Ponzi scheme of CDSs and derivitatives. All it does is hand major market players - from Soros to JP Morgan to hedge funds to national governments & sovereign wealth funds - a chance to be the first to run for the door with their bag of loot before disaster strikes.

The Russian, Chinese and various South American governments are seriously considering cashing in their chips, decoupling from the dollar, and getting out of US Treasuries as well as Equities. The hedge funds and the speculator class such as Soros are looking for the best bets around - which will inevitably destroy companies and national currencies. Bank runs, and bank collapses, are 100% inevitable.

And what does MSM do? It parrots the spin doctor line that the American people may eventually make a profit from Bush's bailout of Wall Street.

The Fourth Estate is guilty, yet again, of Betrayal and Treachery as we sleepwalk into Catastrophe.

[Jan Klimkowski]

As if to emphasise quite how tricky it is trying unpick the "secret agendas" playing out here, Pravda quotes a senior Russian politician suggesting ordinary Russians should buy dollars. Shocked

http://english.pravda.ru/russia/economic...l_crisis-0

Quote
Financial crisis to boost prices on food 30 percent up

The current financial crisis will strike a significant blow on Russia, the former vice prime minister of the Russian government, Boris Nemtsov said in an interview with Novy Region news agency. The prices on basic foodstuffs may rise 30 percent, whereas small banks will go bankrupt, and many Russians will thus have to forget about consumer loans.

September has become a black month for Russia, Nemtsov said. The politician advised all Russians should purchase foreign currency, particularly US dollars, to rescue their savings. The crisis may bring only one piece of good news for the country: the prices on residential real estate may drop, he added.

“The current events and the default of 1998 have only one thing in common – they both are financial crises. The current crisis has a completely different nature. In 1998 Russia suffered from a crisis of the budgetary system, whereas the current events will mostly affect the corporate sector – banks, state-run companies and corporations, such as Gazprom, Rosneft and others,” Nemtsov believes.

The former vice prime minister believes that the nation’s entire banking sector may suffer from the crisis, although small and medium-sized banks will be the first to announce bankruptcy.

“Russian banks have been working at the expense of cheap and long-term funds from the West. The funds have run out today, and the banks have found themselves unable to loan up as a result. On the other hand, they have been giving too many consumer and mortgage loans recently. They are long-term loans that will be returned only in many years. That is why, small and medium-sized banks will be filing for bankruptcy now,” the politician believes.

Russia will provide state support only to state-run banks, such as Vneshtorgbank (Foreign Economic Bank), Sberbank and Gazprombank, Nemtsov said. Russia will be providing the support to the utmost, which will inevitably result in the growing inflation rate.

According to Nemtsov, the Russians will witness a considerable growth of prices (by up to 25-30 percent) on food and communal services in the nearest future.

Russia's main stock exchanges remained all but closed Thursday, a day after regulators suspended trading amid a dizzying plummet in share prices.

Government officials were struggling to keep the crisis now battering Russia's economy from turning into a repeat of the 1998 meltdown.

The MICEX and RTS exchanges plummeted to the lowest points in nearly three years Wednesday, prompting regulators to halt trading at midday, the AP reports.

The two failed to open on time Thursday. MICEX resumed limited trading - mainly of so-called "repo" contracts and bond repurchases - at 11 a.m. (0700 GMT).

In a statement, the exchange called the situation in Russian markets on Wednesday "extraordinary."

An RTS official said it was unclear when it would open.

The Kremlin has struggled to restore confidence in the banking system with a wave of emergency loans, fearing a repeat of the 1998 economic crisis - which saw the ruble devalued, default on the country's sovereign debt, and widespread bank foreclosures.

[Jan Klimkowski]

Market Ticker's Denninger, a natural Republican and certainly no lefty, has just nailed Bush's proposed financial bill aka "Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets".


Quote
Sec. 8. Review.

Decisions by the Secretary [Paulson] pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Hmmm.... I love the smell of fascism in the morning.....

