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

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John Sakowicz
Bohemian.com
How prime brokers paved the way for the biggest bank heist in history
Movies by Werner Herzog, Rainer Werner Fassbinder, Margarethe von Trotta, Volker Schlöndorff, Wim Wenders–you know the genre. Their movies are difficult and dense. Mostly, they are horrid. I hate these movies, but have never forgotten one. I make the comparison because Wall Street, like German New Wave cinema, has always featured heroes with impossible dreams or people with unique talents in obscure fields. And like German New Wave, the obsessiveness of Wall Street’s main characters has also always taken the place of plot. The plan of Wall Street’s hot shots has always been that there is no plan. People are on their own. God is absent. Truth is elastic. The important thing is to keep on pushing.

In the lives of these characters, whether from German New Wave or Wall Street, a lot is improvised. For both groups, life is lived in the theater of the ridiculous. In the Wall Street version, that materializes in statements such as “I am ridiculously rich” or “I am ridiculously lucky.” It’s generally the opposite for characters in German New Wave. In German New Wave movies, chickens often stand in for people. It’s too painful to watch a German New Wave movie without a little existential comic relief every now and then, and the directors know it. There are long shots of chickens on the beach, buried up to their necks in sand, as the tide comes in. Shots of dancing chickens. Hypnotized chickens. Cannibalistic chickens. Dwarves throwing chickens. Chickens talking to themselves. Chickens jumping off of cliffs.

Lately, the chickens have come home to roost on Wall Street. And like German New Wave cinema, the stories coming out of Wall Street this year are touched by the ridiculous, but more fundamentally Wagnerian in scope, influenced by operatic themes. Themes like character, ambition, greed, scandal, disgrace, bankruptcy, ignominy, shame and even justice. Yes, justice.

Bear Stearns Bust

On Thursday, June 19, the FBI made its first big bust since last summer’s subprime mess, the first big bust since the housing and credit crises that followed the subprime mess pushed our country into a recession. Hooray for the FBI. They busted hundreds of housing developers, mortgage lenders and brokers, lawyers, real estate agents and appraisers across the country, while two hedge fund managers on Wall Street were arrested in a separate but related case. (Incidentally, those two guys were referred to, but not named, in our May 28 article, “Secrets and Lies,” about Bear Stearns.)

FBI director Robert Mueller was quick to congratulate himself. “This dragnet operation is an example of our unified commitment to address a significant crime problem,” he told reporters. “The FBI will continue to direct its investigative and analytic resources toward the mortgage fraud and corporate securities fraud that threaten our nation’s economy.” Nice start, Bob.

The fact that the investigation is ongoing underscores that the problems on Wall Street are not isolated to even a few hundred bad apples. “These arrests make it clear that the causes of our credit problems are very broad-based and can’t be put at the feet of any one player,” Mark Zandi of Moody’s said at the same press conference. “It makes it clear that everyone was involved to one degree or another–from lender to investment banker to hedge fund manager–all the way from the bottom to the top.” You forgot to mention someone, Mr. Zandi. You too, director Mueller.

Prime brokers. The new masters of the universe. Among all their colleagues on Wall Street, it is the prime brokers who dream the most impossible dreams and who have the most unique talents in the most obscure fields. If Werner Herzog were to make a movie about Wall Street today, he would be looking into the face of the prime broker. I’m reading from a possible movie review: “The face of the prime broker has the quality of a dream–at once vivid, but vague; easy to touch, but beyond reach; at once scary like science fiction and ethereally lovely like a fantasy. It is a beautiful face, reflected in the eerie blue of a computer screen, but in the end, it is the last face you will see before the market crashes.”

So who are they, these prime brokers? These guys who print the new money in the shadow banking system? These guys who live for all that is unregulated and opaque? First of all, they are not regular people. “They are professional madmen,” said Warren Buffet in his famous 2005 speech to shareholders at Berkshire Hathaway. Except for Warren Buffet, nobody spoke up. Since Buffet’s speech, billions and billions of dollars, perhaps a trillion, were stashed in offshore accounts, as Wall Street managed its own fortune. (It’s a myth that Wall Street manages the fortunes of its clients. It does not. It serves itself the cake. We’re lucky if a few crumbs fall off the plate.) Let’s now break this silence, and with it the omerta of prime brokerage.

