NightBlogger

GERALD P. O’DRISCOLL JR.
The markets have long assessed the debt of Fannie and Freddie at AAA because of the Treasury’s guarantee, now explicit. But no one has ever seriously assessed the Treasury’s creditworthiness with Fannie and Freddie on its books. The public guarantee is entirely open-ended and unbounded. The appetite of the two companies to balloon their balance sheets and take on risk has not been curtailed. Meanwhile, Congress spends apace with new programs for constituents in an election year.

We are at a Smithian moment, in which the temptation for the Fed to spend its last dime of credibility may prove irresistible. Investors are already being taxed by inflation and can rationally expect that tax rate (the inflation rate) to be raised going forward. Wages are not keeping up. Main Street is being taxed to fund Wall Street excess. Anyone who works, saves and invests is exposed to confiscation of his capital and earnings through inflation. More

The Automatic Earth
I’m convinced that whatever anybody says to the contrary, Fannie and Freddie have been used for at least 2 years to dump losses incurred by Wall Street’s largest lenders, including Countrywide. I’m equally convinced that the Treasury and the Federal Reserve knew about this, and gave their permission. Perhaps the scheme even originated there. The key line in the Washington Post article is this one: “Fannie Mae Executive Vice President Thomas A. Lund said the company pursued the purchase of subprime loans in 2006 and 2007 at the request of lenders, who wanted Fannie Mae to take the loans off their books.”. They don’t even try to hide it much. And why should they? After all, they can continue to claim, as the Post quotes from an internal Fannie document, that “The company recognized the already weak performance of subprime loans but predicted that they would get better in 2007″. More

Automatic Earth
The system is going through a last round of tests. The players feel pretty secure that it’s leak-proof, but they want to be certain. Once the final tests are done, we’ll see a system emerge into the open that closely resembles the symbiosis of corporate rule and political power advocated by Mussolini: “Fascism should more properly be called corporatism because it is the merger of state and corporate power.” The system controls itself; there is no outside intervention possible after all the leaks are sealed. Hence we see a blank $800 billion check donated by Congress to the Treasury, which will be used to cover gambling losses of the corporations.

The Treasury, in turn, then hires one or more of the main corporations to help it decide how the loot shall be divided among the corporations. It won’t be for saving the share price of Fannie and Freddie. Thirdly, the financial corporations, united in the Counterparty Risk Management Policy Group, published a report named “The Road to Reform”, which examines how best to get rid of the $700+ trillion in derivatives that threatens the existence of the players. As Washington and Wall Street will soon have become a completely developed two-headed animal, these losses also will be transferred to the public vault. Taking hold of the last large chunk of public money, the pension funds, is the next step the two heads are planning. And as much as one may hope that Henry Waxman’s investigation of the White House as an active player in bringing down Fannie and Freddie will succeed, the chances are as infinitesimal as the amount of information that returns from a black hole.

You have heard that Fannie and Freddie, their gentle names notwithstanding, may cripple the financial system without a large infusion of taxpayer money. You have gleaned that jobs are disappearing, housing prices are plummeting, and paychecks are effectively shrinking as food and energy prices soar. You have noted the disturbing talk of crisis hovering over Wall Street. Something has clearly gone wrong with the economy. But how bad are things, really? And how bad might they get before better days return? Even to many economists who recently thought the gloom was overblown, the situation looks grim. The economy is in the midst of a very rough patch. The worst is probably still ahead. Job losses will probably accelerate through this year and into 2009, and the job market will probably stay weak even longer. Home prices will probably keep falling, shrinking household wealth and eroding spending power. “The open question is whether we’re in for a bad couple of years, or a bad decade,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund, now a professor at Harvard. More

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

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

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

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

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

Douglas A. McIntyre
247wallst.com
The Office of the Comptroller of the Currency revoked the charters of two national banks and the FDIC moved in to protect their depositors. First National Bank of Nevada and First Heritage Bank of Newport Beach failed. According to The Wall Street Journal, The FDIC was appointed receiver of both banks. The Nevada bank has over $3 billion in deposits. Most analysts believe that the current banking crisis will only lead to about 100 bank failures, many fewer than occurred in the S&L disaster of the late 1980s. The trouble with the theory of the low failure rate is that housing prices are dropping more rapidly than most observers thought they would, and foreclosures are rising more quickly.

