SAN FRANCISCO (MarketWatch)
- A network of lenders, brokers and opaque financing vehicles outside traditional banking that ballooned during the bull market now is under siege as regulators threaten a crackdown on the so-called shadow banking system.
Big brokerage firms like Goldman Sachs, Lehman Brothers, Morgan Stanley and Merrill Lynch which some say are the biggest players in this non-bank financial network, may have the most to lose from stricter regulation.
The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve.
While this system became a huge and vital source of money to fuel the U.S. economy, the subprime mortgage crisis and ensuing credit crunch exposed a major flaw. Unlike regulated banks, which can borrow directly from the government and have federally insured customer deposits, the shadow system didn't have reliable access to short-term borrowing during times of stress.
Such vulnerability helped transform what may have been an uncomfortable correction in credit markets into the worst global credit crunch in more than a decade as monetary policymakers and regulators struggled to contain the damage.
Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.
"The shadow banking system model as practiced in recent years has been discredited," Ramin Toloui, executive vice president at bond investment giant Pimco, said.
Toloui expects greater regulation of big brokerage firms which may face stricter capital requirements and requirements to hold more liquid, or easily sellable, assets.
'Clarion call'
"The bright new financial system - for all its talented participants, for all its rich rewards - has failed the test of the market place," Paul Volcker, former chairman of the Federal Reserve, said during a speech in April. "It all adds up to a clarion call for an effective response."
Two months later, Timothy Geithner, president of the Federal Reserve Bank of New York, and others have begun to answer that call.
"The structure of the financial system changed fundamentally during the boom, with dramatic growth in the share of assets outside the traditional banking system," he warned in a speech last week. That "made the crisis more difficult to manage."
On Thursday, Treasury Secretary and former Goldman Chief Executive Henry Paulson said the Fed should be given the authority to collect information from large complex financial institutions and intervene if necessary to stabilize future crises.
Regulators should also have a clear way of taking over and closing a failed brokerage firm, he added. See full story.
Banking bedrock
The bedrock of traditional banking is borrowing money over the short term from customers who deposit savings in accounts and then lending it back out as mortgages and other higher-yielding loans over longer periods.
The owners of banks are required by regulators to invest some of their own money and reinvest some of the profit to keep an extra level of money in reserve in case the business suffers losses on some of its loans. That ensures that there's still enough money to repay all depositors after such losses.
In recent decades, lots of new businesses and investment vehicles have evolved that do the same thing, but outside the purview of traditional banking regulation.
Instead of getting money from depositors, these financial intermediaries often borrow by selling commercial paper, which is a type of short-term loan that has to be re-financed over and over again.
And rather than offering home loans, these entities buy mortgage-backed securities and other more complex securities.
A $10 trillion shadow
By early 2007, conduits, structured investment vehicles and similar entities that borrowed in the commercial paper market and bought longer-term asset-backed securities, held roughly $2.2 trillion in assets, according to the Fed's Geithner. Another $2.5 trillion in assets were financed overnight in the so-called repo market, Geithner said.
Geithner also highlighted big brokerage firms, saying that their combined balance sheets held $4 trillion in assets in early 2007. Hedge funds held another $1.8 trillion, bringing the total value of asset in the "non-bank" financial system to $10.5 trillion, he added.
That dwarfed the total assets of the five largest banks in the U.S., which held just over $6 trillion at the time, Geithner noted. The traditional banking system as a whole held about $10 trillion, he said.
While acting like banks, these shadow banking entities weren't subject to the same supervision, so they didn't hold as much capital to cushion against potential losses.
When subprime mortgage losses started last year, their sources of short-term financing dried up.
"These things act like banks, but they're not," James Hamilton, professor of economics at the University of California, San Diego, said. "The fundamental inadequacy of their own capital caused these problems."
Big brokers targeted
Geithner said the most fundamental reform that's needed is to regulate big brokerage firms and global banks under a unified system with stronger supervision and "appropriate" requirements for capital and liquidity.
