Mr. Mortgage says,
The ‘Alt-A Implosion’ could dwarf the Subprime Implosion when all is said and done. This is because values in higher-priced, heavy Alt-A areas should actually end up being hit harder, as Alt-A loan allowed much more leveraged and much less documentation than Subprime relying mostly on a credit score and an appraisal for loan approval. Within the Alt-A universe is where all of your stated income, no ratio, no doc, 100% piggy-backs can be found. The most notorious Alt-A loan is the Pay Option ARM. The way all of these loans were structured is producing a very linear mortgage crisis - from Subprime to Alt-A to Jumbo-Prime then Prime. The coming Alt-A and Jumbo Prime Implosions puts at risk well over $1 trillion in residential mortgage loans, much of it sitting on the balance sheets of some of the nations largest banks such as Wells Fargo, Chase, Bank of America and Citi. It will also take out of commission the higher income demographic for a long period of time. More
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Anthony M. Freed
Your Mortgage or Your Life
“Will Countrywide and Bank of America Please Step Up?”
In the last week of October I ran an article about the government’s lack of any significant efforts to stop the tsunami of foreclosures that are supposedly responsible for the current economic crisis, titled “No hope for Homeowners: Foreclosure Prevention Program Falters”, which explored evidence the government seems determined to merely pay lip service to the foreclosure problem, while letting another million-plus families linger in a state of insecurity and despair as they rapidly approach foreclosure.
Many people these days are quick to peg people under the threat of foreclosure as being irresponsible, overly-optimistic, or just plain greedy - assuming everyone tried to buy too much house for too little down in the hopes they might be the next Donald Trump. The truth is that the majority of homeowners facing foreclosure were not investors or property flippers looking for an easy buck. And those that did get in over their head did so at the advice and urging of under-supervised or unethical loan officers and brokers - which amounted to only a small number compared to all of the hardworking, honest folks who made a living and a career in the mortgage business - many of whom worked for decades in the business and did not get rich. One reader - who we will call “Kitty” - has volunteered her to share her story, recounting the chain of events that has thrust her family from the comfort of middle-class security to the brink of bankruptcy and foreclosure in the span of about one year.
“Kitty’s” story demonstrates the very precarious nature of America’s middle class, especially in the face of a contracting economy, increased competition from overseas, and a government determined to drive it to into extinction. Read ‘Kitty’s” story and be warned that this could easily happen to any of us, and sooner than we could ever imagine. More
Sphere: Related ContentPAM MARTENS
CounterPunch
The U.S. Treasury Secretary, Henry Paulson’s, $700 billion bailout plan to buy up distressed mortgage assets has spun off its own $250 billion subsidiary plan (skipping that pesky detail called taxation with representation) to inject $125 billion in equity capital into 9 of the biggest commercial and investment banks in the country. Another $125 billion may possibly go to smaller regional banks and thrifts, assuming they will sign on to the deal.
And what will taxpayers get for their investment in these financial firms whose stock prices are getting hammered as the public recoils in revulsion at what they have done to our financial system? The taxpayers, who were not invited to send their own legal representative to the negotiating table, will receive a paltry 5% dividend, exactly half of what Warren Buffett received for his recent investment in General Electric, a company that actually makes something real, like jet engines and light bulbs.
Now we learn from the U.S. Treasury web site that it has hired the law firm of Simpson, Thacher & Bartlett to represent our taxpayer interests going forward at a cost to us of $300,000 for six months work. But we’re not allowed to know their hourly wages; that information has been blacked out on the Treasury’s contract. Curiously, the Treasury has named in its contract the specific lawyers it wants to work for us. Two of those are Lee A. Meyerson and David Eisenberg. Mr. Meyerson has been a central player in facilitating the bank consolidations that have led to the present train wreck, including building JPMorgan Chase from the body parts of Chemical Bank, Chase Manhattan and Bank One.
Mr. Eisenberg has played a central role in the proliferation of the credit derivatives blowing up on the books of the Frankenbanks created by Mr. Meyerson. Here’s what the Simpson, Thacher & Bartlett web site says about its relationships and Mr. Eisenberg’s work:
“The Firm’s practice benefits from established relationships with all of the major investment banks…Mr. Eisenberg is responsible for creating the asset-backed practice at the firm and has represented clients involved in the structuring of the first asset-backed commercial paper program, the first public offering of credit card-backed securities by a bank and the first offering of asset-backed securities supported by dealer floor plan loans…Mr. Eisenberg represents JPMorgan Chase Bank, as issuer, in its ongoing program of public offerings of its credit card receivables backed notes. In addition Mr. Eisenberg represented JPMorgan Chase Bank in connection with the issuance of notes backed by commercial loans and in connection with its offerings of Leveraged Notes for Credit Exposure, a credit derivative product. Mr. Eisenberg has also represented underwriters, issuers and sponsors of modeled index catastrophe bonds. Mr. Eisenberg has represented sellers and buyers of credit protection in connection with synthetic securitizations of consumer loans, commercial loans and high yield bonds.”
This is an unconscionable conflict of interest given that JPMorgan Chase is receiving $25 billion of taxpayer funds under this bailout and that the program is very likely to be buying the very toxic waste for which Mr. Eisenberg wrote legal opinions and assisted in proliferating.
What most Americans do not understand, because mainstream media rarely explains it, is the incestuous relationship between the U.S. Treasury and this small band of financial marauders who busted the entire financial system with insane levels of leveraged derivative bets.
The bulk of the $125 billion will be dispersed among Uncle Sam’s own brokers, or in street parlance, Primary Dealers. Primary dealers are those financial firms anointed by the Federal Reserve to participate in the Fed’s open market activities and are required to participate to a significant degree in buying up Treasury securities at every Treasury auction. In other words, without these firms, the U.S. Government would have no means of financing its own funding needs.