Bill Gross, the most prominent bond investor in the US and head of money management firm Pimco, said that the total financial company write-offs from the present housing problems will total $1 trillion. So far, less than half of that has worked its way through the system. There is not enough new capital in the market to support another $500 billion or more of bank write-downs. A lot more than 100 banks will fail in the next two years.

Gawker
Look, it’s Ron Paul! But what is he doing in New York, the fancy magazine for elites, alongside establishment finance types like a former Morgan Stanley economist and a famous investor? Isn’t he sort of “kooky?” Everyone (who didn’t live in a basement or wasn’t a furry) laughed at Paul’s quest for the 2008 Republican presidential nomination, especially since Paul wanted to get rid of the Federal Reserve and take America back to the gold standard, in which money is backed by something other than the worthless promises of filthy bankers and shiftless bureaucrats. But now it looks like the Fed’s board of governors may be leading us into depression, and even that capitalist bible the Wall Street Journal ran an article this weekend speculating that the thinking behind the gold standard, if not the standard itself, “will have its day again.” So Paul’s stock is rising! Let’s hear what terrible things he has to say about our future:

“I think we are maybe 10 percent into this crisis. The economic distortions have been building for longer than we’ve seen in the history of the world. Never have we had such confidence falsely placed in a reserve currency.”

Ha ha, you know what’s funny about that Ron Paul quote? It’s probably the least disturbing one in the entire New York article. The people from inside the financial system sound far more depressing. Here’s the former Morgan Stanley chief economist:

“The American consumer is toast. We’re talking a multiyear adjustment, at least two or three years, maybe more. Does that mean America is over? Does that mean we have a whole new world order? The jury’s out on that.”

If you really want to ruin your Monday, go ahead and click through and read the other two quotes. The short version is that you’ll soon be starving in the street, but in the meantime don’t stop reading, because there’s this new tapas place New York would like to tell you about! More

Kevin Depew
Chaos and fear doesn’t sleep. This morning the first news story I read was a piece from the Los Angeles Daily News about police threatening to beat down and arrest any “disorderlies” trying to get their money out of a failed IndyMac bank branch in Pasadena, CA. Apparently, after being turned away Monday, customers began lining up at 1:30 a.m. the next morning to take out any cash they had in excess of the $100,000 maximum insured by the Federal Deposit Insurance Corporation. The scene was reportedly emotional and tense. At another IndyMac branch in Encino, the police were called in after line jumpers threatened to turn an ordinary bank run into a full-on riot.

Yes, it’s here. Welcome to the Depression. No, don’t drop whatever it is you’re doing. Don’t get up. It’s not going anywhere. It will wait. It’s just going to sit over here in the corner and read a magazine while you do whatever it is you need to do. A Depression doesn’t run hot and fierce like some crazed meth burner. A Depression is methodical, purposeful, patient. It will build a shelter out of tree branches and newspaper, light a small, well-contained campfire and wait you out, brother. While you feed on the empty calories of denial and popcorn, it will quietly gather shards of broken dreams and fashion them into a terrible weapon of blunt force reality.

It’s a hell of a thing to call this day and age the next Depression. It’s dangerous tinfoil hat territory inhabited mostly by screeching lunatics and volatile nutjobs. But by the time they get squeezed out by reputable folks the whole gig will be up, the circus will have left town. But how can this be? To understand the mechanics of this, the nature of it, let’s look back at the last Great Depression.

