NightBlogger

Our economy didn’t melt down, it was taken down the unbridled greed of economic elites, enabled by their political courtesans in Washington.

Jim Hightower
What the hell’s happening here? Why is my bank in the tank? And my house and job? And my retirement money? Even my state’s teetering on the brink of broke! Who did this to us? Fair questions, but we’re not getting honest answers. Last year, at the first signs of the global financial slide toward the abyss, we were told that it’s just a little hiccup caused by something called subprime mortgages. Not to worry, the Powers That Be declared confidently, for we have the damage contained. And rest assured that “the fundamentals of our economy are sound.”

Then, this spring, Bear Stearns cratered, requiring an emergency federal subsidy to cover billions in bad loans. Okay, admitted those in charge, that subprime stuff actually is leveraged on up the financial system, and maybe there’s been a bit of greed among a few of the big players, but we really do have the problem contained now, and, hey, “the fundamentals of our economy are sound.”

But in September–Omigosh!–there went Lehman Brothers, Freddie Mac and Fannie Mae, AIG, Merrill Lynch, Goldman Sachs, Citigroup, WaMu, Wachovia, and others. Well, yes, conceded the now-frazzled financial establishment, but gollies, we’re throwing hundreds of billions of your tax dollars into sandbags to contain the problem, and remember: “The fundamentals of our economy are sound.”

In October, the contagion rolled through Britain, Canada, and Europe; it spread to Brazil and across to China and Japan; and–Holy Schmoly–suddenly all of Iceland was melting in bankruptcy! Stay calm, cried an openly panicked chorus of Washington officials, for we’re holding some big summit meetings soon and consulting our Ouija boards, and…uh…ah…um…y’all just keep clinging to the thought that “the fundamentals of our economy are sound.”

Let’s meet some of the illusionists who are directly responsible for hurling you, me, America, and most of the world into this dark and as-yet unplumbed economic hole. More

Joshua Frank
Dissident Voice
Tuesday’s celebration hangovers have finally started to wear off, and the pieces are beginning to fall into place. Change will be coming to Washington in January, but it is difficult to decipher what form it will take. Early clues, however, suggest that Barack Obama’s administration will prove unlikely to alter the fundamental political machinery that has led us into war and economic turmoil. Below is a brief summary of Obama’s potential choices for a few key roles in his administration.

Chief of Staff

Obama’s key White House position will go to Rep. Rahm Emanuel of Illinois. While Emanuel knows his way around the corridors of Washington, qualifying him in the traditional sense, this alone doesn’t mean he’s the guy you want drawing up Obama’s policy papers day after day.

For starters, Emanuel is a shameless neoliberal with close ties to the Democratic Leadership Council (DLC), even co-authoring a strategy book with DLC president Bruce Reed. Without Emanuel, Bill Clinton would not have been able to thrust NAFTA down the throats of environmentalists and labor in the mid-1990s. Over the course of his career, Emanuel’s made it a point to cozy up to big business, making him one of the most effective corporate fundraisers in the Democratic Party. He’s also a staunch advocate of Israel’s occupation of Palestinian territories.

Emanuel’s shinning moment came in 2006 as he helped funnel money and poured ground support into the offices of dozens of conservative Democrats, expanding his party’s control of the House of Representatives. Emanuel, who supports the War on Terror, and expanding our presence in Afghanistan, worked hard to ensure that a Democratic House majority would not alter the course of US military objectives in the Middle East.

In short, Rahm Emanuel is not only a poor choice for Obama’s Chief of Staff; he’s one of the least progressive picks he could have made. While he may have decent views on abortion, tax policy, and social security, Emanuel’s broader vision is more of the same: war and corporate dominance.

Treasury Secretary

For arguably the most important position Obama will be appointing, the President-Elect may pick well-regarded economist Paul Volcker, former chairman of the Federal Reserve under Jimmy Carter and Ronald Reagan. Volker is one of Obama’s closest economic advisors and is thought to be the top-choice for the position of Treasury Secretary.

During the late 1970s and early 1980s, Volker, in an attempt to cut inflation, dramatically raised interest rates, which helped the elite maintain value in their assets but strangled the working class as credit dried up.

In his book, A Brief History of Neoliberalism, David Harvey writes that Volker personified one of the key facets of the neoliberal era.

“[Volker] engineered a draconian shift in U.S. monetary policy. The long-standing commitment in the U.S. liberal democratic state to the principles of the New Deal, which meant broadly Keynesian fiscal and monetary policies with full employment as a key objective, was abandoned in favour of a policy designed to quell inflation no matter what the consequences might be for employment. The real rate of interest, which had often been negative during the double-digit inflationary surge of the 1970s, was rendered positive by fiat of the Federal Reserve. The nominal rate of interest was raised overnight … Thus began ‘a long deep recession that would empty factories and break unions in the U.S. and drive detour countries to the brink of insolvency, beginning a long-era of structural insolvency’. The Volker shock, as it has since come to be known, has to be interpreted as a necessary but not sufficient condition of neoliberalism.”

In supporting Henry Paulson’s bailout package, Volker would not re-regulate the banks nor provide more power to shareholders, he’s simply carry on one facet of neoliberalism: tightening federal budgets which inevitably will put great budgetary pressure on federal agencies.

Another potential pick for the post is Robert Rubin, who served under Clinton in the same position and is currently Director and Senior Counselor of Citigroup. Rubin played a key role in abetting another neoliberal objective: deregulation. Where Volker was hung up on economic austerity, Rubin pushed for more deregulatory policies that ended up shifting jobs, and entire industries, overseas.

Rubin even pushed for Clinton’s dismantling of Glass-Steagall, testifying that deregulating the banking industry would be good for capital gains, as well as Main Street. “[The] banking industry is fundamentally different from what it was two decades ago, let alone in 1933,” Rubin testified before the House Committee on Banking and Financial Services in May of 1995.

“[Glass-Steagall could] conceivably impede safety and soundness by limiting revenue diversification,” Rubin argued.

While the industry saw much deregulation over the years preceding these events, the Gramm-Leach-Biley Act of 1999, which eliminated Glass-Steagall, extended and ratified changes that had been enacted with previous legislation. Ultimately, the repeal of the New Deal era protection allowed commercial lenders like Rubin’s Citigroup to underwrite and trade instruments like mortgage backed securities along with collateralized debt and established structured investment vehicles (SIVs), which purchased these securities. In short, as the lines were blurred among investment banks, commercial banks and insurance companies, when one industry fell, others could too.

Robert Rubin is in part responsible for supporting the policies that pushed us to the brink of a great recession. When the subprime mortgage crisis hit, instability and collapse spread across numerous industries.

Another name that is in the hunt for the top spot is Lawrence Summers, who served during the last 18 months of the Clinton administration. Summers is greatly responsible for expanding Rubinomics and is credited by many for the collapse in the derivatives market, which later imploded the housing market.

