Weekend Economists' Cruise to Nowhere and Daylight Savings Time March 6-8, 2009

[Demeter]

Last weekend's iceberg-sighting cruise was so relaxing and restful, we are going to take another imaginary boat trip this weekend. This trip is called the Cruise to Nowhere, a most appropriate destination, as the US economy spent the entire week headed in that direction anyway.

Let's call it the Cruise to Nowhere, because calling it the Odyssey would be too depressing. After all, it took Odysseus 10 freaking years to get home after the Trojan War! While he may have dallied with a siren or a sexy witch here or there, none of his companions made it back, and his poor wife was left at home, trying to keep the vultures away from the family business. We don't want to spend 10 freaking years in the aftermath of Reagan/Bush/Bush, thank you very much! We have futures to build, lives to live.

Economically, our ship of state is at the fabled straits of Scylla and Charybdis, two sea monsters of Greek mythology who were situated on opposite sides of the Strait of Messina between Sicily and Calabria, in Italy. They were located in close enough proximity to each other that they posed an inescapable threat to passing sailors; avoiding Charybdis meant passing too closely to Scylla and vice versa.

http://en.wikipedia.org/wiki/Scylla_and_Charybdis for more details.

So, which monster will our intrepid Obama/Odysseus choose to confront while passing through the strait? Will he opt to pass by Scylla (nationalizing the zombies) and lose only a few crew, rather than risk the loss of his entire ship into the whirlpool(by bankrupting the country with Geithner/Goldman-Sachs bailouts)?

Oh dear! Maybe this won't be as restful as I thought! Well, report all sightings and soundings please. This is a working cruise! And don't forget to strangle the bureaucrats who insist that we "spring forward" (except for Tansy Gold and all other the inhabitants of Arizona and Hawaii).

[Demeter]

1. Merrill's top 10 earners made $209 million in 2008: report

http://www.reuters.com/article/newsOne/idUSTRE52311U20090304

(Reuters) - Merrill Lynch & Co's 10 highest-paid employees got a total of $209 million in cash and stock in 2008, up slightly from $201 million they received a year earlier, the Wall Street Journal said, citing reviewed figures.

Andrea Orcel, the firm's top investment banker, was paid $33.8 million in cash and stock in 2008, the paper said.

New York's Attorney General Andrew Cuomo has been investigating whether billions paid in executive bonuses at Merrill Lynch ahead of its takeover by Bank of America were sanctioned by the Charlotte, North Carolina-based bank.

Eleven top executives were paid more than $10 million in cash and stock last year, the paper said, citing people familiar with the situation. Another 149 received $3 million or more, the paper said.

The stock awards, which accounted for much of the compensation, have fallen sharply in value since they were made last year, according to the paper.

Much of the 2008 pay came from bonuses, since base salaries for top Merrill executives generally ranged from $200,000 to $750,000, the paper said.

Information reviewed by the Journal showed that some traders and investment bankers faced only small pay cuts last year, even though the Merrill units they ran posted significant losses.

Merrill could not be immediately reached for comment by Reuters.

[Demeter]

2. TOO BIG HAS FAILED by Thomas M. Hoenig, Kansas Federal Reserve President

http://www.kc.frb.org/speechbio/hoenigPDF/Omaha.03.06.09.pdf

One of the Indians is leaving the reservation.

[Demeter]

3. Mark Fiore Takes on Explaining AIG

http://www.markfiore.com/political/hopping-mad

Fiore has captured some of the zany Rocky and Bullwinkle shtick in this newest animation. Enjoy!

[DemReadingDU]

9. Excellent!

Thanks for the weekend thread!

[Demeter]

14. You're Welcome! Check Back for Additional Posts All Weekend!

[Demeter]

4. Singapore fund invested ‘too early’ in banks

http://www.ft.com/cms/s/0/19bee12e-08e9-11de-b8b0-0000779fd2ac.html

The Government of Singapore Investment Corp, one of the world’s biggest sovereign wealth funds, invested “too early” in Citigroup and UBS, Lee Kuan Yew, its chairman, said Wednesday.

“When the market fell, we went into UBS and Citi. But we went in too early. That is part of the ride,” he told a forum of bankers sponsored by Thomson Reuters. GIC made the banking investments at the turn of 2008.

Temasek Holdings, GIC’s smaller sister Singapore sovereign fund, suffered a 31 per cent fall in the value of its assets to $127bn between April and November 2008, a senior finance ministry told parliament last month.

However, GIC takes a more conservative approach than Temasek in its investment strategy, said Mr Lee, who was prime minister of Singapore from 1959 to 1990. GIC invests Singapore’s foreign reserves in a variety of overseas assets, including equities, bonds, property and alternative instruments, in contrast to Temasek, which mainly holds stakes in domestic and foreign companies and banks, including Bank of America and Barclays.

GIC, which was estimated by analysts in late 2007 to have had an asset value of $300bn, earlier cut the equity position in its portfolio from 60 per cent to about 45 per cent in anticipation of a downturn in the global economy, Mr Lee said.

But he said he was surprised by the depth of the banking crisis. “How could we have known this was the extent of the damage? You look at all the big-name banks that have gone down, misjudged the situation, ruined their careers,” he said.

GIC last week converted its preferred shares in Citi into common stock, becoming the second largest shareholder in the US bank with a 11.1 per cent stake.

The fund continues to view financials as a long-term investment because they are “the circulation system of the world”, Mr Lee said....Singapore’s economy might contract by up to 8 per cent this year because of its exposure to the global economy, Mr Lee added. But he said it was likely to become one of the first economies to recover when the global economy bounces back.

[Dr.Phool]

13. Were they watching CNBC for investment advice?

We've hit the bottom! BUY,BUY,BUY!

If I were a squawking head, I wouldn't visit Singapore any time soon. They do to these idiots, what we'd like to do.

Talk to the "Chief of Staff".

[Demeter]

5. World Bank grants $2bn loan to Indonesia

http://www.ft.com/cms/s/0/b34b15bc-086f-11de-8a33-0000779fd2ac.html

The World Bank on Tuesday approved its largest ever loan to a country not classified as being in crisis when its board signed off on a “unique” $2bn contingency facility to Indonesia to support government spending and external fundraising during the current market turmoil.

The money, the largest ever World Bank loan to Indonesia, is part of a $5.5bn fund which also involves Japan, Australia and the Asian Development Bank.

Indonesia’s central bank on Wednesday cut its interest rate by 50 basis points to 7.75 per cent bringing the cost of borrowing to its lowest level since the rate was introduced in mid-2005. The bank has now eased rates by 175 basis points since December 2008.

The concept of the World Bank loan is that Jakarta can defer drawing upon it while it can still raise money at reasonable rates from conventional sources but use it to reassure investors when tapping debt markets that it can meet the majority of its external funding requirements.

Joachim von Amsberg, the World Bank’s Indonesia country director, told the Financial Times that the World Bank management, which has never made such a loan before, is considering using it as a model for other countries.

“The situation is different from country to country but it’s something the World Bank is looking at as a way to help countries leverage market financing,” he said. “For markets, this is a comforting backstop facility that takes one of the risks off the table.”

[Demeter]

6. Wanna Make a Bet? MGM Mirage warns of debt default risk

http://www.ft.com/cms/s/0/e07e32ae-084b-11de-8a33-0000779fd2ac.html


MGM Mirage, the gaming operator that owns some of the world’s best-known casinos, warned on Tuesday that it is at risk of defaulting on its debt, underscoring the steep downturn in the global gaming sector.

In a regulatory filing to explain the delayed release of its fourth-quarter earnings, MGM Mirage – which counts billionaire Kirk Kerkorian as its biggest shareholder – said it was “still in the process of assessing its financial position and liquidity needs”.

The group owns the Bellagio, MGM Grand and Mirage casinos in Las Vegas, and other properties in Atlantic City. It is trying to complete construction of CityCenter, a $9bn gaming and hotel complex on the Las Vegas Strip that is the costliest such development ever...

MORE SHADY DETAILS AT LINK

[Demeter]

7. Incredibly Bad Economic Piece on NPR

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=02&year=2009&base_name=incredibly_bad_economic_piece


NPR helped a blackmail effort, as it was accurately described by MIT economist Simon Johnson, by telling us that we will have to pay huge amounts of money to rescue the banks. While it gave Johnson a brief chance to make his case, the piece concluded by telling listeners that "the problem is us," that we had borrowed too much and therefore we have to pay the cost in the form of big taxpayer bailouts.

Okay, this is wrong, wrong, and wrong. First, the excessive borrowing wasn't just shear frivolity, it was attributable to something that got very little notice from NPR at the time and unfortunately still gets very little notice from NPR: an $8 trillion housing bubble.

People borrowed against this bubble wealth because the experts that NPR and other media outlets present to the public all said that this run-up in house prices was real and would persist. Economists who warned about the housing bubble were almost completely excluded from NPR.

Because NPR and the media more generally led homeowners to believe that the run-up in house prices would persist, people acting in a way that was entirely reasonable given this view. If the price of their home had gone from $200,000 to $400,000, many homeowners opted to borrow some of this equity to take vacations, buy a car, pay for their children's education or engage in other spending. They may also have stopped contributing to retirement accounts because their home was saving for them.

The problem was not "us," the problem was the experts who run our economy were unable to see an $8 trillion housing bubble and the reporters who cover the economy largely refused to talk to any of the experts who could have pointed this out.

These reporters now want the taxpayers rather than the bankers, who profited from the bubble, to pay for this failure. This NPR piece is identified as being "Planet Money." That may be appropriate because most listeners probably would not think it belongs on Planet Earth.

--Dean Baker

[Demeter]

8. Mr. Market will have the final say.

http://www.dailyreckoning.com/pole-position/


Here at The Daily Reckoning, we've got substantial doubt about a number of things.

As to GM, we share the auditors' concern. The world is full of car factories. Most of them can make cars better, faster, and cheaper than GM. Meanwhile, demand for autos is not growing as quickly as the global growth in auto-making capacity - especially in America. Not that we're trying to pass judgment. Let the Mr. Market do that!

But GM has friends in high places...ready to lean on the scales of Mr. Market's justice. The automaker has already borrowed $13.4 billion. It is asking for another $30 billion. But what kind of a dope would lend $30 billion to a company whose own auditors say they're worried that it might go out of business?

Then again, who would lend money to AIG four times in a row...after discovering each time that the company was in worse shape than before?

If you guessed anything but 'the US government,' you are not paying attention.

The rest of the world's lenders are idiots too - but of a different sort.

Allow us to simplify the world's credit markets circa 2009: the world's lenders are eager to make loans to the world's biggest debtor; they don't trust anyone else. The world's biggest debtor, meanwhile, lends to the people private lenders don't trust - the borrowers who can't pay the money back.

Meanwhile, sales are falling; profits are collapsing; dividends are disappearing; stock prices are plunging.

[Tansy_Gold]

10. The engine is missing -- but I got in the first rec!

Labor is the engine of the economy, and without jobs, there can be no recovery, as we have so often said. The cartoon is spot on. (Well, I don't know for sure that the dog's name is Spot.....)

Okay, I've got my deck chair, my tall glass of iced tea, sunglasses, and a good book. Anchors aweigh!




Tansy Gold, no sailor

[Demeter]

15. But Tansy, I had You Down For One of the Sirens!

Assuming you sing seductively, of course....

[Tansy_Gold]

20. Of course!

(not)



Tansy Gold, used to

[burf]

11. Another week, another bank

Georgia bank closed in 17th failure of 2009

SAN FRANCISCO (MarketWatch) -- Commerce, Ga.-based Freedom Bank of Georgia was closed by regulators Friday, marking the 17th bank failure of the year, the Federal Deposit Insurance Corporation said in a statement.

http://www.marketwatch.com/news/story/Georgia-bank-closed-17th-failure/story.aspx?guid=%7B495C75DF%2D52C3%2D4D15%2DBEFF%2D456095B1798C%7D

[Demeter]

16. But only One!

they did mutter about the FDIC running out of dough, maybe that's why?

Thanks, burf!

[burf]

25. No, thank you

for all the work you do on this and the SMW thread. It is refreshing to see there are knowledgeable folks who are willing to share their insight. Have a great weekend!

[Dr.Phool]

12. Kick! for the morning.

[Demeter]

17. 9 AM and 11 Recs?

That's okay, no pressure....



http://dilbert.com/dyn_file/str_strip/43544/gif/strip.print/

[Demeter]

18. A Depression - With a Capital ‘D’

http://www.dailyreckoning.com/a-depression-with-a-capital-d/


Remember, this is a Depression...with a capital D...not a recession. It's a depression because it requires a perestroika of the economy...a restructuring, not just a breather and bailouts. The debt cycle is now turning in the other direction. America could be creeping back towards a 10% savings rate - as predicted here in The Daily Reckoning - and now taken up by Nobel-prize winner Paul Krugman. Savings bottomed out in the United States in 2006, when the rate went negative. Now, they're moving higher - fast.

This is good news for the people doing the saving, but it is the kiss of death to the consumer economy. Somehow, businesses have to get along without adding more debt to household balance sheets. House-builders have to make a profit by building houses only for people who can actually afford them. Malls have to give up on customers who spent money they hadn't earned yet. Every business in the world has to adjust to the new economy.

Economists call it the 'paradox of savings.' Savings are good for the individual, but when savings rates go up, spending goes down. The economy suffers. Then, people lose jobs and income, further depressing economic growth.

Many economists came to believe that a little inflation was a necessary thing, since it discouraged saving. But people will believe anything if you give them enough education. They also thought derivatives were a healthy innovation, since they dispersed risk...and that subprime debt was a service to the nation, since it made it possible for people to buy houses they couldn't otherwise afford.

But now it's the "Revenge of the Glut," says Krugman. He's referring to another stupid idea economists had: that the United States was doing the world a favor by consuming Asia's glut of savings.

Suddenly, Americans have wised up. They aren't carrying water for Asia's savers any more. As a result, the huge reservoirs of dollar savings in Asia aren't filling up like they used to. And as a consequence (as yet unnoticed by most commentators), Asians aren't going to be in a position to buy so many T-bonds.

Now Americans are saving for themselves. A welcome trend, as far as we're concerned...even if it does bring a Depression.

[Demeter]

19. What Battered Newsrooms Can Learn From Stewart's CNBC Takedown

http://www.huffingtonpost.com/will-bunch/what-battered-newsrooms-c_b_172397.html


The most talked-about journalism of this week wasn't produced in the New York Times, CNN, Newsweek or NPR. It was Jon Stewart's epic, eight-minute takedown on Wednesday night's Daily Show of CNBC's clueless, in-the-tank reporting of inflatable bubbles and blowhard CEOs as the U.S. and world economies slowly slid into a meltdown. You can quibble about Stewart's motives in undertaking the piece -- after he was spurned for an interview by CNBC's faux populist ranter Rick Santelli -- but you can't argue with the results.

The piece wasn't just the laugh-out-loud funniest thing on TV all week (and this was a week in which NBC rebroadcast the SNL "more cowbell" sketch, so that's saying a lot) but it was exquisitely reported, insightful, and it tapped into America's real anger about the financial crisis in a way that mainstream journalism has found so elusive all these months, in a time when we all need to be tearing down myths. As one commenter on the Romenesko blog noted, "it's simply pathetic that one has to watch a comedy show to see things like this."

But that's not all. The Stewart piece also got the kind of eyeballs that most newsrooms would kill for in this digital age -- planted atop many, many major political, media and business Web sites -- and the kind of water-cooler chatter that journalists would crave in any age. In a time when newspapers are flat-out dying if not dealing with bankruptcy or massive job losses, while other types of news orgs aren't faring much better, the journalistic success of a comedy show rant shouldn't be viewed as a stick in the eye -- but a teachable moment. Why be a curmudgeon about kids today getting all their news from a comedy show, when it's not really that hard to join Stewart in his own idol-smashing game?

Here's how:

1) Great research trumps good access to the powerful: The Stewart piece makes this controversial but critical point in two different ways. For one thing, the story shows how access to the nation's most powerful CEOs -- supposedly the big advantage of a journalistic enterprise like CNBC -- isn't worth a warm bucket of spit when it results in slo-pitch softball questions, for fear of offending the rich and powerful. And so we see Ford's CEO grilled about Kid Rock's performance at the auto show, Ponzi scammer (later revealed) Alan Stanford quizzed on whether it's fun to be a billionaire, and Maria "Money Honey" Bartiromo gushing at how corporate chiefs were still telling her that their companies were doing great, even as the massive iceberg was casting its shadow over the hull of the American economy.

Jon Stewart's act of journalism -- reported, of course, by his ace team of writers -- worked because there were no interviews at all. It all hung instead on meticulous research, dredging up lethal quips of CNBC's stock pumping hosts to hang them with their own undeniable words -- Jim Cramer's "buy buy buy" when the Dow was roughly double what it is today, his touting of Bear Stearns' and Bank of America's doomed stocks. The kind of research that's so hard for most newspapers to do anymore, with downsized staffs and ever-looming deadlines, but which can so often belies the spin from our "accessible" sources.

2) The American public is mad as hell right now, so why isn't the mainstream media? Balanced reporting is important, but a balanced, modulated tone of voice? Not now, not when millions are hurting from lost jobs and under-water mortgages, and many millions more are living in fear of the same fate. People need information but what they so desperately want an outlet that shares their passion -- and, yes, that rage -- and so Jon Stewart gave people what they weren't getting anywhere else.