Financial institutions should be persuaded to keep strong capital cushions and more liquid assets during periods of calm in the market, he explained, noting that's the best way to limit the damage during a crisis.
At a minimum, major investment banks and brokerage firms should adhere to similar rules on capital, liquidity and risk management as commercial banks, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on Wednesday.
"It makes sense to extend some form of greater prudential regulation to investment banks," she said.
Separation dwindled
After the stock market crash of 1929, the U.S. Congress passed laws that separated commercial banks from investment banks.
The Fed, the Office of the Comptroller of the Currency and state regulators oversaw commercial banks, which took in customer deposits and lent that money out. The Securities and Exchange Commission regulated brokerage firms, which underwrote offerings of stocks and corporate bonds.
This separation dwindled during the 1980s and 1990s as commercial banks tried to push into investment banking - following their large corporate clients which were selling more bonds, rather than borrowing directly from banks.
By 1999, the Gramm-Leach-Bliley Act rolled back Depression-era restrictions, allowing banks, brokerage firms and insurers to merge into financial holding companies that would be regulated by the Fed.
Commercial banks like Citigroup Inc., Bank of America and J.P. Morgan Chase signed up and developed large investment banking businesses.
However, big brokerage firms like Goldman, Morgan Stanley and Lehman didn't become financial holding companies and stayed out of commercial banking partly to avoid increased regulation by the Fed.
Run on a Shadow Bank
The Fed's bailout of Bear Stearns in March will probably change all that, experts said this week.
Bear, a leading underwriter of mortgage securities, almost collapsed after customers and counterparties deserted the firm.
It was like a run on a bank. But Bear wasn't a bank. It financed a lot of its activity by borrowing short term in repo and commercial paper markets and couldn't borrow from the Fed if things got really bad.
Bear's low capital levels left it with highly leveraged exposures to risky mortgage-related securities, which triggered initial doubts among customers and trading partners. The Fed quickly helped J.P. Morgan Chase, one of the largest commercial banks, acquire Bear.
To prevent further damage to the financial system, the Fed also started lending directly to brokerage firms for the first time since the Depression.
"They stepped in because Bear was facing a traditional bank run - customers were pulling short-term assets and the firm couldn't sell its long-term assets quickly enough," Hamilton said. "Rules should apply here: You should have enough of your own capital available to pay back customers to avoid a run like that."
Bear necessity
A more worrying question from the Bear Stearns debacle is why customers and investors were willing to lend money to the firm in the absence of an adequate capital cushion, Hamilton said.
"The creditors thought that Bear was too big to fail and that the government would step in to prevent creditors losing their money," he explained. "They were right because that's exactly what happened."
"This is a system in which institutions like Bear Stearns are taking far too much risk and a lot of that risk is being borne by the government, not these firms or the market," he added.
The Fed has lent between $8 billion and more than $30 billion each week directly to brokerage firms since it set up its new program in March. Most experts say this source of emergency funding is unlikely to disappear, even though it's scheduled to end in September.
"It's almost impossible to go back," FDIC's Bair said on Wednesday.
With taxpayer money permanently on the line to save big brokers, these firms should now be more strictly regulated to keep future bailouts to a minimum, Bair and others said.
"By definition, if they're going to give the investment banks access to the window, I for one do believe they have the right for oversight," Richard Fuld, chief executive of Lehman, told analysts during a conference call this week. "What that means, though, particularly as far as capital levels or asset requirements, it's way too early to tell."
Super Fed
Next year, Congress likely will pass legislation forcing big brokerage firms to be regulated fully by the Fed as financial holding companies, Brad Hintz, a securities analyst at Bernstein Research and former chief financial officer of Lehman, said.
Legislators will probably also call for tighter limits on the leverage and trading risk taken on by large brokers, while demanding more conservative funding and liquidity policies, he added.
Restrictions on these firms' forays into venture capital, private equity, real estate, commodities and potentially hedge funds may also follow too, Hintz warned.
This may undermine the source of much of the surging profit generated by big brokerage firms in recent years.