Defense Secretary

While Obama’s choice for this important role is speculative, quite a few fingers are pointing to Richard Holbrooke. After Gerald Ford’s loss and Jimmy Carter’s ascendance into the White House in 1976, Indonesia, which invaded East Timor and slaughtered 200,000 indigenous Timorese years earlier, requested additional arms to continue its brutal occupation, even though there was a supposed ban on arms trades to Suharto’s government. It was Carter’s appointee to the Department of State’s Bureau of East Asian and Pacific Affairs, Richard Holbrooke, who authorized additional arms shipments to Indonesia during this supposed blockade. Many scholars have noted that this was the period when the Indonesian suppression of the Timorese reached genocidal levels.

During his testimony before Congress in February 1978, Benedict Anderson of Cornell University cited a report that proved there never was a United States arms ban, and that during the period of the alleged ban; the US initiated new offers of military weaponry to the Indonesians at Holbrooke’s request.

Over the years Holbrooke, who is philosophically aligned with Paul Wolfowitz and other neoconservatives, has worked vigorously to keep his bloody campaign silent. Holbrooke described the motivations behind his support of Indonesia’s genocidal actions:

“The situation in East Timor is one of the number of very important concerns of the United States in Indonesia. Indonesia, with a population of 150 million people, is the fifth largest nation in the world, is a moderate member of the Non-Aligned Movement, is an important oil producer — which plays a moderate role within OPEC — and occupies a strategic position astride the sea lanes between the Pacific and Indian Oceans … We highly value our cooperative relationship with Indonesia.”

Other foreign policy advisers may also include the likes of Madeline Albright, the great supporter of Iraq sanctions, which killed hundreds of thousands of innocent people. Madeline Albright, when asked by Leslie Stahl of 60 Minutes about the deaths caused by U.N. sanctions, infamously condoned the deaths. “I think this is a very hard choice,” she said. “But the price–we think the price is worth it.”

Samantha Power, cheerleader for humanitarian intervention, also has Obama’s ear and may even entice him to put U.S. forces in Darfur.

“With very few exceptions, the Save Darfur campaign has drawn a single lesson from Rwanda: the problem was the US failure to intervene to stop the genocide. Rwanda is the guilt that America must expiate, and to do so it must be ready to intervene, for good and against evil, even globally. That lesson is inscribed at the heart of Samantha of Power’s book, A Problem from Hell: America and the Age of Genocide. But it is the wrong lesson,” writes author Mahmood Mamdani in the London Review of Books.

As Mamdani continues:

“What the humanitarian intervention lobby fails to see is that the US did intervene in Rwanda, through a proxy … Instead of using its resources and influence to bring about a political solution to the civil war, and then strengthen it, the US signalled to one of the parties that it could pursue victory with impunity. This unilateralism was part of what led to the disaster, and that is the real lesson of Rwanda … Applied to Darfur and Sudan, it is sobering. It means recognising that Darfur is not yet another Rwanda. Nurturing hopes of an external military intervention among those in the insurgency who aspire to victory and reinforcing the fears of those in the counter-insurgency who see it as a prelude to defeat are precisely the ways to ensure that it becomes a Rwanda.”

Other names in the running include John Kerry, who as many know, ran an antiwar campaign for president in 2004. A full supporter of the War on Terror, with a hard-line on Iran, Kerry would certainly not alter the U.S. relationship in the Middle East.

Regarding the Department of Defense, it looks as if Robert Gates will still control the top spot, with no alterations made to the DoD or its inflated budget.

The Next Step

While the election of Barack Obama is a blow to George W. Bush-Republicanism and a gain for racial equality in this country, it is in many ways only a symbolic victory. The future of the U.S.’s foreign and economic agenda will continue to be saturated with ideologies and individuals that are directly responsible for our current predicament, both in the Middle East and domestically.

Celebrating the end of the ugly Bush era is one thing. Celebrating the continuation of their policies with a different administration in the White House is quite another. With these prospective appointments, Obama seems to be moving backwards to Clintontime. This may be sufficient change for some, but it’s far from a progressive push toward social, economic, and environmental justice.

For significant change to happen, the kind that is needed in order to mend the wounds of the Bush years, we have to put down our Obama signs and force Congress and the new administration to end the wars in the Middle East, and push for regulating the financial industry while providing true universal health-care and economic safety-nets for all Americans.

Given the make up of his potential advisors, we’re in for a long uphill battle. So let’s drop our illusions and start organizing, beginning with a discussion of what “organizing” even means in today’s political climate.

Naomi Klein
In the final days of the election, many Republicans seem to have given up the fight for power. But don’t be fooled: that doesn’t mean they are relaxing. If you want to see real Republican elbow grease, check out the energy going into chucking great chunks of the $700 billion bailout out the door. At a recent Senate Banking Committee hearing, Republican Senator Bob Corker was fixated on this task, and with a clear deadline in mind: inauguration. “How much of it do you think may be actually spent by January 20 or so?” Corker asked Neel Kashkari, the 35-year-old former banker in charge of the bailout.

When European colonialists realized that they had no choice but to hand over power to the indigenous citizens, they would often turn their attention to stripping the local treasury of its gold and grabbing valuable livestock. If they were really nasty, like the Portuguese in Mozambique in the mid-1970s, they poured concrete down the elevator shafts. Nothing so barbaric for the Bush gang. Rather than open plunder, it prefers bureaucratic instruments, such as “distressed asset” auctions and the “equity purchase program.” But make no mistake: the goal is the same as it was for the defeated Portuguese—a final frantic looting of the public wealth before they hand over the keys to the safe.

How else to make sense of the bizarre decisions that have governed the allocation of the bailout money? When the Bush administration announced it would be injecting $250 billion into America’s banks in exchange for equity, the plan was widely referred to as “partial nationalization”—a radical measure required to get the banks lending again. Treasury Secretary Henry Paulson had seen the light, we were told, and was now following the lead of British Prime Minister Gordon Brown.

In fact, there has been no nationalization, partial or otherwise. American taxpayers have gained no meaningful control over the banks, which is why the banks are free to spend the new money as they wish. At Morgan Stanley, it looks like much of the windfall will cover this year’s bonus pool. Citigroup has been hinting it will use its newfound $25 billion buying other banks, while John Thain, the chief executive of Merrill Lynch, told analysts that “At least for the next quarter, it’s just going to be a cushion.” The U.S. government, meanwhile, is reduced to pleading with the banks that they at least spend a portion of the taxpayer windfall for loans – officially, the reason for the entire program.

What, then, is the real purpose of the bailout? My fear is this rush of deal making is something much more ambitious than a one-off gift to big business; that the Bush version of “partial nationalization” is rigged to turn the U.S. Treasury into a bottomless cash machine for the banks for years to come. Remember, the main concern among big market players, particularly banks, is not the lack of credit but their battered share prices. Investors have lost confidence in the honesty of the big financial players, and with good reason.