‘Unspoken Terror’

It all started innocently enough, generically enough. In the beginning, through the 1980s and ’90s, prime brokers were the guys at big investment banks like UBS, Morgan Stanley, Merrill Lynch, Goldman Sachs, Bear Stearns, Lehman Brothers, etc., who supported the nascent hedge fund industry with basic services. A hedge fund start-up–and there were thousands of them back in the ’80s and ’90s, as many as 8,000 at one time–usually bought a basic package from a prime broker. The core services in the package included global custody (clearing, custody and asset servicing; no problem, all plain vanilla); securities lending (especially for what’s called “naked short sales,” which is illegal); financing (facilitating the crazy extreme leverage at hedge funds, sometimes as high as 40-to-1); customized technology (providing hedge funds with reporting necessary to value positions and risk; this is where things started to get funky); and operational support (prime brokers became the hedge fund’s primary operations contact with all other members of the broker-dealer community, and oh, did this invite abuse).

It is easy to see how young hedge funds became so dependent on prime brokers. Prime brokers served as incubators for hedge fund hatchlings that were proliferating like so many baby chicks at a Tyson chicken farm. In addition to all the above services, prime brokers also provided what is quaintly called “value-added” services in the hedge fund industry, including capital introduction (introductions to the prime broker’s institutional clients and other possible investors, a blatant conflict of interest but nobody in Congress cared); office space leasing and services (read: free or discounted office space, replete with staff and support–a bribe for business? you bet); risk management advisory services (prime brokers advising hedge funds on the very same junk bonds they secretly wanted to dump on them); and something ambiguously called “consulting services” (often focused on how hedge funds could circumvent established regulatory requirements, usually by domiciling operations beyond the jurisdiction of U.S. law).

It got worse after 2000.

Introduce swaps and derivatives into the mix. Yeah, baby. Things suddenly got really interesting. Preserving the integrity of the balance sheet at hedge funds got thrown out the window as swaps and derivatives grew, including the exponential growth of something called “synthetic positions.”

“Synthetic” means fake, bogus, fixed, fraudulent. It’s that simple. Add to synthetic positions the liquidity of the first years of our decade as Alan Greenspan brought interest rates down to almost nothing, and you get the picture. In one year alone, from 2005 to 2006, the market for credit default swaps, just one product, grew from $12.4 trillion to $26 trillion.

Most markets are a zero-sum game, meaning there are an equal number of winners and losers. For every dollar someone makes, someone else loses a dollar. Prime brokers changed all that. Because prime brokers never lost. Prime brokers acting as the hedge fund industry’s only interface with the world (see “operational support,” above) were able to create a shadow banking system where the counterparties to any hedge fund’s trades were unknown, even to the hedge fund. Add to that opaqueness a lack of infrastructure where a lot of trades are unconfirmed or delayed, and there are the makings for greatest bank heist in history.

While the Federal Reserve Bank has since 1996 published reports on these obvious problems, it wasn’t until September 2005 that the Fed addressed what was termed the “unspoken terror” of settlement issues among prime brokers. Funny that it took two more years before Congress noticed. All it took to get their attention were last summer’s subprime mess, the blow-up at Bear Stearns and a country plunged into a recession.

Shadow Masters

Dreamers and those with unique talents in obscure fields are the folks who built the shadow banking system. They are the prime brokers. Like actors in a Werner Herzog movie, they inhabit a strange new world, one as big as the traditional banking system or bigger, but where there are no federally insured deposits and where shadow banks neither have nor want–or even need–access to short-term borrowing from the Fed or any other central bank during times of crisis. It’s a world where no risk is too great, where collateral isn’t necessary, where there are no capital requirements and where counterparties are never identified. Shadow banks are beyond the reach of law, are almost always found offshore and redefine the term “international crime organization.” Indeed, because shadow banks always make money, they would even profit from the collapse of the global financial system. They might even cause it to happen.

Prime brokers have been the new masters, no question about it. But their primacy may finally be threatened. “This bright new financial system–for all its talented participants, for all its rich rewards–has failed the test of the market place,” said Paul Volker, former president of the Federal Reserve, during a speech I attended in April. “It adds up to a clarion call for reform.” Two months later, at a press conference where I was also present, Timothy Geithner, president of the Federal Reserve Bank of New York, answered that call.