A newly empowered "super Fed" will likely encourage these firms to arrange longer-term, more secure sources of borrowing and even promote the development of deposit bases, just like commercial and retail banks, the analyst explained.
This will make borrowing more expensive for brokerage firms, undermining the profitability of businesses that require a lot of capital, such as fixed income, institutional equities, commodities and prime brokerage, Hintz said.
Such regulatory changes will cut big brokers' return on equity - a closely watched measure of profitability - to roughly 15.5% from 19%, Hintz estimated in a note to investors this week.
Lehman and Goldman will be most affected by this - seeing return on equity drop by about four percentage points over the business cycle - because they have larger trading books and greater exposure to revenue from sales and trading. Goldman also has a major merchant banking business that may also be constrained, Hintz added.
Morgan Stanley and Merrill Lynch will see declines of 3.2 percentage points and 2.2 percentage points in their return on equity, the analyst forecast.
If you can't beat them...
Facing lower returns and more stringent bank-like regulation, some big brokerage firms may decide they're better off as part of a large commercial bank, some experts said.
"If you're being regulated like a bank and your leverage ratio looks something like a bank's, can you really earn the returns you were making as a broker dealer? Probably not," Margaret Cannella, global head of credit research at J.P. Morgan, said.
Regulatory changes will be unpopular with some brokerage CEOs and could result in a shakeup of the industry and more consolidation, she added.
Hintz said the business models of some brokerage firms may evolve into something similar to Bankers Trust and the old J.P. Morgan.
In the mid 1990s, Bankers Trust and J.P. Morgan relied more on deposits and less on the repo market to finance their assets. They also operated with leverage ratios of roughly 20 times capital. That's lower than today's brokerage firms, which were levered roughly 30 times during the peak of the credit bubble last year, according to Hintz.
However, both firms soon ended up in the arms of more regulated commercial banks. Bankers Trust was acquired by Deutsche Bank in 1998. Chase Manhattan Bank bought J.P. Morgan in 2000.
End of Story.
On Friday November 21, the world came within a hair’s breadth of the most colossal financial collapse in history according to bankers on the inside of events with whom we have contact. The trigger was the bank which only two years ago was America’s largest, Citigroup. The size of the US Government de facto nationalization of the $2 trillion banking institution is an indication of shocks yet to come in other major US and perhaps European banks thought to be ‘too big to fail.’
The clumsy way in which US Treasury Secretary Henry Paulson, himself not a banker but a Wall Street ‘investment banker’, whose experience has been in the quite different world of buying and selling stocks or bonds or underwriting and selling same, has handled the unfolding crisis has been worse than incompetent.
It has made a grave situation into a globally alarming one.
‘Spitting into the wind’
A case in point is the secretive manner in which Paulson has used the $700 billion in taxpayer funds voted him by a labile Congress in September.
Early on, Paulson put $125 billion in the nine largest banks, including $10 billion for his old firm, Goldman Sachs.
However, if we compare the value of the equity share that $125 billion bought with the market price of those banks’ stock, US taxpayers have paid $125 billion for bank stock that a private investor could have bought for $62.5 billion, according to a detailed analysis from Ron W. Bloom, economist with the US United Steelworkers union, whose members as well as pension fund face devastating losses were GM to fail.
That means half of the public's money was a gift to Paulson’s Wall Street cronies. Now, only weeks later, the Treasury is forced to intervene to de facto nationalize Citigroup. It won’t be the last.
Paulson demanded, and got from a labile US Congress, Democrat as well as Republican, sole discretion over how and where he can invest the $700 billion, to date with no effective oversight. It amounts to the Treasury Secretary in effect ‘spitting into the wind’ in terms of resolving the fundamental crisis.
It should be clear to any serious analyst by now that the September decision by Paulson to defer to rigid financial ideology and let the fourth largest US investment bank, Lehman Brothers fail, was the proximate trigger for the present global crisis. Lehman Bros.’ surprise collapse triggered the current global crisis of confidence.
