Defaulting banks - where will it stop?

[David Guyatt]

http://www.globalresearch.ca/index.php?c...&aid=10313


Mushroom Cloud over Wall Street

by Mike Whitney


"One bank to rule them all; One bank to bind them..."

These are dark times. While you were sleeping, the cockroaches were busy about their work, rummaging through the US Constitution, and putting the finishing touches on a scheme to assert absolute power over the nation's financial markets and the country's economic future.

Industry representative Henry Paulson has submitted legislation to Congress that will finally end the pretense that Bush controls anything more than reading the lines from a 4' by 6' teleprompter situated just inches from his lifeless pupils. Paulson is in charge now, and the coronation is set for sometime early next week. He rose to power in a stealthily-executed Bankster's Coup in which he, and his coterie of dodgy friends, declared martial law on the US economy while elevating himself to supreme leader.

"All Hail Caesar!" The days of the republic are over.

Section 8 of the proposed legislation says it all:

"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."

Right; "non-reviewable" supremacy.

Congress, of course, is more than eager to abdicate whatever little authority they have left. They're infinitely grateful for their purely ceremonial role, the equivalent of Caligula's horse, albeit, with considerably less dignity. Has even one senator spoken out against this madness, which--according to informal internet polls--is resoundingly rejected by the voters? Does it concern the members of congress at all, that the present financial crisis was brought on by the proliferation and sale of trillions of dollars of mortgage-banked garbage which were fraudulently represented as Triple A rated bonds by the very same people who now claim to need unprecedented and dictatorial powers to fix the problem? Or are they more worried that the steady torrent of contributions which flows from Wall Street to congressional campaign coffers will be inconveniently disrupted if they fail to ratify this latest assault on democratic governance? The House of Representatives is one big steaming dungheap that should be leveled and turned into an amusement park instead of a taxpayer-funded knocking shop. What a pathetic collection of cowards and scumbags.

According to Bloomberg News:

"The Bush administration sought unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets. Through his plan, Treasury Secretary Henry Paulson aims to avert a credit freeze that would bring the financial system and the world's largest economy to a standstill. The bill would prevent courts from reviewing actions taken under its authority.

"He's asking for a huge amount of power,'' said Nouriel Roubini an economist at New York University. ``He's saying, `Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy." (Bloomberg)

The banksters own this country, always have; only now they've decided to strip away the curtain and reveal the ghoulish visage of the puppet-master. It ain't pretty.

Paulson decided that the financial markets needed an emergency trillion dollar face-lift just weeks before his former business partners at G-Sax were dragged off to the chopping block. Was that the reason? Everyone on Wall Street knew that the bulls-eye had already been ripped from Lehman's bloody back and was about to be fastened on Goldman's. Now, it looks like they will escape their day of reckoning due to Paulson's eleventh-hour reprieve. Nice touch, eh?

From the proposed legislation: LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS "(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."

Market Ticker's Karl Denninger summed this up best:

"This is the de facto nationalization of the entire banking, insurance and related financial system..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.....The bill gives Paulson the ability to nationalize unlimited amount of private debt and force you and your children to pay for it."

Denninger again:

"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." (Market Ticker)

Amen. The transformation from a free market to a centralized, Soviet-style economy run by men whose judgment and credibility is already greatly in doubt; does not auger well for the markets or the country. Anyone with a lick of sense would cash in their chips first thing Monday and look for capital's Elysium Fields overseas or as far as possible from the circus sideshow now run by G-Sax ringleader, Colonel Klink.

Paulson's Chicken Little routine might might have soiled a few senatorial undergarments, but let's hope the American people are made of sterner stuff and will reject this charade. The conversation should be shifted from conceding more authority to hucksters in pin-stripes to indictments for securities fraud. Even the most economically-challenged nation ought to be able to afford a few sets of leg-irons and a couple hundred jail cells. That's all it will take. That, and a couple brisk dunks on the waterboard.