This is where Treasury’s equity pays off big time. By purchasing stakes in these financial institutions, Treasury is sending a signal to the market that they are a safe bet. Why safe? Not because their level of risk has been accurately assessed at last. Not because they have renounced the kind of exotic financial instruments and outrageous leverage rates that created the crisis. Rather, because the market will now be banking on the fact that the U.S. government won’t let these particular companies fail. If they get themselves into trouble, investors will now assume that the government will keep finding more cash to bail them out, since allowing them to go down would mean losing the initial equity investments, many of them in the billions. (Just look at the insurance giant AIG, which had already gone back to taxpayers for a top-up and seems set to ask for a third.)

This tethering of the public interest to private companies is the real purpose of the bailout plan: Paulson is handing all the companies that are admitted to the program—a number potentially in the thousands—an implicit Treasury Department guarantee. To skittish investors looking for safe places to park their money, these equity deals will be even more comforting than a Triple-A rating from Moody’s.

Insurance like that is priceless. But for the banks, the best part is that the government is paying them to accept its seal of approval. For taxpayers, on the other hand, this entire plan is extremely risky, and may well cost significantly more than Paulson’s original idea of buying up $700 billion in toxic debts. Now taxpayers aren’t just on the hook for the debts but, arguably, for the fate of every corporation that sells them equity.

Interestingly, Fannie Mae and Freddie Mac both enjoyed this kind of unspoken guarantee before the mortgage giants were nationalized at the start of this crisis. For decades the market understood that, since these private players were enmeshed with the government, Uncle Sam could be counted on to always save the day. It was, as many have pointed out, the worst of all worlds. Not only were profits privatized while risks were socialized but the implicit government backing created powerful incentives for reckless business practices.

Now, with the new equity purchase program, Paulson has taken the discredited Fannie and Freddie model and applied it to a huge swath of the private banking industry. And once again, there is no reason to shy away from risky bets—especially since Treasury has made no such demands of the banks. (Treasury, apparently, does not want to “micromanage.”)

To further boost market confidence, the federal government has also unveiled unlimited public guarantees for many bank deposit accounts. Oh, and as if this wasn’t enough, Treasury has been encouraging the banks to manically merge with one another, ensuring that the only institutions left standing will be “too big to fail,” thereby guaranteed of a bailout. In three different ways, the market is being told loud and clear that Washington will not allow the country’s financial institutions to bear the consequences of their behavior, no matter how reckless. This may well be Bush’s most creative innovation: no-risk capitalism.

There is a glimmer of hope. In answer to Senator Corker’s question, Treasury is indeed having trouble dispersing the bailout funds. So far it has requested about $350 billion of the $700 billion, but most of this hasn’t yet made it out the door. Meanwhile, every day it becomes clearer that the bailout was sold to the public on false pretenses. Clearly, it was never really about getting loans flowing. It was always about doing what it is doing: turning the state into a giant insurance agency for Wall Street—a safety net for the people who need it least, subsidized by the people who will most need state protections in the economic storms ahead.

This duplicity is a political opportunity. Whoever wins the election on November 4 will have enormous moral authority. It should be used to call for a freeze on the dispersal of bailout funds—not after the inauguration, but right away. All deals should be renegotiated immediately, this time with the public getting the guarantees.

It is risky, of course, to interrupt the bailout process. The market won’t like it. Nothing could be riskier, however, than allowing the Bush gang their parting gift to big business—the gift that will keep on taking.

PAM 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

Adrian Salbuchi
Carolynbaker.net
The crisis affecting the global financial system based on parasitic speculation and usury is a terminal crisis. It can no longer be solved through purely financial and monetary mechanisms and measures. If US authorities only concentrate on this type of measure, then a truly serious collapse is imminent and unavoidable.

A more pragmatic view of the global and US power structures, however, indicates that the US will not just stand by whilst this occurs, allowing the demise of the US as a global superpower. The US will not just turn-off the lights, and go home as the Soviet Nomenklatura did in the early nineties. No sir. They’re gonna put up a hell of fight! And that is a problem for all the peoples of the world, as well as for the people of the United States themselves. In this sense, we envision several scenarios out of which we have singled out three clearly defined scenarios which must no doubt have their respective alternative action plans to address this growing crises:

Plan A (i.e., addressing a relatively low intensity crisis through basically financial measures) -

This envisions continuing on-going negotiations between the FED, Treasury Dept., Congress, major bankers, European and Asian central bankers seeking further measures to stop further black-holes and bank failures, lobbying for further u$s 700 billion bail-out plans to be wrenched out of Congress and elsewhere. This will serve to control the crisis in the days and weeks to come by helping banks in trouble, including medium-sized banks anf foreign banks operating in the US (e.g. your HSBC’s, Barclays’, Deutsche Bank’s and others), and most important, the remaining major Mega-banks like Goldman Sachs, Morgan Stanley, JPMorgan Chase and CitiGroup. The immediate effect of this will be that there will be drastic and far-reaching crisis management through financial and monetary measures. At the same time, new rules of the game will be dealt in Wall Street and Washington. The practical result will be massive transference of wealth away from small investors, pension funds, small stockholders, etc., and into the hands of the usual cabal of bankers, institutional investors, speculators and financial parasites.

Plan B (i.e., addressing a medium intensity crisis through financial and monetary measures) -

If Congress does not approve the [another] bail-out plan, or significantly limits it, or even if Congress does approves it, it were to prove insufficient in the days and weeks to come with a further spate of major banking and insurance company failures, then the US Government - i.e., the Fed and Treasury Dept. - might very well declare a “National Economic Emergency” and introduce a totally new currency.

No, not the “Amero” which is a smoke-screen rumor, but rather something far more straight to the point: a “New Dollar” which, contrary to the present devalued dollar, would be Gold-backed, however not by just any gold: it will be 9999 proof gold bullion, with some sort of 100% fool-proof security factor - e.g., either an embedded chip or hologram that will transform it into “Global Reserve Gold”, or financially “sacred” gold - that will have a value maybe ten times higher than normal “profane” Gold. At the same time, an extended banking holiday will be declared in order to implement the change of currency (just as happened in Argentina several times in recent history, notably when former president Alfonsín introduced the “Austral” to replace the highly devalued peso).

Transition to the new currency will be at terms highly beneficial for those banks, companies, citizens, allies and other “preferred allies and friends” of the US who will get One New Dollar for each “old” dollar. Then, certain powerful holders of dollar-denominated instruments - cash, US Treasury Bills and Bonds, and the like - will be given some preferential treatment based on specific US geopolitical and geoeconomic interests such as, for example, the governments and interests of the European Union, Japan, maybe China, and specific institutions and global corporations who will be able to change their old dollars for New Dollars at acceptable rates of exchange, say 2, 3 or 4 old dollars for every New Dollar.