Treasury, therefore, has an obvious conflict of interest in keeping these firms alive, even when they are the walking dead. Here’s how much of the $125 Billion the Fed’s Primary Dealers will collect: Citigroup, $25 Billion; JPMorgan Chase & Co., $25 Billion; Bank of America and its soon to be acquired brokerage, Merrill Lynch, $25 Billion; Goldman Sachs, $10 Billion; Morgan Stanley, $10 Billion. In other words, of the first $125 billion outlay from the emergency bailout fund, 76% is going to shore up Uncle Sam’s brokers and $300,000 is going to retain one of Wall Street’s favorite law firms.
In 1988 there were 46 primary dealers. That number had shrunk to 30 by 1999. In June 2008 there were 20, in no small part as a result of the mergers facilitated by Simpson, Thacher & Bartlett. In rapid succession since July, three more have disappeared from bad bets: Countrywide Securities (shotgun marriage with Bank of America); Lehman Brothers, bankrupt; Bear, Stearns (shotgun marriage with J.P. Morgan Securities). That currently leaves 17 and that number will drop to 16 when Merrill Lynch is folded into Bank of America. (The rest of the 16 primary dealers that are not getting part of the $125 billion are foreign banks.)
In addition to the repeal of the depression era, investor protection legislation known as the Glass Steagall Act, the removal of credit default swaps from regulation by the Commodity Futures Modernization Act of 2000, various U.S. Supreme Court decisions upholding Wall Street’s ability to run its own private justice system shrouded in darkness, there was one more key regulatory change that greased the tracks of this train wreck. On January 22, 1992 the Federal Reserve announced that its New York region would “discontinue the ‘dealer surveillance’ now exercised over Primary Dealers through the monitoring of specific Federal Reserve standards and through regular on-site inspection visits by Federal Reserve dealer surveillance staff.”
In other words, as bank consolidation left the country with fewer and fewer Primary Dealers and more and more “too big to fail candidates,” instead of beefing up surveillance, the Federal Reserve amazingly dropped inspections. Who was at the helm of the Federal Reserve when this nutty decision was made: the same man who lobbied for the repeal of the Glass Steagall Act that ushered in the merger of depositor banks with casino investment banks and brokerages; the same man who lobbied for the passage of the Commodity Futures Modernization Act of 2000 to allow for unregulated derivatives markets. The man, of course, is Alan Greenspan who served a breathtaking 19 years as Chairman of the Federal Reserve. That, by the way, is the approximate number I would assign to how many years it will take to repair the collapse of confidence engendered by his crony wealth transfer system created under the guise of free market capitalism. More
Sphere: Related ContentStephen Lendman
… and here’s what we’ve got. A global asset bubble. A predictable crisis allowed to build and mushroom. Begun after Chicago School economics took hold under Ronald Reagan. Continued under GHW Bush. Became religion under Bill Clinton, and ultimately fundamentalism under GW Bush.
The result - a “slow motion train wreck” gaining speed. Banks and other financial institutions failing globally. On September 25, the largest bank failure in US history with Washington Mutual’s collapse. Earlier it was giant insurer AIG. Before that Fannie Mae and Freddie Mac, Lehman Brothers, Bear Stearns, and Merrill Lynch a forced liquidation to Bank of America.
Others are now teetering on the edge. Strapped by toxic debt. The result of out-of-control greed for easy profits. Massive fraud to get them. Thinking they’re the best and brightest, and only mere mortals mess up. Knowing Fed moral hazard will cushion them if they do. True for some. Not for others, and learning that the Federal Reserve (the world’s key central bank) failed in its primary job. To protect the country’s financial system from insolvency. By contributing to a financial crisis and one of confidence. By creating near-limitless amounts of capital. Fueling a housing bubble. Outsized consumer debt, and irresponsible investments free from government oversight. Fraudulent ones involving multi-trillions of dollars.
Partnering with government to make it easy. Risking a global economic meltdown as a result. Scrambling to find solutions. Unsure if there are any. The present crisis is unparalled. Maybe it can be fixed, and maybe not. The problem is multi-fold. A perfect storm involving:
– residential housing;
– commercial real estate;
– consumer over-indebtedness;
– unknown amounts of toxic debt (in the multi-trillions);
– affecting world finance and economies;
– causing bankruptcies;
– many more will follow;
– selected ones bailed out;
– the entire system endangered;
– consumer money market, bank accounts and private pension funds as well; government backing is needed to protect them; there’s not enough money to do it; and
– the contagion is spreading; threatening world economies and people everywhere.
This time is really different. A $700 billion bailout (called the Emergency Economic Stabilization Act of 2008 - EESA) is just a down payment. Trillions will be needed in the end. Other nations contributing to help. The problems are deeper and more intractable than anyone expected. Before this ends, unimaginable amounts of capital will be written off. Too much to even contemplate. Bad investments contaminating good ones. Threatening world financial structures with paralysis. Severe economic damage to their economies as a result. Eroding industrial capitalism as we know it. At best managing a short-term fix and delaying a final denouement for a later time. Under new management with the current and past ones claiming no responsibility. And unmindful of millions of homeowners facing foreclosure and bankruptcy. One in ten currently behind in their payments. Others losing their jobs and way of life. They’re the most vulnerable. Least able to cope, and for some their ability to survive.
According to The New York Times, here’s how the Paulson scheme helps them: “it requires the government to use its new role as owner of distressed mortgage-backed securities to make ‘more aggressive’ efforts to prevent home foreclosures.” Weasel words. No specifics. No assurances, and nothing apparently for homeowners already in foreclosure.