Here's the whole thang:

Quote
Well now we have it - since this is a proposed bill (public) and in the interests of fair use, here you have it as reported by Fox:

LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY

TO PURCHASE MORTGAGE-RELATED ASSETS

Section 1. Short Title.

This Act may be cited as ___________________.

Sec. 2. Purchases of Mortgage-Related Assets.

(a) Authority to Purchase.—The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.—The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 3. Considerations.

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for—

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.

(a) Exercise of Rights.—The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.

(b) Management of Mortgage-Related Assets.—The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.

© Sale of Mortgage-Related Assets.—The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.

(d) Application of Sunset to Mortgage-Related Assets.—The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretarys authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 7. Funding.

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Sec. 9. Termination of Authority.

The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

Sec. 11. Credit Reform.

The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

Sec. 12. Definitions.

For purposes of this section, the following definitions shall apply:

(1) Mortgage-Related Assets.—The term mortgage-related assets means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.

(2) Secretary.—The term Secretary means the Secretary of the Treasury.

(3) United States.—The term United States means the States, territories, and possessions of the United States and the District of Columbia.

I'm speechless.

Let's disassemble this monster piece by piece.

First, this is a de-facto nationalization of the entire banking, insurance, and related financial system. Specifically:

"(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;"

That's right - every bank and other financial institution in the United States has just become a de-facto organ of the United States Government, if Hank Paulson thinks they should be, and he may order them to do virtually anything that he claims is in furtherance of this act.

This might include things like demanding that a bank or other financial institution sell him its paper, even if it forces that firm to collapse and be assumed by the FDIC!

You didn't buy any bank stocks last week did you?

"(a) Authority to Purchase.—The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States."

This, at first blush, would seem to indicate that only American firms would be covered. Nothing is further from the truth. If the Chinese wish to unload some of their purchased toxic sludge they merely sell it to, oh, Goldman Sachs for 40 cents on the dollar and then Goldman sells it to the Treasury for 50. This, under the black letter of the law here, is perfectly legal, which means that one must assume that Paulson will in fact foist off all the bad paper on world markets that was originally based on a mortgage in the United States, while allowing his banker buddies here to loot the taxpayer by acting as an intermediary in the transaction!

"(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;"

Contracts can (and presumably will) be "no bid, no solicitation" and given to whomever Secretary Paulson favors, without regard to the public interest or normal competitive bidding processes. Must be nice to be a "Friend of Hank."

"In exercising the authorities granted in this Act, the Secretary shall take into consideration means for—

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer."

Notice which comes first.

"© Sale of Mortgage-Related Assets.—The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act."

Having bought these securities for any price Mr. Paulson would like (and he can compel institutions to sell at his demanded price as noted above!) he can then sell those assets at any price he wishes, to anyone he wishes. It certainly is nice to be a "Friend of Hank", and it most certainly sucks if you're not.

"The Secretarys authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time"

This is clever and nobody in the mainstream media has figured it out.

If you think the cost of this bill is $700 billion, you're wrong. The cost is actually infinite and the entire bill constitutes a giant money-laundering scheme.

Paulson can (and presumably will) buy up to $700 billion of these "assets", then sell them. Let's say he decides to buy them at 60 cents on the dollar and sell them for 10. You, the taxpayer, will eat the fifty cents, for an immediate cost of $350 billion dollars.

Having done so, he is then authorized to do so again, since the $700 billion is no longer on the government's balance sheet.

In fact, he can do this without limit, other than possibly due to the federal debt ceiling, which of course Congress will raise any time we get close to it. Oh yeah, this bill does that right up front too. No need to bother with it the first time around.

Folks, $700 billion isn't even close to the total cost of this monster.

If Paulson and his successor decide to, they could literally cycle all $5.3 trillion of Fannie and Freddie's debt through this scheme, potentially sticking the taxpayer for 20% or more of the total, plus as much private debt on various bank balance sheets as they can manage to nationalize until (and possibly beyond) the point where the bond market tells him to go to hell.