3) Tear down this wall... of pretending that the media itself isn't a major player in American society, and isn't a factor in most big stories. Sure, there were greedy bankers and their pocketed politicians working in unintended tandem to take the Dow from 14,000 down to 6,600, but these popular TV pundits were there every step of the way, as The Daily Show revealed, and their contribution was consequential. Mainstream media, after all these years, has a hard time understanding that one of the major political forces in this country is mainstream media, something the audience knows all too well.

4) The First Amendment doesn't say anything about not being funny, or not being passionate. I don't know about you, if you actually watched the piece, but I feel like I learned something important -- confirming the cheerleading nature of the nation's most-watched source for business news, even in a moment of oncoming disaster -- but I also busted my gut laughing as I did. And there's nothing wrong with that, informing and entertaining at the same time -- isn't that what newspapers are charging people 75 cents for?.

You know, sometimes people do some crazy stuff when they realize their days are numbered. I don't have the answers to problems facing American journalism -- not my own newsroom, mired in Chapter 11, nor the others that face a possible death sentence. But fighting for life will mean living each day like it was your last, with passion, anger and laughter, the way The Daily Show shined a light on a crevice of the nation's battered economy on Wednesday night.

Here's the video: for those who missed or lost it

http://www.thedailyshow.com/video/index.jhtml?videoId=220252&title=cnbc-gives-financial-advice

[Demeter]

21. From Interview with Dr. Michael Hudson on "Guns and Butter" from KPFA Berkely Public Radio

http://aud1.kpfa.org/data/20090304-Wed1300.mp3

Key quotation:

"The Europeans are being kept afloat because they are the recipients of a trillion of the bailout dollars...that has gone to pay off the neoliberal European and British banks....that are no the winning side of the gambles with Citibank and AIG and such...


The problem is that people don't understand that the financial sector is not part of the real economy, that it can be cut off, that you don't have to bail out AIG, when you bail out AIG you are bailing out the speculators..you don't have to bail out casino capitalism, you have to bail out industrial capitalism and you have to bail out labor...

[Demeter]

28. Folks, I Am ListeningTo This for the 3rd Time

There is so much information, so many details from reality, so much extrapolated theory, so many references to economic studies (EC 101 was 30+ years ago for me), plus having to shush the Kid periodically....

and each time I absorb more, and become much more alarmed.

Obama is going to have a crisis and it's going to be economic. And it's going to be this month, maybe even next week. Will he tie himself to the mast and resist the siren songs from Goldman Sachs and the Federal Reserve, Or is he going to put wax in his ears so he can't hear the People screaming "STOP!"

If you pray, now is a good time. If you protest, email, write or call, do so! If you know how to gum up the works, be my guest! And above all, try to educate your nearest and most receptive.

[DemReadingDU]

33. I listened yesterday, so much information and details

It is truly frightening.
:scared:


But no one can say that everything will implode (explode?) this week, or next week, or next month, or next summer or fall. But it's coming, with gargantuous proportions.

Get prepared. I've been checking thru this list, it's all over the internet

Top 100 Items to Disappear First During a National Emergency
http://baconreport.blogspot.com/2007/07/top-100-items-to-disappear-first-during.html

[Tansy_Gold]

41. Excellent list

This is the first I'd seen it, but I quickly checked through it and was surprised at how many things I already have on hand in what could almost be stockpiled supply. I think I'll start stockpiling some others.


TG

[DemReadingDU]

60. It is a good list to start with.

Many people, and especially moms, usually have those items.


Here's another...It is a series of articles and Q/A sessions from a poster named "FerFal".

He was a student in Argentina during their economic collapse. He has some very good insights into what life is like during a catastrophe. Particularly an economic catastrophe.

All credit goes to FerFal and the other posters who comprise this series.

It's a long read, appx 31 pages. There is no way I am prepared for a major catastrophe such as what happened in Argentina.


THOUGHTS ON URBAN SURVIVAL
Life in Post-Collapse Argentina, Oct. 2005
http://members.cox.net/theprof/UrbanSurvival/Thoughts%20On%20Urban%20Survival.htm

FerFal's blog
http://ferfal.blogspot.com/

[Robbien]

64. A mop bucket with wringer, just the solution I've been searching for

A manual wringer for clothes cost about a thousand bucks (a bit cheaper on Amazon), so I've been hand wringing on wash day and being sore for days afterwards. Amazon is telling me a mop bucket with wringer costs about fifty bucks.

What a great idea!

Thanks for the list.

[DemReadingDU]

65. What a bargain!

I'm still working my way thru the list, and need that too, and some extra propane bottles for our gas grill.

[burf]

47. If you are interested

in more of Dr Hudson there was an interview with him by Acres USA, a sustainable agricultural magazine in their Jan 2009 edition.

http://www.acresusa.com/toolbox/reprints/Jan09_Hudson.pdf

[Karenina]

75. That was time well spent. Thanx!!!

[Tansy_Gold]

31. "the financial sector is not part of the real economy,"

Where have I heard this before?




TG

[Demeter]

32. From Me, Actually, But Don't Let that Stop You

I'm only an engineer by training--and it didn't add up!

[antigop]

37. "you have to bail out industrial capitalism and you have to bail out labor..."

Precisely.

[bread_and_roses]

45. exactly exactly exactly to second paragraph

It creates nothing. It makes nothing. It produces nothing. It is all paper. Or pebbles. Or seashells. Or whatever. Why not just give them all a pike of seashells? (I realize this "analsis" is not really up to WE standards, but it still pretty well summarizes what I think.)

[Demeter]

22. Scholes Advises ‘Blow Up’ Over-the-Counter Contracts (Update2) (Cancel CDSs!)

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aNRppMJqgURA#

By Christine Harper

March 6 (Bloomberg) -- Myron Scholes, the Nobel prize- winning economist who helped invent a model for pricing options, said regulators need to “blow up or burn” over-the-counter derivative trading markets to help solve the financial crisis.

The markets have stopped functioning and are failing to provide pricing signals, Scholes, 67, said today at a panel discussion at New York University’s Stern School of Business. Participants need a way to exit transactions and get a “fresh start,” he said.

The “solution is really to blow up or burn the OTC market, the CDSs and swaps and structured products, and let us start over,” he said, referring to credit-default swaps and other complex securities that are traded off exchanges. “One way to do that, through the auspices of regulators or the banking commissioners, is to try to close all contracts at mid-market prices.”

Scholes also recommended moving the trading of credit- default swaps, asset-backed securities and mortgage-backed securities to exchanges to allow for “a correct repricing” of the assets. The securities are currently traded between banks and investors, without any price disclosure on exchanges....

I CUT OUT THOSE WHO DISAGREE...



Scholes won the Nobel Prize for economics in 1997 along with Fischer Black and Robert Merton for their Black-Scholes model of pricing options, contracts that give the buyer the right, but not the obligation, to purchase a security or commodity at a later date for a specified price.

He is now chairman of Platinum Grove Asset Management LP in Rye Brook, New York. The hedge fund was forced in November to freeze investor withdrawals after a surge in redemptions.

Among other recommendations, Scholes urged changes to the accounting rules to give better disclosure on risks, said that banks should focus on their return on assets instead of return on equity, and said central bankers shouldn’t try to quell market volatility, which provides a natural brake on risk- taking.

[antigop]

39. and get rid of SECURITIES LENDING. n/t

[Demeter]

23. Random Musings On The End Of The American Experiment

http://www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/EntryID/761/Default.aspx


I think the defining moment for me was when Bernanke responded to the question from Congress, as to whether the American people (and their elected representatives in Congress) would be told to whom all their tax dollars have been given or lent. That single word summed it up perfectly for me: "No."

Any illusions that the money trust in the US, that collection of bankers and hedge fund managers and industrialists who are the beneficiaries of the systematic looting of the Treasury under the current "emergency" measures, is going to do anything other than precisely whatever it likes, or is going to report to those being looted, was dispelled at that moment. Likewise, nobody has been able to articulate why the massive swindle at AIG continues to be subsidized by our tax dollars - but again, no reporting on where those dollars are going will be forthcoming.

Basically, the gloves are off and the banking establishment - the for-profit cartel of private bankers that is the Federal Reserve - refuses the most basic explanations of where our, and the next several generations' retirements, are going.

Just won't talk. Nope. Shhhhh. It's a secret.

So AIG sells insurance for which it has no collateral, thinly disguising it as credit default swaps, to those with no financial interest in the things being insured (which is illegal if insurance), and you and I get to pay those who bought the swaps and are now collecting big on the destruction of the market and the American way of life. Not a mention of simply making swaps illegal and calling them what they are - illegal insurance, which should be null and void. Nope. Instead, we get to pay out hundreds of billions, to Goldman and the Saudis and whomever else is fortunate enough to be a counterparty - but we can't know to whom the billions are being paid. Again. That's a secret.

I was thinking about how casual the disregard for the rule of law has become on Wall Street, and how confident the money trust is in our apathy and our absence of the will or the means to interfere with their schemes. And well they should be. As nothing has, and likely nothing will.

When I started writing about the naked short selling scam, and the underlying larceny that drove it, I predicted that it would ultimately destroy the engine of prosperity that is the US market system. My reasoning was simple - if you allow crooks to run the system, to take money without requiring that they deliver what they were paid for, you don't have a market, you have a giant fraud. And a system built upon a foundation of fraud isn't sustainable; eventually there are no more rubes to fleece. I also was vocal that while this started out as a penny stock fraud, it had grown to include small-cap companies, and that left unchecked, it would ultimately destroy the IBMs of the world just as surely as it has the countless small-caps. And here we are - the other day, the CFO of GE was forced to acknowledge that its stock is being deliberately manipulated down, however he had no choice but to simply ignore it and focus on the long term, as nobody was going to do anything to stop it. How remarkable is that? We've gone from where this was a penny stock issue, to where one of the largest multi-nationals in the world is being played...and there's nothing anyone is going to do about it.

So what's the endgame? Is it to depress the markets to the point that all the naked short shares are coverable at a profit? A decade's worth of fraud, nicely solved by taking the Dow to 4000? Or is it simply that the jig is up on the larger scam, the fiat money game, and this is the final landgrab before the currency goes the way of used Charmin?

At this point, it's hard to know. There is no joy in being right. Nobody's calling to congratulate me, or Patrick, or Patch, for a job well done. There are no full page articles in the WSJ, as there were speculating as to my identity, saying, "GD it, they were right! The full page ad in the Washington Post was right! This is destroying the system, and the same miscreants who are doing it are doing it to the global system using equally fraudulent tactics while the politicians pretend to have more pressing items on their agenda!" Nope. Because the money trust is particularly good at revisionist history, and spin, and controlling the information flow. And because they know you won't remember accurately what the hell happened 5 years from now, thus whatever a Nocera or a Greenberg says in print, no matter how obviously false, will become your accepted truth.

Their contempt for you is manifest in every action now, every day, as the looting moves out into the open. Oh, sure, there is plenty of hand wringing and table pounding by concerned politicians and the occasional journalist, however the point is that your money is being systematically stolen, and you can't do anything to stop it. Game over.

I used to believe that it was an information gap. That if I only articulated the problem with the right words, in the right forum, that exposure would be sufficient to drive those entrusted with protecting us to do their job. For a while I believed that inaction was a function of ignorance of the true issues, and that if only the correct explanation was put forth, that then a lightbulb would go off in the collective congressional head, and the problem would be corrected.

Now I know better. Patrick's site, DeepCapture.com, is read by every major news outlet on a regular basis, as is this site. It's not that the info isn't knowable or known. It's that nothing will ever be done to change it; not by those with the apparent power to do so. Because even that power is an illusion. As evidenced by the single word response to a demand for the most basic and obvious form of transparency in the largest landgrab of national wealth in history:

"No."

I suppose "Bite Me" or "Fat Chance" are more inefficient uses of language. Why increase the number of words when a monosyllable will readily convey the entire idea?

So as you watch the value of your home decline by 60%, and your portfolio decline by at least that amount, and watch as we move from recession into depression (the jobless rate, BTW, is a joke, as it is far above 8% - reality is that we are closing in on 20%, likely to go more like to 25% or higher over the next year), consider that there have been plenty of voices calling this as it is. All along. It's simply that it isn't in the money trust's interests that those voices be heard, or remembered.

A system predicated upon fraud isn't sustainable. A clearing and settlement system that allows counterfeiting and fraud, and which answers to nobody, isn't a clearing and settlement system. A media that only touts the party line isn't a free press. A private cartel of banks, writing trillions of dollars of taxpayer-funded checks while refusing to tell anyone who is receiving the loot isn't a sustainable banking system. A government that allows all the above to become the status quo, and which twists statistics in order to lie to its own citizenry as well as the rest of the world, isn't a sustainable government.

So many were divided over a black President being elected, and liberal ideas taking the day over conservative ones, but doesn't everyone understand that it is all theater, designed to take your mind off the obvious looting of the nation? Who really cares what color or religion or ideology the guy who slips the icepick into your spine is? Why would it even matter?

Rome is on fire. The government is pouring gasoline through the fire hoses, and the only ones benefitting are the recipients of the trillions and trillions of dollars of your money. Fairly soon, I think it will be safe to say that the formerly prosperous middle class will become the working poor, in a land filled with half vacant strip malls selling shoddily made crap to a populace so numb and dazed it doesn't know the difference and can't remember anything better. Just as 50 years ago seems like a fairy-tale time, when a gas station attendant could support a wife, kids, a car or two, and a home on his salary, a few years ago will sound surreal to our children; imagine a time when two working parents could afford a home and a car! Imagine when there was enough work for both of them to even work steadily! Imagine owning a car! Or a home! That's crazy talk, and we can't change things, so why dwell on it...

That's where we are headed. I was roundly criticized by many of my readers for being a pessimist back at Dow 12K+ for saying that anyone with a dime in the market was an idiot - that you had better-regulated odds of prevailing at the blackjack table in Vegas than in the markets. I guess that too was a bit prescient, no? Still not getting it? Still think you can play in the rigged casino and win? You can't. Only about 300 rich white guys ultimately win, and you aren't one of them if you are reading this blog. Trust me on that.

And that's what's been on my mind lately, as I watch the last vestiges of the illusion crumble, and the rapacious character of the beast emerge from its lair to strip the final bits of flesh from the already rotting carcass.

Last one out turn off the lights.

[Demeter]

24. Who Gained From AIG Rescues? Goldman (and Deutsche) Tops the List (and Willer Buiter is REALLY Angry

http://www.nakedcapitalism.com/2009/03/quelle-surprise-who-gained-from-aig.html

Quelle Surprise!

Even though I often take on the Wall Street Journal's depiction of new stories, the flip side is that it does break significant news stories. Today is one of those days, although I wonder about an item this juicy hitting the wires on a Friday evening.

Remember that the reason for shoring up AIG was its credit default swaps portfolio, in which it had written lots of unhedged guarantees on the cheery assumption that there was tantamount to no risk. Insurers are state-regulated in the US, and subject to a host country requirements overseas (and AIG has substantial foreign operations). Uncle Sam has no regulatory responsibility for AIG, but was hit up nevertheless as the most logical deep pocket that could prevent a financial train wreck.

Gretchen Morgenson reported in September that Goldman was the only financial firm that had a seat at the table during the AIG rescue talks. We noted at the time:

This is special dealing, pure and simple. Even if AIG needed to be salvaged (there was considerable agreement on this point), having Goldman deeply involved in the process is cronyism. But that's been a staple of this Administration.


Another reason for the bailout was that AIG's guarantees allowed European banks to circumvent minimum capital requirements, which means the AIG salvage operation was a backstop to European financial firms.

The Wall Street Journal story, "Top U.S., European Banks Got $50 Billion in AIG Aid" peels back another layer in this sorry affair:

The beneficiaries of the government's bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.

Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008....

The names of all of AIG's derivative counterparties and the money they have received from taxpayers still isn't known, but The Wall Street Journal has identified some of them and is publishing others here for the first time....

In a Senate Banking Committee hearing in Washington on Thursday, Fed Vice Chairman Donald Kohn declined to identify AIG's trading partners. He said doing so would make people wary of doing business with AIG.

But Mr. Kohn told lawmakers he would take their requests to his colleagues. The Fed, through a new committee led by Mr. Kohn to discuss transparency concerns, is now weighing whether to disclose more details about the AIG transactions.


Yves here. One would infer that someone who was privy to the details is mighty unhappy with what went down.

The story also includes this text box:

Some banks that were paid by AIG after it was bailed out by the government

Goldman Sachs
Deutsche Bank
Merrill Lynch
Société Générale
Calyon
Barclays
Rabobank
Danske
HSBC
Royal Bank of Scotland
Banco Santander
Morgan Stanley
Wachovia
Bank of America
Lloyds Banking Group
Source: WSJ research


Update 10:50 PM: Readers suffering from bailout fatigue are wondering why this is a biggie. By the time you are talking AIG level numbers, does it matter where the money went, really? Willem Buiter begs to differ (hat tip Ed Harrison). Bottom line: covert subsidies were given to bank via AIG. Remember, Henry Paulson, who had perilously few inhibitions about shoveling money at banks, even when the pretexts were often dubious and the checks non-existent, nevertheless was afraid to overpay openly for dud assets, which is why he retreated from his original conception of the TARP as as way to hoover up bad debt.

