Showing posts with label PPT. Show all posts
Showing posts with label PPT. Show all posts

September 29, 2008

House votes against $700 billion rescue package: Marketwatch

By Ruth Mantell & Steve Gelsi, MarketWatch
Last update: 2:37 p.m. EDT Sept. 29, 2008

WASHINGTON (MarketWatch) -- House lawmakers voted Monday to reject the historic $700 billion financial rescue plan, a sharp blow to the administration and bipartisan leaders in Congress who warn that the country is on the brink of an economic precipice.

With elections approaching, some lawmakers -- both Democrats and Republicans -- may feel nervous about voting for a plan that risks so much taxpayer money and can't promise success. But the president has lobbied hard to approve the plan, and U.S. officials also have stressed the dire consequences of taking no action.

There were 205 in favor of the legislation and 228 against. Among Democrats, 140 voted in favor and 95 against. Among Republicans, 65 voted in favor and 133 against.

Critics say the plan does not adequately address problems such as job losses and a distressed housing market that underlie current economic weakness. U.S. officials had hoped the plan would ease the credit crunch and restore confidence in the markets, even as markets plunged around the world. Those in favor of the rescue plan may have been trying to treat the most manageable symptom -- a frozen credit market -- if not the actual disease.

A vote in the Senate was expected Wednesday, and the president would have followed with a speedy signature.
'I didn't come here to vote for bills like this. Let me tell you this: I believe Congress has to act and that means each and everyone of us.'

— John Boehner, R-Ohio
Earlier Monday, doubt emerged over whether enough representatives would vote in favor of the plan and House Speaker Nancy Pelosi appealed to colleagues in the early afternoon, stressing that representatives will continue to monitor financial issues and pursue additional strategies. She said it's imperative that the measure on the floor receives bipartisan support.

"That is the only message that will send a message of confidence to the markets," Pelosi said.

Colleagues applauded after appeals for bipartisan agreement on the rescue plan from Rep. John Boehner, House minority leader, and Rep. Barney Frank, chairman of the financial-services committee.

The risk of not acting is much higher than the risk of acting, according to Boehner.
"I didn't come here to vote for bills like this. Let me tell you this: I believe Congress has to act and that means each and everyone of us," he said.

Video: Deal draws criticism

After a tentative agreement was set over the weekend, a $700 million Wall Street rescue plan could become law. But there are still holdouts and plenty of public anger. Fox's Doug Luzader reports. (Sept. 29)

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have said the plan is necessary to avert serious consequences for markets and the economy.

There's evidence that voters may be warming to the plan: A new national survey shows that 33% of likely voters now favor the plan, up from 24% on Friday, according to Rasmussen Reports. The survey, conducted Sunday, also found that 32% of voters are opposed to the plan, compared with one-half of those surveyed Friday. Still, 35% of voters are not sure about the plan.

"Those who understand that taxpayers will eventually get much of the money back support the bailout by a 2-to-1 margin,"
Rasmussen Reports said. "Those who incorrectly believe the government will not be getting money back oppose the bailout by a 62% to 18% margin."


Need for Speed

Investors voiced concern about the legislation's ultimate impact, as four European financial institutions were bailed out and Wachovia Corp.'s (WB:
Wachovia Corp
Last: 10.00+490.00-102.08%
12:22pm 09/29/2008
Delayed quote data
Last: 19.70-0.45-2.23%
2:23pm 09/29/2008
Delayed quote data

Stocks opened sharply lower on Wall Street and then fell hard. See Market Snapshot.
At the White House, Bush urged passage of the financial-rescue package, in a move to shore up the country's ailing lending system.
Also Monday, Bernanke said he's looking forward to "swift passage" of the legislation. Bernanke has been urging lawmakers to move quickly on a rescue plan, warning that the economic and financial consequences of a delay would be dire.
"This legislation should help to restore the flow of credit to households and businesses that is essential for economic growth and job creation, while at the same time affording strong and necessary protections for taxpayers," Bernanke said in a statement.
The giant plan is needed to avert a deeper crisis that could hamper the flow of money throughout the financial system, President Bush said. He added that the credit crisis and the housing slowdown will remain facts of life for Americans for the time being.
'This bill provides the necessary tools and funding to help protect our economy against a systemwide breakdown.'
— President Bush
Under the measure, the federal government will purchase assets from banks in order to free up lending in the system, and strong oversight is included, Bush said before U.S. financial markets opened Monday.

Elsewhere, regulators announced Monday that Wachovia's banking operations were being bought by Citigroup. See full story.

Paulson said he supports the Federal Deposit Insurance Corp.'s actions to facilitate the sale to Citigroup (C:
Citigroup, Inc
Last: 19.70-0.45-2.23%
2:23pm 09/29/2008
Delayed quote da

Bernanke also said he supports the FDIC action. See full story.

The Treasury Department also said its temporary guarantee program for U.S. money-market funds in now open. For the next year, the Treasury will insure holdings of any publicly offered money-market mutual fund, retail and institutional, that pays a fee to participate. The temporary guarantee program provides coverage to shareholders for amounts that they held in participating funds as of Sept. 19.

Progress made on rescue

On Sunday, Democratic congressional leaders announced their agreement on details of the rescue plan, releasing a draft text trumpeting taxpayer guarantees and caps on executive compensation.

The draft bill, titled the "Emergency Economic Stabilization Act of 2008," follows days of legislative wrangling as U.S. financial markets teetered on the edge of a collapse triggered by the U.S. mortgage crisis.

"This isn't about a bailout of Wall Street; it's a buy-in so we can turn our economy around," House Speaker Nancy Pelosi, D-Calif., said at a press conference announcing the agreement.
The draft legislation would authorize $250 billion immediately, with another $100 billion upon presidential certification. A further $350 billion would also be available subject to congressional approval.
"I appreciate the leadership shown by members on both sides of the aisle, who came together to write a very good bill,"
Bush said in a statement.
"This bill provides the necessary tools and funding to help protect our economy against a systemwide breakdown."

Under the proposed bill, the Treasury Department can use a combination of tactics to buy bad loans, focusing on mortgages and mortgage-backed securities but also including other types of loans under certain conditions. Treasury could purchase the bad debt through an auction process as well as by buying loans directly, a Treasury official said in a conference call with reporters.
The proposed legislation also allows companies to participate in an insurance program, whereby Treasury would guarantee troubled assets, charging companies a premium "sufficient to cover anticipated claims."

"This bill provides the necessary tools to deploy up to $700 billion to address the urgent needs in our financial system, whether that be by purchasing troubled assets broadly, insuring troubled assets, or averting the potential systemic risk from the disorderly failure of a large financial institution,"
the Treasury secretary said.

The government would get a stake in companies receiving bailout funds so that taxpayer money could be recovered if those companies grow in the future, according to the bill.
The proposed legislation also requires that in five years, the president submit a proposal to Congress "that recoups from the financial industry any projected losses to the taxpayer."

Existing executive-pay contracts will stay in place

In some cases, the bill would require companies limit executive pay, but those limits vary depending on the method by which Treasury purchases a firm's troubled assets, and how much Treasury antes up.

"When Treasury buys assets at auction, an institution that has sold more than $300 million in assets is subject to additional taxes, including a 20% excise tax on golden parachute payments triggered by events other than retirement, and tax deduction limits for compensation limits above $500,000,"
according to a synopsis of the text of the bill.

While the proposed bill prevents companies from signing new golden-parachute deals with top executives after Treasury gets involved, it does not change the terms of already existing contracts, apparently in an effort to encourage companies to participate in the bailout program.

Keeping an eye on progress

The bill would put oversight provisions in place, including creating the position of an inspector general as well as a congressional oversight panel to monitor the program, plus a requirement that the Treasury secretary regularly report to Congress the details of all loan purchases.
Also, "all of the transactions related to this legislation will be on the Internet within 48 hours," Pelosi said. "That transparency, that oversight, will be very important to our economy."
The bill also contains some provisions that seek to help families in financial distress avoid foreclosures, in part by creating a plan to "encourage servicers of mortgages to modify loans" and allowing the Treasury to use loan guarantees to avoid foreclosures.