Bottom line: This bill gives Paulson the ability to nationalize an UNLIMITED amount of private debt and force YOU AND YOUR CHILDREN to pay for it.

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

If you are a bank, investor, or other entity who is forcibly gang-raped by Secretary Paulson due to his actions as "King" (crowned by Congress) under this law, you are unable to seek redress in the courts or by administrative action.

The claim is that this is intended to "promote confidence and stability" in the financial markets.

It will do no such thing.

It will instead strike terror into the hearts of investors worldwide who hold any sort of paper, whether it be preferred stock, common stock or debt, in any financial entity that happens to be domiciled in the United States, never mind the potential impact on Treasury yields and the United States sovereign credit rating.

I predict that if this passes it will precipitate the mother and father of all financial panics, although exactly when the "short bus" riders who inhabit the equity market will figure it out remains to be seen.

If they have an IQ larger than their shoe size it will commence at 9:30:01 AM Monday morning, although given history and the lack of intelligence displayed by the crooning media market euphoria may continue until the first couple of firms are dismantled by Paulson's newly-crowned Kingly powers with the scraps handed out to his favored few.

The best part of this outrageous fraud is that those who get bent over the table can't even sue - their only recourse will be the (literal) deployment of pitchforks and torches.

That Paulson and Bernanke circulated this document, irrespective of what actually gets reported out onto the floor of the House and Senate (if anything) tells you everything you need to know about his intentions and the safety of your financial assets in the United States markets.

That this "proposal" hasn't resulted in Congress calling for both Bernanke and Paulson to resign for their blatant attempt to crown Paulson King tells you everything you need to know about Congressional integrity as well.

My advice: Don't be caught with any stock or debt instruments linked to a United States financial firm in your portfolio past 9:30 AM Monday morning.
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Discussion takes place at The Tickerforum Comment Zone (registration required to post)
Friday, September 19. 2008
Posted by Karl Denninger at 06:43
(Page 1 of 268, totaling 536 entries) » next page
Welcome To The USSA

Our government is truly unbelievable.

Election + Fear = Stupidity.

The sort of ban that we saw this morning on shorting - 800 stocks - is both foolish and unprecedented.

There are many, many reasons to short a stock that have nothing to do with trying to drive a stock into the ground.

For example, if you're concerned about a preferred stock issue, you might short the underlying while being long the preferred. This gives you a 100% safe coupon - that is, dividend - while exactly balancing (or close to it) your risk.

This ability to hedge off that risk just disappeared.

Now has there been manipulative conduct and predatory shorting? Yes.

But you can't short a company and make money unless the company is overvalued in the first place. If you try it you will lose your shirt as the actual value, as discovered, will cause the price to rise instead of fall, your short sale notwithstanding.

And make no mistake about it - this crisis is not an accident. It is in fact a deliberate act - by our government.

Who enabled it?

Everyone.

Alan Greenspan, by flooding the market with money after 9/11 and the technology stock crash, for one.

Barney Frank and the rest of Congress, along with Bill Clinton, who made it public policy that everyone - from a daycare worker to a McDonalds' cook to someone on welfare - could and should own a house.

Both Clinton and Bush Administrations who intentionally looked the other way while rampant fraud ravaged Wall Street and Main Street both, including intentional blindness to outright false accounting in the form of "Level 3" assets and claims of solvency that were not and still are not true.

Now, just yesterday, we find out that The SEC made possible the expansion of leverage in the investment bank and broker/dealer community that made possible the loose lending which helped fuel the housing bubble and mess we are now in:

"The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.

Making matters worse, according to Mr. Pickard, who helped write the original rule in 1975 as director of the SEC's trading and markets division, is a move by the SEC this month to further erode the restraints on surviving broker-dealers by withdrawing requirements that they maintain a certain level of rating from the ratings agencies."

Yep - the SEC was not only involved but basically caused this mess.

And now that Congress is involved, we are going to get the mother and father of all debt - shoved down your throat:

"The proposal to create a massive facility to buy mortgage-backed securities could cost as much as a half-trillion dollars and would involve the purchase of both private-label and government-guaranteed mortgages, according to an administration official. "

This is nothing short of unbelievable, and that actually understates the cost, which is likely to be vastly more than stated. It always is.