Paulson's plan to revive the banking system by buying up hundreds of billions of dollars of illiquid mortgage-backed securities (MBS) and other equally poisonous debt-instruments; ignores the fact these complex bonds have already been "marked to market" in the recent firesale by Merrill Lynch. Just weeks ago, Merrill sold $31 billion of these CDOs for roughly $.20 on the dollar and provided 75 percent of the financing, which means that the CDOs were really worth approximately $.06 on the dollar. If this is the settlement that Paulson has in mind, than the taxpayer will be well served. But this will not recapitalize the banks balance sheets or mop up the ocean of red ink which is flooding the financial system. No, Paulson intends to hand out lavish treats to his banker buddies, while interest rates soar, pension funds collapse, the housing market crashes, and the dollar does a last, looping swan-dive into a pool of molten lava. Thanks, Hank.

Economist and author Henry Liu summarized the current maneuvering like this: "The Fed is merely trying to inject money to keep prices not supported by fundamentals from falling. It is a prescription for hyperinflation. The only way to keep price of worthless assets high is to lower the value of money. And that appears to be the Fed unspoken strategy."

Indeed. The Fed and Treasury have decided to backstop the entire global financial system (foreign banks can access the Fed's facilities, too!) with paper money which is rapidly losing its value. Watch the greenback tumble tomorrow in currency trading.

Congress is getting steamrolled and the American people are getting snookered. Consumer confidence--already at historic lows--is headed for the wood-chipper feet-first. Something has got to give.

One minute everything is hunky-dory; the subprime meltdown is "contained" and "the fundamentals of our economy are strong".(Paulson) And, less than a week later, congress is forced to surrender their constitutionally-mandated right to oversee spending in order to forestall economic Armageddon. Which is it? Or is the real objective just to keep the country on an emotional teeter-totter long enough for all state-power to be subsumed by the Wall Street Politburo?

No one knows what will happen next. We are in uncharted waters. And no one knows what the political landscape will look like after the dust settles from this outrageous power grab. According to Paulson, things are so dire, the entire nation will be reduced to smoldering rubble and twisted iron. But can we trust him this time after his long litany of lies?

Isn't it about time to send the cockroaches scuttling back to their hideouts and bring in the cleaning crew to hose the whole place down? It sounds like a job for Ralph Nader, a man of vision and unshakable integrity. Give Ralph a badge and let him deploy his Raiders to Wall Street armed with bullwhips and tasers. Let them post a guard in every CEOs and CFOs office and every boardroom on the Street---and if even one decimal is accidentally moved to the right or left on the corporate ledger; clap them in leg-irons and drag them off squealing to Guantanamo. That's how you clean up Wall Street!

Don't let the prospect of a national crisis trick you into giving up your freedom, America. The people behind this scam are the same landsharks and flim-flam men who polluted the global marketplace with their snake oil and toxic sludge. These are the fraudsters who manufactured the crisis to begin with. This is just the latest installment of the Shock Doctrine; engineer a crisis, and then, steal whatever is left behind. Be resolute. Don't budge. Our economic foundations may be crumbling, but or determination is not. This is our country, not Goldman Sach's. The people who destroyed America must be held to account. Their time is coming. Justice first.

[Jan Klimkowski]

The Tolkienesque "One bank to rule them all; One bank to bind them..." is entirely appropriate.

The name of the beast is the House of Morgan.

[Jan Klimkowski]

MSM has been absolutely pathetic throughout this entire looting and plundering exercise. If the "taxpayer bailout of Wall Street" bill gets passed on Monday, I'm sure they'll be cheering Bush for acting decisively to save America & the world financial system.

I say Let it call come crashing down...

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The Bush Administration's Banking Rescue Plan

by Rodrigue Tremblay

"Those who cannot remember the past are condemned to repeat it." George Santayana

"The bill gives [Sec.] Paulson the ability to nationalize an unlimited amount of private debt and force you and your children to pay for it.... I predict that if this passes it will precipitate the mother and father of all financial panics." Karl Denninger (Market Ticker)

"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.” Section 8, Bush's administration proposed legislation to bailout U.S. banks [Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets].