While critics have noted that government encouragement won't necessarily impel servicers to work with borrowers, the Treasury official said that buying large groups of loans will help push that process forward. "Treasury will be buying many of the securities in volume. We will have a lot of influence on the servicers and we will work aggressively to ... prevent foreclosures," the official said.

Candidates weigh in

Before the release of the draft text, presidential candidates John McCain and Barack Obama said Sunday morning that they would be willing to sign off on the massive financial rescue plan but would need to first consider the details.

When asked if he supported the plan, McCain told ABC's This Week:
"I'd like to see the details, but hopefully yes. ... This is something we'll all swallow hard and go forward with."

Obama told CBS's Face the Nation:
"We have to get something done. ... My inclination would be to vote for it, understanding that I'm not happy about it -- we should have never gotten to this place."


Ruth Mantell is a MarketWatch reporter based in Washington.
Steve Gelsi is a reporter for MarketWatch in New York.

September 23, 2008

MUST READ !! Webster Tarpley on the Bailout (and the jackals bringing you The Plan hahahaha)

NO To The Paulson-Bernanke
Derivatives Scam Bailout
Bail Out the American People, Not Wall Street!
An Economic Recovery Strategy for Protectionists,
Dirigists, Mercantilists, and Populists

By Webster G. Tarpley
9-23-8

WASHINGTON DC -- The grand theft bailout now being rammed through Congress by Treasury Secretary Paulson, Federal Reserve Chairman Bernanke, and other officials of the Bush regime with the help of accomplices Pelosi, Majority Leader Harry Reid, and other parliamentarians is a monstrosity for the ages, combining every hideous feature of monetarism, elitism, oligarchism, and sheer feckless incompetence. It is to all intents and purposes a national suicide note of the United States of America, a contract with the devil that absolutely guarantees irrevocable national decline. For any person of goodwill there can be only one impulse at the present moment, and that is to stop this bailout -- to block it, to sabotage it, to bottle it up, to load it with killer amendments, and to do everything legally possible to stop this insane design from going through.

IF MCCAIN VOTES AGAINST THE BAILOUT, HE WILL WIN THE PRESIDENCY

In political terms, McCain is now running well to the left of Obama on this issue, with a much stronger populist profile. McCain has attacked the outrageous greed and corruption of Wall Street. Obama does not dare attack Wall Street, since these are his masters. Obama, sounding like Milton Friedman, only attacks Washington. Obama has said that he will support whatever Paulson demands. That is not a surprise, since Paulson represents Goldman Sachs, and Obama is a wholly owned property of Goldman Sachs, which is his single biggest source of campaign contributions. Obama is a creature of Brzezinski, Soros, and Rockefeller, and without them he has no existence; Obama is an abject Wall Street puppet, an agent of finance capital. This week, both senators will have to decide how they vote on the odious derivatives bailout. Obama will surely vote in favor of it, since this is what Wall Street demands. If McCain votes against it, he will most probably propel himself into the White House on the model of Give 'Em Hell Harry in 1948. Filthy corrupt Democrats like Schumer are already attacking McCain as the new Huey Long. Huey Long, the Louisiana populist of the 1930s, had many positive features, and we could certainly use a good dose of Huey Long in this country to counteract the elitism, oligarchism, condescension, and arrogant snobbery of foundation operatives like Obama. The bailout is already very unpopular ­ 72% of all voters are opposed to it ­ and it will become more and more hated when it becomes clear that it is also a failure. McCain's course is clear. Will he have the brains and guts to cross Obama's T on this vital issue?

PAULSON OF GOLDMAN SACHS, WOULD-BE FINANCE DICTATOR

Paulson is a ruthless and brutal eco-freak usurer who learned his trade at the Goldman Sachs stock-jobbing operation. He is now the leading member of the committee of public safety which rules in Washington, and which includes Gates, Rice, and Mullen. He now demands the astronomical sum of 700 billion dollars for the bailout of mortgage-backed derivatives, collateralized debt obligations, credit default swaps, and other poisonous derivatives. Make no mistake -- this is not a bailout of homeowners who are threatened with foreclosure; it is a bailout of the lunatic house of cards which desperate bankers have built on these mortgages using derivatives. The entire crisis is not a crisis of subprime mortgages, it is a crisis of the derivatives bubble which was launched by Wendy Gramm of the Commodities Futures Trading Commission and Greenspan of the Fed with the connivance of Robert Rubin of Goldman Sachs and Citibank, and others in the Clinton administration, some 15 years ago.

These derivatives now amount to a total worldwide notional value that can be estimated between 1 quadrillion and two quadrillion US dollars. [!!!!!!!!!!!] This sum is so large that it dwarfs the total value of the entire planet earth and all those who live here. Compared to the cancerous, bloated, and fictitious mass of derivatives which is at the root of this crisis, the $700 billion demanded by politicians, large as this may seem, is nothing but a drop in the bucket. And a drop in the bailout bucket is what it will be. The mass of world derivatives between $1 and $2 quadrillion represents an insatiable black hole which is capable of putting an end, not just to civilization, but the human life itself. The moral choice could not be clearer: humanity will either destroy the derivatives bubble in our time, or the derivatives bubble will surely destroy humanity. Those are the stakes in the current exercise.

Paulson and Bernanke, both lawyers for the Wall Street jackals, lampreys, vultures and hyenas, argue that the public interest demands a bailout of their cronies at Goldman Sachs, Morgan Stanley, J.P. Morgan Chase, Citibank, Bank of America, Wachovia, and the other large money center institutions. Before the American public antes up $700 billion just for openers in the game of genocidal poker which run by the infernal croupiers Paulson and Bernanke, we would be very well advised to examine the veracity of this premise.

COMMERCIAL BANKS ARE INDISPENSABLE

It is of course true that the healthy functioning of the United States economy requires a viable and flexible system of commercial banks. No one should doubt the necessity of commercial banks.

Andrew Jackson was clinically insane on this point, and he still has not a few followers around today. But it ought to be clear that without the services of a well developed commercial banking system, it is impossible to organize business activities as essential as payments, deposits, checking, payrolls, and the discounting of short-term commercial paper, bills of exchange, bills of lading, and all the credit instruments that are intimately connected with real productive activity. Without a functioning commercial banking system, the economic heart of the United States would stop beating, as it briefly did at the end of the Hoover administration in March of 1933. Without commercial banks, no wheel of a factory or railroad can turn, and no commodities can move to show up in supermarkets.

JPM, CITI, BoA ARE DERIVATIVES MONSTERS, NOT COMMERCIAL BANKS

But when we look at institutions like J.P. Morgan Chase, Citibank, and Bank of America, we become aware that these large money center institutions have become detached from any conceivable connection to the world of production, wages, transportation, and all other useful and productive activities. These institutions are not commercial banks any more in any meaningful sense of the term. Ten years ago, in the midst of the Asian financial crisis and the aftermath of the Russian GKO state bankruptcy collapse, the boss of JP Morgan Chase went on television to announce that his bank was specialized in the "risk business." The risk business meant that JP Morgan Chase, had simply given up on the traditional activity of commercial banks, which was primarily to provide loans to corporations for productive investment in plant and equipment that would also create well-paid industrial jobs. J.P. Morgan Chase decided long ago that that activity was nowhere near profitable enough to be continued.

Instead, J.P. Morgan Chase devoted itself more and more to the issuance, sale, and purchase of derivatives. As early as 1992, the best definition of J.P. Morgan Chase was that it was no longer a commercial bank but rather a derivatives monster. In 2002, the J.P. Morgan Chase derivatives monster came very close to imploding, collapsing in on itself like the hopeless black hole that it still remains to the present day. According to the most recent report of the Comptroller of the Curreny of the US Treasury dated September 30, 2007, JP Morgan Chase today has between $90 trillion and $100 trillion of derivatives. In reality this is a very low-ball estimate, and the real derivatives exposure is some multiple of this figure ­ perhaps $300 or $400 trillion, especially now that Bear Stearns, a smaller black hole of derivatives has been absorbed. But even a mere $90 trillion is already six times the US GDP (currently estimated between $14 and $15 trillion).