It was simply not clear to the rest of the banking world which US financial institution bank might be saved and which not, after the Government had earlier saved the far smaller Bear Stearns, while letting the larger, far more strategic Lehman Bros. fail.
Some Citigroup details
The most alarming aspect of the crisis is the fact that we are in an inter-regnum period when the next President has been elected but cannot act on the situation until after January 20, 2009 when he is sworn in.
Consider the details of the latest Citigroup government de facto nationalization (for ideological reasons Paulson and the Bush Administration hysterically avoid admitting they are in the process of nationalizing key banks).
Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got some $150 billion in US taxpayer funds in the past two months. Ironically, only eight weeks before, the Government had designated Citigroup to take over the failing Wachovia Bank. Normally authorities have an ailing bank absorbed by a stronger one. In this instance the opposite seems to have been the case.
Now it is clear that the Citigroup was in deeper trouble than Wachovia. In a matter of hours in the week before the US Government nationalization was announced, the stock value of Citibank plunged to $3.77 in New York, giving the company a market value of about $21 billion. The market value of Citigroup stock in December 2006 had been $247 billion.
Two days before the bank nationalization the CEO, Vikram Pandit had announced a huge 52,000 job slashing plan. It did nothing to stop the slide.
The scale of the hidden losses of perhaps the twenty largest US banks is so enormous that if not before, the first Presidential decree of President Barack Obama will likely have to be declaration of a US ‘Bank Holiday’ and the full nationalization of the major banks, taking on the toxic assets and losses until the economy can again function with credit flowing to industry once more.
Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses. After that, remaining losses will be split between Citigroup and the government, with the bank absorbing 10% and the government absorbing 90%. The US Treasury Department will use its $700 billion TARP or Troubled Asset Recovery Program bailout fund, to assume up to $5 billion of losses.
If necessary, the Government’s Federal Deposit Insurance Corporation (FDIC) will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses. The measures are without precedent in US financial history. It’s by no means certain they will salvage the dollar system.
The situation is so intertwined, with six US major banks holding the vast bulk of worldwide financial derivatives exposure, that the failure of a single major US financial institution could result in losses to the OTC derivatives market of $300-$400 billion, a new IMF working paper finds. What’s more, since such a failure would likely cause cascading failures of other institutions.
Total global financial system losses could exceed another $1,500 billion according to an IMF study by Singh and Segoviano.
The madness over a Detroit GM rescue deal
The health of Citigroup is not the only gripping crisis that must be dealt with. At this point, political and ideological bickering in the US Congress has so far prevented a simple emergency $25 billion loan extension to General Motors and other of the US Big Three automakers—Ford and Chrysler.
The absurd spectacle of US Congressmen attacking the chairmen of the Big Three for flying to the emergency Congressional hearings on a rescue loan in their private company jets while largely ignoring the issue of consequences to the economy of a GM failure underscores the utter lack of touch with reality that has overwhelmed Washington in recent years.
For GM to go into bankruptcy risks a disaster of colossal proportions. Although Lehman Bros., the biggest bankruptcy in US history, appears to have had an orderly settlement of its credit defaults swaps, the disruption occurred before-hand, as protection writers had to post additional collateral prior to settlement. That was a major factor in the dramatic global market selloff in October.
GM is bigger by far, meaning bigger collateral damage, and this would take place when the financial system is even weaker than when Lehman failed.
In addition, a second, and potentially far more damaging issue, has been largely ignored. The advocates of letting GM go bankrupt argue that it can go into Chapter 11 just like other big companies that get themselves in trouble. That may not happen however, and a Chapter 7 or liquidation of GM that would then result would be a tectonic event.
The problem is that under Chapter 11 US law, it takes time for the company to get the protection of a bankruptcy court. Until that time, which may be weeks or months, the company would need urgently ‘bridge financing’ to continue operating. This is known as ‘Debtor-in-Possession' or DIP financing.