"The Fed is merely trying to inject money to keep prices not supported by fundamentals from falling. It is a prescription for hyperinflation. The only way to keep prices of worthless assets high is to lower the value of money. And that appears to be the Fed unspoken strategy." Henry Liu, economist



If I may simplify somewhat the situation, (but only slightly) we can say that over the last quarter of century, Wall Street firms bought out Congress and the White House (and paid at wholesale prices). Now, they want the U.S. government to buy them back (and they want to sell at retail prices).

Over the years, indeed, Wall Street firms have lavished hundreds of millions of dollars in lobbying Washington D.C. so that their more and more complicated financial businesses would be less and less regulated. During the 1980s, the Savings & Loans industry (S&Ls) was the recipient of Washington largesse. The epitome was the lobbying by five prominent U.S. senators, one of them Sen. John McCain, to deregulate the borrowing and lending practices of savings and loans banks. During the Reagan-Bush era of the 1980's, such deregulation encouraged unsound real estate lending by Savings & Loans financial institutions and this led to the 1986-1995 Savings and Loans crisis. Some 747 savings and loans banks failed and about $160 billion was lost, most of it through a $124.6 billion bailout by the U.S. Government.

During the Clinton and Bush-Cheney eras, large banks were allowed to buy relatively long term subprime home mortgages from regional banks and other mortgage lending firms and repackage them, “securitize” them and resell them as sliced mortgage-backed securities. The banks sold them as short term-like commercial paper, but without guaranteeing them. In 1999, for example, the banking industry spent more than $300 million in lobbying Congress and the White House to repeal the 1933 Glass-Steagall Act that closely regulated banking activities. In November 1999, the Glass-Steagall Act was eviscerated after many years of lobbying efforts. It was replaced by the Gramm-Leach-Bliley Act which established the new market-driven unregulated system for many financial institutions, the largest ones being the New York-based investment banks.

With scant regulation, banks could engage in highly leveraged new banking practices, in violation of sound banking practices. For example, regulated commercial banks normally keep a 1:10 ratio between reserves and loans. But U.S. unregulated entities embarked upon highly leveraged finance, keeping a 1:30, 1:40 or even 1:50 ratio between reserves and risky loans. In so doing, the unregulated banks raked in huge fees at what (they thought) was very little risk for them, because they had hoped to transfer the inherent risk to the buyers of their repackaged securities.

However, when some of the original mortgages downstream became delinquent as the housing price bubble burst, in the spring of 2005, and home foreclosures began to rise, more than $1 trillion of the artificial mortgage-backed securities previously created thus became less secure and less liquid. As time went on, the market for such artificial securities de facto dried up. As a consequence, the issuing banks were left with a large inventory of now toxic securities that nobody wanted to buy. Huge permanent losses replaced huge but illusory short-term profits, although banking CEOs kept receiving large (some would say obscene) total corporate compensations.

The incestuous relationship between unregulated high finance and Washington politics is coming to a climax with the U.S. Treasury Secretary, a former Wall Street CEO of one of the Wall Street banks in relative distress, being declared by legislation a de facto economic tsar and a public Santa Claus. According to proposed legislation, indeed, Mr. Henry Paulson, the former Chairman and Chief Executive Officer (June 1998 – July 3, 2006) of Goldman Sachs, would be entrusted with the power to buy from troubled banks, at his discretion, the bad financial assets they now have on their books. To accomplish that task, as much as $700 billion would be placed in his hands. It is said that Congress, in this election period, does not have time to create an independently-run Bank Resolution Trust under the model of the 1989 Resolution Trust Corp, and all the power to intervene has to be concentrated in the person of the Treasury Secretary.

There you have it. —This is the overall feature of the Bush administration's plan to place hundreds of billion dollars of public money at risk to shore up the U.S. banking industry and prevent the unstable financial house of cards from collapsing.

At the bottom of the problem is the fact that American banks are presently very short of capital, to the point of being insolvent, because of overleveraged investments in the past and because of the huge losses they have suffered in illiquid mortgage-backed securities. The purchase by government of the most illiquid financial assets they have on their books could have the effect of providing some badly need capital to banks through some form of public subsidies, provided it is done in a not too transparent way.