DERIVATIVES ARE FINANCIAL AIDS

The question of the derivatives is once again the central issue of the crisis. Most people may not even know what derivatives are, although by now many have some idea that they are dangerous and toxic. French President Jacques Chirac once defined derivatives as financial aids, and he was right. A share of stock supposedly represents part ownership in a corporation. A corporate bond is a debt instrument issued by a corporation, with some claim to a part of the assets in case of bankruptcy liquidation. That means that the stocks and bonds are paper, but paper that is at only one remove from the real world of production, consumption, employment, and wages. The derivative is something radically different.

A derivative represents paper based on paper, no longer a stock or bond, but a future, option, or index that is based on some stock, bond, or other form of paper. Derivatives are therefore at least one step further removed from the world of tangible physical commodity production of useful items which humanity requires in order to survive and to conduct civilization as we know it. In addition to the options, futures, and indices, we have all the possible permutations and combinations of the above, with new variations that are almost infinite. Even to catalogue these would take a book. In addition to these exchange traded derivatives, there is a much larger class of derivative which does not appear on the Chicago Board Options Exchange or analogous institutions in all the money centers of the world. The second and larger class represents the counterparty derivatives, including such things as collateralized debt obligations, mortgage backed securities, structured notes, credit default swaps, and the myriad of other derivative products.

These derivatives were originally supposed to be used as a hedge against risk, but before too long they began to represent the biggest single source of risk and the entire lunatic edifice would finance. By now, to repeat this point yet again, the total world derivatives of in excess of one quadrillion dollars -- that is to say, 1000 billion dollars, and may be already approaching the neighborhood of $1.5 quadrillion or even more. One of the inherent problems of derivatives is that nobody knows this exact figure, since derivatives are not reportable in many countries and tend to escape regulation by the proper financial authorities.

DERIVATIVES ARE USELESS AND A THREAT TO CIVILIZATION

You cannot eat derivatives. You cannot live in a derivative. You cannot wear derivatives as clothing, nor can you drive a derivative work. You cannot sail in them or fly in them. They cannot be used as tools of any useful trade. They are not computers, not machine tools, not pharmaceutical equipment, not agricultural implements.

Derivatives are therefore totally outside the realm of capital goods production needs, no matter how these may be defined.

FOR RECOVERY, WIPE OUT, SHRED, DELETE ALL DERIVATIVES

J.P. Morgan Chase, therefore, performs no useful or productive social function, and there is absolutely no reason in the world why the people of the United States should want to bail out this pernicious and socially destructive institution. It has probably been several decades since J.P. Morgan Chase created a single modern productive job. J.P. Morgan Chase's strategic commitment in favor of the derivatives bubble means essentially that we can easily dispense with most of the functions of this self-styled "bank," really a casino. Instead of being bailed out, J.P. Morgan Chase ought therefore to be seized by the Federal Deposit Insurance Corporation, and put through chapter 11 bankruptcy. In the course of that bankruptcy reorganization, the entire derivatives book of J.P. Morgan Chase must be deleted, shredded, used as a Yule log, or employed to stoke a festive bonfire of the derivatives. The world did much better when there were no derivatives, and will get along just fine without them.

Derivatives were of very dubious legality in general and were illegal in some of their specific forms until the mid-1990s.

INSTRUMENTS MEANS DERIVATIVES

According to Paulson's pact with the devil published in the New York Times on September 20, 2008, the Secretary of the Treasury is supposed to be empowered by Congress to spend $700 billion on mortgage related securities, obligations, and instruments. That last word instruments is the favorite euphemism of television commentators and journalists who want to propose a derivatives bailout without using this word, which has now become to some degree unmentionable and taboo, presumably because of its highly negative connotations left over from the crises of more than a decade ago. Accordingly, one very good killer amendment that ought to be added to this pact with the devil should state that not one penny of taxpayer money should ever be used to finance the purchase of derivatives, no matter how they may be euphemistically referred to.

WHY BUY MORTGAGE BACKED SECURITIES THAT HAVE NO PRICE BID?

Paulson wants to buy up derivatives. But at what price? Derivatives have no intrinsic value. Like the rasbucknik in the old L'il Abner comic strip, derivatives have negative value, since somebody has to be paid to cart them away. Counterparty derivatives currently have no price, since there is no market where they are trading, and nobody would want to buy them if there were such a market. Collateralized debt obligations were selling at 5 cents on the dollar a few weeks ago, but that was well before the current crisis broke in its full fury. So how will Paulson know how much to pay for the derivatives he wants to purchase? Will he use the discredited Black-Sholes model, which led to the bankruptcy of the Long Term Capital Management hedge fund ten years ago? Given all this, the only price which can be assigned to the mass of derivatives is not their notional value, but rather a big fat ZERO. Anything else is stealing from the government.

"INVESTMENT BANKS" DRIVE UP THE PUMP PRICE OF GASOLINE

Let us now leave behind the category of the commercial banks and move on to institutions like Goldman Sachs and Morgan Stanley, the stock jobbing operations or counting houses that like to call themselves investment banks these days, even though they do not have the status of a commercial bank and are not members of the Federal Reserve. Why should any public money at all be used to prolong the noxious lives of these sociopathic and pernicious institutions? A short examination of what these so-called investment banks do will reveal that there is no public interest in keeping these creatures alive, and that, once again, touch better off without them.

Investment banks used to assist corporations and floating issues of stocks or bonds on the financial markets. Investment banks were supposed to function as the advisers of industrial corporations and other corporations as they sought to raise capital needed for new plant, equipment, and jobs. But today, these functions have virtually disappeared. The investment banks do a certain amount of work in initial public offerings for IPOs of new securities, but these are almost always of a financially speculative nature. The main thing is that investment banks now place bets on certain classes of assets in the hope of turning a purely speculative profit for themselves. Goldman Sachs and Morgan Stanley maintain trading desks and engage in purely speculative trading of assets which they themselves own, and most of the time these assets represent derivatives of one kind or another. In recent times, the most important asset class which Goldman Sachs and MorganStanley have been trading is probably future indices on commodities, especially oil. Goldman Sachs and Morgan Stanley between them have in the past year by various estimates accounted for about half of the speculative activity in the commodities markets of London, New York, and other money centers which brought about the doubling of the per barrel price of oil between July 2007 and July 2008, increasing the cost of gasoline to almost five dollars per gallon.

GOLDMAN SACHS, MORGAN STANLEY CREATE I.C.E. TO FLAY AMERICANS

In a very real sense, American motorists filling their gas tanks at the pump at exorbitant prices have been involuntarily subsidizing the speculative derivatives activity of Goldman Sachs and Morgan Stanley. [absolutely true! This is a hidden tax that discriminates against the poor and working class!] How bitterly ironic that the same American motorists should now be taxed in order to permit their tormentors to live on and to continue to mercilessly loot them. Goldman Sachs and Morgan Stanley found that even the very weak regulatory regime maintained here in the United States under the auspices of the Commodity Futures Trading Commission was too onerous for them because it slightly constrained their rapacious quest for speculative profits at the expense of the American people. These two investment banks therefore created a new speculative commodity exchange, the ICE or Intercontinental Exchange located in London, with a regulatory regime is virtually nonexistent. The ICE or Intercontinental Exchange in London is where about half of the world
futures contracts in oil have been trading in recent months.

Goldman Sachs and Morgan Stanley, like their now-defunct brethren Bear Stearns, Lehman Brothers, and Merrill Lynch, have also made many speculative investments in the area of mortgage backed securities based on predatory subprime mortgages. The adjustable rate mortgages that underlie these derivatives should have been declared illegal long ago. But now let us imagine what will happen if a hapless victim of these predatory lending practices is forced into foreclosure in the current world economic great depression.

Goldman Sachs will send the bailiff to your door to throw you, your family, and your belongings out on the street, even though you have been taxed to permit Goldman Sachs to continue its sociopathic existence. You will in effect be robbed out of one pocket even as you are being pushed out the door and made homeless by the same institution which has been the beneficiary of your forced charity.

Surely any politician daring to come forward to suggest the public bailout of Goldman Sachs so that it can continue to enforce foreclosures against the American citizens who are paying the bill for the financial excesses of this bandit institution ought to be tarred and feathered and run out of town on a rail. Yet this is exactly what Pelosi, Reid, Dodd, and Frank are proposing to force through the U.S. Congress in the coming week. This represents a new low in public morality.