Despite the seeming enormity of it in retrospect, the stock market crash of 1929 barely even registered for most Americans. The day before the crash, Time Magazine’s Oct. 28, 1929 issue was business as usual, national stories, Washington stories, a review of the newest plays opening in Manhattan, a piece on a cat washing contest in Kingston, NC. A week later, in the wake of the stock plunge, the cover story was as far from a piece on crashing share prices as you could 2get - a profile of a man named Samuel Insull, the “financial father of the Chicago opera.” The crash did make the magazine, of course, second billing in the Business section in a piece titled, “Bankers v. Panic.” The next piece, however, was about a $2.5 million investment by a Wall Street investment bank in orchids. “Last week, however, to the orchid industry went 2,500,000 Wall Street dollars, not squandered, but carefully invested.”

Heh. Yes, the dream dies hard, doesn’t it? More

Banks in Colorado, Maryland, Georgia and California top privately-prepared lists of troubled banks being circulated on Wall Street and in Washington. While the Federal Deposit Insurance Corporation (FDIC) is keeping secret its official list of 90 troubled banks, ABC News has obtained other lists prepared by several research groups and financial analysts. The lists use versions of the so-called “Texas ratio” which compare a bank’s assets and reserves to its non-performing loans, based on financial data made public by the FDIC in March.

Analysts say banks with a ratio over 100 per cent would be the most likely to fail, based on what happened to Texas savings and loans during the 1980’s. “That a fair measure,” said Hal Scott, a Harvard law school professor specializing in banking law. “It doesn’t mean every one of those banks is going to become insolvent, but if you have more bad loans than assets, it’s not a bad way to judge what could happen,” Scott told ABC News. More

Shares of Lehman Brothers plunged to nine-year lows and stock in other Wall Street firms declined as new signs of distress in financial markets spooked investors. Lehman fell as much as 23 percent, before recovering to be down more than 15 percent late Friday afternoon, far outpacing the drop in rivals such as Merrill Lynch & Co, which lost 5.33 percent and Goldman Sachs Group Inc, which declined 5.15 percent. Morgan Stanley fell 1.4 percent. In the last two weeks, Lehman has lost about a third of its market value, and the company’s shares now trade at less than half their book value, or the net accounting value of its assets, which typically signals extreme distress. More

Source: (MarketWatch) The incipient collapse of Freddie Mac will in all likelihood dump an additional $5 trillion in debt onto the national books by making explicit the companies’ dependence on the American taxpayer as their ultimate backstop. No glib politician, let alone Treasury Secretary Henry Paulson, will be able to talk their way out of this one. And the world’s leading sources of capital, China and the Gulf oil states aren’t about to sign on to support the political priorities of Washington, D.C. politicians looking to subsidize home ownership and get themselves re-elected. Instead, America is just going to have to work its way through this mess on its own.

It will not be a pleasant process. Wall Street will cherry-pick the productive mortgages, and the rest will be dumped on everyone else’s doorstep. People who didn’t borrow cheap money they couldn’t afford and who paid their mortgages on time, will nonetheless have to pony up more taxes to cover the losses incurred by their profligate fellow citizens at the prodding of an elected class that sought to extend homeownership to every American capable of casting a vote. Maybe, just maybe, the political class will finally have to own up to making some difficult choices: eliminating a couple of aircraft carriers for a start, and that $100 billion a year they spend on the department of education.

It might be a good idea to scrap that new air tanker contract too, given that they can’t seem to get it awarded anyway. If they had any real guts, they’d use this occasion to get rid of the mortgage interest deduction. After all, given that Congress’ popularity rating is in single digits already, why not take advantage of the opportunity? And if the Iraqis can’t use their oil wealth to outsource their internal security needs with oil pushing $150 a barrel, they’re never going to be able to. A high school teacher of mine used to say it didn’t matter how much money the government borrowed because it was a measure of how much faith Americans had in their future. We’re about to find out.