On September 22, ahead of the announced agreement, American Research Group (ASG) published its latest public sentiment poll results, and they were stunning. At 19%, George Bush scored lowest ever for a US president, surpassing Harry Truman at the depth of the Korean War and Richard Nixon during Watergate. It came at a time ASG’s results showed 82% of Americans believe the economy is getting worse, and only 17% approve of how Bush is handling it. Among registered voters, the number is 18% at a time no one surveyed (zero percent) said the economy is improving and 68% say it’s in recession. True or false, it’s how they feel. How the crisis affects them, and that’s what counts most.
Yet on September 24, the president addressed the nation audaciously. Callously dismissing public pain and anger. Deceitfully stating outright lies. A typical performance. Demanded that Congress give the treasury secretary carte blanche authority over $700 billion to address “a serious financial crisis.” Asked taxpayers to pay for corporate fraud. Reward criminals and ignore their crimes. Said nothing about the root cause. The effect on ordinary people, or how Paulson’s scheme will help them. Ignored growing public opposition. Large numbers of credible observers believing the proposed solution is worse than the problem. The most honest of them saying it will enrich fraudsters and offer no help for homeowners.
Yet Bush concluded that “democratic capitalism (is the) best system the world has ever devised” in spite of clear evidence that it’s broken and corrupted. Exploits people for profit. Enriches the few at the expense of the many. Rewards criminals for their crimes. Protects the rich from beneficial social change.
Ahead of the president’s address on September 24, The New York Times showed a rare display of candor in a critical Timothy Egan opinion piece. About “nearly nationalizing the banking system and giving the treasury secretary more power than a king….whose decisions may not be reviewed by any court of law or any administrative agency.” He asked readers to remember “where the biggest heist took place, and how Wall Street dragged down the rest of the country once before,” referring to the Great Depression but leaving out everything in between.
He stressed, however, “how Wall Street brought down main street,” and things have now come full circle. Deregulation unleashed casino capitalism, and bankers made a killing. Now they’re in trouble and Bush demands “the biggest bailout in American history….or the world will crumble. He said the a similar thing in the run-up to war” so who can believe him now. Egan quotes a dirt farmer asking why not the same “concerns (for) average Americans.” Because “we the people” Bush speaks for are them, not us.
As for Paulson’s plan, here’s what the Financial Times writer Martin Wolf said on September 23. He called it “not a true solution to the crisis.” It doesn’t address the “fundamental problem.” It’s “neither a necessary nor an efficient solution. It is not necessary because the (Fed can) manage illiquidity through its many lender-of-last resort operations. It is not efficient because it can only deal with insolvency by buying bad assets (overpriced junk) at far above their true value, thereby guaranteeing big losses for taxpayers and providing an open-ended bail-out to the most irresponsible investors.”
Wolf also objects to Paulson getting unchecked powers. Providing little or no help to the poor and “ill-informed” (read duped) borrowers, and lists other operational suggestions “essential for the long-run health of any financial system” without needing “a penny of public money.” Among them, forcing creditors to take losses and not taxpayers.
Unmentioned in his article is the underlying fraud behind the crisis and a lack of regulatory oversight that made it easy. Also, omitted was what’s covered in the section below.
The 1937 Housing Act’s Empowering Section 8 Authority
One Section 8 sentence provided the basis for the treasury secretary’s empowerment. It reads:
“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administration agency.”
In other words, unchallengeable czarist powers. In contrast to the 1930s Reconstruction Finance Corporation’s (RFC) closely supervised operations. That era’s Home Owners’ Loan Corporation (HOLC) that refinanced homes to prevent foreclosures. And the 1980s Resolution Trust Corporation (RTC) mandate to liquidate assets from failed S & Ls. Not dispense free money for bad investments unchecked. The above authorities subject to judicial review. Not governed by a financial boss to run as he pleased.
The Announced “Bailout” Deal - The Emergency Stabilization Act of 2008 (ESA)
According to The New York Times, EESA calls for “strict oversight of the program by a Congressional panel and conflict-of-interest rules for firms hired by the Treasury to help run the program.” Also “a change in the bankruptcy laws sought by some Democrats to give judges the authority to modify the terms of first mortgages.”
Given the bipartisan blame for today’s crisis. The post-9/11 willingness to give the administration near-carte blanche authority across the board. Eight years of indifference to social needs and public welfare. Who now believes that policy going forward will change and that the agreed-on scheme will protect people or curb the secretary’s authority. On his own initiative, George Bush usurped supreme power post-9/11 while few in Congress blanched. None in leadership positions. Little today has changed.
Disclaimers notwithstanding from both sides of the aisle, Wall Street is pleased. Paulson got what he wanted. The plan’s fine print will assure it. Public money. Far more, if needed, than $700 billion. The power to dispense it freely. With weak at best oversight and judicial review, and the ability to conceal fraud and malfeasance. In short, the between-the-lines meaning of Paulson saying: “We have made great progress toward a deal, which will work and be effective in the marketplace.”
The same one that fleeced the nation and betrayed the public trust. Now empowered to take more with the full faith and blessing of the government from both sides of the aisle. Belying George Bush’s insult that “The rescue effort….is not aimed at Wall Street; it is aimed at your street.” And Nancy Pelosi’s hypocrisy that: “All of this was done in a way to insulate Main Street and everyday Americans from the crisis on Wall Street….I want to congratulate all of the negotiators for the great work they have done.” Who in banker boardrooms would disagree.
Some Relevant Facts
Clearly the present crisis is unprecedented. As stated above, maybe it can be fixed and maybe not. No one is sure because no one understands it fully. Where all the problems lie. To what degree can they be contained. How great their fallout may be. Their full effect on world economies. How bad things may get before they stabilize and improve, and the way the world will look like when they do.