For the rest of dollar-holders - i.e., vast numbers of private investors in all parts of the world in countries in Latin America, Central Europe, the Muslim World, Africa, etc. - the US Government will simply say that their respective local markets will need to determine how many old dollars will buy a New Dollar, and that this will be governed by the market forces of supply and demand. We will then see currency traders of all shapes and sizes offering One New Dollar for every 8, 10, or 20 old dollars in the hands of desperate masses of people trying to get rid of those creased green-backed bits of paper of falling value.(5)

The immediate effect of this would be to further spread the socializing of US banking losses into emerging markets and weaker economies outside of the United States (i.e., New Dollar would allow the bankers to selectively export the US currency’s inflationary erosion towards specific regions and segments of the world).

Plan C (i.e., addressing a high intensity crisis through geopolitical and military measures) -

If the US authorities cannot resolve the crisis with financial, monetary and economic measures, and increasing internal social violence and political insecurity were to affect the US and its key allies, then the crisis will go into geopolitical and military mode. If an extended banking holiday is forced upon the Bush administration, freezing banking accounts, deposits, ATM machines (just like the “Corralito” - i.e., the “baby play pen” - that Argentina suffered starting 1st December 2001 generating unimaginable hardship to our country), this may later lead to trying to resolve the problem on a the international geopolitical stage by “kicking the chessboard”.

This means escalating the overall conflict to political, diplomatic and military planes, fueling a generalized global war which New World Order planners seem to believe will allow them to use vast resources for war, placing the focus away from the on-going financial crisis. This will lead to imposing strict limitations on all civil liberties in the US and elsewhere, and even suspending the Constitution (We Argentines certainly know a lot about that too!).

“National Security” will be the blanket excuse at a time of grave internal emergency, and will be used to justify unilateral invasions of countries and regions in different parts of the world. In short, mobilizing the country and its allies in its material resources, whilst the collective psyche is coaxed on the need to “defend” the country against some elusive “enemy” (new or old terrorist organization suitably demonized). One of the results that would be sought would be to re-stabilize the economy and financial system gearing it on a re-intensified military-industrial complex where the US has an unmatched position - foreign wars are always good to steer attention away from domestic troubles.

The immediate effect of this would very likely consist of a unilateral military attack on Iran with the excuse of destroying its nuclear program , that would probably be triggered by a unilateral Israeli attack on Iran’s nuclear facilities once they get a green light from Washington. This would quickly bring the US into the war with incalculable consequences. Worse still, we may see a carefully orchestrated False Flag mega-attack (i.e., an attack organized or prompted by the New World Order power structures themselves, designed to put the blame on Iran or Islamic organizations, or whatever, so that it can be used as an excuse for a unilateral attack against Iran, Syria and elsewhere).

Such a False-Flag attack might take place on American soil or against US interests anywhere in the world, or those of key US allies, and would make 9/11 look like a mere bonfire in comparison. The New World Order media would ensure that global public opinion believe that Iran in particular, and the Muslim world as a whole, are responsible for such an attack and thus justify a whole series of “counter-attacks”, invasions and wars. No doubt, Russia would also become involved recking havoc throughout Central Europe thus weakening the European Union.

A generalized war in the Middle East would be sufficient excuse to pass legislation to free up oil reserves in Alaska, justify invading Venezuela’s oil fields, militarize the South Atlantic continental platform in the Brazilian and Argentine maritime regions where gigantic oil reserves lie untapped and where the US Navy’s IVth Fleet is already roaming, amongst many other things. China, India and Pakistan will no doubt have important roles to play and if tactical nuclear artifacts are used, then this would turn into a veritable nuclear world war which no one knows how it will continue and end.

This summary merely sets out some information, patterns and conclusions which help stress the extremely grave times all Mankind is presently living under. Its result will deeply affect the whole world. We offer these ideas as a sort of initial exercise in Global Risk Management, hoping that it will serve as a starting point to promote better and greater strategic planning exercises amongst public and private organizations in Argentina and elsewhere.

Even though Argentina’s very mediocre ruling class - both in Government and in the so-called “Opposition” - hardly understand nor fathom the true significance of what is taking place in the world, the truth is that this crisis opens incredible new vistas for Argentina and our region. We would have the opportunity of making an unprecedented Quantum Leap, however in order to take advantage of these opportunities, we need to fully comprehend how the New World Order power structures actually work, in what refers to their political, economic, financial and monetary dynamics, objectives and methods. We strive that Argentine public opinion should begin to understand all of this as quickly as possible; hence the urgency of the matter.

Either way, the days and weeks to come will be very transcendental for all Mankind. Let us all be very alert…More

The fight over control of Wachovia intensified Saturday, as a judge temporarily agreed to block the sale of the bank by Wells Fargo, Citigroup announced in a news release. State Supreme Court Justice Charles Ramos issued the order blocking the sale of Wachovia Corp., which Wells Fargo & Co. had agreed to purchase in a $14.8 billion deal. Citigroup Inc. accused Wells Fargo of trying to cut off its earlier takeover offer of Wachovia’s banking operations for $2.1 billion in a deal struck with the assistance of the Federal Deposit Insurance Corp. On Friday, four days after that deal was struck, Wells Fargo said it was buying Wachovia. More

Citigroup and Wells Fargo were locked in a bidding war on Sunday over a possible emergency takeover of the Wachovia Corporation, people involved in the talks said. The intense negotiations come as concern grew about Wachovia’s stability on Friday, these people said, despite a breakthrough reached Sunday by congressional negotiators on a $700 billion bailout for the financial system. The government, led by the Federal Reserve and Treasury Department, has been involved in the talks as well, these people said. But so far, the government is resisting pressure to help bidders by guaranteeing a part of Wachovia’s assets the way it did for Bear Stearns when it was sold to JPMorgan Chase in March. The government has also opposed taking over Wachovia the way it did Washington Mutual earlier this week, these people said, unless its financial position deteriorates more rapidly. More

mineweb.com, RENO, NV -
Citigroup asserts that gold will benefit from both the “gloom & doom” and “muddle-through & monetization” scenarios, possibly regaining $1,000 per ounce at year-end and even doubling or tripling in the long term. “Frankly, we’re surprised, that gold is not already at $2,000 an ounce,” declared Citigroup analysts John H. Hill and Graham Wark. In an analysis published Wednesday, Hill and Wark suggested, “Gold appears to be entering a powerful new phrase of investment demand tied to safe-haven and monetization themes.” “We have been surprised that gold has been so heretofore quiet, and have expected a much strong and more immediate response to the government takeover of GSE [Government Sponsored Enterprises]/mortgage insurance entities, and broker-deal bankruptcies,” they wrote.