Wall Street has suffered a huge loss, with the Dow Jones Industrial Average plunges 358 points as investors contended with a barrage of bad news. A surge in oil prices past $140 a barrel and warnings of trouble in the key financial, automotive and high-tech industries created a gloomy mood across the market. The day’s news included analysts’ negative comments about brokerages and General Motors Corp. It made clear to investors how much U.S. companies stand to be hurt from the fallout of the prolonged housing slump, the nearly year-old credit crisis and the soaring price of oil. All the major indexes dropped around 3 percent. The Dow is at its lowest point in nearly two years. More

Too late, way over due. The damage is already done. This is a hail Mary attempt to control a rouge financial sector that’s spiraled out of control.

MSNBC
NEW YORK - The Federal Reserve and Securities Exchange Commission (SEC) are finalizing an agreement to start the process of redrawing how Wall Street is regulated, the Wall Street Journal said on its Web site on Sunday. The agreement, which could be announced this week, aims to fill gaps in regulatory oversight and will increase cooperation between the central bank and the SEC in the wake of the near-collapse of Bear Stearns Cos, the report said. More

Dr. Ellen Brown
Globalresearch

An earlier article by this author (”The Secret Bailout of JP Morgan”) summarized evidence presented by John Olagues, an expert in options trading, suggesting that JPMorgan, far from “rescuing” Bear Stearns, was actually its nemesis. The faltering investment bank was brought down, not by “rumors,” but by insider trading based on a plan drawn up much earlier. The deal was a lucrative one for JPM, handing the Wall Street megabank $55 billion in loans from the Federal Reserve (meaning ultimately the U.S. taxpayer). So how did JPM get away with it? Olagues notes the highly suspicious fact that JPM’s CEO James Dimon sits on the Board of the New York Federal Reserve.

In his latest post, Olagues discusses the fate of Lehman Brothers, the nation’s fourth-largest investment bank and the next faltering bank expected to fail. Unlike Bear Stearns, which got decimated by the JPM buyout using Federal Reserve money, Lehman Brothers is probably in line for a massive bailout from the Fed. At least, that’s what its CEO Richard Fuld seems to believe. The June 4, 2008 Financial Times of London quoted him as stating, “The Federal Reserve’s decision earlier this year to lend directly to investment banks should take questions about Lehman’s liquidity off the table.”

Whether Lehman can come up with the “liquidity” to meet its debts is no longer an issue, because it expects to be feeding at the trough of the Federal Reserve, just as JPM did when it bought Bear Stearns at bargain-basement prices. The difference between the two “bailouts” is that Lehman Brothers, unlike Bear Stearns, will actually get the money. Why is Fuld so confident of this rescue operation? Olagues notes that Fuld, like Dimon (and unlike Bear CEO Alan Schwartz), sits on the Board of the New York Federal Reserve. More

Bloomberg
FEDERAL Reserve Board Vice Chairman Donald Kohn raised the possibility of giving Wall Street securities firms permanent access to loans from the central bank, as long as regulators tighten oversight of the companies. Kohn also advocated continuing Fed auctions of funds to commercial banks and loans of Treasuries to Wall Street dealers even after markets stabilize. Such channels would stay open “either on a standby basis or operating at a very low level,” he said in a speech in New York yesterday.

“If you are a bondholder in one of these Wall Street firms, you know you have a big `Sugar Daddy’ now called the Federal Reserve that’s going to back you up,” said Jeff Pantages, chief investment officer of Alaska Permanent Capital Management in Anchorage, which oversees $1.8 billion in assets. “But if you are a stockholder this kind of worries you because investment banks will be more highly regulated and won’t be able to use leverage as much as before,” he said. More

Photo Benno Hansen<
Leon Fisher
Regardless of whether the criminal cabal which has seized the Government of the United States proceeds with their intention to expand the war in the Mideast with an attack upon Iran, it is only a matter of time before the Country goes into a full blown depression.