Whatever’s coming, industrial capitalism is eroding. A kleptocracy replaced it. If the system is saved, it will be temporary, and an even greater one will emerge. Why this article is called Grand Theft America. A criminal class runs it, and they’re rewarded for their crimes. Backed by the full faith and credit of the government with taxpayer money. A near-limitless amount created and borrowed. Who said crime doesn’t pay!
For over 30 years, an unimaginable wealth transfer to the rich has been ongoing. To the top 1% and corporate America from most others. It proves the failure of a system that rewards the few at the expense of the many. Licenses greed and creates this kind of global financial crisis so far uncontained. It begs the questions: what caused it and what’s the fallout:
– the ruinous effects of militarization; insane amounts of spending on it; “military Keynesianism;” believing capitalism thrives on foreign wars; “Global Wars on Terrorism” currently; their costs are unsustainable and are heading the nation toward bankruptcy;
– the drain on an already weakened economy;
– maxed out consumers now debt slaves;
– so is government from unrepayable obligations in the tens of trillions; not the fictitious “official” reported numbers;
– the possibility of future default; hyperinflation; national bankruptcy, and the demise of the republic;
– human default as well: mass bankruptcies; home foreclosures; rising unemployment; increased poverty; and growing numbers of families unable to survive;
– the subprime crisis is just part of it; seven million mortgages sold to the unwary; the idea was to criminally defraud them; offer two-year teaser rates; then reset them higher semi-annually based on an interest rate benchmark; payments soared as much as 30% and became unaffordable; the scheme was to cash in at the expense of mortgage holders, and five million risk losing their homes and life savings;
– an “economic Pearl Harbor” for Warren Buffett; for Senator Chris Dodd a “50-state Katrina;” a “house of cards (built on) reckless finance” for author Kevin Phillips; Frankenstein finance; casino capitalism; for most Americans, a human catastrophe;
– the demise of our manufacturing base; letting malls replace factories as the economy’s engine;
– permitting the financialization of the economy; speculative finance writ large; replacing productive investment; totally deregulated; run by fraudsters; free from government oversight; letting investment banks game the system at up to 40 to 1 leverage; until 2004, 12 to 1 was the maximum;
– a government - business conspiracy for global dominance and the single-minded pursuit of profit; unfettered amounts of it through cleverly manipulated schemes; transferring multi-trillions of dollars from workers to the most wealthy; doing it without people even noticing;
– creative destruction to let giant businesses grow larger by removing and devouring smaller ones; even large ones;
– permitting and/or ignoring massive fraud; involving multi-trillions of dollars; the largest ever Ponzi scheme; a calculated crime with media complicity through silence; not reporting a growing problem as it emerged; waiting until it mushroomed and still not explaining it accurately and honestly; and
– wondering won if the best and brightest can fix things or if no amount of money or ingenuity can do it.
The Plan’s Architect - Henry Paulson
From a Nixon administration staff assistant to the assistant secretary of defense. To assistant to key Watergate official John Erlichman. To Goldman Sachs in 1974. To a partnership in the firm in 1982. Then Chief Operation Officer (COO) in 1994 and CEO in 1998 by a palace coup against co-chairman and now New Jersey governor Jon Corzine, according to New York Times columnist Floyd Norris.
Even before the current crisis, Goldman was the preeminent Wall Street firm. A survivor. The largest, and along with Morgan Stanley, the remaining two Street giants left standing. But no longer as investment banks after the Federal Reserve’s September 21 announcement that both companies will become bank holding companies after a mandatory five-day waiting period, now over.
In theory, they’ll be under stricter Fed oversight but will get Fed help to complete their transition and thereafter. As a well-connected financial powerhouse, whatever Goldman wants, Goldman gets. Always in the past by recycling top executives into Democrat and Republican administrations, and now more than ever given Henry Paulson’s extraordinary financial czar powers.
Before his $700 billion giveaway plan, the 2008 Housing and Economic Recovery Act gave him authority to fleece taxpayers by rescuing Fannie Mae and Freddie Mac as well as raise the national debt by over $5 trillion dollars. He also orchestrated the demise of Bear Stearns, Lehman Brothers and Washington Mutual. The forced sale of Merrill Lynch, and arranged the government takeover of AIG.
He has near-open checkbook authority to reward close allies with loans and free money and let them acquire troubled assets on the cheap. This from a man with much responsibility for today’s crisis. A June 12, 2006 Business Week cover story titled “Mr. Risk Goes to Washington” called him “one of the key architects of a more daring Wall Street, where securities firms are taking greater and greater chances in their pursuit of profits.” Such as assuming huge amounts of debt and “placing big bets (with their own money) on all sorts of exotic derivatives and other securities.” Advising clients to do the same. Casino capitalism at up to 40 to one leverage. Hugely profitable in up markets. Disastrous in down ones.
Paulson earned millions and now has an estimated $700 million + net worth. For 2007 overall, according to Bloomberg.com, “Wall Street’s five biggest firms (paid out) a record $39 billion in bonuses (and did it in) a year when three of the companies suffered the worst quarterly losses in their history and shareholders lost more than $80 billion.”
Speculative finance pays well, even in down years, and it even raised Bloomberg’s ire in a Michael Lewis September 24 commentary titled “America Must Rescue the Bonuses at Goldman Sachs.” It reflected on a possible global financial collapse but sacrificing Goldman bonuses is another matter. If firm “employees (take) pay cut(s), it will be (tantamount to failure and) our country may never recover.” How will the company induce new talent to come aboard. Goldman is well-positioned to get maximum gain from its former CEO’s $700 billion handout.