With Fannie Mae and Freddie Mac, the situation is slightly different, but the same criteria ought to apply. Fanny and Freddie worked very well during the three decades after the formation of Fannie Mae in 1938 as an agency of the federal government -- a hillbilly cousin of the US treasury, as it used to be called.

Things began to go wrong in 1968 when Fannie Mae was privatized, under the pernicious influence of the doctrines of the monetarist Milton Friedman of the infamous Chicago school of pseudo-economics and obscurantism. Fanny and Freddie have now been placed under the control of conservators, but they ought to be nationalized as part of a permanent state sector of the US economy, and operated as the public utility that they were intended to be. The salaries of their officials ought to be determined by the government-wide GSA schedule. Fannie and Freddie have guaranteed mortgages, and ought to continue to do so. But they have no obligation to guarantee mortgage backed securities or any other form of newfangled derivatives which were never mentioned in their charter.

Accordingly, Fannie and Freddie thought to strip away the mortgage backed securities that have been used to package or bundle the mortgages that they now hold. The mortgages represent a valuable asset for the future, under conditions of economic recovery which we intend to organize. But that extra layer of derivatives paper represents a useless additional tax on the public treasury, which the US government has no obligation to maintain. In short, it is time to separate the socially useful core of actual mortgages representing residential and commercial properties from the harmful and speculative overlay of the mortgage-backed security. By this kind of financial engineering, speculators can receive condign punishment, even as the public treasury is believed of an extra layer useless payment which would only reward speculative crimes.

If anyone should inquire as to the ultimate philosophical causes of the current George Bush world economic depression, the answer is simple: this depression is a direct result of the influence of Milton Friedman and the Chicago school, who are themselves to kind of come down American version of the Viennese school of Friedrich von Hayek. Ludwig von Mises, and other charlatans masquerading as economists. The common denominator of the Chicago school is the Vienna school which is represented by the right-wing anarchist thesis that government is always bad and the private sector, especially speculators, are always good. This absurd thesis is now being consigned to the dustbin of history. Friedman and von Hayek, if they were alive today, would doubtless demand the full fury of the free market the unleashed against the American people. This would lead, not to a recovery, but merely to death on a large scale.

The implications of the Chicago school and the Vienna school under current circumstances are nothing short of genocidal, and even the financiers are hastily dumping the discredited doctrines of Friedman and from Hayek as they rush to get their hands into the public till through bigger and better bailouts in an endless series. There is nothing anywhere in the world left today that might resemble a free market, only an endless list of cartels, trusts, monopolies, oligopolies, duopolies, and other conspiracies in restraint of trade. In fact, there has been nothing even vaguely resembling a free market in most of the world in the past several centuries. What is collapsing today in September 2008 is the delusion that such a thing as a free market might exist in the modern world.

The same negative judgment applies to the lunatic doctrines of Joseph Schumpeter, who preached the madness of creative destruction as a way out of the world economic depression of the 1930s.

Schumpeter's doctrines today are nothing less than a public menace, and persons who demand a deflationary crash of the world economy by preaching the Andrew Mellon formula of liquidating labor, liquidating stocks, liquidating bonds, liquidating real estate, etc., are to be put in a padded cell. This is even worse than Herbert Hoover. It was tried in 1932-33, and it turned out to be a bottomless pit already then, so it does not need to be tried again.

BACK TO THE NEW DEAL: RESTORE THE GLASS-STEAGAL FIREWALL

Scribblers like Friedman and von Hayek were paid by finance oligarchs to wage a relentless war against that heritage of the Franklin D. Roosevelt New Deal, the set of policies which allowed humanity to survive the Great Depression of the 1930s. The current crisis would not have been possible in the present form if the institutional safeguards enacted during the New Deal had been left in place, as they should have been. These safeguards represent permanent features of civilization, and they need to be restored. The best example is the repeal of the Glass-Steagall Act under the Clinton administration in 1999. The Glass-Steagall Act was a classic piece of New Deal legislation which established that being a commercial bank and being a stockbroker are mutually exclusive activities that could not be legally combined in the same company.

Commercial banking was one thing, and stock brokerage was something completely separate. Naturally, the greedy financiers and their spokesmen clamored for the repeal of Glass-Steagall, and they finally got their wish. Now less than 10 years later all of the Wall Street banks, seemingly without notable exceptions, are bankrupt and insolvent institutions that cannot not survive without a massive infusion of taxpayer money. We need to restore Glass- Steagal, which will mean among other things that Goldman Sachs and Morgan Stanley will not be eligible to become bank holding companies after all. If you don't like your tax bill next year, you should thank Newt Gingrich and others who made it their business to destroy and roll back the achievements of the New Deal in the name of the despicable ideology of monetarism as preached by Friedman and von Hayek. Newt, by the way, is now calling for an immediate deflationary crash to find out what the real prices of housing might be. This is like doing experiments on your own flesh, and Newt should go to the funny farm.

BACK TO THE NEW DEAL: RESTORE THE UPTICK RULE

Another example is the uptick rule. This New Deal measure meant that it was illegal to sell a stock short if it were continuously in decline. The speculator had to wait until there was an uptick, meaning a trade in which the stock in question increased in price; only then could a short sale be carried out. Another piece of bitter irony inherent in the present crisis is that this uptick rule was abolished by the feckless and incompetent Chairman Cox of the Securities and Exchange Commission at the beginning of last summer, just in time for the explosion of the world credit crisis which has led to the current world economic depression. Incredibly enough, Chairman Cox of the SEC has been unable to pull himself together long enough to permanently re-impose the uptick rule.

Instead, he has drawn up a list of 799 financial institutions and banks whose stock will now be illegal to sell short for at least 10 days, although one suspects that this prohibition will be prolonged indefinitely. This crackpot expedient reveals the true nature of the current monetarist regime. Shorting and destroying General Motors, which actually produces something useful, is fine, but no shorting of JP Morgan Chase, which is a public menace that produces nothing but toxic paper. The long-term roots of the current crisis go back to August 15, 1971, when Nixon, Kissinger, Arthur Burns and George Shultz wantonly destroyed the Bretton Woods system of fixed currency parities, ushering in the new world of financial risk which is now collapsing around us.

NATIONALIZE THE FEDERAL RESERVE AS A BUREAU OF THE TREASURY

The present crisis ought to provide the death warrant for the failed Federal Reserve System. When the Fed was created back under Woodrow Wilson, its Rockefeller and Morgan sponsors promised that the Fed would protect us against all future financial panics. The Fed failed once in 1929-1933, and now it is failing again for a second time. The Fed is worthless as a firewall against depression. We must therefore seize the Fed, audit it, nationalize it, and operate it in the future as a bureau of the US Treasury. From now on, we must go back to the Constitution, meaning that the size of the money supply and short-term interest rates will have to be determined by public laws of the United States, passed by the House and the Senate and signed by the president. Using this method, we can mandate new initial credit issues of $1 to $2 trillion to be used exclusively as low interest (.5% to 1%) and long-term (30 to 40 year maturities) credit for productive purposes only ­ manufacturing, farming, mining, commerce, energy production, infrastructure, and the other things we need. We should stop having the Fed lend money to Citibank at 2% and then having the Treasury borrow that same money back for 4% to 5% in the form of Treasury paper. Nationalize the Fed, and let the Treasury finance itself, cutting out the parasitical middlemen like JP Morgan Chase, Goldman, Citibank, and the rest. The taxpayers will be the big winners.

HOOVER'S RECONSTRUCTION FINANCE CORPORATION WAS A FAILURE

The Paulson-Bernanke $700 billion is roughly comparable (factoring in about 2000% inflation from 1932 to 2008) to the Herbert Hoover Reconstruction Finance Corporation, which started with $2 billion real 1932 dollars, but failed because it tried to prop up insolvent banks and shore up collapsing financial values. Under FDR, the RFC was put under Jesse Jones, who used it to create real plant and equipment with great success. Under Jones, the RFC contributed decisively to US economic recovery by building up the Metals Reserve Company, the Rubber Reserve Company, the Defense Plant Corporation, the Defense Supplies Corporation, the War Damage Corporation, the U.S. Commercial Company, the Rubber Development Corporation, and the Petroleum Reserve Corporation. In other words, the RFC under Jones rebuilt the industrial infrastructure which we have been using down to the present day. Most of these investments represented added physical commodity production.