While an expansion of the war into Iran would doubtless speed up the economic ruin of the United States, the die is already cast and there is no turning back. So weakened has the economy of the United States become since the implementation of so called Free Trade, as well as the lifting of regulations governing the excesses of Wall Street, no matter which political party dominates Congress and the White House and regardless of what measures they may implement, it will be
too little, too late.

If an attack on Iran does not materialize, then the price the American people will have to pay will be mostly economic. Rising unemployment, inflation, food shortages, and ever rising fuel prices will all contribute to lower the standard of living for most Americans. More

Photo courtesy of waffler
Ben Stein, nytimes
“YOU may well be asking yourself, as I have asked myself, how on earth did the credit crisis on Wall Street become such a catastrophe? In a word…the S.E.C. told Wall Street to police itself to save on regulatory costs, while not bothering to discuss the cost to society of increasing the probability that a large broker-dealer could go bust. A result of all this…was as follows: The owners, employees and creditors of these institutions are rewarded when they succeed, but it is all of us, the taxpayers, who are left on the hook if they fail. This is called private profits and socialized risk. Heads, I win. Tails you lose. It is a reverse-Robin Hood system.”
Read more

Photo by arditpg

Just like Wall Street isn’t it? How to profit from the end of the world.

“Load up the pantry,” says Manu Daftary, one of Wall Street’s top investors and the manager of the Quaker Strategic Growth mutual fund. “I think prices are going higher. People are too complacent. They think it isn’t going to happen here. But I don’t know how the food companies can absorb higher costs.” Stocking up on food may not replace your long-term investments, but it may make a sensible home for some of your shorter-term cash. Do the math. If you keep your standby cash in a money-market fund you’ll be lucky to get a 2.5% interest rate.
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Photo courtesy of kharkoma

These are anxious days for Ralph R. Cioffi, the former manager of the two Bear Stearns (BSC) hedge funds whose collapse last summer sparked the credit crisis. Federal prosecutors are expected to decide by June whether or not to bring charges against him and members of his team. Wall Street is watching closely: If the Justice Dept. can’t make a case against Cioffi, a prime figure in the mortgage mess, other criminal investigations may hit a dead end as well.
Read more

Photo courtesy of dirty bodega
Patricia Hill

The upswing in prices has been exaggerated by the massive influx of investors and speculators seeking to profit from rising prices for corn, wheat, oil, gold and other commodities. Big Wall Street firms and hedge funds have taken huge positions in futures markets that once were dominated by relatively small operators such as farmers and grain-elevator owners. Small investors, who see fast-rising commodities as good hedges against inflation and a falling dollar, also are getting a piece of the action by investing in index funds that are tied to commodity prices.
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Pic courtesy of klynslis

George Will at The New York Post writes:

“The Fed has no mandate to be the dealmaker for Wall Street socialism. The Fed’s mission is to preserve the currency as a store of value by preventing inflation. Its duty is not to avoid a recession at all costs; the way to get a big recession is to engage in frenzied improvisations because a small recession (aka, a correction) is deemed intolerable. The Fed should not try to produce this or that rate of economic growth or unemployment.

After the tech bubble burst in 2000, the Fed opened the money spigot to lower interest rates and keep the economy humming. And since the bursting of the housing bubble, the Fed has again lowered interest rates, which for now are negative - lower than the inflation rate, which the open spigot will aggravate”. Read more

Ron Paul, considered by many to be completely out of the loop, wrote this is 2002:

“Since the creation of the Federal Reserve, middle and working-class Americans have been victimized by a boom-and-bust monetary policy. In addition, most Americans have suffered a steadily eroding purchasing power because of the Federal Reserve’s inflationary policies. This represents a real, if hidden, tax imposed on the American people.”

From the Great Depression, to the stagflation of the seventies, to the burst of the dotcom bubble last year, every economic downturn suffered by the country over the last 80 years can be traced to Federal Reserve policy. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial “boom” followed by a recession or depression when the Fed-created bubble bursts”. Read more