Indeed, the government rescue of U.S. banks comes down to this: How many of the toxic financial assets is Sec. Henry Paulson willing to buy from banks and at what prices?

The “Paulson put”

Henry Paulson is being placed in the role of a government financial plumber who promises to unplug the pipes of finance and cleanse them of the mortgage-backed sludge. He is asking taxpayers' representatives for a blank check, to create a huge slush fund, $700 billion, that he would be free to use to buy toxic depreciated securities from troubled banks and relieve their balance sheets from this undesirable load.

If Sec. Paulson were to pay a high price for the most illiquid bank-owned mortgage-backed securities, this would amount to a “Paulson put” because it would have the effect of guaranteeing the profitability of many risky financial operations that otherwise would have failed. As a matter of fact, at what price would Sec. Paulson buy the illiquid bank toxic assets? At 70 percent of initial book value, or at a price closer to market value which may be 20 to 30 percent of face value. Who would know? When? Under what guidance?

Answers to these questions are crucial because they will help to calculate what could be the final cost to the public purse of the bank bailout. But there is a fundamental dilemma here for the government. If Sec. Paulson were to overpay for the banks' garbage securities, the bailout would amount to a recapitalization of the banks, with taxpayers' money. This would not be a popular move, considering how much money the banks' CEOs made in driving their institutions into the ground. On the other hand, if Sec. Paulson were to pay strictly fair market value for those bad debts, priced at a substantial discount to reflect their poor liquidity and marketability, then the troubled banks would have to write down their losses and would still remain weak and unstable.

There is something surreal and profoundly immoral that the individuals who were front and center in creating the subprime financial meltdown are also those who have been entrusted by the government to solve the mess they have created. Are there not independent economic and financial experts in the United States who could have been assigned this task?

Conclusion

Even though it is the primary responsibility of a government to make sure that financial markets and institutions function properly, the Bush administration's banking rescue plan leaves a lot to be desired before being called economically efficient, and socially and politically acceptable.

Rodrigue Tremblay is professor emeritus of economics at the University of Montreal and can be reached at rodrigue.tremblay@ yahoo.com.

[Jan Klimkowski]

George W Bush at his finest:

"This sucker could go down," Bush is said to have told the group - referring to the teetering US economy.

http://www.guardian.co.uk/business/2008/...useconomy1

Meanwhile, Skeletor Paulson is down on one knee begging for his $700 billion of taxpayer money to go with his Clause 8 permanent "Get Out Of Jail Free" card.

It's more daytime soap opera than theatre at the moment...

[Jan Klimkowski]

David - to pick up on the theme of Paulson & Bush spreading word of an impending "financial 9/11" to facilitate the consolidation of financial institutions along the lines of "One bank to rule us all and in the darkness bind us", see this interesting reportage in the, ahem, well-connected Daily Telegraph:

http://www.telegraph.co.uk/finance/finan...crash.html

Bailout failure 'will cause US crash’
The US stock market could suffer a devastating crash with shares losing a third of their value this week if Hank Paulson’s financial bailout plan fails, US Treasury officials have warned.

The financial system could face a meltdown of 1929 proportions unless US politicians succeed in their efforts for a $700bn rescue scheme, experts added.

The warning came as Republicans and Democrats met in Washington for a rare weekend debating session to attempt to seal agreement on the contentious plan, aimed at preventing a long-lasting recession in the US.

Officials close to Paulson are privately painting a far bleaker portrait of the fragility of the global economy than that advanced by President George W Bush in his televised address last week.

One Republican said that the message from government officials is that “the economy is dropping into the john.” He added: “We could see falls of 3,000 or 4,000 points on the Dow [the New York market that currently trades at around 11,000]. That could happen in just a couple of days.

“What’s being put around behind the scenes is that we’re looking at 1930s stuff. We’re looking at catastrophe, huge, amazing catastrophe. Everybody is extraordinarily scared. It’s going to be really, really nasty.”

Investors fretted about contagion into Europe, where Fortis, which was part of the consortium that bought ABN Amro last year, fired its chief executive after liquidity concerns pushed shares down more than 20pc to a 14-year low. Holland’s ING and BNP Paribas are looking at buying the bank this weekend.