Today, this could be repeated to produce infrastructure and energy plants for civilian use.

CLEARING THE DECKS FOR WORLD ECONOMIC RECOVERY

It is time to forget about paper and the price of paper, and to concentrate on production ­ securing the tangible physical commodities and hard commodity production which are necessary for human life and civilization. It is impossible to prop up financial values in a panic, and it is foolish to try. To secure a decent future, we must now enact the following measures. Any of these points, all of which seek to defend the general welfare and the public interest, can and should be used as killer amendments to be attached to the current bailout monstrosity as a means of bringing it down.

Stop all foreclosures on homes, farms, businesses, factories, mines, transport systems, for a period of at least five years or for the duration of the present world economic depression, whichever takes longer. If you throw a family out of their home or shut down a family farm, taxicab company, trucking firm, ferry, airline, railroad, or factory of any kind because of debt, you will be on your way to Leavenworth. All politicians now say that we have to keep families in their homes. Excellent! A uniform federal law with real teeth is the way to do it.

Seize bankrupt banks and financial institutions. Put them through Chapter XI bankruptcy, and cancel the hopelessly unpayable parts of their debts, starting with their derivatives book.

Wipe out all derivatives, whether exchange traded or counterparty, without compensation. They have always been illegal. They are now a threat to all of our lives. Not one penny of public money must go to buy derivatives.

Securities transfer tax or Tobin tax on all financial transactions, including stocks, bonds, foreign exchange, etc. This is a sales tax on finance oligarchs who need to start paying their fair share. This will take the life out of the booze for many speculators.

Stop oil, food and commodity speculation with comprehensive re- regulation including position limits, 50 to 100% margin requirements depending on market conditions, and by distinguishing between legitimate hedgers and predatory speculators.

No tax increases on households. Surtax for foundations like the Ford, Rockefeller, Carnegie, Annenberg, and Gates Foundations, who use their funds not for charity but for subversion and divide and conquer social engineering to divide and weaken the American people in defense of the financier interest.

Restore business confidence and credit with new credit issue through the nationalized Federal Reserve, operating under the legal auspices of the US Treasury. Use credit as a public utility. Provide cheap, long-term credit for productive purposes only, not parasitical speculation or financial services.

Institute an absolute guarantee for Social Security, Medicare, Medicaid, Head Start, WIC, food stamps, unemployment insurance, and the other remaining elements of the social safety net. No "entitlement reform" under any circumstances. Austerity for bankers, not people. Use the proceeds from the Securities Transfer Tax to replenish the Social Security Trust Fund and preserve the other vital programs through the end of the twenty-first century.

Using New Deal methods, it is possible to stop a depression cold in a single day. We did it before, and we can do it again. Only 28% of the American people now support the monstrous derivatives bailout, with 37% opposed and 35% unsure, according to Rasmussen on Sept. 22. This is an issue powerful enough to crystallize the current party re-alignment in the same way that slavery in the territories did in 1860, or the last depression did in 1932. Within a month, the current empty husks of the gutted Democratic and Republican Parties could collapse, and be replaced by the pro-Wall Street Bailout Party led by Obama and his phalanx of rich elitists and Malthusian fanatics from both parties, and the pro-middle class and pro-worker Anti-Bailout Party with support from right-wing Republicans, libertarians, and working class Democrats. Who will have the brains and guts need to assert leadership over the Anti- Bailout Party? Will it be McCain? Or Hillary Clinton?

Or someone else? We will soon find out.

See also by Tarpley (he's real good on banking and the Federal Reserve):

http://www.worldproutassembly.org/archives/2007/09/surviving_the_c.html

September 21, 2008

Financial Bailout: America’s Own Kleptocracy by Michael Hudson

Global Research, September 20, 2008

The largest transformation of America’s Financial System since the Great Depression

Nobody expected industrial capitalism to end up like this. Nobody even saw it evolving in this direction. I’m afraid this failing is not unusual among futurists: The natural tendency is to think about how economies can best grow and evolve, not how it can be untracked. But an unforeseen road always seems to appear, and there goes society goes off on a tangent.

What a two weeks!

On Sunday, September 7, the Treasury took on the $5.3 trillion mortgage exposure of Fannie Mae and Freddie Mac, whose heads already had been removed for accounting fraud.

On Monday, September 15, Lehman Brothers went bankrupt, when prospective Wall Street buyers couldn’t gain any sense of reality from its financial books. On Wednesday the Federal Reserve agreed to make good for at least $85 billion in the just-pretend “insured” winnings owed to financial gamblers who bet on computer-driven trades in junk mortgages and bought counter-party coverage from the A.I.G. (the American International Group, whose head Maurice Greenberg already had been removed a few years back for accounting fraud).

But it is Friday, September 19, that will go down as a turning point in American history. The White House committed at least half a trillion dollars more to re-inflate real estate prices in an attempt to support the market value junk mortgages - mortgages issued far beyond the ability of debtors to pay and far above the going market price of the collateral being pledged.

These billions of dollars were devoted to keeping a dream alive - the accounting fictions written down by companies that had entered an unreal world based on false accounting that nearly everyone in the financial sector knew to be fake. But they played along with buying and selling packaged mortgage junk because that was where the money was. As Charles Prince of Citibank put it, “As long as they’re playing music, you have to get up and dance.” Even after markets collapsed, fund managers who steered clear were blamed for not playing the game while it was going. I have friends on Wall Street who were fired for not matching the returns that their compatriots were making. And the biggest returns were to be made in trading in the economy’s largest financial asset - mortgage debt. The mortgages packaged, owned or guaranteed by Fannie and Freddie alone exceeded the entire U.S. national debt - the cumulative deficits run up by the American Government since the nation won the Revolutionary War!

This gives an idea of just how large the bailout has been - and where the government’s (or at least the Republicans’) priorities lie! Instead of waking up the economy to reality, the government has thrown all its resources to promote the unreal dream that debts can be paid - if not by the debtors themselves, then by the government - “taxpayers,” as the euphemism goes.

Overnight, the U.S. Treasury and Federal Reserve have radically changed the character of American capitalism. It is nothing less than a coup d’Etat for the class that FDR called “banksters.” What has happened in the past two weeks threatens to change the coming century - irreversibly, if they can get away with it. This is the largest and most inequitable transfer of wealth since the land giveaways to the railroad barons during the Civil War era.

Even so, there seems little sign that it even may end the free-market patter talk by financial insiders who have managed to avert public oversight by appointing non-regulators to the major regulatory agencies - and thus created the mess that Treasury Secretary Henry Paulson now says threatens the bank deposits and jobs of all Americans. What he really means, of course, are simply the largest Republican campaign contributors (and to be fair, also the largest contributors to Democratic candidates on key financial committees).

A kleptocratic class has taken over the economy to replace industrial capitalism. Franklin Roosevelt’s term “banksters” says it all in a nutshell. The economy has been captured - by an alien power, but not the usual suspects. Not socialism, workers or “big government,” nor by industrial monopolists or even by the great banking families. Certainly not by Freemasons and Illuminati. (It would be wonderful if there were indeed some group operating with centuries of wisdom behind them, so at least someone at least had a plan.) Rather, the banksters have made a compact with an alien power -not Communists, Russians, Asians or Arabs. Not humans at all. The group’s cadre is a new breed of machine. It may sound like the Terminator movies, but computerized Machines have indeed taken over the world - at least, the White House’s world.

Here is how they did it. A.I.G. wrote insurance policies of all sorts of that people and businesses need: home and property insurance, livestock insurance, even aircraft leasing. These highly profitable businesses were not the problem. (They therefore will probably be sold off to pay the company’s bad gambles.) A.I.G.’s downfall came from the $450 billion - almost half a trillion - dollars it was on the hook for as a result of guaranteeing hedge-fund counterparty insurance. In other words, if two parties played the zero-sum game of betting against each other as to whether the dollar would rise or fall against sterling or the euro, or if they insured a mortgage portfolio of junk mortgages to make sure that they would get paid, they would pay a teeny tiny commission to A.I.G. for a policy promising to pay if, say, the $11 trillion U.S. mortgage market should “stumble” or if losers placing trillions of dollars in bets on foreign exchange derivatives, stock or bond derivatives should somehow find themselves in a position that so many Las Vegas patrons are in, and be unable to come up with the cash to cover their losses.