DIP is essential for most Chapter 11 bankruptcies, as it takes time to get the plan of reorganization approved by creditors and the courts. Most companies, like GM today, go to bankruptcy court when they are at the end of their liquidity.
DIP is specifically for companies in, or on the verge of bankruptcy, and the debt is generally senior to other outstanding creditor claims. So it is actually very low risk, as the amount spent is usually not large, relatively speaking. But DIP lending is being severely curtailed right now, just when it is most needed, as healthier banks drastically cut loans in the severe credit crunch situation.
Without access to DIP bridge financing, GM would be forced into a partial, or even a full liquidation.
The ramifications are horrendous. Aside from loss of 100,000 jobs at GM itself, GM is critical to keep many US auto suppliers in business. If GM failed soon most, possibly even all of the US and even foreign auto suppliers will go under. Those parts suppliers are important to other auto makers. Many foreign car factories would be forced to close due to loss of suppliers.
Some analysts put 2009 job losses from a GM failure as high as 2.5 million jobs due to the follow-on effects. If the impact of that 2.5 million job loss is seen in terms of the overall losses to the economy of non-auto jobs such as services, home foreclosures caused and such, some estimate total impact would be more than 15 million jobs.
So far in the face of this staggering prospect, the members of the US Congress have chosen to focus on the fact the GM chief, Rick Wagoner, flew in his private company jet to Washington. The Congressional charade conjures up the image of Nero playing his fiddle as Rome goes up in flames. It should not be surprising that at the recent EU-Asian Summit in Beijing, Chinese officials mooted the idea of trading between the EU and Asian nations such as China in Euro, Renminbi, Yen or other national currencies other than the dollar.
The Citigroup bailout and GM debacle has confirmed the death of the post-1944 Bretton Woods Dollar System.
The real truth behind Citigroup bailout
What neither Paulson nor anyone in Washington is willing to reveal is the real truth behind the Citigroup bailout.
By his and the Republican Bush Administration’s adamant earlier refusal to take an initial resolute action to immediately nationalize the nine or so largest troubled banks, he has created the present debacle.
By refusing on ideological grounds to instead reorganize the banks’ assets into some form of ‘good bank’ and ‘bad bank,’ similar to what the Government of Sweden did with what it called Securum, during its banking crisis in the early 1990’s, Paulson and company have created a global financial structure on the brink.
A Securum or similar temporary nationalization would have allowed the healthy banks to continue lending to the real economy so the economy could continue operating, while the State merely sat on the undervalued real estate assets of the Swedish banks for some months until the recovering economy made the assets again marketable to the private sector.
Instead, Paulson and his ‘crony capitalists’ in Washington have turned a bad situation into a globally catastrophic one.
His apparent realization of the error of his initial refusal to nationalize came too late. When Paulson reversed policy on September 19 and presented the nine largest banks with an ultimatum to accept partial Government equity ownership, abandoning his original bizarre plan to merely buy up the toxic waste asset-backed securities of the banks with his $700 billion TARP taxpayer money, he never revealed why.
Under the original Paulson Plan, as Dimitri B. Papadimitriou and L. Randall Wray of the Jerome Levy Institute at Bard College in New York point out, Paulson sought to create a situation in which,
'the US Treasury would become an owner of troubled financial institutions in exchange for a capital injection—but without exercising any ownership rights, such as replacing the management that created the mess. The bailout would be used as an opportunity to consolidate control of the nation’s financial system in the hands of a few large (Wall Street) banks, with government funds subsidizing purchases of troubled banks by "healthy" ones.’
Paulson soon realized the scale of crisis, largely triggered by his inept handling of the Lehman Brothers case, had created an impossible situation. Were Paulson to use the $700 billion to buy up toxic waste ABS assets from the select banks at today’s market price, the $700 billion would be far too little to take an estimated $2 trillion ($2,000 billion) in Asset Backed Securities off the books of the banks.
The Levy Economics Institute economists state,
‘It is probable that many and perhaps most financial institutions are insolvent today - with a black hole of negative net worth that would swallow Paulson's entire $700 billion in one gulp.’