London investors have warned that the FTSE could suffer falls of as much as 1,000 points - a fifth of its value, if the deal falls through.

Peter Spencer, economic adviser to the Ernst & Young Item Club, said: “This is the time you have to bail people out and ask questions later. It is very difficult to see how the US banking system would survive without that.This has the potential to make 1929 look like a walk in the park.”

Senator Harry Reid of Nevada, the majority leader, said: “We hope sometime [Sunday] evening we can announce some kind of agreement in principle. We may not have another day.”

Rebel Republicans - who see Paulson’s proposals as socialism by the back door - were warned they will be responsible for causing an “amazing catastrophe” if they continue to oppose the plans, which would see taxpayers buy up the bad debts of failing banks. Instead they want an insurance scheme for banks, which would spread the cost to private enterprise.

[Jim Norman]

A good diagnosis and prognosis of the debacle is available here:

http://solari.com/blog/docs/Final-Bailou...-Paper.pdf


Proposed $700 Billion Bailout Is Too Little, Too Late to End the Debt Crisis; Too Much, Too Soon for the U.S. Bond Market
By Martin D. Weiss & Michael D. Larson (24 Sep 2008)
Submitted to U.S. Congress, Senate Banking Committee, House Financial Services

* Note: This document includes a current list of troubled banks and information on how to find bank ratings.


Rather than paying inflated prices to buy junk paper from a select list of (crony?) financial institions, so they can defer or avoid massive write-downs that would show they are insolvent, the feds ought to concentrate of topping up the FDIC, SIPC, PBGC and other existing insurance programs for what is certain to be an eventual collapse of hundreds of sick banks. Their equit and (non-depositor-based) debt will be wiped out as was WaMu's, but the acquiring banks will go right on with lending and managing the written-down assets. There is no need for the USG to become the owner of (vacant and crumbling) houses.

[Jan Klimkowski]

Rather than paying inflated prices to buy junk paper from a select list of (crony?) financial institions, so they can defer or avoid massive write-downs that would show they are insolvent, the feds ought to concentrate of topping up the FDIC, SIPC, PBGC and other existing insurance programs for what is certain to be an eventual collapse of hundreds of sick banks. Their equit and (non-depositor-based) debt will be wiped out as was WaMu's, but the acquiring banks will go right on with lending and managing the written-down assets. There is no need for the USG to become the owner of (vacant and crumbling) houses.

Jim - I agree. There have also been suggestions (not from MSM of course) that the $700 billion will essentially be used by Wall Street to massage its End of Quarter results, and indulge in one last spasm of looting and CEO bonuses at the expense of taxpayers, before the financial system actually blows.

[Jim Norman]

They're dopping like flies. Here goes Fortis.

http://online.wsj.com/article/SB12226172...yahoo_buzz

[David Guyatt]

Welcome Jim, it's good to have you here.

Do you happen to know if Fortis' troubles are because they are encumbered with the same worthless mortgage rubbish peddled by Wall Street to other tumblers and bumblers around the world?

It seems to me that a great deal of prior consideration of the need of an eventual rescue by the bank of last resort - us! - was given to these securities (or rather more accurately "insecurities") by the bank wrapping fraternity when they began peddling them. I just cannot see that this roulette game would've been sanctioned otherwise. The Fed and Old Lady (nor forgetting the Treasury mullahs) must've known what would ultimately happen in the years ahead and what the underlying game was. They simply kept silent and smiled.

[David Guyatt]

[quote=Jan Klimkowski]David - to pick up on the theme of Paulson & Bush spreading word of an impending "financial 9/11" to facilitate the consolidation of financial institutions along the lines of "One bank to rule us all and in the darkness bind us", see this interesting reportage in the, ahem, well-connected Daily Telegraph:

Interesting Jan. The Daily Bellylaugh opines and the world cringes (in far more ways than one).

So, the spook-meisters are in on the act trying to scare us all to death so we accept our $1.5-2 trillion medicine with a wry grin and a sigh of relief.