But AIG? No problem. CDS are arcane, and these were bi-lateral contracts (while the dud TARP asset were in most cases securities, so in many cases, third parties could formulate a rough view as to where they might trade).

Wake up and smell the coffee. The public purse is being looted and we the great unwashed are being fed pablum. Just because the perps work for once esteemed institutions and are typically treated with deference does not change the nature of the undertaking.

From Buiter:

The reports on the evidence given by the Vice Chairman of the Federal Reserve Board, Don Kohn, to the Senate Banking Committee about the Fed’s role in the government’s rescue of AIG, have left me speechless and weak with rage. AIG wrote CDS, that is, it sold credit default swaps that provided the buyer of the CDS (including some of the world’s largest banks) with insurance against default on bonds and other credit instruments they held. Of course the insurance was only as good as the creditworthiness of the party writing the CDS. When it was uncovered during the late summer of 2008, that AIG had nurtured a little rogue, unregulated investment banking unit in its bosom, and that the level of the credit risk it had insured was well beyond its means, the AIG counterparties, that is, the buyers of the CDS, were caught with their pants down.

Instead of saying, “how sad, too bad” to these counterparties, the Fed decided (in the words of the Wall Street Journal), to unwind “.. some AIG contracts that were weighing down the insurance giant by paying off the trading partners at the full value they expected to realize in the long term, even though short-term values had tumbled.”

An LSE colleague has shown me an earlier report in the Wall Street Journal (in December 2008), citing a confidential document and people familiar with the matter, which estimated that about $19 billion of the payouts went to two dozen counterparties between the government bailout of AIG in mid-September and early November 2008....With the US government (Fed, FDIC and Treasury) now at risk for about $160 bn in AIG, a mere $19 bn may seem like small beer. But it is outrageous. It is unfair, deeply distortionary and unnecessary for the maintenance of financial stability.

Don Kohn ackowledged that the aid contributed to “moral hazard” - incentives for future reckless lending by AIG’s counterparties - it “will reduce their incentive to be careful in the future.” But, here as in all instances were the weak-kneed guardians of the common wealth (or what’s left of it) cave in to the special pleadings of the captains of finance, this bail-out of the undeserving was painted as the unavoidable price of maintaining, defending or restoring financial stability...

I am deeply worried that other people may, as a result of this, be willing to do business with other U.S. financial institutions on the same ludicrous terms that brought us the current crisis,,,,

Unless the counterparties pay the full price for their hubris and recklessness, they will be back for more. It is therefore tragic that central banks and governments everywhere are going out of their way to protect and shelter the unsecured creditors of the banks (holders of junior and senior debt among them), by raiding the tax payer or the credit and reputation of the central bank. Significant mandatory debt-to-equity conversions and large write-downs of (haircuts on) the claims of other unsecured creditors should be an integral part of any financial assistance package.


There's more good stuff here. Buiter also questions conventional wisdom about the Lehman failure.

[DemReadingDU]

34. TPM Josh Marshall: Now We're Getting Somewhere

3/7/09 Just out from the Journal (see link below) ...

The beneficiaries of the government's bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.

Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.

The gist of the rest of the piece is that, as many have surmised, European banks had a disproportionate exposure to AIG's potential collapse.

And just to be clear, the named institutions and even the few specific dollar amounts are broadly in line with what people expected. The only difference being that this report appears to be based on actual documentation of where the money went rather than informed speculation.

http://www.talkingpointsmemo.com/archives/2009/03/now_were_getting_somewhere.php


3/7/09 Top U.S., European Banks Got $50 Billion in AIG Aid
http://online.wsj.com/article/SB123638394500958141.html

[Demeter]

26. IMF: Fifth of Britain's GDP spent so far on bailouts

http://www.guardian.co.uk/business/2009/mar/06/imf-uk-bailout-gdp


Alistair Darling has already spent almost a fifth of Britain's GDP on bailing out its shattered banking system – more than any other major economy, according to a grave assessment of the world financial crisis published today by the International Monetary Fund.

With G20 finance ministers due to gather in Sussex next Friday for a two-day meeting before the London summit in April, the IMF has totted up the costs of financial bailouts so far. It calculates that the UK has spent as much as 19.8% of its GDP, topping the table of G20 countries.

The US, where the investment bank Bear Stearns and the insurer AIG have both been rescued with public finds, has spent just 6.8% of its GDP. Only Norway has come close to the UK, spending 13.8%.

Opposition politicians leapt on the figures as evidence of the economic damage inflicted by the credit crunch. Philip Hammond, the shadow chief secretary to the Treasury, said: "This is a stark illustration of the true cost of Labour's Age of Irresponsibility. Thanks to the failings of the banking regulatory framework that Gordon Brown put in place, we have spent more than twice as much on bailing out the banking system as the United States – and taxpayers are on the hook for billions of pounds as a result."

Vince Cable, the Liberal Democrat Treasury spokesman, said: "This is a direct consequence of playing host to international banks. Britain is in an extremely exposed position. These are global banks, but they're not being rescued by the globe."

He argued that instead of focusing on international action on bonuses at the G20 summit, Gordon Brown should be pushing for a forced separation between risky investment banking, and the staid deposit-taking institutions that are essential to the economy. "We have to separate deposits from the very risky global casino."

[Demeter]

27. Economic Crisis Takes a Toll on Flower Shows

SO MUCH FOR STOPPING TO SMELL THE FLOWERS...


http://www.nytimes.com/2009/03/07/us/07flowers.html?_r=2&hp

By ABBY GOODNOUGH

BOSTON — In March 1929, unaware that the start of the Great Depression was just months away, the Massachusetts Horticultural Society staged a flower show for its centennial with lavish abandon.

“A desert garden valued at $25,000 has been brought all the way from California,” a New York Times correspondent marveled, noting waterfalls, forests, houses with backyards and a rambling tropical garden. “Remarkable acacia trees reach from floor to ceiling across one of the wide walls of the Great Hall. It really is magnificent.”

The annual spectacle, known as the New England Flower Show, survived the Depression era and all the way to 2008, motivating winter-whipped Bostonians to endure the last desperate weeks of the season with over-the-top exhibits.

But this year, when an early glimpse of sweet peas or a whiff of lilac might be more urgently needed than ever, the show is gone. So, too, are flower shows in Bangor, Me.; Allentown, Pa.; and Cleveland, victims of the economic crisis and shifting demographics.

The Greater New York Orchid Society has canceled its annual show, a rite of spring in Manhattan, “due to a variety of circumstances beyond our control,” according to its Web site. In addition, longtime flower shows in Seattle and San Francisco will end this year if their founder, who said he could no longer bear the financial risk, cannot find a buyer.

In Maine, Scott Wilkerson, whose nonprofit group, Keep Bangor Beautiful, has run the show there since 1991, said: “We’ve had increasing costs and decreasing revenues. We basically just fell on the sword and said, ‘Hey, this is more than we can handle without gardening ourselves into the poorhouse.’ ”

The loss of the Boston flower show, which is older and more celebrated than any other in the nation but Philadelphia’s, has been especially hard to bear. The horticultural society, known as Mass Hort, is one of Boston’s most storied institutions, once fabulously rich but now hobbled by mismanagement.

Its former building, a Victorian behemoth across from Symphony Hall, is a testament to its historic importance, as is its claim to introducing the Concord grape, the Bartlett pear and the concept of garden cemeteries.

In the late 1800s, membership was said to be enough of a guarantee of affluence to qualify women for department store credit accounts.

But Boston Brahmins stopped showering bequests on the society as their ranks thinned and competing interests grew. Because of periodic financial crises over the past 30 years, Mass Hort sold a magazine it published, Horticulture, and most of its rare-book collection. It lost the title to its building in 1991 and moved to the suburbs a few years later.

The society’s reputation suffered further when its plan to raise tens of millions of dollars for a glass-enclosed garden above the highway tunnels of the Big Dig failed.

Last year, after its trustees learned that their new director had been jailed in 2007 after not paying back wages to employees at a former firm, the organization fired most of its staff, froze payments to creditors and called off the flower show for the first time in 137 years.

In an Internal Revenue Service filing from 2007, the group said it made $3.28 million that year but spent $4.85 million. It reported that the flower show, which charged adults $20 for admission, cost nearly $2 million and lost money.

Paul Miskovsky, a trustee, said the show might return but not until the 8,000-member society got back on firm ground.

“We need to settle our past scores and get our house in order,” said Mr. Miskovsky, a landscape designer from North Falmouth....MORE AT LINK

[Demeter]

29. Foreclosure Crisis: Working Toward a Solution

http://cop.senate.gov/documents/cop-030609-report.pdf


SOMEBODY UP TO READING THIS AND GIVING US A SUMMARY? 198 PAGES OF CONGRESSIONALEZE.

[Demeter]

30. Former Australian Prime Minister Savages Geithner's Performance in the Asian Crisis

http://www.nakedcapitalism.com/2009/03/former-australian-prime-minister.html

Paul Keating, former Austrailian Prime Minister, gave an assessment of Timothy Geithners' performance in the Asian crisis that is sharply at odds with US reports. According to Keating, Geither completely misread the nature of the crisis, that it was the result of hot money flight, but reverted to the standard IMF "country facing currency crisis" playbook, and made a bad situation worse.

And to compound matters, the mismanagement of the Asian crisis led China to decide to build up FX reserves so it would never have to go hat in hand to the IMF. In other words, the "savings glut" that Bernanke and other economists like to portray as a cause, if not the cause, of our current financial crisis, was in response to the misguided Asian crisis program.

From the Sydney Morning Herald (hat tip reader Sean):

When Barack Obama announced his champion to rescue the world from economic ruin, it was the first time most Americans had ever heard the name Tim Geithner.

The initial impression was good....."Exactly a decade ago, he was Uncle Sam's golden-boy emissary sent into the stormy centre of what was then the world's worst financial crisis ," reported The New York Post.

The paper gushed: "Just 36 at the time, he'd been raised in Asia and knew the culture so intimately he scored successes and won confidences that other diplomats couldn't match. Geithner earned widespread plaudits for pulling together quarrelling Asian finance ministers into a $US200 billion rescue of their economies."

"A fantastic choice," said a Bank of Tokyo-Mitsubishi analyst, Chris Rupkey, as the Dow rose by nearly 6 per cent. Even one of Obama's political rivals, the hard-bitten Republican senator Richard Shelby, agreed Geithner was "up to the challenge".

If anyone in the US media had thought to ask a former Australian prime minister for his assessment, they would have heard a different view. And they would not have been so surprised at Geithner's performance since.

In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis."

In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.

Geithner thought Asia's problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts.

The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment.

But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans - Thailand, South Korea and Indonesia - all had sound public finances.

The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind.

But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.

Keating continued: "Soeharto's government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power."

Exactly who was the "gigantic fool"? It was, obviously, the man who wrote the program, Geithner, although Keating is prepared to put the then managing director of the IMF, the Frenchman Michel Camdessus, in the same category.

Worse, Keating argued, Geithner's misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences: "The IMF is the gun that can't shoot straight. They've been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose."

China, in particular, drew hard conclusions from the IMF's mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.

Keating continued: "This has all been noted inside the State Council of China and by the Politburo. And it's one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it's why through a series of exchange-rate interventions each day that they've built these massive reserves....

Is this some flight of Keatingesque fancy? The former deputy governor of the Reserve Bank of Australia, Stephen Grenville, doesn't think so: "After the Asian crisis, the countries of east Asia decided that they would never go to the IMF again. The IMF is taboo in east Asia. Look at the evidence. The revealed preference of the region is that no one has gone to the IMF since, even when they needed the money."

And Asian capitals know that they have no real influence over the IMF - while European governments enjoy 40 per cent of the voting power on the IMF, Japan, China and the rest of east Asia put together have only about 16 per cent....

Keating urges that the fund should be decapitated, with control passing to the governments of the Group of 20 countries whose leaders are to meet in London on April 2. The summit, which is to include China, India and Indonesia as well as Australia, is meeting to consider solutions to the global crisis.

As for The New York Post's claim that Geithner was the hero who cajoled those quarrelsome Asians into agreeing to a $US200 billion rescue, the key fact burned into the minds of Asian elites is that the US was deaf to requests for funds. Washington did not contribute a cent of its own money to any of the emergency packages. Japan and Australia were the only nations that made loans to all three of the stricken Asian countries.

Keating went on to argue that, by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy....

"That is the fundamental cause of the problem - the imbalance is the fundamental cause."

[Mojorabbit]

35. Lloyds Cedes Control to Government, Insures Assets

Lloyds Cedes Control to Government, Insures Assets (Update2)


By Andrew MacAskill and Jon Menon

March 7 (Bloomberg) -- Lloyds Banking Group Plc, Britain’s biggest mortgage lender, will cede control to Prime Minister Gordon Brown’s government in return for state guarantees covering 260 billion pounds ($367 billion) of risky assets.

The government’s stake will rise to as much as 75 percent, making Lloyds the fourth U.K. bank to slip into state control since the run on Northern Rock Plc in September 2007. Brown is using that leverage to force banks to increase lending to homeowners and businesses and spur an economy that is facing its worst recession since World War II.

“In order to get British banks lending again the government needed to take them over,” said Simon Willis, an analyst at NCB Stockbrokers Ltd. in London, who has a “sell” rating on Lloyds stock. “It is likely to be at least three of four years before the banks return to the private sector.”

Lloyds will pay more for asset protection than Royal Bank of Scotland Plc, the first lender to enter the program, because of the deteriorating quality of loans acquired when it bought HBOS Plc in a government-brokered deal. London-based Lloyds will pay 15.6 billion pounds, or 5.2 percent of the insured assets, in the form of non-voting shares, the bank said in a statement. RBS last month paid 2 percent.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aUuK.B52o350&refer=home

[Mojorabbit]

36. Run on UK' sees foreign investors pull $1 trillion out of the City

Run on UK' sees foreign investors pull $1 trillion out of the City

Banking crisis undermines Britain's reputation as a safe place to hold funds

By Sean O'Grady, Economics correspondent

Saturday, 7 March 2009


A silent $1 trillion "Run on Britain" by foreign investors was revealed yesterday in the latest statistical releases from the Bank of England. The external liabilities of banks operating in the UK – that is monies held in the UK on behalf of foreign investors – fell by $1 trillion (£700bn) between the spring and the end of 2008, representing a huge loss of funds and of confidence in the City of London.

Some $597.5bn was lost to the banks in the last quarter of last year alone, after a modest positive inflow in the summer, but a massive $682.5bn haemorrhaged in the second quarter of 2008 – a record. About 15 per cent of the monies held by foreigners in the UK were withdrawn over the period, leaving about $6 trillion. This is by far the largest withdrawal of foreign funds from the UK in recent decades – about 10 times what might flow out during a "normal" quarter.

The revelation will fuel fears that the UK's reputation as a safe place to hold funds is being fatally comp-romised by the acute crisis in the banking system and a general trend to financial protectionism internat- ionally. This week, Lloyds became the latest bank to approach the Government for more assistance. A deal was agreed last night for the Government to insure about £260bn of assets in return for a stake of up to 75 per cent in the bank. The slide in sterling – it has shed a quarter of its value since mid-2007 – has been both cause and effect of the run on London, seemingly becoming a self-fulfilling phenomenon. The danger is that the heavy depreciation of the pound could become a rout if confidence completely evaporates.
http://www.independent.co.uk/news/business/news/run-on-uk-sees-foreign-investors-pull-1-trillion-out-of-the-city-1639413.html

[Demeter]

52. Run, Rabbit Run! Great Posts!

England is always a step or two ahead of the US economically.

[antigop]

38. Thanks for the thread, Demeter. Good stuff... K&R nt

[Robbien]

40. Bain Capital’s Steve Pagliuca said on CNBC

“We don’t know where the bottom is but companies are cost reducing and demand can’t go down forever.”


Since cost reducing is CNBCspeak for cutting jobs

does Pagliuca think that once people are rid of their time consuming jobs they will be free to go shopping?

[Tansy_Gold]

42. "free to go shopping"

yes, they will be, and they'll be taking with them the list from post #33 upthread.

[Demeter]

43. Banana Republic Watch: Rodgin Cohen a Candidate for Deputy Treasury Secratary

http://www.nakedcapitalism.com/2009/03/banana-republic-watch-rodgin-cohen.html

This tidbit comes in a Wall Street Journal story, "Top Treasury Candidates Pull Out":

Treasury has identified and is vetting other people for top slots, including H. Rodgin Cohen, chairman of top law firm Sullivan & Cromwell LLP and an adviser to virtually every firm on Wall Street, for the deputy secretary position, two people familiar with the matter said.


Sullivan & Cromwell has long been the outside counsel for Goldman, and outside counsel is a vastly more important role for a securities firm than just about any other type of business. In the stone ages, when I worked for a few years at Goldman, certain S&C partners had so much clout at Goldman that they could get a mid-level banker fired. And even then, "Rodg", head of the banking practice, was a very influential figure at Goldman.

After I (Yves Smith) left Goldman, I was involved in a behind the scenes role on a deal that broke new ground from a regulator standpoint. Cohen was representing the other side, the target of a minority investment. I was later told by a senior bank regulator that Cohen worked against my client's interest in a particularly duplicitous way.

So Cohen is not only deeply tied to entrenched interests, but he plays a ruthless game, with a mild manner that would lead you not to suspect him of that sort of behavior.