“The structure of the financial system changed radically during the boom, with dramatic growth outside the traditional banking system,” Geithner warned in his speech, adding that unregulated growth in opaque assets made the last crisis difficult to manage and could make a future crisis impossible to manage. And two weeks before the FBI busted those two guys at Bear Stearns, U.S. Treasury Secretary Henry Paulson said the Federal Reserve should “be allowed to collect information from large complex financial institutions.” He said, “Regulators should have a clear path toward figuring out how to intervene in a crisis and how to close a failed brokerage firm.”

Sounds like Paulson is expecting more trouble. If this were a New Wave German film instead of the banal horror of real life, someone would figure out that it must be time to pull out the chickens.
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John Sakowicz is a Sonoma County investor who was a cofounder of a multibillion-dollar offshore hedge fund, Battle Mountain Research Group. Arianna Carisella contributed research to this article.

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Jim Willie
Golden Jackass.com
Listen to Jim Willie speak his mind on the death throes of the U.S. Dollar with the economy on life-support. Click

What is pushing the USDollar up cannot be construed as anything remotely resembling healthy factors. In no way whatsoever does it resemble investment. It is more like paid off death contracts, paid off death investments, paid off transfers from toxic US bonds into what are falsely regarded as safer US bonds with a guarantee from a crippled USGovt. Foreign financial entities are liquidating on massive scale. They need a tremendous amount of USDollars in order to complete transactions. Also, a tremendous amount of USDollars are needed for CDSwap payouts as defaulted bonds are resolved. Almost all CDSwap and other credit derivatives are paid out in USDollars. The Lehman Brothers payout was full of lies, again. The Lehman Brothers total volume of corporate bonds was $160 billion, but $400 billion existed in total CDS volume tied to them! It is no surprise that the Dow and S&P500 stock indexes fell hard (by almost 400 points on Dow) and on the Lehman resolution day. And market mavens boasted of no impact on the Lehman funeral date!

The DTCC (Depository Trust & Clearing Corp) reported only a net $5.2 billion payout on the Lehman Brothers failure CDSwap resolution. The ‘Dis-Trust Clearing Corp’ might want to check credit derivative experts who claim between $220 billion and $270 billion in that total after netting. By the way, the DTCC is the official banking entity that oversees all stock clearing overnight, including all the naked shorting. The de-leveraging process has left the central bankers empty handed, exposed as having empty financial cupboards. Thus the need for massive central bank swaps from the USFed, which has perversely farmed out its function to foreigners. In fact, the foreign central banks might be in possession of more US$ inventory items than the USFed. So the US central bank has asked foreign central banks to do its job, and to manage the world reserve currency? This amidst a US$ rally!?!

The Credit Default Swaps are capable of burning Hiroshima holes all over the US financial system, resulting in USEconomic implosion from eliminated bank and financial system structures almost entirely. The process has only begun, but in darkness. The other purpose for big bailouts was to prevent CDSwap explosions, risking a string of bombs to go off. The key aspect of CDSwap contracts is their hidden nature, with fuses intersecting in the dark.

When the market mavens talk about the de-leverage process, they refer to speculative investments being liquidated. Oftentimes, they do not include in the story how Wall Street firms, desperate to stave off bankruptcy, are targeting viciously their own clients. The big accounts lie in hedge funds, where the private wealthy are being decimated. Credit is being pulled. Margin calls are being delivered. Margin ratios are being raised. Those funds whose positions are aligned with the predators on Wall Street continue in their investment portfolios. Those funds in opposition are attacked with artillery, carpet bombs, and early morning raids. The USDollar is rallying amidst this type of sinister liquidation. The result has been numerous spread trades anchored by the USTreasury Bond are forced into sale. That means a USTBond buyback occurs from the short cover on the trade. Whether a spread on mortgage bonds, corporate bonds, emerging market bonds, or crude oil, or gold, the trade is liquidated, and a USTBond is bought back. NO TANGIBLE END DEMAND, ONLY USTREASRY BOND SHORT COVERS. This is the basis for a US$ rally?