A.I.G. collected billions of dollars on such policies. And thanks to the fact that insurance companies are a Milton Friedman paradise - not regulated by the Federal Reserve or any other nation-wide agency, and hence able to get the proverbial free lunch without government oversight - writing such policies was done by computer printouts, and the company collected massive fees and commissions without putting in much capital of its own. This is what is called “self-regulation.” It is how the Invisible Hand is supposed to work.

It turned out, inevitably, that some of the financial institutions that made billion-dollar gambles - usually in the form of a thousand million-dollar gambles in the course of a few minutes or so, to be precise - couldn’t pay up. These gambles all occur in microseconds, at strokes of a keyboard almost without human interference. In that sense it is not unlike alien pod people taking over. But in this case they are robot-like machines, hence the analogy I drew above with the Terminators.

Their sudden rise to dominance is as unforeseen as an invasion from Mars. The nearest analogy is the invasion of the Harvard Boys, World Bank and U.S.A.I.D. to Russia and other post-Soviet economies after the Soviet Union was dissolved, pressing free-market giveaways to create national kleptocracies. It should be a worrying sign to Americans that these kleptocrats have become the Founding Fortunes of their respective countries. We should bear in mind Aristotle’s observation that democracy is the political stage immediately preceding oligarchy.

The financial machines that placed the trades that bankrupted A.I.G. were programmed by financial managers to act with the speed of light in conducting electronic trades often lasting only a few seconds each, millions of times a day. Only a machine could calculate mathematical probabilities factored in regarding the squiggles up and down of interest rates, exchange rates and stock and bonds prices - and prices for packaged mortgages. And the latter packages increasingly took the form of junk mortgages, pretending to be payable debts but in reality empty flak.

The machines employed by hedge funds in particular have given a new meaning to Casino Capitalism. That was long applied to speculators playing the stock market. It meant making cross bets, lose some and win some - and getting the government to bail out the non-payers. The twist in the past two weeks’ turmoil is that the winners cannot collect on their bets unless the government pays the debts that the losers are unable to cover with their own money.

One would have thought that this requires some degree of control over the government. The activity probably never should have been licensed. In fact, it never was licensed, and hence nor regulated. But there seemed to be a good reason: Investors in hedge funds had to sign a paper saying that they were rich enough to afford to lose their money on this financial gambling. Your average mom and pop investors were not permitted to participate. Despite the high rewards that millions of tiny trades generated, they were deemed too risky for the uninitiated lacking trust funds to play with.

A hedge fund does not make money by producing goods and services. It does not advance funds to buy real assets or even lend money. It borrows huge sums to leverage its bet with nearly free credit. Its managers are not industrial engineers but mathematicians who program computers to make cross-bets or “straddles” on which way interest rates, currency exchange rates, stock or bond prices may move - or the prices for packaged bank mortgages. The packaged loans may be sound or they may be junk. It doesn’t matter. All that matters is making money in a marketplace where most trades last only a few seconds. What creates the gains is the price fibrillation - volatility.

This kind of transaction may make fortunes, but it is not “wealth creation” in the form that most people recognize. Before the Black-Scholes mathematical formula for calculating the value of hedge bets, this kind of put and call option was too costly to provide much profit to anyone except the brokerage houses. But the combination of powerful computers and the “innovation” of almost free credit and free access to the financial gambling tables has made possible a frenetic back-and-forth maneuvering.

So why has the Treasury found it necessary to enter this picture at all? Why should these gamblers be bailed out, if they had enough to lose without having to become public wards by going on welfare? Hedge fund trading was limited to the very rich, for investment banks and other institutional investors. But it became one of the easiest ways to make money, loaning funds at interest for people to pay out of their computer-driven cross-trades. And almost as fast as it was made, this revenue was paid out in commissions, salaries and annual bonuses reminiscent of America’s Gilded Age in the years prior to World War I - years before the income tax was introduced in 1913. The remarkable thing about all this money was that its recipients didn’t even have to pay normal income tax on it. The government let them call it “capital gains,” which meant that the money was taxed at only a fraction of the rate that incomes were taxed.

The pretense, of course, is that all this frenetic trading creates real “capital.” It certainly does not do so in the classical 19th-century concept of capital. The term has been decoupled from producing goods and services, hiring wage labor or from financing innovation. It is as much “capital” as the right to conduct a lottery and collect the winnings from the hopes of the losers. But then, casinos from Las Vegas to riverboats have become a major “growth industry,” muddying the language of capital, growth and wealth itself.

For the gaming tables to be closed and the money paid out, the losers must be bailed out - Fannie Mae, Freddie Mac, A.I.G. and who knows what to come? This is the only way to solve the problem of how companies that already have paid out their revenue to their managers and stockholders instead of putting it in reserves are to collect their winnings from insolvent debtors and insurance companies. These losers also have paid out their income to their financial managers and insiders (along with the usual patriotic contributions to the political candidates on the key committees in charge of deciding the nation’s financial structuring).

This has to be orchestrated well in advance. It is necessary to buy politicians and give them a plausible cover story (or at least a well-crafted set of poll-tested euphemisms) to explain to voters just why it was in the public interest to bail out gamblers. Good rhetoric is needed to explain why the government should let them go into a casino and let them keep all their winnings while using public funds to make good on the losses of their counterparties.

What happened on September 18-19 took years of preparation, capped by a faux ideology crafted by public-relations think tanks to be broadcast under emergency conditions to panic Congress - and voters - right before the presidential election. This seems to be our September election surprise. Under staged crisis conditions, Pres. Bush and Treasury Secretary Paulson are now calling for the country to come together in a War on Defaulting Homeowners. This is said to be the only hope to “save the system.” (What system is this? Not industrial capitalism, or even banking as we know it.) The largest transformation of America’s financial system since the Great Depression has been compressed into just two weeks, starting with the doubling of America’s national debt on September 7 with the nationalization of Fannie Mae and Freddie Mac. (My computer’s spellchecker will not permit me to use the euphemism “conservatorship” that Mr. Paulson applied to bailing out the Fannie Mae and Freddie Mac fraudsters.)

Economic theory used to explain that profits and interest were a return for calculated risk. But today, the name of the game is capital gains and computerized gambling on the direction of interest rates, foreign currencies and stock prices - and when bad bets are made, bailouts are the calculated economic return for campaign contributions. But this is not supposed to be the time to talk of such things. “We must act now to protect our nation’s economic health from serious risk,” intoned Pres. Bush on September 19. What he meant was that the White House must make the Republican Party’s largest group of campaign contributors whole - Wall Street, that is - by bailing out their bad gambles. “There will be ample opportunity to debate the origins of this problem. Now is the time to solve it.” In other words, don’t make this an election issue. “In our nation’s history there have been moments that require us to come together across party lines to address major challenges. This is such a moment.” Right before the presidential election! The same guff was heard earlier on Friday morning from Sec. Paulson: “Our economic health requires that we work together for prompt, bipartisan action.” The broadcasters said that half a trillion dollars was discussed for this day’s maneuverings.

Much of the blame should go to the Clinton Administration for leading the call to repeal Glass-Steagall in 1999, letting the banks merge with casinos. Or rather, the casinos have absorbed the banks. That is what has put the savings of Americans at risk.

But does this really mean that the only solution is to re-inflate the real estate market? The Paulson-Bernanke plan is to enable the banks to sell off the homes of five million home mortgage debtors faced with default or foreclosure this year! Homeowners with “exploding adjustable-rate mortgages” will lose their homes, but the Fed will pump enough credit into the mortgage-lending agencies to enable new buyers to go deeply enough into debt to take the junk mortgages off the hands of the gamblers who presently own them. Time for another financial and real estate bubble to bail out the junk mortgage lenders and packagers.

America has entered into a new war - a War to Save Computerized Derivative Traders. Like the Iraq war, it is based largely on fictions and entered into under seeming emergency conditions - to which the solution has little relation to the underlying cause of the problems. On financial security grounds the government is to make good on the collateralized debt obligations packaged (CDOs) that Warren Buffett has called “weapons of mass financial destruction.”