In case you think this reaction is extreme, some e-mail comments from reader Marshall:

We should operate from the assumption that Geithner will always surround himself with the most awful Wall Street cronies imaginable. He's totally captive to that ideology. This Administration is going to make Warren Harding's Administration seem like a convention of nuns by comparison.

[Ghost Dog]

49. So, exacly when was Obama instructed to appoint Geithner,

and by whom?

Edit: Hint? - http://www.americanfreepress.net/html/obama_bilderbergers_160.html

[DemReadingDU]

50. Bilderbergers

In 1954, the most powerful men in the world met for the first time under the auspices of the Dutch royal crown and the Rockefeller family in the luxurious Hotel Bilderberg of the small Dutch town of Oosterbeck. For an entire weekend they debated the future of the world. When it was over, they decided to meet once every year to exchange ideas and analyze international affairs. They named themselves the Bilderberg Club. Since then, they have gathered yearly in a luxurious hotel somewhere in the world arrogantly plotting the subversion and silent takeover of constitutional governments everywhere. Their goal is a World Government run exclusively by their hand-picked puppets.

Shrewd and calculating, their hearts are filled with lust for power and consumed by greed for money. Rich and aristocratic, they despise Christians and they loathe the lowly working class. They control the world's press and virtually all our banks and financial institutions. They screen and choose who America's leaders will be and even determine who will run on the Democratic and Republican Party tickets. It was shortly after attending the 1991 Bilderberger meeting, Governor Bill Clinton was selected to be the next President of the United States. Bill Clinton and White House advisor Vernon Jordan's relationship goes back to it's Bilderberger connections.

more...
http://www.jeremiahproject.com/newworldorder/nworder04.html

Edit for the wiki link
http://en.wikipedia.org/wiki/Bilderberg_Group


Hm, very interesting. So perhaps the Bilderbergers are really in charge?

[Demeter]

55. If Bushand Cheney were the Bilderbergers' Idea of Good Puppets

then they are going senile. Those two stooges gave away the game, blew the cover, and will have ushered in the greatest revolution around the world. The rich are not going to get off this time. There is no place to hide, not enough money in the world to pay off enough peasants, and some serious intellect coming to bear.

[Demeter]

51. Even More Alarming--Why Didn't the Dissent Speak Up Before Confirmation?

Incompetence PLUS tax cheat would have scuttled him for sure.

With all the leaking on this economic ship of state, somebody's ox must have gotten gored (to wildly mix metaphors! See Ozy, you aren't the only one!)

[Demeter]

44. Martin Wolf is Angry About Bank Bailouts

http://www.nakedcapitalism.com/2009/03/martin-wolf-is-angry-about-bank.html

The British don't do shrill, but Wolf today is as close as you will ever find on the pages of the Financial Times. And the telling sign that Wolf is borderline unhinged is (aside from mentioning his fury) that his article has less of a clear structure than his comments usually do. But he nevertheless works his way up to an important point at the end of his piece, namely, that if we cannot find a way to make banks less interconnected, so that danger to one can bring the entire system to its knees, then government has to regulate them as utilities.....



My colleague, Willem Buiter, in his magnificent blog states bluntly that: “like its American and Dutch counterparts, this toxic asset insurance scheme is without redeeming social value: it is inefficient, unfair and expensive”. Is he being too harsh? Not much.

Clearly, the biggest attraction of such a scheme, to both politicians and beneficiaries, is that its costs are removed from the public accounts.


Yves here. That's a point we and others have made about the various US toxic assets schemes. Paulson couldn't figure out a way (at least in the limited time he had left in office) to hide the large subsidies that would be paid to the banks through this arrangement. So Team Obama comes up with the "public private partnership" concept, which HAS to be more wasteful than propping up banks via paying over-the-market prices because an additional party, the investors, also has to be enriched.

Back to Wolf (boldface mine):

How large might these costs be? I understand that internal calculations of the International Monetary Fund suggest a fiscal cost of all UK bank support of 13 per cent of GDP, or £200bn. I suspect this is too optimistic. Certainly, together with the costs of the economic slump, an increase of well over 50 percentage points in the ratio of public sector debt to GDP is highly likely. Such are the wages of financial mania. They would be similar to the fiscal costs of a war.

Why should not more of the losses fall on creditors, other than the insured depositors? That is the question asked by many economists. It is the approach recommended by proponents of a “good bank” solution.

The big point here is that the losses against which the government is now offering such generous insurance relate strictly to bygones. If we want banks to make new loans, it makes far more sense to guarantee those, rather than bail out all those who financed the mistakes of the past. So, suggest the radicals, toxic assets should have been left with the shareholders and uninsured creditors of the old bank, who would also gain a claim on a clean new bank. Moral hazard would disappear and taxpayers would be left relatively unharmed.

The arguments against this are two: first, the possibility of a default would create a wave of panic worse than the one that followed the bankruptcy of Lehman last September; and, second, for this reason, no individual government could dare to go it alone.

Unlike Professor Buiter, I recognise that these could be valid arguments in the current circumstances. I certainly have no desire to make the slump even worse than it is. But, if so, they have compelling implications.

One is that we must create effective mechanisms for orderly bankruptcy of very large financial institutions. Indeed, this is far and away the most important lesson of the crisis.


Yves here. Wolf does not go far enough. In the US, devising a bankruptcy regime, or at least devising interim measures to make a failure less catastrophic (could certain entities and operations be parsed out?) should have been the number one priority of the Fed and Treasury after the Bear Stearns failure. Bear was the smallest independent investment bank at the time, yet was still too big to fail. Lehman, Morgan Stanley, and by some accounts, UBS and Merrill were next on the list. With so many firms in perilous shape, planning for what to do when the next one went off the rails should have been top priority. Yet amazingly, the powers that be acted as if life would of course return to normal, even though it had failed to despite increasingly aggressive interventions. Back to the article:

Another is that if large institutions are too big and interconnected to fail, precisely because they are bound to get into serious trouble together, then talk of maintaining them as “commercial” operations, as the chancellor of the exchequer does, is a sick joke. Such banks are not commercial operations; they are expensive wards of the state and must be treated as such.

The UK government has to make a decision. If it believes that costly bail-out must be piled upon ever more costly bail-out, then the banking system can never be treated as a commercial activity again: it is a regulated utility – end of story. If the government does want it to be a commercial activity, then defaults are necessary, as some now argue. Take your pick. But do not believe you can have both. The UK cannot afford it.


This observation is of fundamental importance. Here in the US we are still dancing around the dirty word nationalization, with the respectable position being that yes, the US might take banks into the government emergency room for a while, but of course, they will be made private again as soon as possible.

But Wolf is correct. If the authorities do not find a way to change the structure of the banking industry, firms will remain tightly networked, and any one can imperil the health of all, requiring a state rescue. That means they should be very highly regulated, in the classic utility model of regulated return on equity. Finance, or at least the kind that uses depositor money and takes a lot of capital, will be put clearly at the service of the public.

Now there are ways to reduce the interdependence. Setting up exchanges is one. Limiting the scope of firm's activities is another (Glass Steagall, which separated commercial from investment banking, had that effect).

But we see neither type of measure underway, neither an effort to rework the composiiton and operation of the industry, nor to regulate it more strictly if it is to be left more or less as is. Instead, heaven and earth are being moved to prop up a broken system in place.

[Demeter]

46. A Bank Bailout That Works By Joseph E. Stiglitz

http://www.thenation.com/doc/20090323/stiglitz/single?rel=nofollow

The news that even Alan Greenspan and Senator Chris Dodd suggest that bank nationalization may be necessary shows how desperate the situation has become. It has been obvious for some time that a government takeover of our banking system--perhaps along the lines of what Norway and Sweden did in the '90s--is the only solution. It should be done, and done quickly, before even more bailout money is wasted.

The problem with America's banks is not just one of liquidity. Years of reckless behavior, including bad lending and gambling with derivatives, have left them, in effect, bankrupt. If our government were playing by the rules--which require shutting down banks with inadequate capital--many, if not most, banks would go out of business. But because faulty accounting practices don't force banks to mark down all their assets to current market prices, they may nominally meet capital requirements--at least for a while....


There is a basic principle in environmental economics called "the polluter pays": polluters must pay for the cost of cleaning up their pollution. American banks have polluted the global economy with toxic waste; it is a matter of equity and efficiency that they must be forced, now or later, to pay the price of cleaning it up. As long as the banking sector feels that it will be bailed out of disasters--even ones it created--we will continue to have a moral hazard. Only by making sure that the sector pays the costs of its actions will efficiency be restored.

The full costs of those mistakes include not just the $700 billion bailout but the almost $3 trillion shortfall between the economy's potential output and its actual output resulting from the crisis. Since we are not forcing banks to pay these full costs imposed on society, we should hear no complaints from them about paying for the much smaller direct costs of the bailout.

The politicians responsible for the bailout keep saying, "We had no choice. We had a gun pointed at our heads. Without the bailout, things would have been even worse." This may or may not be true, but in any case the argument misses a critical distinction between saving the banks and saving the bankers and shareholders. We could have saved the banks but let the bankers and shareholders go. The more we leave in the pockets of the shareholders and the bankers, the more that has to come out of the taxpayers' pockets.

Principles and Goals

There are a few basic principles that should guide our bank bailout. The plan needs to be transparent, cost the taxpayer as little as possible and focus on getting the banks to start lending again to sectors that create jobs. It goes without saying that any solution should make it less likely, not more likely, that we will have problems in the future.

By these standards, the TARP bailout has so far been a dismal failure. Unbelievably expensive, it has failed to rekindle lending. Former Treasury Secretary Henry Paulson gave the banks a big handout; what taxpayers got in return was worth less than two-thirds of what we gave the big banks--and the value of what we got has dropped precipitously since.

Since TARP facilitated the consolidation of banks, the problem of "too big to fail" has become worse, and therefore the excessive risk-taking that it engenders has grown worse. The banks carried on paying out dividends and bonuses and didn't even pretend to resume lending. "Make more loans?" John Hope III, chair of Whitney National Bank in New Orleans, said to a room full of Wall Street analysts in November. The taxpayers put out $350 billion and didn't even get the right to find out what the money was being spent on, let alone have a say in what the banks did with it.

TARP's failure comes as no surprise: incentives matter. Bankers won't restart lending unless they have a reason to do so or are forced. Receiving billions of dollars in bonus pay for racking up record losses is a peculiar "incentive" structure. Bankers have been accused of unbounded greed using hard-earned taxpayer dollars for bonuses and dividends, but economists more calmly observe: they were simply responding rationally to the incentives and constraints they faced.

Even if the banks had not poured out the money in bonuses as we were pouring it in, they might not have restarted lending; they might have just hoarded it. Recapitalization enables them to lend. But there is a difference between the ability to lend and the willingness to lend. With the economy plunging into deep recession, the risks of lending are enormous. TARP did nothing to require or create incentives for new lending, focusing instead on cleaning up past mistakes. We need to be forward-looking, reducing the risk of new lending. Just think of what new lending $700 billion could have financed. Leveraged on a modest ten-to-one basis, it could have supported $7 trillion of new lending--more than enough to meet business's requirements.

......

Is There an Alternative?

Firms often get into trouble--accumulating more debt than they can repay. There is a time-honored way of resolving the problem, called "financial reorganization," or bankruptcy. Bankruptcy scares many people, but it shouldn't. All that happens is that the financial claims on the firm get restructured. When the firm is in very bad trouble, the shareholders get wiped out, and the bondholders become the new shareholders. When things are less serious, some of the debt is converted into equity. In any case, without the burden of monthly debt payments, the firm can return to profitability. America is lucky in having a particularly effective way of giving firms a fresh start--Chapter 11 of our bankruptcy code, which has been used repeatedly, for example, by the airlines. Airplanes keep flying; jobs and assets are preserved. Under new management, and without the burden of debt, the airline can go on making a contribution to our society.

Banks differ in only one respect. The failure of a bank results in particular hardship to depositors and can lead to broader problems in the economy. These are among the reasons that the government has provided deposit insurance. But this means that when banks fail, the government comes in to pick up the pieces--and this is different from when the local pizza parlor fails. Worse still, long experience has taught us that when banks are at risk of failure, their managers engage in behaviors that risk losing even more taxpayer money. They may, for instance, undertake big bets: if they win, they keep the proceeds; if they lose, so what?--they would have died anyway. That's why we have laws that say when a bank's capital is low, it should be shut down. We don't wait for the till to be empty. Because the government is on the hook for so much money, it has to take an active role in managing the restructuring; even in the case of airline bankruptcy, courts typically appoint someone to oversee the restructuring to make sure that the claimants' interests are served.

Usually, the process is done smoothly. The government finds a healthy bank to take over the failed bank. To get the healthy bank to do this, it often has to "fill in the hole," making up for the difference between the value of what the bank owes depositors and the value of the bank's assets. It's no different from an ordinary takeover or merger, except the government facilitates the process. Typically, in the process, shareholders get wiped out, and often the government and/or private investors may put in additional money.

Occasionally, the government can't find a healthy bank to take over the failed bank. Then it has to take over the failed bank itself. Usually, it restructures the bank, shutting down many of the branches and lending departments with particularly bad track records. Then it sells the bank. We can call this "temporary nationalization" if we want. But whatever we call it, it's no big deal. Not surprisingly, the banks are trying to scare us into believing that it would be the end of the world as we know it. Of course, it can be done badly (Lehman Brothers, for example). But there are far more examples of it being done well.

The current situation is only slightly different. There are few healthy banks to take over the very many unhealthy banks, and the banks are in such a mess--and the economy is in such a downturn--that we don't really know how much money would be needed. We don't know if claims by depositors are greater than the value of assets, and if so, by how much. The banks may claim, If we hold the assets long enough, and if the real estate market recovers, and if our recession isn't too deep or long, then we can meet all our obligations. We are "solvent." We just can't get the cash we need.

Those are big ifs. That's why governments typically make judgments based on market values. Right now, the suspicion is that the banks don't meet their capital requirements with current market values, let alone the market values in the future, as real estate prices continue to fall and the downturn gets worse. (If banks don't have enough capital, we would give them short notice: either come up with additional capital, or you can't continue to operate as you are. We either find someone to take you over, or we run you, restructure and sell.)

The banks obviously don't want the government to play by the rules. They want to delay the day of reckoning. They want what is called forbearance. They say, Allow us a little slack now, because we are fundamentally sound. Of course they would say that. Of course banks claim that market prices underestimate true values. We learned the hard way in the S&L crisis, however, that delay is very costly. We are on track to learn that lesson again.

MUCH MORE AT LINK


About Joseph E.Stiglitz
Joseph E. Stiglitz is University Professor at Columbia University. He received the Nobel Prize in Economics in 2001 for research on the economics of information.

[Demeter]

48. ANOTHER Secret conversation between Volker and Geithner.

WE FEATURED A SIMILAR SCENARIO A FEW WEEKS AGO--HERE IS THE NEXT INSTALLMENT....


http://brucekrasting.blogspot.com/2009/03/secret-conversation-between-volker-and.html


Transcript of phone conversation between Paul Volker (“BIG PAULIE’) and Tim Geithner (“TIMMY”) March 4, 2009. 8:20 PM EST.

BIG PAULIE: Good evening Tim. How you doing Kiddo? You still in the office?

TIMMY: Hi Paul. Thanks for calling. I guess I am okay. It was another bad day for me.

BIG PAULIE: Those Senators tough on you? I could not tell. CNBC had you on in a small box in the corner with no sound.

TIMMY: Yes it was tough. Not as bad as the House though. They all want to blame someone and I am always in the way. I am at my desk now, looking at the email and phone messages. 90% are negative. The press, half of Washington, foreign finance officials, industry leaders. Irate voters from every State. They all hate me. They blame me because I am the one in the hot seat.

BIG PAULIE: That bad huh?

TIMMY: You should see the Blogs. It breaks my heart. Half of them refer to me as a tax cheat.

BIG PAULIE: You are a tax cheat.

TIMMY: That was a computational problem. 80% of all Americans have had this problem at one time or another. I did get one nice note from Jeff Immelt. He wrote of kum by ya. What does that mean?

BIG PAULIE: Oh boy…. Speaking of GE I got a call from Jack Welch. He said he would become a Democrat if the President spoke nice about GE. Heh.heh.heh. (the noise of the lighting of a cigar is heard)

TIMMY: Well, I am so sorry that I have failed the Administration in these critical times.

BIG PAULIE: What fail? You are doing a great job. Perfect in fact.

TIMMY: I don’t get it. How is that possible given the negative reviews my financial plans have received? The markets are collapsing!

BIG PAULIE: We set it up for you to fail Tim. Sorry. We needed a beard. We needed to have someone propose the conventional approaches to economic problems as a blue print for addressing today’s black hole. We knew you could not sell that sack of weeds. Before we came forward with Plan B we had to let you and the “conventional wisdom” have a shot. (Puff, Puff, Puff) And then let you fail.

TIMMY: You set me up? Who is we? What the hell is plan B and how come I do not know about it? What does a beard have to do with it?

BIG PAULIE: Slowdown. Here is the deal. (Puff, Puff) There are going to be some changes announced. I am going to become actively involved in the big issues we are facing. You are going to continue to be Treasury Secretary. I will assume the title of Uber Secretary of Treasury.

TIMMY: Uber? Does this mean I lose my office?

BIG PAULIE: You can keep the office and get to go to all the meetings. But, you report to me. Get it? You can call me Boss.