WORSENING US$ FUNDAMENTALS

How many times have we seen the US stock market go down, non-government bond yields rise, the USDollar rise, and the USTBond yields fall? That has been the norm in the last few weeks. These are death signals, not investment signals. The USEconomy cannot afford liquidation and constricted credit, a well-known fact, seemingly forgotten today. These signals come amidst falling confidence, more bank distress measures, more job loss, more home foreclosures, and lately, trouble with letters of credit at port facilities.

Financial markets, including the USDollar, have yet to factor in the deep USEconomic recession. The USDollar rally flies in the face of deteriorating fundamentals. See job cut announcements at Caterpillar, Merrill Lynch, General Motors, Chrysler, several Wall Street firms including Goldman Sachs today. Weekly jobless claims at close to half a million per week, equal to peak during the unrecognized 2001 recession. See the UMichigan consumer sentiment, Philly Fed index, Empire Fed index, leading economic indicators, durable goods orders, on and on. Retail sales, the backbone of the backwards USEconomy, are plummeting. That is, the plummet is before inflation price adjustments. Car sales are plummeting also.

Exports are to be worse from the higher US$ exchange rate on the table, combined with slower foreign economies. The improved export trade has been a big boast from the lunatics running the asylum. The USEconomy is accelerating in its decline, certain to produce a recession and huge USGovt deficits. That deficit is likely to at least double and possible quadruple next year. USTreasury Bond issuance cannot conceivably finance all, or at least half, of the commitments. The printing press will do the rest, which will cut down the US$ valuation. The USDollar decline lies ahead, when the distortions slow or come to an end. Gold will soar on the other side of this liquidation.

An extreme backlash attack is coming against the USDollar. Rising import prices in foreign economies have already caused alarm. Foreigners will soon attack the US$ in a matter of time, using heavy US$-based reserves. Their banking sectors are in disarray, primarily because they are intimately tied to the US$ and USTBonds. The process has begun with Brazil and Mexico in Latin America, to use their strong reserves and sell into this queer US$ strength. That is what reserves are for. The process will spread to other nations.

GOLD MARKET CLOSE TO BREAKING

The gap between the physical gold market and paper gold market is widening. An example bears this out. In Toronto this week, a major off-market gold transaction took place. The price paid was $1075 per ounce on the physical transaction. Its volume was in the multi-million$. There was no US involvement in the transaction, and the settlement was in euros. Enormous repositioning is ongoing by the groups that will participate in the new, partially gold-backed currency. My take is this movement is from a large financial entity with global activity, and ties to central banks. It might be tied to the upcoming split in the euro, into a Nordic Euro and trashed Latin Euro. The Nordic version might contain a gold component. This and other transactions are taking place with European settlement. They are being satisfied in the alternative market, far from the distortions of COMEX. This was a physical transaction with the real metal being moved. Big shifts occur behind the scenes. A couple of months ago, 400 metric tonnes were moved into storage with the Royal Canadian Mint by a sovereign entity.

The more massive the paper manipulation, the more violent the coming correction. The asylum managers are losing control of their paper-physical arbitrage. Watch the gold lease rates, and silver lease rates, which have each more than tripled in the last two months. Lease rates precede price movement. Bullion bankers, including central banks, are reluctant to lease their physical supply. This time is no different, an event to come after the COMEX criminality is swept aside, or simply overwhelmed in return. One well-informed source, with over two decades of gold market experience, actually expects arrests to take place among COMEX officials before long.

John Embry of Sprott Asset Mgmt has raised the possibility of a December gold futures contract default. He is not predicting it, or claiming it as certain, but rather mentions how talk centers on the December gold contract as having extreme stress for actual delivery. Pressure is building. The December contract not only is end of quarter, but end of year. He suggests a possible default. He said, “there is probably going to be such an event to change perceptions.” He cited a possible force majeure that could act as a “seminal event that defines the whole situation.” He explained that the physical gold price would then dictate the paper gold price, a return to normalcy, and with a gigantic move up in the gold price. Right now the paper gold market is overwhelming the physical side, but the physical side is constricted on supply. He explained that hedge funds are being unwound on a massive scale, slaughtered by margin calls. The long side must call for delivery on many contracts. He also expects there will be many questions on the Exchange Traded Funds soon as well, although those are surely not as important as the COMEX contract defaults. Watch and listen to his interview on the Canadian Business News Network (CLICK HERE), and be sure to move to the 10 to 11 minute mark.