Hardly by surprise, this giveaway of public money is being handled by the same group that warned the country so piously about weapons of mass destruction in Iraq. Pres. Bush and Treasury Secretary Paulson have piously announced that this is no time for partisan disagreements over this shift of public policy to favor creditors rather than debtors. There is no time to make the biggest bailout in election history an election issue. Not an appropriate time to debate whether it is a good thing to re-inflate housing prices to a level that will continue to oblige new home buyers to go so deeply into debt that they must pay some 40 percent of their take-home pay on housing.

Remember when President Bush and Alan Greenspan informed the American people that there was no money left to pay Social Security (not to mention Medicare) because at some future date (a decade from now? 20 years? 40 years?) the system might run a deficit of what now seems to be merely a trivial trillion dollars spread over many, many years. The moral was that if we can’t figure out how to pay, let’s plow the program under right now.

Mr. Bush and Greenspan did have a helpful solution, of course. The Treasury could turn Social Security and medical insurance money over to Bear Stearns, Lehman Brothers and their brethren to invest at the “magic of compound interest.”

What would have happened to U.S. Social Security had this been done? Perhaps we should view the past two weeks’ events as having assigned to Wall Street gamblers all the money that has been set aside since the Greenspan Commission in 1983 shifted the tax burden onto FICA wage withholding. It is not retirees who are being rescued, but the Wall Street investors who signed papers saying that they could afford to lose their money. The Republican slogan this November should be “Gambling insurance, not health insurance.”

This is not how the much-vaunted Road to Serfdom was mapped out to be. Frederick Hayek and his Chicago Boys insisted that serfdom would come from government planning and regulation. This view turned upside down the classical and Progressive Era reformers who depicted government as acting as society’s brain, its steering mechanism to shape markets - and free them from income without playing a necessary role in production.

The theory of democracy rested on the assumption that voters would act in their self-interest. Market reformers made a kindred happy assumption that consumers, savers and investors would promote economic growth by acting with full knowledge and understanding of the dynamics at work. But the Invisible Hand turned out to be accounting fraud, junk mortgage lending, insider dealing and a failure to relate the soaring debt overhead to the ability of debtors to pay - all of this mess seemingly legitimized by computerized trading models, and now blessed by the Treasury.

Michael Hudosn is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City and author of Super-Imperialism: The Economic Strategy of American Empire (1972 and 2003) and of The Myth of Aid (1971).

© Copyright Michael Hudson, Global Research, 2008

The url address of this article is: www.globalresearch.ca/index.php?context=va&aid=10279

see

Bill Moyers Journal: Wall Street Woes + Kevin Phillips + Yankee Stadium

SEP presidential candidate speaks on financial crisis

Bush Announces Bailing Out Wall Street

The Point of No Return By Mike Whitney

Global Financial Meltdown by Michel Chossudovsky

The U.S. Is Becoming an Impoverished Nation by Richard C. Cook

The Economy Sucks and or Collapse


July 16, 2008

BANKING DOSSIER: Financial Tsunami "news"

The next big wave is breaking
By F William Engdahl

The announcement by US Treasury secretary Henry Paulson, together with Federal Reserve chairman Ben Bernanke, that the US government will bail out the two largest guarantors of the country's housing mortgage debt - Fannie Mae and Freddie Mac - far from calming financial markets has confirmed what we have said repeatedly in this space: the financial tsunami that began in August 2007 in the relatively small "subprime" high-risk mortgage securitization market, far from being over, is only gathering momentum.

As with the tsunami that devastated Asia in wave after terrifying wave in December 2004, what we are witnessing now is a low-amplitude, long-wave phenomenon of trillions of dollars of financial
securities being unwound, defaulted on, and dumped on the market.


The scale of the latest wave to hit, the collapse of confidence in the two government-sponsored entities, Freddie Mac and Fannie Mae, is a harbinger of worse to come in what will be the most devastating financial and economic catastrophe in United States history. The impact will be felt globally.

The Royal Bank of Scotland (RBS), one of the largest financial institutions in the European Union, has warned its clients that "a very nasty period is soon to be upon us - be prepared". RBS expects the S&P-500 index of US stocks, one of the broadest stock indices in Wall Street used by hedge funds, banks and pension funds, could lose almost 23% by September as, in the bank's phrase, "all the chickens come home to roost" from the excesses of the US-led securitization revolution that took hold after the dot.com bubble burst and then Fed chairman Alan Greenspan lowered US interest rates to levels not sustained since the 1930's Great Depression.

This will be seen in history as the disastrous Greenspan "Revolution in Finance" - an experiment in asset-backed securitization, a mad attempt to bundle risk into loans, "securitize" them in new bonds, insure them via specialized insurers called "monoline" insurers (which insured only financial risks in bonds), then rate them via Moody's and Standard & Poor's as AAA, or highest grade. All that was done so that pension funds and banks around the world would assume they were high-quality debt.

Fed in panic mode
While he is getting praise in the financial media for his "innovative" and quick reactions to the unraveling crisis, Fed chairman Bernanke in reality is in a panic mode. His room to act is increasingly bound by the soaring asset price inflation in food and oil, which is pushing consumer price inflation to new highs even by the doctored "core inflation" model of the Fed.

If Bernanke continues to provide unlimited liquidity to prevent a banking system collapse, he risks destroying the US corporate and Treasury bond market and with it the dollar. If Bernanke acts to save the heart of the US capital market - its bond market - by raising interest rates, the Fed's only anti-inflation weapon, it will only trigger the next even more devastating round in tsunami shock waves.

The US government passed the law creating Fannie Mae in 1938 during the Great Depression as part of president Franklin D Roosevelt's New Deal. It was intended to be a private entity, although "government sponsored", that would enable Americans to finance buying of homes as part of the country's attempt at economic recovery. Freddie Mac was formed by Congress in 1970, to help revive the home-loan market. Congress started the companies to promote home buying and their charters give the Treasury the authority to extend a US$2.25 billion credit line.

The problem with the privately owned government-sponsored entities, or GSEs, as they are technically known, is that Congress tried to fudge on whether they were subject to government guarantee in the event of a financial crisis such as the present one. Before now, that appeared a manageable problem. No more.

The United States economy is in the early phase of its worst housing-price collapse since the 1930s. No end is in sight. Fannie Mae and Freddie Mac, as private stock companies, have gone to excesses in leveraging their risk, much as many private banks did. The financial market bought the bonds of Fannie Mae and Freddie Mac because they bet that the two were "too big to fail," that is, in a crisis the government - more accurately the US taxpayer - would be forced to step in and bail them out.

The two companies either own or guarantee about half of the $12 trillion in outstanding US home mortgage loans, or $6 trillion - which is also about half the combined gross domestic product (GDP) of the entire 27 member states of the European Union in 2006, or almost three times Germany's GDP that year.

In addition to their home mortgage loans, Fannie Mae has $831 billion in outstanding corporate bonds and Freddie Mac $644 billion.

Freddie Mac owes $5.2 billion more than its assets today are worth, meaning under current US "fair value" accounting rules, it is insolvent. Fair value of Fannie Mae assets has dropped 66% to $12 billion and may go negative next quarter. As home prices continue to fall across America, and corporate bankruptcies spread, the size of the negative values of the two will explode.

On July 14, Treasury secretary Paulson, former chairman of Wall Street investment bank Goldman Sachs, stood on the steps of the Treasury building in Washington, in a clear attempt to add gravitas to the occasion, and announced that the George W Bush administration would submit a bill proposal to Congress to make taxpayer guarantee of Freddie Mac and Fannie Mae explicit. In effect, in the present crisis it will mean nationalization of the $6 trillion agencies.

The bailout statement by Paulson was accompanied by an announcement by Bernanke that the Fed stood ready to pump unlimited liquidity into the two companies.

The Federal Reserve is rapidly becoming the world's largest financial garbage dump, as for months it has agreed to accept banks' asset-backed securities, including sub-prime real estate bonds, as collateral in return for US Treasury bond purchases. Now it agrees to add to that potentially $6 trillion in GSE real estate debt.

Yet the disaster in the two private companies was obvious as far back as 2003 when grave accounting abuses were made public. In 2003, William Poole, then president of the St Louis Federal Reserve, publicly called for the government to cut its implied guarantee of Freddie Mac and Fannie Mae, claiming then that the two lacked capital to weather a severe financial crisis. Poole, whose warnings were dismissed by then Fed chairman Greenspan, called repeatedly in 2006 and again in 2007 for Congress to repeal their charters and avoid the predictable taxpayer cost of a huge bailout.

