Defaulting banks - where will it stop?

[Jan Klimkowski]

Ticker Forum's Genesis skewers Paulson, and get angry with the passivity of ordinary Yanks in the face of Wall Street looting:

Posted by Karl Denninger at 08:14
How To Create A Depression

We're starting today with AIG, which was reported now to be in a deal with the US Government to "terminate" some debt obligations.

"NEW YORK (Reuters) - American International Group Inc (AIG.N) and the U.S. government have reached an agreement to clear the insurer of its obligations on about $53.5 billion in toxic mortgage debt, the giant insurer said in a regulatory filing on Tuesday."

Now let's talk about how that was accomplished - because it sounds like magic.

What has actually happened is that the government (The Fed and Treasury) have purchased some $46 billion of the "assets" (mostly CDOs and similar things) that AIG wrote CDS against. Since the government now owns "both sides of the bet", the need to post additional collateral (or pay off in the event of a default) has disappeared.

But here's the problem - the loss still happened and still got eaten by government (that is, you), which is being "conveniently" ignored! See, while AIG might not need to pay the $53 billion in bets (the underlying), the reason they were under threat of having to pay out in the first place is that the underlyings - in this case all synthetic instruments with no actual asset behind them - were threatening to have an actual value of zero!

The zero is still happening, but now we're going to hide it in "Maiden III", yet another opaque LLC in which we the people (who paid the check to buy these so-called "assets" - at par, natch) can't look.

In other words, this is yet another rooking of the people, this time to the tune of over $50 billion, where we have essentially pissed into the hurricane of debt deflation and we're not even allowed to see what was bought or at what price.

Now this is, indisputably, bullish for AIG. But it is an outrageous subsidy for this company on the backs of the US Taxpayer, for which we have not been compensated, nor have the acts that led to this situation been punished under the law. The executives at AIG have not been forced to disgorge their bonuses and compensation, they have not been criminally charged, and no punishment has been levied against those who set up this outrageously overlevered mess in the first place.

Paulson continues to jawbone about "increasing lending"; this sort of idiocy from him, Mishkin on CNBC this morning, and similar bleating by Bernanke and others misses the point.

That point, by the way, is clearly illustrated here:

JK EDIT: there's a graph at the url of the article showing that in 1929, Total US Debt as a % of GDP was 299.8% and in Q2 of 2008 stood at 356.7%

Essentially all of the so-called "growth" since 1996 was in fact debt that was claimed to be growth!

This is exactly identical on a national scale to you borrowing more and more money over a period of more than ten years, spending it all, and claiming to be "enjoying unprecedented prosperity."

As total debt rises so does total debt service and this presents an ever-growing drag on growth (GDP).

Adding to total debt through bailouts, which must add to total debt as we do not have the money in the United States and must borrow it, simply adds to the negative impact on GDP and thus the drag on the economy!

There is no escaping this reality whether the government (or private parties) like it or not. These are mathematical facts and not subject to political whim; Paulson and Bernanke, both of whom are highly intelligent, understand this.

Unfortunately the American people do not, and it appears that we are instead going to be forced to recognize this reality as we continue to trying to play "borrow and spend" out of the hole, further depressing GDP.

This is how government causes economic Depressions; in the late 1920s and 1930s government did the same thing attempting to deal with a recession and created The Great Depression, and this time, attempting to prevent the excesses of the 1990s Tech Mess from being worked off through recession, it has done precisely the same thing.

Buckle up folks - it is only reasonable to expect that from the same actions will come the same result, and we the people have utterly failed in our most-recent elections to hold Congress to account in that we returned the vast majority of those who voted for the EESA/TARP to office.

Get up, go look in the mirror.

There is no conspiracy - the responsibility for this depression is in fact YOURS.

http://market-ticker.org/archives/672-Ho...ssion.html