“It is notable that hard-core goldbugs have been proven correct in the decade-long contention that an overwhelmingly vast and complex pool of nested financial derivates would ultimately result in cascading defaults and ruin for major portions of the banking system. Frankly, we’re surprised that gold is not already at $2,000 per ounce.” “Our sense is that gold has been temporarily depressed by a series of ephemeral, short-term trading dynamics that served to mask strong physical off-take in what is ultimately a tiny market,” the analysts said. “We continue to regard as a barometer in the grand battle between hard assets and paper assets.” More

CNNMoney.com
…shares of most big banks plunge again as investors brace for a bigger financial shakeout. As the government reportedly tries to broker a buyer for Washington Mutual, shares of WaMu and other banking and finance firms continued to spiral downward Wednesday. WaMu fell 11% in midday trading on reports that federal regulators were trying to organize a buyout for the battered bank. Shares of other big commercial banks, including Citigroup and Wachovia, all tumbled more than 10% as well. And the nation’s top two investment banks were hit particularly hard: Morgan Stanley plunged 38% and Goldman Sachs plummeted 23%. More

Source: Forbes.com
Citigroup and Bank of New York Mellon are trustees to $138 billion of Lehman Brothers’ bonds, the biggest on the list of unsecured creditors, according to a petition filed in New York bankruptcy court on Monday. Banks are trying to calm employees and clients in the wake of Lehman’s bankruptcy filing Monday. which is also reeling from exposure to mortgage securities and rising loan losses, said in a memorandum Monday by CEO Vikram Pandit that the firm had strong liquidity and capital positions. Pandit also wants to motivate them to focus on business. “It is important that we maintain our unrelenting focus on the needs and concerns of our clients and shareholders,” Pandit said in the memo. “We are confident about the future despite a very challenging time.” Citi also had a $275 million bank line out to Lehman (nyse: LEH - news - people ), according to the bankruptcy filing. Bank of New York Mellon is exposed to $17 billion of bond debt.

Source: The Angry Bear
Nouriel Roubini
It is now clear that we are again – as we were in mid- March at the time of the Bear Stearns collapse – an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer.

Let me elaborate in much detail on these issues…

This bail-in of investors is the opposite of a bailout of investors like the one that was done in the case of Bear Stearns and Fannie and Freddie. It is thus akin to the bail-in of investors that was done in the case of LTCM in the summer of 1998 and the bail-in of the interbank creditors of Korean banks in the winter of 1997. I wrote in 2004 with Brad Setser an entire book titled “Bailouts versus Bailins: Responding to Financial Crises in Emerging Markets” that discusses these policy tradeoffs in financial crises where you have runs on the liquid liabilities of either illiquid and/or insolvent countries. Those were the international equivalent of the banks runs and financial crises that we are now seeing in the cases of Bear Stearns, Lehman and Fannie and Freddie.

Since government bailouts put at risk public money and create moral hazard Treasury and the Fed decided that they need to draw a line somewhere after the bailouts of Bear Stearns creditors, of Fannie and Freddie and all the other actions aimed at backstopping the financial system. These actions have included the creation of the TAF, TSLF, PDCF, the use of the FHLBs to provide liquidity to distressed mortgage lenders, the provision of Treasury liquidity to the FHLBs, the outright purchase of agency MBS by the Treasury, the swapping of two thirds of the safe Treasuries of the Fed for toxic illiquid securities of banks and non banks, etc. So after having created the mother of all moral hazard with their actions (including the biggest bailout of all, i.e. the rescue of Fannie and Freddie) the Fed and Treasury are playing a chicken game with the financial system. Tim Geithner told clearly to the heads of all the major Wall Street firms that if they pull the plug on Lehman and Lehman collapses they are next in line for a run on their institutions. So if a buyer for Lehman is not found (or even if it is found and the counterparty lines are still pulled) not only Lehman will collapse but the run will extend to all of the other major broker dealers and banks that are the counterparties of Lehman.

The Fed may delude itself in thinking – as its stress models suggest – that the systemic risk of a collapse of Lehman are less serious than those of Bear Stearns: afterall Lehman is less involved into CDSs than Bear was and now both Lehman and the other major broker dealers have access to the discount window with the PDCF. A collapse of Lehman instead will have as much of a systemic effect as the collapse of Bear for many reasons: Lehman is larger than Bear was; Lehman is a major player in a variety of key financial markets; all the other major Wall Street institutions are interconnected with Lehman in dozens of different types of counterparty activities; the PDCF support of the Fed is neither unlimited nor unconditional, i.e. investors cannot assume that Lehman or any other broker dealer can borrow unlimited amounts with no conditions from the discount window. Thus, a collapse of Lehman would trigger a panic and a potential run on all sort of other broker dealers and also on other distressed financial institutions like banks (WaMu) and insurance companies (AIG) and smaller member of the shadow financial system (distressed and highly leveraged hedge funds, etc.).

The reason why Lehman is having a hard time to find a buyer is that it is most likely insolvent. If you had to mark to market the value of it illiquid and toxic assets (the $40 billion of commercial real estate assets, its remaining residential MBS and CDOs, its holdings of real estate private equity funds) Lehman is most likely insolvent (i.e. has negative net worth with liabilities well above its impaired assets). So leaving aside the potential and now dubious value of its franchise (an option to the value of a much slimmed down financial institution) no financial institution should be paying even a single penny to buy an insolvent firm. That is why all the potential suitors of Lehman (such as Bank of America and others) are waiting for the government to provide another sleazy Bear Stearns deal where the government would buy at higher than market value the toxic assets of Lehman (the commercial real estate assets for example) so as to make the net worth of the remaining institution positive and worth buying. But such action – borderline illegal in the case of Bear as pointed out by Paul Volcker – would be a scandal in the case of Lehman and severely exacerbate the moral hazard problem.

But here lies the conundrum of this Lehman crisis: no one seems to want to buy for a positive price Lehman unless there is a public subsidy (taking off their toxic assets off the firms’ balance sheet). The government cannot afford to provide the subsidy as the moral hazard problems are becoming severe. But then if on Monday no deal is done Lehman collapses and goes into Chapter 11 court and you have the beginning of a systemic financial meltdown as the run on the other broker dealers will start. Thus, what Fed and Treasury are trying to do this weekend is another 1998 LTCM bailin or Korea 1997 bailin, i.e. trying to convince all the major institutions to either support a purchase of Lehman or maintain their exposure to Lehman if no buyers is found. Can this bail-in work? It is not clear as there is a major collective action problem: you can’t only convince half a dozen major Wall Street firms to maintain their exposure to Lehman. You need also to convince all the other counterparties of Lehman (including the hedge funds and the other broker dealers and banks) not to roll off their claims and credit to Lehman. This is a much more messy collective action problem and coordination game than in the case of LTCM and Korea where the number of involved counterparties was more limited (less than 20 in each case).