NEW BRETTON WOODS II FARCE

Last weekend in Brussels, G8 Finance Ministers met. Among other things, they discussed a reform to the global banking structures. For the many challenged on geography, that city is in Belgium, headquarters for many European Union functions, in Western Europe. Creditors were not present, which means the finance ministers were talking to themselves. Credit masters were not invited. The nations whose banking systems are in the process of implosion are essentially attempting to revise the global currency system. Those in attendance constitute the losers! However, the Arabs and Chinese were not present. This seems entirely backwards. The bankrupt nations do not dictate to the creditors terms of a revised agreement.

Imagine a large business saying the following. “We are bankrupt. We want a meeting. We are going to dictate to you bankers anyway. We are broke. Our economies are shattered. Our banking systems are in ruins. But we going to tell you how we are to restructure our debt and rework a new system. We realize our debts to you are bigger than we can ever repay. We realize we cannot continue in commerce without your continued extended credit. But we will force upon you a new system. It does not matter what your opinion is. You do not have a seat on this elite committee, sorry!” THIS FLOW IS NOT FROM THE WORLD OF REALITY!

No! Bankruptcy receivership is next, where creditors will be left with few options. They will be compelled to run management committees, and dissolve many functions of government. Creditors will probably await the G8 initiative, then summarily reject it. They will next propose their own new global financial structure. The teenager’s credit card is about to be taken away, when the irresponsible kid proposes a new repayment system, new promises, new chores done even. The kid has burned down half the neighborhood, yet thinks he can call the shots! Sadly, the parents will probably ground him and force a tutor to direct his studies, and force a strict drill sergeant to direct his work activities. His friends will not be permitted to form new teams that include him. A ‘Post-US World’ is being planned, and Americans are the last to know. Entire new barter systems between a key pair of nations is about to be launched. Regional bond and commodity organizations are being formed, with exclusion of the US. The US press reports nothing on these important developments.

Foreign creditors will form new committees, which will be recognized in time as the Receivership Committee. Foreigners are watching in horror. Decisions have already been made, with Americans the last to know. In order to arrest the cancer they so clearly see, they are ready to force a complete upheaval. The USDollar will lose its global currency status, a thoroughly abused privilege. The above lack of disclosure only reinforces their motive to take action. They will move when they must, upon a system failure, or when they are challenged, or when flimsy attempts by debtors are made to dictate reform.

Without any changes forthcoming soon, the foreign banking systems and economies face huge threats to failure. To friends, family, and contacts, my approach has been to attempt to explain the underlying forces behind revolutionary financial change. Foreigners must cut off a cancerous body part, the one attached to the United States. Foreigners must cut off flow from a toxic systemic organ, the one attached to the United States. CUT IT OFF OR RISK DEATH. They must disconnect of USDollar from the global currency system attached intimately to their own financial and economic systems. They must to survive.

ARAB GOALS & MOTIVES

Arabs clearly lust to control and manage a global gold trading center. It will be in Dubai in the United Arab Emirates. The new Gulf dinar currency will pave the road to that center. The Gulf Coop Council is biding time, cutting time delay deals, warding off pressure by the USGovt, appeasing with weapons contracts from the USMilitary, and is working behind the scenes to create a new dinar currency. The new Gulf dinar is likely to be primarily gold in its backing. So, foreign nations will soon be forced to purchase the dinar for all or most of crude oil payments. This forces the purchase of gold in order to purchase crude oil. The demand for gold will thus fortify the global banking system, by means of commodity settlements. Many details are unknown, but the basic structure has been slowly come to light. A new motive flashes red in front of Arabs to institute some changes FAST. The crude oil price is down, cut in half from July. Their revenues are sharply reduced. Russia figures into the complex deal to launch the dinar. The Saudis and small sheikdoms need security protection. The next chapter will involve protection amidst a gold-backed currency, not a military-backed currency, in Saudi eyes.

ISOLATED USTREASURYS

The other side to the Arab dilemma is that the USTreasury Bond demand is quickly eroding from Petro-dollar recycle on trade surplus. The USGovt finds itself as relying far too much on foreign central banks for demand of USTBonds, relying far too much soon on the printing press. The USTBond demand is missing the oil surplus in recycle. Their reduced and unstable oil revenue motivates the Arabs to install a new payment system, based upon an end to the ugly defacto Petro-dollar standard. It shamefully is the basis of what my analysis has called a Protection Racket.