Why else would Warren Buffett bet $5 billion on the firm! For preferred shares paying an annual 10% dividend. Warrants as well to buy $5 billion in common stock at a $115 a share strike price. Well off its $251 peak and below the latest September 26 $138 a share.
Joseph Stiglitz on the Economy
Stiglitz was formerly part of the system he now criticizes. Free market fundamentalism in its most extreme form. For many months, he warned about a worsening global economy and growing financial crisis that’s as bad or worse than the Great Depression.
He sees similar problems now as then:
– outsized speculation through excessive leverage;
– pyramid schemes;
– multiple bubbles through so-called Wall Street innovations; and
– a lack of transparency and government oversight.
Combined they created a crisis “so great that no one knows exactly the magnitude of the risk they face. It is particularly bad because our financial institutions are based on trust. You put money in the bank and you trust that you can get (it) out, so trust is absolutely essential for the functioning of our financial markets and economy.”
The problem is exacerbated by those providing the news. The dominant media and frequent spokespeople. Industry representatives like Lehman Brothers CEO saying last April that “we turned the corner, and the economy is on the uptick.” Also from the president, treasury secretary and others in government as things keep worsening.
Stiglitz calls this a “top down crisis.” The “$3 trillion cost” of foreign wars a key. Creating huge deficits and consuming vital resources needed for growth. “This is the first war in American history that has been totally financed on the credit card. For the last five years….we have been a debt economy.” Not since the Revolutionary War have “we have had to turn to foreigners,” so now “40% of our national debt is financed by (them). Even as we went (to war) we had a big deficit, and yet the president called for tax cuts for upper middle class Americans.” Insane but we did it.
Another factor is other countries trusting that our economy is working well, and when the president says it is he’s believable. “This administration burned that trust….no wonder everybody around the world is losing confidence.” Even worse is that the administration isn’t dealing responsibly with these problems, mostly because they’re of our own making.
Stiglitz worries about the “real economy:” home prices dropping; owners forced into foreclosure; more financial firms in crisis; and a good many won’t survive. He sees a weakening financial system unable or unwilling “to provide credit (the lifeblood of the economy for) loans, mortgages,” and that means lower home prices, contracting businesses, rising unemployment, and a “downward vicious cycle. You have to be in fantasy land to say that everything is fine (or even) that we have turned the corner.” He sees at least another 18 months of pain. Maybe longer. Who can know or how much.
For sure, real economic stimulus is needed. Productive investment. Not the phony “bailout” kind proposed. Aiding state and local governments. Better unemployment insurance and more for infrastructure. Providing a basis for long-term growth. Not feeding markets and starving the hungry, as one writer put it. Not believing markets on their own will fix things.
Understanding that government must intervene. Responsibly. Facilitate job creation. End casino capitalism. Provide incentives for real economic growth. Let foreclosed and threatened homeowners stay in their homes. Work out an equitable way to do it. “We learned a painful lesson in the 1930s and today: The invisible hand often seems invisible because it’s not there.” It led to the kind of predicament now confronting the country. The solutions proposed will just compound it.
Ones that Can Fix It
Good ones not considered. From figures like Dean Baker of the Center for Economic and Policy Research. Others as well with solid advice to:
– make fraudsters eat the bulk of their losses;
– use public funds only “to sustain the orderly operation of the financial system;”
– minimize speculative finance; the root of the current problem;
– “minimize moral hazard” - the Paulson (and Bernanke) “put” picking up where Greenspan left off;
– let delinquent homeowners stay in their homes and pay rent;
– curtail executive compensation for companies getting government aid;
– make a key Fed responsibility the prevention of asset bubbles; reinstitute regulations to do it; Glass-Steagall for starters that prohibited commercial and investment banks and insurance companies from combining;
– impose a modest financial transactions tax to curb excesses and raise revenue;
– trade assets, like credit default swaps, openly on exchanges to establish fair value for them;
– impose strict limits on leverage;
– keep Fannie and Freddie public institutions; their status before being privatized in 1968; and
– restructure the Fed democratically; a far better solution is abolish it and let government control its own money; use it responsibly for all Americans, not just the privileged few.
Other recommendations recognize no quick or easy solutions to problems this great. Economist James Galbraith says borrowers need collateral. A new Home Owners Loan Corporation to rewrite mortgages. Manage rental conversions, and decide what degraded properties should be demolished. Which ones to save and refurbish. Set it up in communities under federal guidelines and do it quickly. Help state and local governments strapped for cash. Reestablish federal revenue sharing. A National Infrastructure Bank making capital available for infrastructure. Put people to work building it. Protect seniors and near-retirees from wealth loss. Extra Social Security, Medicare and Medicaid revenue will help. Get money in the hands of people who’ll spend it.
Address other crucial issues like energy conservation, reconstruction and renewable power. Infrastructure overall. Tuition help for students. Another GI bill. Credit card and mortgage interest rate caps. Rescind anti-consumist laws like the misnamed 2005 Bankruptcy Abuse Prevention and Consumer Protection Act. A boon for credit card companies and other businesses. Unfairly burdensome to the public.
A whole range of other projects and ideas to redirect the economy away from speculative finance and militarism and toward high-return public investment. Do it before it’s too late. Recognize that the present course is unsustainable. Imagine a government working for everyone and not just the privileged few. Imagine it not tolerating fraud and malfeasance.
Instead, Congress agreed to a “bailout” and passed a record $634 billion omnibus spending bill (to run the government through March 6, 2009) to include a record Pentagon budget; $25 billion in low-interest auto industry loans; maybe with no provision for repayment; lifting a quarter-century ban on Atlantic and Pacific off-shore drilling; billions more in earmarked pork; and likely more coming later for the airlines and other endangered companies. Taxpayers for Common Sense criticized the bill at the same time it noted that government “bailout” appropriations will reach about $1.2 trillion with the $700 billion Paulson scheme. Others put the total above $1.5 trillion, and many say it’s only for starters.