Meanwhile some investors are viewing the Paulson bailout not as a bid to rescue the US economy but a lifeline for his former Wall Street cronies as the country's big banks teeter towards a financial implosion. What until recently had been the largest bank in terms of loans outstanding, Citigroup in New York, has been forced to raise billions in capital from sovereign wealth funds in Saudi Arabia and elsewhere to remain in business.

In a statement in May, Citigroup's new chairman, Vikram Pandit, announced plans to reduce the bank's $2.2 billion balance sheet of liabilities. However, he never mentioned an added $1.1 trillion in Citigroup "off balance sheet" liabilities, which include some of the highest risk deals in the US real estate and securitization era it so strongly backed.

The Financial Accounting Standards Board in Connecticut, the official body defining bank accounting rules is demanding tighter disclosure standards. Analysts fear Citigroup could face devastating new losses as a result, with the value of liabilities exceeding the bank’s $90 billion market value. In December 2006, prior to the onset of this financial crisis, Citigroup had a market value of more than $270 billion.

F William Engdahl is the author of A Century of War: Anglo-American Oil Politics and the New World Order, Pluto Press Ltd. Further articles can be found at his website, www.engdahl.oilgeopolitics.net.

(Copyright 2008 F William Engdahl.)

BANKING DOSSIER: FINANCIAL T

The next big wave is breaking
By F William Engdahl


The announcement by US Treasury secretary Henry Paulson, together with Federal Reserve chairman Ben Bernanke, that the US government will bail out the two largest guarantors of the country's housing mortgage debt - Fannie Mae and Freddie Mac - far from calming financial markets has confirmed what we have said repeatedly in this space: the financial tsunami that began in August 2007 in the relatively small "subprime" high-risk mortgage securitization market, far from being over, is only gathering momentum.

As with the tsunami that devastated Asia in wave after terrifying wave in December 2004, what we are witnessing now is a low-amplitude, long-wave phenomenon of trillions of dollars of financial securities being unwound, defaulted on, and dumped on the market.

The scale of the latest wave to hit, the collapse of confidence in the two government-sponsored entities, Freddie Mac and Fannie Mae, is a harbinger of worse to come in what will be the most devastating financial and economic catastrophe in United States history. The impact will be felt globally.

The Royal Bank of Scotland (RBS), one of the largest financial institutions in the European Union, has warned its clients that "a very nasty period is soon to be upon us - be prepared". RBS expects the S&P-500 index of US stocks, one of the broadest stock indices in Wall Street used by hedge funds, banks and pension funds, could lose almost 23% by September as, in the bank's phrase, "all the chickens come home to roost" from the excesses of the US-led securitization revolution that took hold after the dot.com bubble burst and then Fed chairman Alan Greenspan lowered US interest rates to levels not sustained since the 1930's Great Depression.

This will be seen in history as the disastrous Greenspan "Revolution in Finance" - an experiment in asset-backed securitization, a mad attempt to bundle risk into loans, "securitize" them in new bonds, insure them via specialized insurers called "monoline" insurers (which insured only financial risks in bonds), then rate them via Moody's and Standard & Poor's as AAA, or highest grade. All that was done so that pension funds and banks around the world would assume they were high-quality debt.

Fed in panic mode
While he is getting praise in the financial media for his "innovative" and quick reactions to the unraveling crisis, Fed chairman Bernanke in reality is in a panic mode. His room to act is increasingly bound by the soaring asset price inflation in food and oil, which is pushing consumer price inflation to new highs even by the doctored "core inflation" model of the Fed.

If Bernanke continues to provide unlimited liquidity to prevent a banking system collapse, he risks destroying the US corporate and Treasury bond market and with it the dollar. If Bernanke acts to save the heart of the US capital market - its bond market - by raising interest rates, the Fed's only anti-inflation weapon, it will only trigger the next even more devastating round in tsunami shock waves.

The US government passed the law creating Fannie Mae in 1938 during the Great Depression as part of president Franklin D Roosevelt's New Deal. It was intended to be a private entity, although "government sponsored", that would enable Americans to finance buying of homes as part of the country's attempt at economic recovery. Freddie Mac was formed by Congress in 1970, to help revive the home-loan market. Congress started the companies to promote home buying and their charters give the Treasury the authority to extend a US$2.25 billion credit line.

The problem with the privately owned government-sponsored entities, or GSEs, as they are technically known, is that Congress tried to fudge on whether they were subject to government guarantee in the event of a financial crisis such as the present one. Before now, that appeared a manageable problem. No more.

The United States economy is in the early phase of its worst housing-price collapse since the 1930s. No end is in sight. Fannie Mae and Freddie Mac, as private stock companies, have gone to excesses in leveraging their risk, much as many private banks did. The financial market bought the bonds of Fannie Mae and Freddie Mac because they bet that the two were "too big to fail," that is, in a crisis the government - more accurately the US taxpayer - would be forced to step in and bail them out.

The two companies either own or guarantee about half of the $12 trillion in outstanding US home mortgage loans, or $6 trillion - which is also about half the combined gross domestic product (GDP) of the entire 27 member states of the European Union in 2006, or almost three times Germany's GDP that year.

In addition to their home mortgage loans, Fannie Mae has $831 billion in outstanding corporate bonds and Freddie Mac $644 billion.

Freddie Mac owes $5.2 billion more than its assets today are worth, meaning under current US "fair value" accounting rules, it is insolvent. Fair value of Fannie Mae assets has dropped 66% to $12 billion and may go negative next quarter. As home prices continue to fall across America, and corporate bankruptcies spread, the size of the negative values of the two will explode.

On July 14, Treasury secretary Paulson, former chairman of Wall Street investment bank Goldman Sachs, stood on the steps of the Treasury building in Washington, in a clear attempt to add gravitas to the occasion, and announced that the George W Bush administration would submit a bill proposal to Congress to make taxpayer guarantee of Freddie Mac and Fannie Mae explicit. In effect, in the present crisis it will mean nationalization of the $6 trillion agencies.

The bailout statement by Paulson was accompanied by an announcement by Bernanke that the Fed stood ready to pump unlimited liquidity into the two companies.

The Federal Reserve is rapidly becoming the world's largest financial garbage dump, as for months it has agreed to accept banks' asset-backed securities, including sub-prime real estate bonds, as collateral in return for US Treasury bond purchases. Now it agrees to add to that potentially $6 trillion in GSE real estate debt.

Yet the disaster in the two private companies was obvious as far back as 2003 when grave accounting abuses were made public. In 2003, William Poole, then president of the St Louis Federal Reserve, publicly called for the government to cut its implied guarantee of Freddie Mac and Fannie Mae, claiming then that the two lacked capital to weather a severe financial crisis. Poole, whose warnings were dismissed by then Fed chairman Greenspan, called repeatedly in 2006 and again in 2007 for Congress to repeal their charters and avoid the predictable taxpayer cost of a huge bailout.

Meanwhile some investors are viewing the Paulson bailout not as a bid to rescue the US economy but a lifeline for his former Wall Street cronies as the country's big banks teeter towards a financial implosion. What until recently had been the largest bank in terms of loans outstanding, Citigroup in New York, has been forced to raise billions in capital from sovereign wealth funds in Saudi Arabia and elsewhere to remain in business.

In a statement in May, Citigroup's new chairman, Vikram Pandit, announced plans to reduce the bank's $2.2 billion balance sheet of liabilities. However, he never mentioned an added $1.1 trillion in Citigroup "off balance sheet" liabilities, which include some of the highest risk deals in the US real estate and securitization era it so strongly backed.

The Financial Accounting Standards Board in Connecticut, the official body defining bank accounting rules is demanding tighter disclosure standards. Analysts fear Citigroup could face devastating new losses as a result, with the value of liabilities exceeding the bank’s $90 billion market value. In December 2006, prior to the onset of this financial crisis, Citigroup had a market value of more than $270 billion.

F William Engdahl is the author of A Century of War: Anglo-American Oil Politics and the New World Order, Pluto Press Ltd. Further articles can be found at his website, www.engdahl.oilgeopolitics.net.

(Copyright 2008 F William Engdahl.)




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