Remember folks, the original estimate on the S&L bailout was that it would cost $20 billion.

The actual cost, when all was said and done, was approximately $160 billion dollars extracted from your wallets all across America.

So let's add it up - thus far:

*
Housing "bailout" bill, $300 billion
*
"Stimulus checks", $160 billion
*
"Back door" bailouts done without Congressional authorization, including "hidden" loans that may never be repaid, such as Bear Stearns and "temporary" clearing loans to Lehman Brothers, about $100 billion (in total)
*
Treasury's plan to back money market funds, $50 billion
*
This new "bailout", $500 billion

Oh, and don't believe that $500 billion number. Its a lie. I have long maintained that we have about $2-3 trillion of bad housing-related debt involved, of which only $200-300 billion has been written off.

So there's still $1.7-2.7 trillion out there to be cleared in this mess and you are going to get charged for all of it unless you literally take to the phones and the streets right now - this weekend - and stop it.

This sort of election-year pandering is beyond outrageous; it is nothing other than government theft (from you) to bail out the pigmen of Wall Street who have robbed you blind for the last decade.

WE THE PEOPLE DO NOT HAVE THE MONEY TO SUPPORT THIS AND THIS SORT OF PANDERING AND OUTRAGEOUS CRAMDOWN OF THE COST OF WALL STREET'S MALFEASANCE UPON THE CHECKBOOK OF THE AMERICAN CONSUMER IS AN ACT OF ECONOMIC TREASON.

I hope you like INSANE (and real) monetary inflation because the raw monetary printing required to support this program is going to blow your mind (and household budget.)

What you're seeing today is the utter fear in the hearts of people who have made (correct) bets that the financial sector is radically overvalued and these firms are bankrupt; they have now been told that bankrupt or not, you, the taxpayer, are on the hook for their insolvency, despite THEIR bad decisions.

In addition the liquidity that was provided by the floor traders and others in the market who made those correct bets - many of whom will be broke today, literally - will permanent disappear from the market.

Oh, by the way, we don't have the money to do this in America, and not only has LIBOR not unlocked, but spreads haven't come in nearly as much as you would think if the problem was actually solved.

Beware chasing this - yes, we are going to be up huge today - probably 500+, maybe 1000+ on the DOW - think carefully about whether there has actually been a resolution to any of this mess, and whether the root problems identified here have been removed.

If you judge not, then we risk the mother and father of all market crashes at some point in the future - and probably not far in the future either.
http://market-ticker.denninger.net/

[Jan Klimkowski]

Although the political analysis is shite, the leaks from traders in this piece are very interesting:

---------------------------

Quote
ALMOST ARMAGEDDON
MARKETS WERE 500 TRADES FROM A MELTDOWN
http://www.nypost.com/seven/09212008/bus....
By MICHAEL GRAY Last updated: 6:20 am September 21, 2008 Posted: 4:16 am

The market was 500 trades away from Armageddon on Thursday, traders inside two large custodial banks tell The Post.

Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level - a 22 percent decline! - while the clang of the opening bell was still echoing around the cavernous exchange floor.

According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.

The panicked selling was directly linked to the seizing up of the credit markets - including a $52 billion constriction in commercial paper - and the rumors of additional money market funds "breaking the buck," or dropping below $1 net asset value.

The Fed's dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt.

While many depositors treat money market accounts as fancy savings accounts, they are different. Banks buy a variety of short-term debt, including commercial paper, with the assets. It is an important distinction because banks use the $1.7 trillion commercial-paper market to fund their credit card operations and car finance companies use it to move autos.

Without commercial paper, "factories would have to shut down, people would lose their jobs and there would be an effect on the real economy," Paul Schott Stevens, of the Investment Company Institute, told the Wall Street Journal.