TIMMY: Well, I guess that is a relief. So, Boss What is plan B?

BIG PAULIE: I am calling it the Low/Short, High/Long - Gap Fund Program.

TIMMY: What? I did not understand a word you said. Let me get some paper. You talk too fast. Hold on….. Okay, now I have a pencil. What did you say about gaps?

BIG PAULIE: Plan B is the VolkerII Plan. I call it PLOVER. It will bring Shock and Awe to the global financial markets. In less than one week I will solve the $2T funding gap and also solve the balance sheet problems of the top fifteen banks in the Country.

TIMMY: Hold on. I am writing this down. Shock and awe… All the funding… Fix the banks... One week... Hmm. I can’t wait. How are you going to do this?

BIG PAULIE: Treasury will create a new evergreen security. It has no stated maturity. It is a floater. It is re-set based on the future t-bill rate. It will be priced at 35 BP over Treasuries. We will sell two Trillion of this in one week.

TIMMY: No way Jose!. We are having troubling lining up buyers for 50-60 billion. Forget 2 Trillion. In a week no less! Even you can’t do that. No one can sell that many bonds. If you price something like that at 35 beeps no one will come to your party!

BIG PAULIE: Let’s just say I know the buyers.

TIMMY: Huh?

BIG PAULIE: The fifteen banks are going to buy it. All of it. In exchange for the American people extending a hand and setting them right the banks return the favor and buy the bonds. Get it? I am going to stuff the banks with this. Remember, we own the banks. They will do anything I tell them to. You think EPS means anything anymore? I will call these new notes Federal Agency Resolution Trust Securities. This is the Low/Short side of PLOVER. Low interest rates for Short-term borrowing.

TIMMY: Okay. I am writing. Let’s see. Stuff the banks…. No EPS….We own them….Low interest. That does seem easy! Now the name. F as in Federal… A as in Agency…. R as in Resolution… Oh! I see a problem! With the name I mean. How about this? We can call them Perpetual Tees. People will think of underwear that lasts for decades! See! I am contributing to the process! But how do you fix the banks? Surely the banks can’t buy these Notes unless they are made sound. That is the core problem!

BIG PAULIE: In the same week Treasury will issue $2 trillion of 20-year zero-coupon bonds. The yield on the bonds will be set at 10% The cash price for the zero’s will be 15% of par with the big implied coupon. The fifteen banks I choose will get the right to buy these beauties. They will use the Zero’s to immunize themselves against principal loss on $2 trillion of dodgy paper they have on their books. We will capitalize the lucky fifteen with the remaining TARP money. They will use that new capital to buy the zeros. 300B in 300B out. We round trip the money. Therefore there is no money. I already have the accountants in my pocket on this. That was a lay up.

The banks will agree to use this accounting break to restructure all manner of loans providing real debt relief. With the zero’s behind them they can no longer take a loss and therefore any settlement is bottom line income.This is the Long term/High rate part of PLOVER.

That is it. We start on Monday. We finish on Friday with the securitization of $2T in stinky paper backed by the zeros, the banks are saved, the deficit is pre-funded for the next 18 months, Treasury has raised $2.3 T in cash with a decent duration and a reasonable average blended cost. Saturday I go to Canada to fish for Salmon. (Puff, Puff, Puff)

TIMMY: This seems so simple. Why didn't I think of it? One thing I see is that your plan is at risk to rising short-term rates. What is your response to that?

BIG PAULIE: That is the gap funding part of PLOVER. Get your seat belt on Timmy. We are making a big rate bet. Let’s say I have an understanding with Bernanke. PLOVER keeps the assets off of the FED’s balance sheet. In exchange Ben will set rates where I need them. It’s all a deal Timmy. I gotta go.

TIMMY: Good night Boss.

CLICK.

Heard from TIMMY: I think he just took over Treasury. Gulp

Heard from BIG PAULIE: I just took over Treasury. Puff, Puff, Puff

[Demeter]

53. A.I.G., Where Taxpayers’ Dollars Go to Die

http://www.nytimes.com/2009/03/08/business/08gret.html?ref=business

A.I.G., Where Taxpayers’ Dollars Go to Die
By GRETCHEN MORGENSON

“DERIVATIVES are dangerous.”

That simple sentence, written by Warren Buffett, begins an enlightening discussion in Berkshire Hathaway’s most recent annual report. Mr. Buffett’s views on derivatives, gleaned from his own unhappy encounters with them, should be required reading for all United States taxpayers.

Why? Because we own almost 80 percent of the American International Group, the giant insurer whose collapse was a direct result of derivatives it sold during the late, great credit boom.

A.I.G. nearly barreled off the cliff last September, when it couldn’t meet its obligations to customers who had bought a version of derivatives called credit default swaps. Such swaps are like insurance policies; bondholders buy them to protect themselves from default on various forms of debt.

When A.I.G. couldn’t meet the wave of obligations it owed on the swaps last fall as Wall Street went into a tailspin, the Federal Reserve stepped in with an $85 billion loan to keep the hobbled insurer from going bankrupt; over all, the government has pledged a total of $160 billion to A.I.G. to help it meet its obligations and restructure operations.

So is A.I.G. the taxpayer gift that keeps on taking? Sure looks that way. And while no one can say with certainty whether more money will be needed, the sheer volume of derivatives engineered by a small London unit of A.I.G. suggests that taxpayers haven’t seen the bottom of this money pit.

Some $440 billion in credit default swaps sat on the company’s books before it collapsed. Its biggest customers, European banks and United States investment banks, bought the swaps to insure against defaults on a variety of debt holdings, including pools of mortgages and corporate loans.

Because of the way A.I.G. wrote its swaps, and because the company had a double-A credit rating at the time, it did not have to put up collateral to assure its customers that it would be able to pay on the insurance if necessary. Collateral would be required only if A.I.G.’s credit rating were cut or if the debt underlying the swaps declined.

Both of these “unthinkable” events occurred in 2008. Suddenly, A.I.G. had to cough up collateral it didn’t have.

SO, you see, the rescue of A.I.G. also involved a bailout of its many customers, none of whom the insurer or the government is willing to identify.

Nevertheless, Edward M. Liddy, the chief executive of A.I.G., explained to investors last week that “the vast majority” of taxpayer funds “have passed through A.I.G. to other financial institutions” as the company unwound deals with its customers.

On Wall Street, those customers are known as “counterparties,” and Mr. Liddy wouldn’t provide details on who the counterparties were or how much they received. But a person briefed on the deals said A.I.G.’s former customers include Goldman Sachs, Merrill Lynch and two large French banks, Société Générale and Calyon.

All the banks declined to comment.

How much money has gone to counterparties since the company’s collapse? The person briefed on the deals put the figure at around $50 billion.

Unfortunately, that is likely to rise.

According to its most recent financial statements, A.I.G. had $302 billion in credit insurance commitments at the end of 2008. Of course, the company is not going to have to make good on all that insurance: the underlying securities are not all going to zero.

But as the economy deteriorates, A.I.G.’s insurance bets certainly become more perilous. And because most of A.I.G.’s swaps are known as the “pay as you go type,” collateral must be supplied when the underlying debt declines in value. Swap arrangements made by other insurers require payments only if a default occurs.

So the meter is constantly running at A.I.G. Just as quickly as taxpayer funds flow into the firm, chunks of it go right out the door to settle derivatives claims.

A.I.G.’s insurance commitment stood at “only” $302 billion in part because the government has already voided $62 billion of the protection A.I.G. had written on pools of especially toxic securities. The underlying collateral on those contracts, valued at about $32 billion or so, now sits in a facility that the Federal Reserve Bank of New York oversees and which we, the taxpayers, own.

In order to rip up those contracts, the taxpayers had to make A.I.G.’s counterparties whole by buying the debt that A.I.G. had insured and paying out — in cash — the remaining amount owed to the counterparties.

Of the $302 billion in insurance outstanding at A.I.G., about $235 billion was sold to foreign banks and covers prime home mortgages and corporate loans. The banks that bought this insurance did so to reduce the money they must set aside for regulatory capital requirements.

A.I.G. also wrote $50 billion of insurance on pools of corporate loans. These contracts are performing O.K. for now, the company has said.

But there’s yet another complication that will probably force A.I.G. to cough up cash more quickly than it otherwise might have had to. That’s because it didn’t simply write insurance protection on debt; it also entered into yet another derivative contract — known as an interest rate swap — with counterparties buying the protection.

The reason A.I.G. entered into the second contract was that banks feared they were also exposed to interest rate risks on the loans bundled into debt pools. Presto! A.I.G. was happy to remove that risk by writing another complicated swap.

Now, however, A.I.G. not only has to meet collateral calls as the value of the debt it insured withers, but also has to post collateral related to the interest rate swaps.

Another troubling aspect of these deals is how long it takes to untangle them when they go awry. Back to Mr. Buffett’s recent shareholder letter: when Berkshire acquired the insurance company General Re in 1998, he wrote, General Re had 23,218 derivatives contracts that it had struck with 884 counterparties.

Mr. Buffett wanted out from under the contracts and he began unwinding them. “Though we were under no pressure and were operating in benign markets as we exited,” he said, “it took us five years and more than $400 million in losses to largely complete the task.”

When you look back with the benefit of hindsight, it is truly amazing how outsized A.I.G.’s insurance commitment was, at $440 billion. After all, in 2005, when A.I.G. put many of these swaps on its books, the market value of the entire company was around $200 billion.

That means the geniuses at A.I.G. who wrote the insurance were willing to bet more than double their company’s value that defaults would not become problematic.

That’s some throw of the dice. Too bad it came up snake eyes for taxpayers.

[KoKo]

66. Here's what Barry Ridholtz says should have been done to AIG..

(His article at the site is a good read, too. Talks about how half of AIG was a Hedge Fund while the other was Solvent)

What should have been done?

Simple: When we nationalized AIG, we should have immediately spun out the good, solvent life insurance company. It is a highly viable standalone entity.

The hedge fund should have been wound down in an orderly fashion. Match up the offsetting trades, the rest go to zero. End of story.

You as a credit default swap gamblor have no reasonable expectation that anyone other than the incompetent firm you placed your bet with is going to make good. You had as your xounter party another hedge fund. Tahatwas the risk YOU — not the yaxpayer — assumed. That is was under the roof of a legitimate insurance company is irrelevant.

Right now, we are into this clusterfuck for $166 billion — every last penny of which is a needless waste.

Taxpayers should not be bailing out hedge fund trades. This insanity must cease immediately .

[Demeter]

71. Link?

[Demeter]

54. Bill Seeks to Let FDIC Borrow up to $500 Billion

http://online.wsj.com/article/SB123630125365247061.html

WASHINGTON -- Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.

The Connecticut Democrat's effort -- which comes in response to urging from FDIC Chairman Sheila Bair, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner -- would give the FDIC access to more money to rebuild its fund that insures consumers' deposits, which have been hard hit by a string of bank failures.

Last week, the FDIC proposed raising fees on banks in order to build up its deposit insurance fund, which had just $19 billion at the end of 2008. That idea provoked protests from banks, which said such a burden would worsen their already shaken condition. The Dodd bill, if it becomes law, would represent an alternative source of funding.

Mr. Dodd's bill could also give the FDIC more firepower to help address "systemic risks" in the economy, potentially creating another source of bailout funds in addition to the $700 billion already appropriated by Congress.

Mr. Bernanke said in a Feb. 2 letter to Mr. Dodd that such a "mechanism would allow the FDIC to respond expeditiously to emergency situations that may involve substantial risk to the financial system."

The FDIC would be able to borrow as much as $500 billion until the end of 2010 if the FDIC, Fed, Treasury secretary and White House agree such money is warranted. The bill would allow it to borrow $100 billion absent that approval. Currently, its line of credit with the Treasury is $30 billion.

The FDIC's deposit-insurance fund has fallen precipitously with 25 bank failures in 2008 and 16 so far in 2009. Some bank failures have a bigger impact on the fund than others, as IndyMac's failure cost the fund more than $10 billion, while many others cost the fund less than $100 million.

A 1991 law generally caps the amount of money the FDIC can borrow from the Treasury at $30 billion, and the FDIC hasn't borrowed money from the Treasury in more than a decade.

Ms. Bair said a change in the law would give the FDIC more options to determine the best way to rebuild its depleted fund. In an interview, she stressed that all insured deposits were already backed by the "full faith and credit of the United States government."

A change in the law would ease "the mechanics of how seamlessly we can access our lines of" funding. "I'm the kind of person that likes to be prepared for all contingencies," she said.

Write to Damian Paletta at [e-mail]

RECALL ALSO THAT SHRUB DIDN'T COLLECT THE FUNDS THAT HE WAS SUPPOSED TO, BECAUSE THERE WERE NO FAILURES....(IN OTHER WORDS, NO OVERSIGHT ON HIS WATCH...)

[Demeter]

56. There's Another Born Every Minute....

Leuthold Says Stocks Will Surge, Depression Avoided (Update4)

By Betty Liu and Lynn Thomasson

March 4 (Bloomberg) -- Steve Leuthold, whose Grizzly Short Fund returned 74 percent last year betting against U.S. stocks, said now is the time to buy equities because investors are too fearful about the economy.

“These comparisons people make with the Great Depression are totally out of touch with reality, and pretty stupid,” he told Bloomberg Television in an interview today. “We’ve been in much worse, much more panicked and more scary situations in the U.S.”

The economy isn’t as bad as it was in 1974, when stocks began rebounding, said Leuthold, who oversees $3.2 billion at Leuthold Weeden Capital Management in Minneapolis. He predicted the Standard & Poor’s 500 Index will surge to at least 1,000 in 2009, representing a gain of 44 percent from yesterday’s 12-year low of 696.33.

The index rose 2.4 percent to 712.87 today on speculation China will add to a 4 trillion yuan ($585 billion) spending plan and U.S. lawmakers will reach agreement on a plan to stem mortgage defaults.

Because a rally is likely, Leuthold said investors shouldn’t buy his Grizzly Short Fund. It has returned 26 percent in 2009. Short seller Bill Fleckenstein, who warned of the housing bubble in 2005, closed his 13-year-old bear market fund last year because valuations made it “too dangerous” to bet on more losses, he said in a interview last month.

China, Korea, Taiwan

The Leuthold Core Investment Fund, which bets on stock gains, is most concentrated in biotechnology companies, automotive retailers and education providers, Leuthold said. Investors should also buy equities in China, Korea and Taiwan because their economies are growing faster and the Asian banking system hasn’t been battered by subprime loans as badly as U.S. financial institutions, Leuthold said.

The Chinese economy may grow 7.7 percent this year, compared with a 2 percent contraction in the U.S., according to the median economist estimates in a Bloomberg survey. North American financial firms have reported $811.2 billion in credit losses and writedowns tied to mortgage defaults, 27 times more than banks in Asia, according to Bloomberg data collected since the housing slump began in 2007.

“We’re going global,” he said. “Global investing is the way of the future.”

To contact the reporters on this story: Betty Liu in New York at [e-mail]; Lynn Thomasson in New York at [e-mail].

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoOD10XZvOPE&refer=home

[Demeter]

57. Headline Makes No Sense, But

http://www.bloomberg.com/apps/news?pid=20601109&sid=aHwKEcyrDbu0&refer=home

Darth Wall Street Thwarting Debtors With Credit Swaps (Update2)

By Caroline Salas and Shannon D. Harrington

March 5 (Bloomberg) -- Amusement-park operator Six Flags Inc. and automaker Ford Motor Co. may be pushed toward bankruptcy by bondholders trying to profit from credit-default swaps that protect against losses on their high-yield debt.

By employing a so-called negative-basis trade, investors could buy Six Flags bonds at 20.5 cents on the dollar and credit- default swaps at 71 cents. If the New York-based chain defaults, the creditors would receive the face value of the debt, minus costs. In a Feb. 27 note, Citigroup Inc.’s high-yield strategists put that profit at 6 percentage points, or $600,000 on a $10 million purchase.

Investors who bet on the collapse of a company are pitting themselves against traditional debt holders at a time when Moody’s Investors Service projects defaults will more than triple this year to the worst level since the Great Depression. The clash may stall restructuring efforts to prevent bankruptcies, as basis traders may be less inclined to participate in distressed debt exchanges, said Matthew Eagan, an investment manager at Boston-based Loomis Sayles & Co., with $7 billion in high-yield assets.

“Before, you really had to worry mostly about where you were in the” company’s capital structure, he said. “Now, you have to consider the possibility that you might have this large holder of CDS incentivized to see it go into bankruptcy. It’s something that’s going to come up more and more.”

THIS IS A LENGTHY AND DETAILED ARTICLE WHICH EXPLAINS THE PIRACY INVOLVED, AND WHY THIS MUST BE STOPPED YESTERDAY...

[Demeter]

58. Did You Wonder WHAT EXACTLY Hank Paulson Was Doing With TARP?

Buying out China and the Arabs and the Russians and....

http://www.moscowtimes.ru/article/600/42/375117.htm

Oil Funds Can't Buy Fannie Bonds

Russia banned on Thursday investment of its $220 billion oil wealth funds in bonds of quasi-sovereign agencies such as Fannie Mae and Freddie Mac, citing needs of its own budget and pension system.

Russia had about $100 billion of its foreign currency reserves invested in U.S. government agencies at the start of 2008 as it sought to broaden its portfolio and chased higher yields.