That reality is the real reason Paulson was forced to abandon his original ‘crony bailout’ TARP plan and opt to use some of his money to buy equity shares in the nine largest banks.
That scheme as well is ‘dead on arrival’ as the latest Citigroup nationalization scheme underscores.
The dilemma Paulson has created with his inept handling of the crisis is simple:
If the US Government paid the true value for these nearly worthless assets, the banks would have to write down huge losses, and, as Levy economists put it, ‘announce to the world that they are insolvent.’
On the other hand, if Paulson raised the toxic waste purchase price high enough to protect the banks from losses, $700 billion ‘will buy only a tiny fraction of the 'troubled' assets.’
That is what the latest nationalization of Citigroup is about.
It is only the beginning....
The 2009 year will be one of titanic shocks and changes to the global order of a scale perhaps not experienced in the past five centuries. This is why we should speak of the end of the American Century and its Dollar System.
How destructive that process will be to the citizens of the United States who are the prime victims of Paulson’s crony capitalists, as well as to the rest of the world depends now on the urgency and resoluteness with which heads of national Governments in Germany, the EU, China, Russia and the rest of the non-US world react.
It is no time for ideological sentimentality and nostalgia of the postwar old order. That collapsed this past September along with Lehman Brothers and the Republican Presidency.
Waiting for a ‘miracle’ from an Obama Presidency is no longer an option for the rest of the world.
Part 1 – Hello feudalism
September 22, 2008
There is no other way to describe it. The biggest financial institutions in the U.S., in league with Republican and Democratic leaders in Congress, are staging a kind of coup d’etat against the American people.
If allowed to proceed, they will put forward legislation later in the week that will assign dictator-like powers to the U.S. Secretary of Treasury and certain big banks, and, using these powers, dump hundreds of billions of more bad debt on ordinary Americans. The consequences are dire, not just for the economy, but also for the civil rights of Americans.
Working behind closed doors over the weekend, leaders of the political and financial elite have been putting the final touches on a plan whereby the big banks and financiers will shift up to $700 billion of bad debt and toxic mortgages (which they created) onto the backs of the American people via the federal government, as well as put themselves in an ideal position to strike a blow at other competitors, including non-monopoly financial institutions that are smaller or more community and regionally based.
All of this is in addition to the hundreds of billions that have already been pledged to bail out various big banks and other Wall Street financial institutions, as well as pump liquidity into the markets. The scale of this bailout is almost beyond description.
For example, various politicians and bankers are saying that the total amount of the bailout will be between $1 to $1.5 trillion, which is bad enough, being more than the GDP of a country like Canada. The government has already pledged $200 billion alone to prop up the mortgage companies Fannie Mae and Freddie Mac.
What the politicians who support this bailout often fail to mention is that the American taxpayer must also now take on the debt of these giant mortgage companies, a sum that adds up to around $5 trillion. If housing prices do not recover (they are already down more than 15% on average), taxpayers could be liable for a substantial portion of that amount.
Likewise with the government bailout of AIG Insurance last week which cost $85 billion and results in the government now owning 80% of the company. One of the reasons why other banks would not touch AIG with a ten foot pole was that, over the last few years, AIG has been heavily involved in what are called “credit default swaps,” a kind of insurance policy for other companies in case they go bankrupt. If the American economy tanks, which many believe it is in the process of doing, no one can really say for sure how much the U.S. government (and the American taxpayer) would get back from the sale of AIG assets, if anything.
It is important to remember that these hundreds of billions of government bailout funds are being directed to aid an extremely tiny, but unimaginably wealthy, section of the population that is notorious for its greed, corruption, high living and recklessness, and that is responsible for hatching up the schemes to spread the bad mortgages, toxic securities, and other questionable financial instruments through, not only the American, but also the world financial system, thus triggering the worst financial crisis since the Great Depression of the 1930’s.
Indeed, even the notoriously corrupt emperors Caligula and Nero of Ancient Rome would be shocked by the sheer avarice, arrogance, and egotism of this privileged 21st Century elite.