Cracks started to show in money market accounts late Tuesday when shares in one fund, the Reserve Primary Fund - which touted itself as super safe - fell below the golden $1 a share level. It had purchased what it thought was safe Lehman bonds, never dreaming they could default - which they did 24 hours earlier when the 158-year-old investment bank filed Chapter 11.

By Wednesday, banks sensed a run on their accounts. They started stockpiling cash in anticipation of withdrawals.

Banks, which usually keep an average of $2 billion in excess reserves earmarked for withdrawals, pumped that up to an astounding $90 billion by Wednesday, Lou Crandall, chief economist at Wrighton ICAP, told The Journal.

And for good reason. By the close of business on Wednesday, $144.5 billion - a record - had been withdrawn. How much money was taken out of money market funds the prior week? Roughly $7.1 billion, according to AMG Data Services.

By Thursday, that level, fed by the incredible volume of sell orders pouring in from institutional investors like pension funds and sovereign funds, had grown to $100 billion. It was still not enough to stem the tidal wave.

The banks knew something drastic had to be done. So did Paulson.

The injection of capital into the market was followed up by calls from Treasury Secretary Hank Paulson to major money market players like Bank of New York Mellon and State Street in Boston informing them that federal money was in the market and they should tell their clients the Feds would be back with a plan to stem the constriction in the credit market.

Paulson knew the $105 billion injection was not a real solution. A broader, more radical answer was needed.

Hours after Paulson made his round of calls to calm the industry, word leaked out that an added $1 trillion bailout of banks was being readied. Investors cheered. At about 3 p.m., news of the plans was filtering up and down Wall Street, fueling a 700-point advance in the Dow Jones industrial average through 4 p.m. Friday.

By that time, Paulson had announced the plan. It included insurance on money market accounts, a move that started in quiet Thursday morning, when the former Goldman Sachs executive saved the country from a paralyzing meltdown.

[David Guyatt]

The more I think about this in the light of events over the ast weekend, then the more I begin to wonder if it wasn't the young Bush's version of his Daddy's Savings Loans "crisis" - i.e., the plundering of the S&L's followed by the taxpayer/state rescue. This time it was the trillion dollar wrapped-crap mortgage plunder.

Overall there have been some losers but by far the majority are winners. Six weeks ago Lloyds &HBOS were in merger talks, we now learn. They agreed that a merger/takeover would be a very positive thing and wanted to proceed but could not get past competition laws. These laws were thrown out last Friday. I think the general same picture is beginning to emerge with BOA/Merrill. Goldman's and Morgan's decision to become banks rather than remaining as investment banks may well be a long term strategy that is of benefit to them anyway.

the bottom line, as with the S&L affair, is that the taxpayer has picked up the bill. This could not possibly have been sold to the American public 10 days ago. It has taken a "financial 911" to achieve it.

The question therefore is whether the "financial 911" was an inside job - a 'bank heist' - or whether it was the perfect storm that has been reported?

[Jan Klimkowski]

David - yes. It's just another turn of the spiral in the looting of the "wealth" of ordinary people, and its appropriation by tiny, ruling, elites.

The most infuriating aspect is the manner in which the victims of this robbery, ordinary people, do not realize that they've been mugged. The complicity of MSM - "heavens, we mustn't start a bank run" - has created a situation where most people simply do not understand the workings of global markets & the interactions between currency, worthless loans, national debt, taxation levels.

Your "manufactured financial 9/11" hypothesis is very astute.

As Pynchon wrote, "it's all theatre".

[David Guyatt]

I watched the testimony given to the House Banking Committee by Paulson, Bernanke & Co. The rescue plan is a scam. The 'sleight of hands' is hidden in the technical language. The rescue plan calls for the banks to sell their wrapped-crap assets to the government/taxpayer at "maturity value" -- not current "marked-to-market value".

There is a huge gulf between the two values.

Basically, the community of bankers would not just be rescued but would make a huge profit from being bailed out, as they hold these assets on their books at current market values (having been forced to write them down under audit conventions). Getting "maturity value" for them is a scandalous idea and one that very clearly has been engineered by crooks for crooks.