Paulson and Bernanke and Geithner (the troika managing this financial crisis) have all made public statements in the last few month to the necessity of finding an orderly way to close down – rather than bailout – a major and systemically important non bank financial institutions: the embarrassment and losses for the Fed that the bailout of the creditors of Bear led made it paramount to avoid another Bear like bailout. That is why they are now playing tough with Lehman and its creditors. But in this game of chicken the Fed and the Treasury may end up being the ones to blink. Faced with the risk of a generalized run on the other broker dealers they may decide that greasing again a deal for the purchase of Lehman may be less costly and less risky than testing whether the system can orderly work out a collapse of Lehman (something that is highly uncertain). Even in the case of the Bank of America purchase of Countrywide such public subsidy was significant (the FHLB of Atlanta lent to Countrywide over $50 billion and Bank of America has most likely received plenty of tacit forbearance from the Fed to support its takeover of an insolvent Countrywide). So implicitly or explicitly the Fed and the Treasury may decide – however reckless and moral hazard laden that choice may be – to provide some explicit or implicit subsidy to a private purchase of Lehman.

The trouble is that, in spite of all public statements regarding the need to provide an orderly demise of large broker dealers, the Fed and the Treasury have done nothing to create such insolvency regime for such broker dealers. So the only option for Lehman – if a buyer is not found - will be the one of ending up in Chapter 11 and trigger massive losses on its counterparties that will in turn trigger a run on such counterparties.

In February of 2008 I predicted – in my “12 Steps to a Financial Disaster” – that one or two major broker dealers would go bankrupt. A month later Bear Stearns went bust and the collapse of the other ones was avoided for a time by the most radical change in monetary policy since the Great Depression, i.e. the creation of the PDCF that extended the lender of last resort (LOLR) role of the Fed to non-bank systemically important broker dealers (i.e. all of the bank and non bank primary dealers of the Fed).

I next argued in June that such action would not prevent a run on other broker dealers such Lehman as to avoid a run you need both deposit insurance and unlimited and unconditional access to the Fed LOLR support. I also discussed why Lehman was next in line for a collapse and why the PDCF would not prevent a run on Lehman.

I also argued in follow-up pieces that, in a matter of two years, no one of the remaining independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs) would survive as: 1. their business model is now impaired (securitization is semi-dead); 2. they will need to be regulated like banks given the PDCF support and thus have lower leverage, higher liquidity and more capital that will erode their profitability; 3. Their severe maturity mismatch – borrowing very short term and liquid, leveraging a lot and lending and investing in more long term and illiquid ways – makes them very fragile – in the absence of deposit insurance and in the presence of only limited LOLR support by a central bank – to bank like run that are destructive even of illiquid but otherwise solvent institutions. Thus all such broker dealers need to merge with larger financial institutions that have a commercial banking arm and thus access to stable and insured deposits and to true LOLR Fed support. That process of unraveling of independent broker dealers started with Bear Stearns; now it is moved to Lehman; tomorrow Merrill Lynch will be on line; and Morgan Stanley and Goldman Sachs will be next. No one of them can and will survive as independent entities. So, the Fed and Treasury should advise them all to start finding a large international partner (international as almost no domestic partner is now sound to take them over) and merge with such partner before we get another Bear or Lehman disaster.

The step by step, ad hoc and non-holistic approach of Fed and Treasury to crisis management has been a failure so far as plugging and filling one hole at the time is useless when the entire system of levies is collapsing in the perfect financial storm of the century. A much more radical, holistic and systemic approach to crisis management is now necessary.

What we are facing now if the beginning of the unraveling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank like runs; but unlike banks they are not properly regulated and supervised, they don’t have access to deposit insurance and don’t have access to the lender of last resort support of the central bank (with now only a small group of them having access to the limited and conditional and thus fragile support of the Fed). So no wonder that this shadow banking system is now collapsing. The entire conduits/SIV system has already collapsed with the roll-off of their ABCP financing; next is the collapse of the broker dealers (Bear, Lehman and soon enough the other ones) that rely mostly on unstable overnight repos and other very short term funding for their financing; next will be hundreds of poorly managed hedge funds that will face a tsunami of redemptions; and finally runs on money market funds that are not supported by a large financial institutions or other smaller member of the shadow banking system as well as highly leveraged and distressed private equity funds cannot be ruled out either.

This is indeed the most severe financial crisis since the Great Depression and occurring at a time when the US is falling in a now severe consumer led recession. The vicious interaction between a systemic financial and banking crisis and a severe economic contraction will get much worse before there is any bottom to it. We are only in the third inning of a nine innings economic and financial crisis. And the only light at the end of the tunnel is the one of the incoming train wreck.

New York Times
Several possibilities began to emerge as top Wall Street executives met under the guidance of the Federal Reserve and Treasury Department. One would involve major banks and securities firms providing a financial backstop to facilitate a sale of Lehman. Another option would involve an agreement among Wall Street players to keep trading with Lehman as the bank seeks an orderly liquidation. Those briefed on the talks said the situation was still fluid and other options could emerge.

Adding urgency to the discussions were growing concerns that other big financial institutions like the insurance giant American International Group and Merrill Lynch might face a similar crisis and also need billions of dollars in capital to strengthen their businesses. The spreading troubles were the latest sign that even the government’s extraordinary interventions into private enterprise during the last year have not been enough to halt the unraveling of the financial system.

As the trading week ended, top officials from the Federal Reserve and the Treasury Department called an emergency meeting in Lower Manhattan with the heads of major Wall Street firms to insist that they find a way to rescue Lehman because their own companies might be next. The meetings, which involved top executives from Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup and other financial companies, continued on Saturday. More

Money.aol.com
The evidence that sales at many companies are struggling and that employment will suffer are almost everywhere. Several large companies will almost have to cut employment. Most are industries which are already in trouble. This is the 24/7 Wall St. list of companies that will have to cut jobs, probably over 10,000 in each case, to make ends meet or improve earnings between now and the end of 2008.
Sears
Citigroup
Washington Mutual
Rite Aid
AT&T
Circuit City
The Gap
Merck
AIG
More

Accused Of Fraudulent Securities Sales, Financial Giant Cuts Settlement Deal With Regulators

Citigroup Inc. will buy back more than $7 billion in auction-rate securities and pay $100 million in fines as part of settlements with federal and state regulators announced Thursday. Citigroup will buy back the securities from tens of thousands of investors nationwide under separate accords with the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and other state regulators. The buybacks will have to be completed by November. More

MISH’S
Global Economic
Karl Denninger wrote a scathing attack of Paulson’s maneuver in Now We Know - There WAS A Threat. My thoughts on the so-called “confidence building measures” of this scheme follow.

* How can anyone have confidence in the markets when the Fed, the SEC, or the Treasury Department has to intervene on a weekly basis?

* How can anyone have any confidence in earnings statements when level 3, market to fantasy assets rise every quarter?