The incredible fact evident in the data is that until mid-September, the US Federal Reserve has drained liquidity from the US private banking system in order to offset its colossal bond swap bailouts for major Wall Street and New York money center banks. Their objective was to avoid undue US$ money supply growth. THEY WERE TARGETING GOLD. They essentially drained the lifeblood from the USEconomy on Main Street in order to subsidize fraud sanctioned and approved on Wall Street. Only since mid-September has the USFed been monetizing USTBond debt issuance. They are running scared, printing with abandon. The gold price is falling as the USDollar printing press is rapidly heating up, no longer offset by bank system drains. Details are in the Hat Trick Letter report.

DESERVED DISRESPECT TO GREENSPAN

Can you believe what is happening before a Congressional banking committee? Greenspan is being grilled, as his past errors are vividly pointed out. His past memos are being read back to him. His wrong premises are being questioned as having being totally discredited. His opposition to credit derivative disclosure is being challenged. His opposition to Fannie Mae reform is being challenged. He has been brought to task for his steadfast opposition for reform in the past during his tenure as USFed Chairman. He is being interrupted by lowly Congressional reps. His time to speak is being cut, in defense of others to be grilled. HE IS BEING SHOWN THE DISRESPECT DESERVED OF ANY FAILED PUBLIC OFFICIAL. Maybe they will demand to know who paid his second paycheck from Switzerland, and what his agenda was! Not likely! My view is that Greenspan was a primary key person used to take down the US banking system, to pave the way for a bigger agenda. These are intelligent people who knew what they were doing, who were the cheerleaders, even the Mythology High Priest.

Greenspan admitted a grand flaw in his free market ideology. He admitted being shocked that financial markets did not self-regulate. Hey Alan! They never self-regulate amidst a Fascist Business Model, since regulators and law enforcement is compromised as much as humanly or institutionally possible! He admitted a failure in the global financial market structure as he perceived it, a stunning admission. He acknowledged the USEconomy is faltering badly. He sees the rise in job layoffs and unemployment. He sees the retrenchment in consumer spending. He sees the price declines in housing without abatement. He forecasted a worsening recession.

His biggest admission is this. He admits to a flaw in the structural model perceived in the critically function for global banking. Wow! THAT IS A BIG ADMISSION, NOT PROPERLY PERCEIVING THE GLOBAL BANK STRUCTURE. He admits to how his risk pricing model did not take into account periods of financial stress. Hey Alan! Is that not what they are designed for? He used to boast for a full decade how offloaded risk via credit derivatives was a sign of sophistication, which enabled economic expansion. Instead, my view is that risk offload devices contributed toward an expansion atop a bubble, which when burst, killed the entire US banking system and then the USEconomy. He used to boast that credit derivatives shared the risk, but in fact it resulted in destruction on a widespread systemic basis. Recall the many claims made by Bernanke, that the subprime mortgage bond bust would be contained. The former Princeton Professor is not a good student of banking and economics! Unlike me, he is greatly encumbered by the limitations of economics credentials! Mathematics and statistics are pure science and its application as artistry.

NO SOLUTIONS FOR ECONOMY FROM BAILOUTS

Almost all US-based bailouts to date are to pay for dead financial firms. Their shareholders and bond holders and asset base have been repaired but not restored. To think this benefits the loan process is folly. It facilitates retirement to the Caribbean for corrupt bank executives. The flow of federal funds will not find its way to the people, or at least only pennies per dollar will. The ‘Top-down Approach’ is destined to fail because the corruption, bond fraud, accounting fraud, financial instrument shell game, and other assorted illicit procedures are the cause of the problem, and all lie at the top of the structure intended to trickle down! To expect benefits downstream is lunacy. In fact, the devices to assist and subsidize the criminal behavior at the top are vastly expanding with multiple branches. No less than five special purpose vehicles created by JPMorgan Chase were announced on Wednesday. The number of USFed lending facilities, all to big banks, none to people on Main Street, has exploded to such an extent that one needs a sportsbook guide to comprehend all the acronyms. David Rosenberg of Merrill Lynch even coined the YAP, yet another program. Proliferation might be what the architects of the Financial Coup d’Etat intended. Confusion is the best friend of coup architects, just like truth is the first victim of war.