Paying “hold-to-maturity” prices compounds the fraud. For securitized assets worth a fraction of full value. Much of it pennies on the dollar, if anything. Trillions of dollars of toxic ones. All sorts of them. Newly invented ones. Structured finance and insurance. Asset-backed securities. Repackaged into marketable pools. Sold to investors. It’s been done for decades but only recently so out of hand. Greed and deregulation created an alphabet soup of levered-up, high-risk securitized assets. Financial alchemy. Largely outright fraud, including:
– collateralized debt obligations (CDOs), including auto loans, credit and corporate debt;
– collateralized (asset-backed home) mortgage obligations (CMOs);
– commercial mortgage-backed securities (CMBS);
– mortgage-backed securities (MBS) and levered loans;
– structured investment vehicles (SIVs);
– special purpose vehicles (SPVs);
– pass-through securities;
– credit and interest rate default swaps;
– commercial paper and more;
– repackaged arcane stuff most people don’t understand; even investors who bought them; like eating a stew with no idea what’s in it; a recipe with no list of ingredients; learning too late it’s toxic and you’re in trouble;
Credit card companies as well from growing amounts of unrepayable credit card debt. The auto industry already assured of a low-interest $25 billion loan (or maybe handout) for starters. Airlines coming next. Select homebuilders and troubled companies called too big to fail. If they’re too big to fail, says one observer, they’re too big to exist.
EESA will give the treasury secretary near-carte blanche powers to conceal fraud and help the fraudsters, including his former company, Goldman Sachs, now in trouble. Pick and choose among others. Which will survive, and what less favored ones will go on the block at fire sale prices or disappear. Today there are 9000 banks in the country. In a decade, half or more of them may be gone.
Economist Michael Hudson calls EESA “cash for trash” and a “giveaway,” not a bailout. A “transfer of wealth to insiders.” A financial coup d’etat. The “largest and most inequitable (kind) since the (19th century) land giveaways to the railroad barons.”
In this case, socializing losses to let fraudsters “sell out all their bad bets.” Junk of all sorts: a stew of securitized assets, bad mortgages, car loans, credit card loans, student loans, anything for insiders stuck with too much of them.
A doomed scheme that will raise the debt level instead of lowering it. Enrich fraudsters with taxpayer funds. Stick the public with toxic junk. Maybe buy time before more people and markets catch on, but, in the end, cripple the economy and erode industrial capitalism with it.
Hudson is justifiably angry given the amount of fraud and deceit. The government-concocted scheme to whitewash it. Reward criminals. Harm most others, and wreck the country at the same time. He says a “kleptocratic class has taken over the economy to replace industrial capitalism….’banksers’ ” for FDR and earlier condemned by Jefferson with this stinging comment:
“I sincerely believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs.”
A half century later Lincoln said:
“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country….corporations (including bankers) have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.”
Lincoln refused to pay bankers usurious rates to finance the Civil War and got Congress to pass the 1862 Legal Tender Act. It empowered the US Treasury to issue “greenbacks” that were interest-free because government printed its own money. When Lincoln was assassinated in 1865, the “Greenback Law” was rescinded. A new national banking act was passed, and the government once again had to pay interest to bankers.
On June 4, 1963, President Kennedy issued executive order (EO) 11110 giving the president authority to issue currency. He ordered the treasury to begin printing “United States (Treasury) Notes” to replace “Federal Reserve Notes.” He began a process to let government control its own money and no longer private bankers under the guise of the Federal Reserve. Months later, Kennedy was assassinated. Once Lyndon Johnson took office, he rescinded EO 11110 and reestablished the current system. More on that below.
The Two Greatest Ever Financial Crimes - Today’s Fraud and the 1913 Federal Reserve Act’s Privatization of Money Creation
Most people think the Federal Reserve is a government agency, subject to its control. It’s sometimes mistakenly called a quasi-governmental decentralized central bank to disguise its real identity and purpose. Its Eccles building headquarters compounds the subterfuge. Below it’s stripped away.
The Federal Reserve is a private for-profit banking cartel. Owned and run by major banks and Wall Street in each of its 12 Districts. It was created and operates in violation of Article 1, Section 8 of the Constitution that states that Congress alone shall have the power to create money and regulate its value. In 1935, the Supreme Court ruled that Congress cannot constitutionally delegate this power to another authority, but, in fact it did.
On December 22, 1913, between 1:30 - 4:30 AM, the Federal Reserve Act was shepherded through a special Congressional Conference Committee. Then voted on and passed the next day. Two days before Christmas with many members gone and most others with no time to read or consider this momentous document.
By enacting this law, Congress and President Woodrow Wilson defrauded the public. Wilson later said (when it was too late to matter) he made a mistake and “unwittingly ruined my country.” This from a man who was an intellect. Trained in the law. A PhD in political science and president of Princeton University in his earlier years.
The Federal Reserve Act gives private bankers the most important of all powers. The one most of all that governments should never relinquish. The authority to print money. Control its supply. Its price through the Fed Funds rate and how it influences the whole yield curve. Loan it out for profit, and charge government interest on its own money. It’s later returned minus operating expenses and a guaranteed 6% profit. Taxpayers foot the bill. An early and continuing example of wealth transfer from the public to powerful bankers. Illegally sanctioned by Congress and the president.
The Fed literally creates money out of nothing. Expands or contracts its supply as it wishes - with no government oversight or control. Gold once backed it until Nixon closed the gold window in August 1971. Suspended dollar convertibility into the metal, and ended compliance with the Bretton Woods core provision. The US dollar became fiat currency. Mere paper. Backed by nothing except the faith of the issuing authority.