* How can anyone have confidence in banks when Citigroup Holds $1.1 Trillion in Mysterious Off Balance Sheet Assets?

* How can anyone have any confidence when the FASB Postpones Off-Balance-Sheet Rules for a Year, at Citigroup’s request, because “It’s not practical” to implement the rules now. (Please see Not Practical To Tell The Truth for more on this story).

* How can anyone gave confidence in financial institutions when Deleveraging Risk Is High And Growing At Lehman and other broker dealers?

* How can anyone have any confidence in banks when there are 25 Rock Solid Reasons To Believe The Banking System Is Unsound.

* How can taxpayers have any confidence when Congress acts in the best interest of Fannie Mae executives, investors like Bill Gross who bet on a taxpayer funded bailout, and China, rather than the best interests of taxpayers and innocent citizens that had nothing to do with this housing mess?

* How can anyone have confidence in the system if there is even the remotest possibility that the US financial system was held hostage by China? More

Source: (Fortune) — The credit crisis is far from over, star analyst Meredith Whitney tells Fortune magazine in its upcoming issue. Whitney, who audaciously - and correctly - predicted last October that Citigroup (C, Fortune 500) would have to cut its dividend, tells the magazine that banks in general today are still facing much bigger credit losses than what they’ve reported so far. The Oppenheimer & Co. analyst warned last year - and continues to warn today - that the “incestuous” relationship between the banks and the credit-rating agencies during the real estate bubble will have a long-lasting impact on banks’ ability to recover.

For years the ratings agencies, which are paid by the issuers of bonds, gave high marks to securities backed by subprime mortgages. Many of those bonds, of course, turned out to be anything but safe. With Moody’s (MCO) and Standard & Poor’s (MHP, Fortune 500) now trying to make up for past wrongs, the pace of downgrades on mortgage securities is quickening. This is a problem, because every time their portfolios are hit by significant credit downgrades, banks are forced to improve their capital ratios. Often that means issuing reams of new stock, which leads to serious dilution, as shareholders at Citi, Merrill Lynch (MER, Fortune 500), and Washington Mutual (WM, Fortune 500) now know.

“You’re going to have this stealth pressure on bank balance sheets until you start to see the ratio of downgrades to upgrades change,” Whitney tells the magazine. (This is an excerpt from “The Woman Who Called Wall Street’s Meltdown and What She Sees Next” in the August 18 issue of Fortune. Read the complete story.) Whitney’s bearishness has deep roots. In fact, she was the first analyst to sound the alarm loudly about subprime mortgages, predicting back in October 2005 that there would be “unprecedented credit losses” for subprime lenders. The problem, as she saw it, was that loose lending standards and the proliferation of teaser-rate mortgage products had artificially inflated the U.S. home-ownership rate.

A lot of the new homeowners were in over their heads, she believed, and would have trouble making their monthly payments when home prices started to fall and their teaser rates got bumped up. Whitney’s current concern is that banks aren’t slashing costs and cutting losses in their loan portfolios fast enough. On the cost side, she says, banks have yet to come to terms with the disappearance of the securitization market, which she believes will stay in hibernation for the next three years. Why does this matter? From 2001 through 2005, for every dollar of bank capital used to make mortgage loans, ten were supplied via investors in mortgage securities. All that secondary-market capital is now sidelined, but the staffing levels of bank lending departments don’t yet reflect it.

By Whitney’s reckoning, banks have laid off about 7% of their employees; she thinks the cuts need to reach 25%. She also argues that banks need to “get real” about how they’re valuing their problem mortgage-related debt, much as Merrill Lynch has now done. Merrill recently sold a large package of toxic mortgage debt for just 22 cents on the dollar. Whitney’s idea of “real” is pretty drastic. Whereas most banks are estimating 20% to 25% peak-to-trough declines in housing prices, the Case-Shiller housing futures traded on the Chicago Mercantile Exchange portend a much steeper 33% decline, she points out.

In fact, Whitney thinks the actual declines will be worse - closer to 40% - because of the loss of the securitization market and the paucity of mortgage credit available. And that means more defaults: “The consumer’s ability to refinance his way out of trouble has diminished greatly.” Whitney’s critics, and there are many among bankers and analysts, contend her bearishness at this point shows she simply doesn’t now how to measure the remaining downside risk. Her response: If she has no idea how to properly value bank stocks now, it’s because the metrics don’t work. Price-to-earnings ratios are useless when earnings are nonexistent. And valuing banks on price-to-book ratios is just as futile. Those book values - which reflect underlying assets and liabilities - are moving targets.

“Citibank has lost 50% of its book value since last year,” says Whitney, who is married to pro wrestler John Layfield. “I do not think we are near the end of write-downs,” she tells Fortune, “so I continue to see capital levels going lower, capital raises diluting existing shares further, and stocks going lower.”

The battered financials have been using every known spell of witchcraft to get a bounce before crashing into ultimate supports, and they finally fell upon a one-two punch to squeeze the shorts out. First the SEC declared that it would selectively enforce naked short selling protection on 19 of the Chosen Ones, including Citigroup, followed by a daily rotation of members reporting earnings that “beat the street by a penny.” Today the baton was passed from the noble JPMorgan to ever-majestic Citigroup, who could do no better than lose $2.5B, eat write-downs of $7B in investment banking and lose an additional $7.2B to credit-related costs. More

Citigroup Inc may write down about $8 billion in the third quarter from its exposure to collateralized debt obligations (CDOs) after Merrill Lynch & Co agreed to sell its CDOs at a sharp discount, Deutsche Bank analyst Mike Mayo said. The analyst also forecast a third-quarter loss and widened his 2008 loss estimate for Citigroup, the largest U.S. bank by assets. More

Nicholas von Hoffman
Source: The Nation
Our disfunctional financial system hit a new low last week when Citigroup, the hopeless wreck of Wall Street, announced it had lost $2.5 billion in the past three months — a cheer went up, and so did the Dow. Only $2.5 billion; people were afraid the losses would be much higher. Happy days are here again. There are no happy days for the millions of Americans who have been trying to put away some money for their retirement in tax-sheltered entities like IRAs, Roth Accounts and 401(k)s. For them, the market’s downward slope has been harrowing and frightening. When will the steady erosion of their savings end? And when it does, what will be left of their future financial security?

Many of the millions suffering through these worrisome months didn’t buy a house they could not afford, didn’t speculate on their homes, didn’t let greedy impulses lead them to the edge of foreclosure or bankruptcy. Nevertheless, the excesses of their neighbors and the criminal folly of American finance is destroying their plans for retirement. It is dragging down much of the value of their homes, on which they have never missed a payment, homes on which they were counting on selling at retirement to help finance their last years in comfort. For years, the privatization propagandists have been telling people that when the time comes, Social Security will not be there for them. Now many are learning that it’s their private savings that may not be there. They are discovering they have been forced into a system in which other people have, in effect, been allowed to gamble with their retirement savings and have lost it.