Examples of their out-of-control greed abound.
One individual, Dick Fuld, CEO of the now bankrupt Lehman Brothers, walked off with $490 million for his term of office. Goldman Sachs sold toxic securities to unsuspecting pension funds, companies and individuals around the world, while at the same time selling “short” these securities, i.e., betting that their value would decrease. It is estimated that Goldman Sachs made billions of dollars on this scheme alone, which, if not constituting fraud, certainly borders on it.
And there are numerous other examples of both questionable and criminal behavior by top investment banks and brokers. Which brings us to the legislative proposal that the White House has sent to Congress.
Who is spearheading this proposal?
None other than Henry Paulson, Secretary of the U.S. Treasury, who, surprise, surprise, was a former official with the same Goldman Sachs. The fox looking after the henhouse, so to speak.
The actual text of the Bush government’s legislative proposal sounds like the proclamation of a banana republic “coup d’etat” and is chilling in its implications. For example, the proposal gives Henry Paulson, as Secretary of the U.S. Treasury, dictatorial powers to designate any financial institutions he chooses as “financial agents of the Government.”
You can bet that the financial institutions that will be handed these extraordinary government powers will not be your local credit union, community-based bank or smaller investment house. Rather it will be the big banks associated with the Federal Reserve and other chosen financial monopolies (both domestic and foreign) that caused the crisis in the first place and are now using it to mount a sort of “coup” against other competitors (especially the smaller, non-monopoly ones), and the American people as a whole.
In other words, the same individuals who wrecked the U.S. financial system are the very ones given the lucrative contract to “rebuild it.” Many analysts are predicting that hundreds of smaller banks and financial companies across the U.S. will go bankrupt in the coming period. Guess who will be swooping in to take over their business.
Further language in the Bush government proposal gets even spookier.
Section 8 reads:
“Decisions by the [U.S. Treasury] 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 administrative agency.”
In essence, this is putting above the law any decisions or actions carried out under this Act by the U.S. Secretary or by any financial institutions it has chosen to be “agents of the government.” This is feudal rule, pure and simple, whereby the rulers put themselves over and above the law, and the civil right of citizens to challenge arbitrary decisions does not exist.
Using this anti-democratic legislation, the U.S. government, working on behalf of the big banks, can shift hundreds of billions of dollars of the big banks’ toxic debt onto the American people, as well as knock off other players in the financial sector that are not part of the “chosen few”. And nobody can challenge these decisions. No one can even mount a lawsuit against unfair or discriminatory practices.
How will this cabal of Wall Street financiers that is pulling the strings of the U.S. government wipe out their competition?
One way - Designated as “financial agents” of the government, these chosen banks will have huge influence over which financial institutions get to unload their bad debt and which will not. If you are a small bank or credit union somewhere in rural America that has some bad mortgages on your balance sheets and you are not one of the Wall Street chosen few – watch out!
Another way – The big banks will sell their toxic mortgages at top price to the government, say 40 cents on the dollar. Then watch the government turn around and sell these same mortgages back to another arm of the same banks at a big loss, say 10 cents on the dollar. Thus the big banks make bundles of money “going up” and “going down.”
This situation is not farfetched at all.
Similar shady banking schemes were exposed in the aftermath of the U.S. savings and loans scandal of the 1980s.
To their great shame, both Republican and Democratic Party leaders in Congress, are cheerleading this scheme of the moneybags. The role of the Democrats is particularly treacherous, in that they are proposing a “sweetener” to the scheme, i.e., some form of help for homeowners and ordinary people to add to the “cocktail”.
But people should not be fooled.
No matter how much sweetener you add to a poisonous brew, it still remains toxic...
Part 2 – Pay, pay and pay again...
September 23, 2008
Sometimes in history, events can go by so slowly it seems as if we are on a train chug-chugging up a long and steep hill. But inevitably the train, puffing smoke and steam, labours its way to the crest, and then … the wild ride down begins.