The people receive $1 for every $500 given to Wall Street elite in fraud redemption. The rank & file population entered a ‘Revolving Door’ of loan repayments that often do not reduce the loan balance, assured to end in foreclosure within a year or so. The same nonsense of ‘Trickle Down’ was prevailed when it has no past precedent of succeeding.

The lack of disclosure is a tragedy. Congress demands no better disclosure, and receives none. The Lehman Brothers resolution has been conducted in total darkness. Evidence coming my way indicates that JPMorgan is using the dead Lehman carcass as a vast private arsenal to attack hedge funds. Some such funds have most of their assets frozen, while their positions are attacked. What is happening is criminal, a climax of this administration, which has been taken over by Wall Street. A complaint has been made that Treasury Dept documents look like redacted CIA documents, hardly what is needed to instill confidence. One official decree after another undermines investor confidence, the last being short rule restrictions on financial stocks, with an exemption given to Goldman Sachs. This is a selective bailout of Wall Street, a process run by Wall Street, permitting financial crimes worthy of 1000-page indictments.

DISTRIBUTION CHANNELS INTERUPTED

Big disruptive events are occurring in the distribution system. Letters of credit are routinely being refused by export nations who distrust US sources. A fall of 10% to 20% in shipping traffic to western US ports has been reported. Ships are empty at Asian ports, some even loaded but interrupted on their voyage to US ports and European ports. Many details are given in the October Hat Trick Letter reports. Even manufacturers of shipping vessels are being severely affected, as credit has interrupted construction projects. Indian suppliers are often demanding 100% upfront on costs to east coast retailers, again showing the distrust. Almost total attention has been given to banks and credit markets and stock markets. The USEconomy is moving from recession toward something different from depression. The current interruption could actually be more like disintegration. Short-term credit is soon to interfere greatly with truckers and railways in distribution channels on the domestic side, much like letters of credit are wrecking havoc on the overseas shipper side.

The next big shoe to drop is credit cards. Bank of America has announced plans, not yet fully implemented, to cut back on credit cards to lower FICO scorers. The lower 60%-ile of credit score recipients will find themselves without credit cards at all. One friend told me that he used to own 10 credit cards. Recently, all but four were simply discontinued, but a few were not used. Other friends said most of their credit limits were slashed. Changes are coming. Then the next big shoe to drop will be commercial mortgage default. No reprieve, rest, or respite for US bankers. Changes are coming. It will force defaults in most every conceivable financial corner.

DISHONOR AMONG BANKERS

The system is breaking down. Just when the heart attack signals are actually improving, although only slightly, the USEconomy is falling off a cliff, as unprecedented decay is occurring. Some improvement has been seen with the short-term LIBOR rate, the money market funding, TED spreads, and mortgage bond spreads. But bankers and financial subsidiaries are in focus for dishonor.

The following message came yesterday to my desk. It pertains to General Electric. It involved dishonored Letters of Credit (L/C). The US banks not only distrust each other, they are engaging in criminal activity, like contract fraud. If big enough, or connected well enough to the power center, it is permitted. Again, no solutions, only proliferation of chaos. More

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Stephen 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

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The 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

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Martin D. Weiss, Ph.D.
In the wake of Lehman’s demise, Fed Chairman Bernanke and Treasury Secretary Paulson will try to put out the word that it’s no great trauma. But it’s a lie and they know it. If they openly admitted that the Lehman collapse will paralyze Wall Street, torpedo the stock market and sink the economy, they’d have to pony up $100 billion or more to support it. Instead, their agenda was to push big banks to put up the money. And they failed to do so. No matter what, there’s no denying that the Lehman debacle is a massive and immediate threat to U.S. and global markets. At the latest reckoning, Lehman had $691 billion in assets. That makes it bigger than Wachovia, twice as big as Washington Mutual, and over sixteen times larger than Schwab.