Given today’s crisis, that faith is fast eroding and is to blame for dollar weakness. Mostly because of profligate policies by private bankers running the country’s monetary policy for their own gain. The grandest of grand thefts along with today’s all-consuming fraud. Backed by the full faith and credit of the government, and up to now at least, with most people none the wiser.
A Growing Public Response to the Crisis
For how long is the question given growing public anger and people expressing it publicly. It has administration officials worried enough to order what Michel Chossudovsky wrote in his September 26 article titled “Pre-election Militarization of the North American Homeland.”
He cites an Army Times article saying that the 3rd Infantry’s 1st Brigade Combat Team is coming home (in October) from Iraq as (according to the Times) “an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks.” Perhaps with a manufactured incident as pretext. To defend the homeland against ourselves. Be deployed against dissent. Erupting public anger. On city streets like in Denver and St. Paul. Displaying civil disobedience. Defiance against fraud, deceit, illegal foreign wars, and nearly eight intolerable years under George Bush and a complicit Congress. Capped by the current financial crisis touching everyone while government rewards crime and hangs its victims out to dry.
Chossudovsky is blunt about the possibilities. The 3rd Infantry’s 1st Brigade is for combat. It’s not the National Guard or local police. It’s trained for war. “Equipped to kill people” with potent weapons, and a last hurrah scheme may be planned to divert public attention from the financial crisis. A “terrorist” attack with “chemical, biological” or other dangerous weapons. A possible pretext for martial law at a time the administration and Congress are vulnerable. When people are angry about Washington protecting the privileged. Partnering with them in crime. Defrauding the public and stifling dissent. Moving one step closer to tyranny and away from silly notions about democracy. Proving crime indeed does pay and awfully well on Wall Street. “It’s the economy, stupid.” Theirs, not ours. More
Sphere: Related ContentThe International Forecaster
Let’s now take a look at the new financial landscape in the aftermath of the initial carnage of the derivative debacle and credit-crunch. We are left with the Fed as overseer of the Big Four. Who are The Big Four? First, there is JP Morgan Chase, which bagged and tagged Bear Stearns with help from the Fed and Treasury and which just rescued Washington Mutual, preventing the FDIC from being wiped out in by far the biggest bank failure in US history. Next is Bank of America, which went bonzai for toxic waste dumps Merrill Lynch and Countrywide in buyouts that are certain to come back to haunt them. Rounding out the pack are Goldman Sachs and Morgan Stanley, who just became bank holding companies, abandoning their investment bank status for the stability of a commercial bank, but with far less leverage. You can rest assured that Goldie and Morgan will now dump their toxic waste on the Fed through the Term Securities Lending Facilities and will borrow from the Fed like fiends under the other plans of taxpayer largesse provided courtesy of the Fed. More
Boston Globe
Several money market funds are losing money as the $3.5 trillion sector that long had been considered as safe as cash is buffeted by the turmoil on Wall Street. Separately, four mutual fund firms are taking extraordinary steps to calm investor fears and protect customer investments. The companies - Wachovia Corp.’s Evergreen Investments, Bank of America Corp.’s Columbia funds, Ameriprise Financial, and Frank Russell Funds - said they had either injected millions of dollars to shore up their money market funds or were ready to do so. More companies are expected to make similar moves in coming days to compensate for losses from fund investments in the securities of Lehman Brothers Inc. after the financial behemoth filed for bankruptcy protection this week.
The Reserve Primary Fund, a pioneer of money market funds, was the first this week to announce it had reduced the value of its shares to below $1. The fund cut its share value by 3 cents to 97 cents, which means a loss for investors, unthinkable for funds that were long regarded as safe havens. Only once before, in 1994, did a money market fund “break the buck,” as the industry calls it. The Reserve, which runs the fund, then announced two more of its funds were also losing money. One more fund, the Colorado Diversified Trust, which holds investments for schools and government in that state, also saw the value of its assets fall below $1 a share, according to the rating service Standard & Poor’s.
Of the four, only Reserve Primary is a traditional money market fund. For example, one of the Reserve funds is an “enhanced-cash” product, which can make riskier investments. “This is the real human cost of allowing Lehman to fail. There’s a ripple effect,” said Don Phillips, managing director of Morningstar Inc., the Chicago mutual fund tracking firm. Although money funds are not insured by the federal government as bank deposits are, investment analysts and fund companies said there is no need for worry. “I’m certainly not thinking I need to move my money out of a money market fund and into a mattress,” said Phillips. Wall Street investors have pumped a record $1 trillion into money funds since the summer of 2007, following a collapse of the subprime mortgage market and a slowdown in housing. The bankruptcy filing from Lehman, which had an enormous portfolio of securities backed by subprime loans, was one in a series of financial upheavals this week that included an $85 billion government bailout of insurance giant American International Group and yesterday’s 449-point stock market plunge.
But some ordinary investors, who have watched some of the nation’s largest financial institutions fall like dominoes, were terrified. “It’s Armageddon,” said Gokmen Kilincarslan of Westport. The 27-year-old said he transferred money from his money market account to a bank savings account yesterday. His money is now “safer,” he said, “but I still don’t feel confident.” More
Sphere: Related ContentIlargi
The Automatic Earth
Banks can now get loans through the Fed’s newly enhanced “permanent emergency” credit windows, and pose as collateral equities (stocks) and even your deposits. Yes, you heard that right. That is the condition underlying Bank of America’s purchase of Merrill Lynch. BoA can -and will- use the money in your bank account to continue Merrill’s activities, the same ones that led to Lehman’s death: securitization, swaps and derivatives.