The way the private, you’re-on-your-own retirement system was supposed to work had individuals, during their younger, working years, investing in stock through tax-sheltered accounts. Almost nobody who is not breaking the law can choose among individual stocks and make money, so future retirees have been encouraged to buy mutual funds run by professional managers, who are supposed to be able to pick the winners. Most of them aren’t much better at doing that than are their customers, but in a rising market, a chicken pecking at stock tables can pick winners. In boom times, it doesn’t matter that the future retiree must choose among thousands of mutual funds, many of which carry ruinously high fees. The damage to people’s savings goes unnoticed until the market begins to go down.

Even as the market falls, future retirees are told not to panic, to keep their money where it is, because in the long run the value of their accounts will go up and they will have many a happy sunset year traveling the globe and showering their grandchildren with presents. As the retirement date comes near, they are advised to begin selling stocks and buying fixed-income securities — as bonds are sometimes called — because these pay the interest they earn on a fixed schedule, providing a regular income. For this to work, stock prices must be high when the holdings are sold and the bonds purchased must pay high rates of interest. But what happens when the stock market is in a nosedive and interest rates are half of the inflation rate, as is the case right now? Panic and worry, no golden years of travel, no presents for the grandchildren. The energy that was to be expended on leisure activities is spent instead trying to figure out how to make ends meet.

The bright spot is Social Security. That check does come with the regularity of the calendar, whether the market is up or down, whether interest rates be high or low and if, as is the case now, the Greenspan-Bush inflation is destroying family budgets. Social Security adjusts for the rising prices. But Social Security is too narrow a ledge to stand on through the years between retirement and death. It was designed as the base on which other retirement savings were to be built. Those savings — the house and the tax-sheltered retirement accounts — are shriveling up and blowing away. The persons for whom Americans’ savings have been a reliable source of income are the brokers, the lawyers, the account administrators, the whole tribe of Wall Street fee farmers. They get other people’s retirement money regardless of the direction the market may be moving in. You can’t call it a broken system because it was a bad one from the start. It is failing, just as its critics said it would. And what lies ahead for those whose retirement savings are gone may be a very unpleasant old age.

MISH
Reuters is reporting WaMu has $3.33 bln loss, may be cut to “junk”. It is now time to explore the implications of the desperate deal that Washington Mutual made with TPG. Please consider Lack of Transparency = Shareholders Get Ratcheted. Following are a few highlights from the above lengthy, but well written article. I condensed this down as best as I can but inquiring minds will definitely want to read the entire article.

Even though hundreds of billions of dollars of capital have been raised by the financial sector over the past several months, which of the investors in a financial institution have made money since their initial investment? Answer: Zero.

We can’t think of one. They are all underwater. When Abu Dhabi first invested $7.5 billion in Citigroup last November, Citi’s stock was $35. Subsequently, when Citi did their $14.5 billion raise in January, the stock was trading at $30. Today Citigroup’s stock is under $20… and it keeps falling. Merrill Lynch did a combined raise of $12.8 billion in December and January at $48. Now the stock is under $35… and also falling. Warburg Pinkus made their now infamous $1 billion investment in MBIA at $31 per share. MBIA has fallen over 80% since and is now trading at under $5 per share.

Those who participated in Ambac’s $1.5 billion rights issue in March are down a similar amount, 80%, as the stock now hovers under $2. Bank of America made their initial investment in Countrywide Financial last August at $18 per share (rather surprising to us, given that Countrywide looked to be going bankrupt if BofA didn’t come to the rescue). Bank of America subsequently made a takeover offer in January. Today Countrywide shares can be got for under $5 per share.

TPG invested in Washington Mutual to the tune of $7 billion at $8.75 per share, a substantial discount at the time to WaMu’s stock price of $13. Today WaMu’s stock is $6. Last month AIG raised $20 billion when their stock was trading at $37 per share. Today AIG stock is just above $30 per share. Even those who participated in Lehman Brothers’ $6 billion equity offering last week at $28 per share are already underwater, with LEH currently trading below $24 (year-to-date Lehman’s stock is down over 60%).

Ironically, thanks to full ratchet provisions, this promises to lead to further dilution and even weaker stock performance going forward.

There were at least some smart investors who noted the downward trend and successfully negotiated for downside protection. We know of at least two cases (though there are doubtless others); namely, Merrill Lynch’s $12.8 billion investment from Temasek (the Singapore sovereign wealth fund) and Washington Mutual’s $7 billion raise from TPG (a private equity firm).

Quite unbeknownst to the general public at the time, downside protection was built into these equity raises to protect these investors. They are called “look back” provisions or “full ratchet” compensation.

We believe it is more accurate to call them “death spiral” securities. They work as follows. The investors in the equity raise would have their investment “protected” by a provision which states that should the bank afterwards raise money at a lower price than what they paid, these investors would be compensated retroactively by having their initial investment priced at this lower price, thereby being issued new shares for free. It doesn’t take a mathematician to see how these provisions can result in massive dilution should the bank subsequently raise even a paltry amount of capital. A new offering will trigger a lower price because of the dilution it would cause, which would trigger even more dilution because of the lower price, which would then trigger an even lower price because of the even higher dilution, etc. This is why we call such securities a death spiral.

However, unless the bank goes bankrupt, these investors can’t lose. And we already know to what lengths the Fed will go to prevent a banking bankruptcy. It’s heads I win, tails I win.

They can even short the stock in the expectation that it will go down and still not lose. At the next financing, which is sure to come, they will be made whole… even making money on the short!

More

The bad news buyers were all over Wachovia (WB) today. The stock was about 10% down at one point is now about 10% up. The market is apparently cheering the dividend cut and job cuts. Bank of America (BAC), the second biggest US bank is up another 7% at one point today after reporting yesterday it may not guarantee $38.1 billion of Countrywide Financial Corp.’s debt after taking over the mortgage lender. “There is no assurance that any such debt would be redeemed, assumed or guaranteed,” the bank said in an April 30 regulatory filing.

The short squeeze in Fannie Mae (FNM) and Freddie Mac (FRE) may be over although both are significantly higher than the morning lows. What is American Express (AXP) going to do for an encore? Wachovia (WB)? Citigroup (C)? Washington Mutual (WM)? Lehman (LEH)? Wells Fargo (WFC)?

Wells Fargo “beat the street” last week only because it made a policy change to write off home equity loans after 180 days instead of 120 days? What’s next Wells Fargo, 210 days? Wachovia now effectively has no dividend. Can it go negative? Citigroup wants to sell $500 billion in assets. To who? At what price? Other than eliminating its dividend inquiring minds are asking “Then what?” Every company above is already hiding ever increasing amounts of garbage in level 3 “marked to fantasy” assets. Will investors overlook this forever? More