It has now cut its holdings to zero as its reserves fell by a third to $384 billion on the back of capital outflows and ruble support and as authorities sought to invest the remaining wealth into less riskier assets.

The Finance Ministry said it needed to shift the portfolios in favor of more liquid assets, such as sovereign bonds, as Russia plans to tap the funds to cover budget and pension fund deficits this year.

"The funds will be used for their direct purpose," said Pyotr Kazakevich, head of the ministry's state debt department.

The Finance Ministry holds the funds in foreign currency accounts at the Central Bank, which manages them as part of its forex reserves and pays back returns in line with performance of an index, designed by the ministry's portfolio managers.

The announced changes will affect the composition of the ministry's index, and experts say the Central Bank's foreign currency reserves' portfolio, which is not publicly disclosed, is close to the ministry's index.

But much of the retreat from the quasi-sovereign assets has already occurred.

"This is a case of the practice that has been established being enshrined into law," said Maxim Oreshkin, head of research at Rosbank.

"Last year, when Fannie Mae and Freddie Mac were having problems, the Central Bank, which invests the fund, sharply pared back its investments," Oreshkin said. "It had invested in short-term paper that was gradually redeemed, and it didn't make new investments," he said.

Russia will this year run its first budget deficit in a decade, and the deficit is expected to hit 8 percent of the gross domestic product provided that the price of oil, Russia's main export commodity, averages $41 per barrel.

Russia plans to tap the $136.3 billion Reserve Fund for 2.7 trillion rubles ($74.54 billion) to cover the deficit.

The new rules say 95 percent of the fund should be kept in sovereign bonds.

Russia also plans to tap the $83.7 billion National Welfare Fund, initially earmarked for riskier investments, to cover the pension fund deficit and also to support the banking system.

According to the latest U.S. Treasury data Russia in 2008 boosted its holding of U.S. Treasuries to $116.4 billion from $32.7 billion, becoming the seventh-largest holder of Treasuries globally.

[Demeter]

59. What's Driving This Stock Market? Short-Selling

http://pensionpulse.blogspot.com/2009/03/death-of-highly-levered-illiquid.html

Lengthy gossip article with predictions....

[Demeter]

61. What Did Congress Do in the Previous Great Depression? A Hell of a Lot More Than Now!

http://en.wikipedia.org/wiki/Pecora_Commission

[Demeter]

62. So, Did You All "Spring Forward?" SNARL!!

I loathe DST because Michigan is already always on DST, thanks to clocking itself on Eastern time instead of Central. But for 8 months of the year, Michigan is on Double Daylight Savings Time. Not only does the body protest, but it turns out that there is no documented "energy savings" associated with this annual torture of the circadian rhythm. In fact, the only value DST has is to encourage people to go shopping after work! Especially for gardening supplies and golf equipment, according to NPR.

The birds are singing like it's spring, though. Our resident swans are back, huddled in the weeds next to the frozen pond. The ice has barely started to rot, let alone melt. Don't know what the foolish birds are doing back so early. Maybe it's too hot wherever they went for the winter, but there's nothing to eat and nothing to do here. It's hardly nest-building weather!

Friday was a beautiful day. We hit a record high of 68F, one degree higher than 1973. But since then it's been cold, rainy, gray, windy; perfect pneumonia weather.


And the economy is similar. The reports, speculations, predictions, aside from the occasional joker, are uniformly cold,gray, wet and windy. Wear your foul-weather gear!

So sail on, little ship of state! Be valiant, Americans! Get a clue, Mr. President. Hire a real economist, not a Goldman Stooge or a Rubin clone or a Chicago charlatan.


Keep posting! I'll be back! (At least, I Hope to add a bit more this evening). The inbox is filling up again. If it weren't so depressing, I'd clear it all out. Just reading through this stuff takes its toll.

[Tansy_Gold]

63. Huh? What's that?

:rofl:





Tansy Gold, where we already have plenty of daylight, thankyouverymuch

[Dr.Phool]

69. The robins are on their way back.

They were here last week. If there weren't 300 of them in my back yard, there weren't 3. They usually stop here for 1 day on their way back up north.

At least my watch is right again. I bought this fancy-schmancy aviators watch about 7 years ago. You don't adjust the time like you do on a normal watch, and it has about a 40 page manual on how to set it. This fall I didn't adjust it. Just said fuck it, I can figure it out. So, today, it's right again.

[Demeter]

73. Now, a Thunderstorm

and that last bolt hit very close!

[DemReadingDU]

67. Denninger: "The Bezzle" Defined

3/8/09 "The Bezzle" Defined by Karl Denninger

I keep getting emails asking me to define "The Bezzle" in a form that "ordinary people" understand, strongly indicating that I've failed in that regard thus far. Let's try again....

Here's what John Galbraith said about it:

"In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. there is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in - or more precisely not in - the country's business and banks. This inventory - it should be called the bezzle. It also varies in size with the business cycle."

That sounds rather arcane, but if you roll it around in your head for a while, it should make sense.

Here are some examples of "The Bezzle":

*
Liar loans: The borrower can't possibly pay off the loan on the original agreed terms and the institution that makes the loan "passes it" to an investor fully aware that the borrower almost certainly lied about credit capacity.
*
Overly-rosy projections about growth in property values: The speaker is either incompetent (doesn't understand exponents - a fundamental mathematical concept) or is intentionally deceiving people.
*
Overly-rosy projections about the stock market: "The market always comes back" and "over long periods of time it outperforms other investments." Both true, but both misleading; if you're 18 you might be able to wait for it to come back, but the market has remained flat to down from a given level for more than 20 years before. How long did you say it was before you intended to retire?
*
"The Internet is doubling every three months!": It was - for about six months. But that got embedded into the business plans of thousands of businesses, long after the growth rate had started to slow down to something more sustainable. Oh by the way, the fundamental lie of that claim is that in 7 years the Internet would have gone from its original two people to covering more than the entire population of the planet, including the rice farmer in China and the starving child in Bangladesh.

In short The Bezzle is "the lie" that is always present in business.

The truth is always some degree of lying in business transactions - always has been, always will be. And so long as The Bezzle doesn't become the underlying theme in business, it simply bankrupts the people who try to run it when they get discovered.

But when The Bezzle becomes the underlying premise and basis for business transactions that entire segment of the market is doomed.

more...
http://market-ticker.org/archives/857-The-Bezzle-Defined.html

[Tansy_Gold]

84. The Bezzle has now become

not just the underlying premise and basis for a segment of the market but for the entire economy.

And this is what I've been trying to wrap my head around and put into coherent prose for several years. MANY THANKS to Denninger and of course to Demeter for finding and posting this.

Back in about 1967, I was working in New York City and actually managed to stay with the company long enough to qualify for insurance benefits. As I filled out my beneficiary form, I wrote in my then boyfriend's name. The personnel manager -- we didn't have HR people in those days -- told me I couldn't name someone who wasn't related to me; I had to designate my parents or my siblings, none of whom I wanted to get my insurance money. "Why can't I list my boyfriend?" I asked. She answered, "Because he doesn't have an insurable interest in you. He wouldn't have to pay off your debts or pay for your funeral or anything. It's like there'd be too much temptation for him to bump you off to get the money."

Later I would come to realize that this was the insurance companies' way of protecting themselves: people couldn't take out policies on other people just to collect the money. Of course, when Wal-Mart started taking out "dead peasant" policies, we saw that the rules had been relaxed a little bit, at least for some people/corporations. But for the most part, you still can't buy a life insurance policy on someone with whom you have no financial relationship. The insurance companies couldn't pay off on all those policies, especially since there would be so many opportunities for fraud and/or calculated risk.

What's happened in the financial markets with the CDSes and other imaginary money vehicles is that the embezzlers have conned the insurance companies into writting all those life insurance policies they wouldn't write before, but this time they have rigged the game so that the insurance companies won't have to pay; they'll actually COLLECT on those policies. The Bezzle, in the form of something approaching a quadrillion dollars in "notional" ("imaginary") value of derivatives, is being used to siphon off the wealth of the nations into the hands of a very, very, very few individuals. (Don't worry about corporations having lots of money; "corporate personhood" means nothing so long as there are real people holding the stocks.)

The Bezzle doesn't exist. It's a trillion dollar insurance policy on a stranger who is going to be killed in a freak accident that no one saw coming.

The working/middle class is the stranger.


Tansy Gold

[DemReadingDU]

87. into the hands of a very, very, very few individuals

Catherine Austin Fitts has been trying for years to determine who these very very few individuals are. She guesses, but says she really doesn't know. A few comments from her blog


catherine
Feb 6th, 2009 at 9:45 pm

The right question is, of course, who is in charge. The answer is that I do not know.

My personal experience is that there is a handful of families — intergenerational wealth– who run things. Yes, the Rockefellers are the most prominent in the US, although outside of David it seems to be mostly outside the bloodline at this point. Yes, there are also coordinating bodies used for management — both bureaucracies like G8 or various secret societies or policy bodies like the Trilateral Commission and the CFR. For my story on the CFR, read http://www.dunwalke.com .

The question is what is driving the current behavior. Is it the power of technology that gives extraordinary ability to centralize and kill?Is it the belief that war is essential to ensure control and a sustainable economy? Is it the perversion in culture that the black budget and organized crime breads? Is it thousands of years of intergenerational mind control? Is it the prisoner’s dilemma caused by the economics in which humans are easy to manipulate (See my article Narco Dollars for Beginners.) Or is it the belief that the only way to achieve sustainability on planet earth is significant depopulation? Or are the stories of aliens really true? Or an out of the box event, such as a pole shift that is anticipated to make the planet uninhabitable.

I don’t know the answer. What I do know is that we are dealing with leadership who are behaving rationally according to the rationale in which they are operating. That is why it is very important to understand their point of view, how they view their risks and why they are so afraid.

Which leads me back to the same question I have been asking for many years…where is the money and how do we get it back?

Find the money and we find the logic of the behavior as well as who is pulling the strings.

Step one is that the rest of us withdraw our money. We stop financing criminal enterprises and shift to the most competent, ethical that we find. That shift will reveal a great deal about who is who and what is really going one.

If you have a “tapeworm” best to stop feeding it what makes it grow and you die.


Catherine
Feb 7th, 2009 at 2:29 am

In response to the request that I give names…

The answer is that I do not know. Sure, I can guess, but that is conjecture. And guessing the names of the “twelve people” who run the world or the various cartels, syndicates and secret societies bypasses the point that this system takes millions of people implementing the most forceful parts of it and hundreds of millions financing it. We get our greatest power when we see the betrayal that occurs at the most intimate levels. (BTW, where’s your money?)

I have found the ability to find the truth on any particular issues requires both the speedy admission that we don’t know, the ability to search for real facts and to do so with an open heart without anger. After all the time that I have invested to try to know the answer to these questions, I don’t know. Somehow, I am no longer frustrated by having to live in a state of ignorance about things I need to know to use my time and serve others effectively in this world.

Anger gives energy to evil. We need to channel all of our energy to ourselves and those who help and protect us.

The above comments from
2/2/09 Financial Coup d’Etat
full article...
http://solari.com/blog/?p=2058



This is another excellent posting...

1/14/09 Financial Coup d’Etat & Your 401k
http://solari.com/blog/?p=2005










About Solari
http://solari.com/about-us/

About Catherine Austin Fitts
http://solari.com/blog/?page_id=2

Bio
http://solari.com/about-us/catherine/

Resume
http://solari.com/about-us/resume/

[hamerfan]

68. Thanks for all your hard work, Demeter!

And to everyone else who contributes to this thread and the daily SMW. I'm a longtime lurker to the SMW but generally take weekends off from this light reading, lol.
Gawd, do I feel sorry for the next generation.
hamerfan

[Demeter]

70. I Feel Sorry for THIS Generation

the next generation has nowhere to go but up.

[Demeter]

80. You're Welcome, hamerfan!

Stop in whenever you want to ruin your weekend....

[Ghost Dog]

85. Music for a ruined weekend

(so beautiful): http://www.youtube.com/watch?v=MNdDoL3s8aA (Erik Satie, Gnossienne No. 3)

;(

Thanks, Demeter.

[Demeter]

89. I Love Satie--Thanks, GD!

Since it rained all weekend, this is better than mindless TV.

[Demeter]

72. Prison Terms Might Be the Future for Some Bank Executives

http://seekingalpha.com/article/124536-prison-terms-might-be-the-future-for-some-bank-executives



Hedge fund manager James Chanos from Kynikos Associates was the guest host on Squawk Box on CNBC Wednesday morning. Both videos are excellent viewing for those interested in the truth about the banks, mark-to market accounting, and financial executives going to federal prison.

Chanos has been right about this crisis from day one. Apparently he has been involved in official discussions of late pertaining to the criminality of certain executives. Without naming individuals, he mentions Lehman Brothers and the $150 billion discrepancy that appeared on their books after declaring bankruptcy. He seems quite certain there was fraud and that executives will be wearing orange jumpsuits soon. That's his phrase, not mine. He also mentions AIG (AIG) and says that we will see executives sent to prison for their role in that collapse.

How ya doing, Dick Fuld and Joe Cassano? We hope that investigators have already seized the passports of both of these individuals.

[Demeter]

74. Wall St. Bailout: Is A Massive Scandal About To Unfold?

http://www.dailykos.com/storyonly/2009/3/8/7452/30422/848/705961


re facts concerning details of the current Wall Street bailout--past, present and future--about to unfold in a manner which may very well undermine President Obama's first term unless he acts immediately to staunch the damage created, and the damage about to be created, by the missteps of both (former) Bush Treasury Secretary Henry Paulson, as well as (current) Obama Treasury Secretary Tim Geithner?

This is the indication being gauged by this diarist given deeper dives into press coverage concerning two bailout-related matters of note swirling around the media over the past 72 hours, namely:
1.) AIG counterparty overpayments during the last 16 weeks of the Bush Administration, which are far more extensive and generous than the already-massive $50 billion being reported over the past 24 hours, and
2.) an effort--apparently well underway--to absurdly contort the FDIC's mission statement, to the point where the feds are going to provide a stealthy cash bonanza (up to $2 trillion in loans and guarantees/backstops), at taxpayer expense, to the grossly underregulated hedge fund industry--which if you read the Prudent Bear, below, looks at this as something of a free-for-all--as well as to some sovereign funds, under the guise of a federal program that had (up until now) absolutely nothing to do with the hedge fund industry, whatsover.

* bobswern's diary :: ::
*

Reports have been circulating, based upon leaks to the media over the past 24 hours, that:

1.) AIG ("Bad Bank" #1): $50 billion of the $173 billion forked over to AIG, since September, has been doled out to a handful of Wall Street heavy-hitters--a/k/a the "couterparties" that paid AIG to insure their toxic paper--to support their so-called insurance claims, backed by the good faith of AIG; folks who happened to make a pantload of money writing insurance policies on these Credit Default Swaps and Commercial Debt Obligations over the past few years.

We have Ms. Morgenson in the NY Times telling us the counterparties' sweetheart deals are "likely to increase" in terms of sheer numbers of billions of taxpayer dollars. But, it's the additional documentation ("NEW INFO") below Morgenson's quote which is most troublesome...it's not $50 billion...it's already $80 billion...and these same firms are receiving 100 cents on the dollar for this toxic paper, too!

Gretchen Morgenson tells us in Sunday's NY Times: "A.I.G., Where Taxpayers' Dollars Go to Die."


A.I.G., Where Taxpayers' Dollars Go to Die
Gretchen Morgenson
March 8, 2009

...Mr. Liddy wouldn't provide details on who the counterparties were or how much they received. But a person briefed on the deals said A.I.G.'s former customers include Goldman Sachs, Merrill Lynch and two large French banks, Société Générale and Calyon.

All the banks declined to comment.

How much money has gone to counterparties since the company's collapse? The person briefed on the deals put the figure at around $50 billion.

Unfortunately, that is likely to rise.


Diarist provides bold emphasis.

NEW INFO: It's already a LOT more than $50 billion, which was reported as "the number" in the past 24 hours; it's at least $80 billion and growing, or almost half of all the funds sent to AIG to date...and growing; perhaps much more if not MOST of the funds dished out to AIG to date all going to the same usual suspects...
The facts are we may just be scratching the surface on the AIG matter. It's going to--and already is--getting much more out-of-hand than originally reported, and virtually all of those funds has gone to the same 20-25 firms (and that's only as of late December '08); and, perhaps even more outrageous, it appears that a trend had developed early on with regard to these toxic debt purchases, whereby the recipients (that same list of 25+/- firms) of the Treasury Department's and the Federal Reserve's largesse were profiting to the tune of 100% on the actual value of the paper being purchased. They're doing this by allowing the counterparties to KEEP the collateral, on top of receiving the payments!!! (See story link and quote, immediately below.) In other words, the Fed was overpaying these firms to the tune of full face value, 100 cents on the dollar, on paper that was only worth from 20 cents to 60 cents on the dollar in the marketplace!

We know this because there've been reports on this dating back more than two months: "AIG Becomes the Fed's Vehicle to Buy Toxic Assets."


AIG Becomes the Fed's Vehicle to Buy Toxic Assets
by: Michael Steinberg December 28, 2008

The Washington Post (from Bloomberg News) "With Fed's Help, AIG Unloads $16 Billion in Credit Default Swaps" reports that American International Group (AIG) retired another $16B face value of credit default swaps for $6.7B by purchasing the underlying securities and canceling the contracts. The insured (counterparties) were able to keep the more than $9B in collateral that AIG posted. The counterparties were taken out at par. So far, the Fed's Maiden Lane III special purchase fund has purchased $62.1B face value of CDOs from AIG's counterparties. The Fed has committed to purchase up to $70B face value of CDOs from AIG's counterparties at roughly 50% of par. Each time the Fed is allowing the counterparties to keep all collateral.