We are on such a wild ride now, both politically and economically, and, as the old saying goes, “everyone better hold onto their hats” - events are developing very fast.
Since I wrote the first part of this series of articles two days ago, The American people, and people around the world have had time to learn about the brazen coup d’etat that the Bush government is trying to pull off. This coup will grant sweeping, dictatorial powers to the Secretary of the Treasury and his Wall Street backers, and will foist $700 billion dollars of bad debt, like heavy sacks of coal, onto every man, woman and child living in the United States.
All of this, of course, is in addition to the hundreds of billions of dollars that the U.S. government has spent on bailing out or propping up other financial institutions, like Freddie Mac, Fannie Mae, and AIG Insurance, as well as the taking on of potentially trillions of dollars of debt from these same institutions.
Over the weekend, the American people were told by both the Republican and Democratic leadership, as well as various big media and Wall Street pundits that there is no alternative to this massive bailout, that the financial system will collapse unless the big financial institutions are paid off, that workers will lose their jobs, pensioners their savings, and so on. In short, like the story of Chicken Little, the sky itself will “fall in” unless the moneybags are rescued.
Is there any truth to the allegation that the financial system will collapse if the big financial institutions are not bailed out with taxpayer’s money? Such scare tactics have been typical of the Bush regime, which, as the entire world now knows, used a similar method to justify the invasion of Iraq.
The fact of the matter is that the U.S. financial system is already in a state of collapse and, many analysts believe a severe recession is almost certain to happen. The attempted “coup” by the Wall Street bankers and the Bush government is not so much aimed at staving off the inevitable downturn that is coming, but rather to make a grab for taxpayer cash while they still can.
To put it another way, in the coming economic storm, the Wall Street financiers want to be sheltered, all dry and comfortable, in their taxpayer-funded limousines, while everyone else is on foot trudging through the rain, getting soaked to the bone.
One thing for sure – When the moneybags get those limousines, don’t count on them picking up any hitchhikers.
If this financial “coup d’etat” by the Bush government goes through, it will actually make the looming recession much worse.
Why?
Because such huge government debt (which ultimately Americans will have to pay for in one way or another) will severely damage the purchasing power of the American people as a whole, which is already under tremendous stress from high gas prices, falling house prices, the slumping dollar, usurious credit card debt, and so on.
In other words, a “crisis of overproduction” will be hastened, and it will be longer and deeper as a result of the bailout. A crisis of overproduction is triggered not because too many goods and services are produced. Rather it is because the purchasing power of ordinary people is weakened to the point that they simply can’t afford to buy the goods and services.
As a result, sales plummet and there is massive deflation of prices. Factories close. Unemployment skyrockets. And the results are not pretty.
The most famous crisis of overproduction? The Great Depression of the 1930s.
Thus, it is in the interests of the American people to not allow the government to rob the treasury and bailout the moneybags (who, through their greed and recklessness, caused the credit and mortgage crisis in the first place). A much better solution is to demand that the big banks and financial institutions be made to dig into their own extensive assets and holdings to clean up the mess.
In any case, the reaction of the people across America has been swift and splendid. Newsrooms report that people are overwhelmingly against this bailout. Online discussion boards are raging with opposition. A polling agency found that only 28% of those American’s polled supported the government’s proposal.
Now, as a result, some media pundits are beginning to get cold feet, suggesting that the “cure might be worse than the disease.” Even some Democratic and Republican leaders, perhaps worrying about their electoral skins, are backtracking. What appeared to have been a “coup” several days ago on the part of big government and the big banks, could well turn into a humiliating “rout.”
That being said, the Wall Street bankers are determined to dump their problem onto someone somewhere, and Americans will have to be vigilant about any “new” or “modified” bailout schemes that come via either the Democratic or Republican Party leadership.
In this time of crisis, the people of the world are with the American people and wish them all the best in this important struggle.
Americans do not deserve to have to pay for the greed, abuses and crimes of the Wall Street financiers, who are no friends to them or, for that matter, anyone else in this wide world.