Lehman’s debts — at $668.6 billion — are also enormous. Even if you added together all the debts of TD Ameritrade, E-Trade and Schwab, you’d still have only $108.5 billion, or less than one-sixth the total debts which Lehman reports. In fact, among brokers, there are only two other U.S. firms that beat Lehman in the debt category: Morgan Stanley, with $1 trillion, and Merrill Lynch, with $988 billion. Can you imagine anyone in his right mind making the argument that a Merrill Lynch downfall would be “no great trauma to investors and financial markets”? Of course not. The reality: The collapse of America’s third-largest brokerage operation is very serious business with equally serious consequences. The primary concern …

Defaults on Derivatives

We’ve lost count of how many times the authorities have virtually sworn on a stack of Bibles that “our financial system is fundamentally sound.” But no one could possibly lose count of their recent desperate efforts to prevent the system’s collapse — actions which directly belie their words: One — the coordinated efforts by central banks to flood the global economy with liquidity in the summer of 2007. Two — the hasty bailout of Bear Stearns in March of this year. Three — the giant Fannie and Freddie rescue announced just eight days ago. Each time they intervene, they say “we must not reward CEOs who deceive the public and walk off with multibillion dollar bonus checks.” And each time they say it’s the “last time we’ll make an exception to that rule.”

But then they go ahead and do it anyhow, not only breaking their own word … but also trashing the long tradition of restraint established by their predecessors since the Great Depression. Why? Because they had neither the courage nor the audacity to confront Wall Street’s ultimate nightmare: A collapse in the giant mountain of derivatives. Derivatives are essentially bets on interest rates, foreign currencies, stocks or specific events like the bankruptcy of a particular company. The interest rate-related bets are by far the biggest. But the bets on bankruptcies — called credit default swaps — are the fastest growing and the most volatile. These derivatives were originally designed to help hedge investments reduce risk — like insurance policies. But in practice, they’ve been increasingly used to leverage investments, increasing the risks of participants.

Here are some essential facts that illustrate the enormity of the problem …

* The amounts are absurdly large. The total “notional,” or face value, of derivatives held by U.S. banks is $180 trillion, and it’s three times that much globally. This figure is said to overstate the actual market risk. But it does not overstate the risk of defaults such as those that could be triggered by the failure of a company the size of Lehman Brothers.

* Over 90% of all derivatives are traded outside of regulated exchanges. Consequently, other than very general information, the authorities have no mechanism for keeping track — let alone efficiently cleaning up the mess in the wake of a giant failure.

* Off the balance sheets. Some companies report nothing more than the total value of their derivatives in footnotes to their financial statements. Others don’t report at all. Consequently, the actual risk, amounts and even the very existence of derivatives is often poorly disclosed to investors.

* Disclosure in the brokerage industry is especially bad. Many brokerages are private and do not disclose more than their rank and serial number. The SEC collects sparse data and does not publish it. So if you want to figure out how much derivates risk your broker is exposed to, good luck! Getting the information can be like pulling teeth. More

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Ilargi
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

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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.

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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

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WALL STREET JOURNAL
The crisis gripping the nation’s financial system deepened, with Lehman Brothers Holdings Inc. racing to sell itself over the weekend and other major U.S. institutions scrambling to show they have the financial wherewithal to ride out the crisis. Potential buyers of Lehman were heading toward a standoff with federal officials Friday. Firms weighing offers for the battered investment bank sought financial assistance, while Treasury Secretary Henry Paulson has been unwilling to support a government-led bailout, people familiar with the situation say. The weekend’s negotiations over Lehman’s fate could define the next chapter of the government’s handling of the crisis.

Friday’s unease spread beyond Lehman. Shares of American International Group Inc., the giant insurer, fell more than 30%. Standard & Poor’s said it might lower its credit ratings on AIG because of its tumbling share price and the increasing yield on its debt instruments compared with safe government Treasurys. Friday’s share drop prompted top AIG management to consider holding a conference call for investors Monday morning to announce a series of steps, including asset sales, aimed at reassuring the market, according to a person familiar with the matter.

Merrill Lynch & Co., which boasts the largest force of retail brokers on Wall Street, saw its stock drop 12%, following a 17% drop Thursday. Washington Mutual Inc. shares fell 3.5% Friday, after the thrift released some financial projections late Thursday in hopes of reversing a week-long stock-price slide fueled by worries about its capital levels and access to cash. Speculation that WaMu could be up for sale, with J.P. Morgan Chase & Co. as a potential suitor, fanned rollercoaster trading. While the New York bank remains interested in WaMu, no talks are under way, people familiar with the situation said. More

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