Why has the Fed completely removed the risk of AIG as a counterparty in CDS transactions? Perhaps the Fed views moral hazard as a foreword looking constraint and AIG is just trying to unwind past regrettable activities. More likely the Fed is viewing AIG as a conduit to funnel capital into favored financial institutions. By forcing counterparties to sell the underlying CDO securities in order to receive full recovery, the Fed is liquidating toxic assets and preventing pure speculators from participating. But by paying close to par, when posted collateral is included, the benefit of price discovery is missing.

AIG told shareholders that the Fed would negotiate the CDO purchases on AIG's behalf and AIG's participation in any price appreciation would be limited. The implication was that the Fed would use its strength to be an advocate for AIG. Quite the opposite turned out to be true. Instead the Fed used its strength to force a weakened AIG to make whole its stronger counter parties.

Here, we have Fortune Magazine, via InsuranceNewsNet, from January '09, referencing $80 billion--not $50 billion--going to these same usual suspects: "...around 25 financial institutions...." AIG: The Company That Came To Dinner -- A Fortune Profile."


January 19, 2009 U.S. Edition
SECTION: FEATURES; Pg. 70 Vol. 159 No. 1
HEADLINE: AIG: THE COMPANY THAT CAME TO DINNER
BYLINE: CAROL J. LOOMIS; REPORTER ASSOCIATE Doris Burke

...Today FP has around $2 trillion of derivatives, not a big book in this world (J.P. Morgan Chase has more than $80 trillion) but one known to be loaded with particularly complex and long-dated contracts. The most infamous among these derivatives are the $80 billion of credit default swaps described above, for which the counterparties were around 25 financial institutions in the U.S. and at least seven other countries. All of the counterparties, of course, were wrung out by the credit crisis and vulnerable to a domino effect if AIG went under. Liddy proves himself a master at understatement in describing the threat to the counterparties: "That would have backed up into their capital adequacy and could have caused a problem."...

2.) FDIC ("Bad Bank" #2): The Treasury Department is currently in the process of providing a $500 billion infusion (along with another $1.5 trillion government guarantee to the hedge fund industry) into the Federal Deposit Insurance Corporation. And, while some naive speculation in the MSM is focused upon a handful of large bank defaults with regard to how this money is going to be spent, the reality is that it's apparently the stealthiest way for the government to actually provision that "Bad Bank" that everyone's been hearing about. (Some have said that the first bad bank was, in effect, AIG. But, based upon the sheer magnitude of Geithner's plans--already on record in a few stories--for this massive FDIC scam, the AIG mess pales in comparison.) You see, Geithner's stated plans call for "private investment" (i.e.: hedge funds and sovereign funds) to buy up as much as another $2 trillion in toxic debt; but here's the scam: the government is going to insure 100% of all investor's funds via the FDIC, under something they're calling, a "Temporary Liquidity Guarantee Program," basically eliminating all risk in the deall for these hedge fund investors! (NOTE: I blogged a few days ago about part of this FDIC story, "Outrage: FDIC insures bank investors' risk with our money."

NEW INFO: The FDIC plan is already in motion; and, it looks like it's all about a massive loan and guarantee program for hedge funds and sovereign funds; this is NOT about putting a big bank into formal receivership, IMHO; apparently, it's about circumventing the spin on TARP! "FDIC Bill Dodges a New TARP Fight."


FDIC Bill Dodges a New TARP Fight
By DAMIAN PALETTA
March 7, 2009

WASHINGTON -- A three-page bill designed to bolster the Federal Deposit Insurance Corp. could let the Obama administration sidestep a huge political problem: securing more financial firepower without opening a debate over the Troubled Asset Relief Program.

--SNIP--

"Clearly, it is a backdoor way to avoid the restrictions that could potentially come by means of TARP," said Rep. Scott Garrett, a New Jersey Republican who sits on the House Financial Services Committee.

Democrats might try attaching the measure to a separate bill already moving through Congress that would allow bankruptcy judges to alter the terms of mortgages that are in foreclosure...

On the one hand, the article puts forth the notion that they're merely getting ready to put a large bank into receivership, but this is belied by comments to the contrary elsewhere in the story, such as in the opening paragraph, above, and here:


The Obama administration has suggested it wouldn't allow any of the 19 U.S. banks with more than $100 billion of assets to fail.

And, just in case you were wondering how the industry was looking at this, here's a couple of selections from this past week's editions of the Wall Street Journal, by way of the Prudent Bear stock market website, where I can't help but think of the word "bonanza" applying to the language here:


March 4 - Wall Street Journal (Liz Rappaport and Jon Hilsenrath): "The U.S. launched a program to finance up to $1 trillion in new lending to consumers and businesses, in an ambitious attempt to jump-start credit for everything from car loans to equipment leases. The Federal Reserve and the Treasury Department hope to revive the moribund market for so-called securitized lending, which until last year was central to providing consumer and business loans. Starting March 17, large investors -- including hedge funds and private-equity firms -- can obtain cheap credit from the Fed and use the money to buy newly issued securities backed by such loans."

March 3 - Wall Street Journal: "If you missed the first hedge-fund boom, now may be the time to put up your shingle. Looking at the terms of the Federal Reserve's new Term Asset-Backed Securities Loan Facility, investors using it should be able to generate hefty returns with little risk. The TALF effectively turns the Fed into a generous prime brokerage. The central bank lends money for up to three years to investment firms to buy bonds backed by assets like auto or credit-card loans. The Fed needs to lure investors back into the market for these asset-backed securities, or ABS, where new issuance has almost disappeared."

And, just so we're clear folks, the "shadow banking system" (hedge funds, etc.) is comprised of a what could be described as little more than a bunch of sophisticated compulsive gamblers living in a world where, for the most part, they package what they want, sell it as they feel like selling it, and reap massive revenues from the commissions on it. It's comprised of folks like these guys:

John Paulson, Paulson & Co., (not to be confused with former Treasury Secretary Henry Paulson) the person widely considered to have almost single-handedly short sold the British banking sector down the tubes in 2008. In 2009, he's looking for distressed debt...and he knows just where to find it, too! (Oh, yes, having Alan Greenspan on your payroll doesn't hurt when it comes time to spinning things so the market rolls over and begs precisely when you want it to, as well.) Much of what you'd want to know about Mr. Paulson is here: "John Paulson's Funds Shine in the Gloom."

Stanford Kurland, Angelo Mozillo's number two guy at Countrywide, now leading the surge buying up the very foreclosures he helped to create. Read about it here: "Ex-Leaders of Countrywide Profit From Bad Loans."

Yep, meet the new leaders of our banking system...same (or as worse) as the old bankers...but perhaps a lot more ruthless.

So, recapping:

1.) AIG: Almost all of the $173 billion that's passed through AIG may be going to these 20-25 key Wall Street "players." It's not the $50 billion that's been widely reported in the past 24 hours. We know it is at least $80 billion...and growing. And, these good ole' boys are getting 100 cents on the dollar on assets that are only worth between 20 cents and 60 cents on the dollar now.

2.) FDIC: It appears that the primary reason the FDIC's sole mission is being contorted is to: a.) provide a massive handout to the hedge fund and sovereign fund sectors, b.) avoid the negative spin that would occur if this was labelled for what it actually is, a bad bank and a massive extension of TARP, c.) and a situation where much more control of our nation's traditional banking services are being put in the hands of a grossly underregulated hedge fund industry cowboys...the exact opposite of the much more intensive regulation which is, both, so desperately needed and for which so many are clamoring as I write this. (In reality, we're turning over the keys to the car to the very "drivers" that got us into this mess in the first place.)

There are going to be tens of millions more pissed-off Americans once (or if they're ever) they're made aware of the extent of these outrageous actions by our government, in conjunction with a privatized NY Fed and a Federal Reserve Board that doesn't even release the minutes of its Open Market Committee meetings until four or five years after they occur. And, President Obama's window of opportunity to keep the narrative focused on his efforts to clean-up eight years of a country gone wild due to god-awful mismanagement by the Bush administration, will quickly be supplanted with much more negative criticism directed towards him, however unjustified it might be. And, that's due to the reality that Tim Geithner comes from many years at the New York Federal Reserve, working in an environment that was only monitored by the federal government, but totally controlled by (in this instance, the very Wall Street entities that actually are receiving most of the bailout funds now, and with whom Geithner was so close, to the point where, technically, they were paying his salary) the private banks doing business in it.

Yes, it's no wonder that "56% of the Public Favors Bank Nationalization."

[Demeter]

76. There You Have It In Black and White

Exactly what the "smartest guys in the room" the "masters of the universe" and the Obama Administration think of the American people. Suckers!

[Demeter]

77. Another Daily Kos Resource: The Flaw in the System: The Bankers Don't Care About the Banks

The Flaw in the System: The Bankers Don't Care About the Banks

http://www.dailykos.com/story/2009/3/2/115827/7121/136/703638

[Demeter]

78. This Is What A Financial Collapse Looks Like Argentina's Economic Collapse

http://www.youtube.com/watch?v=rH6_i8zuffs&eurl=http://informationclearinghouse.info/article22169.htm&feature=player_embedded

http://informationclearinghouse.info/article22169.htm

It's 12 parts--I just linked the first. Second link has them all.

[DemReadingDU]

90. That was frightening

I only watched the 1st video, need to watch the rest.

Desperate people do desperate things. Unfortunately, I see unrest coming to our country as more and more people are jobless, homeless, and hungry.

[BelgianMadCow]

95. 2 hours very well spent. The role of the IMF should be screamed from the rooftops

cause they are doing it again, this time to all of us.

Thanks for the link, I enjoyed filling in part of the huge gap in my knowledge of history.

Ultimately, the People win.

[Demeter]

79. Pew Report: More Than One in 100 Adults Imprisoned in US

http://www.pewcenteronthestates.org/news_room_detail.aspx?id=35912

[Demeter]

81. When Securitization Blew Up; So Did the Economy By Mike Whitney

http://informationclearinghouse.info/article22144.htm


"Nothing we do for banks is for banks. It's all for the benefit of the people that depend on banks -- the businesses, the families, the students -- that require credit in order to do things that are important to their future." Treasury Secretary Timothy Geithner PBS Jim Lehrer News Hour

March 04, 2009 "Information Clearing House" - --- One thing is certain, this isn't a normal recession. In a normal recession aggregate demand declines, economic activity slows, and GDP shrinks. While those things are taking place now, the reasons are quite different. The present slump wasn't brought on by a downturn in the business cycle or a mismatch in supply and demand. It was caused by a meltdown in the credit system's central core. That's the main difference. Wall Street's credit-generating mechanism, securitization, has broken down cutting off roughly 40 percent of the credit that had been flowing into the economy. As a result, consumer demand has collapsed, inventories are growing, and manufacturing has contracted for the 13th consecutive month. The equities markets are in freefall and all the economic indicators are pointed south. The so called "shadow banking system" which provided wholesale funding for mortgages, car loans, student loans, and credit card debt, has stopped functioning entirely.

Journalist David K Richards describes the modern credit system in his article "Humpty Dumpty Finance":

"To begin, it is important to recognize how Wall St. has transformed the bank-based credit system, which existed in the 1930's and prevailed until the mid-1990's, into the 'modern' securities-based credit system we have today. Non-bank sources currently supply more than half the credit needs of businesses and consumers. This transformation in the way credit is supplied has made it difficult for the Federal Reserve to reignite credit growth through massive expansion of the Federal Reserve balance sheet, which was the supposed 1930's style antidote. The old-style banking system, in which banks kept the loans they made on their balance sheets, would have responded quickly to Bernanke's interest rate cuts and aggressive injections of excess reserves. But banks today no longer keep most of the credits they underwrite on their own balance sheets, nor do they keep them in the form of individual loans. Instead, banks gather credits together to form asset-based or mortgage-based bonds which they then distribute or sell to pension funds, insurance companies, banks, hedge funds, and other investors worldwide. ("Humpty Dumpty Finance" David K Richards, Huffington Post)

This new "securities-based" credit system emerged almost entirely in the last decade and had never been stress-tested to see if it could withstand normal market turbulence. As it happens, it couldn't survive the battering. The market for mortgage-backed bonds and other securitized investments disintegrated at the first whiff of grapeshot. As soon as subprime foreclosures began to rise, investors fled the market en masse and securitization hit the canvas. Now the wholesale funding for MBS and other consumer loans has slowed to a trickle. That means that housing prices will continue to crash dragging the stock market along behind.

The Fed and Treasury are determined to revive securitization. They're planning to provide $1 trillion for the so-called "public-private partnership" and the Term Asset-Backed Securities Loan Facility (TALF). The money is a taxpayer-provided subsidy for a deeply-flawed system which is inherently unstable. Consider this: subprime mortgages were only defaulting at a rate of 6 percent when the entire market for securitized investments folded like a house of cards. The Fed and Treasury are wasting their time trying to fix a dysfunctional system instead of focusing on debt relief for underwater homeowners and struggling working people. That's where the money needs to be spent

It's no surprise that the banks were big players in the securitization racket. Converting mortgages and other debts into securities has many perks including transfer of risk, a reduction in funding costs, lower capital requirements and additional liquidity. Banks can actually create a security and then sell it to itself at a profit in what amounts to an "in house" transaction. Nice trick, eh? There are also considerable benefits from maintaining off-balance sheets operations which--through the magic of modern accounting--allow loans to be held as assets that don't require the same capital reserves as conventional mortgages. All this sleight-of-hand increases the amount of credit that banks can balance on smaller and smaller morsels of capital.

The financial sector now represents 40 percent of GDP, which is to say that the exchange of paper claims to wealth is the driving force behind economic growth. The production of useful things, that actually improve people's lives and raise the standard of living, has been replaced by the trading of complex debt instruments and opaque derivative contracts. Securitization is at the very heart of Wall Street's Ponzi-finance scam. It creates profits by transforming liabilities into "cash flow" which can be sold at market. Bottom line: Factories and manufacturing are out. Toxic paper and garbage loans are in.

As ringleader of the banking fraternity, the Federal Reserve has a big stake in securitization and would like to see it succeed. Bernanke's job is to provide the liquidity and capital that's needed to put the credit markets back in order. To that end, Bernanke has spared no expense to underwrite all of the toxic loans which have presently brought the financial system to its knees. According to Bloomberg:

"The U.S. government has pledged more than $11.6 trillion on behalf of American taxpayers over the past 19 months, according to data compiled by Bloomberg. Changes from the previous table, published Feb. 9, include a $787 billion economic stimulus package. The Federal Reserve has new lending commitments totaling $1.8 trillion. It expanded the Term Asset-Backed Lending Facility, or TALF, by $800 billion to $1 trillion and announced a $1 trillion Public-Private Investment Fund to buy troubled assets from banks. The U.S. Treasury also added $200 billion to its support commitment for Fannie Mae and Freddie Mac…” (Bloomberg News)


There's literally no end to the Fed's generosity when it comes to providing for its friends on Wall Street. Only a small portion of Bernanke's largesse was bestowed with proper congressional authorization. Bernanke simply doesn't care if the public sees him as the unelected oligarch that he really is.

Securitization soared between 2003 and 2006 when US current account deficit skyrocketed to nearly $800 billion per year. That's when "America's banks discovered that they could borrow money cheaply from Asia and lend it out in higher-yielding domestic mortgages while using sophisticated financial engineering to wall off and strictly control their risks."(Brad Delong) The US was consuming $800 billion more per year than it was producing, but the damage remained invisible because foreign governments and investors were recycling their savings back into US Treasurys, GSE bonds (Fannie Mae), and mortgage-backed securities (MBS). It was a windfall for Wall Street that put the investment banks and hedge funds deep in the clover. A number of economists sounded the alarm, saying that the burgeoning account imbalances were unsustainable, but the business media just brushed them off as Chicken Littles. Now, foreign investment has slowed, the credit markets are frozen, real estate is retreating and $40 trillion of wealth has drained from the global equities markets. The tremors from Wall Street's mortgage-laundering swindle have rippled through the broader economy causing an unprecedented contraction in retail, imports, durable goods, transports, high tech, electronics, and cyclicals. The unemployment roles have mushroomed while asset prices have continued to plummet. The Dow has dropped 54 percent from its peak and is sliding inexorably towards 6,000. Pessimism abounds.

The economy is now caught in a deflationary downdraft. The sharp decline in asset prices is making it more difficult for businesses to roll over loans. Without financing, tens of thousands of businesses will default. Bernanke assumed it would be easy to reflate the bubble economy by increasing the money supply. Now he knows he was wrong; the printing presses haven't worked. The Fed's trillions are sitting in stagnant pools on bank balance sheets rather than churning through the credit markets. Monetary policy has failed; velocity is down and capital injections have not stabilized the financial system.