That is one frightening development. And so, for that matter, is accepting stocks for T-bills. What if those stocks plunge, as so many are doing lately? What if companies go bankrupt? In the end, through the Treasury, it’s once again the taxpayer who’s going to be presented with the bill.
You would think that the central banks and Treasuries in the world would see the light and the signs on the wall, and refrain from putting even more of the people’s money at risk. You need to think again.
Central banks today are pumping credit like mad into the markets. Like all similar actions in the past two years, it will not save anything, or make any difference other than that the system gets to roll on for a few more months. The system cannot be saved, but it can still suck more profits out of the public purse. If this is not perverse, I don’t know what is. More
Sphere: Related ContentThe Market Ticker
Lehman Brothers has gone down and Bank America has forcibly swallowed Merrill Lynch. Forced by The Fed, one assumes - they surmised (correctly) that come Monday shorts would attack Merrill immediately and in force, thrusting them to the bottom of the pool if they did not first insure that they couldn’t be attacked. So a deal was brokered, and now we have gone from five investment banks to two, with the count decreasing by fifty percent in one day. That’s right - Morgan Stanley and Goldman Sachs are all that’s left, and they won’t last long. Say good-bye to the last pieces of the Depression-era legislation that prohibited the co-mingling of investment and commercial banking, the hard way.
ALL investment and commercial banking is now in the hands of a very small number of institutions, with the key players being JP Morgan and Bank of America. This is not a good thing folks. Not at all. At the same time The Fed orchestrated this they also announced that the “23A Exemptions” that limit to 10% the “passthrough” financing to affiliates was being “temporarily suspended” on a blanket basis. In addition, The Fed has announced that it will take equities as collateral for loans. “Equities” is a fancy name for stocks. That’s right - for the first time in history, now banks can take stocks to the discount window. Maybe even their own stocks. The Fed has gone from taking only the highest-quality securities - “AAA” rated debt instruments - to taking everything up to and including the most dangerous (common stock) all at once!
…this effectively makes The Fed a margin lender on the equity markets! You think they don’t have a reason to interfere in the market eh? Oh boy, now they have billions of reasons, all of them sitting on their balance sheet! Fair and open markets? Bah! Note carefully folks - this effectively makes The Fed LONG (that is, a “buyer”) of STOCKS. What’s even better is that they don’t eat their own losses if there are any - they’re yours! That’s because The Federal Reserve Act says that the profits (or losses) from The Fed flow through to the Treasury (after operating expenses) which means that now, suddenly The Federal Government is potentially directly exposed to losses in the stock market!
Now it has always been true that The Government “loses” when the market goes to hell as it gets less in the way of tax receipts. But that’s different than suffering an actual capital loss - and that is now possible. You think you’ve seen “intervention” in the stock market in the past? Bah! You’ve seen nothing yet; now we have The Fed going entirely outside of the boundaries of The Federal Reserve Act and literally making things up as they go along. More
Sphere: Related ContentNEW YORK (Reuters) - Bank of America Corp, the largest U.S. retail bank, said on Thursday that it has received subpoenas and requests for information from federal and state government agencies over auction-rate securities. The Charlotte, North Carolina-based bank also said it has received subpoenas, interrogatories or civil investigative demands from a number of state attorneys general regarding municipal derivatives transactions from 1992 to the present. Bank of America said it is cooperating on both matters. Separately, the bank said Countrywide Financial Corp, the mortgage lending giant it acquired last month, has responded to subpoenas from the U.S. Securities and Exchange Commission, and that the agency is conducting a formal investigation.
Sphere: Related ContentSAN DIEGO (Reuters)
San Diego’s city attorney said on Wednesday he filed a lawsuit against Bank of America Corp and its Countrywide unit to prevent the mortgage lenders from foreclosing on homes in the city, which he aims to make a “foreclosure sanctuary.” City Attorney Michael Aguirre plans to file similar lawsuits against Washington Mutual Inc, Wells Fargo & Co and Wachovia Corp in an effort to make the lenders negotiate with mortgage borrowers facing foreclosure. “We would like to see San Diego become a foreclosure sanctuary,” Aguirre said. Housing markets across Southern California, including the city of San Diego and the county of the same name, are seeing steep increases in foreclosure rates because so many homes bought there earlier this decade involved subprime mortgages and other types of risky loans. More
Oppenheimer analyst Meredith Whitney cut the North Carolina-based bank to “underperform,” blaming too-rosy valuations on the bank’s mortgage assets. She called the outlook “bleak” for shareholders. Basically, the bank’s current path means losses are rising as assets are shrinking, and as Whitney titled her report, “Shrinking to Grow Historically Doesn’t End Well for Financials.” She says on-balance-sheet loans will drop by 5 percent by year-end and warns that “in this very real scenario, expenses simply cannot come down fast enough, seriously jeopardizing [Wachovia Bank’s] ability to grow earnings.” She predicts losses at the bank in 2008 and 2009. Wachovia shares have lost three quarters of their value this year, falling 10 percent so far today.
It’s not just Wachovia. Banks, Whitney says, are still too optimistic about the severity of the drop in home prices. She says Wachovia, the worst of the bunch, is still operating on the assumption that home prices will drop just 12.9 percent because that’s what Office of Federal Housing Enterprise Oversight data are telling them. The problem is that almost nobody is using OFHEO numbers as a benchmark. Data from the Case-Shiller index show prices could fall by a third from peak to trough (they’re off 15 percent already). Whitney says Bank of America, JPMorgan Chase, and Citigroup look as if they’re expecting less severe declines as well. The result? Investors will keep selling until the banks “get real” about the value of the assets on their books. More
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