The TALF and "public-private partnership" is just more grasping at straws; another attempt to stop the debt deflation by trying to rev up securitization. It won't work. Bernanke and Geithner still don't understand the main problem, which is the explosion in private debt. Consumers are tapped out and easy credit won't help. Homeowners just lost 28 percent of their home equity in the last two years and more than half of their retirement (401K). They are much poorer than they thought and they need to increase their savings fast. What they really need is a reduction in the face value of their mortgage and a write down on their other main debts. Otherwise they will be forced to curtail spending and circle the wagons. That will trigger an even more precipitous decline. Have Bernanke and Geithner even considered how long the recession will last if the savings rate continues to rise at its present pace?

Until the two Bears Stearns hedge funds defaulted 19 months ago, securitization had been Wall Street's most reliable source of revenue; a real cash cow. It was the main reason that total mortgage debt jumped from $4.5 trillion in 1999 to $11 trillion in 2006; more than double in just 7 years. At the same time, the asset-backed securities (ABS) market, which packaged other types of business and consumer debt into securities, shot up by more than 500 percent to $4.5 trillion. Securitzation turned out to be the Mother Lode. The torrent of surplus capital from the savings glut in the Far East (as well as "yield seeking" insurance companies, retirement funds and investment banks) turned mortgage-backed securities and other structured investments into a multi-trillion dollar industry. The process recycled revenue to mortgage originators where low interest rates and lax lending standards kept the volume of MBS high, but the quality low. It's clear now, that securitization created incentives for fraud by transferring credit risk from the originator of the loan to the investor. The originator makes his money on the volume of securities sold; the quality of the underlying mortgages is secondary. This week, the Wall Street Journal reported that 7 out of 10 subprime mortgages vintage 2006 will default. The failure rate proves that the system had deteriorated into little more than a scam.

It was securitization and the 25 to 1 leveraging of toxic assets at the hedge funds, investment banks and private equity firms, that brought on the current financial crisis. When trouble broke out in the subprimes, the secondary market shut down, and the flow of credit from nonbank financial institutions dried up. Unfortunately, the real economy has become addicted to easy credit and sky-high asset prices. Now that the bubble has burst, the phony prosperity of the Bush years has been wiped out in one fell swoop. The stock market has plunged to its 1996 level and housing prices are returning to the mean. The question now should be, do we really want to restore a crisis-prone credit-generating system (securitization) by providing a $1 trillion subsidy to profit-oriented hucksters who are largely responsible for the current recession?

As Barak Obama stated last week, "Credit is the economy's life-blood". It should distributed through government-owned and regulated financial institutions that operate as public utilities. Credit is everyone's business. It shouldn't be controlled by speculators.

[Demeter]

82. AIG: Billions Dished Out in the Dark By Robert Scheer

http://www.thenation.com/doc/20090316/scheer



March 05, 2009 "The Nation" -- This is crazy! Forget the bleating of Rush Limbaugh; the problem is not with the quite reasonable and, if anything, underfunded stimulus package, which in any case will be debated long and hard in Congress. The problem is with what is not being debated: the far more expensive Wall Street bailout that is being pushed through--as in the case of the latest AIG rescue--in secret, hurried deal-making primarily by the unelected secretary of the treasury and the chairman of the Federal Reserve.

Six months ago, we taxpayers began bailing out AIG with more than $140 billion, and then it went and lost $61.7 billion in the fourth quarter, more than any other company in history had ever lost in one quarter. So Timothy Geithner and Ben Bernanke huddled late into the night last weekend and decided to reward AIG for its startling failure with thirty billion more of our dollars. Plus, they sweetened the deal by letting AIG off the hook for interest it had been obligated to pay on the money we previously gave the company.

AIG doesn't have to pay the 10 percent interest due on the preferred stock the US government got for the earlier bailout funds because that interest will now be paid out only at AIG's discretion, which means never. The preferred stock, which got watered down, carried a cumulative interest, meaning we taxpayers would have recaptured some money if the company ever got going again, but that interest obligation was waived in the new deal.

We've already given AIG a total of $170 billion--an amount that dwarfs the $75 billion allocated to helping those millions of homeowners facing foreclosures. And more will be thrown down the AIG rat hole because President Barack Obama is blindly following the misguided advice of his top economic advisers, who insist that AIG is too big to fail.

"AIG provides insurance protection to more than 100,000 entities, including small businesses, municipalities, 401(k) plans and Fortune 500 companies who together employ over 100 million Americans," the joint Treasury Department and Fed statement declared while insisting that for that reason, plus the "systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high."

What about the cost of inaction by Treasury and the Fed before this meltdown? If AIG were so important to the American economy, shouldn't government regulators have been looking more closely at its activities? They couldn't then, and even now they don't understand what AIG has been up to, because the company was allowed to operate in an essentially unregulated global economy in which multinational corporations have their way. As the Treasury/Fed statement concedes: "AIG operates in over 130 countries with over 400 regulators and the company and its regulated and unregulated subsidiaries are subject to very different resolution frameworks across their broad and diverse operations without an overarching resolution mechanism."

Oh, really? And you're discovering that only now, when you're making us bail AIG out? It wasn't that long ago that a couple of hustlers operating out of an AIG office in London were going wild making money off selling insurance on credit default swaps that no one could understand, but the company execs loved those huge profit margins. To challenge their maneuvering, as some in Congress attempted, was said by their defenders, including Geithner, to put them at an unfair disadvantage in the world market. Ignorance was bliss... until the bubble burst.

This was all belatedly conceded by Bernanke in his Senate testimony on Tuesday: "AIG exploited a huge gap in the regulatory system. There was no oversight of the Financial Products division. This was a hedge fund, basically, that was attached to a large and stable insurance company, made huge numbers of irresponsible bets--took huge losses. There was no regulatory oversight because there was a gap in the system."

AIG used to be in the conventional insurance business, covering identifiable risks it knew something about, until it took advantage of deregulation and a lack of government surveillance to come up with contrived new financial products. Even Maurice Greenberg, the man who built AIG from the ground up over a span of 40 years before he was forced out amid corruption charges in 2005, admits that he didn't understand the newfangled financial gimmicks that the company was peddling. This week, claiming he too was swindled, Greenberg sued in federal court, charging the AIG execs who forced him out with "gross, wanton or willful fraud or other morally culpable conduct," over the credit default swap portfolio that was part of his settlement.

US taxpayers now have ownership of almost 80 percent of AIG, but with the company's once solid traditional insurance business now suffering a steep loss of consumer confidence, it's not likely that even the formerly healthy parts of the company will be worth much. What we have here is all pain and no gain for the taxpayers roped into this debacle, which is proving to be the story of the entire banking bailout.

[Demeter]

83. Well, It's All AIG All the Time This Weekend

I could go on, but one must consume a few calories (and wash dishes) once in a while...


Last weekend it was Citi in the scales of public opinion, doomed to be shut down in some sleight of hand....we wish it were so. It still could be so, and how would we know? There's no transparency!

But this AIG thing, there's real emotion behind it. I think the more responsible people are really getting scared. They've been patient, waiting for the new Administration to get on the learning curve, to catch a clue, and it isn't happening.

The winding-down has turned to a rout (well, what did these Einsteins think would happen?) and finally, FINALLY, the PTB are getting a little concerned.

If it gets bad enough, we may actually see Bush and Cheney walk the plank, not for the ostensible reasons, but because they screwed with the wrong moneybags.

[Demeter]

86. How to take back the money

http://interfluidity.powerblogs.com/posts/1236486735.shtml

SEE ORIGINAL LINK FOR FURTHER LINKS..


I have two ideas to throw out.

My first thought is an old doctrine. If we could get the people who supposedly represent the people to formally acknowledge the insolvency of the institutions we are bailing out, there is a wide-ranging doctrine known as "fraudulent conveyance" that might help. Payments by a bankrupt firm during the period preceding the bankruptcy are subject to challenge and reversal, under the theory that preferential transfers by insolvent firms to some parties rather than others are inequitable. I don't know, from a legal perspective, how far back and how broadly the doctrine of fraudulent transfer could be applied to insolvent financials, but it's possible that a formal insolvency (e.g. a nationalization or receivership) could put a lot of people who got paid by banks during the boom at risk.

Yves Smith pointed this out a while back. I think it's worth taking a moment to wonder whether and how much the political resistance to formal nationalization is due to fears on the part of well-connected executives of being clawed-back via this doctrine. (Has fraudulent conveyance been aggressively pursued with respect to the Lehman bankruptcy? If not, why not?)

I hasten to add that I know very little about the legal details of fraudulent conveyance, whether it could in fact be applied to large, insolvent financials, what if any legislative action would be required to make the doctrine bite effectively, etc. I do know that even good-faith sellers of firms into leveraged buyouts are quite terrified of fraudulent conveyance, since even healthy firms become risky after the levering up and capital extraction that often followed these deals, and the former owners of previously viable firms can be made to take a serious hit. People who might know stuff about this (Buce?) are encouraged to weigh in. If we treated nationalizations as insolvency for the purpose of fraudulent conveyance, could we do some clawing back? Or is this a ridiculous idea?

Another way we could claw back is to simply enact a special tax on all recipients of income from firms receiving public support. Again, we are partially screwed by Hank Paulson's cynical strategy of encouraging healthy firms to camouflage the rotten ones by accepting TARP funds. But we might set a deadline for the return of public capital, to encourage the healthy trend of banks returning unneeded public support. People who received income as an employee or contractor of banks requiring continued public support during 2004-2007 could be subject to a special, retroactive tax on that income. The IRS presumably has W-2s and 1099s by which they can identify those who would be liable.

This is obviously mean and unfair to many innocent bank employees, and cuts against the America tradition of eschewing collective justice. To diminish the meanness, the special tax could be progressive in the amount of income collected, so that janitors and tellers at Citibank wouldn't be unduly hit. It could be spread over several years, to help people finance the unexpected charge. But, however imperfect, this sort of tax would be far better targeted than future taxes that penalize Americans broadly, or even forward looking tax levies on financials that (if we get our act together) might be very different from the dinosaurs and innocent of their sins. (Should prosper.com pay for the excesses of Citibank?) Administration of the tax should be straightforward and comprehensive, as even the sharkiest of sharks working for putrescent financials wouldn't have seen this one coming a few years ago and contrived to hide the source of paychecks from Citi.

Of course, it would set a precedent going forward, so highly-paid agents of firms capable of forcing a bail-out might seek get paid via squirrelly networks of special-purpose vehicles in order to evade future clawbacks. But that is a feature, not a bug. One problem with our financial system is that it was easy for basically decent people to engineer rapacious and fraudulent practices while persuading themselves it was respectable work. Acting in a manner that yields private short-term profits in exchange for catastrophic risk to taxpayers and the economy is not respectable work. People who find they have to launder their paychecks like drug dealers are less likely to get confused about that (and less likely to be dealt with mildly if they push us to the edge again).

If we do this kind of thing, we should make it clear that its purpose is to cover actual rescue costs, not to arbitrarily discourage risk-taking. (I'd view it as similar to how people who get stuck on mountains are sometimes billed for the cost of their search-and-rescue.) Agents of firms that are clearly small enough to fail could rest assured that the taxman would have no claim against people caught in private tragedies. Fear of such a tax might discourage managers and executives from building up large or insidiously interlinked firms and then capitalizing on an implicit "too big to fail" guarantee. Firms may be too big to fail, but the people who make them that way needn't be invulnerable.

Update: Reader Paul Morelli directs us to the excellent Adam Levitin at Credit Slips on the subject of fraudulent conveyance and bonuses. See also the comments, in which Tom Grey suggests a "windfall bonus tax".

Update 2: Skeptical CPA has a great deal about bankruptcies and fraudulent transfers, for example here. He also points to this interesting summary of bankruptcy scams. To reiterate the connection between this stuff and current events, if the government bails out an insolvent bank by making creditors and counterparties whole, that is like a bankruptcy, except the government steps into the shoes of creditors and takes the hit they otherwise would take. Conduct that would harm private creditors in a bankruptcy harm the taxpayer in a bailout, and in theory should be litigated just as aggressively by the aggrieved party, which is all of us. However, by preventing any formal declaration of insolvency, bailouts enable scavengers to avoid the whole skein of case law surrounding bankruptcy, which tends to put people who extract benefits from a firm while it is foreseeably bust in jeopardy.

Update 3: Buce weighs in on fraudulent transfer (and distinguishes them usefully from preferential transfers) in the comments. His conclusion? "...maybe less here than meets the eye." Thanks Buce! Not to many comments on the tax idea, which I thought the more incendiary of the two proposals...

[Demeter]

88. The Next Hit: Quick Defaults: More FHA-Backed Mortgages Go Bad Without a Single Payment

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/07/AR2009030702257.html?hpid=topnews

By Dina ElBoghdady and Dan Keating
Washington Post Staff Writers
Sunday, March 8, 2009; A01

The last time the housing market was this bad, Congress set up the Federal Housing Administration to insure Depression-era mortgages that lenders wouldn't otherwise make.

This decade's housing boom rendered the agency irrelevant. Americans raced to aggressive lenders, seduced by easy credit and loans with no upfront costs. But the subprime mortgage market has crashed and borrowers are flocking back to the FHA, which has become the only option for those who lack hefty down payments or stellar credit. The agency's historic role in backing mortgages is more crucial now than at any time since its founding.

With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency's overall growth in new loans, according to a Washington Post analysis of federal data.

Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders looking to make a quick buck.

If a loan "is going into default immediately, it clearly suggests impropriety and fraudulent activity," said Kenneth Donohue, the inspector general of the Department of Housing and Urban Development, which includes the FHA.

The spike in quick defaults follows the pattern that preceded the collapse of the subprime market as some of the same flawed lending practices that contributed to the mortgage crisis are now eroding one of the main federal agencies charged with addressing it. During the subprime lending boom, many mortgage brokers and small lenders milked the market for commissions and fees by making as many loans as possible with little regard for whether they could be repaid.

Once again, thousands of borrowers are getting loans they do not stand a chance of repaying. Only now, unlike in the subprime meltdown, Congress would have to bail out the lenders if the FHA cannot make good on guarantees from its existing reserves. And those once-robust reserves are showing signs of stress, raising the possibility that taxpayers may have to pick up the tab for the first time since the agency was established in 1934.

More than 9,200 of the loans insured by the FHA in the past two years have gone into default after no or only one payment, according to the Post analysis. The pace of these instant defaults has tripled in one year. By last fall, more than two dozen FHA home loans on average were defaulting this way every day, seven days a week.

The overall default rate on FHA loans is accelerating rapidly as well but not as dramatically as that of instant defaults.

The agency's share of the mortgage market is up from 2 percent three years ago to nearly a third of the mortgages now made, its highest level in at least two decades, according to Inside Mortgage Finance, an industry trade publication. The FHA does not lend money directly. It provides mortgage insurance for borrowers working with FHA-approved lenders and uses the premiums to cover its losses. If the premiums are not enough, taxpayers could be on the hook.

At the same time, Congress has substantially increased the amount a homeowner can borrow on an FHA loan in pricey areas, thrusting the agency into markets it was previously shut out of, such as California, where plunging home prices have made people more vulnerable to foreclosure. Moreover, lawmakers last year put the FHA in charge of a program created to address the roots of the financial crisis by helping delinquent borrowers refinance into new mortgages....

MUCH MORE AT LINK

[DemReadingDU]

91. Mike Morgan: The End of the World . . . As We Knew It

another doomy

3/8/09 The End of the World . . . As We Knew It by Mike Morgan

For the last four and a half years, I have been writing, speaking and warning about the consequences of the housing bubble, commercial real estate bubble and the toxic paper that fueled both bubbles. I took a lot of heat for my comments.

I was not shy when I said we were headed for the worst Recession since the Depression. I was not shy when I then began referring to the coming tsunami as a Decession . . . and then in January of 2008, I took the next step and called it what it is . . . a Depression.

Deep VIOLENT Depression - I cannot emphasize this enough . . . and I have already taken heat for using the "V" word. But today I am prepared to kick it up a notch, and urge you to prepare for what is unfolding. Did we think we would have seen the extent of the violence during the Civil War, when we killed each other on our own land? Did we ever think we would have seen the violence that came out of the Depression? Hitler came to power when people lost hope in the government and financial markets. Can it happen again? We said it could never happen then, so now that we are in far worse shape than 1930, why couldn’t something much worse come out of this crisis?

100,000 Protesters - Does the government have any idea how angry people are, how betrayed they feel? It will be years before our economy recovers from the devastation wreaked by bankers. In the meantime, the possibility of something awful happening is very real. We’re one swing of a garda baton, one cracked head, away from chaos. - Gene Kerrigan

This statement could have been written about the United States, England, France, China or just about any country in the world. But for now, it comes straight from The Irish Independent. You didn’t see it on CNN, CNBC or even in any of the American papers. You had better prepare for it, because it will shut down banks, supermarkets and the very fabric of what we are. If you have not built up a food pantry, stored cash and gold, and armed yourself, you might want to consider doing it now.

more...
http://realestateandhousing2.blogspot.com/2009/03/end-of-world-as-we-knew-it.html

[Demeter]

92. Martin Feldstein and Simon Johnson on the U.S.'s Lost Decade

http://paul.kedrosky.com/archives/2009/03/martin_feldstei_1.html

[Demeter]

93. The knives are out for Geithner

http://ukhousebubble.blogspot.com/2009/03/knives-are-out-for-geithner.html


Direct link to video


http://link.brightcove.com/services/link/bcpid1079049304/bctid14954864001

[Demeter]

94. Well, It Was an Eventful Cruise

and we ended up right where it said we would---nowhere!

Have a good week, everybody! And beware the Ides of March!